The regulatory burdens imposed on venture issuers will soon be reduced under new rules published by Canada’s securities regulators addressing MD&A, executive compensation disclosure, significant acquisition reporting, audit committees and financial statements in prospectuses. The changes are meant to strike a reasonable balance between the interests of the venture issuer investor community and the costs of compliance for these smaller, earlier-stage public companies.
Despite the more lenient requirements, regulators expect that some larger, more seasoned venture issuers may, depending on the expectations of their investors, voluntarily go beyond the minimum requirements—for example, by providing a comprehensive interim MD&A instead of just quarterly highlights as permitted under the new rules.
The rule changes reflect an effort by securities regulators to pay increased attention to the market forces and business conditions affecting smaller, earlier-stage companies, and this is true in both Canada and the United States. Other, similarly-motivated regulatory accommodations over the past few years include the ability of issuers to test-the-waters with potential investors on both sides of the border before committing to an initial public offering; the more lenient disclosure and governance requirements that the SEC requires of emerging growth companies under the JOBs Act; and various Canadian and U.S. initiatives to relax some of the rules governing private placements to Canadian and U.S. investors.
Key Changes to the Rules Governing Venture Issuers
Venture issuers will be able to provide quarterly highlights instead of a full interim MD&A. This option will be permitted in respect of financial years beginning on or after July 1, 2015. Quarterly highlights consists of a short discussion of material information about the issuer’s operations, liquidity and capital resources, including:
- the issuer’s financial condition, financial performance and cash flows, and any significant factors causing period-to-period variations;
- known trends and risks as well as material commitments, events and uncertainties;
- major operating milestones;
- significant changes from previous disclosure about the use of proceeds from a financing;
- significant related party transactions; and
- material effects of changes in accounting policies.
Quarterly highlights disclosure was originally proposed only for venture issuers without significant revenue, but securities regulators decided to adopt it for all venture issuers. The new rules state that venture issuers without significant revenue should focus their quarterly highlights on expenditures and progress toward achieving business objectives.
Executive Compensation Disclosure
Venture issuers’ executive compensation disclosure will be scaled back as follows, effective June 30, 2015:
- two rather than three years of compensation data will be required;
- information will be required for three rather than five named executive officers (NEOs), namely, the CEO, the CFO, and the next highest-paid executive officer; and
- the grant date fair value of equity awards will not have to be disclosed in the summary compensation table (although detailed information about stock options and other equity-based awards issued, held and exercised is required); and
- perquisite disclosure will only be mandated above certain thresholds, depending on the NEO’s or director’s salary.
Business Acquisition Reports
Instead of having to file business acquisition reports for M&A transactions that are significant at the 40% level, venture issuers will be able to use a significance threshold of 100% (based on the existing asset and investment tests). The same 100% significance threshold will apply to disclosure about M&A transactions in prospectuses and disclosure in proxy circulars for meetings at which investors are voting on the M&A transaction. This rule becomes effective June 30, 2015.
This is one area where the rules are becoming more stringent for venture issuers. Their audit committees will be required to have at least three members, a majority of whom are not executive officers, employees or control persons. However, the TSX Venture Exchange already imposes such a requirement, so the new rule will not be onerous for that subset of venture issuers. Compliance is required in respect of financial years beginning on or after January 1, 2016.
IPOs and Other Prospectus Offerings
In a venture issuer’s IPO prospectus, only two rather than three years of audited financial statements will be required. More generally, the disclosure mandated in prospectuses for public offerings by venture issuers is scaled back in conformity with the rule changes described above.
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