Canada's securities regulators are considering revamping public companies' reporting obligations and the rules governing capital raising in the public markets in light of changing investor demographics, technological innovation and globalization. The regulators have published a consultation paper identifying a broad range of potential rule changes that they believe could reduce regulatory burdens on companies without compromising investor protection.1
The most notable proposal on capital raising is to replace the short-form prospectus system with an alternative public offering model under which prospectus disclosure would focus on deal-specific information, including a detailed description of the securities being offered; the intended use of proceeds; the plan of distribution; the issuer’s consolidated capitalization and earnings coverage; material risk factors related to the offering; and any conflicts of interest.
In respect of dealers' liability under this model, the consultation paper states that participating dealers would assume liability for misrepresentations in all written marketing materials and in the issuer's disclosure base. The specific materials that would constitute an issuer's disclosure base are not specified, so it is unclear whether the scope of potential liability faced by underwriters—and their corresponding due diligence obligations—would be broader, compared to the current short-form and shelf prospectus offering regimes.
Other potential reforms relating to capital raising include the following:
- reducing the number of years of audited financial statements and MD&A that must be included in an IPO prospectus, i.e., the current requirement of three years for non-venture issuers could be reduced for all companies, or for companies with revenue below a certain threshold;
- eliminating the rule that an auditor must review interim financial statements in connection with prospectus offerings;
- extending short-form prospectus eligibility to a broader group of issuers;
- adopting tailored rules to facilitate at-the-market offerings and eliminate the need to obtain exemptive relief;
- liberalizing the pre-marketing and marketing rules.
Ongoing Reporting by Public Companies
Potential reforms relating to public companies' ongoing reporting obligations include the following:
- permitting smaller companies to comply with reduced disclosure and governance requirements, based on the size of their assets, revenues or market capitalization; this would be an alternative to the current distinction between venture and non-venture issuers, so that all smaller companies would have lighter regulatory obligations regardless of the stock exchange on which their securities are listed;
- consolidating the AIF, MD&A and financial statements into a single disclosure document and eliminating overlapping requirements;
- permitting all issuers, not just venture issuers, to prepare quarterly highlights instead of MD&A, or permitting semi-annual instead of quarterly reporting;
- enhancing issuers’ options for delivering materials to shareholders electronically;
- eliminating MD&A requirements that overlap with accounting rules under IFRS, such as those pertaining to financial instruments, critical accounting estimates, changes in accounting policies and contractual obligations;
- in respect of Business Acquisition Reports (BARs),
- increasing the financial thresholds for determining whether an acquisition is significant so that BARs would be required less often;
- eliminating some or all of the significance tests;
- adopting industry-specific criteria for filing BARs;
- eliminating the requirement to present pro forma financial statements in BARs.
Scope of Feedback on Consultation Paper
Market participants are invited to submit comment letters on the consultation paper. Comments are due by July 7, 2017. The regulators welcome feedback on what the top priorities for reform should be; the potential impact of reforms on investors; and whether there are rule changes beyond those identified in the consultation paper that should also be considered.
1 The consultation paper does not address prospectus-exempt capital raising nor does it address the regulation of investment funds. Reforms in those areas are being considered separately by the regulators.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2018 by Torys LLP.
All rights reserved.