On May 20, 2021, the Canadian Securities Administrators (CSA) announced  a 120-day comment period for proposed amendments to National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) under the unwieldy title “Proposed Amendments to National Instrument 51-102 Continuous Disclosure Obligations and Other Amendments and Changes Relating to Annual and Interim Filings of Non-Investment Fund Reporting Issuers and Seeking Feedback on a Proposed Framework for Semi-Annual Reporting – Venture Issuers on a Voluntary Basis”. The proposed amendments and request for comments follow CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers issued in April 2017.
The proposed amendments to NI 51-102 include combining an issuer’s annual financial statements, management’s discussion and analysis (MD&A) and annual information form into one annual reporting document called an “annual disclosure statement”, and combining interim financial statements and MD&A into an “interim disclosure statement” for quarterly reporting purposes, all as set out in proposed Part 3A of NI 51-102. According to the CSA, subject to the comment process and required regulatory approvals, the final amendments to NI 51-102 are expected to become effective on December 15, 2023.
Proposal for Semi-Annual Reporting by Eligible “Venture Issuers”
Of particular interest to “venture issuers” is a proposed framework to allow semi-annual reporting. If the proposed framework enters into effect, it will give eligible venture issuers an option to replace their Q1 and Q3 financial statements and MD&A with, in each case, a news release containing prescribed information. While the CSA have not proposed specific amendments to introduce semi-annual reporting at this time, they are seeking feedback from stakeholders on the proposed framework.
Definition of “Venture Issuer”
Under NI 51-102, a “venture issuer” is a reporting issuer that does not have any of its securities listed or quoted on the Toronto Stock Exchange (TSX), Aequitas NEO Exchange, a U.S. marketplace (defined as an exchange registered as a “national securities exchange” under section 6 of the Securities Exchange Act of 1934, or the Nasdaq Stock Market), or a marketplace outside of Canada and the United States other than the Alternative Investment Market (AIM) of the London Stock Exchange or the PLUS markets operated by PLUS Markets Group plc. In short, a company that is listed only on the TSX Venture Exchange (TSXV) or the Canadian Securities Exchange (“CSE”) is a “venture issuer” under NI 51-102. However, the proposed reporting framework will not be available to a “venture issuer” that is an “SEC issuer” under NI 51-102, that is, an issuer subject to the United States Securities Exchange Act of 1934.
Fundamental Reporting Changes
The CSA’s “Proposed Semi-Annual Reporting Framework” would make the following fundamental changes to reporting by eligible venture issuers:
- Eligible venture issuers will be able to choose between the current quarterly reporting regime and new semi-annual reporting regime. In short, an eligible venture issuer will have the option to eliminate financial statements and MD&A for Q1 and Q3 of its financial year, so that the only interim financial statements and MD&A will be for the first six months of the fiscal year.
- An eligible venture issuer using the semi-annual reporting regime will be required to issue a news release within 60 days of the end of Q1 and Q3 to: (i) provide an update on its operations, major operating milestones, commitments, unexpected events, and risks that are likely to materially affect operations going forward, and explain any significant changes from previous disclosures regarding the use of proceeds (presumably from previous financings), and (ii) disclose information and events that are material, including those related to: the issue or cancellation of any securities; new or modified litigation or liabilities; new or modified financing arrangements; defaults under financing arrangements; changes to the financial condition of the issuer; the inability to pay debts as they become due; and related party transactions.
In short, for venture issuers that elect to use the new semi-annual reporting regime, the current interim financial statements and MD&A for Q1 and Q3 will be replaced by a news release containing the information set out above, to the extent applicable.
- CEO and CFO certifications will not be required for the Q1 and Q3 news releases.
- An eligible venture issuer must file a notice when it enters or exits the semi-annual reporting regime.
- Opting in or out of the semi-annual reporting regime must be done at the beginning of a fiscal year.
- The opting-in or opting-out commitment must be for at least one complete year unless an issuer which opted-in to semi-annual reporting becomes ineligible due to ceasing to be a venture issuer (e.g., listing on the TSX) or becoming an SEC issuer.
- If an issuer loses eligibility during a year, it must file all applicable Q1 and Q3 filings that were not otherwise filed prior to the date on which it no longer qualified for semi-annual reporting.
In other words, if a company “graduates” from the TSXV to the TSX, retroactive filings for that year will be required, which may be problematic.
CSA Questions and Deadline
The CSA have asked the following specific questions relating to the proposed semi-annual reporting framework:
- Should we pursue the Proposed Semi-Annual Reporting Framework for voluntary semi-annual reporting for venture issuers that are not SEC issuers?
- Are there specific types of venture issuers for which semi-annual reporting would not be appropriate? For instance, should semi-annual reporting be limited to venture issuers below a certain market capitalization or those not generating significant revenue?
- Would the proposed alternative disclosure requirements under the Proposed Semi-Annual Reporting Framework provide adequate disclosure to investors? Would any additional disclosure be required? Is any of the proposed disclosure unnecessary given the existing requirements for material change reporting and the timely disclosure requirements of the venture exchanges?
- Do you have any other feedback relating to the Proposed Semi-Annual Reporting Framework?
The deadline for comments on the proposed semi-annual reporting regime is September 17, 2021. Information on where comments should be submitted is set out in Part 10 of the Request for Comments.
CSA Policy Concerns
It is evident from the questions above that the CSA are weighing a reduction of the regulatory burden for venture issuers against the need to provide investors with adequate information to make informed decisions. Clearly, the elimination of Q1 and Q3 financial statements, MD&A and CEO/CFO certifications and their replacement with a news release, however detailed it may be, will allow venture issuers to substantially reduce costs and allocate their time and resources elsewhere. It should be noted that the proposed semi-annual reporting regime applies to all venture issuers regardless of market capitalization or revenues and gives all such issuers an option to file interim financial statements and MD&A only once a year. For small resource exploration companies listed on the TSXV or CSE, Q1 and Q3 financial statements and MD&A may be of limited benefit to investors. In fact, venture issuers can at present provide “quarterly highlights” under NI 51-102 instead of full interim MD&A, consisting of a short discussion of all material information about the issuer’s operations, liquidity and capital resources. However, in order for the proposed framework to go forward, stakeholders will have to convince or reassure the CSA that larger venture issuers will likely continue to file quarterly financial statements and MD&A, particularly if they raise capital on a regular basis, or that if they opt into the new semi-annual regime, the detailed Q1 and Q3 news releases will provide the market with all relevant information, particularly when combined with the existing requirement of NI 51-102 for a news release and material change report in the event of a material change. Given the potential impact of the semi-annual reporting regime, it is in the interest of companies listed on the TSXV and CSE and other stakeholders to make their views known to the CSA by the September 17, 2021 deadline.
 Canadian Securities Administrators news release May 20, 2021: https://www.securities-administrators.ca/aboutcsa.aspx?id=2057
 National Instrument 51-102 Continuous Disclosure Obligations: https://www.osc.ca/en/securities-law/instruments-rules-policies/5/51-102/unofficial-consolidation-national-instrument-51-102-continuous-disclosure-obligations
 Proposed Amendments to National Instrument 51-102: https://www.osc.ca/en/securities-law/instruments-rules-policies/5/51-102/proposed-amendments-national-instrument-51-102-continuous-disclosure-obligations-and-other
 CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers: https://www.osc.ca/en/securities-law/instruments-rules-policies/5/51-404/csa-consultation-paper-51-404-considerations