Authors: Paul Goldman, Kimberly Burns
Updated June 23: The CSA has extended the comment period until July 28 (from July 7).
The Canadian Securities Administrators (the “CSA”) is soliciting comments on potential regulatory changes to reduce burdens on non-investment fund reporting issuers.
Certain specific changes are discussed in Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers, published April 6, 2017 (the “Paper”), and the CSA is requesting feedback on general proposals that would bring proportionality to regulatory burdens and objectives, without compromising investor protection and market stability.
The Paper highlights five specific areas of regulation that could be changed to lighten issuer’s obligations:
- extending streamlined rules to smaller reporting issuers
- reducing or streamlining prospectus rules and offering processes
- reducing continuous disclosure requirements
- identifying and eliminating overlapping requirements
- increasing accessibility to electronic document delivery
This is an opportunity for market participants to provide reasoned, anecdotal, high reaching, optimistic, focused ideas for consideration.
Extending Streamlined Rules to Smaller Reporting Issuers
Current Canadian securities legislation permits venture issuers to comply with continuous disclosure requirements that are less onerous than non-venture issuers. Recognizing that listing status is not necessarily representative of issuer size, the CSA has proposed an alternative size-based distinction under which smaller issuers listed on senior exchanges would benefit from the reduced regulatory requirements currently available to venture issuers.
The U.S. Securities and Exchange Commission (the “SEC”) currently uses a size-based distinction under which reporting companies who presently have less than US$75 million in common equity public float, or less than US$50 million in revenue in the case of companies without publicly traded equity, are subject to reduced reporting requirements.
As the median market capitalization for reporting issuers listed on the Toronto Stock Exchange (the “TSX”) is currently C$112 million, the CSA suggests some TSX-listed reporting issuers could benefit from reduced reporting requirements if a size-based distinction similar to the current SEC regime is adopted. This is particularly true in the mining sector, where nearly half of TSX listed mining companies have a quoted market value below C$100 million.
While we are hopeful that adopting a size-based distinction may lead to reduced regulatory burdens for junior corporations currently listed on the TSX, we are uncertain as to how the CSA will determine the appropriate metric and threshold to use in adopting a size-based distinction.
Reducing Burdens Associated with Prospectus Offerings and Ongoing Disclosure Requirements
The Paper suggests changes to the prospectus offering process that would result in more focused and less burdensome regulation for smaller issuers.
One potential area of relief for small issuers would be a relaxed or more accessible short form prospectus system.
The CSA has requested general comments from market participants on how the burdens of the short form prospectus regime could be decreased (e.g. by reducing/eliminating risk factor disclosure) and how the system could be opened to more issuers without compromising investor protections.
Another concept discussed in the Paper, and historically much discussed in capital markets, is the alternative prospectus model whereby purchasers primarily rely on continuous disclosure, and a ‘prospectus’ is a minimalist document focused on the offering and the relevant securities.
Although we appreciate this concept and understand that it may be a good choice for Canadian capital markets, we are skeptical that it could be considered, legislated and implemented in a way that would reduce the regulatory burden on issuers, particularly smaller issuers that do not frequently use full prospectus offerings. The concept and proposal of an alternative prospectus model is perhaps an alternative, rather than an addition, to the other proposals made in the Paper.
The Paper also suggests a further liberalization in the pre-marketing and marketing regime.
In 2013, the CSA adopted amendments to the prospectus rules and policies which increased the range of permissible “pre-marketing” and “marketing” activities in connection with prospectus offerings by non-reporting issuers other than investment funds.
In particular, these amendments adopted provisions which permitted issuers, through investment dealers, to “test the waters” in relation to a potential initial public offering without incurring related costs. The rationale behind these changes largely parallels that of the 2012 U.S. Jumpstart Our Business Startups Act, which permitted “emerging growth companies” to determine potential interest in a contemplated securities offering by engaging in oral or written communications with qualified institutional buyers and accredited investors.
While the U.S. regulations contain additional relief mechanisms for some issuers, such as exempting communications made more than 30 days before filing a registration statement (Rule 163A) and communications made by “well-known seasoned issuers” (Rule 163) from pre-marketing rules, subject to the 2013 amendments and the long-standing “bought deal” exemption, Canadian securities regulation currently creates undue regulatory requirements that limit the ability of issuers to accurately and economically gauge market interest and raise capital.
We believe a further measured enlargement of Canada’s pre-marketing regime could benefit smaller, cost-sensitive issuers by streamlining the process of – and reducing the significant investment currently associated with – successfully completing a prospectus offering, while still providing adequate protection to market participants.
The Paper also discusses the potential for allowing smaller issuers on the TSX to report on either a quarterly or semi-annual basis.
We note that while a semi-annual reporting model has been long-established practice in the U.K. and Hong Kong, the transition to longer term reporting has the potential to deprive investors of timely financial disclosure, while doing little to push publicly-traded entities into better long-term decision making – a key consideration of the CSA in pushing for this change.
In addition, a longer time period between financial reports might adversely affect market perception of venture issuers, their governance, liquidity and comparability to more senior issuers. While the adoption of quarterly or semi-annual reporting requirements may reduce burdens and costs, we believe the potential for a corresponding reduction in investor confidence may not be worth the risk.
Other concepts from the CSA proposals notable to smaller issuers on the TSX are expanded application of reduced venture requirements for business acquisition reports, and movements from MD&A to the venture concept of “quarterly highlights.”
Enhancing Electronic Delivery of Documents
The CSA is also considering whether new methods of electronic delivery should be permitted.
Currently, the “notice-and-access” procedure requires reporting issuers to deliver a printed notice and voting documents to beneficial owners who have not given their prior consent to electronic delivery. Beneficial owners may also request additional paper copies of certain documents at no charge. These requirements have led some issuers to incur significant costs associated with the printing and delivery of various documents required under securities legislation.
The CSA is considering changes to the “notice-and-access” procedure including whether it would be appropriate for reporting issuers to satisfy the delivery requirements under securities legislation by making certain materials available electronically without prior notice or consent and only delivering paper copies of these documents if an investor specifically requests paper delivery.
Potential changes to the current system may lead to decreased delivery costs that could be especially beneficial to junior companies sensitive to such costs.
Practically, the artificial distinction regarding regulatory obligations between reporting issuers listed on the TSX and TSX Venture Exchange (the “TSX-V”) has created major challenges for smaller issuers listed on the TSX. Traditionally, the TSX-V focused on junior companies whose assets, business and market capitalization were too small to be listed on the TSX, and the reduced regulatory requirements associated with TSX-V issuers aided developing companies in expanding their business.
This historic divide between the TSX and TSX-V is no longer true.
Currently, the largest 100 mining issuers by quoted market value on the TSX-V have an average quoted market value nearly four times greater than the smallest 100 mining issuers listed on the TSX.
We believe that moving to a size-based distinction would not only help facilitate the traditional rationales for the division among venture and senior securities exchanges, but also ease the regulatory burden for smaller issuers listed on the TSX.
The CSA requests market feedback on these ideas in general, and is seeking guidance on appropriate thresholds for eligibility. Comments must be submitted in writing to the CSA by July 28, 2017.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.