Give and Take: Canadian Securities Regulators Ease Disclosure Burdens on Venture Issuers but Enhance Audit Committee Member Requirements

Written By Jon C. Truswell, Christian P. Gauthier, Aaron E. Sonshine and David Bowles

On April 9, 2015, the Canadian Securities Administrators announced amendments to the continuous disclosure and governance obligations of venture issuers in three national instruments: National Instruments 51-102 Continuous Disclosure Obligations (NI 51-102), 52-110 Audit Committees (NI 52-110), 41-101 General Prospectus Requirements (NI 41-101) and related companion policies, which are expected to come into force between June 30, 2015 and January 1, 2016. The amendments, initially proposed in May 2014, were previously discussed in our article, Streamlining Disclosure for Venture Issuers, published on May 29, 2014.

The amendments will generally simplify and reduce the disclosure required of venture issuers in interim management's discussion and analysis (MD&A), management information circulars, business acquisition reports and prospectuses. However, as a result of new requirements that a majority of audit committee members not be executive officers, employees or control persons of the issuer, venture issuers should review the composition of their boards of directors before the January 1, 2016 implementation of this requirement.

Continuous Disclosure Amendments

Interim MD&A Amendments. For financial years beginning on or after July 1, 2015, all venture issuers may choose to disclose "quarterly highlights" (in lieu of an interim MD&A in the form required by Form 51-102F1). The quarterly highlights are intended to be a brief, focused summary of material updates to the business operations, liquidity and capital resources of a venture issuer since its last annual MD&A. The highlights should include an analysis of financial condition, performance and cash flows; known trends, risks or demands; major milestones; commitments and expected or unexpected events or uncertainties that have materially affected the venture issuer; significant changes to prior disclosure; and significant transactions between related parties.

Executive Compensation Disclosure. A new Form 51-102F6V will apply to venture issuers for financial years beginning on or after July 1, 2015 and will allow for more streamlined disclosure of executive compensation. Under the new Form 51-102F6V, venture issuers:

• may provide less extensive compensation discussion and analysis disclosure;
• are not required to include fair value calculations for stock options and other share-based awards granted to named executive officers (NEOs) or directors;
• are limited to disclosing compensation for three currently employed NEOs instead of five;
• are required to disclose two years of historical compensation information instead of three; and
• are required to disclose perquisites given to a NEO or director only if the value of the perquisites is, in the aggregate, greater than: (i) $15,000 if the NEO or director's salary is $150,000 or less; (ii) 10% of the NEO or director's salary if the salary is greater than $150,000 but less than $500,000; or (iii) $50,000 if the NEO or director's salary is $500,000 or greater.

Form 51-102F6V must be filed within 180 days after a venture issuer's financial year-end.

Threshold for Business Acquisition Reports (BARs). As of June 30, 2015, venture issuers will be required to file a BAR after a completed acquisition or include a BAR in prospectuses filed to finance proposed acquisitions or information circulars related to proposed acquisitions only if the acquisition exceeds the new 100% threshold under the asset or investment tests set out in Part 8 of NI 51-102. In addition, as of June 30, 2015 venture issuers will not be required to include pro forma financial statements in a BAR.

Annual Information Forms (AIFs) for Mining Issuers. The disclosure to be included in the AIFs of venture issuers with mineral projects has been harmonized with the technical report disclosure rules set out in National Instrument 43-101 Standards of Disclosure for Mineral Projects.

Prospectus Disclosure Amendments

Company History and Financial Statements. Venture issuers will be required to include only two years of company history and audited financial statements in an initial public offering prospectus, instead of the three years required for non-venture issuers.

Audit Committee Amendments

Audit Committee Members. While venture issuers continue to be exempt from the requirement that every audit committee member be "independent" (as that term is defined in NI 52-110), for financial years beginning on or after January 1, 2016, venture issuers must have audit committees composed of at least three members, the majority of whom cannot be executive officers, employees or control persons of that venture issuer. There are limited short-term exemptions for events beyond the control of venture issuers, such as if circumstances arise that are best addressed by a committee member becoming an officer or employee of the issuer or in the event of the death or resignation of a member. If an exemption is relied upon, it must be disclosed in the venture issuer's annual meeting management information circular, or if the venture issuer is not required to send a circular to shareholders, in its AIF or annual MD&A.