Streamlined Reporting Regime for Venture Issuers Effective June 30, 2015
On April 9, 2015, the Canadian Securities Administrators (“CSA”) announced significant changes to the reporting regime for venture issuers. There are three significant changes that venture issuers should be aware of:
- Optional Quarterly Highlights MD&A – Venture issuers will be given the option to file streamlined and shortened interim MD&A disclosure in the form of quarterly highlights. This change comes into effect for financial years beginning on or after January 1, 2016, and will allow venture issuers to highlight key information concerning the issuer’s business activities, financial performance and cash flows, among other information.
- Enhanced Audit Committee Composition Requirement – A venture issuer’s audit committee will be required to consist of at least 3 directors, the majority of whom cannot be executive officers, employees or control persons. This requirement will apply for financial years beginning on or after January 1, 2016, thereby providing issuers with a transition period to prepare for compliance. This change is intended to enhance corporate governance for venture issuers.
- Executive Compensation – Revised venture-specific executive compensation disclosure will be due for filing 180 days after an issuer’s fiscal year end. This disclosure may be included in an issuer’s information circular, or filed as a standalone document. Value of perquisites received by directors and named executive officers will be disclosed in a separate column of the summary compensation table.
Venture issuers will need to ensure they understand the implications of substituting quarterly highlights for the full interim MD&A disclosure, and determine whether it is the right decision for their business. In addition, your board of directors should plan for the potential pitfalls involved with meeting the enhanced audit committee composition requirements. For guidance as to how these changes will impact your company’s disclosure obligations and corporate governance, contact any member of the Boughton Securities Group.
Changes to National Instrument 45-106 – Changes to the Accredited Investor Exemption
In April 2015, the CSE announced a host of amendments regarding NI 45-106 which will come into force on May 5, 2015. The amendments will impact any company that plans to raise capital in reliance on the (i) accredited investor exemption; and (ii) the $150,000 “minimum amount” exemption, among others.
Below are some of the key changes and their implications:
- In the past, companies who were selling securities were able to simply rely on the purchaser providing a representation in the subscription agreement or signing a form stating the category of prospectus exemption the purchaser was relying upon to purchase securities without a prospectus. That will no longer be permitted. Seller companies are now required, before completing the sale of the shares, to take active steps to verify the category of the prospectus exemption the purchaser plans to use, provided that the steps are reasonable in the circumstances. The steps recommended by the CSA as being reasonable are as follows:
- Individuals engaged in selling efforts on a company’s behalf must be able to explain the terms and conditions for particular exemptions – Any individual who is engaged in selling efforts on behalf of a company must be able to explain the terms and conditions of the particular exemption a purchaser will be relying on. Examples of relevant terms that individuals should be able to explain for the accredited investor exemption include the terms “financial assets” and “net assets”. If any term involves a calculation being made to assess whether the purchaser meets the definition, the individual must be able to explain the specific assets and liabilities that form part of each calculation.
- Companies must establish appropriate policies and procedures – The seller company is now responsible for ensuring that all persons who act on the seller’s behalf to distribute securities, including employees, directors, officers, agents, finders and other intermediaries (whether registered or not), understand the conditions to be met in order to rely on a particular prospectus exemption. The seller company should implement policies and procedures to confirm that all parties:
- understand the exemption being relied upon,
- are able to describe the terms of the exemption to purchasers, and
- know the type of information and documentation required to be obtained from purchasers to confirm that the conditions of the exemption being used are satisfied.
- Companies must verify that the purchaser meets the exemption criteria – Seller companies are now required to confirm, before discussing investment details with the purchaser, that the purchaser meets the criteria set out in the exemption that the purchaser will be relying upon to complete the purchase. For example, certain categories of the accredited investor exemption rely on an income or asset test being met. A seller who proposes to sell securities to an individual based on this category of the accredited investor exemption should ask questions about the purchaser’s net income, financial assets or net assets, and if any concerns arise about whether the exemption requirements are met, the purchaser should continue to request additional information, including perhaps documentation until the purchaser is satisfied that the conditions of the exemption will be met by the purchaser.
- Companies are required to keep documentation evidencing that conditions of the exemption are met – Seller companies should keep detailed documentation to evidence that reasonable steps were taken to comply with these requirements. Consider what type of documentation would be required to be kept in each circumstance. Examples include detailed meeting notes, e-mails with the purchaser, any documents provided to the selling company by the purchaser and a written statement signed by the purchaser describing how the purchaser meets the exemption conditions. All such documentation should be kept by the selling company for a period of 8 years after the date the securities are sold.
- Compliance with privacy laws when retaining documents that include personal information – Certain documentation that selling companies are required to retain may include the purchaser’s personal information. Companies should be cognizant of the legal requirements that apply to the protection of personal information that is collected and retained by any person under provincial and federal privacy laws.
- A new Risk Acknowledgement Form (the “Risk Acknowledgment”) must be signed by some accredited investors at the time they purchase securities in reliance on the accredited investor exemption. Subscribers will be required to sign a Risk Acknowledgment if they qualify as accredited investors under any of the following common categories:
- An individual, who alone or with a spouse, has liquid assets with over $1,000,000 in total realizable value, before taxes but net of related liabilities;
- An individual who had net income before taxes of $200,000 in each of the past two calendar years, which the individual expects to continue in the current year;
- An individual, who alone or with a spouse, had total net income before taxes of $300,000 in each of the past two calendar years, which the couple expects to continue in the current year; and
- An individual, who alone or with a spouse, has assets having at least $5,000,000 in value.
Some of the features of the Risk Acknowledgment include:
- A warning, featured prominently in bold at the top of the Risk Acknowledgment, that the investor acknowledges the investment is risky and that they could lose their entire investment;
- A plain-language description of the categories of accredited investors described above; and
- A description of the finder’s fee being paid to any salesperson in respect of the subscriber’s subscription.
- New verification requirements – the Companion Policy to NI 45-106 has been amended to require issuers distributing securities in reliance on subjective exemptions (accredited investor, close personal friend, etc.) to actively make inquiries to verify the subscriber qualifies under the applicable exemption, and to document those inquiries. It will not be adequate to rely on a certificate in a subscription agreement that a subscriber “is an accredited investor” or “is a close personal friend of a director”.
- The $150,000 “minimum amount” exemption, which previously provided a very simple prospectus exemption for any single distribution of securities for $150,000 cash or more, will no longer be available to individual investors. The right of a company to distribute securities to a corporation under this exemption remains unchanged.
Both issuers and investment dealers will need to ensure their subscription agreements and selling practices comply with these new requirements effective May 5, 2015. For more information on the impact of these changes or advice regarding best practices in complying with new requirements, please contact any member of the Boughton Securities Group.
Proposed New Investment Dealer Exemption Where Suitability Advice is Given
The CSA recently announced a proposal for a new investment dealer exemption that if adopted would allow companies to issue securities to purchasers on a prospectus-exempt basis provided the purchasers receive suitability advice about the investment from an investment dealer. The proposed exemption as currently contemplated would be subject to certain conditions:
- the issuer will be required to be a “reporting issuer” with securities listed on the TSX, TSX-V or CSE or the Aequitas Neo Exchange Inc.;
- the issuer will be required to issue a news release describing the proposed distribution and how the proceeds are intended to be used, among other information;
- the issuer will be required to have up-to-date continuous disclosure that is in compliance with applicable securities legislation; and
- the issuer will be required to provide investors with a right to sue (known as a “contractual right of action”) in the subscription agreement if the issuer’s continuous disclosure record contains a misrepresentation. The exemption would be available to the issuer regardless of whether the investor actually relied on the misrepresentation or not.
The exemption, if adopted, would not be available to either restricted dealers, exempt market dealers, or any investment dealers who are exempt for any reason from providing suitability advice, such as discount brokers. For more information on the impact or application of the proposed exemption, please contact any member of the Boughton Securities Group.
Proposed Rights Offering Regime
In late 2014, the CSA announced a proposed overhaul of the rights offering regime in Canada to be implemented as a prospectus exemption under NI 45-106. If adopted, the new exemption should be a significant benefit to reporting issuers, allowing them to raise capital from their existing shareholder base quicker and more costly effectively. The proposal is expected to benefit retail shareholders who wouldn’t otherwise qualify under a prospectus exemption and provide them with an opportunity to avoid dilution. The CSA accepted comments on this proposal up to February 27, 2015, and have yet to release the results of comments received.
The key features of the proposed exemption are as follows:
- rights offerings would no longer require advance review and approval by securities regulators. (This should reduce the duration of the conducting a rights offering by at least 40 days, resulting in a shorter time from start to close);
- issuers would be able to raise more capital as the maximum threshold of dilution to existing shareholders without receiving a prospectus would be increased from the current 25% level to 100% permissible dilution;
- a discount to market price would be available to listed issuers, similar to the discounts currently permitted by Canadian stock exchanges including the TSX-V and the CSE;
- the information circular would be shortened and include a question and answer format focusing on the particular details of the financing, without any required description of the issuer’s business as this information is readily available on SEDAR;
- for mining issuers, filing an information circular would no longer trigger filing of a technical report under National Instrument 43-101 Standards of Disclosure for Mineral Projects; and
- while a small notice providing certain basic information about the rights offering would be required to be sent to shareholders, the rights offering circular would need only be filed on SEDAR.
The proposal continues to be under consideration by the CSA and securities regulators in Canada. Regulators are considering whether to impose the customary four-month hold period on securities issued under this exemption. If you wish to discuss the proposal, please contact a member of the Boughton securities group.
Recent TSX Venture Exchange Policy
The TSX Venture Exchange recently announced that it will allow listed issuers to dual-list on the Santiago Stock Exchange, Venture, which is the newly created venture exchange board of the Santiago Stock Exchange. This initiative will benefit listed issuers seeking access to capital in Latin America.
Should you require guidance on this initiative, and the potential impact of a dual-listing on your company under Canadian securities law, please contact any member of the Boughton Securities Group.
The information contained in this update is a summary only and is not to be construed or relied on as comprehensive legal advice. If you require legal advice, we would be pleased to discuss these recent updates with you.