Amended requirements for venture issuers (zombies and all)

The Canadian Securities Administrators have finalized their rule amendments to streamline and tailor disclosures by venture issuers, set to come into effect on June 30, 2015

The main effect of the changes, as summarized in the CSA’s news release, will be to bring in the following:

  • allow all venture issuers to meet interim management’s discussion and analysis requirements by preparing a brief “quarterly highlights” document;
  • allow venture issuers to use a new tailored form of executive compensation disclosure;
  • reduce the instances in which venture issuers will have to file business acquisition reports by increasing the significance threshold from 40 per cent to 100 per cent;
  • streamline prospectus disclosure requirements by reducing the number of years of company history and audited financial statements required in a venture issuer initial public offering prospectus from three to two years; and
  • strengthen corporate governance by requiring venture issuers to have an audit committee of at least three members, the majority of whom cannot be executive officers, employees or control persons of the venture issuer or of an affiliate of the venture issuer.

This is largely in line with what the CSA proposed last year, as discussed here. At that time, we noted that the CSA had discarded the most striking aspect of its previous proposals, to require venture issuers to prepare interim reports just once a year, at the six month point, rather than quarterly (IAS 34 sets out the principles and minimum content for entities preparing interim financial reports under IFRS, but leaves it to regulators in each jurisdiction to prescribe which entities should be required to publish such interim reports, or how often; other jurisdictions commonly only require six-monthly reporting, even for the largest entities). Instead, the CSA proposed a more modest concession in this area, to permit (although not require) venture issuers without significant revenue to fulfil the quarterly MD&A reporting requirement by preparing and filing a streamlined disclosure document, referred to as “quarterly highlights”, in each of their first three quarters. The quarterly highlights would consist primarily of a short discussion about the venture issuer’s operations and liquidity.

In its request for comment, the CSA stated: “Venture issuers that have significant revenue would be required to provide existing interim MD&A for interim periods because we think that larger venture issuers should provide more detailed disclosure,” and asked for specific input on this point. We suggested here that this criterion alone (one apparently subject to some subjectivity) shouldn’t necessarily be the trigger for distinguishing between different disclosure obligations; one can readily think of circumstances in which an entity without significant revenue (but with the promise of great prospects) might hold greater risks for investors than an entity with significant (but stable and predictable) revenue. The CSA apparently now takes the same view, concluding that “drawing a line to separate venture issuers for the purpose of quarterly highlights would not serve the purpose of streamlining venture issuer regulation.” It goes on: “However, investors in larger venture issuers, including those with significant revenue, may want full interim MD&A to assist them in making informed investment decisions. Issuers will likely take the needs of their investors into consideration when determining whether to provide quarterly highlights or full interim MD&A.”

Through an accident of timing, the CSA finalized its project at around the same time as a report in the National Post, colourfully titled: “’Walking dead’ on the TSX Venture Exchange: How are ‘zombie’ companies surviving?” Based on recent research by Tony Simon, a co-founder of the Venture Capital Markets Association, this noted the following:

  • “The controversy started in February, when Mr. Simon published research suggesting there are about 600 “zombie” resource companies on the TSX Venture Exchange that are not meeting listing requirements and should be de-listed. His report has spread around, even getting picked up by Zero Hedge, the influential U.S. financial blog.
  • The big numbers are grim: by Mr. Simon’s calculation, these “zombies” have combined negative working capital of greater than $2 billion. Raising money has become impossible for many of these junior firms as market conditions have deteriorated over the past few years. Now they are just “walking dead” companies with no serious prospects that pose a threat to investors looking at the sector, he said.
  • So why are they still around? Mr. Simon noted that TMX Group Inc. is a profitable corporation that relies on listing fees for revenue. He believes the exchange is failing to enforce its own rules, and also blames auditors and securities regulators for not doing enough to crack down on these companies and protect investors.”

The article concludes: “However one feels about the listing debate, at some point it may make more sense for a lot of companies to just die than to be part of Tony Simon’s Walking Dead.” Of course, the CSA’s rule amendments aren’t directly concerned with these matters – 600 zombie companies still leaves several thousand venture issuers that presumably aren’t zombies, and with regard to which meaningful investment decisions can presumably still be made. Still, when the CSA notes that these amendments are “also intended to streamline the disclosure requirements for venture issuers to allow management of those issuers to focus on the growth of their business,” it might seem to beg a question about what to do with those issuers where there’s apparently no such focus…

The opinions expressed are solely those of the author

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