We recently looked at Trump’s proposal to move US companies away from quarterly and toward semi-annual financial reporting…

…noting along the way that Canadian regulators would no doubt move in the same direction, and that one almost hoped for them to get there first, if even just for the sake of not always seeming to follow the US. Well, they did, at least for part of the market: the Canadian Securities Administrators (CSA) recently announced a proposed multi-year pilot to allow eligible issuers to voluntarily adopt semi-annual financial reporting. As the press release put it:

• “The semi-annual financial reporting pilot is the result of work and consultations by the CSA that go back several years, as well as our ongoing efforts to support the competitiveness of Canadian capital markets by making financial reporting more efficient and cost-effective for eligible issuers,” said Stan Magidson, CSA Chair and Chair and CEO of the Alberta Securities Commission. “We are committed to a Canadian regulatory environment that is right-sized for our market and responsive to the changing needs of market participants.”

Enough buzzwords in there for several interim reporting cycles! Anyway, the concession would be available to so-called venture issuers (basically, smaller companies, although there are some larger ones that qualify) with at least a year of history as a reporting issuer, in compliance with all requirements and not subject to any recent penalties or cease trade orders, and with revenue of no more than $10 million, as shown on the most recently filed audited annual financial statements.

The proposal doesn’t have much to say about the determination of the $10 million threshold, beyond that it “was determined to be an appropriate threshold to ensure that the smaller venture issuers most likely to benefit from the (pilot) would be eligible to participate.” Of course, such dividing lines are inherently arbitrary to some extent; still, it’s easy to point out cases in which the approach proposed here might create debatable outcomes. For example, a stable company with regular and barely changing revenue of $11 million (say from recurring contracts with the same handful of customers) would be ineligible to use the exemption, even though its quarterly statements might regularly fail to provide much new or decision-critical information. On the other hand, investors in a development-stage company with recurring liquidity challenges and a complex transaction stream might find six months to be a long time between financial statements, although of course they would, or at least should, continue to receive material information through news releases and other filings (the notice comments that “material change reporting can be more tangible and useful to investors who may struggle to distill the relevant information included in quarterly reports,” which suggests the regulators don’t rate the acumen of those investors too highly).

The notice suggests that the proposal “reflects a flexible regulatory environment, which allows smaller venture issuers to benefit from lower costs of reporting,” and that it “could lower barriers to entry through lower reporting costs, which may result in more private issuers going public.” On the other hand, the program “could negatively impact the market’s perception of eligible issuers that decide to report semi-annually. The market and investors may view less frequent reporting by eligible issuers as a potentially negative market signal, resulting in higher cost of capital, reduced market value and reduced liquidity for the issuer’s securities.” The notice also muses that the proposal will “facilitate capital formation by providing eligible issuers with flexibility to reallocate resources from reporting to operational matters and to determine the appropriate frequency of their reporting based on needs, available resources and expectations of investors (and) reducing administrative burden and costs associated with certain interim filings.” Realistically though, the notion that this concession would do much to free up capital seems fanciful at best, and the release also acknowledges “that the reduced reporting frequency may result in less trading activity and reduce market liquidity for issuers that adopt (the pilot).” It’s notable that the release makes no attempt to quantify those burdensome costs, noting that the data isn’t readily available from public sources and would have to be specifically collected from issuers, perhaps raising a question on how they can be so sure that “burden” is a well-chosen term…

I still think, as I said before, that there’s something perverse, in an age of increased capacity for generating and processing information of all kinds, about proposing to roll back a well-established aspect of formal periodic reporting. But obviously, notwithstanding various comments made above, it’s less perverse, overall, to do it for the smaller companies than it would be for the larger ones. The release indicates that “the CSA intends to engage in a formal rule-making project to consider whether the (pilot) should be adjusted in terms of scope, eligibility and conditions” – events in the US will presumably impact on its consideration of those matters…

The opinions expressed are solely those of the author.