Commentary: Proposed regulatory changes for venture issuers could cut red tape

Over the past decade, we’ve seen a push for increased rigor and disclosure in capital markets. This is a natural response to the chaos in the aftermath of the global financial crisis. Regulators have responded to investor concerns by strengthening the rules and regulations for publicly traded companies. The intent of many of these changes has been to restore investor confidence by providing more information on a timely basis.

One anomaly in this push for increased regulatory oversight is unfolding right now in Canada — and it’s a good thing. The
Canadian venture exchanges like the TSX Venture Exchange and the Canadian National Stock Exchange provide essential services  to the capital market and are the trading  venue mainly for companies with smaller market capitalizations. These companies  may be small, but they have the potential for significant growth if successful. Junior mining in particular makes up 58% of TSX-V  issuers, and it’s the top sector for equity capital raised. 

Changes to the TSX Venture Exchange would have a disproportionate impact on the mining industry, which is important to Canada’s economic strength and future growth. From this perspective, it makes sense to reduce red tape and remove barriers to that growth. 

Last year, the Canadian Securities Administrators (CSA) published proposed rules and amendments — the National Instrument (NI) 51-103: Ongoing Governance and Disclosure Requirements for Venture Issuers and Related Amendments — to introduce a new mandatory regulatory regime for venture issuers. 

It is intended to streamline and tailor disclosures to reflect the needs and expectations of investors, and make disclosure requirements more suitable and manageable for venture issuers. 

Following a comment period, the CSA released a second draft, the proposed NI 51-103: Ongoing Governance and Disclosure Requirements for Venture Issuers. 

Some of the highlights of the proposed changes include: 

• Consolidating the venture issuer’s annual disclosures — including financial statements, management discussion and analysis (MD&A), business, management and governance practices, and CEO and CFO certifications — into a single annual report. 

• Requiring interim financial reports for each of the three-, six- and nine-month interim periods, rather than an earlier proposal to have only mid-year financial statements and a report. The revised proposals do not require MD&A, but an interim report including quarterly highlights will be required, as well as a certificate from the CEO and chief financial officer certifying that there are no misrepresentations in the interim financial report and quarterly highlights document. 

• Eliminating the need to provide for an optional significance test at the time of closing major acquisitions by ensuring that both the venture issuer’s market capitalization and the estimated value of the business to be acquired are determined before the transaction is announced. 

• Eliminating pro forma financial statements for major acquisitions, unless the acquisition is also a primary business in the context of a long-form prospectus. 

• Enhanced guidance regarding the types of policies and procedures a venture issuer might implement to comply with its governance responsibilities. 

• Control persons have been added to the list of people who should not be considered independent for the purposes of the audit committee. This is consistent with the TSX Venture Exchange. 

• Executive compensation disclosure is required only in the information circular, but it will be required for the top-three (rather than the top-five) executive officers.

• Other enhanced disclosures have been added around a change of auditors and forward-looking information. 

•Use of proceeds disclosure in a short-form prospectus will be required (something that is not currently mandatory). 

These proposed changes, which are expected to become final this year, will set a new minimum bar for reporting. The new, more streamlined reporting requirements will reduce the amount of time that venture-stage mining companies need to spend on fulfilling regulatory requirements, which could help them focus on what’s more important — growing their businesses and attracting investment. 

Whenever a regulator proposes changes that affect the capital markets, investors should pay attention. Does it make sense to lower the threshold for reporting in an era when regulatory oversight has reached new heights? In this case, yes. It seems that the CSA has got it right. Compared to investors in more advanced companies, investors in venture-stage entities need less — but very specific — financial information. These investors are often much closer to the companies they’re investing in, and as investors, their information needs are different than investors in non-venture companies. Many of the required financial documents now being filed do not contribute to an investor’s understanding in the company and they often repeat necessary and unnecessary information. Preparing them also takes up valuable resources that are better employed on the companies’ core business activities. 

The comment period on the regulatory proposals closed this past December, and investors are now waiting to see what the final rules will look like. 

Let’s hope that the CSA continues on its current path towards streamlining regulatory reporting requirements to meet the needs of this specific investor group. This will allow mining companies to use more of their valuable and limited resources to focus on Canada’s future economic growth.

— Mark Zastre, CA, MBA, CPA, is an auditor and advisor in Grant Thornton LLP’s Vancouver office. He is the national leader of Grant Thornton’s Mining Sector and has worked with Canadian and U.S.-listed mining companies that operate worldwide. He is also the global leader of Grant Thornton International’s Mining Sector. Grant Thornton is a leading Canadian accounting and business advisory firm, providing audit, tax and advisory services to private and public organizations. See www.grantthornton.ca for more details.