Junior public companies could be one step closer to dealing with a less burdensome regulatory framework in Canada.
Canadian securities regulators, including the BC Securities Commission (BCSC), are considering their next steps toward streamlining compliance regulations for publicly-traded companies listed on the TSX Venture Exchange and other junior exchanges like the Canadian National Stock Exchange (CNSX).
Over the summer, regulators solicited comments from market participants across the country over a consultation paper that included proposed regulatory changes tailored to the junior market. Some of the proposals included:
- combining all the disclosure requirements currently found in four regulatory documents into a single instrument for venture companies;
- combining separate filings like the financial statements, management’s discussion and analysis (MD&A), management information circulars and annual information forms into a single annual report;
- eliminating first- and third-quarter financial statements and MD&As;
- eliminating business acquisition reports; and
- permitting prospectuses to have two instead of three years worth of historical financial information.
William Rice, chairman and CEO of the Alberta Securities Commission, said at the recent BCSC annual conference that some of the proposals are significant because “if we’re going to suggest a new regime and ask issuers and investors it had better be worthwhile. Tinkering and making small changes will just be annoying.”
Martin Eady, BCSC’s director of corporate finance, said that many of the initial proposals came out of anecdotal evidence that a “one-size-fits-all” regulatory framework for junior and senior public companies did not make sense for smaller companies. It made it relatively more expensive for venture firms to access public money markets. Aside from the amount of duplication involved in the current regulatory framework, Eady said some disclosures were not necessarily relevant or even read by investors.
Eady noted that two-thirds of B.C. venture companies are junior miners and another significant segment is high tech. Businesses in these sectors generally are in a development stage and for the most part aren’t generating revenue.
“Investors have told us that what matters most to their investment decisions is not the quarterly financials, but the news releases and technical reports,” said Eady. “We do think it’s time to reconsider some of the assumptions used about venture issuers, about what matters in terms of what gets reported and how they are governed.
It takes a lot of management’s time to prepare this disclosure, but it’s a balancing act. We don’t want to get rid of good information that investors find useful. But there were people telling us that some information is not useful to them.”
The regulatory burden is part of the cost of capital for companies considering raising funds on the public market.
Darren Hopkins, vice-president of the public venture division at Macquarie Private Wealth, noted that while Canada’s public venture market is regarded as one of the world’s best, the cost of capital for junior companies can be high.
“One of the most important things now in Canada is to try and reduce the cost of capital wherever possible for junior companies so they can put more money to work.”
But market participants disagreed with some of the changes. The Canadian Foundation for Advancement of Investor Rights noted in its proposal comments that there was little need to overhaul the regulatory regime, especially if it meant further reductions in compliance obligations and shareholder protections.
It pointed out, for example, that eliminating first- and third-quarter financial statements would fundamentally change the financial reporting regime in Canada and not benefit investors.
It said investors rely on such disclosures, in part, because analyst coverage of venture companies is minimal in Canada. Eady noted that, given the feedback from its consultations, cutting the quarterly financials would likely not be included in a subsequent round of regulatory proposals. But other changes, such as creating a combined annual report and eliminating business acquisition reports, received more favourable response. He said the new rules are not intended to reduce investor protection.
In some cases, the proposals are stricter, he said, referencing the proposed requirement that all venture companies produce an annual information form. Currently, only 10% to 15% of venture issuers provide such a document to access the streamlined prospectus offering system.
“We’ve heard loud and clear that people don’t want us to take steps that would create a general unease among market participants or give the impression that the market was more dangerous than it was before.”