Regulators propose another fix to small company disclosures

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Canada's securities regulators are hoping the third time is the charm in their effort to streamline reporting rules for small companies.

The Canadian Securities Administrators, an umbrella group for provincial securities commissions, has published yet another proposed set of disclosure rules for venture companies – including those trading on the TSX Venture Exchange – revamping a proposal first published in July 2011 and then revised in September 2012. The initiative was withdrawn last summer after companies complained they were too overwhelmed by economic hard times to adapt to a lot of new rules, which was somewhat ironic given that the stated goal of the reform was to make reporting requirements easier for small companies.

The CSA is trying again, however, with new proposals unveiled Thursday that will introduce fewer major structural reforms in favour of simplifying existing disclosure rules. The latest version, for example, drops the 2012 proposal to create a new type of annual report at venture companies, which would have combined a number of currently separate disclosures into one document, including financial statements, disclosure of board and governance practices, and CEO and CFO certification documents.

Instead of implementing changes through a new "stand-alone, tailored regime for venture issuers," the CSA said it now proposes to implement changes "on a targeted basis by amending existing rules."

One highlight is a new quarterly financial reporting standard for early-stage venture companies, eliminating the current requirement to file a full management and discussion analysis (MD&A) disclosure for each quarter. Instead, smaller venture companies "without significant revenue" could file a highlight document with "a brief narrative update about the business activities and financial condition of the company" for the prior quarter. The CSA said it anticipates the quarterly reports would be one or two pages long.

Larger venture companies with significant revenue would still have to file under current MD&A rules, and all companies would still have to file year-end financial statements.

The new rules would also change executive compensation reporting for venture companies, requiring them to disclose pay for just three top executives – the CEO, CFO and one other highest-paid executive – instead of five. Venture companies would only have to disclose pay for the prior two years instead of three years.

Small firms would also be exempted from having to calculate and disclose the grant-date value of stock options or other share-based awards on the executive compensation chart. Instead, venture issues would only have to provide information about how many options and shares have been issued, held and exercised by executives. While the disclosure is less detailed than that provided by larger companies, it would reintroduce disclosure about gains from exercising stock options. That's something even large companies don't have to disclose.

Venture issuers would also face less stringent rules for filing so-called BARs or business acquisition reports, which are disclosure documents provided to investors to explain the details of the company's significant acquisitions. BARs currently have to be filed for all acquisitions that increase assets or operating income by more than 40 per cent, but the CSA is proposing to raise the threshold to 100 per cent and to eliminate a requirement to include pro forma financial statements in the BAR.

While most of the changes would reduce disclosure requirements compared to the status quo, the CSA said Thursday they could end up serving investors better by making documents easier to read.

"We think that those eliminated obligations may be of less value to venture issuer investors, and that the proposed amendments will result in more relevant disclosure for those investors," the regulators said.

"The resulting streamlined disclosure should also make it easier for venture-issuer investors to read disclosure documents and locate key information."