Alexandra Iliopoulos and Greg Hogan
Adria Leung Lim
Covering the periods July and August 2016
National Instrument 43-101: Part 7 – What Issuers Need to Know About Promotional Language
This is the seventh installment in our periodic series on National Instrument 43-101.
Regulators do not generally look favourably on overly promotional language in a company’s disclosure. Overly promotional language is a red flag to regulators and companies who use it are often the first ones chosen for continuous disclosure reviews. Securities laws require that a company’s public disclosure be factual, complete and balanced and not present or omit information in a manner that is misleading. Unfavourable news must be disclosed just as promptly and completely as favourable news. Sufficient detail must be included in the disclosure to enable investors to understand the “substance and importance” of the disclosure. Thus if promotional language is used, the company needs to very clearly substantiate why it is appropriate. For instance, “world class” is an example of overly promotional language that regulators do not approve but is nevertheless used by many mining companies. If a project truly is “world class,” the explanation on why it is “world class” needs to be included in the disclosure. Arguably, this would only be accomplished by some form of comparison to truly word class projects which is a difficult endeavour because there are many factors that could apply and the term itself is subjective.
Also in the series:
Part 1: What Issuers Need to Know about Technical Reports
Part 2: What Issuers Need To Know About Terminology
Part 3: What Issuers Need To Know About Historical Estimates
Part 4: What Issuers Need To Know About Economic Analysis
Part 5: What Issuers Need To Know About Disclosure on Exploration Targets
Part 6: What Issuers Need To Know About Technical Report Triggers
National: Proposed Amendments to National Instrument 31-103 and National Instrument 33-109
On July 7, 2016, the Canadian Securities Administrators (CSA) proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and National Instrument 33-109 Registration Information. The proposed amendments relate to:
The CSA is proposing to:
The CSA is proposing the following changes to NI 31-103:
National: CSA Announce Results of Their Continuous Disclosure Review Program for Fiscal 2016
The CSA has released the results of its members’ continuous disclosure (CD) review programs for the previous past fiscal year. The report, CSA Staff Notice 51-346 Continuous Disclosure Review Program Activities for the Fiscal Year ended March 31, 2016 (the Staff Notice), highlights common deficiencies in members’ disclosure and suggests best practices for compliance with CD obligations. It also includes some examples to assist issuers in addressing these deficiencies.
Scope and Outcomes
The CSA conducted 902 CD reviews during the fiscal year ended March 31, 2016, a slight decline from 1058 during the previous fiscal year. 69 percent of such reviews were issue-oriented rather than a full CD review, meaning they were based on a specific accounting, legal or regulatory issue, an emerging issue, implementation of recent rules or on concerns which the CSA believes may give rise to a greater risk of harm to investors. Of these issue-oriented reviews, 33 percent were focused on mining and oil and gas technical disclosure issues, 12 percent were focused on gender diversity disclosure, nine percent were focused on management’s discussion and analysis (MD&A) disclosures, eight percent were focused on financial statement matters, six percent were focused on non-GAAP financial measures, five percent were focused on press releases and material change reports and the remaining 27 percent were focused on other matters which included corporate governance, management information circulars, material contracts, public complaints and other regulatory requirements.
62 percent of this year’s reviews uncovered deficiencies requiring action on the part of issuers including amendments and improvements to disclosure, referral to enforcement, cease trades or placing the issuer on a default list. The Staff Notice identified numerous deficiencies in Financial Statements, MD&As and other regulatory requirements which resulted in revision and/or refilling of CD documents.
The Staff Notice also provided examples of common deficiencies in financial statements, MD&As, material contracts, management information circulars and annual information forms.
Financial Statement Deficiencies
Issues identified in financial statements included inadequate sensitivity analysis in market risk assessment, failure to identify and account for contingent consideration in business combinations, poor allocation of a purchase price between intangible assets, inadequate explanation of determinations of the useful life of intangible assets during business combinations and aggregation of operating segments into a single segment for reporting purposes without ensuring that the aggregation criteria have been met.
Issues identified in MD&As included failure to provide sufficient analysis of liquidity and capital resources, failure to update disclosure relating to forward looking information, inconsistent identification of segments in financial statements and MD&A’s and reliance on the investment entity definition in IFRS 10 Consolidated Financial Statements without providing sufficient information for material investments and related investment and operating activities. The Staff Report also identified giving undue prominence to non-GAAP measures in MD&As as well as failure to discuss the more directly comparable GAAP measure as a deficiency and provided examples of these issues.
Other Regulatory Disclosure Deficiencies
Additional issues were identified in the following deficiencies:
Finally, the Staff Report noted common insider reporting deficiencies including the lack of a SEDI profile for issuers required to file reports under National Instrument 55-104 – Insider Reporting Requirements and Exemptions, failure to provide insider reports on SEDI for acquisitions made pursuant to a normal course issuer bid, failure to file amended issuer profile supplements on SEDI as necessary to reflect changes and failure to report the expiration of certain derivative securities of the issuer within five days of said expiration. The Staff report also noted deficiencies in reports being filed on SEDI including inaccurate transaction codes and dates, inaccurate reporting with respect to ownership, failure to report the name of the registered holder and incorrect security designations created by issuers.
Oil and Gas Reporting
The Staff Report highlighted disclosure deficiencies specific to reporting issuers engaged in oil and gas activities such that they are subject to disclosure standards and annual disclosure requirements under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities including errors and omissions and potentially misleading information regarding abandonment and reclamation costs, resources other than reserves and type wells, drilling locations and required associated information.
Ontario: OSC Publishes Corporate Finance Branch 2015-2016 Annual Report
The Annual Report summarizes the OSC Corporate Finance Branch's operational and policy work during the fiscal year ended March 31, 2016. Divided into two principal sections – compliance and responsive regulations – the report aims to encourage compliance with regulatory obligations, improve disclosure in regulatory filings and provide informational updates regarding trends, new issues and policy initiatives.
Key highlights of the Annual Report in relation to continuous disclosure compliance include:
Further, in examining public offerings completed during fiscal 2016, the OSC provides guidance on certain specific issues which the OSC identified in connection with prospectus filings, including:
The Annual Report also includes a discussion of the OSC’s program for distributions in the exempt market, applications for exemptive relief reviewed in fiscal 2016, and guidance in relation to insider reporting.
The OSC reviewed a number of regulatory initiatives implemented during the past two fiscal years in relation to the exempt market, including:
Lastly, the Annual Report provides an update on proposed changes in relation to distributions of securities outside of Ontario and amendments to Multilateral Instrument 11-102 – Passport System that came into force in the CSA jurisdictions other than Ontario, which had the effect of expanding the passport system.
Ontario: OSC Proposes Rule to Streamline Distributions of Securities Outside of Canada
On June 30, 2016, the OSC published for comment Proposed Rule 72-503 Distributions Outside of Canada (the Proposed Rule) that would:
Ontario: Securities Act Amendments to Insider Trading Prohibitions
On July 1, 2016, a provision contained in the Jobs for Today and Tomorrow Act (Budget Measures), 2016 (Bill 173) came into force, which amended insider trading rules (the Amendment) in section 76 of the Securities Act (Ontario) (the Act). The Amendment broadens the scope of what constitutes insider trading. It prohibits any person who has knowledge of an undisclosed material fact or material change in respect of a certain issuer from recommending or encouraging another person to purchase or sell securities of that issuer.
The Amendment is codified in the newly added section 76(3.1) of the Act. Prior to the Amendment, the Act’s insider trading prohibitions were limited to situations where, (i) a person in a special relationship with an issuer purchased or sold securities of that issuer with knowledge of an undisclosed material fact or change; or (ii) a person in a special relationship with an issuer informed another person of an undisclosed material fact or change regarding that issuer.
The Amendment closes in on a grey area not caught by (i) and (ii) above whereby a person who has knowledge of an undisclosed material fact or change merely recommends or encourages another person to purchase or sell securities of an issuer. The previous prohibitions required that the person ultimately purchasing or selling the securities have knowledge of the material fact or change at the time of a trade (either through a special relationship or tipping). No such requirement exists under the Amendment.
Exemptions from the Amendment are contained in section 175(1.1) of the Act’s regulations (General, RRO 1990, Reg 1015).
Ontario: OSC Releases 2016 Annual Summary Report for Dealers, Advisers and Investment Fund Managers _____________________________________________________________________________________________________________________
On July 28, 2016, the Ontario Securities Commission released its Annual Summary Report for Dealers, Advisers and Investment Fund Managers. The report is prepared by the Compliance and Registrant Regulation (CRR) Branch of the OSC and provides information for registered firms and individuals that are directly regulated by the OSC, being exempt market dealers (EMDs), scholarship plan dealers (SPDs), advisers (portfolio managers or PMs), and investment fund managers (IFMs). The CRR Branch registers and oversees firms and individuals in Ontario that trade or advise in securities or act as IFMs.
The CRR Branch intends the report to assist registrants by:
Some of the highlights of the report include guidance for firms seeking registration to operate online portals and trading platforms and an overview of current trends in deficiencies for firm registration filings (details below).
Guidance for Firms Seeking Registration to Operate Online Portals and Trading Platforms
Firms should consider submitting a pre-file application where the portal/platform has a unique or complex business model or will require discretionary relief from registration requirements. These applications may require more time to review and may take longer than the OSC's service standards. The OSC may also request a demonstration of the online portal/platform as part of the pre-registration interview. Regulatory requirements apply to all business models, including online advisers, crowdfunding portals and lending platforms. Typical registration deficiencies include:
The report reminds current EMDs and investment dealers that want to rely on the crowdfunding exemption, you will need to notify their regulator of this change in by filing Form 33-109F5 -- Change of Registration Information (Form 33-109F5) to update the business activities in Form 33-109F6 -- Firm Registration (Form 33-109F6).
An Overview of Current Trends in Deficiencies for Firm Registration Filings
Common deficiencies for firm registration filings were identified in section 3.2 of OSC Staff Notice 33-746. Additional themes that that were identified include.
o the international dealer registration exemption;
o the international adviser registration exemption; or
o the international investment fund manager registration exemption.
If a firm is no longer relying on any of the aforementioned registration exemptions, and has no intention on utilizing the exemptions(s) in the future, confirm in writing that your firm has no securities business of any kind in Ontario and also confirm the date your firm ceased to rely on the exemption(s) in order for the firm's reliance to be removed from the NRD system.
Ontario: OSC Approval of Fifth No-Contest Settlement Confirms Regulatory Commitment To Efficient Resolution Of Enforcement Cases
On July 29, 2016, the Ontario Securities Commission approved its fifth no-contest settlement. The OSC’s approval of five no-contest settlements over the past two years confirms the regulator’s commitment to cautious use of this enforcement tool and dispels the floodgates concerns raised by detractors. “No-contest” settlements were introduced in 2014 through OSC Staff Notice 15-702: Revised Credit For Cooperation Program in an effort to achieve more timely and efficient resolution of enforcement matters. Such settlements do not require respondents to admit facts alleged by enforcement staff, a contravention of the Securities Act (Ontario) or that the alleged conduct is contrary to the public interest. The OSC’s approach in this case demonstrates a firm recognition that no-contest settlements are an effective tool which offer the flexibility needed to achieve finality in settlement negotiations.
For more information on the OSC’s approval of previous no-contest settlements see Securities Litigation Outlook: Trends to Watch for Capital Markets Participants.
TSX Venture: TSX Venture Exchange to Launch New Market Making Service called TSXV LiquidityPro™
In an effort to enhance liquidity for public venture companies, the TSX Venture Exchange (the TSXV) announced the launch of a new issuer-sponsored market making service called TSXV LiquidityPro™.
Market making offers several benefits to growing companies, such as those listed on the TSXV. Market makers can promote market stability, mitigate price volatility, and enhance the trading experience for investors. According to the TSXV, companies who received market maker services from a TSXV Member experienced a $0.02 decline in their average spread, an 18 percent increase in the number of days when a trade occurred, and a 6 percent decline in price volatility measured by the closing price against the 10 day moving average price.
In this optional program, TSXV companies have the opportunity to select from a pool of pre-qualified TSXV LiquidityPro Providers (LPPs) that can provide quotation services, facilitate price discovery, and increase overall liquidity for an issuer under the governance of the TSXV. Each LPP submits a bid across a standardized set of market making metrics, along with their related monthly fee. Companies can then select a market maker based on their specific and individual needs, and establish clear expectations regarding their desired service level.
Key features of the LiquidityPro service include:
For more information or to sign up for the service, contact the TSXV at email@example.com or at 1-888-873-8392.
For information on becoming an LPP, contact TSXV at firstname.lastname@example.org or at 1-877-421-2369.
United States: SEC Proposes Modernization of Mining Disclosure Rules
The SEC recently proposed revisions to the property disclosure requirements for mining companies and related guidance, currently set forth in Item 102 of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and in Industry Guide 7 with the objective of modernizing the US disclosure rules to bring them closer to those of other jurisdictions.
In The Press
An opinion piece on Ontario's new Office of the Whistleblower by Wendy Berman and Lara Jackson - titled "Will the OSC Whistle-blower Program Change the Game, or Just Get Played?" – was recently published by The Globe & Mail:
"The recently announced program mimics the regime established by the U.S. Securities and Exchange Commission several years ago, and will pay out substantial awards for credible, actionable, original information that leads to convictions and/or the recovery of funds from wrongdoing in Canadian capital markets."
However, "the OSC program is not without criticism and concern from public companies and their advisers," note the authors, who go on to explore the possible risks of the program in this article.
For a list of recent transactions, including these transactions from July and August 2016, please click here. Highlights include representing: