Simplifying venture issuer disclosures, part 2

by John Hughes

Over a year ago now, I wrote about a CSA discussion paper on Simplifying Venture Issuer Regulation. The paper proposed exempting venture issuers from many of the requirements currently applying to them, while introducing some new supplemental disclosures. Most prominently perhaps, it proposed requiring them to prepare interim reports just once a year, at the six month point, rather than quarterly.

These ideas were generally well received, and the CSA moved this year to the next step, issuing formal proposals for a new National Instrument 51-103, Ongoing Governance and Disclosure Requirements for Venture Issuers: the comment period ends a week from now, on October 27. I still think my earlier remarks on this project sound pretty good, so I’ll repeat them here.

I said: “I think the proposals make sense in virtually every respect. The notion that every public company, regardless of its size or risk profile, should provide the same minimum volume of information may have some conceptual simplicity, but is as likely to provide an illusion of transparency as the real thing. Of course financial statements can provide a nice illustration of a struggling business, but no more so than a good narrative and a table of financial highlights: you don’t need pages of disclosure to communicate (for example) that you’re running out of cash and you’d better get some more fast. Financial statements, in their classic IFRS-enhanced mode, really work best when you think about the investment as a sustaining annuity, and draw on the full complexity of the information to monitor the evolving risks attached to it. But no one looks at venture issuer investments that way. Actually, the regular cycle of quarterly financial statements and MD&A is as likely to mislead as inform, by somehow suggesting these documents are key to compliance and oversight. But I’ve often looked through venture issuer disclosures, leafing through interim reports that barely change from one period to the next, without ever really being able to follow where the money was going or what was happening with the core business opportunity….”

The proposals, hopefully, will address this by providing a more focused and accessible body of disclosure, better tailored to the key activities and risks. For example, the six-month report will be specifically required to include an assessment by management of the issuer’s performance, and to address such matters as how the issuer’s actual use of financing proceeds compares to its previous statements about their intended use.

Coming at this from the direction of IFRS: IAS 34 encourages publicly traded entities to provide interim financial reports at least at the six month point, no later than 60 days after the end of the interim period, but otherwise leaves those kinds of issues to regulators and others, focusing only on defining content requirements. This only reflects the limits of the IASB’s power of course, but still, it’s a bit odd to say in effect: we don’t have any strong view on whether you file interim statements or not,  but if you do, make sure you don’t leave out any of those disclosures about transfers of financial instruments between levels of the fair value measurement hierarchy. Wouldn’t it enhance the IASB’s overall image, and further the achievement of its vision, if it devoted just a little of its energy and resources to the other elements of the financial reporting infrastructure? For example, financial statements plainly don’t tell you much without an accompanying MD&A or other commentary to provide perspective on the underlying strategy, the business risks, and so on. The IASB did issue a practice statement last year on management commentary, but hasn’t done much to publicize it, and certainly doesn’t have any follow-up projects in the pipeline. I’m sure there’s some structural appeal to having the IASB stick to its own knitting, but sticking to your own knitting is an awfully slow way to get the kids warm for the winter, that’s what I say (don’t forget folks, I offer metaphors for any situation on demand, at a reasonable rate.)

Anyway, the CSA’s new proposals show an admirable practicality and focus on outcomes, but again, their ultimate effectiveness depends in large part on other pieces of the puzzle. For example, there’s a sore need for a high-profile education campaign on what it means to invest in venture issuers, and on how the new proposals will or won’t assist in making risk-appropriate decisions. And what about the value of IFRS for these issuers? Well, the CSA, at the time of writing, has yet to comment on IFRS accounting or disclosure issues arising from Canadian filings; the IFRS-related deficiencies on the OSC’s refilings list all reflect formal or structural matters. Regulators are understandably cautious about muddying the compliance waters, or saying anything that might tend to promote local interpretations of IFRS. But for venture issuers in particular, it’s crazy to claim all the IFRS requirements carry equal significance. To take an extreme contrast, a compliant cash flow statement is crucial to the overall picture; the boilerplate disclosures about accounting standards not yet adopted seldom matter at all. Once the new rules are in place, I hope the CSA’s communications and review programs will focus aggressively on what counts the most for investors in all this.

The opinions expressed are solely those of the author