In an effort to ease the costs of being a public company on small issuers, Canadian securities regulators are launching a pilot project that will allow issuers to drop a couple of quarterly reports and adopt semi-annual reporting (SAR) — an experiment that could eventually be expanded beyond venture issuers.
Last fall, the Canadian Securities Administrators (CSA) consulted on a proposal for the pilot project, which found broad support for the option of allowing issuers to voluntarily shift to semi-annual reporting. The project is designed to reduce the costs of filing quarterly financials, albeit at the risk of reducing the information available to investors, and increasing the risk of selective disclosure.
“While quarterly financial statements provide timely information to investors, for certain reporting issuers there can be instances in which the regulatory and internal cost of preparing such frequent reporting exceeds their benefit,” the regulators said in the staff notice spelling out the initiative.
The regulators’ exemption from the requirement to file first- and third-quarter reports will be open to certain venture issuers — including companies with less than $10 million of annual revenue, at least 12 months of reporting history and active listings on the TSX Venture Exchange Inc. or the CNSX Markets Inc., among other conditions.
According to a regulatory impact analysis by the Ontario Securities Commission (OSC), the exemption will be available to 89% of listed venture issuers in Ontario — led by the materials sector (58% of eligible issuers), followed by financials (12%), tech (7%) and health care (6%).
And, depending on how the pilot plays out, the CSA indicated that it may also lead to a broader shift to semi-annual reporting.
Indeed, the CSA said it “intends to engage in a broader rule-making project related to voluntary semi-annual financial reporting for eligible reporting issuers and will use learnings from the SAR pilot to inform that project.”
In the meantime, the regulators said they will also “continue to monitor international developments” in this area. It’s expected that U.S. regulators will propose allowing semi-annual reporting in the coming months.
“The semi-annual financial reporting pilot is a great example of harmonization by Canada’s regulators to support the competitiveness of Canadian capital markets, particularly for smaller venture issuers,” said Stan Magidson, chair of the CSA and chair and CEO of the Alberta Securities Commission, in a release.
While the prospect of reduced compliance costs could encourage more small companies to go public, increase competition and facilitate capital formation, the OSC’s analysis acknowledged the potential risks of moving to semi-annual reporting too — including a possible negative impact on the price discovery process from less timely disclosure, reduced comparability between issuers and uncertain effects on market perception.
For instance, an issuers’ decision to adopt semi-annual reporting could also be viewed as a red flag.
“The market and investors may view less frequent reporting by eligible issuers as a potentially negative market signal, resulting in higher cost of capital, reduced market value and reduced liquidity for the issuer’s securities,” the analysis said.
This could also “harm the broader venture market and increase the cost of capital for all issuers since it is difficult to compare or evaluate issuers that continue to report quarterly against their peers that choose only [semi-annual reporting],” it said.
Overall, however, the regulators concluded that the potential benefits of the project are proportionate to the expected costs.