Written By Brent Kraus, Abbas Ali Khan and Kieran Brennan

On November 3, 2022, the Canadian Securities Administrators (CSA) published its biennial report on issuer compliance with continuous disclosure obligations—Staff Notice 51-364 (Staff Notice), which covers fiscal years ended March 31, 2022, and March 31, 2021. The Continuous Disclosure Review Program was established to help issuers understand and comply with their obligations under National Instrument 51-102 Continuous Disclosure Obligations.

The CSA noted that the fiscal years ended March 31, 2022, and March 31, 2021, were marked by atypical uncertainties in the market, including:

• persistent supply chain issues;
• the continuing effects of the COVID-19 pandemic;
• higher than normal energy costs; inflationary pressures including rising interest rates; and
• the conflict in Ukraine.

These factors impacted issuers operating performance, financial position and future prospects which made complying with continuous disclosure obligations uniquely challenging.

In total, the CSA reviewed 1,038 issuers, of which 61 percent in 2022 and 51 percent in 2021 required issuers to improve and/or amend their disclosure, refile a previously filed document or file unfiled documents. The primary areas of deficiencies the CSA identified in the Staff Notice were (i) Financial Statements, (ii) Management's Discussion & Analysis (MD&A) and (iii) Other Regulatory Deficiencies. We review each of these categories in more detail below.

Financial Statements

The Staff Notice identified ongoing issues consistent with previous staff notices. Issuers continue to face challenges meeting International Financial Reporting Standards (IFRS) requirements including (i) the disclosure of probability of variable consideration in a transaction's price, (ii) the uncertainty in the nature, amount and timing of revenue and cash flows; and (iii) the proper disclosure of risks to credit. Issuers should both review and understand the IFRS guidelines when drafting their disclosure documents.

MD&A

Forward-Looking Information, Future-oriented Financial Information and Financial Outlooks

The CSA found consistent issues with full and plain disclosure regarding forward-looking information (FLI). Issuers must not disclose FLI unless they have a reasonable basis for the FLI, otherwise the disclosure would likely be overly optimistic or promotional. If FLI is disclosed, the underlying assumptions and associated risks of the FLI must also be included. The CSA also highlighted the importance of updating previously disclosed FLI in an issuer's MD&A, which helps the market understand how the issuer is meeting its targets and shows why results may differ materially from previous disclosure.

Issuers also failed to disclose financial projections where it was clear they were unlikely to achieve them. All financial outlooks must be supported by reasonable assumptions including flagging highly unusual sales volumes, demand issues, delivery or supply chain issues and personnel or infrastructure issues. The CSA noted that unique circumstances and the atypical market uncertainties, both of which were experienced during the review period, will affect disclosure. Therefore, issuers must be careful when discussing financial outlooks and FLI more generally.

The CSA reminded issuers that they can disclose updated information in news releases before filing their MD&A, which ensures that information is communicated to the market on a timely basis. However, issuers are not permitted to disclose information only in a news release without disclosure in the MD&A.

Non-Generally Accepted Accounting Principles (Non-GAAP) and other Financial Measures

The CSA indicated that issuers are also struggling to comply with rules regarding the disclosure of non-GAAP financial measures in earnings releases. Issuers are not allowed to present a non-GAAP financial measure with more prominence than the most directly comparable financial measure disclosed in primary financial statements. When multiple non-GAAP financial measures are used for the same or similar purpose, they may obscure disclosure of the most directly comparable financial measure.

In addition, issuers must be careful not to incorporate by reference information that is contained in an investor presentation. Issuers were reminded that if referencing an MD&A, the reference must contain the specific location of the information in the MD&A. Moreover, the MD&A must be filed and include the information about the specific financial measure disclosed in the investor presentation. General statements such as, "see the non-IFRS measures section in the MD&A" are not sufficient.

Venture Issuers and Early-Stage/Development-Stage Issuers

Venture issuers continue to have difficulties disclosing sufficient information to enable investors to understand the timing and costs associated with announcements of significant projects. Concrete milestones, both short- and long-term plans for research and development and the required regulatory and license approvals must all be disclosed with sufficient detail to understand the announcement. If a venture issuer has not yet generated significant revenue from operations, they must disclose sufficient information on costs incurred in operations, research and development and exploration. The disclosure would include a breakdown of the material components of the following, including the cost incurred: exploration and evaluation assets or expenditures, expensed research and development costs,  intangible assets arising from development and general and administration expenses. If the business primarily involves mining exploration and development, the analysis of exploration and evaluation assets or expenditures must be presented on a property-by-property basis. 

Other Regulatory Deficiencies

Overly Promotional Disclosure (Greenwashing)

When reviewing environmental, social and governance (ESG) factors, the CSA observed an increase in potentially misleading, unsubstantiated or otherwise incomplete claims about business operations or the sustainability of a product or service being offered. These claims are promotional in nature and convey a false impression to an investor, which "greenwashes" the factual reality of the disclosure.

Issuers should be wary of disclosing aspirational ESG targets and goals without identifying the risk factors that could cause actual results to be materially different. For example, carbon neutral targets for a specific year must be based on facts and supported by active corporate activities. If environmental ratings are referenced, the methodology and criteria used to create the rating should be disclosed with the rating itself. If an issuer is working with another entity to develop environmental technologies or plans, any statement should be supported with information about the relationship and what specifically the entity is doing. Without sufficient detail on the relationship, the disclosure is likely to be vague, misleading and promotional in nature and investors will not be able to make informed decisions.

Business Acquisitions

Issuers were reminded that they must file a business acquisition report when either (i) the securities of an acquired business were exchanged for the issuer's securities; or (ii) the transaction met the definition of a restructuring transaction such that the issuer was required to file a material change report or an information circular when prospectus level disclosure is required. The CSA noted that acquisition of securities of another entity is considered to be an acquisition of a business. Issuers seeking relief from the requirements to file a business acquisition report or to include financial statements of an acquired business or related businesses must apply for exempted relief before the filing deadline for the business acquisition report and before the closing date of the transaction.

Mineral Project Disclosure

Some disclosure of scientific or technical information about mineral projects appears to have been approved by geoscientists or engineers lacking relevant experience in the subject matter. Under National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101), individuals reviewing such information must have sufficient relevant experience with the subject matter being disclosed. Investors must have confidence that an expert has enough relevant experience with the topic they are writing about to discuss the topic with authority, knowledge and expertise.

In addition, issuers cannot file Technical Reports where the authors "self-exempt" themselves from the personal inspection requirements under NI 43-101. There is no mechanism for issuers of the qualified person, often an engineer or scientist, to exempt themselves unless a specific exemption has been granted.

The CSA staff also reviewed news releases that disclosed exploration results or mineral resource estimates in terms of equivalent grades. The CSA noted that issuers often defend the use of equivalent grades as providing investors with a single number to represent the metal content of a drill intersection or resource block, However, the CSA staff noted that equivalent grades may obscure the real economic potential when different metals are recovered at different rates. The CSA further noted that the potentially misleading grade equivalents can be avoided by calculating them based on the results of metallurgical tests or—where test results are not available—including reasonable assumptions for recovery of the constituent species.

The CSA further noted that foreign disclosure codes such as JORC, SAMREC and SME have requirements for disclosure of grade equivalents that explicitly require the issuer to include recovery and, in some instances, treatment, smelting and other costs. The applicable clauses of those codes may reasonably be used as guidance.

Audit Committees

The CSA noted that issuers have incorrectly relied on National Instrument 52-110 Audit Committees (NI 52-110) to appoint less than three members to the audit committee. The audit committee of a non-venture issuer must be comprised of a minimum of three members, each of whom must be a director of the issuer and, except in very limited circumstances, each audit committee member must be independent.

In addition, venture issuers should be aware that, except in very limited circumstances, a majority of the audit committee members must not be executive officers, employees or control persons of the venture issuer or an affiliate. Any exemptions to NI 52-110 are generally available for a limited timeframe. Audit committee members must be mindful of their responsibilities including that they review the issuer’s financial statements, MD&A and annual and interim profit or loss press releases before the issuer publicly discloses this information.

If you have any questions about the Staff Notice or any continuous disclosure obligations, please contact a member of the Bennett Jones Capital Markets group or the authors of this blog.

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