Capital Markets Update: Cannabis and Beyond - October 24, 2018 Patricia Olasker, Rob Murphy, David Wilson, Robin Upshall and Chantelle Cseh ...
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Capital Markets Update: Cannabis and Beyond
October 24, 2018
Patricia Olasker, Rob Murphy, David Wilson, Robin Upshall
and Chantelle Cseh
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL
Agenda
1 Cannabis Update 5 Non-GAAP and Other Financial Measures Disclosure
2 Cross-Border Developments 6 The Evolving Standard for Assessing Materiality
3 Securities Laws and Blockchain Update 7 Elon Musk and the Importance of Careful Tweeting
4 TSX Update
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 2
Cannabis Update
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 3
Market Size
– Illicit: ~ $5.0 – $6.2 Billion
– Expected: ~ $4.9 - $8.7 Billion
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 4
Licensed Producers
TSX Listed Issuers (as at October 23) Other Issuers
Market Cap: Market Cap: Market Cap: Market Cap: Market Cap:
$11.74 Billion $9.38 Billion $3.65 Billion $10.18 Billion $696 Million
(TSX & NYSE) (TSX & NYSE) (NASDAQ) (TSX-V)
Market Cap: Market Cap: Market Cap: Market Cap: Market Cap:
$1.93 Billion $1.02 Billion $1.04 Billion $440 Million $412 Million
(TSX & NASDAQ) (TSX-V) (TSX-V)
Market Cap: Market Cap: Market Cap:
$983 Million $728 Million $529 Million
(TSX-V) (TSX-V) 5
Regulatory History
October 17,
2012 2018
MMPR Cannabis Act
1999 Harper government Legalization of
Exemptions regulations creating cannabis for
issued by commercial recreational
Health Minister cannabis industry purposes
2001 2016
MMAR ACMPR
Allows individuals Foundation for
with medical need current medical
to grow their own cannabis
cannabis regime
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 6
Cannabis Legislation Overview
Federal Cannabis Act Provincial Regulation
– Comprehensive scheme governing the licencing, - Provinces are given the ability to regulate on,
among other things, the retail sale of cannabis
production, distribution and sale of cannabis and
under s. 69(1) of the Cannabis Act
related products
- The provinces have generally adopted one of
– Replaces Access to Cannabis for Medical three retails methodologies:
Purposes Regulations
Public
– New medical regime substantially similar to Private
ACMPR
Hybrid
– What’s legal: fresh, dried, oils, plants and seeds
- Ontario
– What’s not legal: edibles and concentrates
Current: Cannabis sold exclusively online
April 2019: Private retail
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 7
Deal Update – M&A
Aurora Cannabis Inc. Acquired: Canopy Growth Corporation Aphria Inc. Acquired:
– CanniMed Therapeutics $1.1 Acquired: – Broken Coast Cannabis Inc. -
billion (May 2018) – Mettrum Health Corp. - $430 $230 million (February 2018)
– MedReleaf Corp - $3.2 billion million (January 2017) – Nuuvera Inc. - $425 million
(July 2018) – Hiku Brands Ltd. - (March 2018)
– ICC Labs Inc. - $290 million $299.4million (September
(pending) 2018)
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 8
Deal Update – Joint Ventures, Strategic
Investments and Other Relationships
Alcohol/CPG Retail
– Constellation Brands Inc. acquisition of equity stake – Aurora Cannabis and Liquor Stores N.A. Announce
in Canopy Growth Corporation Investment to Develop Retail Cannabis Business
– Molson Coors Canada and Hexo Joint Venture – Billion-Dollar Cannabis Brand MedMen Coming To
Focused on Non-Alcoholic, Cannabis-Infused Canada Via Cronos
Beverages – NAC and Second Cup Establish Strategic Alliance
– Coca-Cola? to Operate Recreational Cannabis Dispensaries
Pharmaceutical – Shoppers Drug Mart gets medical pot licence from
– Tilray and Sandoz Announce Pharmaceutical Health Canada
Partnership Technology
– CannTrust and Apotex Accelerate Partnership to Fuel – Cronos Group and Ginkgo Bioworks Announce a
Global Expansion in Medical Cannabis Market Partnership to Produce Cultured Cannabinoids
Tobacco? – Emerald Health Announces Blockchain based
– Altria investment in Aphria? Supply Chain Management solution
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 9U.S. Cannabis Industry Risk
Use and sale
– Cannabis is Schedule I narcotic under U.S. Controlled Substances Act
> Medical sales permitted in 31 states; Recreational sales permitted in 9 states
– Cole Memorandum
> Never de-criminalized cannabis offences, just de-prioritized
U.S. federally regulated banks
– Any money derived from cannabis operations in the U.S. proceeds of crime
> Size of the investment does not matter
– BUT any profits from legal Canadian operations are not proceeds of crime
> Key is that the cannabis company be operates solely within Canada, or another
jurisdiction where cannabis is legal
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 10Securities Regulation
TSX Staff Notice – Delisting of Cannabis Companies
– (i) direct or indirect ownership of, or investment in, an entity engaging in the cultivation,
distribution or possession of marijuana in the U.S. (“Subject Entities”)
– (ii) commercial interests or arrangements with Subject Entities that are similar in
substance to ownership of, or investment in, Subject Entities
– (iii) providing services or products that are specifically designed for, or targeted at,
Subject Entities
– (iv) commercial interests or arrangements with entities engaging in the business activities
described in (iii)
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 11Securities Regulation (continued)
CSA Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities
– Focus on disclosure BUT deference to stock exchanges
> nature of the issuer's involvement in the cannabis industry,
> cannabis remains illegal under U.S. federal law
> whether and how the issuer's U.S. cannabis related activities are conducted in a
manner consistent with U.S. federal enforcement priorities
> ability to access both public and private capital and what financing options are or are
not available in order to support continuing obligations.
– CSA revised Staff Notice in 2018 in response to rescission of Cole Memo
– Quantification of exposure, receipt of legal advice, exposure arising from U.S. federal law
12Securities Regulation (continued)
– Issuers' response: – Aphria sold its shares in Liberty Health
> Divest/spin-out assets Sciences, a cannabis producer with operations
in Florida for $59.1 M
> Buyback options contingent upon cannabis
becoming federally legal in the U.S.
– CannTrust assigned certain US IP to a non-
related party for nominal consideration
– Aurora spun-out its subsidiary, Australis, to
pursue investment opportunities in the U.S.
– Canopy Rivers restructured its investment in
TerrAscend to allow TerrAscend to pursue
strategic transactions in the U.S.
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 13Access to Capital
Equity Financing Reverse Take Overs Streaming Agreements
– Primary source of capital – Preferred method of going – What is streaming?
– Big banks slow to enter public > Essentially a loan, to be
– Recent RTOs: repaid in cannabis at agreed
– BMO
> Canopy Rivers (September upon rates
> $100 million bought deal for
2018) > Often accompanied by equity
Cronos
> Flowr Corporation stake
> $200 million bought deal for
Canopy (September 2018) – Auxly
> $90 million bought deal for – IPOs – Canopy Rivers
Supreme Cannabis > The Green Organic
– CIBC Dutchman
> Canopy Rivers RTO > Tilray (NASDAQ)
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 14Access to Capital (continued)
Bank Financing What are the Assets?
– Cannabis companies can borrow from Schedule I - Real Property
Banks, but how will a bank take and enforce its - Equipment
security?
- Intellectual Property
– Asset Forfeiture/Seizure
- Goodwill
– Considerations when taking Security
- Securities or Other Interests
> What are the assets
> Challenges when enforcing security - Inventory
- Receivables
- Production and/or Sales License(s)
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 15Border Issues
– Generally, any non-U.S. citizen who has been convicted of, admits having committed or admits
committing acts that violate any law or regulation of a state in the U.S. or the U.S. itself will be
inadmissible to the U.S.
– September directive: “As Canada prepares to legalize recreational marijuana starting Oct. 17,
2018, U.S. Customs and Border Protection (CBP) would like to remind travelers that marijuana
is a controlled substance under United States federal law. The sale, possession, production,
distribution or the facilitation of the aforementioned of both medical and recreational marijuana
remains illegal under U.S. federal law…Determinations about admissibility and whether any
regulatory or criminal enforcement is appropriate are made by a CBP officer based on the facts
and circumstances known to the officer at the time.”
– October update: “A Canadian citizen working in or facilitating the proliferation of the legal
marijuana industry in Canada, coming to the U.S. for reasons unrelated to the marijuana
industry will generally be admissible to the U.S. however, if a traveler is found to be coming to
the U.S. for reason related to the marijuana industry, they may be deemed inadmissible.”
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 16Employment and Workplace Safety
Employment Issues Workplace Safety Issues
– Benefits Plans Coverage – Concern that increased use of cannabis, led by
> Manulife and Shoppers offering coverage social normalization, will result in higher
incidences of impairment in the workplace
– Drug Testing for Cannabis Use
– Challenge: identifying impairment and
responding accordingly
– Accommodating Cannabis Use
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 17Cross-Border Developments
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 18New Offshore Offering Exemptions – Local Rules in AB, BC, ON
What are they?
• Ontario's new rule (72-503) provides a prospectus exemption for any:
i. public offering in the U.S. or specified foreign jurisdiction;
ii. foreign offering concurrent with a Canadian public offering;
iii. foreign offering of a Canadian reporting issuer; or
iv. foreign offering of a non-reporting issuer
• Acquired securities are freely tradeable except under exemption (iv)
• Exemptions (iii) and (iv) require brief trade report (no confidential purchaser info)
Equivalent rules implemented in British Columbia and Alberta
• B.C. first to implement (Oct 2017) but modelled on Ontario's initial rule proposal
• Later Alberta rule (Aug 2018) is substantially same as Ontario's final rule
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 19New Offshore Offering Exemptions – Legal Implications
Why are they important? Finally, we can give you a clear answer …
• Provide clear exemptions from local Canadian prospectus requirements
• Without them there is legal uncertainty due to broad 'distribution' trigger (which
does not expressly except trades outside a local jurisdiction)
• Critical in AB and BC, where offshore trades are deemed a 'distribution' from the
jurisdiction by any issuer with substantial connection (regardless of flowback risk)
• Prior AB and BC offshore offering exemptions were outdated & impractical
Do they work?
• The Ontario and Alberta rules work in practice but the B.C. rule is flawed
• Ontario also adopted new policy on its general approach to offshore sales
• Replaced outdated Ontario guidance
• Unfortunately, BC and Alta failed to revisit their 'distribution from' approach
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 20New Offshore Offering Exemptions – Other (Interesting) Implications
(Fun) Fact: No hold period on offshore private placement by reporting issuer
• Foreign purchaser can freely resell back into Canada day one
• No limitations on their volume or manner of resale
• In contrast with 4 month hold on same securities privately placed in Canada
Potential to apply same approach to Canadian private placements? Unclear
• CSA has said they are conducting a broader review of resale regime
• Could new exemptions signal a change in their view on restricted periods?
• That available disclosure is sufficient to address investor protection?
• It is possible but …
• New exemptions were local and provided no rationale for absence of hold period
• Regulators seem focused on a national (not local) approach to resale regime
• Investor protection concerns if results in diminished underwriter participation
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 21New Offshore Resale Exemption
Alternative exemption for offshore resale of non-reporting “foreign” issuer securities
• Issuer does not qualify as 'foreign' if:
• organized or has head office in Canada or
• a majority of its directors or executive officers are resident in Canada
Why is this new exemption important?
• Removes impediment to Canadian participation in treasury issue of foreign issuer
• Existing exemption not available if Canadian residents own more than 10% of issuer
• Impractical to confirm ownership; Canadian investors may have indefinite hold
Does it work? Yes, for the most part, but still imperfect
• Availability is a function of domestic connections that aren't a good proxy for risk that
securities flowback into Canada
• Not available to Canadian company listed exclusively on foreign exchange
• CSA is considering whether to address in its broader review of resale regime
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 22Initiative to Reduce Regulatory Burden – Following the U.S. Lead
The Objective: To meaningfully reduce regulatory burden on reporting issuers without
compromising investor protection
• Began with April 2017 CSA consultation
• Similar to the SEC's Disclosure Effectiveness Initiative (started in 2012/13)
• In March 2018, the CSA identified six 'options' as policy projects in the near term:
i. Streamlined, alternative prospectus offering model
ii. Facilitate at-the-market offerings
iii. Clarify the 'primary business' financial statement requirement for IPOs
iv. Remove / modify the criteria to file a business acquisition report
v. Review current continuous disclosure requirements with a view to …
• reducing the disclosure burden on issuers
• while enhancing usefulness and understandability
vi. Facilitate / expand the use of electronic delivery
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 23Initiatives to Reduce Regulatory Burden – What We (Don't) Know
Are there further details? Not yet
• As the CSA noted, these are just 'options' as policy projects in the near term
• In true lawyerly fashion, they've disclaimed any assurance of changes
• While some changes are obvious, hard to guess direction they'll take on others
• Not even clear on initiatives that they chose not to pursue at this time …
• as some are being considered in the context of another CSA policy initiative
When will we hear more? Don't hold your breath …
• Per the CSA, any regulatory change involves a number of steps
• Some of these initiatives could involve significant changes
• Likely the CSA will first deal with low-hanging fruit
• Disclosure rationalization to be in stages with majority requiring longer timeframe
• Experience to date with U.S. disclosure rationalization initiative may be instructive
• A few years before first proposals; started with redundant & outdated disclosure
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 24Securities Laws and Blockchain Update
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 25Securities Law and Blockchain:
Statistics and a Refresher
– ICO Statistics – Adopted (and broadened) by SCC in Pacific
> 2015 - $6 million raised Coast Coin Exchange
> 2016 - $99 million raised > investment of money
> 2017 - $6.5 billion raised > common enterprise
> 2018 - $21.4 billion raised (so far) ○ fortunes interwoven with investee
> expectation of profit
> from sole, primary or significant efforts of others
– Refresher
> definition of “securities” very broad
○ includes an “investment contract” – Capital raising
> law on investment contracts originates in U.S. > key hallmark of a security token
Supreme Court decision in Howey
○ orange grove case
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 26Securities Law and Blockchain:
Regulatory Responses
– Summer 2017 – February 2018
> DAO: SEC Report of Investigation > SEC chairman: “Every ICO I’ve seen is a
> CSA Notice 46-307 security”
○ Very limited guidance – May 2018
– November 2017 > Operation Cryptosweep
> SEC chairman: “I have yet to see an ICO that
○ U.S. and Canadian regulators – 70 inquiries
doesn’t have a sufficient number of hallmarks of
a security” and investigations; 35 pending or completed
enforcement actions
– December 2017
> SEC files fraud charges against Quebec-based – June 2018
PlexCorp > CSA Notice 46-308
> SEC halts ICO of Munchee tokens ○ Utility not determinative
○ Emphasis on investor’s expectation
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 27Securities Law and Blockchain:
Industry Responses
– Issuers responded by acknowledging the capital- – U.S. pathway
raising nature of their activities or other measures > hope is that Regulation A+ will open the door to
> SAFT: more crypto issuers
○ Simple Agreement for Future Tokens (aka ○ broader scope of potential purchaser
DDATs, SAFEs) • not just accredited investors
• limited financial reporting, in some cases
> jurisdiction shopping no audit necessary
○ leave for a more crypto-friendly jurisdiction • immediately freely tradable
– Canadian pathway?
> Patience/compliance > “closed system” means that no free tradability
○ waiting for relevant hold periods on the unless a reporting issuer
“security” tokens to expire ○ tokens generally require free tradability to be
○ offering under a prospectus functional
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 28Securities Law and Blockchain:
The Next Hurdles
– Investment funds – Exchanges/Marketplaces
> emergence delayed due to concerns with > only exchanges currently established trade in
○ custody the main cryptocurrencies
○ valuation > avoids risk of trading in securities and requiring
> initially only “crypto-adjacent” funds registration
> now IFMs registered and custodians approved ○ Canadian regulators have sent inquiry letters
to crypto-participants asking whether they
> some crypto funds have emerged
operate marketplaces, clearing agencies
○ limited to main cryptocurrencies
> some participants intend to start a regulated
• bitcoin, ether, litecoin marketplace
○ need regulatory approval to expand holdings
> limited ability to trade where custodian is not
registered dealer
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 29TSX Update
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 30Determining Market Price in Connection with an Offering
• TSX Staff Notice 2018-003
• Builds on TSX Staff Notice 2016-006
• Discourages pricing of offerings with material undisclosed information
• When pricing public offerings and private placements,
the TSX compares the offering price to the market price
• TSX will require security holder approval of offerings that:
• Exceed the permissible pricing discount
• Result in dilution in excess of 25% and are priced at a discount
to the market price
• Materially affect control (create a new 20% shareholder)
• Exceed the10% threshold for placements to insiders
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 31Determining Market Price (continued)
• What is the market price?
• Generally, the five-day VWAP
• What if the five-day VWAP is not appropriate?
• Includes period before and after disclosure
of a material event
• TSX view is that pricing should occur
five clear trading days following dissemination
of material information
• TSX may permit market price calculation using
VWAP of less than five days
• Issuers proposing to use
an abbreviated period to determine market price
should contact the TSX in advance
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 32Public Company Acquisitions using Share Consideration
• TSX Staff Notice 2018-0005
• Applies if security holder approval required in connection with the issuance of securities
• Mandates disclosure required to be provided to the issuer’s security holders
• Commonly implicated where more than 25% of an issuer's securities are to be issued in
connection with the acquisition of a public company
• Requirement to approve a maximum number of shares issuable is unchanged
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 33Public Company Acquisitions (continued)
• Can issue up to an additional 25% of the number of shares approved for issuance by
security holders
• Exclusively for an increase in consideration payable to target shareholders
• Circular must state:
“TSX will generally not require further security holder approval for the issuance of
up to an additional [x] [securities], such number being 25% of the number of
securities approved by security holders for the transaction.”
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 34Non-GAAP and Other Financial Measures
Disclosure
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 35Non-GAAP Financial Measures:
What Has Changed?
– Proposed rule, if adopted, will have the force of
law – New provisions relate to use of
> Current policy is a CSA staff notice, which > forward-looking non-GAAP measures
stated staff’s views on where use of non-GAAP
> ratios
information might be a misrepresentation
> segment measures
> Rule will provide CSA staff with stronger tool for
enforcement > supplementary financial measures
> capital management measures
– When adopted, will apply to
> disaggregated line items
> all issuers other than “SEC foreign issuers”
> investment funds
> public documents
> social media
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 36Non-GAAP Financial Measures:
Why the Concern? Why the New Approach?
– Regulators’ concerns about non-GAAP Financial – Regulators have found that disclosure practices
measures surrounding non-GAAP financial measures vary
– Provide CSA with stronger tool for enforcement
> lack standardized meanings under financial
– Have identified that the 52-302 definition of non-
reporting framework used in an issuer’s
GAAP financial could be equally problematic
financial statements
without additional disclosure
> lack context when disclosure outside the
issuer’s financial statements – Reaction to some confusion in marketplace about
non-authoritative guidance provided by industry
> lack transparency in their calculation
groups and professional bodies
> vary significantly by issuer and industry
– other stakeholders (particularly investors) also
interested
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 37Non-GAAP Financial Measures:
What exactly are they?
– New definition: – Some common examples of non-GAAP financial
> non-GAAP financial measure means: information
○ a financial measure of financial performance, > adjusted earnings
financial positions or cash flow > adjusted EBITDA
• not disclosed or presented in the financial > free cash flow
statements; and > pro forma earnings
• not a “disaggregation” (calculated in > cash earnings
accordance with the accounting policies > distributable cash
used to prepare the financial statements) of
> cost per ounce
a line item presented in the primary
financial statements; or > adjusted funds from operations
○ a financial outlook for which no equivalent > earnings before non-recurring items
financial measure is presented in the primary
financial statements
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 38Non-GAAP Financial Measures:
Requirements under the Proposed Rule
– A non-GAAP financial measure must be – First time non-GAAP financial measure disclosed
> labelled appropriately given its composition and > identify measure as non-GAAP
in way that distinguishes it from financial > state that it is a non-GAAP measure
statement measures ○ does not have a standardized meaning and
> no more prominent than most directly ○ may not be comparable to other issuers
comparable GAAP financial measure
> explain how the non-GAAP measure
> document must present same measure for
○ provides useful information; and
comparative period
○ additional purposes, if any, for which
– Rule addresses the disclosure of ratios a little bit management uses the measure
differently
> provide a quantitative reconciliation to most
directly comparable GAAP measure
> explain reason for any change to label,
composition or calculation of measure
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 39Non-GAAP Financial Measures:
Reconciliations
– How to reconcile – Reconciliations that are forward-looking have
> must be disaggregated in a way that gives a separate rules
reasonable person an understanding of each > must present the equivalent historical non-
reconciling item GAAP measure
> explained in a way that provides a reasonable > must describe either
person an understanding of each reconciling ○ each of the material differences between
item • the financial outlook; and
– Reconciliation may be located in another section • the most directly comparable financial
of the document outlook for which an equivalent historical
financial measure is presented in the
financial statements; or
○ each of the significant components of
financial outlook used in its calculation
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 40Non-GAAP Financial Measures:
Segment Measures and Supplementary Financial Measures
– A segment measure is a financial measure that is – Supplementary financial measures are
disclosed in the notes to the financial statements > not in financial statements and are a
– Regulators are concerned about aggregations of “disaggregation” of a line item in financial
segment measures statements; and
– If not a total, subtotal or line item in financials > disclosed on a periodic basis (or intended to be)
to present an aspect of financial performance,
> first-time disclosure must provide a quantitative
financial position or cash flow
reconciliation to the most directly comparable
financial measure in the financial statements – First time disclosed in document, must
> present the total of segment measures with no > describe how calculated
more prominence that the comparable measure > explain any reason for change in label,
> include the total of segment measures for the composition or calculation of measure
comparative period if the total has been – Include measure for comparative period if it has
previously disclosed been previously disclosed
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 41Non-GAAP Measures:
Capital Management Measures
– Capital management measures are – May not present capital management measure
> measures disclosed in the notes with greater prominence than
> most directly comparable financial measure in
> enable users of financial statements to evaluate
financial statements, or
issuer’s objectives, policies and processes for
> if ratio, similar financial measures presented in
managing capital financial statements
– Rule applies to measures that are not a total, – First-time disclosure requires
subtotal or line item in financial statements or a > description of how measure calculated
disaggregation of a line item presented in the
> statement that calculation is not prescribed
financial statements
> explanation of how measure provides useful
information and how management uses
> quantitative reconciliation
– Include measure for comparable period if
previously disclosed
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 42The Evolving Standard for Assessing Materiality
WONG V. PRETIUM RESOURCES, 2017 ONSC 3361
PANICCIA V. MDC PARTNERS INC., 2018 ONSC 3470
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 43© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 44
Timeline
1 2 3
2011-2012: Pretium November 2012: May 2013: Pretium
conducts mineral Snowden produces announces the start
exploration program its Mineral of its Bulk Sample
at Brucejack. Resource Estimate. Program.
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 45Timeline (continued)
4 5
July-October 2013: October 7-9, 22
Strathcona 2013: Strathcona
expresses concerns resigns from the
with the sample Bulk Sample
tower results. Program and
Pretium issues
press release.
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 46The Parties' Positions
Plaintiff Defendants
• Strathcona's concerns with the sample tower • Strathcona's concerns were discussed both
results were material facts that were required to internally and with Snowden and the decision
be disclosed at the time they were raised by was made not to disclose those concerns
Strathcona during the period from July 23 to because they were deemed premature and
October 21, 2013. unreliable, and accordingly were not material.
• The only accurate and reliable test method was
• There was no reason why Pretium could not milling the entire sample.
have disclosed Strathcona's concerns from the • As it turns out, Pretium was right and mill results
outset together with an explanation of the supported the Mineral Resources Estimate.
Company's view as to why those concerns were • Relied on the reasonable investigation defence.
unfounded.
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 47The Standard for Assessing Materiality: Market Impact or
Reasonable Investor?
• Misrepresentation:
a) an untrue statement of material fact; or
b) an omission to state a material fact that is necessary to make a statement not
misleading in light of the circumstances in which it is made.
• Material Fact: a fact that would “reasonably be expected to have a significant effect on the
market price or value of securities.”
o Known as the “market impact” test for assessing materiality – impact of the alleged
misrepresentation on the market price or value of a company's securities.
o Compare with the “reasonable investor” test – information that a reasonable investor
would consider important in making an investment decision.
o “Reasonable investor” sets a lower threshold for materiality than “market impact” – a
reasonable investor might want to know information that would not have an impact
on the market price or value of securities.
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 48Wait, that doesn't seem right…
Belobaba J. asked the wrong question: “Even if
Pretium genuinely believed that Strathcona's
findings and concerns were based on unreliable
(sample tower) data, how can it be that the
findings and concerns of an experienced and
respected mining consultant is not information
that a reasonable investor would consider
important?”
No mention anywhere in the decision as to whether
the “findings and concerns” of Strathcona would be
expected to have an impact on the market price or
value of Pretuim's securities.
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 49What Drove the Court's Decision?
• Primary goal of the OSA is investor protection.
o Decision should be viewed through this lens. Focus on investor protection likely
drove articulation and application of the law on materiality.
• Pretium could easily have satisfied its disclosure obligations at many points along the
way while including language that made express the Company's views about the
unreliability of Strathcona's findings.
• Materiality is not to be assessed with the benefit of hindsight.
o The fact that Pretium ultimately turned out to be right is not relevant to assessing
the materiality of the information at the relevant time.
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 50Along comes Paniccia v. MDC Partners Inc., 2018 ONSC 3470
• Five separate claims for misrepresentation
advanced, including failures by MDC to disclose:
Subpoena received from the SEC
Formation of a Special Committee to
conduct an internal investigation
Amounts reimbursed to the company's CEO
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 51What Does This Mean for You?
• Leave to appeal was denied, so the decision is out there to contend with in future
cases. The case has not received any subsequent judicial consideration.
• How are we to assess materiality – market impact or reasonable investor?
o Prevailing standard appears to be “market impact” in light of the language of the
relevant provisions of the OSA.
o However, courts are still supposed to assess materiality “from the perspective of
a reasonable investor”.
o There are multiple decisions out there from both the OSC and the courts relying
on the lower, reasonable investor standard.
o Bottom line: companies should be cautious in assessing materiality, and need to
understand that regulators and the courts will not defer to executives’ “business
judgment” in assessing materiality, even if the business judgment of those
executives ultimately turns out to be correct.
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 52Elon Musk and the Importance of Careful
Tweeting
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIALElon Musk: The Importance of Careful Tweeting
– Musk and Tesla charged with securities violations
in the U.S. over an ill-advised tweet about
privatizing Tesla
> Musk forced to resign as Tesla Chairman
> Personally and professionally embarrassing
– Stock price still down ~ 24% over “pre-tweet”
price
– Private action ongoing
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 54Twitter Best Practices
SEC treats tweets as disclosure/press releases – make sure
you do the same
Draft carefully and subject tweets to due diligence
Apply disclosure protocols to social media posts
Internally coordinate timing of posts to avoid surprises
Empower independent directors to oversee communications
Separate corporate and employee online personas when
possible – use social media managers
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 55Questions?
Patricia L. David Chantelle
Olasker Wilson Cseh
Partner Partner Partner
Toronto Toronto Toronto
416.863.5551 416.863.5517 416.367.7552
polasker@dwpv.com dwilson@dwpv.com ccseh@dwpv.com
Robert S. Robin
Murphy Upshall
Partner Partner
Toronto Toronto
416.863.5537 416.367.6981
rmurphy@dwpv.com rupshall@dwpv.com
© 2018 DAVIES WARD PHILLIPS & VINEBERG LLP — CONFIDENTIAL 56TORONTO
155 Wellington St. W.
Toronto ON
M5V 3J7
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