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Outlook 2021: Disclosure Obligations in the COVID-19 Era


As the COVID-19 pandemic continues to cause considerable social and economic uncertainty, reporting issuers across all industries must remain diligent in disclosing the impacts of the pandemic – whether realized or anticipated – on their business operations, current financial condition, liquidity, and future prospects. The Canadian Securities Administrators (CSA) has indicated that they are committed to closely monitoring potentially misleading disclosure related to COVID-19,1 but over a year and a half into the pandemic, no Canadian securities regulator has announced charges against any reporting issuers for improper COVID-19 disclosure.

The CSA has conducted studies throughout the COVID-19 pandemic to review disclosure filings and analyze issuers’ compliance with National Instrument 51-102 Continuous Disclosure Obligations. Most recently, the CSA published CSA Staff Notice 51-362 (SN 51-362), which summarized their findings and offered guidance on improved disclosure practices.2 SN 51-362 offers important guidance on how issuers should disclose issues relating to COVID-19 and provides insight into how reporting issuers can avoid the scrutiny of Canadian regulators with respect to pandemic-related disclosure.

Case Studies from the United States

While we have not yet seen any Canadian proceedings against issuers with respect to inadequate COVID-19 disclosures, the Securities and Exchange Commission (SEC) has announced charges against two issuers for making misleading disclosure related to COVID-19. As the SEC often sets trends followed by Canadian regulators, Canadian reporting issuers may yet see similar proceedings brought in Canada.

1. The Cheesecake Factory: Misleading Disclosure Through Omissions

On December 4, 2020, the SEC announced that it had settled proceedings against the chain restaurant establishment, The Cheesecake Factory Incorporated (Cheesecake Factory). The SEC charged the Cheesecake Factory with having omitted material information from its public filings on the impacts of COVID-19 on its business operations and financial condition.3

The SEC alleged that the Cheesecake Factory stated in its March and April 2020 public filings that its restaurants were “operating sustainably,” when in fact it was losing approximately $6 million in cash per week and only had a projected 16 weeks of cash remaining from the date of its disclosures.4 The SEC stated that the Cheesecake Factory also failed to disclose its financial concerns and the steps it was taking to conserve its financial position – for example, the Cheesecake Factory had notified each of its landlords that it would be unable to pay April rent.5 Moreover, to seek additional liquidity, the SEC alleged that the Cheesecake Factory had privately disclosed its actual cash position and projected earnings to lenders and potential private equity investors.6 These allegations would, if found to be true, establish that the Cheesecake Factory failed to satisfy its disclosure obligations.

The Cheesecake Factory and SEC ultimately settled the proceedings, with no admission or denial of the findings presented in the SEC order, for a fine of $125,000.7

2. Parallax: Misleading Disclosure Through Over-Promotion

On July 7, 2021, the SEC announced charges against Parallax Health Sciences Inc. (Parallax), an integrated digital healthcare company, for making misleading statements as to the opportunities arising out of COVID-19.8 The SEC also charged Parallax’s CEO and CTO for their role in approving the alleged inaccurate disclosures.9

The SEC alleged that Parallax issued a series of press releases in March and April 2020 that falsely claimed that Parallax would capitalize off the pandemic by offering COVID-19 related health products on an overambitious timeline.10 Specifically, Parallax stated that it had medical and personal protective equipment (PPE) for “immediate sale” and that it was working on a COVID-19 screening test that would be “available soon.”11 The SEC alleged that:

  • Parallax never had the PPE it offered to sell;12
  • Parallax was insolvent and lacked the necessary capital to develop the screening test;13
  • even if Parallax had the capital needed to fund its promised products, the screening test would take over a year to develop, and several other factors prevented the company from acquiring the PPE (for example, the company lacked the FDA registrations required to import and sell PPE);14
  • Parallax misled investors by falsely positioning itself as capitalizing on opportunities created by the pandemic;15 and
  • Parallax’s CEO drafted the relevant press releases for the purpose of boosting the company’s declining stock price (and the stock prices did in fact increase after the misleading press releases were published).16

Parallax and its officers agreed to settle the proceedings without admitting or denying liability. If the court approves the settlement, Parallax and each of the named officers will pay penalties of $100,000 and $45,000, respectively.17 In addition, the CEO will be prohibited from acting as a public company officer or director and from participating in an offering of penny stock for five years and the CTO will be prohibited from participating in an offering of penny stock for three years.18

SN 51-362: Common Disclosure Deficiencies and the CSA’s Recommendations

While Canadian regulators have yet to announce charges against any reporting issuers, SN 51-362 identifies certain common deficiencies in Canadian issuers’ COVID-19 disclosures that need improvement.

In SN 51-362, the CSA assessed the adequacy of issuers’ disclosure of present and anticipated impacts of COVID-19 on businesses’ operations, financial condition, liquidity, and future prospects.19 The CSA found that while most issuers provided quality and detailed disclosures, there were several common deficiencies in need of improvement.20 In short, the CSA specified that it is not sufficient for an issuer to simply report that COVID-19 has or will impact their business, but rather issuers must also provide precise details as to how COVID-19 has or may impact their specific business, and outline the methodology used to attribute the business-impacts to COVID-19.

The tables below summarize common deficiencies that the CSA noted in each area of disclosure,21 as well as the CSA’s guidance for how issuers may improve their disclosure compliance in the era of COVID-19.

Management Discussion and Analysis (MD&A)

Common Deficiencies CSA Guidance for Issuers
  • Providing lists of responses and risks without necessary detail to address the anticipated impact to the issuer
  • Using boilerplate language and disclosing generally-known trends rather than COVID-19 impacts specific to the industry or issuer
  • Insufficient evidence showing that costs and other impacts are specifically attributable to COVID-19
  • Inadequate detail regarding issuers’ ability to meet working capital requirements, meet planned growth initiatives, or fund planned activities and expenditures
  • Provide detailed, meaningful, and issuer-specific disclosure on how COVID-19 has impacted its industry and day-to-day operations
  • Avoid boilerplate language and generic list-making
  • Provide thorough descriptions of material impacts and liquidity risks of COVID-19, and where possible, quantify material factors and provide up-to-date risk factors
  • Disclose methodology used in management’s assessments and explain how link to COVID-19 is known

Financial Statements

Common Deficiencies CSA Guidance for Issuers
  • Providing “lists” of generally known, non-entity-specific economic risks
  • Failure to identify reasons for impairments of non-financial assets or only noting “negative economic impacts of COVID-19” as an impairment indicator for all cash generating units
  • In some “close call” situations, failure to disclose mitigating actions that factored into the conclusion that an issuer will continue as a going concern
  • Inadequate updates to early judgments and measurement uncertainties in interim financial statements
  • Failure to provide corresponding disclosure in financial statements
  • Failure to consider the impact of COVID-19 on associates and joint ventures in determining whether there is a “loss event”
  • Failure to provide corresponding disclosure in financial statements where MD&As disclose increased liquidity, market risk, or credit risk
  • Provide detailed disclosure of ability to meet working capital requirements, meet planned growth initiatives, or fund developmental activities and capital expenditures
  • Disclose key assumptions management based its determination of recoverable amounts on
  • Use probability weighted scenarios where possible, rather than providing a single best estimate
  • Disclose all material uncertainties that management is aware of that may cast significant doubt on the issuer’s ability to continue as a going concern.
  • Disclose judgments and mitigating actions to support a determination that a “close call” was avoided
  • Consider whether there have been changes to credit risk. Factors to consider include risk concentrations, risk to expected credit losses, and any significant assumptions being made

Non-GAAP Financial Measures (NGMs)

Common Deficiencies CSA Guidance for Issuers
  • General failure to disclose, under 5% of issuers disclosed NGMs adjusted for COVID-19 impacts
  • Inadequate explanation of how adjustments were attributable to the COVID-19 pandemic
  • Misleading disclosures of NGMs where adjustments were made for COVID-19 expenses without adjusting for government subsidies
  • Consider how NGMs adjusted for COVID-19 assist investors, how management uses the measure, and why management thinks it may be useful to explain the impact of COVID-19
  • Be specific in describing adjustments and be wary before concluding that an adjustment is non-recurring, infrequent, or unusual
  • Include balanced adjustments and consider the impacts of government subsidies, insurance recoveries, and tenancy relief

Forward-Looking Information (FLI)

Common Deficiencies CSA Guidance for Issuers
  • Insufficient detail of assumptions related to FLI
  • Failure to update MD&A to reflect updated FLI
  • Provide a reasonable basis for providing FLI and provide sufficient detail as to how FLI was derived
  • Update MD&A to consider what is reasonably likely to cause actual results and disclose what differs from previously provided FLI

Material Change Reporting

Common Deficiencies CSA Guidance for Issuers
  • Failure to account for unique or significant impacts of COVID-19 based on issuer’s industry or business
  • Provide detailed, entity and industry specific disclosure of the impact of COVID-19
  • Definition of “material change” varies by jurisdiction, so understand how “material change” is defined by an issuer’s principal regulator

Promotional Disclosures

Common Deficiencies CSA Guidance for Issuers
  • Overly promotional material that lacks specificity (particularly in the biotech or pharma industry)
  • Overstating a positive impact of COVID-19 or making assumptions at too early a stage of the pandemic to understand the true impact
  • Be complete, balanced, and focused on material information
  • Avoid making any statements or omitting any facts that make a disclosure untrue or misleading

Looking Forward

SN 51-362 is a valuable resource for all market participants. As we continue to experience the economic and business disruption of the pandemic, issuers must remain diligent in disclosing the realized and anticipated impacts of COVID-19 on their businesses.


1 CSA Staff Notice 51-362, “Staff Review of Covid-19 Disclosures and Guide for Disclosure improvements,” February 25, 2021, online: <https://www.osc.ca/sites/default/files/2021-02/csa_20210225_51-362_staff-review-covid19.pdf> at p. 1 (CSA Staff Notice 51-362).
2 Ibid at p. 3.
3 “SEC Charges The Cheesecake Factory For Misleading COVID-19 Disclosures,” SEC Press Release, December 4, 2020, online: <https://www.sec.gov/news/press-release/2020-306> at para. 1.
4 Ibid at para 2.
5 Ibid at para 2.
6 Ibid at para 2.
7 Ibid at para 5.
8 “SEC Charges Company and Two Executives for Misleading COVID-19 Disclosures,” SEC Press Release, July 7, 2021, online: <https://www.sec.gov/news/press-release/2021-120> at para. 1.
9 Ibid at para. 1.
10 Ibid at para. 2.
11 Ibid.
12 Ibid.
13 Ibid.
14 Ibid.
15 Ibid at para. 3.
16 Ibid at para. 2.
17 Ibid at para. 4.
18 Ibid.
19 CSA Staff Notice 51-362, supra note 1, at p. 1.
20 Ibid at p. 6.
21 Ibid at Appendix A.

This publication is a general summary of the law. It does not replace legal advice tailored to your specific circumstances.

For more information, please contact the authors of this article or any member of our Securities Litigation Group.