Canada: CSA Propose To Ease Restrictions On Marketing Rules In Connection With Prospectus Offerings

The Canadian Securities Administrators (CSA) proposed amendments today intended to expand the scope of marketing activities that can be conducted in connection with prospectus offerings and to clarify other related restrictions applicable to bought deals.

The amendments proposed to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and National Instrument 44-101 Short Form Prospectus Distributions (NI 44-101) expressly codify permissible "pre-marketing" and "marketing" activities that can be conducted prior to and after the filing of a preliminary prospectus. These proposals should provide some much needed clarity and guidance in connection with marketing activities given the disconnect between what is currently permissible under securities legislation and the practical reality of how offerings are marketed. In addition to expanding the scope of marketing activities that are expressly permitted, the CSA also clarify when the size of a bought deal can be enlarged or the bought deal syndicate can be expanded.

While the CSA's stated intention is to expand the range of permitted activities, their views on matters such as non-offering roadshows, the commencement of distributions, and the exclusion of "market out" clauses from bought deal bid letters, may be at odds with some of the practices currently pursued by certain market participants.

The following are some highlights of these proposals, which will be discussed in detail in future updates:

Marketing during the waiting period

  • Term Sheets - Investment dealers will be expressly permitted to provide term sheets in conjunction with a preliminary prospectus, subject to certain conditions, including that all information concerning the securities (including any comparables) be contained in the preliminary prospectus and the term sheet be included or incorporated by reference into the final prospectus.
  • Green sheets – Regulatory guidance will be amended to clarify that while investment dealers will continue to be able to provide traditional green sheets to their registered representatives, any green sheet that is distributed to the public will be considered a "term sheet" and will need to comply with the proposed provisions applicable to term sheets (discussed above).
  • Road shows – Road shows will be expressly permitted to be conducted for both "permitted institutional investors" and retail clients, subject to the caveat that those conducted for retail investors do not contain comparables (in the absence of prospectus liability) and other conditions are satisfied.
    • In this respect we note that a "road show" will be defined as a presentation to potential investors regarding a distribution of securities conducted by an investment dealer on behalf of an issuer in which one or more executive officers of the issuer participate. Access for road shows will also need to be restricted such that the investment dealer must establish and follow reasonable procedures to: verify the identity and keep a written record of attendants; ensure that investors receive a copy of the preliminary prospectus; and restrict copying of any written materials.
  • Testing of waters exemption for IPOs – The proposals include a new exemption that will permit IPO issuers to communicate with permitted institutional investors through investment dealers, provided certain conditions are satisfied. This exemption will not extend to public companies in foreign jurisdictions, notwithstanding the fact that they may be doing an IPO in Canada.

Changes Applicable to Bought Deals

  • Increasing the Size of a Bought deal – A bought deal agreement will be allowed to be amended to increase the offering size provided the increase is not a culmination of a formal or informal plan to offer a larger amount devised before the execution of the original agreement and:
    • A news release is issued immediately after the agreement is amended.
    • The preliminary prospectus is filed and receipted within four business days of the original agreement.
    • The enlarged offering is for the same price as the original offering.

The amount by which the offering can be increased will also be limited, but that cap has not been set out in the amendments and is a matter that the regulators have specifically asked for comments on.

  • Enlarging Syndicate –Additional underwriters will be allowed to join the bought deal syndicate if the addition of a particular underwriter was not the culmination of a formal or informal plan to add that underwriter devised before the execution of the original agreement.
  • Term sheets for bought deals - Investment dealers will be allowed to provide term sheets to permitted institutional investors after the bought deal is announced but before the preliminary prospectus is filed, subject to certain conditions, including that the information concerning securities in the term sheet must be in the bought deal news release or in the issuer's continuous disclosure record, and the term sheet must be included or incorporated by reference into the prospectus. The term sheet must also be approved in writing by both the issuer and the underwriters and filed before it is used (although it will not be made public until the preliminary prospectus is receipted). In this respect, the regulators have specifically asked for comments on whether investment dealers should be allowed to also provide term sheets to retail investors.

The proposals also provide guidance on road shows for cross border IPO offerings, provision of research reports and marketing after the receipt of a final prospectus and a final base shelf prospectus, among other matters.

While the CSA believe that the policy rationale for the existing rules (including ensuring equal access to information, providing investor protection through adequate disclosure, deterring conditioning of the market and deterring insider trading) still apply, the proposed amendments are intended to ease regulatory restrictions faced by issuers and investment dealers when marketing prospectus offerings.

Comments on the proposed amendments are being accepted until February 23, 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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