Canada: CSA Propose Pre-Marketing And Marketing Amendments To Prospectus Rules

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Securities, November 2011

Highlights

  • Upsizing of bought deals and adding underwriters to bought deal offerings permitted, subject to conditions
  • Investment dealers permitted to distribute term sheets for prospectus offerings to potential investors
  • Conditions and limitations proposed for investor road shows
  • New exemption permitting issuers and investment dealers to "test the waters" for certain IPOs

The Canadian Securities Administrators (CSA) have published a Request for Comment proposing amendments to the Canadian prospectus rules relating to bought deals, term sheets and road shows used to market public offerings. Under the proposed amendments, issuers would be permitted to upsize a bought deal; term sheets and road shows would be permitted for use in marketing public offerings, subject to specified conditions and restrictions; and issuers and investment dealers would be permitted to "test the waters" for certain initial public offerings (IPOs) before filing a preliminary prospectus. The CSA are accepting comments on the proposed amendments until February 23, 2012.

This bulletin summarizes the significant proposed amendments.

BOUGHT DEALS

The pre-marketing changes in the proposed amendments have specific application to bought deal offerings. Pre-marketing occurs when a dealer communicates with potential investors before a preliminary prospectus for a public offering is filed and a receipt issued. At present, National Instrument 44-101 – Short Form Prospectus Distributions (NI 44-101) provides a limited accommodation for companies seeking certainty of financing and permits an investment dealer to solicit expressions of interest before the filing of a preliminary short form prospectus if the issuer has entered into an enforceable agreement with an underwriter who has agreed to purchase the full amount of an offering, the issuer issues a news release announcing the agreement, and the agreement requires the issuer to file and obtain a receipt for the preliminary prospectus within four business days of the agreement. The proposed amendments generally do not affect the bought deal pre-marketing accommodation. However, they would specifically permit bought deals to be enlarged provided that: a news release is issued after the agreement is amended; the offering size is increased by not more than a specified percentage of the original size of the offering; the enlarged offering is for the same price as the original offering; and the enlargement of the offering is not the culmination of a prior plan to offer a larger amount of securities. The CSA have requested comments as to whether the specified percentage by which a bought deal could be enlarged should be 15% of the original size of the offering (corresponding to the existing 15% limit on over-allotment options), 25%, 50% or another limit.

The proposed amendments would also allow for additional underwriters to join a bought deal syndicate if the addition was not the culmination of a plan to add that underwriter devised before the execution of the original bought deal agreement.

The proposed amendments make clear that a bought deal agreement cannot have a market-out clause, being one that permits the underwriters not to purchase securities if they cannot be profitably marketed.

TERM SHEETS

Bought Deal Term Sheets

To permit a greater range of marketing communication for issuers and investment dealers, the proposed amendments would permit investment dealers to provide term sheets to "permitted institutional investors" after a bought deal is announced but before the preliminary prospectus is receipted. The CSA believe that a term sheet may benefit investors by providing an initial "snap-shot" of certain terms of a prospectus offering. The conditions for providing a bought deal term sheet to permitted institutional investors include:

  • that the disclosure in the term sheet must be fair, true and plain;
  • other than contact information for the investment dealer distributing the term sheet, all information concerning the securities in the term sheet must be in the bought deal news release or in the issuer's continuous disclosure record;
  • that the term sheet must be approved in writing by the issuer and the underwriters and filed on SEDAR before use;
  • that the term sheet must be included in, or incorporated by reference into, the preliminary prospectus and final prospectus;
  • that the term sheet contain certain prescribed cautionary language referring investors to the subsequent preliminary prospectus and final prospectus and stating that the term sheet does not contain full disclosure of all material facts; and
  • that any permitted institutional investor who receives a term sheet must also receive the subsequent preliminary prospectus.

The CSA's guidance explains that "fair, true and plain" means that the disclosure is honest, balanced and not misleading, does not give undue prominence to a particular fact or statement and does not contain promotional language.
A permitted institutional investor is a defined concept that would include specified financial institutions, pension funds, investment funds and government agencies, but not individual or private investors that qualify as accredited investors under Canadian private placement rules. The CSA have requested comment on whether investment dealers should be permitted to distribute bought deal term sheets to retail investors.

Term Sheets During and After the Waiting Period

The proposed amendments would also permit investment dealers to provide a term sheet in conjunction with a preliminary prospectus in order to allow for a greater range of marketing communication during the waiting period (the period between the issuance of a receipt for a preliminary prospectus and the issuance of a receipt for a final prospectus) provided certain conditions are met, including:

  • that the disclosure in the term sheet must be fair, true and plain;
  • other than contact information for the investment dealer, all information concerning the securities in the term sheet must be contained in the preliminary prospectus;
  • that the term sheet must be approved in writing by the issuer and the underwriters and filed on SEDAR before use;
  • that the term sheet must be included in, or incorporated by reference into, the final prospectus;
  • that the term sheet must be distributed with a copy of the preliminary prospectus; and
  • that the term sheet must contain certain prescribed cautionary language referring investors to the preliminary prospectus and the final prospectus and stating that the term sheet does not contain full disclosure of all material facts.

The proposed amendments also include similar rules relating to the provision of term sheets to potential investors after a receipt for a final prospectus and a final base shelf prospectus has been issued.

ROAD SHOWS

Road shows are often conducted as part of "soliciting expressions of interest" in a public offering. The proposed amendments would define a road show as "a presentation to potential investors, regarding a distribution of securities under a prospectus, conducted by an investment dealer on behalf of an issuer in which one or more executive officers of the issuer participate." The proposed amendments would regulate the content and conduct of road shows by any means, including in person, by telephone, over the Internet or by other electronic means. While explicitly recognizing and permitting road shows, the proposed amendments introduce new conditions and requirements for investment dealers and issuers, including content restrictions, requirements for written authorization by issuers to conduct a road show, keeping records of persons who attend road shows and limiting the use of comparables.

Permitted Institutional Investors

The proposed amendments would permit road shows for permitted institutional investors during the waiting period. The conditions for conducting these road shows would include:

  • that the disclosure in the road show must be fair, true and plain;
  • other than information that compares the issuer to other issuers (comparables) and contact information for the investment dealer conducting the road show, all information in the road show concerning the securities must be disclosed in the preliminary prospectus and any amendment to the preliminary prospectus;
  • that the issuer provide written authorization to the investment dealer to conduct the road show;
  • that only permitted institutional investors, registered individuals (i.e., representatives of a registered investment dealer) and representatives of the issuer attend the road show; and
  • that before the road show commences, the investment dealer obtains confirmation in writing from each permitted institutional investor attending the road show that the permitted institutional investor will keep confidential any information that compares the issuer to other issuers that is disclosed in connection with the road show.

In addition, a permitted institutional investor attending a road show cannot be provided with any written material, other than a preliminary prospectus, unless:

  • the materials are treated as a term sheet and the rules relating to term sheets (described above) are complied with, including that the materials are filed with the securities commissions;
  • if the materials include comparables, that information is redacted before the materials are filed; and
  • the materials must contain a notice following any information not included in the preliminary prospectus (namely, comparables), stating that the information is not disclosed in the preliminary prospectus, or any amendment, and will not be subject to prospectus liability.

Presumably the reference to written materials is meant to include electronic files or slide shows made available over the Internet or by electronic means.

Retail Investors

The proposed amendments would also introduce a more limited permission for road shows for retail investors during the waiting period. The proposed conditions for conducting such a road show would include:

  • that the disclosure in the road show must be fair, true and plain;
  • other than contact information for the investment dealer conducting the road show, all information in the road show concerning the securities must be disclosed in the preliminary prospectus and any amendment to the preliminary prospectus;
  • that the issuer provide written authorization to the investment dealer to conduct the road show; and
  • that only potential investors, registered individuals (i.e., representatives of a registered investment dealer) and representatives of the issuer attend the road show.

Under the proposed amendments, an investment dealer would not be permitted to provide written material, other than a preliminary prospectus, to an investor attending a retail road show unless the written material complies with the term sheet requirements described above. Notably, the retail road show provisions do not permit the inclusion of comparables (unless they are included in the preliminary prospectus, for which statutory liability attaches). The CSA have specifically requested comments on whether to allow comparables to be provided to retail investors, citing as a concern that comparables could be "cherry picked" by investment dealers and misunderstood by retail investors.

Road Shows After Filing a Final Prospectus

The proposed amendments contain similar provisions as those described above for road shows conducted after an issuer has obtained a receipt for a final prospectus (including a final base shelf prospectus). In the case of a shelf prospectus, the proposed amendments specify that road show information (other than comparables, in the case of permitted institutional investors, and contact information) must be contained in the final shelf prospectus and any prospectus supplement or preliminary form of prospectus supplement.

Restricted Access to Road Shows and Oral Disclaimers

The proposed amendments would require investment dealers conducting a road show to establish and follow reasonable procedures to:

  • verify the identity and keep a written record of any investor attending the road show in person, by telephone conference call, over the Internet or by other electronic means;
  • ensure that the investor has received a copy of the preliminary and/or final prospectus, as applicable, and any amendment; and
  • restrict copying of any written materials.

In addition, the proposed amendments would require that the investment dealer conducting a road show must commence the road show by reading a prescribed cautionary statement making reference to the preliminary prospectus or final prospectus, as applicable.

Guidance for Road Shows for Cross-Border IPOs

The CSA state that the proposed amendments should eliminate the need for exemptive relief for road shows conducted for Canada/U.S. cross-border IPOs by requiring road show materials to be filed on SEDAR.

TESTING OF WATERS EXEMPTION FOR IPOS

The proposed amendments contain a limited exemption from the general prohibition against pre-marketing of an IPO that would permit investment dealers to solicit expressions of interest in a potential IPO from permitted institutional investors on a confidential basis before filing a preliminary prospectus.

This exemption would be available only if, among other things, each permitted institutional investor confirms in writing that it will keep confidential any information it receives from an investment dealer about the proposed IPO. The exemption would not be available to issuers that are already public in a foreign jurisdiction.

The CSA have requested comment on whether this exemption would be of value to issuers and investment dealers.

GREENSHEETS

Under the proposed amendments, investment dealers will continue to be able to provide traditional greensheets to their registered representatives. However, any greensheet that is distributed to the public will be considered a "term sheet" and be required to comply with the provisions applicable to term sheets discussed above.

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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