On November 25, 2011, the Canadian Securities Administrators (CSA) issued a notice and request for comment regarding proposed amendments intended to increase the range of permissible pre-marketing and marketing activities that can be conducted in connection with prospectus offerings. In particular, the amendments will, subject to certain conditions:
- expressly allow non-reporting issuers, through an investment dealer, to determine interest in a potential initial public offering (IPO) by communicating with permitted institutional investors, and
- expressly allow investment dealers to use term sheets and conduct road shows during the "waiting period" and following the receipt of a final prospectus.
The amendments will also clarify when bought deals and bought deal syndicates can be enlarged.
While the CSA acknowledge that the proposed amendments may impose certain costs on market participants, they expect the changes to:
- ease certain regulatory burdens and restrictions that issuers and investment dealers face in trying to successfully complete a prospectus offering, while at the same time providing protection to investors, and
- clarify certain matters in order to provide clear rules and a "level playing field" for market participants involved in a prospectus offering.
In many cases, the proposed amendments will codify existing practices relating to prospectus offerings.
The following are some highlights of the CSA proposals:
Marketing During the Waiting Period
Testing of Waters Exemption for IPOs
- The proposals include a new limited exemption to permit non-reporting issuers, through an investment dealer, to determine interest in a potential IPO through limited confidential communication with permitted institutional investors. The exemption will be subject to certain conditions to ensure confidentiality and prevent abuse (e.g., conditioning of the market). Due to insider and tippee trading concerns, the exemption will not be available to "IPO issuers" that are already public companies in a foreign jurisdiction.
- The conditions of the exemption include the following:
- before providing a permitted institutional investor with information about the proposed offering, the investment dealer must ask the permitted institutional investor to confirm in writing (e.g., by return email) that it will keep the information confidential,
- the issuer relying on the exemption must keep a written record of any investment dealer that it authorized to act on its behalf in making solicitations in reliance on the exemption and a copy of any written authorization, and
- an investment dealer that relies on the exemption must keep a written record of any permitted institutional investor that it solicited and a copy of the above-noted correspondence with the investor.
- Pursuant to the proposed amendments, investment dealers will be expressly permitted to provide term sheets in conjunction with a preliminary prospectus in order to allow for a greater range of marketing communications during the waiting period, 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.
- Regulatory guidance will be added to clarify that investment dealers will continue to be able to provide traditional green sheets to their registered representatives. However, 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 will be expressly permitted to be conducted for both permitted institutional investors and retail investors, subject to the condition that road shows for retail investors do not contain comparables in the absence of prospectus liability. In addition, all information in the road show for retail investors must be contained in the preliminary prospectus and be fair, true and plain. 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. The CSA have also proposed that road show materials be filed on SEDAR.
- The proposed amendments contain guidance that any research reports issued by an investment dealer on an issuer must comply with IIROC's Universal Market Integrity Rules and any applicable local rules. The guidance also indicates that an investment dealer should have appropriate "ethical wall" policies and procedures in place between the business unit that issues research reports or provides media commentary on an issuer and the business unit that acts as underwriter for prospectus offerings.
Marketing After the Receipt of a Final Prospectus
- The proposed amendments also contain provisions prescribing when investment dealers can provide term sheets and conduct road shows after the receipt of a final prospectus (provided the disclosure is based on the final prospectus), subject to certain conditions.
Changes Applicable to Bought Deals
Enlarging Bought Deals
- Under the proposed amendments, 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 offering size is increased by not more than a specified percentage of the original size of the offering,
- the preliminary prospectus is filed and receipted within four business days of the original agreement, and
- the enlarged offering is for the same price as the original offering.
- This amendment merely confirms the practice that is currently followed to upsize bought deal offerings.
Enlarging Bought Deal Syndicate
- The proposed amendments clarify that 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
- Under the proposed amendments, 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. This provision would be subject to certain key conditions, which include the following:
- the disclosure in the term sheet must be fair, true and plain,
- all information concerning securities in the term sheet must be in the bought deal news release or the issuer's continuous disclosure record,
- the term sheet must be approved in writing by the issuer and the underwriters and filed before use,
- the term sheet must be included in the preliminary prospectus and final prospectus or incorporated by reference into the preliminary prospectus and the final prospectus - this will result in the term sheet being subject to statutory liability for misrepresentations, and
- the term sheet must contain a prescribed legend with cautionary language referring investors to the subsequent preliminary prospectus and the final prospectus and noting that the term sheet does not contain full disclosure of all material facts.
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.