Canada: The Canadian Securities Regulators Propose Amendments To "Pre-Marketing" And "Marketing" Rules

On November 25, 2011, the Canadian Securities Administrators (CSA) published for comment proposed amendments to the rules related to "pre-marketing" and "marketing" activities in connection with prospectus offerings (the Proposals).

The CSA indicate that the Proposals are intended to ease certain regulatory burdens that issuers and investment dealers are facing in trying to successfully complete a prospectus offering, while at the same time providing protection to investors, and to clarify certain matters in order to provide clear rules and a "level playing field" for market participants involved in a prospectus offering.

The Proposals include significant new rules relating to the:

  • use of term sheets in connection with prospectus offerings;
  • conduct of road shows;
  • conduct of bought deals; and
  • process for non-reporting issuers to gauge interest in a potential initial public offering.

The proposed rules would apply to issuers, including investment funds, that use the general prospectus rules but do not impact mutual funds that file prospectuses under National Instrument 81-101 Mutual Fund Prospectus Disclosure.

The Proposals have had the benefit of preliminary consultations by the CSA with market participants over recent years and are a welcome response to changing conditions in the marketplace, such as the introduction of "free-writing prospectuses" in the United States, the increased demand by retail investors for access to similar opportunities as institutional investors, and the proliferation of information available on the internet to investors of all types. The CSA have requested comment on the Proposals and this presents an opportunity for market participants to clarify the permissibility of existing practices and to advocate for a practical regime that protects investors while enhancing the flow of investment opportunities and related information.

Term sheets

The Proposals include provisions regulating the use of term sheets, which are defined as any written communication regarding the distribution of securities under a prospectus that contains information regarding the issuer, other than the prospectus or the limited notices permitted under the current rules.

The use of term sheets will be subject to the following:

  • the disclosure in the term sheet must be fair, true and plain;
  • all information concerning the securities in the term sheet, including any information that compares the issuer to other issuers, must be contained in the preliminary prospectus (although the information may be summarized or include graphs or charts based on numbers in the prospectus);
  • the term sheet must be approved in writing by the issuer and the underwriters and must be filed before use;
  • the term sheet must be included in the final prospectus or incorporated by reference into the final prospectus;
  • the term sheet must be distributed with a copy of the preliminary prospectus; and
  • the term sheet must contain a prescribed legend.

Requiring the inclusion or incorporation of the term sheet in the prospectus is intended to provide investors with remedies under the civil liability provisions of securities legislation if the term sheet contains a misrepresentation.

Proposed guidance indicates that investment dealers may continue to provide green sheets to their registered representatives, but that a green sheet will be treated as a term sheet if it is distributed to the public.

Road shows

Proposed requirements for road shows will distinguish between road shows to institutional investors and retail investors. Specific terms will apply depending on whether the road show is conducted during the waiting period or after the receipt for the final prospectus.

The principal requirements for road shows include:

  • all information in the road show must be contained in the preliminary prospectus (although road shows for permitted institutional investors may include information about comparable companies not included in the prospectus);
  • all information in the road show must be fair, true and plain; and
  • any written materials distributed to investors must comply with the term sheet provisions.

The scope of the requirement to treat written materials distributed to investors in connection with a road show as a term sheet may impact current practice in this regard. Under the current rules, road show presentations are generally permitted as part of the solicitation of expressions of interest from prospective purchasers, provided that copies of the presentation are not distributed. However, we understand that CSA staff consider a road show presentation displayed to potential investors to be within the meaning of "written materials distributed" and subject to the term sheet provisions, including the requirement to file the road show presentation prior to use.

The CSA have limited the use of information that compares the issuer to other issuers to road shows for permitted institutional investors because comparable information can be "cherry picked" by investment dealers and misunderstood by retail investors. Also, the CSA note that investment dealers frequently include comparables in road shows for institutional investors, but have generally resisted including them in the prospectus since they would be subject to prospectus liability. If an issuer decides to include comparables in a prospectus, it should also include appropriate risk factors and cautionary language.

Restricted access for road shows

The Proposals require "restricted access" for road shows. Investment dealers must 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 prospectus; and
  • restrict copying of any written materials.

Guidance for road shows for cross border IPO offerings

The Proposals include guidance that the CSA will no longer provide relief in connection with road shows for cross border offerings to allow for compliance with U.S. requirements. Since the Proposals require that all road show materials be filed on SEDAR, issuers will be able to file the same materials on EDGAR without needing exemptive relief.

Bought deals

Bought deal agreement

The current requirement that a bought deal requires an enforceable agreement with an underwriter for the purchase of the offered securities will be changed to require that an agreement must also not be subject to a "market-out" clause through the introduction of the defined term bought deal agreement. Although this has always been the general practice and is consistent with the market's general understanding of what is meant by a "bought deal", we understand that there have been instances where issuers and dealers have purported to rely on the bought deal exemption for transactions that are subject to a market-out clause.

Enlarging bought deals and bought deal syndicates

Enlarging a bought deal will be permitted if:

  • a news release is issued immediately after the bought deal agreement is amended;
  • the offering size is increased by not more than a specified percentage of the original size of the offering (the CSA request comment on whether this percentage should be 15%, 25%, 50% or another limit);
  • the preliminary prospectus is filed and receipted within four business days of the original agreement;
  • the enlargement of the offering cannot be the culmination of a formal or informal plan to offer a larger amount devised before the execution of the original agreement; and
  • the enlarged offering is at the same price as the original offering.

These conditions are intended to ensure that the original bought deal agreement is a firm commitment for a substantial number of securities and to prevent underwriters from entering into the original agreement for a small number of securities in order to solicit investors without a preliminary prospectus and then, after having obtained expressions of interest, entering into an amended agreement for a much larger amount.

Adding additional underwriters to a bought deal syndicate will also be allowed provided that there was no formal or informal plan to add the dealers before the execution of the original agreement.

Additional guidance regarding the commencement of distribution discussions and non-deal road shows

Marketing activities in connection with a prospectus distribution are generally prohibited until the receipt for the preliminary prospectus is issued or a bought deal agreement is executed. The Proposals include guidance as to when discussions with an issuer are of sufficient specificity that the distribution would be regarded as having commenced. The proposed guidance includes the following examples:

  • the dealer provides the issuer with financing scenarios at specified price ranges, the directors authorize management to pursue a prospectus financing within any such range, and the dealer is advised of this approval; or
  • the dealer indicates that market conditions are favourable and that the dealer will likely provide indicative terms of a financing later that day.

Accordingly, in these circumstances, any communication by the dealer with its clients would be considered to be in furtherance of the distribution and must not take place until the bought deal agreement has been entered into and announced.

Guidance is also proposed that non-deal road shows should be considered to be prohibited, if undertaken in anticipation of a prospectus offering.

Term sheets for bought deals

The Proposals include specific provisions regarding the use of term sheets in bought deals, 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 be filed before use (the term sheet will not be made public until the preliminary prospectus is filed and receipted);
  • the term sheet must be included in the preliminary prospectus and final prospectus or incorporated by reference into the preliminary prospectus and final prospectus;
  • the term sheet must contain a prescribed legend; and
  • any permitted institutional investor who received a term sheet must receive the subsequent preliminary prospectus.

The CSA request comment on whether the rules should also permit an investment dealer to provide a bought deal term sheet to retail investors or use a term sheet before providing a preliminary prospectus.

News releases before filing a preliminary prospectus

The Proposals include guidance that an issuer that considers a bought deal to be a material change can comply with its material change reporting obligations without contravening the pre-marketing restrictions, if:

  • the news release is not promotional and is carefully drafted to avoid "conditioning of the market"; and
  • no expressions of interest are solicited until a bought deal is announced or a preliminary prospectus is filed and receipted.

Testing the waters exemption for IPO issuers

A limited exemption is proposed to permit non-reporting issuers to determine interest in a potential IPO. The exemption will be subject to the following:

  • the communications are made through an investment dealer and only to permitted institutional investors;
  • the investment dealer must ask the permitted institutional investor to confirm in writing that it will keep the information confidential;
  • the issuer 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 must keep a written record of any permitted institutional investor that it solicited and a copy of the correspondence with the investor.

The CSA are seeking comments on whether this testing the waters exemption will be valuable for issuers and investment dealers. The exemption will not be available to issuers that are already public companies in a foreign jurisdiction.

Research Reports

The Proposals also provide guidance to the effect that research reports issued by an investment dealer must comply with section 7.7 of the Universal Market Integrity Rules and any applicable local rule. 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 an underwriter for prospectus offerings.

The CSA are seeking written comments until February 23, 2012. The CSA Notice and Request for Comment is available here.

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