Canada: Canadian Securities Administrators Propose Significant Changes To The Prospectus Pre-Marketing And Marketing Regime

On November 25, 2011, the Canadian Securities Administrators (CSA) published for public comment proposals (Proposals) to change the current prospectus pre-marketing and marketing regime in Canada. If adopted, the Proposals will significantly alter the manner in which prospectus offerings of securities are marketed. In particular, the Proposals would:

  • permit limited communications with certain institutional investors to gauge interest in a potential initial public offering
  • permit the use of term sheets as a marketing tool
  • prescribe new requirements governing road shows, including road shows for retail investors
  • allow for upsizing of bought deals and bought deal syndicates, subject to certain conditions
  • clarify the CSA's views on the marketing of a bought deal financing, including the use of term sheets.

The Proposals do not apply to mutual funds. The comment period will remain open until February 25, 2012.

The Current Regulatory Regime

Existing rules governing communications with potential investors and other promotional activities before a public offering (i.e. pre-marketing) and after a preliminary prospectus has been filed (i.e. marketing), restrict the range of permissible activities by issuers and investment dealers. In general, securities laws prohibit any form of marketing for a public offering and solicitations of expressions of interest from potential investors until a preliminary prospectus has been filed and a receipt for the prospectus has been obtained. A limited exception to these rules permits solicitations of expressions of interest before a preliminary prospectus is filed in relation to a bought deal financing, so long as certain conditions are satisfied, including; the issuer having entered into an enforceable agreement with an underwriter who has agreed to purchase the full amount of the offering; issued a news release announcing the existence of the agreement; and filed and obtained a receipt for a preliminary prospectus within four business days of the agreement.

During the "waiting period" between the filing of the preliminary prospectus and the filing of the final prospectus, issuers and underwriters may engage in limited marketing activities in relation to a public offering, including: distributing a notice containing limited information about the offering; distributing the preliminary prospectus; and soliciting expressions of interest from prospective investors, if the investor is provided with a copy of the preliminary prospectus prior to the solicitation, or forthwith after the investor indicates an interest in purchasing the securities.

Pre-Marketing Activities

Testing of the Waters Exemption for IPO Issuers

The CSA are proposing to create a limited exemption to the prohibition against marketing an offering or soliciting expressions of interest prior to the filing of a preliminary prospectus for an initial public offering. Under the exemption, issuers that are not reporting issuers (or "public issuers" in any foreign jurisdiction), would be permitted to determine interest in a potential initial public offering through limited confidential communication between an investment dealer and certain types of institutional investors, which the Proposals refer to as "permitted institutional investors" (including Canadian financial institutions, federal and provincial pension funds, federal, provincial and foreign governments, and investment funds managed by a registered investment fund manager or advised by a registered adviser).

Reliance on the exemption would be subject to satisfying a number of conditions, including: the permitted institutional investor confirming in writing its agreement to keep the communications confidential; the issuer keeping a written record of the dealers authorized to act on its behalf and maintaining a copy of any written authorization; and the investment dealer keeping a written record of any investor that it solicited together with a copy of the investor's agreement to keep the communications confidential.

When Does an Offering Commence?

The CSA has previously expressed the view that, once a distribution of securities commences, an investment dealer may not communicate with investors for the purpose of determining the investor's interest in purchasing securities of the type that are the subject of discussions between the dealer and the issuer about a possible offering, until: the issuer has filed a preliminary prospectus in relation to the offering; issued a press release announcing an enforceable bought deal agreement; or the dealer has decided to no longer pursue the offering. Existing guidance from the CSA indicates that a distribution of securities commences when an investment dealer has had discussions with an issuer that are of "sufficient specificity" that it is reasonable to expect that the dealer will propose to the issuer an underwriting of securities. In response to concerns that certain market participants are taking aggressive interpretations of "sufficient specificity", the Proposals contemplate additional guidance on the meaning of those words, including permitted activities before the announcement of a bought deal, or the filing of a preliminary prospectus.

For example, the amended guidance in the Proposals indicates that the CSA does not agree with the following interpretations:

  • A securities distribution ends if an issuer rejects a proposed engagement letter or underwriting proposal from a dealer, thereby permitting the dealer to immediately resume communications with potential investors about their interest in purchasing securities of the Issuer. In these circumstances, the Proposals suggest that the dealer must observe a "cooling off" period before re-engaging in discussions.
  • A distribution of securities does not commence until a proposed engagement letter or underwriting proposal with indicative terms is provided by a dealer to an issuer.

Presumably, this guidance will also be applicable in the context of an issuer's obligation to issue a press release, once the issuer or a selling securityholder has formed a reasonable expectation to proceed with a distribution of equity securities under an unallocated shelf prospectus.

The Proposals reiterate the CSA's view that "non-deal road shows" (i.e. where issuers and dealers meet with investors to discuss the business and affairs of the issuer) are prohibited by securities legislation if the road show was undertaken in anticipation of a prospectus offering.

Marketing Activities

Use of Term Sheets for Bought Deals Prior to the Filing of the Preliminary Prospectus

Under the Proposals, issuers and investment dealers would be permitted to provide a term sheet to permitted institutional investors in connection with a bought deal, after the deal is announced and prior to the filing of the preliminary prospectus. This activity would only be permitted in the following circumstances:

  • 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 may only be provided to investors in a province or territory where the prospectus will be filed
  • the term sheet must be included or incorporated by reference in the preliminary prospectus and final prospectus and will therefore be subject to statutory liability for misrepresentations
  • the term sheet must contain a prescribed legend with cautionary language referring investors to the subsequent preliminary prospectus and final prospectus and noting that the term sheet does not contain full disclosure of all materials facts
  • any permitted institutional investor who received a term sheet must receive the preliminary prospectus

The Proposals indicate that the CSA would consider a term sheet to be "fair", true and plain (as contrasted with the prospectus standard of "full", true and plain) if the term sheet is honest, impartial and not misleading, does not give undue prominence to a particular fact or statement in the prospectus, and does not contain promotional language.

The CSA has specifically requested comments on whether the rules should permit investment dealers to provide bought deal term sheets to retail investors before the filing of a preliminary prospectus.

Use of Term Sheets During and After the Waiting Period

Distributing Term Sheets to Investors During the Waiting Period

The Proposals would allow for a greater range of marketing communications during the waiting period, by permitting investment dealers to provide a term sheet to both retail and institutional investors with a preliminary prospectus. This activity would only be permitted in the following circumstances:

  • the disclosure in the term sheet is fair, true and plain
  • all information in the term sheet relating to the securities (including any information that compares the issuer to other issuers) is included in the preliminary prospectus (but it would be permissible for the term sheet to summarize information from the prospectus or include graphs or charts based on numbers in the prospectus)
  • the term sheet is approved in writing by the issuer and the underwriters and filed before use
  • the term sheet is distributed with a copy of the preliminary prospectus
  • the term sheet is included or incorporated by reference in the final prospectus
  • the term sheet is distributed with a copy of the preliminary prospectus
  • the term sheet contains a prescribed legend with cautionary language referring to the preliminary prospectus and noting that the term sheet does not contain full disclosure of all material facts

Distributing Term Sheets to Investors After Receipt for a Final Prospectus

The Proposals would permit an investment dealer to provide a term sheet to a potential investor after a receipt for a final prospectus (or any prospectus amendment) is issued, so long as:

  • the disclosure in the term sheet is fair, true and plain
  • other than contact information for the investment dealer, all information in the term sheet concerning the securities is disclosed in the final prospectus and any amendment
  • the term sheet contains the same cautionary language in bold type (other than prescribed legends) as the face page and summary of the final prospectus;
  • the term sheet is approved in writing by the issuer and the underwriters and filed before it is provided
  • the term sheet is provided in the local jurisdiction only if a receipt for the final prospectus was issued in that jurisdiction
  • the investment dealer provides a copy of the final prospectus, and any amendment, with the term sheet
  • the term sheet is dated and contains prescribed language on the first page of the term sheet

If a term sheet is provided after the receipt for the final prospectus has been issued, the issuer would be required to include the term sheet in the final prospectus.

Distributing Term Sheets to Investors After Receipt for a Final Base Shelf Prospectus

The Proposals would permit an investment dealer to provide a term sheet to a potential investor after a receipt for a final base shelf prospectus (or any prospectus amendment) is issued, so long as:

  • the term sheet is included or incorporated by reference in the final prospectus
  • the disclosure in the term sheet is fair, true and plain
  • other than contact information for the investment dealer, all information in the term sheet concerning the securities is disclosed in the final prospectus and any amendment or any applicable shelf prospectus supplement or preliminary form of shelf prospectus supplement that has been filed
  • the term sheet contains the same cautionary language in bold type (other than prescribed legends) as the face page and summary of the final base shelf prospectus
  • the term sheet is approved in writing by the issuer and the underwriters and filed before it is provided
  • the term sheet is provided in the local jurisdiction only if a receipt for the final prospectus was issued in that jurisdiction
  • the investment dealer provides a copy of the final base shelf prospectus, any amendment and any applicable shelf prospectus supplement or preliminary form of shelf prospectus supplement, with the term sheet
  • the term sheet is dated and contains prescribed language on the first page of the term sheet

If a term sheet is provided after receipt for the final base shelf prospectus is issued, but before a shelf prospectus supplement is filed, the issuer would be required to include the term sheet in the relevant shelf prospectus supplement or incorporate it by reference in the supplement.

Use of Green Sheets

The Proposals confirm that investment dealers may provide traditional green sheets to their registered representatives. However, any green sheet that is distributed to the public would be considered a "term sheet" and would contravene the prospectus requirement, unless they complied with the proposed term sheet provisions described above.

Research Reports

The Proposals provide that any research reports issued by an investment dealer or an issuer must comply with Section 7.7 of IIROC's Universal Market Integrity Rules and any applicable local rule, and that investment dealers should have appropriate "ethical walls" policies and procedures in place, between the business unit that issues research reports or provides media commentary on the issuer, and the business unit that acts as underwriter for prospectus offerings.

Road Shows

The Proposals introduce specific requirements for the conduct of "road shows" during the waiting period (i.e. a presentation to potential investors regarding a prospectus offering of securities conducted by an investment dealer on behalf of an issuer in which one or more executive officers of the issuer participates), including in-person, telephone conference calls, internet and other electronic road shows. The requirements would vary based on the type of potential investor.

Road Shows for Permitted Institutional Investors

The Proposals would allow an investment dealer to conduct a road show for permitted institutional investors during the waiting period so long as: all information in the road show is contained in the preliminary prospectus (other than comparables to other issuers, which would otherwise be permitted to be disclosed at road shows for permitted institutional investors); all information in the road show is fair, true and plain (including comparables); any written materials distributed to investors comply with the term sheet provisions described above (other than comparables); and certain other conditions are satisfied.

Road Shows for Retail Investors

The Proposals would allow an investment dealer to conduct a road show for retail investors during the waiting period so long as: all information in the road show is contained in the preliminary prospectus; all information in the road show is fair, true and plain; any written materials distributed to investors comply with the term sheet provisions described above; and certain other conditions are satisfied.

The Proposals would not permit road shows for retail investors to include comparables, reflecting the CSA's concern that comparables can be "cherry picked" by investment dealers and misunderstood by retail investors. Where an issuer includes comparables in a prospectus, appropriate risk factor language and cautionary disclosure should be included.

The CSA has sought comment on the circumstances in which comparables should be permitted to be given to retail investors.

Restricted Access for Road Shows

The Proposals would require restricted access for road shows, and would also require the investment dealer 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 or by 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's

Historically, issuers conducting a cross-border IPO have sought relief from the "restricted access" requirements of Canadian securities legislation because of the requirement under U.S. securities laws that issuers either file Internet road show materials with the Securities and Exchange Commission (SEC), or make them "available without restriction by means of graphic communication to any person." The Proposals would require road show materials to be filed on the System for Electronic Document Analysis and Retrieval (SEDAR), and consequently, cross-border IPO issuers would be able to file the same materials on the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) without requiring any relief.

Changes to the Bought Deal Rules

The Proposals contemplate several changes which clarify the securities regulators' views on when a bought deal and syndicate can be enlarged; the use of "market out" clauses in bought deal letters; and the use of term sheets to market a bought deal offering.

Upsizing Bought Deals

Under the Proposals, an issuer that relies on the bought deal exemption and signs a bought deal agreement would be permitted to subsequently amend the agreement to upsize the offering if: a news release is issued immediately after the agreement is amended; the offering is increased by not more than a specified percentage of the original offering; the upsizing of the offering is not the culmination of any plan to offer a larger amount devised before the execution of the original agreement; and the upsized offering is for the same price as the original offering.

The CSA has sought comment on the maximum specified percentage by which a bought deal could be enlarged and has indicated that it expects that percentage to be 15 per cent, 25 per cent or 50 per cent of the original size of the offering.

Enlarging Bought Deal Syndicates

The Proposals would also allow for additional underwriters to join the bought deal syndicate after the deal is initially announced, if the addition of the underwriters is not the culmination of any plan to add the underwriters devised before the execution of the original bought deal agreement.

Market-Out Clauses in Bought Deal Letters

The Proposals would specify that the bought deal exemption would not be available if the bought deal letter contained a market-out clause entitling the investment dealer to terminate the letter in the event of a change in market conditions.

Permitting the Use of Term Sheets in Bought Deals

As discussed above, the Proposals would permit issuers and investment dealers to provide a term sheet to permitted institutional investors in connection with a bought deal, once the deal has been announced and prior to the filing of the preliminary prospectus, subject to certain conditions.

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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