On November 25, 2011, the Canadian Securities Administrators (CSA) published for comment proposed amendments to National Instrument 41 – 101 General Prospectus Requirements and other rules, which, if adopted, would increase the range of permissible "pre-marketing" and "marketing" activities in connection with prospectus offerings by issuers other than mutual funds.
The proposed amendments would:
- allow non-reporting issuers, through an investment dealer, to determine interest in a potential initial public offering (IPO) by communicating with permitted institutional investors;
- allow the use of term sheets as a marketing tool;
- prescribe new requirements governing road shows; and
- allow bought deals to be up-sized and bought deal syndicates to be enlarged.
The proposed amendments are expected to ease certain regulatory burdens and restrictions faced by issuers and investment dealers in trying to successfully complete a prospectus offering and to foster capital raising activities while, at the same time, addressing investor protection concerns.
The fundamental principles underlying the restrictive existing regulatory regime with respect to the marketing of securities are that there can be no direct or indirect preparation of the market by the issuer, that investors should have equal access to information, and that investor protection should be ensured through the use of a prospectus as the main marketing document (with the attendant potential liability of the issuer and the underwriters for any misrepresentations in the prospectus).
Currently, during the period between the issuance of a receipt for a preliminary prospectus and a receipt for a final prospectus (the Waiting Period), the primary exception to the restrictions against advertising permits the dissemination of written information provided the information is designed solely to advise the prospective investor of the availability of the offered securities and the preliminary prospectus containing the relevant information.
Securities regulators take the position that, except as expressly permitted under applicable securities legislation, only the preliminary prospectus may be distributed during the Waiting Period and that, in particular, the distribution of any advertising or marketing material (including any marketing brochure, circular, advertisement, letter, notice or other communication) which can reasonably be considered to be in furtherance of an issuance of securities is prohibited until a receipt for a final prospectus has been issued.
"TESTING OF THE WATERS" EXEMPTION FOR IPOS
The proposed amendments put forward a limited exemption to the general prohibition on pre-marketing activities (i.e., solicitation of expressions of interest prior to the time when a receipt for a preliminary prospectus is issued) that would allow limited confidential communication with permitted institutional investors (that is, specified financial institutions, pension funds, government agencies and certain investment funds). The proposed exemption would enable a would-be issuer, through an investment dealer, to determine interest in its potential IPO.
This exemption would only be available if certain conditions are met, including, the fact that the "IPO issuer" cannot already be a public company in a foreign jurisdiction, that each permitted institutional investor confirms in writing that it will keep confidential any information received from any investment dealer authorized by the issuer to act on its behalf, that the issuer keep a written record of any investment dealer it authorized to act on is behalf and that such authorized investment dealer keep a written record of any permitted institutional investor that it solicited.
The CSA specifically request comment on the utility of this proposed exemption.
USE OF TERM SHEETS
The proposed amendments would, in certain circumstances, allow investment dealers to provide investors a term sheet, thus enabling a greater range of marketing communications.
Definition of Term Sheet
Under the proposed amendments a "term sheet" would be defined as a written communication regarding a distribution of securities under a prospectus that contains information on the issuer or the securities, but does not include a prospectus, or a notice, circular, advertisement, letter or other communication that is expressly permitted by securities legislation.
Fair, True and Plain Disclosure
The CSA's guidance in the proposed amendments sets out that, since a term sheet is not required to contain the same information as a prospectus, it cannot meet the prospectus standard of "full, true and plain" disclosure. Consequently, the required disclosure in a term sheet must be "fair, true and plain"; meaning that the disclosure is honest, impartial, balanced and not misleading, does not give undue prominence to a particular fact and does not contain promotional language.
Bought Deal Term Sheets
The proposed amendments would allow investment dealers to provide a term sheet to permitted institutional investors after a bought deal is announced, but before the preliminary prospectus is filed and receipted (within four business days following the announcement). The conditions for the use of terms sheets in connection with bought deals include that:
- all information concerning securities in the term sheet be in the bought deal news release or the issuer's continuous disclosure record;
- the term sheet be approved in writing by the issuer and the underwriters and filed on SEDAR before being used;
- the term sheet be included in, or incorporated by reference into, the preliminary and final prospectus;
- the term sheet contain prescribed cautionary language referring investors to the subsequent preliminary prospectus and final prospectus and specifying that the term sheet does not contain full disclosure of all material facts; and
- any permitted institutional investor who receives a term sheet must also receive the subsequent preliminary prospectus.
Under the proposed rules, investment dealers would only be permitted to provide a bought deal term sheet before the filing of a preliminary prospectus to permitted institutional investors and not to retail investors. Whether bought deal term sheets ought to be given to retail investors before the receipt of a preliminary short form prospectus is a specific comment request of the CSA, recognizing that under the current bought deal exemption, an investment dealer is able to solicit expressions of interest from retail investors before the filing of a preliminary prospectus.
Use of Term Sheets During the Waiting Period
The proposed amendments would also permit investment dealers to provide a term sheet in conjunction with a preliminary prospectus. The use of a term sheet during the Waiting Period is subject to a number of conditions, including that:
- all information concerning the securities in the term sheet, including any "comparables" (i.e., information that compares the issuer to other issuers), be contained in the preliminary prospectus;
- the term sheet be approved in writing by the issuer and the underwriters and filed on SEDAR before being used;
- the term sheet be included in, or incorporated by reference into, the final prospectus;
- the term sheet be distributed with a copy of the preliminary prospectus; and
- the term sheet contain prescribed cautionary language referring investors to the preliminary prospectus and indicating that the term sheet does not contain full disclosure of all material facts.
Use of "Comparables" in Term Sheet
In the proposed amendments, the CSA provide guidance on the requirement that all information in a term sheet must be disclosed in the prospectus. A term sheet could summarize information from the prospectus or include graphs or charts based on numbers in the prospectus. However, if an investment dealer wanted to include information in a term sheet comparing the issuer to other issuers, that information would also need to be disclosed in the prospectus (and, accordingly, be subject to prospectus liability). Furthermore, should an issuer decide to include information in the prospectus that compares it to other issuers, that information should be accompanied by appropriate cautionary and risk factor language so that the prospectus does not contain a misrepresentation.
Remedies and Liabilities
In the proposed amendments, the CSA provide guidance on the remedies available to an investor if a term sheet contains a misrepresentation. For example, an investor who purchases a security distributed under the final prospectus may have remedies under the civil liability provisions of applicable securities legislation. In addition, an investor who purchases a security of the issuer on the secondary market may have remedies under the civil liability for secondary market disclosure provisions of applicable securities legislation if the term sheet contains a misrepresentation since:
- the term sheet is required to be included in the final prospectus or incorporated by reference into the final prospectus (a final prospectus is a "core document" under the secondary market liability provisions); and
- the term sheet is required to be filed and is therefore a "document" under the secondary market liability provisions.
Road shows are presentations that are made by an issuer's senior management (often accompanied by representatives of the lead underwriters) to market an upcoming securities offering to prospective investors. The investor participants will typically include representatives of large institutional investors, money managers or brokerage firms. It is not surprising that 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 contain provisions regulating road shows during the Waiting Period. These provisions will apply to all types of road shows (including in-person, telephone conference calls, over the internet or by other electronic means).
Road Shows for Permitted Institutional Investors
The proposed amendments would allow an investment dealer to conduct a road show for permitted institutional investors during the waiting period, subject to certain conditions, including that:
- other than information that compares the issuer to other issuers and contact information for the investment dealer conducting the road show, all information in the road show concerning the securities is disclosed in the preliminary prospectus and any amendment to the preliminary prospectus;
- all information (including any comparables) in the road show must be fair, true and plain;
- the issuer provides written authorization to the investment dealer to conduct the road show;
- only permitted institutional investors, registered individuals and representatives of the issuer attend the road show; and
- 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.
- A permitted institutional investor attending a road show cannot be provided with any written material, other than a preliminary prospectus, unless:
- the written material is treated as a term sheet and the proposed rules dealing with term sheets are complied with;
- the issuer redacts any information that compares the issuer to other issuers from the written material (unless that information is included in the prospectus) before filing it on SEDAR (since term sheets must be filed);
- the written material contains a statement, immediately after any information not disclosed in the preliminary prospectus that compares the issuer to other issuers, that the information is not disclosed in the preliminary prospectus and will not be subject to prospectus liability.
Road Shows for retail Investors
The proposed amendments would allow an investment dealer to conduct a road show for retail investors during the waiting period, subject to certain conditions, including that:
- all information in the road show is contained in the preliminary prospectus;
- all information in the road show must be fair, true and plain;
- any written materials distributed to investors must comply with the term sheet provision.
Unlike the provision for road shows for permitted institutional investors, the proposed amendments do not allow road shows for retail investors to contain comparables in the absence of prospectus liability. In the absence of adequate protections for retail investors, the CSA believe that comparables should only be given to permitted institutional investors. Further, the CSA note that comparables can be "cherry picked" by investment dealers and misunderstood by retail investors.
Access to Road Shows and Oral Disclaimer
Under the proposed amendments, the investment dealer conducting a road show must establish and follow reasonable procedures to:
- verify the identity and keep a written record of any person attending a road show in person, by telephone conference call, over the internet or by other electronic means;
- ensure that any person attending a road show has received a copy of the preliminary prospectus and any amendment to the preliminary prospectus; and
- restrict copying of any written materials.
Finally, the proposed amendments would require that an investment dealer conducting a road show must commence a road show by reading a prescribed cautionary statement referring to the preliminary prospectus and the fact that it is subject to completion and that the presentation does not contain full disclosure of all material facts relating to the securities offered.
Guidance for Road Shows for Cross Border IPO Offerings
In the past, issuers conducting internet road shows for cross-border IPOs applied for exemptive relief from the "restricted access" requirements in Canadian securities legislation because U.S. securities law required the issuers to either file the internet road show materials with the SEC or make them "available without restriction by means of graphic communication to any person". Issuers felt that if they were to file the materials with the SEC on EDGAR, then they would contravene the Canadian waiting period restrictions. Since the CSA are now proposing to require road show materials to be filed on SEDAR, cross-border issuers will be able to file the same materials on EDGAR without applying for exemptive relief.
MARKETING AFTER THE RECEIPT OF A FINAL PROSPECTUS OR FINAL BASE SHELF 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 or a final base shelf prospectus (provided the disclosure is based is based on the final prospectus or, as the case may be, on the final base shelf prospectus and any applicable shelf prospectus supplement or preliminary form of shelf prospectus supplement), subject to similar conditions as the conditions described above.
Guidance by the CSA in the proposed amendments make it clear that an investment dealer 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 would contravene the prospectus requirement unless it complied with the proposed rules for the use of term sheets during the Waiting Period.
BOUGHT DEAL EXEMPTION
The existing "bought deal exemption" provides a limited accommodation for issuers seeking certainty of financing by allowing an investment dealer to solicit expressions of interest before the filing of a preliminary prospectus if, among other things, the issuer has entered into an enforceable agreement with an underwriter who has agreed to purchase the full amount of the offering, the issuer issues a news release announcing the agreement, and the issuer files and obtains a receipt for a preliminary prospectus within four business days of the agreement.
Enlarging Bought Deals
Under the proposed amendments, an issuer relying on the bought deal exemption would be, under certain conditions, permitted to upsize the offering. The CSA make it clear that any deal upsizing cannot be the culmination of a plan to offer a larger amount of securities devised before the execution of the original agreement giving rise to the bought deal exemption.
Furthermore, deal upsizing would only be permitted if a news release is issued immediately after the original 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 execution of the original agreement (and not of the amended agreement), and the enlarged offering is for the same price as the original offering.
The CSA have specifically requested comments on what would be the appropriate level of the specified percentage up to which a bought deal could be enlarged. Amongst the proposals are 15% of the original size of the offering (which corresponds to the existing 15% limit on over-allotment options), 25%, 50% or any another limit that would provide the required flexibility while preventing abuse of the bought deal exemption.
Enlarging Bought Deal Syndicate
The proposed amendments would also allow for additional underwriters to join the bought deal syndicate if the addition was not the result of a plan to add that underwriter devised before the execution of the original bought deal agreement.
Market Out Clause
In what might be seem as a return to the source, the proposed amendments would provide a definition of a "bought deal agreement" giving rise to the "bought deal exemption" expressly providing that such a bought deal agreement cannot have a "market-out clause" (being a provision in an agreement which permits an underwriter to terminate its commitment to purchase securities in the event that the securities cannot be marketed profitably due to market conditions).
Comments on the Proposed Amendments are due by February 23, 2012. Information on submitting comments to the CSA can be found on the website of the individual security administrator.
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.