Rules governing the marketing of prospectus offerings were amended by the Canadian Securities Administrators in August 2013, in some respects in a significant manner. Intended to ease marketing restrictions and complement existing market practices, the new rules provided some much needed clarity in respect of activities that are commonly undertaken in marketing prospectus offerings. However, they have also given rise to various questions as issuers and underwriters worked through the ramifications of these new requirements in the first few months since their implementation.
Amendments were made primarily to National Instrument 41-101 General Prospectus Requirements and National Instrument 44-101 Short Form Prospectus Distributions and expressly codified permissible "pre-marketing" and "marketing" activities that can be conducted prior to and after the filing of a preliminary prospectus.
As discussed in detail below, the amendments included a new exemption to permit registered dealers to "test the waters" in connection with an initial public offering (IPO), as well as express rules relating to the use of "standard term sheets" and "marketing materials" and to the conduct of "road shows" during and after the waiting period. Amendments were also made to existing exemptions that permit pre-marketing in connection with a "bought deal agreement" that, among other things, impose new requirements on what will be considered a "bought deal agreement" for the purposes of the exemption. Specific requirements were also imposed on amending the terms of a bought deal agreement, including increasing or decreasing the size of the offering. While these changes have been characterized by the regulators as an easing of restrictions, as discussed below, these accommodations come at the price of specific rules and express policy bias that may cast some doubts on "street" practices that routinely took place. In this article, we review these changes and examine some practical issues faced in their application.
New "Testing of the Waters" Exemption for IPOs
With respect to pre-marketing in connection with a prospectus offering, the CSA implemented a new exemption from the prospectus requirement that permits the solicitation of expressions of interest where the issuer has a reasonable expectation of filing a preliminary long form prospectus in respect of an IPO. Pursuant to this exemption, an investment dealer that is authorized in writing to do so by the issuer is permitted to make solicitations to "accredited investors" (as defined in National Instrument 45-106 Prospectus and Registration Exemptions).
When relying on this exemption, both the issuer and the investment dealer must keep information about the proposed offering confidential, written materials provided to potential investors must be marked confidential and contain a prescribed legend, and prior to providing any information about the proposed offering, the investment dealer must obtain a written confidentiality confirmation from the investor. Guidance in the Companion Policy to NI 41-101 advises that this confirmation may be obtained through e-mail.
Any issuer relying on this exemption must keep a written record of the investment dealers it authorizes to act on its behalf as well as a copy of the written authorization itself. To comply with this requirement, the CSA would expect the issuer to record the name and contact information for a contact person with each investment dealer that it authorizes.The investment dealer is also subject to record-keeping requirements and must keep a written record of any accredited investor that it solicits, as well as a copy of any written materials it provides to them and the confidentiality confirmations it obtains from them.
This "testing the waters" exemption is not available to any issuer that is a reporting issuer in any other jurisdiction prior to filing a preliminary prospectus in Canada, nor is it available to SEC issuers, whose securities have been assigned a ticker symbol by FINRA for use on any OTC market in the United States or whose securities have been traded on an OTC market where trade data is publicly reported, or those that have had any securities listed, quoted or traded on a marketplace or similar facility outside of Canada where trade data is publicly reported. The exemption is also not available where a "control person" of the issuer is a public issuer and the IPO would be a material fact or material change with respect to such control person. In addition, the preliminary prospectus cannot be filed until 15 days after the last of such solicitations is made.
As discussed below, specific requirements now apply to the use of written materials in connection with a distribution and to the conduct of a "road show". This will require greater scrutiny of "non-deal" road shows and similar presentations to ensure they are not, in fact, being undertaken in connection with a distribution. While they were specifically asked through comments, the regulators opted not to provide any bright-line threshold for a "cooling-off" period between a non-deal roadshow and the commencement of an offering, leaving the determination to one based on facts as to whether a distribution was contemplated. As a consequence, there is undoubtedly a greater focus on making such a determination given that for deal-related roadshows there is the potential to be offside both applicable pre-marketing restrictions as well as the new requirements. Market practice on this issue has also been influenced by the 15-day cooling off period for the "testing the waters" exemption, notwithstanding that has been prescribed in a very specific context.
Use of Written Marketing Materials During and After the Waiting Period
After a preliminary prospectus has been filed and receipted (starting the "waiting period"), Canadian securities laws expressly permitted only for the distribution of the preliminary prospectus or the solicitation of expressions of interest from prospective purchasers provided that, prior to making the solicitation or forthwith after the purchaser indicates an interest in purchasing, a copy of the preliminary prospectus is provided. The distribution of certain limited communications, referred to in the new rule as a preliminary or final "prospectus notice" is also permitted. However, in addition to identifying the person from whom a copy of a preliminary prospectus may be obtained, such notices permit only the identification of the security proposed to be issued, the price (if then determined), and the name and address of the person from whom the securities may be purchased.
Under the new rules, written communications outside of the prospectus itself and such notices must be either a "standard term sheet" or "marketing materials". Both of these terms have specific defined meanings under the new rules and are accompanied by specified filing and other requirements and restrictions.
Standard Term Sheets
With respect to "standard term sheets" other than contact information for the dealer, all information concerning the issuer, securities or the offering must be disclosed in or derived from the relevant prospectus and the standard term sheet must be dated and contain a prescribed legend. The type of information permitted to be in a "standard term sheet" is very limited and specifically prescribed in NI 41-101. Information such as a description of the business of the issuer, the securities and the use of proceeds, for example, is limited to no more than three lines of text. Significantly, information such as credit ratings are not included in the prescribed line items and therefore cannot be included in a "standard term sheet." In contrast to "marketing materials," a standard term sheet is not required to be incorporated by reference into the prospectus or filed on SEDAR. While the new exemption to expressly allow for the provision of a "standard term sheet" is intended to provide greater flexibility in marketing an offering, it raises questions about certain existing practices, including those involving the provision of terms sheets and other written materials that may no longer strictly comply with the prescribed requirements. This has required dealers to review their documentation and procedures to ensure that written communications that are intended to be used only as a term sheet comply with the applicable requirements. As discussed below, written communication beyond a permitted "standard term sheet" will likely constitute marketing materials and be subject to additional requirements where used. Given the very limited nature of "standard term sheets", the result is that the bulk of written materials used have had to be modified to ensure they qualify as "marketing materials".
Marketing Materials and Road Shows
With respect to "marketing materials," like standard term sheets, generally all information concerning the issuer, securities or the offering must also be disclosed in or derived from the applicable prospectus. However, this requirement does not apply to any comparables that may be included in marketing materials. As discussed above, marketing materials are required to be included or incorporated by reference in the final prospectus, which includes filing on SEDAR and translation to French where applicable. Information relating to comparables may, however, be redacted from the version filed on SEDAR provided certain related disclosure requirements are satisfied and a complete version is delivered confidentially to the relevant securities regulators. A version, referred to in the new rules as a "template version" of the marketing materials, must also be approved in writing prior to use. The provision of a "template version" means that excerpted portions may be used where the template version in its entirety is not required. A copy of the relevant prospectus must also be provided along with the marketing materials.
Given the broad coverage of "written communications," presentations and other written materials used for road shows and similar activities must comply with the above requirements. New Companion Policy guidance clarifies that this applies regardless of whether or not a copy of the road show presentation is left with a prospective investor. However, the ambit of "written communications" does not include cover e-mails or similar types of cover communications that may be used to transmit marketing materials to a prospective investor. When conducting road shows in connection with an offering, the dealer is required to ask each investor for their name and contact information, record any such information provided and provide the investor with a copy of the applicable prospectus. If the road show is not restricted to "accredited investors," a prescribed oral warning must also be read out loud to attendees.
Any written materials used also continue to be subject to other securities laws restrictions and requirements relating to advertising and promotional disclosure, such as prohibited representations regarding resales or the future value of the securities.
While dealers are still permitted to prepare summaries of the principal terms of an offering for distribution to their registered representatives, any such "green sheet" that is distributed to the public must be either a "standard term sheet" or "marketing materials" under the new rules, and is therefore subject to the relevant requirements. The implication of including material information in a green sheet or other marketing communication that is not contained in the prospectus is the same as it has always been, in that it could indicate a failure to provide full, true and plain disclosure in the prospectus.
Pre-Marketing of Bought Deals
As discussed above, the new rules expand the range of pre-marketing activities that can be undertaken in connection with bought deals and ease other restrictions applicable to bought deals. These include exemptions to allow for the provision of both "standard term sheets" and "marketing materials" prior to filing a preliminary short form prospectus (i.e., during the "pre-marketing period").The CSA explain that "pre-marketing" occurs when a dealer communicates with potential investors before a public offering and includes other promotional activities that occur before a preliminary prospectus is filed. Unless relying on the very narrow exemption available in the context of bought deals, pre-marketing is generally prohibited in Canada. The pre-marketing exemption for bought deals is therefore described as a "limited accommodation" for issuers seeking certainty of financing.
Use of standard term sheets and marketing materials in bought deals
Under the new rules, both "standard term sheets" and "marketing materials" are permitted to be used both prior to and after the filing of a preliminary or final short form prospectus. Generally, similar requirements as described above will apply. Notably with bought deals, when used prior to the filing of a preliminary short form prospectus, information contained in the standard term sheet or marketing materials must be disclosed in or derived from the bought deal news release or the issuer's continuous disclosure record. While marketing materials used during the pre-marketing period still need to be filed on SEDAR, they will not be made public until the preliminary prospectus is filed and receipted.
Termination provisions, upsizing bought deals and expanding bought deal syndicates
In addition to easing marketing restrictions, the new rules contain some significant new requirements on what may or may not be contained in a "bought deal agreement". Specifically, such an agreement cannot contain a "market out" clause which permits termination of the agreement in the event that the securities cannot be marketed profitably due to market conditions. While not contained in the rules, Companion Policy guidance also cautions that since the policy rationale for the "bought deal exemption" is to facilitate issuers seeking certainty of financing, certain types of other termination "outs" such as a due diligence out or a failure to obtain a final prospectus receipt by a specified date may not be permitted or could be subject to objection. While the regulators understandably want certainty, shifting the risk to the dealers may come with its own costs. The early experience demonstrates an attempt to push the risk back onto the issuer, but it remains to be seen how this may ultimately impact pricing, commissions and other deal elements.
A bought deal agreement also may not be conditional on syndication, although a prescribed form of "confirmation clause" is permitted, provided certain conditions are satisfied. For these purposes, a "confirmation" is defined as a provision that provides that the agreement is conditional on the lead underwriter confirming that one or more additional underwriters have agreed to purchase and a confirmation clause is only permitted if the issuer signs back the bought deal agreement on the same day it is presented by the lead underwriter, and the lead underwriter provides notice to the issuer in writing either confirming or terminating the agreement on the next business day.
An increase in the number of securities proposed to be purchased under a bought deal agreement is limited to 100% of the original offering, and must pertain to the same type of securities and price. The new rules also require that a preliminary short form prospectus for the increased number be filed within four business days of entering into the original bought deal agreement. However, filing the preliminary prospectus is sufficient, it is no longer required that it be receipted within the four days.
With respect to decreases, a decrease in price or number of securities is only permitted on or after the date that is four business days after entering into the original agreement, in other words, after the short form prospectus is required to have been filed. The bought deal agreement may only be amended to encompass a different type of securities if the aggregate dollar amount to be purchased by the underwriters remains the same and the issuer issues and files a new release upon amendment of the bought deal agreement and before any solicitations can be made. The issuer is also required to file a preliminary short form prospectus for the different type of securities within four days of entering into the original bought deal agreement.
Overall these rules can best be characterized as imposing new compliance obligations on activities that were routinely undertaken to market prospectus offerings. While such activities, arguably, may not expressly have been sanctioned under securities laws, they were undertaken as a matter of market practice. Ultimately, while they provide certainty and some clarity, the new rules also give rise to new questions and additional compliance requirements. Their impact on market practice has already been observed in the first months since adoption, although the long-term effects, including on substantive issues such as increased investor protection, enhanced disclosure, efficiency and deal certainty, remain to be seen.
This article was previously published by Federated Press in Volume XVIII, No. 4 of Corporate Financing.
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