Canada: Prospectus Offerings: 5 More Questions Issuers Need To Consider

In our September 2014 Blakes Bulletin: Prospectus Offerings: 5 Questions Issuers Need to Consider (Initial Bulletin), we identified five questions Canadian public companies raising capital should consider. Below, we identify five further questions to be considered prior to launching a prospectus offering of securities.


Five different forms of prospectus can be used to access Canadian capital markets. All prospectuses must include full, true and plain disclosure of all material facts relating to the offered securities.

Long Form Prospectus

Used for initial public offerings, the long form prospectus is a detailed disclosure document that includes: (i) a detailed description of the company's operations and business affairs, (ii) information concerning officers and directors, (iii) governance and compensation disclosure, and (iv) financial statements (typically, three years of audited annual financial statements of the company and financial statements for the company's most recently completed interim period, as well as further financial statements in respect of any significant business(es) to be acquired using the proceeds of the offering). Companies that are not eligible to use another form of prospectus must use a long form prospectus.

Short Form Prospectus

A short form prospectus can be used by a company that is a reporting issuer in Canada, has current annual financial statements and a current annual information form, and has equity securities listed on an eligible Canadian stock exchange (e.g., the Toronto Stock Exchange). The short form prospectus incorporates by reference a company's existing continuous disclosure record, including its annual information form, most recent annual financial statements and interim financial reports (together with management's discussion and analysis), management information circular, business acquisition reports, and material change reports. As short form prospectuses are generally significantly shorter than long form prospectuses, they can be prepared rapidly, allowing for companies to access Canadian capital markets quickly (see the Initial Bulletin at "3. How Long Will the Offering Take to Complete?").

Prospectus Supplement to a Base Shelf Prospectus

A base shelf prospectus is a short form prospectus that permits companies to offer up to a specified aggregate dollar value of one or more types of securities over a 25-month period. The base shelf prospectus contains, or incorporates by reference, disclosure not specific to a particular offering of securities (i.e., it omits what is known as "shelf information"). When a company decides to issue securities, a brief prospectus supplement disclosing the "shelf information," including the specific terms of the securities being offered, is incorporated by reference into the base shelf prospectus and provided to investors.

As with long form and other short form prospectuses, preliminary and final base shelf prospectuses are reviewed and receipted by the applicable Canadian securities regulators. However, in the case of base shelf prospectuses, this process is completed in advance of any offerings. Since a prospectus supplement will generally not be subject to regulatory review prior to being finalized, companies are permitted to rapidly access capital markets (see the Initial Bulletin at "3. How Long Will the Offering Take to Complete?").

Regulatory restrictions on the pre-marketing of securities—see our June 2013 Blakes Bulletin: New Marketing Rules for Prospectus Offerings in Canada—and limits regarding "upsizing" (discussed below) do not apply to offerings by prospectus supplement.

Supplemented PREP Prospectus

Under the post-receipt effective pricing (PREP) procedures, a final base PREP prospectus is permitted to omit "PREP information," such as the price of the offered securities and related disclosures. Subsequently, within two business days of determination of the "PREP information," a company may file a supplemented PREP prospectus containing full, true and plain disclosure of all material facts relating to the offered securities. The supplemented PREP prospectus must be identical to the final base PREP prospectus; subject to limited exceptions including the inclusion of the "PREP information" and that the size of the offering may be increased or decreased by up to 20 per cent.

The PREP procedures are available to companies using either a long form prospectus or a short form prospectus and are intended to permit greater integration with the U.S. registration statement regime, in order to facilitate cross-border offerings. However, given that use of the PREP procedures facilitates a timelier commencement of trading for offered securities, its benefits extend to domestic offerings as well.

MJDS Prospectus

The multi-jurisdictional disclosure system (MJDS) was implemented by Canadian securities regulators and the U.S. Securities and Exchange Commission to reduce duplicative regulation in cross-border offerings and remove unnecessary obstacles to certain offerings of securities in the United States by Canadian issuers and in Canada by U.S. companies, while ensuring that investors remain adequately protected. MJDS offerings of securities may be made on the basis of disclosure documents prepared in accordance with the securities laws of the company's home jurisdiction.


Minimum Offering Size

The cover page and body of a prospectus must disclose the number and type of securities qualified for distribution, the price per offered security, and the total proceeds to the company. If a distribution of securities is being undertaken on a "best efforts" basis (see the Initial Bulletin at "2. Who Bears the Risk of Completing the Offering?") and a minimum offering amount is required for the company to achieve one or more of the stated purposes of the offering, the prospectus must provide a minimum and maximum offering amount and provide that if the minimum amount of funds is not raised within the distribution period, any funds deposited by potential subscribers will be returned.

Canadian securities regulators may refuse to issue a receipt for a final prospectus unless a minimum offering amount is specified if they conclude that a minimum offering amount is necessary to achieve stated objectives or if they have concerns about a company continuing as a going concern (see our March 2012 Blakes Bulletin: CSA Outlines Concerns Regarding an Issuer's Financial Condition in the Context of a Prospectus Offering).

Bought Deal Upsizing/Downsizing

There is a limited exception from the general prohibition on marketing before a prospectus has been filed that permits an underwriter to solicit expressions of interest if the company has entered into a written "bought deal" agreement with an underwriter who has agreed to purchase the full amount of the offering on a firm commitment basis (see the Initial Bulletin at "2. Who Bears the Risk of Completing the Offering?"). Such bought deal agreements are prohibited from containing an upsizing option (other than an over-allotment option).

The pre-marketing exception for bought deals facilitates prompt offerings by companies and reduces the risk that an offering will not be completed. However, companies need to be aware of restrictions on their ability to subsequently increase or decrease the size of such offerings. The company and underwriter may agree to (i) increase the number of securities to be purchased by the underwriter, at the same offering price, by no more than 100 per cent of the initial offering size or (ii) reduce the size of the offering, or the offering price, only on or after the date which is four business days after the date the original bought deal agreement was entered into.


On the closing date of a prospectus offering, the underwriters may choose to sell an aggregate number or principal amount of offered securities that exceeds the size of the offering indicated in the prospectus. As a result, the underwriters will hold a short position in the securities (i.e., an over-allocation position). The company and the underwriters typically will have negotiated an over-allotment option (sometimes called a greenshoe option), pursuant to which the company grants the underwriters a right to purchase an additional number of securities at the offer price to cover their over-allocation position.

Securities regulatory policy restricts the size of over-allotment options to the lesser of 15 per cent of the base offering and the size of the underwriters' over-allocation position. Over-allotment options are priced at the same per security price as the base offering, and must expire no later than the 60th day following the closing date of the base offering.

If the market price of the securities offered under the prospectus decreases after closing of the offering (particularly if it decreases by more than the underwriting commission per security), the short position created by the underwriters' over-allocation position can be expected to be filled through purchases in the market, creating upward pressure on the price of the securities. The underwriters are compensated for such market stabilization services by retaining the difference between the price that the over-allocated securities were sold to investors and the price at which the underwriters fill their short position in the market.

If the market price of the securities increases after closing of the distribution (or decreases by less than the underwriting commission per security), underwriters may fill their over-allocation position through the exercise of an over-allotment option. In such cases, the underwriters are compensated by receiving the underwriting commission associated with the over-allotment shares issued by the company.


Whenever a company is contemplating a prospectus offering, it is important to consider the additional requirements that will be imposed on foreign individuals and advisers.

In connection with the filing of a preliminary prospectus, companies must file (subject to prescribed exceptions) a personal information form (PIF) for each director, executive officer and promoter of the company. PIFs are detailed surveys of biographical information. It can take more than a month after submission of a PIF for Canadian securities regulators to complete background checks in foreign jurisdictions regarding non-Canadians. If a PIF cannot be satisfactorily cleared in a timely manner, Canadian securities regulators may not issue a receipt for the final prospectus or require an undertaking pursuant to which the individual agrees to resign if the results of the background checks prove to be unsatisfactory.

In addition, a prescribed form of submission to jurisdiction and appointment of a Canadian agent for service of process is required to be filed with the final prospectus for each director of the company, each securityholder selling securities pursuant to the prospectus, and any other person or company that signs a prospectus certificate (e.g., the company's chief executive officer and chief financial officer), if the person or company is incorporated or organized under a foreign jurisdiction and does not have an office in Canada or is an individual who resides outside of Canada (collectively, Submitting Foreigners).

Each Submitting Foreigner and each person or company required to provide a consent to the Canadian securities regulators concerning "expertised" disclosure in the prospectus (e.g., foreign "qualified persons," law firms or auditors) that is incorporated, continued, or otherwise organized under the laws of a foreign jurisdiction or resides outside of Canada, must be noted on the prospectus cover page or under a separate prospectus heading, along with a cautionary statement noting that it may not be possible for purchasers to enforce judgments obtained in Canada against such persons or companies.


A company's external auditors, together with the company's external legal counsel, an offering's underwriters, the underwriters' external legal counsel and other professional experts act as gatekeepers to Canadian capital markets. In connection with a prospectus offering, a company's external auditors provide an independent assessment of whether the information presented in the company's annual financial statements has been fairly presented. In particular, the auditors (i) audit and review the historical financial statements required in a prospectus; (ii) prepare letters to the underwriters providing comfort with respect to financial data contained in the prospectus; (iii) participate in conference calls or meetings regarding the underwriters' due diligence investigation; and (iv) provide "expert" consents to the Canadian securities regulators concerning their audit report.

Although auditor review of interim financial statements is not required for purposes of continuous disclosure, companies should be aware that any unaudited financial statements (other than pro forma statements) that are included or incorporated by reference in a prospectus must be reviewed by the applicable auditors. This will include the company's own financial statements, as well as other financial statements that may be included in a prospectus (e.g., financial statements of an acquired business included in a business acquisition report). Accordingly, if a company frequently accesses Canadian capital markets for prospectus financings or otherwise anticipates that it may do a prospectus offering, it should consider having its current interim financial report reviewed by its auditor in advance of commencing the offering process.

Considering these five questions prior to commencing a prospectus offering in Canada will enhance the prospects for completing a timely and successful offering.

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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