Canada: Changes to Canada’s Short Form Prospectus System

Extended Premarketing Period, Eligibility Relaxed And Prospectus Content Rationa
Last Updated: December 2 2005

Canada’s securities regulators have finalized changes to the short form prospectus system, which will be effective for short form prospectuses filed on or after December 30, 2005. The premarketing period has been extended, eligibility requirements have been relaxed and the content requirements for the short form prospectus have been rationalized and harmonized with the continuous disclosure obligations. With regular continuous disclosure reviews, the regulators believe that the short form prospectus system can be relaxed without diminishing investor protection.

More Time to File Preliminary Short Form Prospectus in Bought Deals

The most important change for an issuer that is currently eligible to use the short form prospectus system is the extension of time for filing a preliminary prospectus in a bought deal. Under the new rule, an issuer must file a preliminary prospectus within four business days (rather than two business days) after entering into an underwriting agreement.

Relaxation of Eligibility Requirements

The basic qualification criteria have been relaxed to permit a reporting issuer, including an investment fund, that has equity securities listed on (a) the Toronto Stock Exchange, (b) Tier 1 or 2 of the TSX Venture Exchange, or (c) the Canadian Trading and Quotation System to issue any type of security using the short form prospectus system if its continuous disclosure filings are up to date and it has filed a notice declaring its intention to be qualified to file a short form prospectus. The 12-month seasoning requirement and minimum public float (market capitalization) requirements have been abolished. A long form prospectus will continue to be required for an initial public offering or for an issuer that has ceased operations or whose principal asset is cash, cash-equivalents or its listing.

Alternative qualification criteria continue to exist for issuers of (a) non-convertible securities that have received an approved rating; (b) guaranteed non-convertible debt, preferred shares and cash-settled derivatives if the credit supporter meets certain basic qualification criteria; (c) guaranteed convertible debt or preferred shares if the credit supporter meets the basic qualification criteria; and (d) asset-backed securities that have received an approved rating.

Short Form Prospectus Content Requirements Rationalized

The content requirements for the short form prospectus have been rationalized to eliminate duplication and conflicts with the continuous disclosure rules, and to reflect current accounting principles and auditing standards. The following are some of the more significant changes to the disclosure required in a short form prospectus and to filing procedures:

  • Annual Information Form. The requirement to file an initial AIF for review by the securities regulators has been eliminated, although an issuer must have a current AIF to access the short form prospectus system. A venture issuer (i.e., an issuer that is listed on the TSX Venture Exchange or not listed on any exchange) that is not otherwise required to file an AIF will be required to file an AIF to access the short form prospectus system.
  • Significant Acquisitions. Business acquisition reports (BARs) filed since the beginning of the most recently completed financial year will be incorporated by reference into the short form prospectus, eliminating the need to include most significant acquisition disclosure in the prospectus. Disclosure (in some cases including financial statements of the acquired business) will be required for (a) completed acquisitions if the BAR has not yet been filed; (b) completed acquisitions if there was no requirement to file a BAR because the issuer was not a reporting issuer at the time of the acquisition; and (c) proposed significant acquisitions that are highly likely to occur.
  • Significant Dispositions. No disclosure will be required in the short form prospectus about significant dispositions because disclosure of discontinued operations is now required in the financial statements under Canadian generally accepted accounting principles.
  • Material Documents. Documents affecting the rights of securityholders and other material contracts that relate to the securities being distributed must be publicly filed on SEDAR, as opposed to being delivered to the securities regulators.
  • Auditor’s Review of Interim Financial Statements. Any unaudited interim financial statements of the company or acquired business that are included in or incorporated by reference into the short form prospectus must be reviewed by the entity’s auditor. An auditor’s comfort letter regarding unaudited financial statements need no longer be filed with the final short form prospectus, because changes in generally accepted auditing standards have made this letter redundant.
  • Use of Proceeds. If more than 10% of the net proceeds of the distribution will be used to repay indebtedness that was incurred within the two preceding years, the short form prospectus must describe the principal uses to which that indebtedness was put. If the creditor is an insider, associate or affiliate of the issuer, the identity of the creditor and its relationship with the issuer must be disclosed.
  • Disclosure of Experts. Recognizing prior practice, the form now expressly exempts auditors from the requirement that they disclose their interests in the issuer. The prospectus must, however, disclose that the auditor is independent from the issuer in accordance with relevant professional standards. (Corresponding changes are being made to the "disclosure of experts" section in the AIF.)
  • Reliance on Exemptions. The short form prospectus must list any exemptions that the issuer has obtained from the short form prospectus rule.

Impact on MJDS

The Canadian securities regulators have confirmed with staff of the U.S. Securities and Exchange Commission that a short form prospectus prepared under this replacement rule will qualify as a home jurisdiction document for an offering of securities in the United States under the U.S. multijurisdictional disclosure system (MJDS).

Additional Changes Being Considered

The Canadian securities regulators have indicated that they are considering further changes that would permit certain eligible companies to (a) market a securities offering once they have publicly disclosed that an offering is pending, regardless of whether the offering is a bought deal, and (b) access the public markets simply by filing a final prospectus, without any regulatory review.

The regulators also will consider the new SEC rules that come into force on December 1, 2005. These rules eliminate the delivery requirement for final prospectuses, relax the gun-jumping prohibition for well-known seasoned issuers (WKSIs) by permitting them to make offers of securities before filing a registration statement and permit all issuers to offer securities by using documents (called "free writing prospectuses") other than the statutory prospectus. At the moment, MJDS issuers are not eligible to be WKSIs, although those that meet the financial tests could become eligible if they voluntarily file an annual report on the SEC’s Form 20-F in lieu of Form 40-F.

Any additional changes will be considered as part of ongoing deliberations to reform the prospectus system, which also includes harmonizing and nationalizing the rules applicable to long form prospectuses.

A copy of new National Instrument 44-101, Short Form Prospectus Distributions, can be found on the Ontario Securities Commissions website at:
www.osc.gov.on.ca/Regulation/Rulemaking/Current/rrn_part4_index.jsp.

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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