On April 21, 2006, the OSC and other provincial securities commissions (together, the CSA) issued a Staff Notice in relation to the pre-marketing of underwriters’ options on bought deals. The Staff Notice was the result of a technical review of a practice that had developed on bought deal offerings, whereby an issuer grants underwriters an option, exercisable prior to closing, to purchase securities in addition to the base securities the underwriters agreed to purchase under the underwriting agreement. According to the CSA, insofar as the securities underlying these options were being marketed prior to the agreement to purchase them being entered into (i.e., prior to exercise of the options) and a receipt having been issued for the preliminary prospectus, issuers and their underwriters were violating securities law pre-marketing restrictions.
However, as often results from highly technical analysis, the pre-marketing issue effected more than just underwriters’ options. Significantly, the Staff Notice not only froze the use of underwriters’ options but also the practice of over-allotment options as it regrettably further provided:
"We recognize that the [pre-marketing] exemption ... does not extend to the pre-marketing of securities underlying post-closing over-allotment options to purchase up to 15% of the securities offered under the prospectus (also known as greenshoe options)."
Over-allotment options have long been an accepted corporate finance practice, both in relation to facilitating initial sales efforts and necessary market stabilization activities. Understandably, the market has not reacted well to this unfortunate result.
Today (May 24, 2006), the OSC published a further Notice signaling that it will grant relief, on an expedited basis, to permit the continued use of over-allotment options in connection with bought deal offerings. To underscore its commitment to dealing with the practical realities in which bought deals occur, OSC Staff has sought and received a designation of authority to permit Directors, Managers and Senior Managers to grant the relief, likely on a verbal basis with documentation to follow. Assuming appropriate circumstances, issuers and their underwriters may assume that the required relief will be obtainable in a matter of minutes or hours as opposed to days or weeks. Based on discussions with OSC Staff, we understand that the other provincial securities commissions are considering implementing similar measures.
The April CSA Staff Notice telegraphed that the OSC and other provincial securities regulators intend to review the regulatory restrictions on pre-marketing. If the OSC acts in a manner consistent with past practice, it is not unlikely that today’s Staff Notice will prove to be just a first step toward a liberalization of pre-marketing activities in Canada (i.e., the selling of securities prior to the receipt for a preliminary prospectus), especially in relation to optioned securities. At the very least, it would not be inconsistent with past practice for the OSC to amend Rule 44-101 - Short Form Prospectus Distributions (the Rule pursuant to which the vast majority of bought deals occur) to institutionalize this practice, thereby eliminating this (likely) interim step of obtaining discretionary relief to permit the granting and use of over-allotment options in connection with bought deals.
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.
