As a general rule, an underwriter is prohibited under securities law from soliciting expressions of interest from potential purchasers of securities in a prospectus offering before a receipt has been issued for the preliminary prospectus (commonly referred to as "pre-marketing"). National Instrument 44-101 – Short Form Prospectus Distributions ("NI 44-101") provides an exception to the prohibition against pre-marketing for short form prospectus offerings carried out on a bought deal basis. Under NI-44-101, an underwriter may pre-market the securities for up to four business days if, among other things, the issuer has entered into an enforceable agreement with an underwriter who has agreed to purchase the securities.
April CSA Notice Regarding Pre-Marketing
On April 21, 2006, the Canadian Securities Administrators ("CSA") published CSA Staff Notice 47-302 - Pre-marketing of Underwriters’ Options on Bought Deals (the "Notice"). The information in the Notice significantly impacted the manner in which bought deals were conducted in Canada. The CSA staff expressed the view that, rather than being underwritten securities, the securities that were the subject of an underwriter’s over-allotment option were essentially agency securities. Since the optioned securities were not the subject of an enforceable agreement with an underwriter who had agreed to purchase those securities, the CSA staff took the position that the exception to the prohibition against pre-marketing in NI 44-101 did not extend to those securities.
In the Notice, the CSA staff said that they intended to review the regulatory restrictions on pre-marketing and consider whether the law should be changed to permit pre-marketing of the optioned securities. Subsequent to the publication of the Notice, the Ontario Securities Commission ("OSC") granted a number of applications for an exemption from the prohibition, subject to certain conditions. In addition, substantially all of the other provinces granted "blanket" exemptions from the prohibition (subject to the same conditions), which made individual exemption applications in those provinces unnecessary.
Amendment to NI 44-101
As of September 6, 2006, the OSC has amended NI 44-101 in a manner consistent with the blanket exemptions granted in the other provinces, so that individual exemptions are no longer required if the conditions specified in the amendment are met.
Under the amendment, the securities underlying an over-allotment option can be pre-marketed under the same conditions that apply to the pre-marketing of securities that the underwriter agrees to purchase from the outset, if the over-allotment option:
(a) is granted for the purpose of covering the over-allocation position of the underwriter;
(b) expires not later than the 60th day after the closing of the offering; and
(c) is limited to the lesser of
(i) the over-allocation position of the underwriter determined as at the closing of the offering, and
(ii) 15% of the number or principal amount of the securities qualified for distribution under the prospectus, without taking into account the securities issuable on the exercise of the over-allotment option.
Effect of the Amendment
The amendment to NI-44-101 permits the pre-marketing of securities underlying an over-allotment option regardless of whether the option expires on or after the date of the closing of the offering, but only if the specified conditions are met. The regulatory limitation of an over-allotment option to a maximum of 15% of the number or principal amount of the offered securities, which has historically applied only to options that do not expire on the offering’s closing day, now applies to any over-allotment option if the underlying securities are to be pre-marketed.
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