The Canadian Securities Administrators issued a notice on April 21, 2006 setting out their view that underwriters are limited in their ability to "pre-market" securities that are subject to an underwriters’ option or an over-allotment on a bought deal. Certain securities commissions had made comments consistent with this notice in response to prospectus filings.
Under National Instrument 44-101, underwriters may solicit expressions of interest, or "premarket" the offering, prior to the filing of a preliminary short form prospectus if the issuer has entered into an enforceable agreement with underwriters, a news release is issued immediately, and a preliminary short-form prospectus is required to be filed within four business days after the date of the agreement.
The CSA has taken the position that securities that are subject to an underwriters’ option are not subject to an enforceable agreement to purchase the securities, but rather are in effect "agency securities". An underwriters’ option is an option exercisable by the underwriters on or prior to closing and which entitles the underwriters to purchase from an issuer securities in addition to the underwritten securities. The CSA advises that it will be considering the issue of whether National Instrument 44-101 should be amended to specifically permit the pre-marketing of securities subject to an underwriters’ option.
The CSA also suggests that the .pre-marketing. of securities that are subject to an over-allotment option may not be permitted either. An over-allotment option (or a "greenshoe") is generally exercisable by the underwriters following the closing of the offering and is limited to up to 15% of the underwritten securities. The CSA indicates in its notice that it is willing to consider recommending the grant of exemptions from the restrictions of National Instrument 44-101 on a "case-by-case basis" to the extent that there is pre-marketing of securities underlying an overallotment option. We expect that the CSA will be considering whether National Instrument 44- 101 should also be amended to specifically permit the pre-marketing of securities subject to an over-allotment option.
The CSA’s position in respect of over-allotment options is likely to raise concerns. Although it may be that not all bought deals which contemplate an over-allotment option actually involve pre-marketing of the securities that are subject to the over-allotment option, this determination may be difficult to reach in certain circumstances. Underwriters and issuers will have to consider whether the facts of each bought deal require the grant of an exemption. If that is the case, the receipt of the required exemption is likely to cause a delay in the launch of a number of bought deals.
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