Canadian securities regulators to permit confidential prospectus pre-filings

On March 5, the Canadian Securities Administrators (CSA) announced the introduction of a harmonized pre-filing process for the review of prospectuses on a confidential basis.

What You Need To Know

• Companies planning an IPO in Canada will now be able to confidentially pre-clear regulatory comments before publicly launching an IPO. This is consistent with existing market practice on cross-border IPOs.
• Public companies in Canada will also be able to confidentially pre-clear regulatory comments before publicly launching a follow-on offering or filing a base shelf prospectus.
• The confidential pre-file process is designed to foster capital formation and give companies greater flexibility and more certainty in their capital raising planning.
  • Although not introduced in response to COVID-19, the confidential pre-file process may be particularly helpful for issuers who are trying to navigate the current volatility in the markets.
• We expect that confidentially pre-clearing IPO prospectuses and follow-on offering prospectuses where there may be greater risk of regulatory scrutiny will become the new market standard in Canada.

Background

To date, there has not been a codified or consistent process across Canada for the pre-filing and confidential review of a prospectus for a Canadian-only offering. Outside of the cross-border context or where an issuer files a pre-filing application seeking guidance on a specific issue, the regulatory review process typically commences only once an issuer has publicly filed its preliminary prospectus. As a result, an issuer’s ability to market and complete its public offering is contingent on the timing of clearing all regulatory comments – this can create timing uncertainty and potential delays that can be tricky for an issuer and its advisers to manage against the backdrop of changing market conditions.

To address these concerns, on March 5, the CSA announced the introduction of a harmonized pre-file process for the confidential review of prospectuses. The new process, consistent with the broader regulatory focus on burden reduction, is meant to foster capital formation and provide issuers with greater flexibility and more certainty in their capital raising planning.

Pre-filing criteria

Any non-investment fund issuer filing a prospectus in a Canadian jurisdiction can use the pre-file process. The pre-filing process is available for prospectuses filed on an IPO, on a follow-on offering and under the base shelf procedures. Novel offerings of structured notes distributed under a base shelf prospectus will continue to be handled under established pre-clearance procedures.

Since the pre-filing process is designed to provide greater certainty for issuers planning a prospectus offering, the pre-file process is not available for non-offering prospectuses (other than those filed in connection with a cross-border financing) and prospectuses filed solely to qualify the issuance of securities on conversion of convertible securities (such as special warrants).

Pre-filing process and timing

At the time of any prospectus pre-filing, the regulators expect the following:

• the terms and conditions of the offering and any related transactions to be clearly determined
• the underwriters to have substantially completed their review of the pre-filed prospectus
• the pre-filed prospectus to be of the same form and quality as if it was the publicly filed preliminary prospectus and to contain all disclosure, including financial statements, required under securities laws
• an estimate of the offering price, where practical
• the concurrent filing of any other documents required to be filed with the publicly filed prospectus, including copies of any required material contracts and technical reports
• an indication of when the issuer expects to publicly file the prospectus

Issuers are advised to submit the pre-filing sufficiently in advance of the targeted public filing of the preliminary prospectus. Regulators will use their best efforts to provide initial comments on the pre-filed prospectus within 10 working days (which is consistent with the regulatory timing for review of publicly filed long-form prospectuses). However, this timing may vary depending on a number of factors, such as the complexity of the pre-filing and the completeness of the issuer’s disclosure. In addition, regulators have advised that they intend to prioritize reviews of public prospectus filings.

Although there is no maximum period of time prescribed between clearing a pre-filed prospectus and publicly filing the preliminary prospectus, the pre-file process is meant to facilitate clearing as many issues as possible prior to the public filing. While the principal regulator will conduct the same level of review on a pre-filing as would be conducted on a public prospectus filing, additional comments may be raised at the time of the public filing to address new issues or changes in the prospectus disclosure. Since a longer gap between the pre-filing and public filing will likely necessitate changes to the prospectus disclosure (and updates to financial statements), issuers who are able to minimize the time between clearing the pre-filed prospectus and the public filing will likely be more successful in minimizing additional regulatory comments on the public filing.

Issuers are instructed to pre-file the prospectus with their principal regulator only—if the filing raises novel policy issues, the principal regulator will determine whether to involve regulators from other jurisdictions.

Issuers that pre-file a materially non-compliant or incomplete prospectus will be asked to resubmit a revised draft before the pre-file review process will advance. A pre-filing will be considered withdrawn if the regulator does not receive a response to a request for information or comment letter within 90 days of the initial pre-filing date.

Impact on market practice

We expect the pre-file process will be well-received by issuers and their advisers. We anticipate that confidentially pre-clearing IPO prospectuses will fast become the new norm in Canada, consistent with U.S. practice on an IPO. Companies who are prepared to invest the time and resources up front will effectively be able to pre-clear substantially all regulatory comments and get themselves “market-ready” to launch an IPO once market conditions are most favourable.

The pre-file process does not change Canadian IPO “testing the waters” rules—issuers would continue to be subject to a 15-day cooling off period on any permitted testing the waters communications prior to the first public filing of the preliminary prospectus. Issuers planning an IPO who take advantage of the pre-file process will, however, need to consider the impact of any regulatory comments on the content of any testing the waters communications—for instance, it may be preferable to commence testing the waters meetings only once substantially all regulatory comments have been settled through the pre-file process.

We expect pre-filing will also become the market standard for follow-on offerings by public companies where there may be a greater risk of regulatory scrutiny. For instance, the pre-file process could be particularly helpful for issuers operating in emerging markets (such as cannabis or cryptocurrency), or that may have liquidity constraints, or that desire to launch offerings with disclosure that regulators may be more focused on (such as significant use of non-GAAP measures or financial forecasts)—in all of these instances, the pre-file process will allow issuers to better manage their capital raising plans while mitigating the risks, and associated timing implications, of a protracted regulatory review with an uncertain outcome.