Securities regulators have adopted changes to the prospectus offering regime that will give issuers and investment dealers greater flexibility in marketing public offerings of securities in Canada. The changes are designed to ease the regulatory burdens that market participants face when planning and executing a public offering, while at the same time providing enhanced investor protections. The changes are expected to take effect on August 13, 2013. Offerings by investment funds will not be eligible for the new rules. Key aspects of the new rules are as follows:
- In initial public offerings (IPOs), dealers will be able to "test the waters" by communicating with accredited investors confidentially before a preliminary prospectus is filed.
- In bought deals, the syndicate may be expanded and the deal may be upsized by up to 100%, on certain conditions.
- Investment dealers will be able to give investors term sheets as well as other marketing materials once the preliminary prospectus is filed or, in the case of bought deals, once the deal is announced.
Testing the Waters for Initial Public Offerings
Under the current rules, issuers and investment dealers are prohibited from communicating about an offering of securities before a preliminary prospectus is filed. The new rules will permit dealers to "test the waters" for a potential IPO by contacting accredited investors on a confidential basis to solicit expressions of interest. These activities will have to cease for a quiet period of 15 days before the preliminary prospectus is filed. The issuer and dealers will have to keep records of which investors were contacted and obtain written confirmations from them that they will keep the information about the offering confidential. Testing the waters will not be permitted for Canadian reporting issuers, issuers that are already public in a foreign jurisdiction, or issuers that are subsidiaries of a public company if the IPO is material to the parent.
Upsizing and Adding Investment Dealers to a Bought Deal
The rules governing bought deals currently permit investment dealers to solicit expressions of interest before the issuer has filed a short form prospectus, provided that the issuer and dealers have entered into an agreement for the purchase and sale of the securities, the issuer has publicly announced the offering, and the preliminary prospectus is filed within four business days.
The new rules clarify the circumstances under which bought deals may be upsized, underwriters may be added to the syndicate, and other amendments may be made. These changes include the following:
- Issuers and dealers will be able to upsize by up to 100% of the original deal (including any over-allotment option), provided that the other terms of the offering remain the same. No other upsizing option is permitted in a bought deal agreement.
- New dealers may be added to a bought deal syndicate, but the agreement may not be conditional on syndication except during a one-day confirmation period.
- A bought deal agreement may be amended to reduce the number of securities or lower the price of the securities only after four business days from the date of the original agreement.
Term Sheets and Marketing Materials
Current rules limit the use of written materials, other than the prospectus, to market an offering of securities. Under the new rules, investment dealers will be able to provide standard term sheets as well as more detailed marketing materials to both institutional and retail investors, once a preliminary prospectus is filed or, in the case of bought deals, once the deal is announced. Appendix A lists the information that may be included in standard term sheets. Written materials containing more information than is permitted in a standard term sheet are defined as "marketing materials." The use of term sheets and marketing materials will be subject to the following conditions:
- Information in term sheets and marketing materials will have to be disclosed in, or derived from, the preliminary prospectus or, in the case of bought deals, the news release or the issuer’s continuous disclosure documents. They will have to containcertain prescribed legends with cautionary language noting, among other things, that they do not contain full disclosure of all material facts.
- Marketing materials will have to be included in, or incorporated by reference into, the final prospectus. This means that they will be subject to prospectus-level liability for misrepresentations. They will also have to be filed publicly on SEDAR.
- Information in marketing materials that compares the issuer to other issuers ("comparables") will be exempt from the above requirements. The new rules will permit comparables to be provided to institutional and retail investors without being subject to prospectus-level liability. However, comparables will have to be delivered to securities regulators and will be subject to the general securities law prohibition against misleading or untrue statements. They will also have to be accompanied by cautionary language explaining, among other things, the basis for selecting the compared issuers and the risks of relying on comparables in making an investment decision.
Road Shows and Investor Presentations
There are currently no explicit rules in Canada governing road shows and other investor presentations. This has resulted in varying practices in the marketplace and uncertainty as to what activities are permitted. The new rules will govern all types of road shows for institutional and retail investors, whether live, electronic or conducted in another manner. The new rules include the following:
- All written materials used in road shows will be treated as marketing materials and subject to the provisions described above, with an exception for road show materials used in U.S.-Canada offerings where the underwriters reasonably expect that the securities will be sold primarily in the United States. In those transactions, in lieu of statutory prospectus-level liability, investors must be given a contractual right of action for misrepresentations in the prospectus.
- Investment dealers will have to follow reasonable procedures to track attendance/viewership at road shows and provide attendees/viewers with a copy of the preliminary prospectus.
- Like other marketing materials, road show materials will be filed on SEDAR. Issuers conducting cross-border offerings will no longer have to apply for exemptive relief to reconcile the conflicting U.S. and Canadian rules regarding the public availability of road show materials.
- In bought deals, road shows may be conducted once the offering is announced.
Interpretation of When a Distribution of Securities Commences
The companion policy to the prospectus rules states that a distribution of securities in a public offering begins when an investment dealer has had discussions with an issuer or selling security holder of sufficient specificity that it is reasonable to expect that the dealer will propose an underwriting. From that point on, any marketing activities before the issuer files a preliminary prospectus are impermissible pre-marketing. This guidance applies generally to all types of public offerings, except that (i) pre-marketing is not a concern when an issuer has a base shelf prospectus in place and (ii) under the new rules, pre-marketing will be permitted in connection with IPOs even after the distribution has commenced, subject to the constraints discussed above (see Testing the Waters for Initial Public Offerings).
The regulators believe that, despite the guidance on when a distribution begins, some market participants take an aggressive view that a distribution does not commence until an investment dealer proposes indicative terms to the issuer or provides the issuer with a proposed engagement letter. The regulators disagree with this, and they have expanded the companion policy to state that sufficient specificity exists if (i) an investment dealer advises an issuer that the market looks favourable for a possible offering and that the dealer will likely provide indicative terms later that day, or (ii) a dealer proposes financing scenarios at specified price ranges, the issuer’s board gives management authority to proceed within a price range, and the dealer is so advised. The companion policy also states that if an engagement letter or indicative terms are rejected, a cooling off period (of unspecified length) must pass before communications with potential investors may resume.
Cross-Border Offerings Going Forward
One of the most significant aspects of the new Canadian rules is the ability to use term sheets and marketing materials once a preliminary prospectus is filed. This will reduce regulatory conflicts in Canada-U.S. public offerings because under the U.S. regime, marketing materials (called "free-writing prospectuses") have been permitted since 2005. Regulatory conflicts may also be reduced in cross-border IPOs, if the issuer qualifies as an emerging growth company (EGC) under U.S. rules (i.e., it has annual revenues of less than U.S.$1 billion), because testing the waters will be permitted on both sides of the border. And in transactions involving a Canadian public offering combined with a U.S. private placement, if the SEC adopts rules mandated by the JOBS Act permitting general solicitation and advertising in connection with private placements to sophisticated investors, there will be less concern about Canadian marketing efforts violating U.S. private placement rules.
There are still a number of regulatory differences between the U.S. and Canada. For example, the SEC’s rules for testing the waters apply to all offerings by EGCs, whereas the new Canadian rules apply only to IPOs. Moreover, in cross-border IPOs by EGCs, the 15-day cooling-off period under Canadian rules will have to be respected, and in IPOs by non-EGCs, testing the waters is still prohibited under U.S. rules. Also, there is no U.S. equivalent to Canada’s bought deal regime (although the SEC permits offerings by well-known, seasoned issuers to be marketed at any time). As a result of these and other regulatory differences, issuers and investment dealers conducting Canada-U.S. offerings must continue to structure their marketing activities to comply with the rules of both jurisdictions.
Appendix A: Information Permitted in a Standard Term Sheet
(a) the name of the issuer, the jurisdiction where its head office is located, and the laws under which it is organized;
(b) a brief description* of the issuer’s business;
(c) a brief description* of the securities;
(d) the price or price range of the securities and the total number or dollar amount of the securities, or range of the total number or dollar amount of the securities;
(e) the terms of any over-allotment option;
(f) the names of the underwriters and their contact information;
(g) the amount of the underwriting commission, fee or discount and whether the offering is on a firm commitment or best efforts basis;
(h) the proposed or expected closing date of the offering;
(i) a brief description* of the use of proceeds;
(j) the exchange on which the securities are proposed to be listed, provided that the standard term sheet complies with the requirements of securities legislation for listing representations;
(k) in the case of debt securities, the maturity date of the debt securities and a brief description* of any interest payable on the debt securities;
(l) in the case of preferred shares, a brief description* of any dividends payable on the securities;
(m) in the case of convertible or exchangeable securities, a brief description* of the underlying securities;
(n) in the case of restricted securities, a brief description* of the restriction;
(o) in the case of securities for which a credit supporter has provided a guarantee or alternative credit support, a brief description* of the credit supporter and the guarantee or alternative credit support provided;
(p) whether the securities are redeemable or retractable; and
(q) a statement that the securities are eligible, or are expected to be eligible, for investment in registered retirement savings plans, tax-free savings accounts or other registered plans, if the issuer has received, or reasonably expects to receive, a legal opinion that the securities are so eligible.
* A "brief description" means no more than three lines of text in type that is at least as large as that used generally in the body of the standard term sheet.
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