Since 2010, the Canadian Securities Administrators (“CSA”) have been reviewing the existing rules and policies regarding the marketing of prospectus offerings. On August 13, 2013, new rules (as set out in National Instrument 41-101 General Prospectus Requirements (“NI 41-101”) and National Instrument 44-101 Short Form Prospectus Distributions (“NI 44 101”) came into force which clarify the range of permissible prospectus pre-marketing and marketing activities. This article highlights some of the key changes.
“Pre-marketing” occurs when an investment dealer or issuer communicates with potential investors before a public offering, and includes other promotional activity before a preliminary prospectus is filed and receipted. Previously, pre-marketing was only permitted in the context of bought deal offerings done by way of short form prospectus, provided certain conditions were met. The new rules introduce a new exemption and add certain additional conditions to the existing bought deal exemption.
Summary of Key Changes
1. Testing of the waters exemption for IPO issuers
The new rules contain a limited exemption, which permits non-reporting issuers that have a reasonable expectation of filing a preliminary long form prospectus in connection with an initial public offering (“IPO”) in Canada, to solicit expressions of interest through an investment dealer through limited confidential communication with accredited investors. The exemption is subject to certain conditions to ensure confidentiality and prevent abuse, such as ‘conditioning the market’, and is not available to issuers that are already public companies in a foreign jurisdiction or whose securities are held by a control person that is a public issuer. In order to use this exemption, investment dealers must keep a written record of all accredited investors from whom the investment dealer solicited an expression of interest. Further, an issuer is prohibited from filing a prospectus within 15 days of the last date on which an investment dealer solicited an expression of interest from an accredited investor.
2. Bought deal exemption
The former rules provided an exemption to the general prohibition against pre-marketing, such that investment dealers could solicit expressions of interest for a bought deal short form prospectus offering during the four days before the preliminary prospectus was receipted, provided that certain conditions had been met. The new rules maintain the bought deal exemption and clarify the conditions of its use. The new rules include the following provisions:
- the bought deal agreement between the issuer and the underwriter(s) cannot contain a “market-out clause,” an option to increase the offering other than an over-allotment option, or be conditional upon syndication;
- the size of a bought deal may be increased by up to 100% of the original offering, provided other conditions have been met;
- the preliminary prospectus for the bought deal must be filed within four days of the date of the bought deal agreement (note that it is no longer necessary to have obtained a receipt for the preliminary prospectus within the four day period);
- changes to the syndicate of underwriters and terms of the offering may take place so long as the amount of the bought deal remains the same; and
- the size of the bought deal or the price of the securities may be reduced only after four days have passed since the date of the bought deal agreement.
3. Additional guidance on “sufficient specificity”
The Companion Policy to NI 41-101 provides that a distribution of securities commences when an investment dealer has had discussions with an issuer that are of “sufficient specificity” that it is reasonable to expect the investment dealer will propose an underwriting of the issuer’s securities. If the “sufficient specificity” threshold has been met, and therefore a distribution of securities has commenced, any activities to solicit purchasers would be “pre-marketing” and would therefore be prohibited. Although the new rules do not set out all situations where the “sufficient specificity” threshold will be met, some examples of situations that meet the threshold have been included in the Companion Policy. The Companion Policy also comments on “non-deal road shows,” which are meetings among an issuer, an investment dealer, and institutional investors to discuss the business of the issuer. The policy states if a non-deal road show was undertaken in anticipation of a prospectus offering, it would be generally prohibited under securities laws.
C. Marketing during the waiting period
The “waiting period” is defined as the period between the issuance of the receipt for the preliminary prospectus and the issuance of the receipt for the final prospectus.
Summary of Key Changes
1. Standard term sheet provision
The new rules contain provisions that permit investment dealers to provide a “standard term sheet” to potential investors in conjunction with a prospectus offering. However, the information that is permitted in a standard term sheet is limited to the following: name, jurisdiction of incorporation and head office of the issuer; a brief description of the business and securities of the issuer; the price of the offered securities; the offering size; the name of, contact information for, and fees payable to the underwriter(s); the expected closing date; a brief description of the use of proceeds from the offering; the stock exchange upon which the issuer’s securities are listed; a brief description of any unique securities; the RRSP/TFSA eligibility of the offered securities (if an opinion on such eligibility will be provided in the prospectus); and contact information for the investment dealer. The new rules define “brief description” as no more than three lines of text.
The rules governing standard term sheets also include the following:
- other than contact information for the investment dealer, all information contained in a standard term sheet must be derived from the relevant prospectus; however, if the offering is a bought deal, the information must be disclosed in, or derived from, the bought deal news release, the issuer’s continuous disclosure record on SEDAR or the prospectus;
- the standard term sheet must include prescribed cautionary language; and
- standard term sheets are not incorporated into the prospectus and are not required to be filed with the securities regulators.
2. Marketing materials
The new rules contain provisions that permit investment dealers to provide marketing materials in conjunction with a preliminary prospectus. Under the new rules, “marketing materials” means a written communication intended for potential investors regarding a distribution of securities under a prospectus that contains material facts relating to an issuer, securities, or an offering.
The rules governing marketing materials include the following:
- other than contact information for the investment dealer, all information contained in marketing materials must be derived from the relevant prospectus; however, if the offering is a bought deal, the information must be disclosed in, or derived from, the bought deal news release, the issuer’s continuous disclosure record on SEDAR, or the prospectus;
- marketing materials must include prescribed cautionary language;
- a template version of the marketing materials must be approved in writing by both the issuer and the lead underwriter; then filed with the appropriate securities commissions on or before the date on which such marketing materials are provided to prospective investors;
- marketing materials are incorporated into the prospectus and subject to statutory prospectus liability; and
- investment dealers may prepare limited use versions of the marketing materials by combining sections from the filed template version. For example, an investment dealer may provide to retail investors a version of the marketing materials that excludes detailed technical information, and provide to institutional investors a separate version that includes such technical information.
If any comparables (a comparison of the issuer to another issuer) are included in the marketing materials, the marketing materials must also include prescribed cautionary language and, among other things, describe the basis on which the other issuer(s) and compared attributes were selected for comparison and disclose any risks associated with the comparables. Additionally, the marketing materials must state that investors will not have a remedy under securities legislation if the comparables contain a misrepresentation.
3. Road shows
In the new rules, a “road show” is defined as a presentation to potential investors regarding a distribution of securities under a prospectus conducted by one or more investment dealers on behalf of an issuer, in which one or more executive officers or other representatives of the issuer participates. Pursuant to the new rules, investment dealers are allowed to conduct road shows for potential investors during the waiting period, provided other conditions have been met. These conditions include, among other things, a requirement to record, maintain a list of, and provide a copy of the prospectus to road show attendees. All marketing materials presented during a road show must be compliant with the new rules. Moreover, if non-accredited investors attend a road show, the road show must commence with the reading of prescribed language as set out in the new rules.
D. Marketing after the issuance of a final prospectus receipt
Standard term sheets, marketing materials and road shows.
The new rules permit investment dealers to provide standard term sheets and marketing materials to potential investors and to conduct road shows, after the receipt of a final prospectus. For the most part, the rules relating to the use of standard term sheets and marketing materials during the waiting period also apply to the use of such documents after the issuance of a final prospectus.