On May 30, 2013, the Canadian Securities Administrators published final amendments to the applicable securities rules that significantly expand the range of permissible “pre-marketing” and “marketing” activities undertaken by issuers and investment dealers in connection with prospectus offerings. The amendments will come into force on August 13, 2013.
The amendments, primarily to National Instrument 41-101 General Prospectus Requirements and National Instrument 44-101 Short Form Prospectus Distributions, allow, among other things: (a) non-reporting issuers, through their investment dealers, to communicate with “accredited investors” prior to filing a preliminary prospectus for an initial public offering; (b) the expanded use of “marketing materials” for prospectus offerings; and (c) bought deals to be up-sized and bought deal syndicates to be enlarged. The amendments also clarify and provide guidance on certain prospectus offering practices including procedures for road shows and issuing “material change” news releases announcing a prospectus offering prior to the filing of a preliminary prospectus.
“Testing the Waters” Exemption for an IPO
The amendments contain a new limited exemption from the general prohibition on pre-marketing activities allowing non-reporting issuers, through their investment dealers, to communicate on a confidential basis with “accredited investors” for a period lasting up until 15 days before the filing of a preliminary prospectus, in order to determine interest in a potential initial public offering.
This exemption is subject to specific requirements, such as keeping records of the accredited investors that were solicited and obtaining written board approval of, and retaining a copy of, materials that were provided to such investors. The exemption is not available if either: (a) the issuer is already a public company in a foreign jurisdiction; or (b) any of the issuer’s securities are held by a control person that is a public issuer and the initial public offering would be a material fact or material change with respect to the control person.
Marketing Prospectus Offerings
Marketing After Announcing an Offering – The new rules significantly expand marketing activities as they allow an investment dealer to provide marketing materials and a standard term sheet after announcing a bought deal short form prospectus offering and prior to obtaining a receipt for the preliminary prospectus. Subject to certain conditions, an investment dealer is also expressly permitted to conduct road shows after the announcement of a bought deal short form prospectus offering and prior to obtaining a receipt for the preliminary prospectus.
Marketing During the Waiting Period – After the issuance of a receipt for a preliminary prospectus and before the issuance of a receipt for a final prospectus, an investment dealer may conduct marketing activities via standard term sheets, marketing materials and/or road shows. Previously, only a preliminary prospectus or a brief notice was permitted to be used for marketing purposes during this time period. Subject to certain conditions, an investment dealer is also expressly permitted to conduct road shows during the waiting period.
Marketing After Receipt for a Final Prospectus – All changes to the conditions for marketing materials and road shows during the waiting period are also applicable to marketing materials and road shows after the receipt of a final prospectus, with certain accommodations for a draw-down under a final base shelf prospectus and a final base PREP prospectus.
Standard Term Sheets & Marketing Materials – The amendments differentiate between standard term sheets and marketing materials. Standard term sheets may only contain limited prescribed information about the issuer, securities or the offering, however, marketing materials may also contain more detailed information, including comparables (comparisons to other issuers) and material facts relating to the issuer, securities or the offering.
Standard term sheets are subject to the following conditions:
- other than the contact information for the investment dealer or underwriters, any information in a standard term sheet concerning an issuer, securities or an offering must be disclosed in or derived from the preliminary prospectus (except for a bought deal standard term sheet, in which case the information must be disclosed in or derived from the bought deal news release, the issuer’s continuous disclosure record on SEDAR or the subsequent preliminary prospectus); and
- the term sheet must be dated and contain prescribed cautionary language referring investors to the preliminary prospectus and stating that the term sheet does not contain full disclosure of all material facts relating to the securities offered.
Marketing materials are subject to the two conditions described above plus the following additional requirements:
- a template version of the marketing materials must be approved in writing by the issuer and the lead underwriter and filed on SEDAR before being provided to potential investors (marketing materials for bought deals will only be made public after the preliminary prospectus is filed and receipted); and
- upon issuance of a receipt for the preliminary prospectus, a copy must be delivered to each person who received the marketing materials (for bought deals, this condition only applies if the investor expressed an interest in acquiring the securities).
As the amendments do not require standard term sheets to be filed on SEDAR or included or incorporated by reference in the relevant prospectus, they are not subject to civil liability (although they are subject to the existing prohibition on misleading or untrue statements). In contrast, the filed version of the marketing materials must be included or incorporated by reference in the relevant prospectus and, as a consequence, are part of the prospectus, are subject to the full, true and plain disclosure standard and could subject issuers to statutory liability for misrepresentations.
Road Shows – The new rules clarify the procedures for road shows conducted in conjunction with prospectus offerings. These procedures include investment dealers asking investors their name and contact information, keeping a record of the information provided by investors, providing investors with a copy of the relevant prospectus, and, in certain instances, reading a cautionary statement at the road show. Written marketing materials provided during the road show are subject to the same conditions as other marketing materials.
Bought Deal Agreements
Enlarging the Offering – The amendments have clarified that in addition to relying on the over-allotment option mechanism to increase the size of the offering, a bought deal agreement may be amended in order to increase the size, provided that:
- the offering size is increased by no more than 100% of the original deal;
- the type of securities to be purchased and the price per security are the same as under the original agreement;
- the issuer files a preliminary prospectus within four days of the original bought deal agreement;
- the issuer issues a news release confirming the amendment; and
- no previous amendment has been made to the original agreement to increase the offering size.
Enlarging Bought Deal Syndicates – The amendments permit additional underwriters to join the bought deal syndicate, but the bought deal agreement must not be conditional on syndication. Further, “confirmation clauses” (which allow the lead underwriter to contact potential syndicate members before confirming the bought deal) are only acceptable in limited circumstances and require confirmation of the terms of the bought deal agreement within one business day.
No “Market-Out” Clauses or “Upsizing Options” – Under the amendments, it has now been codified that a bought deal agreement may not contain a “market-out clause” (which permits the underwriter not to purchase the securities if they cannot be profitably marketed due to market conditions) or an “upsizing option” (which allows the underwriter to increase the number of securities to be purchased without amending the bought deal agreement as discussed above), other than an over-allotment option.
Clarification of Issuing “Material Change” News Releases Announcing Prospectus Offerings
In the companion policy to NI 41-101, the amendments also clarify that issuers need to consider whether the decision to pursue a potential prospectus offering is a material change under applicable securities legislation (most likely in the case of a “non-bought deal” offering), and if so, that the news release and material change report requirements in Part 7 of National Instrument 51-102 Continuous Disclosure Obligations and other securities legislation apply. The amendments further clarify that, in order to avoid contravening the pre-marketing restrictions under applicable securities legislation, any news release and material change report filed before the filing of a preliminary prospectus should be limited to identifying the securities proposed to be issued without a summary of the commercial features of the prospectus offering (those details should instead be dealt with in the preliminary prospectus).
For further reference, a copy of the CSA Notice of Amendments is available here.
If you have any questions concerning this bulletin or would like to discuss any aspects of the new rules, please contact the authors or any member of the Davis Securities & Corporate Finance Practice Group.