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Securities

Proposed Changes to Canadian Rules for Marketing Public Offerings

Published: 12/01/2011

By Chad Accursi, Michael Brown, Gregory Hogan

On Friday, November 25, 2011, the Canadian Securities Administrators published proposed amendments to the prospectus pre-marketing and marketing regimes in Canada for issuers other than mutual funds.

The proposals would make it easier for issuers and their investment dealers to market offerings by permitting, in limited circumstances, investment dealers to determine interest in certain initial public offerings before filing a prospectus (referred to as “testing of the waters”). The proposed amendments would also permit the use of term sheets and road shows to market an offering, and provide much needed clarity regarding the availability of the “bought deal exemption” in Part 7 of National Instrument 44-101 Short Form Prospectus Distributions.

Testing of the Waters for Certain Initial Public Offerings

The proposed amendments would expressly allow certain non-reporting issuers, through an investment dealer, to determine interest in a potential IPO by way of limited confidential communication with permitted institutional investors. To be eligible, the non-reporting issuer cannot already be a public company in a foreign jurisdiction.

A permitted institutional investor would include “Canadian financial institutions”, such as banks, loan corporations and insurance companies, as well as investment funds that are managed by a registered investment fund manager or advised by an adviser under securities legislation. As proposed, the amendments would not permit retail investors to participate in the testing of the waters.

Term Sheets

The proposed amendments would expressly allow investment dealers to use term sheets in conjunction with a preliminary or final prospectus. For the purpose of the amendments, a term sheet is a written communication regarding a distribution of securities that contains information on the issuer or the securities being distributed. The term sheet must be filed on SEDAR before it can be used, and must contain fair, true and plain disclosure. Disclosure will be considered fair, true and plain if:

• it is honest, impartial and not misleading,
   
• it does not give undue prominence to a particular fact or statement in the prospectus, and
   
• it does not contain promotional language.

In addition, the term sheet must be incorporated directly or by reference into the final prospectus, in order to subject it to statutory liability for misrepresentations.

For the purpose the amendments, any green sheets that are distributed to the public will be considered “term sheets” for the purposes of the legislation.

Road Shows - General

The proposed amendments contain express provisions for conducting road shows both during the waiting period and after the issuance of a receipt for the final prospectus. In each case:

• the disclosure must be fair, true and plain.
   
• other than contact information for the investment dealer conducting the road show, all information in the road show concerning the securities must be disclosed in the final prospectus, and written material (other than the prospectus) must comply with the term sheet provisions (above).
   
• only potential investors, registrants and representatives of the issuer can attend the road show.
   
• the investment dealer must establish procedures to verify the identity and keep records of those in attendance, to ensure that each investor is provided with a copy of the prospectus, and to restrict the copying of materials. The dealer must also provide oral cautions to the audience at the commencement of the road show.

Road Shows – For Permitted Institutional Investors Only

If a road show is presented exclusively for permitted institutional investors only, an investment dealer may, in addition to the above, also present “comparables” (i.e., information that compares the issuer to other issuers) even where this information is not included in the prospectus. However, any comparable information must be redacted from written material before it is filed on SEDAR.

Clarifications Regarding Use of Bought Deals

Currently, marketing activities prior to the filing of a preliminary prospectus and the issuance of a receipt by the applicable securities regulatory authority are only permitted in the context of a bought deal financing. The proposed amendments maintain the bought deal exemption, but also seek to clarify certain matters with respect to its availability. In particular: 

• the proposed exemption would clarify when and how an issuer can amend an underwriting agreement to provide for a larger than anticipated offering, or to permit additional underwriters to participate in the bought deal.
   
• the definition of “bought deal agreement” would provide that the agreement cannot have a “market-out” clause.
   
• the proposal provides additional guidance regarding discussions between an issuer and a dealer prior to the filing of a prospectus, and at which point such discussions have “sufficient specificity” to trigger the commencement of a distribution, requiring use of the exemption.

The amendments would also permit a term sheet to be provided by investment dealers to permitted institutional investors after the bought deal is announced but before the preliminary prospectus has been filed, subject to certain conditions, including the requirement that the term sheet be filed and incorporated into the prospectus.

The proposed amendments are open for comment until February 23, 2012.

A full copy of the proposed amendments is available on the websites of various CSA members, including the Ontario Securities Commission: www.osc.gov.on.ca.

For further information regarding this matter, please contact Chad Accursi, Greg Hogan, Michael Brown or any member of our Securities Group.