Recent amendments to the pre-marketing and marketing rules in connection with public securities offerings (other than offerings by mutual funds and investment funds) give both issuers and dealers additional flexibility in marketing public offerings (including the introduction of a limited exemption to the prohibition against marketing before the filing of a preliminary prospectus), while also imposing additional regulatory burdens, both during and after the waiting period. Many of the changes reflect the codification and clarification of existing practices and reflect the regulators’ view that the prospectus is still the key disclosure document for investors. The revised rules also reduce some of the regulatory conflicts in Canada-U.S. public offerings. The amendments take effect on August 13, 2013.
The key changes are as follows:
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Changes to Pre-marketing Rules
Testing the Waters
Investment dealers can “test the waters” for a potential initial public offering by confidentially contacting accredited investors to solicit expressions of interest before an issuer files a preliminary prospectus. This permits dealers to determine the market appetite for an IPO before the issuer incurs the costs associated with preparing a prospectus and launching an IPO.
The ability to “test the waters” is subject to certain conditions, including:
- The investment dealer must keep a written record of the accredited investors that it solicits.
- The issuer must not file a preliminary long form prospectus in respect of an initial public offering until the date which is at least 15 days after the date on which any investment dealer last solicited an expression of interest from an accredited investor. This condition is intended to reinforce the prohibition against pre-selling the IPO.
- Written material used to solicit an expression of interest must be approved in writing by the issuer. The material facts contained in the written material should also be included in the subsequently filed preliminary prospectus.
- Canadian reporting issuers, issuers that are already public in a foreign jurisdiction or issuers that are subsidiaries of a public company if the initial public offering is material to the parent, may not use this exemption.
Changes Applicable to Bought Deals
The current Canadian bought deal rules permit investment dealers to solicit expressions of interest before the issuer files a preliminary short form prospectus, as long as the dealers and the issuer have entered into a binding commitment to purchase the securities, the deal has been publicly announced and the preliminary prospectus is filed (and a receipt obtained) within four business days.
The changes for bought deals include the following:
- A confirmation clause is permitted in the bought deal agreement, allowing the lead underwriter to terminate the agreement if it is unable to syndicate the deal within one business day of signing the agreement.
- A preliminary prospectus need only be filed, and not necessarily receipted, within four business days following the date of the bought deal agreement (or confirmation).
- The issuer and the underwriter may agree, after a bought deal is announced, to increase the size of the offering by up to 100%.
- New dealers can join the bought deal syndicate, but the bought deal agreement may not be conditional on syndication, except during the one-day confirmation period.
- The issuer and underwriter may amend a bought deal agreement to reduce the number of offered securities or the price on or after the fourth business day following the date of the bought deal agreement.
- A bought deal may not include a “market out” termination clause.
Changes to Marketing Rules During and After the Waiting Period
Standard Term Sheets
Investment dealers are permitted to provide “standard term sheets” once a preliminary prospectus has been receipted, or under a bought deal offering once the offering has been announced.
Standard term sheets may only include limited information, such as the following:
- The name of the issuer, jurisdiction of incorporation and head office location.
- A brief description (no more than three lines of text) of the business of the issuer, securities being offered (including price ranges), use of proceeds and any dividends payable.
- Terms of an over-allotment, if any.
- Names of the underwriter(s), including contact information and underwriter fee.
- Stock exchange on which securities are to be traded or trade.
- Eligibility for investment in the securities.
- The closing date for the offering.
The information in the standard term sheets must be disclosed in, or derived from, the relevant prospectus. In a bought deal offering, the information must be disclosed in or derived from the bought deal news release, the issuer’s public continuous disclosure record or the preliminary prospectus. Standard term sheets must also be dated and include prescribed cautionary language. They are not required to be filed on SEDAR.
An investment dealer may now provide more detailed marketing materials to potential investors. “Marketing materials” are broadly defined to include any written communications intended for potential investors other than a standard term sheet or a prospectus notice. The new rules clarify the allowable content of marketing materials, again reinforcing the principle that the prospectus should be the main disclosure document provided to investors in a public offering.
The use of marketing materials is subject to certain conditions, including the following:
- All information in the marketing materials must be included, or incorporated by reference, in the prospectus.
- The marketing materials must be approved by the issuer and the lead underwriter in writing and filed on SEDAR on or before the date of first use.
- If any statements of a material fact are subsequently amended in the prospectus, a blacklined copy of the marketing materials must be filed with the securities regulators on SEDAR and made public. The prospectus must contain a statement indicating a modification and noting that a blacklined copy of the marketing material is available on SEDAR.
- Any comparisons between the issuer and other issuers (comparables) must be accompanied by cautionary language. Discussion must include the basis for selecting the comparables and risks of relying on the comparables. Comparables may be removed from the “template” marketing materials that are filed on SEDAR and need not be included in the prospectus. In this case, a separate, complete version of the template marketing materials, which includes the redacted comparables, must be confidentially delivered to the applicable Canadian securities regulators.
A copy of the preliminary prospectus must be provided with the marketing materials. In a bought deal offering, a copy of the preliminary prospectus must be sent to each person that has received the marketing materials and expressed an interest in acquiring the securities.
The new rules govern road shows and presentations, whether live, electronic, by telephone or conducted in another manner. Road shows may be conducted for both institutional investors and retail investors.
The new road show rules include certain requirements, such as:
- Subject to limited exceptions, all written material shown to potential investors at a road show is considered “marketing material” and as such must comply with the marketing material requirements. This means that road show materials (excluding comparables) must be filed on SEDAR and included, or incorporated by reference, in the prospectus.
- Procedures must be established to track participants, and to provide participants with a copy of the relevant prospectus.
- A prescribed cautionary statement that the presentation does not contain full disclosure of all material facts must be read at the commencement of the presentation if any investors in attendance at a road show are not accredited investors.
In bought deals, road shows may be conducted once the offering is announced.
Marketing After the Waiting Period
Under the new rules, marketing activities after the waiting period (following receipt of a final prospectus) are governed in the same manner as marketing activities during the waiting period. This includes marketing activities related to offerings pursuant to a draw-down under a final base shelf prospectus or an offering under the PREP prospectus procedures.