Effective August 13, 2013, the Canadian Securities Administrators (CSA) will adopt new rules on permissible pre-marketing and marketing activities in connection with the public offering of securities in Canada (the Rules). The introduction of the Rules follows a public consultation by the CSA and increases the range of pre-marketing and marketing activities that dealers may undertake in connection with public offerings.
- distinguish between a new concept of “marketing materials” and standard term sheets and expressly provide for using such marketing materials and term sheets and holding road shows after the announcement of a bought deal, during the period between the preliminary prospectus and final prospectus (the waiting period) and following the filing and receipt of a final prospectus;
- allow an issuer to include comparable information in marketing materials without attracting statutory civil liability;
- provide specific rules for road shows conducted in connection with the offering of securities;
- clarify when a bought deal and its syndication may be enlarged; and
- allow non-reporting issuers, through investment dealers, to gauge interest in any potential IPO of their securities prior to incurring costs in respect of such an offering.
Marketing materials and standard term sheets
The Rules distinguish between marketing materials and standard term sheets used to market securities offerings.
Marketing materials are defined as 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 but does not include a prospectus or any amendment or a standard term sheet.
A standard term sheet, on the other hand, is a written communication intended for potential investors that contains very limited and prescribed information regarding the issuer and the securities being offered. The information that may be included in marketing materials is broader than that contained in a term sheet. The Rules codify that marketing materials and term sheets may be provided to investors after a bought deal has been announced but before a preliminary prospectus has been filed, during the waiting period and after the final prospectus has been receipted.
Template marketing materials must be approved by the issuer and lead underwriter and must bear a cautionary legend that states they do not contain full disclosure and directs potential investors to the prospectus. Template marketing materials must be filed on SEDAR on the same day they are first used. Non-substantive changes may be made to such template materials without requiring further filing of the revised marketing materials. Marketing materials for bought deals must also be filed on SEDAR but will be kept confidential until the preliminary prospectus is filed.
Subject to limited exceptions, all information contained in marketing materials, other than dealer contact information and comparables, must be disclosed in or derived from the prospectus and, in the case of a bought deal, from the bought deal press announcement, the issuer’s continuous disclosure record filed on SEDAR or the issuer’s subsequent preliminary prospectus.
Marketing materials must be included or incorporated by reference in the prospectus relating to the offering and therefore will attract statutory civil liability in both the primary and secondary markets, subject to the exemption for comparable information described below. If a prospectus modifies a statement of a material fact contained in the marketing materials then the issuer must file a blackline copy of the marketing materials and make disclosure in the prospectus of the modifications.
The information contained in a standard term sheet, other than underwriter contact information, like marketing material information, must be disclosed in, or derived from the relevant prospectus. In the case of a bought deal the information must be disclosed in or derived from the bought deal announcement or the issuer’s continuous disclosure record filed on SEDAR or the subsequent preliminary prospectus.
A standard term sheet will not be required to be filed on SEDAR or incorporated by reference in the relevant prospectus and therefore will not be subject to the statutory civil liability provisions of securities legislation. Information contained in a standard term sheet is subject to the statutory provisions prohibiting misleading or untrue statements.
Guidance accompanying the Rules acknowledges the practice of dealers providing green sheets to registered representatives and states the CSA’s view that if such green sheets are delivered publicly they must comply with the relevant requirements applicable to marketing materials or standard term sheets described above.
Comparables contained in marketing materials
Marketing materials may contain information that compares an issuer to other issuers (comparables). Comparables may be provided to any investor whether institutional, accredited or retail.
Comparables must be accompanied by proximate disclosure that explains what they are, the basis upon which the other issuers were chosen and why they are appropriate for comparative purposes, the basis upon which the compared attributes were included, a statement that the information about other issuers was obtained from public sources and has not been verified by the issuer or the underwriters, disclosure of any risks relating to comparables and a statement that if the comparables contain a misrepresentation the investor does not have a remedy under securities legislation.
The use of comparables will not attract statutory civil liability for misrepresentations, as they may be removed from the marketing materials prior to their filing on SEDAR. The prospectus must include or incorporate by reference the marketing materials with the comparables removed. Comparables will, however, still be subject to the statutory provision prohibiting misleading or untrue statements. Issuers will be required to confidentially deliver to SEDAR a copy of the marketing materials with the comparables and the necessary risk factor disclosure included.
Changes to the bought deal regime
The Rules continue the bought deal exemption for marketing activities currently contained in securities legislation. However, the Rules provide the following clarification and refinement of the exemption:
Enlargement of the Bought Deal. The Rules allow issuers and underwriters to enlarge bought deals in response to investor demand during the marketing period. Bought deals may be enlarged to an amount up to 100% of the original deal size plus the over-allotment option. To rely on the bought deal exemption for marketing, a bought deal agreement may not include an upsizing option, other than a standard over-allotment option.
Terminating the Bought Deal Agreement. The Rules contain a revised definition of bought deal agreements that provides that agreements may not contain a “market out” clause. However, bought deal agreements may be terminated by the parties if they decide not to proceed with the deal. Bought deal agreements may contain termination clauses that provide that they may be terminated by a party in the event the other party fails to perform certain obligations or certain events occur.
Syndication and Confirmation Clauses. The bought deal agreement must not be conditional on syndication, although it may provide that the deal can be syndicated. The purpose of this provision is to ensure the original bought deal is a true and firm commitment to purchase the securities on a bought deal basis. The Rules do, however, allow confirmation clauses to be included in bought deal agreements subject to certain conditions. A confirmation clause is defined as a provision in a bought deal agreement that provides that the deal is conditional upon the lead underwriter confirming that one or more underwriters has agreed to purchase certain of the securities offered. The Rules provide that confirmation clauses are only acceptable if the underwriter and issuer sign a bought deal agreement on the same day and the following day the lead underwriter provides notice that the bought deal has been confirmed or terminated.
The Rules expressly provide that road shows may be conducted in connection with a bought deal prior to the filing of a preliminary prospectus, during the waiting period and after the receipt for the final prospectus. Such road shows may be open to institutional investors, other accredited investors and retail investors. Marketing materials used in a road show are subject to the same restrictions as marketing materials used in other offerings regardless of whether such materials are retained by the investor.
Investment dealers must establish and follow road show procedures to determine investor identity, keep records of the information provided by an investor and provide the investor with a prospectus. The Rules do not regulate oral statements made in a road show. However, where non-accredited investors are permitted to attend the road show, a prescribed cautionary statement must be read at the beginning of the road show.
The original proposals provided that only investors, registered dealers and issuer representatives could attend a road show. The rules have now been amended to allow members of the media to attend road shows; however, accompanying guidance states the CSA’s view that an offering should not be marketed through the media.
US cross-border offerings
In US cross-border offerings, due to concerns regarding potential liability under US laws issuers may not wish to file on SEDAR the marketing materials used at road shows. The Rules provide an exemption from filing and including or incorporating such materials in a prospectus if they are confidentially delivered to SEDAR, the offering is made primarily in the United States and a contractual right of action is provided to investors in the event the marketing materials contain a misrepresentation.
Testing of the waters for IPO
The Rules provide for a new exemption from the current restrictions on pre-marketing that will allow an issuer, through an investment dealer, to gauge interest in an IPO of its securities from accredited investors prior to incurring the costs of an underwriting. To prevent concerns of insider trading, the exemption will not be available where the issuer is a public issuer in a foreign jurisdiction or where the control person of the issuer is a public issuer and the IPO would be a material fact or a material change with respect to the control person.
All “testing of the water” activities must cease at least 15 days prior to the filing of a preliminary prospectus in respect of the IPO. This provision is consistent with the exemption’s purpose, which is to allow solicitation before the incurrence of costs. The exemption requires that the dealer obtain written confirmation from the accredited investor that it will keep all information confidential until the earlier of the time the information has been generally disclosed in a preliminary long-form prospectus or otherwise, or the issuer has otherwise confirmed in writing that it is not pursuing the offering. Accompanying guidance stresses that the exemption is to be used only to determine interest in the offering and not to pre-sell the deal.
Public offerings of mutual funds and investment funds made under certain prescribed forms are not subject to the Rules.
A copy of the Rules can be accessed here.