NI 41-101 will harmonize prospectus rules across the country.
National Instrument 41-101 General Prospectus Requirements and Related Amendments (NI 41-101 or the Instrument) was first published by the Canadian Securities Administrators on December 21, 2006 for comment. After making changes in response to comments received, the final proposal was published on December 21, 2007, to come into force on March 17, 2008. The adoption of NI 41-101 will result in significant changes to prospectus rules across the country, including the long form prospectus rules, short form prospectus rules, continuous disclosure requirements and investment fund rules.
The substance and purpose of the Instrument is expressed primarily to be the harmonization and consolidation of existing prospectus requirements and policy across Canada. The Instrument and related consequential amendments, however, go much further than that, with the introduction of new restrictions for linked notes and other derivatives, expanded prospectus certification requirements, broader disclosure requirements for material contracts with tighter limits on selfredaction, as well as additional certification, undertaking and personal information form (PIF) requirements. And while the Instrument would primarily affect issuers offering and investors purchasing securities under a long form prospectus, it also impacts upon underwriters, with proposed changes to over-allotment options, limits on compensation warrants, and restrictions on backdoor underwritings.
Distribution of securities to an underwriter
In an effort to curb so-called “back door underwriting” practices, the Instrument prohibits the distribution of securities under a prospectus to a person acting as an underwriter for the distribution, except in respect of:
- over-allotment options, or the securities issuable or transferable on the exercise of overallotment options (subject to the limits described above); and
- certain compensation securities.
Compensation options or warrants permitted to be distributed by underwriters for the distribution must not exceed, in the aggregate, 10% of the base offering. The 10% limit is calculated using as the numerator the number of securities granted as compensation, assuming the conversion or exchange of these securities, if applicable.
The Instrument consolidates (and in some instances expands on) existing certification requirements found in applicable securities legislation. This includes specific rules relating to certificates required by trust and limited partnership issuers, as well as promoters, investment fund managers, operating entities and (except in Ontario), selling securityholders. While the original draft of the Instrument required certification by substantial beneficiaries, the final version of NI 41-101 no longer includes this requirement.
Legends and advertising
The Instrument includes provisions relating to advertising and marketing in connection with a prospectus, including legends for advertising material during the waiting period and after the receipt for the final prospectus is obtained. Further, the companion policy gives specific guidance on what is permitted for prospectus distributions (including contents of green sheets), stating that, at a minimum, participants in all prospectus distributions should consider the following practices to avoid contravening securities legislation:
- directors or officers of an issuer should not give interviews to the media immediately prior to or during the waiting period and should limit themselves to responding to unsolicited inquiries of a factual nature;
- no director or officer of an issuer should make any statement during the period of distribution of securities (which includes the pre-marketing and solicitation of expressions of interest period in the context of a bought deal) which constitutes a forecast, projection or prediction with respect to future financial performance, unless that statement relates to and is consistent with a forecast contained in the prospectus;
- underwriters and legal counsel have the responsibility of ensuring that the issuer and all directors and officers of the issuer who may come in contact with the media are fully aware of the restrictions applicable during the period of distribution of securities. It is not sufficient to make those restrictions known only to the officers comprising the work group; and
- issuers, dealers and other market participants should develop, implement, maintain and enforce procedures to ensure that advertising or marketing activities that are contrary to securities legislation are not undertaken, whether intentionally or through inadvertence.
As mentioned above, the Instrument was published by the CSA on December 21, 2006. The final version was published on December 21, 2007 and implementation of the final instrument and all related consequential amendments is scheduled for March 17, 2008.