On May 30, 2013, the Canadian Securities Administrators (CSA) published the final version of the amendments to the rules related to “pre-marketing” and “marketing” activities in connection with prospectus offerings (the “Final Amendments”). The amendments to the rules were originally published for comment by the CSA on November 25, 2011 (the “Original Amendments”).
The CSA indicate that the amendments are intended to ease certain regulatory burdens that issuers and investment dealers are facing in trying to successfully complete a prospectus offering, while at the same time providing protection to investors, and to provide clear rules and a level playing field for market participants involved in a prospectus offering.
The Final Amendments include significant new rules relating to the:
- use of standard term sheets and marketing materials in connection with prospectus offerings;
- conduct of road shows;
- conduct of bought deals; and
- process for non-reporting issuers to gauge interest in a potential initial public offering.
The Final Amendments are the long awaited response to changing conditions in the marketplace, such as the introduction of “free-writing prospectuses” in the United States, the increased demand by retail investors for access to similar opportunities as institutional investors, and the proliferation of information available on the internet to investors of all types. The Final Amendments are expected to come into force on August 13, 2013.
TERM SHEETS AND MARKETING MATERIALS
In addition to the notice related to the availability of a prospectus regarding an offering contemplated under the current rules, the Final Amendments provide for “standard term sheets” and “marketing materials”, which are defined as follows:
- A “standard term sheet” is a written communication intended for potential investors regarding a distribution of securities under a prospectus that contains solely limited prescribed information relating to an issuer, securities or an offering. A standard term sheet does not include a preliminary prospectus notice or a final prospectus notice.
- “Marketing materials” are defined as written communications 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 amendment thereto, a standard term sheet, a preliminary prospectus notice or a final prospectus notice.
The rules governing marketing materials are intended to apply to situations where issuers and investment dealers would like to provide investors with information that is more detailed than the limited information that can be contained in a standard term sheet.
The use of the standard term sheet will be subject to the following conditions:
- the standard term sheet must contain the prescribed information;
- other than contact information, all information in the standard term sheet must be disclosed in, or derived from, the relevant prospectus;
- a receipt for the relevant prospectus must have been issued in the local jurisdiction; and
- it must contain the prescribed legend.
The provision of marketing materials to potential investors will be subject to the following conditions:
- other than contact information and any comparables, all information in the marketing materials must be disclosed in, or derived from, the relevant prospectus;
- the material must contain a prescribed legend as well as the same cautionary language in bold type as contained on the cover page, and in the summary, of the relevant prospectus;
- a template version of the marketing materials must be approved in writing by the issuer and the lead underwriter before the marketing materials are provided;
- a template version of the marketing materials must be filed on or before the day that the marketing materials are first provided;
- a receipt for the relevant prospectus must have been issued in the local jurisdiction;
- the investment dealer must provide a copy of the relevant prospectus and any amendment with the marketing materials; and
- the template version of the marketing materials must be included in the prospectus or incorporated by reference into the prospectus.
Requiring the inclusion or incorporation of the marketing materials in the prospectus is intended to provide investors with remedies under the civil liability provisions of securities legislation if the marketing materials contain a misrepresentation. Standard term sheets will not have to be filed on SEDAR or included or incorporated by reference in the relevant prospectus, thus they will not be subject to civil liability, but they will be subject to the existing statutory prohibitions on misleading or untrue statements.
While the Original Amendments permitted the disclosure of information comparing the issuer to other issuers, such disclosure could only be provided to permitted institutional investors. The Final Amendments permit the disclosure of comparable information to any investor in marketing materials subject to certain conditions. If comparables are used, certain additional disclosures are also required, including the source and basis for inclusion.
The Original Amendments contained separate requirements for road shows aimed at institutional investors and road shows aimed at retail investors. This distinction has been eliminated in the Final Amendments. However, if an investor, other than an accredited investor, attends a road show, the investment dealer must make a prescribed cautionary statement to the effect that the presentation does not provide full disclosure of all material facts. Investment dealers conducting a road show must establish and follow reasonable procedures to:
- ask any investor attending the road show in person, by telephone conference call, on the internet or by other electronic means to provide their name and contact information;
- keep a record of any information provided by the investor; and
- provide the investor with a copy of the relevant prospectus.
Guidance for road shows for cross border IPO offerings
The Final Amendments include guidance that the CSA will no longer provide relief in connection with road shows for cross-border offerings to allow for compliance with U.S. requirements. Since the proposed rules require that marketing materials be filed on SEDAR, issuers will be able to file the same materials on EDGAR without needing exemptive relief. However, the CSA have added an exception to the requirement to file and incorporate marketing materials in the prospectus for certain cross-border offerings to prevent U.S. underwriters from avoiding Canadian tranches due to concerns regarding class action lawsuits. The exception will apply for where:
- the U.S. cross-border prospectus offering is primarily intended to be sold in the U.S.;
- the issuer and underwriters provide a contractual right of action to any investor who views the marketing materials; and
- a copy of the marketing materials is confidentially delivered to the applicable securities regulators on SEDAR.
It would appear that these provisions could well lead to conflict between the Canadian rules and U.S. rules for road shows, where the offering is not primarily made in the U.S.
Bought deal agreements
In order to take advantage of the bought deal procedures, an issuer and underwriter must enter into an enforceable agreement for the purchase of the offered securities. These rules will be clarified to require that the agreement must not be subject to a “market-out” clause. Although this has always been the general practice and is consistent with the market’s general understanding of what is meant by a “bought deal”, we understand that there have been instances where issuers and dealers have purported to rely on the bought deal exemption for transactions that are subject to a market-out clause. This will now be prohibited.
Enlarging bought deals
The Final Amendments allow bought deals to be enlarged up to 100% of the size of the original offering. In addition, the Final Amendments permit the increase of a bought deal if:
- the type of securities to be purchased, and the price per security, is the same as under the original agreement;
- the preliminary prospectus is filed within four business days of the original agreement;
- a news release is issued immediately after a bought deal agreement is amended; and
- no previous amendment has been made to the original agreement to increase the number of securities to be purchased.
In addition, the Final Amendments provide that a bought deal agreement may not contain an upsizing option (other than an over-allotment option). Increasing the size of a bought deal would most efficiently be done prior to the filing of the preliminary prospectus; however, it may be done after this point though doing so is likely to require an amendment to the preliminary prospectus and to the bought deal agreement.
These conditions are intended to ensure that the original bought deal agreement is a firm commitment for a substantial number of securities and to prevent underwriters from entering into the original agreement for a small number of securities in order to solicit investors without a preliminary prospectus and then, after having obtained expressions of interest, entering into an amended agreement for a much larger amount.
Bought deal syndicates
The Final Amendments specify that a bought deal agreement may not be conditional on syndication, provided that the parties may add or remove an underwriter or adjust the number of securities to be purchased by each underwriter on a proportionate basis under certain conditions.
Furthermore, confirmation clauses, where an underwriter proposes a bought deal subject to confirmation of the participation of one or more additional underwriters, are only permissible where (i) the lead underwriter provides a signed bought deal agreement to the issuer and the issuer signs it on the same day, and (ii) on the following day, the lead underwriter provides a notice to the issuer either confirming the bought deal or terminating it.
Additional guidance regarding the commencement of distribution discussions and non-deal road shows
Marketing activities in connection with a prospectus distribution are generally prohibited until the receipt for the preliminary prospectus is issued or a bought deal agreement is executed.
The Final Amendments include guidance as to when discussions with an issuer are of sufficient specificity that a distribution would be regarded as having commenced. The proposed guidance includes the following examples:
- the dealer provides the issuer with financing scenarios at specified price ranges, the directors authorize management to pursue a prospectus financing within any such range, and the dealer is advised of this approval; or
- the dealer indicates that market conditions are favourable and that the dealer will likely provide indicative terms of a financing later that day.
Accordingly, in these circumstances, any communication by the dealer with its clients would be considered to be in furtherance of the distribution and must not take place until the bought deal agreement has been entered into and announced.
The Final Amendments also provide guidance as to when non-deal road shows should be considered to be prohibited, particularly when undertaken in anticipation of a prospectus offering.
Marketing materials for bought deals
The conditions applicable to marketing materials in the context of a bought deal are similar to the conditions mentioned above, except that all the information in such marketing materials must be disclosed in, or derived from, the bought deal news release, the issuer’s continuous disclosure record or the subsequent preliminary prospectus.
TESTING THE WATERS EXEMPTION FOR IPO ISSUERS
A limited exemption is proposed to permit non-reporting issuers to determine interest in a potential IPO.
The exemption is subject to the following:
- the communications are made through an investment dealer and only to accredited investors (which is an expansion of the name of investors compared to the Original Amendments);
- any materials used by the investment dealer to solicit an expression of interest from an investor must be approved in writing by the issuer;
- the investment dealer must obtain confirmation in writing from the accredited investor that the investor will keep the information about the proposed offering confidential and will not use the information for any other purpose other than assessing the investor’s interest in the offering;
- the issuer must keep a written record of any investment dealer that it authorized to act on its behalf in making solicitations in reliance on the exemption and a copy of any written authorization; and
- an investment dealer must keep a written record of any accredited investor that it solicited.
The Final Amendments prohibit solicitation under the testing of the waters exemption for a period of 15 days prior to the filing of the preliminary prospectus for the initial public offering.
The exemption will not be available to issuers if (i) any of the issuer’s securities are held by a control person that is a public company, and (ii) the initial public offering would be a material fact or material change with respect to the control person.
The new rules do not apply to mutual funds that file prospectuses under National Instrument 81-101 Mutual Fund Prospectus Disclosure and investment funds that file prospectuses under Form 41-101F2 Information Required in an Investment Fund Prospectus or Form 41-101F3 Information required in a Scholarship Plan Prospectus.