The Canadian Securities Regulators (CSA) have announced amendments to National Instrument 41-101 – General Prospectus Requirements and related instruments and policies intended to increase the range of permissible pre-marketing and marketing activities in connection with prospectus offerings. The new rules will provide additional flexibility and certainty for issuers and investment dealers.
The key amendments to the pre-marketing and marketing rules will:
- allow non-reporting issuers, through an investment dealer, to "test the waters" in potential initial public offerings by communicating with accredited investors;
- permit and set out the conditions under which investment dealers can use marketing materials and conduct road shows after the announcement of a bought deal and following the filing of a preliminary prospectus; and
- clarify the circumstances in which bought deals and bought deal syndicates can be enlarged.
soliciting expressions of interest for IPOs
Pre-marketing of a prospectus offering refers to communications by a party to potential investors or other promotional activity which occurs before a preliminary prospectus is filed. Under the current regulatory regime, pre-marketing is generally prohibited in Canada except pursuant to the bought deal exemption (described below).
The new rules set forth the conditions under which companies may "test the waters" in connection with a potential initial public offering (IPO). Investment dealers, on behalf of issuers, will be permitted to solicit expressions of interest from accredited investors in order to determine if there would be sufficient interest in an IPO. Investment dealers and issuers relying on the new rules will be required to meet certain requirements, including keeping a written record of the accredited investors that were solicited, as well as written confirmation from such accredited investors that they will keep any information about the issuer and the proposed IPO confidential. Issuers relying on the new rules will be required to wait at least 15 days after the date on which expressions of interest are solicited prior to filing a preliminary prospectus. The pre-marketing rules are not available to reporting issuers, SEC issuers and certain other categories of issuers.
bought deal exemption
The current regulatory regime for bought deals already provides an exemption which permits pre-marketing prior to the filing of a short form preliminary prospectus where, among other things, the underwriter has agreed to an offering price. The amendments expand upon and clarify the rules for pre-marketing of bought deals. Although the bought deal agreement cannot provide the underwriter with an upsizing option, issuers and underwriters may now agree to amend an agreement to increase the size of a bought deal offering by up to 100% provided that the other terms of the offering do not change. The new rules also clarify that the bought deal agreement may permit underwriters to be added to or removed from the syndicate. The agreement may also contain a "confirmation clause" making the agreement conditional on one or more additional underwriters agreeing to participate, provided that the lead underwriter would be required to confirm within one business day whether the bought deal is confirmed or terminated. Finally, the amendments provide that bought deal agreements can be amended to provide for additional classes of securities or, provided four days from the date of the agreement has passed, to reduce the number of securities being offered or lower the offering price.
term sheets and marketing materials
The CSA has also clarified and expanded on the marketing activities which can be conducted during the "waiting period" between the filing of a preliminary prospectus and the filing of a final prospectus. As well, the CSA has clarified and expanded on the marketing activities which can be conducted following the filing of a final prospectus. In particular, while the current rules generally limit the written materials that can be used in marketing an offering to the prospectus, the amended prospectus rules expressly permit the use of standard term sheets and other more detailed marketing materials.
Terms sheets will only be permitted to include certain prescribed information disclosed in or derived from the prospectus, which is set out in detail in the amended prospectus rules. This includes basic information such as a brief description of the issuer's business and the offered securities, the price range of the offered securities, the proposed use of proceeds and certain other terms of the offering. Term sheets will also be required to include prescribed cautionary language advising investors, among other things, that they must look to the prospectus for full disclosure of all material facts.
Issuers will be permitted to provide more detailed marketing materials that contain information other than what is included in the standard term sheet; however, such materials will be subject to additional requirements, including the requirement to publicly file the marketing materials on SEDAR. In addition, the content of marketing materials, which must also be disclosed in or derived from the prospectus, will be required to be included or incorporated by reference in the final prospectus. As a result, the issuer and other signatories to the prospectus will be subject to statutory liability for any misrepresentations in the marketing materials. The only marketing materials which will be exempt from public disclosure and incorporation by reference into the prospectus are those that compare the issuer to other issuers. Such an exemption is on condition that, among other things, such comparable information includes explanatory language, discloses risks associated with comparables and is filed with applicable securities regulatory authorities.
road shows and investor presentations
Currently, there are no explicit rules regarding road shows and investor presentations. Although certain standard practices have developed, considerable uncertainty and inconsistency still exists in practice. To address this, the CSA has amended the prospectus rules to clarify the required practices for presentations to investors which are conducted during the waiting period or following the filing of a final prospectus. Investment dealers conducting a road show will be required to take attendance at investor presentations and provide each investor with a copy of the preliminary or final prospectus, as applicable. All written materials which are provided during an investor presentation must meet the requirements described above for marketing materials, subject to a limited exception for investor presentations for cross-border IPOs in the United States. In addition, in the event that an investor presentation is attended by investors who are not accredited investors a prescribed statements is required to be read at the commencement of any presentation.