Highlights

  • “Standard term sheets” and “marketing materials” may be used by investment dealers to market public offerings
  • “Marketing materials” must be filed on SEDAR before use and incorporated in the prospectus
  • Doubling the size of bought deals permitted
  • New requirements for investor road shows
  • New exemption permitting issuers and investment dealers to “test the waters” for certain IPOs

The Canadian Securities Administrators (CSA) are implementing amendments to the Canadian prospectus rules relating to permitted marketing activities for public offerings. The new rules will regulate the use of term sheets, marketing materials and road shows in marketing public offerings; permit bought deals to be increased by up to 100%; and permit issuers and investment dealers to “test the waters” for certain initial public offerings (IPOs) before filing a preliminary prospectus. The new rules come into force on August 13, 2013.

Standard Term Sheets and Marketing Materials

The new rules distinguish between “standard term sheets” and “marketing materials” used to market public offerings. A “standard term sheet” is defined to mean a written communication intended for potential investors regarding a distribution of securities under a prospectus that only contains limited, prescribed information (excluding a simple notice stating the security to be offered, its price and the person from whom purchases can be made and a prospectus can be obtained).  “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 (excluding a prospectus or any amendment, a standard term sheet and the simple notice referred to above).

Standard Term Sheets

The new rules will permit investment dealers to provide standard term sheets to potential investors after a bought deal is announced but before the preliminary prospectus is receipted; during the “waiting period” between the issuance of a receipt for a preliminary prospectus and the issuance of a receipt for a final prospectus; and after a receipt has been issued for a final prospectus (including a shelf prospectus and a final base PREP prospectus). The requirements for a standard term sheet include:

  • other than contact information for the investment dealer or underwriters, all information concerning the issuer, securities or an offering in the standard term sheet must be disclosed in, or derived from the relevant prospectus.  If the offering is a bought deal, the information must be disclosed in, or derived from, the bought deal news release or the issuer’s continuous disclosure record, or information included in the subsequent preliminary prospectus;
  • the term sheet must contain prescribed cautionary language referring investors to the preliminary prospectus and/or final prospectus and stating that the standard term sheet does not contain full disclosure of all material facts; and
  • a standard term sheet does not have to be filed on SEDAR or incorporated by reference in the relevant prospectus.  Standard term sheets are not subject to prospectus liability, but are subject to the existing statutory prohibitions on misleading or untrue statements.

The limited information permitted in standard term sheets includes the issuer name, a brief description of the business of the issuer and the securities offered, the total number or dollar amount of the securities, the underwriters’ names, the proposed closing date, a brief description of the use of proceeds, the maturity date of debt securities and a brief description of interest payable, whether the securities are redeemable or retractable and, in the case of convertible or exchangeable securities, a brief description of the underlying securities. A “brief description” is defined as no more than 3 lines of text. Among other things, credit rating disclosure is not permitted. Many kinds of summary term sheets currently used, including those for more complex offerings (such as convertible debentures or rate reset preferred shares), will not qualify as “standard term sheets” because they contain disclosure beyond the prescribed limited content. These materials are “marketing materials” subject to additional requirements (including filing on SEDAR and incorporation into the prospectus – see below).

Marketing Materials

Under the new rules, “marketing materials” may be provided to potential investors after a bought deal is announced but before the preliminary prospectus has been receipted;  during the “waiting period”;  and after a receipt has been issued for a final prospectus. The term “marketing materials” includes written or electronic marketing presentations (other than “standard term sheets”) that are provided to investors or made available as part of or in connection with a road show, or otherwise.

The conditions for use of permitted marketing materials include:

  • all information, other than contact information for the investment dealers and comparables, must be disclosed in, or derived from, the related prospectus or, for a bought deal, the bought deal news release, the issuer’s continuous disclosure record or the subsequently-filed preliminary prospectus;
  • specified cautionary language (different than that for a standard term sheet) must be included;
  • a template version of the marketing materials must be approved in writing by the issuer and lead underwriters before use;  and
  • the template version of the marketing materials must be filed on SEDAR on or before the date they are first provided to an investor, and must be included or incorporated by reference in the prospectus for the offering.

If the marketing materials include comparables (information that compares an issuer to other issuers), they must contain prescribed cautionary language explaining the basis on which other issuers were chosen and why they are considered to be appropriate comparisons and the risks relating to the comparables. Comparables may be removed from the “template” marketing materials that are filed on SEDAR, but in that case a separate, complete version of the template marketing materials, including comparables, must be delivered (confidentially) to the applicable Canadian securities regulators. Marketing materials are subject to the prohibition on misleading or untrue statements.

These significant changes will require issuers, underwriters and their counsel to review term sheets and marketing materials to determine in advance whether they are “standard term sheets” or “marketing materials”. For a prospectus offering in Quebec, marketing materials will need to be translated into French since they will be included or incorporated in the prospectus. 

Bought Deals

The new rules make changes to bought deal offerings. The existing limited exemption from the general prohibition on marketing before a prospectus is filed that permits an investment dealer to solicit expressions of interest before the filing of a preliminary short form prospectus if the issuer has entered into an enforceable agreement with an underwriter who has agreed to purchase the full amount of an offering, the issuer issues a news release announcing the agreement, and the agreement requires the issuer to file and obtain a receipt for the preliminary prospectus within four business days of the agreement is generally maintained. However, the new rules provide specificity on the following bought deal arrangements: bought deals may not include market-out clauses (provisions that allow an underwriter not to purchase securities if they cannot be marketed profitably due to market conditions); the only permitted option is an over-allotment option; bought deals may be conditional on the lead underwriter confirming on the next business day that other underwriters have agreed to purchase certain of the securities being offered (a confirmation clause); underwriters may be added to a bought deal; the size of a bought deal may be increased by up to 100% of the initial offer size; bought deals may be reduced in size only four business days after the original agreement; and bought deals may be terminated if the parties decide not to proceed with an offering.

Road Shows

Road shows are often conducted as part of “soliciting expressions of interest” in a public offering. The new rules define a road show as “a presentation to potential investors, regarding a distribution of securities under a prospectus, conducted by one or more investment dealers on behalf of an issuer in which one or more executive officers, or other representatives, of the issuer participate.”

The new rules regulate certain aspects of the content and conduct of road shows by any means, including in-person, by telephone, over the internet or by other electronic means. While explicitly recognizing and permitting road shows, the new rules introduce specific process requirements requiring investment dealers to collect and maintain records of, and provide prospectuses to, road show attendees. In addition, the new requirements relating to “marketing materials” apply to marketing materials used in connection with a road show which will generally be required to be filed on SEDAR and included or incorporated by reference into the prospectus for the offering.

Oral Statements at a Road Show

Amendments to the Companion Policy to the prospectus rules clarify and provide guidance on oral statements made at road shows including cautioning against selective disclosure of undisclosed material information and that oral statements are subject to the provisions of securities legislation against making misleading or untrue statements.

Certain U.S. Cross Border Prospectus Offerings

The new rules provide limited exceptions for issuers in U.S. cross-border offerings with respect to records of investor attendance, and filing and incorporation by reference of road show marketing materials.  A U.S. cross-border offering is an offering undertaken contemporaneously in both the United States and Canada under a prospectus in each jurisdiction.

U.S. Cross-Border IPOs

When conducting a road show for a cross-border initial public offering, an investment dealer will not be required to comply with the general record keeping requirements if:

  • the issuer is relying on the exemption from United States filing requirements in Rule 433(d)(8)(ii) under the U.S. Securities Act of 1933 in respect of the road show; and
  • the investment dealer establishes and follows 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 voluntarily provide their name and contact information; and keeps a record of any information voluntarily provided by the investor.

All U.S. Cross-Border Offerings

Under the new rules, there is a limited exemption for U.S. cross-border offerings (including IPOs) from the requirement to file the marketing materials for a road show on SEDAR, and the requirement to include or incorporate the marketing materials in the final prospectus. The exemption is subject to the following conditions:

  • the underwriters have a reasonable expectation that the securities offered under the U.S. cross-border offering will be sold primarily in the United States;
  • the issuer and the underwriters who sign the Canadian prospectus provide a contractual right of action to investors for any misrepresentation in the road show marketing materials; and
  • the template version of the marketing materials relating to the road show is delivered (confidentially) to the Canadian securities regulatory authorities.

These exemptions only relate to marketing materials provided in connection with a road show, and not to any other marketing materials.

The CSA noted that the filing and other requirements for road show marketing materials only apply if the underwriters provide the materials to Canadians (including, presumably, if the road show materials are made available on an unrestricted basis over the internet).  Road show materials that are made available to U.S. investors only in a U.S. cross-border offering would not be subject to the new rules.

Testing of Waters Exemption for IPOs

The new rules contain an exemption from the general prohibition against pre-marketing of an IPO that permits investment dealers to solicit expressions of interest in a potential IPO from accredited investors before filing a preliminary prospectus, if certain conditions are satisfied.  This exemption is not available for issuers that are public companies in foreign jurisdictions, notwithstanding the fact they may be doing an IPO in Canada, nor to issuers whose securities are held by a control person that is a public issuer (i.e., a spin-off of a subsidiary or division by a public company).  Issuers using this exemption may not file a preliminary prospectus until at least 15 days after the last investor solicitation was made.  All information provided to accredited investors must be approved in writing by the issuer, be marked confidential and contain prescribed legends.  In addition, the investment dealer must obtain confirmation in writing from each accredited investor that it will keep information confidential until either a prospectus is filed or the issuer confirms in writing that it will not pursue the potential offering.