This is the fourth in a series of posts in which we take a closer look at proposed amendments to NI 41-101, released by the Canadian Securities Administrators in November 2011. The proposed amendments are intended to expand the scope of marketing activities that can be conducted in connection with prospectus offerings. Our first post, published earlier this month, considered the new "testing the waters" exemption for IPOs. Our second looked at the use of term sheets during and after the waiting period. Last Thursday, we considered the proposed amendments' new exemption allowing for “road shows” to be conducted in connection with a prospectus offering. In this post, meanwhile, we consider the pre-marketing of bought deals and other amendments.
The proposed amendments expand the range of pre-marketing activities that can be undertaken in connection with bought deals and ease other restrictions applicable to bought deals. These include exemptions to allow for the provision of term sheets prior to filing a preliminary short form prospectus (i.e., during the “pre-marketing period”) and expressly accommodate upsizing of bought deal offerings or enlarging of bought deal syndicates. The CSA explain in their request for comments that “pre-marketing” occurs when a dealer communicates with potential investors before a public offering and includes other promotional activities that occur before a preliminary prospectus is filed. Unless relying on the very narrow exemption available in the context of bought deals, pre-marketing is generally prohibited in Canada. They describe the pre-marketing exemption for bought deals as a “limited accommodation” for issuers seeking certainty of financing.
Use of term sheets in bought deals
Under the proposed amendments, investment dealers would be permitted to provide terms sheets to permitted institutional investors during the pre-marketing period. Such term sheets would be subject to the same conditions and requirements that apply to terms sheets provided during and after the waiting period (as described in detail in our summary of the term sheet requirements). In addition, all information concerning the securities would need to be included in the bought deal news release or the issuer’s continuous disclosure record. While the term sheet would still need to be filed on SEDAR prior to being distributed, it would not be made public until the preliminary prospectus is filed and receipted. While the proposed amendments currently only contemplate the provision of term sheets to permitted institutional investors during the pre-marketing period, the CSA have requested specific comments on whether this exemption should be expanded to retail investors given that, under the proposed amendments, retail investors can be given term sheets during and after the waiting period if accompanied by a copy of the relevant prospectus, and currently (and under the proposals) dealers can solicit expressions of interest from retail investors before filing a preliminary short form prospectus under the pre-marketing exemption for bought deals.
Upsizing bought deals and expanding bought deal syndicates
The proposals clarify the circumstances under which the size of a bought deal can be increased after the bought deal agreement has been signed. Such an increase would be permitted if the increase is not “a culmination of a formal or informal plan to offer a larger amount devised before the execution of the original agreement.” The amended agreement must otherwise be on same terms as original, including price per security and with the same underwriters (unless the syndicate is expanded in accordance proposed rules allowing for expansion of the syndicate as discussed below). Further, only one such amendment is permitted, the preliminary prospectus must be filed and receipted within four business days of the original agreement (not the amendment) and a news release must be issued immediately after the agreement is amended.
The proposed amendments also limit the amount by which the offering size may be increased. A cap has not been proposed in the amendments and is a matter that the CSA have specifically asked for comments on, providing a plausible range of 15 to 50%.
Amendments are proposed to NI 44-101 to allow for additional underwriters to join the bought deal syndicate if the addition of a particular underwriter was not the culmination of a formal or informal plan to add that underwriter devised before the execution of the original agreement. The proposed amendments also prohibit representations, warranties, indemnities and conditions contained in the original bought deal agreement from being amended unless the agreement is otherwise the same terms as the original and other conditions to reliance on the pre-marketing exemption for bought deals are complied with. A bought deal agreement may also not be terminated unless the parties decide not to proceed with offering and a new definition of “bought deal agreement” would clarify that such an agreement cannot have a market-out clause.