Applicability and exemptions
When must a prospectus be filed? Are there any notable exemptions?
When conducting an initial public offering (IPO), a registration statement containing a preliminary prospectus and certain other information must first be filed with the Securities and Exchange Commission (SEC). After responding to SEC comments following a review period, an issuer may solicit written offers to purchase the shares being registered only after filing an amended preliminary prospectus referred to colloquially as a ‘red herring’. The red herring contains almost all the information required in a final prospectus, except:
- the final offering price;
- the amount of proceeds;
- the underwriting fees; and
- other matters that relate to the offering price.
The red herring must also include a bona fide estimate of the price range for the shares to be sold. A final prospectus including this omitted pricing information must be filed by the second business day following the pricing of the IPO.
When an issuer conducts a follow-on shelf takedown offering from an already-effective shelf registration statement, it will typically file a preliminary prospectus before announcing or launching any marketing efforts with respect to the offering. The preliminary prospectus supplements a prospectus originally filed with the shelf registration statement and contains information particular to the specific offering, such as:
- the number of securities to be sold;
- the use of proceeds; and
- specific terms of the underwriting agreement.
As in the IPO context, a preliminary prospectus excludes pricing-related information. The issuer must file a final prospectus incorporating the omitted pricing information by the second business day following the pricing of the offering.
What must the prospectus contain?
Securities legislation prescribes the required content of a prospectus and requires that the prospectus include additional information as may be necessary to ensure that the required statements are not misleading. The required contents of a prospectus include:
- disclosure regarding the business of the issuer;
- financial information of the issuer;
- risk factors;
- information about the management of the company and management compensation;
- significant security holders;
- information about the securities offered;
- the use of proceeds from the offering;
- the underwriters; and
- the method of distribution.
Filing and approval procedure
What is the procedure for filing for and obtaining prospectus approval from the regulator? Can draft prospectuses be submitted to the regulator for preliminary comment?
IPO registration statements are subject to SEC review and may be submitted in draft form for confidential, non-public review. The SEC will typically provide comments on the initial registration statement within 30 days after submission. The company must publicly file any registration statement submitted confidentially at least 15 days before the IPO’s road show. After addressing all comments on the registration statement to the satisfaction of the SEC, the company may request that the registration statement be declared effective by the SEC.
Following an IPO, registration statements of certain issuers (generally including issuers that have been public for less than one year) may still be subject to SEC review, although the SEC has discretion to conduct a limited review or no review of a post-IPO registration statement. Certain large and seasoned issuers (ie, those that, among other things, have been public for at least one year and have a public float of at least $700 million) can conduct follow-on offerings using a shelf registration statement that is not subject to SEC review or comment.
What types of prospectus liability can arise (eg, statutory, contractual, tort)? Which parties may be held liable?
Parties may be held civilly or criminally liable if a prospectus included in a registration statement:
- contains an untrue statement of a material fact; or
- omits a material fact that:
- must be stated therein; or
- is necessary to ensure the statements therein are not misleading.
Section 11 of the Securities Act of 1933 is the primary provision providing for civil liability and provides that the parties that may be held liable include any person:
- who signed the registration statement;
- who was a director (or performed a similar function) or partner at the time of filing the registration statement;
- who, with their consent, is named as being or about to become a director (or person performing a similar function) or partner;
- whose profession gives authority to a statement made by them (eg, an auditor);
- who, with their consent, is named as having prepared or certified any part of the registration statement; or
- who is an underwriter.
In addition, any person who controls any of the foregoing may be liable.
What defences are available for liable parties?
Parties other than the issuer may rely on the affirmative due diligence defence provided by Section 11 of the Securities Act, which provides that no person will be held liable if they undertook a reasonable investigation before the registration statement took effect and believed that the information in the registration statement was true and that there were no material omissions.