As reported in our Timely Disclosure post, on May 30, 2013, the Canadian Securities Administrators (CSA) published amendments to National Instrument 41-101 General Prospectus Requirements, National Instrument 44-101 Short Form Prospectus Distributions, National Instrument 44-102 Shelf Distributions and National Instrument 44-103 Post-Receipt Pricing (Amendments).
The Amendments will increase the pre-marketing and marketing activities permitted by issuers and investment dealers in connection with prospectus offerings. In addition, the CSA also published changes to various related companion policies. The Amendments will not affect mutual funds or investment funds filing a prospectus in the form of Form 41-101F2 Information Required in an Investment Fund Prospectus or Form 41-101F3 Information Required in a Scholarship Plan Prospectus.
Among other things, the Amendments will allow issuers and investment dealers to “test the waters” for certain initial public offerings (IPOs) prior to filing a preliminary prospectus, allow issuers to upsize bought deals and, subject to specified conditions and restrictions, permit the use of standard term sheets, marketing materials and road shows for marketing public offerings.
The Amendments and policy changes are scheduled to come into force on August 13, 2013.
Testing the Waters Exemption for IPO Issuers
The Amendments contain an exemption which allows issuers to determine market interest in advance of a potential IPO by communicating confidentially with accredited investors through investment dealers. The exemption is subject to certain conditions which include:
- all written material provided be approved by the issuer, be marked confidential and contain a legend with cautionary language;
- requiring investment dealers to receive confirmation from accredited investors that information provided will be kept confidential and not be used for any purpose other than assessing the investor’s interest in the IPO;
- the issuer keeping records relating to investment dealers authorized to act on its behalf; and
- investment dealers keeping records relating to accredited investors that were solicited and materials provided.
This exemption is not intended to allow investment dealers an opportunity to “pre-sell” the IPO or “fill their book” before filing the preliminary prospectus. In this regard, the Amendments provide for a “cooling off” period whereby there is a prohibition on solicitations under the exemption for a period of 15 days before the filing of the preliminary prospectus for the IPO.
In order to avoid concerns around insider trading, the testing the waters exemption will not be available to issuers that are already public companies in a foreign jurisdiction or to issuers that have a control person that is a public issuer where the IPO would be material fact or material change with respect to the control person.
Bought Deal Agreements
The Amendments introduce a definition for “bought deal agreement” that, among other things, provides that a bought deal agreement:
- must not have a market-out clause;
- must not provide an option for a party to increase the number of securities to be purchased (other than an over-allotment option); and
- must not be conditional on syndication (other than what is agreed to under a permissible “confirmation clause”).
However, the Amendments do provide that the parties may amend a bought deal agreement to, amongst other things:
- increase the size of the offering by up to 100% if certain conditions are met including:
- the type of securities and price per security remains the same;
- immediately issuing and filing a news release announcing the amendment; and
- filing the preliminary short form prospectus for the increased number of securities within four days of the original agreement; and
- add or remove an underwriter or adjust the number of securities to be purchased by each underwriter on a proportionate basis, provided certain conditions are met.
The Amendments also specify that a “confirmation clause” is acceptable in bought deal agreements only if certain circumstances apply, including that the confirmation period only be between the day on which the bought deal agreement is signed and the following business day.
Prospectus Receipts, Regulatory Outs and Due Diligence Outs
The Amendments provide that a preliminary prospectus must be filed within four business days of the bought deal agreement but do not require that an issuer obtain a receipt for the preliminary prospectus within such four business day period, as is currently the case.
In its companion policy revisions, the CSA has also provided guidance and identified its concerns with respect to a number of matters including the use of regulatory outs and due diligence outs in bought deal agreements.
Of particular concern, the CSA noted that where final prospectuses need to be receipted within a limited number of days following the issuance of the first comment letter, this creates tension when CSA staff identify issues that cannot be resolved within the time period specified in the underwriting agreement. While not going so far as to limit the use of regulatory outs and due diligence outs, the revised Amendments set out the CSA’s concerns that in certain instances these provisions may defeat the policy rationale for the bought deal exemption, which is to facilitate certainty of financing. The CSA also suggests that if an underwriter does not want to assume the risk of a bought deal and allow for a reasonable period of time for the issuer to settle any comments from staff of the principal regulator or is unable to conduct sufficient due diligence in advance of proposing a bought deal to an issuer, that the underwriter may want to consider proposing a marketed offering to the issuer rather than a bought deal.
Standard Term Sheets & Marketing Materials
The Amendments introduce and distinguish between “standard term sheets” and “marketing materials” that may be provided to potential investors.
“Standard term sheets” may contain only certain prescribed information regarding an issuer and a distribution, which largely relate to the basic terms and conditions of the offering. The Amendments provide that standard term sheets do not have to be filed on SEDAR or included in or incorporated by reference into the final short form prospectus, and therefore will not be subject to statutory civil liability. However, they will be subject to statutory prohibitions on misleading or untrue statements.
“Marketing materials” on the other hand, will provide more detailed information about an issuer and a distribution and may include comparables which compare the issuer to other issuers. Investment dealers may provide investors with marketing materials in connection with a prospectus offering upon certain conditions, which include:
- the marketing materials must be approved in writing by the issuer and lead underwriter and include a prescribed legend (or words to the same effect) with cautionary language;
- filing a template version of the marketing materials on SEDAR (subject to certain conditions, comparables may be removed prior to filing and will not be subject to statutory civil liability) on or before the day they are first provided to investors;
- confidentially delivering a complete template version of the marketing materials containing the comparables to the relevant securities regulatory authorities;
- providing a copy of the relevant prospectus with the marketing materials or, in the case of a bought deal, sending a copy of the preliminary short form prospectus to each investor that received the marketing materials and expressed an interest in acquiring the securities;
- including or incorporating by reference the template version of the marketing materials filed on SEDAR into the relevant prospectus; and
- filing a revised blacklined copy of the marketing materials and including certain disclosure in the subsequent prospectus document if the subsequent prospectus document modifies a statement of material fact that appeared in the original marketing materials.
The information contained in both standard term sheets and marketing materials (other than information about the investment dealer or underwriters and comparables) must be disclosed in, or derived from, the relevant prospectus or, in the case of a bought deal, the information must either:
- currently be disclosed in, or derived from, the bought deal news release or the issuer’s continuous disclosure record; or
- later be disclosed in, or derived from, the preliminary short form prospectus that is subsequently filed.
Investment dealers will still be able to continue providing traditional green sheets to their registered representatives during the waiting period. However, if such green sheets are distributed publicly, they must comply with the new provisions relating to “standard term sheets” and “marketing materials”, as applicable.
The Amendments explicitly recognize and permit road shows during the waiting period and after receipt of the final prospectus. The Amendments also recognize and permit road shows after the announcement of a bought deal but before a receipt for a preliminary short form prospectus.
However, the Amendments introduce certain conditions and requirements for investment dealers and issuers in conducting road shows, including requiring investment dealers to:
- establish and follow procedures to:
- ask any investor attending the road show (in person, by phone, or by electronic means) to provide their name and contact information;
- keep a record of any information provided by the investor; and
- upon issuance of a receipt, provide the investor with a copy of the relevant prospectus; and
- if an investor, other than an accredited investor, is permitted to attend, begin the road show with the oral reading of a cautionary statement.
Subject to a limited exception for U.S. cross-border offerings (discussed below), any marketing materials provided to an investor attending a road show must be provided in accordance with and comply with the “marketing materials” provisions discussed above. This means any marketing materials to be provided to investors at a road show must be filed on SEDAR and incorporated by reference in the issuer’s final prospectus. Of note, the new rules and policies specify that such provisions apply to any marketing materials shown to a potential investor and include materials that are not physically retained. For example, marketing materials shown to an investor on a projector screen at a road show would have to be filed on SEDAR and comply with the other marketing materials provisions.
The Amendments provide a limited exception from these requirements for certain U.S. cross-border offerings. The reason for this exception arose around concerns that publicly filing road show materials on U.S. offerings may increase the likelihood of investor class action lawsuits in the United States and would result in U.S. underwriters avoiding Canadian tranches of cross-border prospectus offerings.
Issuers will not be required to file on SEDAR, and include or incorporate by reference in their final prospectus, marketing materials used on road shows for U.S. cross-border offerings where the following conditions are satisfied:
- the U.S. cross-border prospectus offering must be primarily intended to be sold in the U.S;
- the issuer and underwriters are required to provide a contractual right of action to any investor who viewed the marketing materials, in the event that the marketing materials contain a misrepresentation. The contractual right of action must also be disclosed in the prospectus; and
- a copy of the marketing materials must be confidentially delivered to securities regulators on SEDAR.
The companion policy also clarifies that the exception does not apply to all marketing materials relating to the U.S. cross-border offering. The exception applies only to those marketing materials provided to investors in connection with the road show.