Written by William S. Osler, David F. Phillips, J. Paul D. Barbeau, Christopher A. Straub
The Canadian Securities Administrators (CSA) have adopted amendments to the rules governing permissible marketing activities in the context of a public offering. The amendments, which will come into force on August 13, 2013, involve significant changes to the existing marketing rules.
Marketing Prior to Filing a Preliminary Prospectus
Testing the Waters for an IPO
Under the new rules, private issuers, through registered dealers, may approach accredited investors on a confidential basis (or test the waters) prior to filing a preliminary prospectus, in order to gauge interest in a proposed IPO, provided the issuer allows for a 15-day cooling off period after solicitations are completed. All materials used by a dealer to solicit expressions of interest must be approved by the issuer in writing. Dealers are required to keep a record of all investors they have solicited, a copy of the written materials provided to the investors and a copy of a confirmation from the investor agreeing to keep the information received confidential.
Because of concerns with selective disclosure and insider trading, the test-the-waters exemption is not available to an issuer whose securities are held by a control person that is a public issuer if the IPO would constitute a material change for the public issuer.
Marketing Bought Deal Offerings
The new rules significantly expand the scope of permissible marketing activities by allowing dealers to distribute standard term sheets and marketing materials after the announcement of a bought deal and prior to obtaining a receipt for a preliminary prospectus. A standard term sheet contains a brief description of the business of the issuer, the securities offered, the total number or dollar amount of the securities, underwriter fees payable and use of proceeds, all of which should be derived from the bought deal letter. Standard term sheets are not required to be filed on SEDAR and carry no civil liability for issuers or dealers.
Marketing materials may contain much more detailed information than a standard term sheet, including comparisons to other issuers provided there is disclosure regarding the basis on which the other issuers and compared attributes were selected as well as cautionary language and risk factors relating to the comparables. Marketing materials must be approved by the issuer and the lead underwriter and filed on SEDAR on the same day they are first used, provided that the comparables may be redacted. Marketing materials must be included in, or incorporated by reference into, the preliminary prospectus and, as a result, they carry statutory liability for any misrepresentations.
Guidance on Bought Deal Agreements
The new rules maintain the requirement that a preliminary prospectus for a bought deal must be filed within four business days after the date a bought deal is entered into. However, the new rules do not require the issuer to obtain a receipt for the preliminary prospectus dated the fourth business day. In addition, the new rules expressly prohibit market out clauses and provide guidance on the use of regulatory or due diligence outs (indicating they must not be used in a way that would defeat the policy rationale of the bought deal exemption).
The new rules permit bought deals to be upsized by up to 100 percent of the size of the original deal, provided the initial bought deal agreement does not permit the dealer to unilaterally upsize the offering. Bought deal agreements are generally not permitted to be conditional upon syndication, but may include confirmation clauses which require the dealer to confirm on the next business day that the bought deal is either confirmed or terminated.
Bought deal agreements may be amended to provide for the issuance of new or additional classes of securities and may be amended to provide for a lower price per share or a smaller offering if such withdrawal or reduction to the offering price or size does not occur prior to the fourth business day after the original bought deal agreement.
Non-Deal Road Shows
Non-deal road shows involve an issuer and dealers meeting with institutional investors to discuss the business and affairs of the issuer. The new rules expressly provide that a non-deal road show undertaken in anticipation of a prospectus offering would be prohibited under securities legislation by virtue of the prospectus requirement.
Marketing after Filing a Preliminary Prospectus
The current rules provide that only a preliminary prospectus and/or a brief notice may be used for marketing purposes once the preliminary prospectus is filed. The new rules allow the issuer to use standard term sheets and other marketing materials during the waiting period and after the filing of the final prospectus on substantially the same terms described above in the context of marketing a bought deal offering. All information included in standard term sheets and other marketing materials is required to be derived from the preliminary prospectus (excluding contact information for the dealers and comparables to other issuers) and as a result carries statutory liability for any misrepresentations.
Marketing materials provided in connection with a road show are subject to the same conditions that apply to other marketing materials, including the requirement that they be filed on SEDAR and as a result, result in civil liability for any misrepresentations. The new rules contain exceptions from the requirement to file road show materials and incorporate such materials by reference into a prospectus for a U.S. cross-border offering with respect to marketing materials provided in connection with a road show. In order to rely on this exception, the dealers must have a reasonable expectation that the securities offered will be sold primarily in the U.S., provide a contractual right of rescission to investors in the event the materials contain a misrepresentation and deliver the template version of the marketing materials to the appropriate securities regulatory authority.
Dealers will be required to implement procedures to ensure that they obtain the name and contact information of any investor attending a road show, keep a record of any information provided by the investor and provide the investor with a copy of the prospectus and any amendment. If a road show includes investors that are not accredited investors, then a cautionary statement must be read at the commencement of the meeting.