On November 25, 2011, the Canadian Securities Administrators (CSA) released for comment proposed amendments to the rules governing marketing activities for prospectus offerings, including pre-marketing under the bought deal regime.
Currently, issuers and underwriters may not communicate with investors about a potential public offering prior to the issuance of a receipt for a preliminary prospectus, except in reliance on the pre-marketing exemption for bought deals. In addition, current rules permit only limited marketing activities during the waiting period between the issuance of receipts for the preliminary and final prospectuses.
The proposed amendments would increase the range of permitted marketing and pre-marketing activities and establish express rules regarding practices such as the use of road shows. They would also clarify aspects of the bought deal regime, including when a bought deal can be upsized and permitted activities by dealers prior to the announcement of a bought deal.
The key elements of the proposed amendments are summarized below.
1. Term Sheets
Permitted Use. Term sheets describing an offering may be provided to institutional investors prior to the filing of a preliminary prospectus in a bought deal and to all investors during the waiting period for all public offerings.
Disclosure Standard. Term sheets must be fair, true and plain (as opposed to the full, true and plain requirement for a prospectus). To meet this standard the disclosure must be honest, impartial, balanced and not misleading, and not give undue prominence to a particular fact or statement in the prospectus or contain promotional language.
Permitted Disclosure. For bought deals the information in the term sheet must be in the press release or the issuer's public disclosure. For other public offerings the information in the term sheet must be in the preliminary prospectus. The term sheet must in all cases be included in or incorporated by reference in the prospectus (and the preliminary prospectus for bought deals).
Filing. Term sheets must be filed on SEDAR prior to use. On a bought deal they would not be made public until the preliminary prospectus is receipted.
Liability. Issuers and underwriters will have prospectus and secondary market liability for term sheet disclosure.
2. Upsizing Bought Deals
Current market practices regarding the upsizing of bought deals would be codified as follows:
- A press release must be issued immediately upon agreement to increase the offering size.
- A preliminary prospectus must be filed within four business days of the original agreement.
- An upsized deal must have the same price per security as the original offering.
- A size increase may not be the culmination of a formal or informal plan to offer a larger amount of securities devised before the execution of the original agreement.
The CSA is also seeking comment on an appropriate limit on the size of any upsizing, such as 15%, 25% or 50% of the original deal size.
There will also be an express requirement prohibiting bought deal agreements from having a market-out clause, reflecting market practice.
3. Permitted Dealer Activities Prior to the Announcement of a Bought Deal
Additional guidance has been proposed as to when a distribution begins under a bought deal. Currently, a dealer may not discuss a possible securities offering from an issuer with prospective investors once its discussions with the issuer are of a "sufficient specificity" that it is reasonable to expect that the dealer will propose an underwriting of those securities. Such discussions may occur only after the execution and announcement of a bought deal agreement.
CSA staff rejects the notion that an engagement letter or indicative terms for a proposed offering must be provided to an issuer for "sufficient specificity" to be satisfied. Further, CSA staff expresses the view that an issuer's rejection of an underwriting proposal does not terminate the distribution and indicates that it is not appropriate for the dealer to resume communications with potential investors until after a "cooling off" period. No guidance has been provided as to the length of an appropriate cooling off period.
4. "Testing of the Waters" Exemption for IPO Issuers
A new "testing of the waters" exemption would allow a dealer to determine interest in a potential initial public offering on behalf of a non-public issuer through limited confidential communication with permitted institutional investors. Issuers would be required to keep records of any dealer it authorized to use this exemption and dealers would be required to keep records of all investors solicited under exemption as well as copies of related correspondence.
5. Road Shows
The prospectus rules would be amended to specifically provide for the use of road shows. Road shows are marketing presentations to potential investors made by an investment dealer in which one or more executive officers of the issuer participate. The new provisions would apply to all road shows during the waiting period whether they are conducted in-person, by conference call or over the Internet or by other electronic means.
Retail investors would be permitted to participate in road shows provided that all road show information: is contained in the preliminary prospectus; is fair, true and plain; and, in respect of any written materials, is prepared in compliance with the term sheet requirements discussed above. Road shows restricted to permitted institutional investors may provide information comparing the issuer and the securities to other issuers and securities without including such information in the prospectus.
Authored by Jim Reid and Robert Murphy.
If you have questions regarding the foregoing or would like further information on this topic, please contact Jim Reid (416.367.6974) or Robert Murphy (416.863.5537) in our Toronto office or Neil Kravitz (514.841.6522) in our Montréal office.
Davies Ward Phillips & Vineberg LLP is an integrated firm of more than 240 lawyers with offices in Toronto, Montréal and New York. The firm is focused on business law and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its clients, regardless of borders.
The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.