Proposed amendments to prospectus marketing rules: new "testing of the waters" exemption for IPOs

Ramandeep Grewal, Jay Kellerman, Raymond McDougall and Mihkel Voore -

As we discussed in a post last year, the Canadian Securities Administrators (CSA) proposed amendments on November 25, 2011 intended to expand the scope of marketing activities that can be conducted in connection with prospectus offerings.

With respect to pre-marketing in connection with a prospectus offering, the proposals include a new exemption from the prospectus requirement to permit the solicitation of expressions of interest where the issuer has a reasonable expectation of filing a preliminary long form prospectus in respect of an initial public offering (IPO). Pursuant to this exemption, an investment dealer that is authorized in writing to do so by the issuer would be permitted to make solicitations to “permitted institutional investors” (defined below). 

When relying on this exemption, both the issuer and the investment dealer must keep information about the proposed offering confidential, written materials provided to potential investors must be marked confidential and contain a legend to the effect that the material is not subject to liability under securities legislation and, prior to providing any information about the proposed offering, the investment dealer must obtain a written confidentiality confirmation from the investor. Guidance in the proposed Companion Policy to NI 41-101 advises that this confirmation may be obtained through email.

Any issuer relying on this exemption must keep a written record of the investment dealers it authorizes to act on its behalf as well as a copy of the written authorization itself. To comply with this requirement, the proposed Companion Policy to NI 41-101 states that the CSA would expect the issuer to record the name and contact information for a contact person with each investment dealer that it authorizes. Regulators may ask for copies of these documents during compliance reviews. The investment dealer is also subject to record-keeping requirements and must keep a written record of any permitted institutional investors that it solicits, as well as a copy of any written materials it provides to them and the confidentiality confirmations it obtains from them. The CSA expect that to satisfy this requirement investment dealers will record the name and contact information of a contact person with each applicable permitted institutional investor and may ask for this information from dealers during compliance reviews.

Permitted institutional investors” as defined in the proposed amendments include:

  1. Canadian or foreign banks, loan or trust companies, insurance companies and other similar organizations, including Schedule III banks under the Bank Act (Canada) and the Business Development Bank of Canada, and their subsidiaries;
  2. pension funds regulated by OSFI or similar Canadian or foreign pension commissions or other regulatory authorities and their subsidiaries;
  3. Canadian or foreign governments and their agencies, as well as Crown corporations;
  4. Canadian municipalities, public boards or commissions; and
  5. investment funds that have a Canadian registered investment fund manager or adviser.

This exemption would not be available to any issuer that is a reporting issuer in any other jurisdiction prior to filing a preliminary prospectus in Canada. It is also not available to SEC issuers, issuers whose securities have been assigned a ticker symbol by FINRA for use on any OTC market in the Unites States or whose securities have been traded on an OTC market where trade data is publicly reported, or those that have had any securities listed, quoted or traded on a marketplace or similar facility outside of Canada where trade data is publicly reported.

Since the issuer will not yet have prepared a preliminary prospectus the CSA have not extended this exemption to permit solicitation of retail investors and have specifically asked for feedback on whether the exemption as proposed would be useful to IPO issuers. 

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Comments (2) Read through and enter the discussion with the form at the end
Paul Peduto - February 17, 2012 6:09 PM

Would this pre-marketing exemption also be available to a Foreign Exempted Investment Dealer ?

Ramandeep Grewal - February 21, 2012 11:40 AM

Thanks for your question, Paul. Based on how the proposed amendments are currently drafted the exemption appears to be available only to a person or company that is registered in the category of "investment dealer".

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