Yesterday, the Canadian Securities Administrators (CSA) published final amendments to their securities rules that will expand the scope of marketing activities that can be conducted in connection with prospectus offerings .
The amendments to National Instrument 41-101 General Prospectus Requirements and National Instrument 44-101 Short Form Prospectus Distributions expressly codify permissible “pre-marketing” and “marketing” activities that can be conducted prior to and after the filing of a preliminary short or long form prospectus. Not only do these amendments ease restrictions on the types of activities that can be conducted, they also expressly acknowledge and codify various marketing activities in a manner that better reflects the practical reality of how offerings are marketed.
These amendments were first proposed for comment on November 25, 2011. In response to comments received, the CSA have made certain significant changes to their earlier proposals, including expanding the types of investors who may participate in certain marketing activities to “accredited investors” and retail investors in certain circumstances, as opposed to only “permitted institutional investors” as was originally proposed. Specifically with respect to bought deals, the final amendments also carry forward proposals relating to increasing the deal size and enlarging the syndicate, and include rules that expressly permit road shows to be conducted during the “pre-marketing” of a bought deal.
The following are some highlights of these proposals, which will be discussed in detail in future updates:
Testing the waters exemption for IPOs
- The originally proposed “testing the waters” exemption has been codified in the final amendments and will allow IPO issuers to communicate with accredited investors through investment dealers, provided certain conditions are satisfied. As previously proposed, this exemption will not be extended to public companies in foreign jurisdictions, notwithstanding the fact that they may be doing an IPO in Canada. Under the final amendments, it is also not available to an issuer whose securities are held by a control person that is a public issuer. The final amendments also prohibit solicitations under this exemption for a period of 15 days prior to filing the preliminary IPO prospectus.
Marketing during the waiting period
- Provision of “marketing materials” - Investment dealers will be expressly permitted to provide “marketing materials,” subject to certain conditions, including that all relevant information contained in the materials be disclosed in or derived from the relevant prospectus, and that a template version of the materials be approved by the issuer and the lead underwriter in writing and filed prior to use. In contrast to what was first proposed, “marketing materials” are now recognized as distinct from “term sheets,” with “standard term sheets” (being those that contain certain limited information and a prescribed legend) not being subject to the forgoing requirements.
- Green sheets – Regulatory guidance has been amended to clarify that while investment dealers may continue to provide traditional “green sheets,” where the green sheet falls within the definitions of “term sheet” or “marketing materials,” it will need to comply with applicable requirements (some of which are noted above).
- Road shows – Road shows will be expressly permitted to be conducted for both “permitted institutional investors” and retail clients. Previously proposed distinctions on applicable requirements based on who attends have been removed, including the limitation that “comparables” be provided only to permitted institutional investors.
A “road show” is defined as a presentation to potential investors regarding a distribution of securities conducted by an investment dealer on behalf of an issuer in which one or more executive officers, or other representatives, of the issuer participate. Compliance requirements applicable to dealers have also been relaxed in this respect, with dealers being required to ask investors their name and contact information (as opposed to verifying their identity), keep a record of the information provided and provide investors with a copy of the relevant prospectus.
Changes Applicable to Bought Deals
- Increasing the size of a bought deal – A bought deal agreement will be permitted to be amended to increase the offering size to up to 100% of the size of the original deal. It was previously proposed that, as a condition, the increase could not have been “a culmination of a formal or informal plan to offer a larger amount devised before the execution of the original agreement.” This condition is no longer applicable. However, the final amendments clarify that a bought deal agreement must not contain an option to increase the number of securities to be purchased (an “upsizing option”), other than an over-allotment option.
- Enlarging syndicate –Additional underwriters will be allowed to join the bought deal syndicate, however, the bought deal agreement must not be conditional on syndication and “confirmation clauses” will only be acceptable in certain circumstances.
- Marketing materials for bought deals - Investment dealers will be allowed to provide “marketing materials” to any type of investor after the bought deal is announced but before the preliminary prospectus is filed, subject to certain conditions, including that the information concerning securities in the marketing materials must be disclosed in or derived from the bought deal news release, the issuer’s continuous disclosure record or the preliminary prospectus. A template version of the marketing materials must also be approved in writing by both the issuer and the lead underwriter and filed before being provided (although it will not be made public until the preliminary prospectus is receipted). As discussed above, “marketing materials” are now characterized differently than “standard term sheets,” which are subject to less onerous requirements. The final amendments have also been expanded to expressly permit road shows to be conducted after the announcement of a bought deal but before the filing of a preliminary prospectus.
The final amendments are comprehensive and also contain amended rules and/or policy guidance on acceptable termination provisions for bought deals, road shows for cross border IPO offerings, and the conduct of marketing after the receipt of a final prospectus or final base shelf prospectus, among other matters.
While the CSA believe that the policy rationale for the existing rules, such as ensuring equal access to information, providing investor protection through adequate disclosure, deterring conditioning of the market and deterring insider trading, still apply, the final amendments are intended to ease regulatory restrictions faced by issuers and investment dealers when marketing prospectus offerings.
Consequential amendments will also be made to National Instrument 44-102 Shelf Distributions, National Instrument 44-103 Post-Receipt Pricing, National Policy 47-201 Trading Securities Using the Internet and Other Electronic Means, and National Policy 41-201 Income Trusts and Other Indirect Offerings, with the changes generally scheduled to take effect on August 13, 2013.