Short Form Prospectus System to be Updated and Streamlined
November 21, 2005
Notice of Changes
The regulatory regime for short form prospectus distributions in Canada will be revamped effective at year-end. The Canadian Securities Administrators (CSA) have decided to streamline the short form prospectus system and increase access for issuers to the short form prospectus system.
The CSA have published a Notice that, as of December 30, 2005, National Instrument 44-101 Short Form Prospectus Distributions (Current NI 44-101), Form 44-101F3 Short Form Prospectus (Current Form) and Companion Policy 44-101CP Short Form Prospectus Distributions will be replaced with a new revised instrument, form and policy consisting of:
- National Instrument 44-101 Short Form Prospectus Distributions (New NI 44-101);
- Form 44-101F1 Short Form Prospectus (New Form); and
- Companion Policy 44-101CP Short Form Prospectus Distributions.
The New NI 44-101 and the New Form (collectively, the New Instrument) modify the qualification, disclosure and other requirements of the short form prospectus system so that the short form prospectus system can build on and be more consistent with recent developments and initiatives of the CSA. For example, the New Instrument:
- permits more reporting issuers to use the short form prospectus system by eliminating the minimum market capitalization requirement and the requirement that an issuer be a reporting issuer for a certain length of time before it can use the short form prospectus system;
- eliminates duplication and inconsistencies between the short form prospectus system and both National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) and National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) (together, the CD Rules), thereby better integrating the disclosure regimes for the primary and secondary markets;
- further streamlines the short form prospectus system by eliminating the requirement for regulatory review of an issuer’s initial annual information form before the issuer could file a short form prospectus; and
- addresses deficiencies or ambiguities in Current NI 44-101 that the CSA had identified over the past four years.
Current Short Form Prospectus System
The short form prospectus system was designed to enable qualifying issuers to access the markets more quickly and efficiently by permitting the incorporation of certain information by reference thereby reducing the disclosure required in a prospectus and by streamlining regulatory review without diminishing the information and protection available to investors.
The Current NI 44-101 was implemented on December 31, 2000 and prescribes conditions for the use of a short form prospectus to distribute securities to the public. The Current Form incorporates by reference, rather than restates, information contained in the issuer’s annual information form (AIF), financial statements and other continuous disclosure (CD). In addition, Current NI 44-101 sets out qualification criteria that emphasize the filing and review of an initial AIF and prescribes additional requirements meant to enhance and update the CD requirements, as they existed in 2000, including requiring business acquisition financial statement disclosure in a short form prospectus.
Impetus for New Instrument
Since 2000, there have been various important regulatory and technological developments that have affected the information that is available to the public, including:
- the adoption of NI 51-102 on March 30, 2004;
- the adoption of NI 81-106 on June 1, 2005;
- the implementation and continued refinement of the harmonized CD review program by many CSA jurisdictions and the progress made by the CSA to enhance consistency in the scope and level of reviews carried out by staff across Canada; and
- advances in technology, including the inception and growth of the Internet and the development of the CSA’s System for Electronic Document Analysis and Retrieval (SEDAR), have enhanced investor access to CD.
The CSA believe that, because the requirements of, and access to, CD have been so enhanced, the public offering system for some issuers could be simplified without diminishing investor protection.
Expansion of Eligibility
The New Instrument will allow more issuers to use the short form prospectus system as it provides for a much broader set of basic qualification criteria by:
- eliminating the requirement that the issuer be a reporting issuer for 12 months prior to the date of the filing of its most recent AIF in at least one Canadian jurisdiction; and
- eliminating the requirement that the issuer have a minimum market capitalization of $75 million within 60 days of filing the preliminary short form prospectus.
Under the New Instrument, the basic qualification criteria will require that the issuer:
- be a SEDAR filer;
- be a reporting issuer in at least one jurisdiction of Canada;
- have filed all required CD documents;
- have filed a current AIF and current annual financial statements (exemptions available from this latter requirement);
- have its equity securities listed and posted for trading on a short form eligible exchange in Canada (namely, any one of the Toronto Stock Exchange, Tier 1 and Tier 2 of the TSX Venture Exchange and the Canadian Trading and Quotation System Inc.);
- not have ceased its operations and not have its principal asset comprised of cash, cash equivalents or its exchange listing; and
- have filed, at least 10 business days prior to filing its first preliminary short form prospectus, and not withdrawn, a one-time notice of intention to be qualified to file a short form prospectus with the securities regulatory authority in the applicable jurisdiction of Canada.
Each issuer who has a current AIF on December 29, 2005 under Current NI 44-101 will be deemed to have filed a notice on December 14, 2005 declaring its intention to be qualified to file a short form prospectus.
Alternative qualification criteria are available for issuers of: approved rating non-convertible securities; guaranteed non-convertible debt securities, preferred shares and cash-settled derivatives; guaranteed convertible debt securities or preferred shares; and asset-backed securities.
Extension of Bought Deal Pre-Marketing Period
New NI 44-101 extends the period during which the pre-marketing of a bought deal can occur from two business days to up to four business days following the execution of an enforceable agreement between the issuer and the underwriters. Similarly that agreement must require the issuer to file and obtain a receipt for a preliminary short form prospectus within four business days of entering into the agreement. Although this change will provide issuers and underwriters with more time in which to conduct due diligence investigations and prepare the prospectus and other relevant offering materials, it may also extend the period in which a bought deal can be completed.
Elimination of Duplication of AIF Filing Requirement
The AIF filing and acceptance procedure under Current NI 44-101 is eliminated as all reporting issuers, other than venture issuers, are subject to a mandatory AIF requirement under the CD Rules. New NI 44-101 retains the requirement that an issuer – including a venture issuer – have a current AIF to be eligible to use the short form prospectus distribution system, but effectively incorporates the AIF form and filing requirements provided for under the CD Rules. Venture issuers that wish to use the new short form prospectus system should prepare and file an AIF and otherwise ensure that they satisfy the qualification criteria of New NI 44-101.
Elimination of Duplication of Significant Acquisition or Disposition Disclosure
The requirements for detailed financial statement disclosure relating to significant acquisitions completed more than 75 days prior to the date of the short form prospectus have been eliminated from the New Instrument, as the CD Rules now require eligible issuers to file a Business Acquisition Report (BAR) within 75 days of completing a significant acquisition. In some cases, if the issuer was not required to file a BAR or has not yet filed a BAR, the New Form requires comparable disclosure to be provided in the short form prospectus.
The CSA have also eliminated the requirement of Current NI 44-101 for pro forma financial statements for significant dispositions because changes to the CICA Handbook now require this information to be included in the issuer’s financial statements.
Change in Comfort Letter from Auditors
The CSA have removed the requirement of Current NI 44-101 to file an auditor’s comfort letter regarding unaudited financial statements with the final short form prospectus as a result of the development of CICA Handbook Section 7110 – Auditor Involvement with Offering Documents of Public and Private Entities, which sets out the auditor’s professional responsibilities when the auditor is involved with a prospectus or other securities offering document and requires that the auditor perform various procedures prior to consenting to the use of its report or opinion, including reviewing unaudited financial statements included in the document. New NI 44-101 requires the review of such unaudited financial statements in accordance with the relevant standards set out in the CICA Handbook. New NI 44-101 still requires the delivery to the regulator, concurrently with the filing of the preliminary short form prospectus, of an auditor’s comfort letter if the audited financial statements included in the preliminary short form prospectus are accompanied by an unsigned audit report.
Form of Prospectus
The New Form requires enhanced prospectus disclosure with respect to: certain cover page disclosure; over-allotment, compensation and other options granted to underwriters; use of proceeds; earnings coverages ratios; and certain recent or proposed significant acquisitions.
If more than 10 per cent of the net proceeds of the distribution will be used to reduce or retire indebtedness that was incurred within the two preceding years, the issuer must identify the principal purposes for which the proceeds of the indebtedness were used and, if the creditor is an insider, associate or affiliate of the issuer, identify the creditor and the nature of the relationship to the issuer and the outstanding amount owed.
Amendments in disclosure requirements for earnings coverage ratios reflect the implementation of NI 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency, address recent changes to the accounting rules which may require certain debt obligations to be classified as current liabilities, and clarify the requirements and the transition year expectations where there has been a change in year end.
Exemptions are provided from the requirement to include disclosure about both the issuer and any applicable credit supporter in a short form prospectus offering guaranteed securities where investors either require only issuer disclosure or only credit supporter disclosure to make informed investment decisions.
The New Form requires summary disclosure of any significant acquisition completed within 75 days of the date of the short form prospectus and of any proposed significant acquisition. The short form prospectus must also include the financial statements that would be required by a BAR if the significant acquisition is a reverse takeover or if the inclusion of the financial statements is necessary in order for the prospectus to contain full, true and plain disclosure relating to the securities being distributed and, in Quebec, disclosure of all material facts likely to affect the value or the market price of the securities being distributed.
Elimination of Material Contracts Inspection
The requirement to make all material contracts available for inspection during the distribution has been eliminated. Pursuant to the CD Rules, certain material documents are now required to be filed on SEDAR and therefore available for public inspection on a continuous basis.
Concurrently with the publication of the Notice of the New Instrument, the CSA published another Notice that sets out related amendments (the Consequential Amendments) required to conform the following instruments to the New Instrument:
- National Instrument 44-102 Shelf Distributions;
- National Instrument 44-103 Post-Receipt Pricing;
- National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities; and
- Form 51-102F2 Annual Information Form of NI 51-102.
Proposed Effective Date
Provided all necessary ministerial approvals are obtained, the New Instrument and Consequential Amendments will come into force in all provinces on December 30, 2005.
It is understood that the CSA’s next major mandate in rules affecting public securities offerings will be the harmonization, rationalization and unification of all remaining provincial and national prospectus-related rules, notices, forms and policies into a to-be-proposed new National Instrument 41-101 Prospectus Requirements. The current National Instrument 41-101 Prospectus Disclosure Requirements was implemented on December 31, 2000.