New Rules for Marketing of Public Securities Offerings
New rules will come into force on August 13, 2013, that will allow issuers and underwriters to engage in a broader range of "pre-marketing" and "marketing" activities in the context of securities offerings but that will also introduce filing requirements with respect to marketing materials and new requirements with respect to investor road shows. The rules also provide specificity on certain aspects of bought deal arrangements. The rules, which will apply uniformly in all Canadian provinces, were adopted by the Canadian Securities Administrators as amendments to National Instrument 41-101 General Prospectus Requirements and certain other national instruments.
Subject to the "bought deal" exemption, Canadian securities laws currently prohibit issuers and underwriters from communicating with potential investors about an offering of securities before a preliminary prospectus is filed. In addition to clarifying and further developing the bought deal exemption, the new rules add a new exemption to the pre-marketing prohibition by permitting the solicitation of expressions of interest from accredited investors prior to the filing of a preliminary prospectus in the context of an anticipated initial public offering (IPO).
1. Bought Deal Exemption
The current rules permit investment dealers to solicit expressions of interest from potential investors before an issuer has filed a preliminary prospectus provided that (i) the issuer and the underwriters have entered into an enforceable agreement pursuant to which the underwriters have agreed to purchase the securities on fixed terms, (ii) the offering has been publicly announced and (iii) the issuer files a preliminary prospectus within four business days of the underwriting agreement being entered into. The new rules provide greater detail and clarity as to the requirements for relying upon this "bought deal" exemption, including with respect to the following:
Upsizing. While the new rules do not permit an issuer to grant the underwriters a unilateral right to upsize a bought deal offering (except pursuant to the exercise of the over-allotment option), the issuer and underwriters may agree, after a bought deal is announced, to increase the size of the offering by up to 100%.
Amendment of terms. Under the new rules, the issuer and underwriters may not amend a bought deal agreement to reduce the number of offered securities or to lower the price unless four business days have passed since the date of the initial commitment.
Termination rights. The new rules permit a bought deal agreement to include a "confirmation clause" that permits the lead underwriter to terminate a bought deal if it is unable to syndicate the deal within one business day of announcement. A bought deal offering may not be conditional upon syndication except during this one day "confirmation period." In addition, a bought deal agreement may not include a "market-out" clause that permits underwriters to terminate a bought deal arrangement due to an unexpected change in market conditions. This is consistent with current market practice.
Receipt. Under the current rules, a bought deal agreement must require an issuer to file and obtain a receipt for a preliminary prospectus within four business days of the date the agreement is entered into. Under the new rules, the preliminary prospectus is required only to be filed (and not necessarily receipted) within that four business day timeframe.
2. Confidential Pre-Marketing of IPOs
The new rules permit issuers, through investment dealers, to "test the waters" for an IPO through confidential communications with accredited investors before the issuer files a preliminary prospectus. This will allow issuers to determine interest in a potential IPO before it launches the IPO process and begins incurring related costs (including, for example, the cost of engaging advisors to perform due diligence and prepare the preliminary prospectus).
Use of this exemption will be subject to certain conditions, including the following:
- All information provided to investors must be approved in writing by the issuer, contain prescribed legends and be marked confidential.
- An issuer must allow for a 15-day cooling off period between the date on which an investment dealer last solicited an expression of interest pursuant to the exemption and the filing of the preliminary prospectus for the IPO.
- An investment dealer acting on behalf of an issuer must (i) obtain written confirmation from each accredited investor it solicits that the investor will keep information about the proposed offering confidential and not use such information for any purpose other than assessing its interest in the investment and (ii) keep a written record of the accredited investors it solicits and copies of the written confirmations described above.
The exemption is not available to a "public issuer" (including a foreign issuer) or any issuer whose securities are held by a control person that is a public issuer if the IPO would represent a material fact or material change for the control person.
Marketing in the Waiting Period
Under the current rules, the only written information issuers and underwriters may disseminate to investors during the "waiting period" between the preliminary prospectus and final prospectus is the preliminary prospectus and a skeletal "prospectus notice" identifying the securities, their price and a contact from whom they will be available for purchase. The new rules permit investment dealers to provide "standard term sheets" and more detailed marketing materials to potential investors once a preliminary prospectus has been filed or, in the case of a bought deal, once the offering has been announced.
Although "road shows" are common practice during the waiting period, the current rules do not provide guidance on whether and how such presentations to investors can be conducted. In addition to expanding the range of marketing materials that can be used during the waiting period, the new rules provide additional guidance with respect to road shows.
1. Standard Term Sheet
Under the new rules, the information that can be included in a "standard term sheet" distributed to potential investors during the waiting period extends beyond what is permitted in a prospectus notice but remains fairly basic (issuer’s name, brief description of the issuer’s business and the offered securities, underwriters’ names, closing date, etc.). In certain cases, including the description of the business and the offered securities, the new rules require that the description be limited to three lines. Among other items, credit rating disclosure cannot be included. All information in the standard term sheet concerning the issuer, the securities or the offering must be disclosed in, or derived from, the preliminary prospectus (or, in the case of a bought deal, the bought deal news release, the issuer’s continuous disclosure record or the subsequent preliminary prospectus). The new rules prescribe a legend containing cautionary language that must be included on the first page of a standard term sheet. Unlike "marketing materials," the new rules do not require a standard term sheet to be incorporated by reference in the prospectus or filed on SEDAR.
2. Marketing Materials
Under the new rules, "marketing materials" include any written communication intended for potential investors that contains material facts relating to the issuer, securities or offering (but does not include a prospectus, a standard term sheet or a prospectus notice). The type of information that can be contained in marketing materials is more extensive than what can be contained in standard term sheets. Their use during the waiting period is, however, subject to certain conditions, including the following:
- Prescribed cautionary language (different than that for a standard term sheet) must be included.
- Except for "comparables" (see below), all information in the marketing materials concerning the issuer, the securities or the offering must be disclosed in, or derived from, the preliminary prospectus (or, in the case of a bought deal, the bought deal news release, the issuer’s continuous disclosure record or the subsequent preliminary prospectus).
- The template version of the marketing materials (i.e., a version of the document with spaces for information to be added, including date, names of investment dealers or underwriters and their contact information) must be approved in writing by the issuer and lead underwriter and filed on SEDAR on or before the day the marketing materials are first provided to potential investors.
- A copy of the preliminary prospectus must be provided along with the marketing materials.
- The filed template version of the marketing materials must be included in or incorporated by reference into the final prospectus. For a prospectus offering in Quebec, this means that any marketing materials will need to be translated into French.
If the marketing materials include "comparables" (information that compares the issuer to other issuers), the issuer may remove any comparables, and any disclosure relating to those comparables, from the template version of the marketing materials before filing it on SEDAR. As a result, such comparables and related information would not form part of the marketing materials incorporated by reference in the final prospectus.
By introducing the concept of "marketing materials," the new rules greatly increase the scope of written communications contemplated to be distributed to potential investors during the waiting period. At the same time, the requirement that such materials be incorporated by reference in the prospectus ensures that such materials attract potential statutory liability in the case of deficient disclosure. Issuers, underwriters and their counsel will need to review any materials to be provided to potential investors to determine in advance whether they are "standard term sheets" or "marketing materials."
3. Road Shows
The new rules define a "road show" as "a presentation to potential investors, regarding a distribution of securities under a prospectus conducted by one or more investment dealers on behalf of an issuer in which one or more executive officers, or other representatives, of the issuer participates." Road shows may be in person, by telephone, over the internet or by other electronic means. The new rules relating to road shows add certain procedural requirements to this common practice. In particular:
- Subject to certain exceptions, all written materials shown to potential investors at a road show will be considered to be marketing materials and must comply with the new rules relating to marketing materials (including the rule that marketing materials must be filed on SEDAR and incorporated by reference in the prospectus).
- The investment dealer must establish certain administrative procedures to track attendance at road shows and ensure that each attendee is provided with a copy of the preliminary or final prospectus.
- If any non-accredited investors are in attendance, the investment dealer must commence the road show by reading a prescribed cautionary statement that the roadshow will not contain full disclosure of all material facts and encouraging the investors to consult the prospectus.
Subject to certain conditions, exceptions from the requirement to incorporate road show marketing materials by reference into the final prospectus are available for cross-border offerings in respect of which the underwriter reasonably expects the securities will be sold primarily in the United States. The template version of such materials, however, must be delivered to the applicable Canadian securities regulator or regulators on a confidential basis. In addition, the issuer and the underwriters who sign the Canadian prospectus must assume liability for any misrepresentation in those materials through a contractual right of action provided to each Canadian investor to whom such road show materials are provided.
While these exceptions eliminate certain inconsistencies between U.S. and Canadian securities laws, significant differences continue to exist. Issuers and underwriters conducting cross-border offerings must carefully structure their offerings to comply with both U.S. and Canadian securities laws.
Marketing After the Waiting Period
While the current rules do not regulate marketing activities following the issuance of a receipt for the final prospectus, the new rules provide that the waiting period rules also apply to post-final receipt financing (for example, shelf and PREP offerings). In IPOs and short form prospectus offerings, where the distribution period tends to be quite short and marketing after the waiting period is unlikely to be necessary, this regulation will likely not have a significant impact on the current practices of issuers. However, issuers and underwriters engaged in shelf and PREP prospectus offerings will be subject to the new rules with respect to standard term sheets, marketing materials and road shows described above.
Commencement of a Distribution
The companion policy to the new rules also provides guidance as to when a distribution of securities has commenced, at which point an issuer or investment dealer may not engage in discussions with potential investors regarding a possible offering of securities, except in accordance with the prospectus requirements, and the exceptions for pre-marketing and marketing described above.
According to the companion policy, a distribution has commenced when an investment dealer has had discussions with an issuer or selling security holder of "sufficient specificity" that it is reasonable to expect that the dealer will propose to the issuer or selling security holder an underwriting of those securities. Under the companion policy, "sufficient specificity" may exist where (i) an investment dealer provides the issuer with a document outlining possible prospectus financing scenarios at one or more specified security price ranges, the directors of the issuer provide management with authority to proceed within that price range and the dealer is advised of that approval or (ii) an investment dealer advises an issuer that the market looks favourable for a potential offering and that the dealer will likely provide indicative terms later that day. The companion policy expressly rejects the position that an engagement letter or indicative terms for a proposed offering must be provided to an issuer before a distribution will be deemed to have commenced. The policy also states that the mere rejection of a proposal by an issuer does not terminate a distribution and indicates that an investment dealer should not resume communications with potential investors until after a cooling-off period (of unspecified length) has passed.