Significant Liberalization of Canadian Pre-Marketing Rules
|Area||Corporate Finance and Securities|
Canadian securities regulators have adopted new rules which significantly broaden the scope of permissible marketing activities for prospectus offerings in Canada. The rules broaden the range of marketing activities even more than the initial proposals (outlined in our January 26, 2012 Update, Significant Changes Proposed to the Rules Governing Prospectus Offerings in Canada). The new rules also reflect, and provide guidance on, well-developed practices in securities offerings, and clarify regulatory perspectives on questions and issues concerning offering processes that have been clouded with uncertainty.
Highlights of the Rule Changes
Testing of the waters exemption for IPO issuers
The new rules will allow issuers to gauge potential interest in an initial public offering (an “IPO”) before initiating an IPO process, which can be expensive and time-consuming. Non-publicly traded issuers (other than subsidiaries of publicly-traded entities) will be permitted to “test the waters” by having one or more investment dealers measure the appetite of accredited investors (being investors who meet the criteria to make private placement investments) for investment in an IPO, subject to obtaining the potential investors’ commitments to maintain confidentiality and not to misuse the information about the proposed offering and other limited procedural requirements. This rule change will help issuers avoid spending time and resources on IPOs when there is insufficient demand.
The bought deal exemption
The new rules also clarify the requirements for relying on, and in so doing significantly expand the flexibility of, the “bought deal exemption,” which is a long-standing exception to the general rule that marketing of an offering cannot occur until the preliminary prospectus is filed. In a “bought deal,” expressions of interest can be solicited before the filing of the preliminary prospectus where the underwriters are prepared to commit to the offering at an agreed price. Historically, there has been uncertainty about the limits of the bought deal exemption; the new rules directly address those historical questions.
Under the new rules, a bought deal offering can be increased in size by up to 100%; however, the agreement between the issuer and the underwriters cannot include an upsizing option. In other words, the underwriters making the investment commitment that underpins the “bought deal” cannot have the contractual right to increase the size of the deal (and therefore cannot game the process with a reduced initial commitment and the right to increase the size if there is interest), but if there is sufficient demand and the underwriters and the issuer agree, the offering can be increased and even doubled.
The new rules address questions about the involvement of other underwriters after an initial “bought deal” commitment is made. Under the new rules a bought deal commitment can be subject to confirmation, in order to give the lead investment dealer(s) one business day to involve other underwriters (or “syndicate” the offering). In transactions with a confirmation clause the lead dealer(s) would have to give notice on the next business day either confirming the bought deal or advising that it has been terminated. The rules prohibit any condition relating to syndication of the commitment other than a confirmation right as described. This rule provides significant clarity to the longstanding practice of underwriter confirmations of bought deals.
The new rules also clarify, and further expand the flexibility of, the bought deal exemption in other ways, including:
- acknowledgement that bought deal agreements can be amended to provide for new or additional classes of securities;
- permission for the withdrawal or amendment (to reduce price or size) of bought deals, provided any such withdrawal or change is not before the fourth business day after the original deal; and
- caution about bought deal commitments with inappropriate conditionality, such as regulatory conditions where the timetable for prospectus clearance with the securities regulators is aggressive, and due diligence conditions.
Use of term sheets and marketing materials
Unlike the current framework, which essentially limits the documentation that can be used in marketing an offering to the preliminary and final prospectus, the new rules contemplate the use of both term sheets and other marketing materials.
The content of term sheets (other than prescribed cautionary language and contact information for the underwriters) will be limited to certain basic information about the issuer and the offering, such as brief descriptions (limited to three lines) of the business and the securities, and information concerning the terms of the proposed offering and the use of proceeds, all of which must be based on or derived from disclosure included or incorporated by reference in the preliminary prospectus (or, in the case of a bought deal, in the bought deal news release). Term sheets will not have to be publicly filed.
The new rules also permit delivery to prospective investors of marketing materials with more detailed information than the limited amount that can be included in term sheets. Except as noted below, marketing materials will need to be publicly filed (and re-filed, together with a blackline, if information in a subsequent prospectus document is not consistent). Marketing material disclosures will have to be included, or incorporated by reference into, the issuer’s prospectus, meaning that there will be statutory civil liability for misrepresentations in marketing materials. The exception is for marketing material disclosure about “comparables,” which compares the issuer to other issuers. Comparables can be excluded from the publicly-filed marketing materials, and need not be included in the issuer’s prospectus, provided that certain elements of cautionary disclosure are provided about comparables in the marketing materials and the issuer files a copy of the full marketing materials (including the comparables information) with the regulators on a confidential basis. Other than the comparables (and underwriter contact information), all of the disclosure in the marketing materials must be based on, or derived from, the issuer’s prospectus disclosures.
Parallel rules apply to marketing initiatives after the filing of the final prospectus (for example, for a drawn-down under a shelf prospectus, or an offering under the PREP procedures).
Unlike the original proposals, the new rules do not restrict attendance at road shows to specified classes of potential investors. The rules applicable to road shows:
- treat written material provided at a road show as “marketing material,” subject to the rules applicable to such material as described above; and
- require that an investment dealer inquire about the identity of each attending potential investor, keep a written record of all attendees, and provide each attendee with a copy of the preliminary or final prospectus.
In some jurisdictions, ministerial approvals are required to implement the new rules. The Canadian Securities Administrators have advised that, if all such approvals are obtained, the new rules will take effect on August 13, 2013.
The full text of the amendments and related policies is publicly available, including at:
Please contact any member of our Corporate Securities Group to discuss the implications of the new rules.