Pre-Marketing and Marketing Amendments to Prospectus Rules

On May 30, 2013, the Canadian Securities Administrators published the final form of certain amendments to the prospectus pre-marketing and marketing regime in Canada. The amendments were first proposed by the CSA in November 25, 2011 (see the November 2011 Wildeboer Dellelce Client Update) and set out modifications to the prospectus pre-marketing and marketing regime in Canada for issuers other than mutual funds and investment funds filing a prospectus on Form 41-101F2 Information Required in an Investment Fund Prospectus or Form 41-101F3 Information Required in a Scholarship Plan Prospectus.

Provided all necessary ministerial approvals are obtained, the amendments will come into force on August 13, 2013.

Summary of Changes to the November 2011 Proposals

Testing of Waters Exemption for IPO Issuers

The amendments include a limited exemption from the restriction against pre-marketing of prospectus offerings to allow issuers to determine demand for a proposed initial public offering.

• The November 2011 proposals provided that due to insider and tippee trading concerns, the testing of the waters exemption for issuers planning to conduct an initial public offering (IPO Issuers) would not be available to IPO Issuers that are already public companies in a foreign jurisdiction. In response to comments raised regarding insider and tippee trading concerns in relation to the use of the testing of the waters exemption by an IPO Issuer that is the subsidiary of a public company, the CSA have revised the amendments to National Instrument 41-101 General Prospectus Requirements to specify that the testing of the waters exemption for IPO Issuers cannot be used for an issuer if:
• any of the issuer’s securities are held by a control person that is a public issuer, and
• the initial public offering would be a material fact or material change with respect to the control person.

The November 2011 proposals also limited the class of persons who may be solicited under the testing of the waters exemption to “permitted institutional investors”. After considering the comments raised in respect of the November 2011 proposal, the CSA have revised the amendments to NI 41-101 to broaden the class of persons who may be solicited under the testing of the waters exemption to include all accredited investors.

In addition, the CSA have revised the amendments to NI 41-101 to prohibit solicitation under the testing of the waters exemption for a period of 15 days before the filing of the preliminary prospectus for the initial public offering, indicating the prohibition supports the policy rationale underlying the exemption (i.e., to assess interest in a potential initial public offering before incurring costs relating to the offering).

The CSA have also revised the amendments to NI 41-101 to clarify that any materials used by a dealer to solicit an expression of interest from an investor under the exemption must be approved in writing by the issuer.

Last, the CSA have also included companion policy guidance to remind investment dealers and accredited investors that they should not use information obtained under the testing of the waters exemption in a way that may be considered abusive and to clarify certain matters relating to the testing of the waters exemption for IPO Issuers. Specifically, the companion policy:

• clarifies that the exemption may be used at the same time by more than one investment dealer in respect of the same issuer, provided that the issuer has authorized each dealer in accordance with the conditions of the exemption,
• reminds issuers, dealers and accredited investors that selective disclosure concerns would arise if accredited investors were provided with material facts that are not disclosed in the subsequent preliminary prospectus for the initial public offering, and
• reminds issuers and dealers that the purpose of the exemption is to see if there is enough interest before initiating the initial public offering process and incurring costs, rather than to pre-sell the offering.

As with the November 2011 proposals, the testing of the waters exemption will be subject to certain conditions to ensure confidentiality and reduce the risk of conditioning the market, including:

• Before providing an accredited investor with information about the proposed offering, the investment dealer must ask the accredited investor to confirm in writing that it will keep the information confidential until the earlier of: (i) the information being generally disclosed in a preliminary long form prospectus or otherwise, or (ii) the issuer confirming in writing that it will not be pursuing the potential offering.
• The issuer relying on the exemption must keep a written record of any investment dealer that it authorized to act on its behalf in making solicitations in reliance on the exemption and a copy of any written authorization.
• An investment dealer that relies on the exemption must keep a written record of any accredited investor that it solicited and a copy of the above-noted correspondence with the investor.

Bought Deal Exemption

The November 2011 proposals provided for the enlargement of bought deals up to a specified percentage. After considering the comments received, the CSA have revised the amendments to National Instrument 44-101 Short Form Prospectus Distributions to allow bought deals to be enlarged up to 100% of the size of the original offering.

Enlarging bought deals

The CSA have not retained the provision in the November 2011 proposals that would prohibit a bought deal from being enlarged if doing so “is the culmination of a formal or informal plan to offer a larger number of securities under the short form prospectus devised before the execution of the original agreement”. Instead, the amendments to NI 44-101 now specify that a bought deal agreement may not contain an upsizing option, the CSA indicating that they believe that these revisions will prevent abuse of the bought deal exemption, but will still enable issuers to benefit from increased demand for the offering.

Enlarging or reducing bought deal syndicates

The November 2011 proposals also contained a prohibition against adding a new underwriter to a bought deal syndicate if doing so was “the culmination of a formal or informal plan to add that underwriter devised before the execution of the original agreement”. The CSA have revised the amendments to NI 44-101 to both remove the prohibition and to specify that a bought deal agreement must not be conditional on syndication (except for confirmation clauses, discussed below), although the parties can add or remove an underwriter or adjust the number of securities to be purchased by each underwriter on a proportionate basis, provided that certain conditions are met.

Confirmation clauses

The CSA have revised NI 44-101 to provide that a “confirmation clause”, defined to mean “a provision in a bought deal agreement that provides that the agreement is conditional on the lead underwriter confirming that one or more additional underwriters has agreed to purchase certain of the securities offered”, will only be acceptable in certain circumstances if, among other things:

• The lead underwriter provides a signed bought deal agreement to the issuer and the issuer signs it on the same day.
• On the following day, the lead underwriter provides a notice to the issuer either confirming the bought deal or advising that the bought deal has been terminated. If the bought deal is confirmed, the issuer must file a news release announcing the bought deal.

The CSA have maintained the requirement in NI 44-101 that the preliminary prospectus for a bought deal must be filed within four business days after the date a bought deal agreement is entered into. However, the revised amendments to NI 44-101 do not require the issuer to obtain a receipt for the prospectus on the fourth day.

Withdrawing or amending bought deals to provide for a lower price or smaller offering

Indicating that the CSA have become aware of a number of cases where bought deals have been either withdrawn or amended to provide for a lower price per share or a smaller offering, the CSA have revised the amendments to NI 44-101 to prohibit such an amendment to a bought deal agreement until the fourth business day after the bought deal was entered into. The CSA have also added companion policy guidance providing further details regarding the regulatory concerns of the CSA in respect of such amendments. The companion policy guidance also indicates that the bought deal rules do not prevent a party to a bought deal agreement from exercising a termination right set out in the agreement if: (i) another party or person performs, or fails to perform, certain actions, or (ii) certain events occur or fail to occur.

Regulatory and due diligence outs

Noting that a practice has developed in which underwriters will require in a bought deal agreement or a more extended form of underwriting agreement that the issuer obtain a receipt for the final prospectus within a short period of time after the first comment letter relating to the preliminary prospectus is issued by staff of the principal regulator, the CSA have included companion policy guidance regarding the use of regulatory outs in bought deal agreements and more extended forms of underwriting agreements. The CSA have also included companion policy guidance regarding the use of due diligence outs in bought deal agreements and more extended forms of underwriting agreements, and their concerns around this practice.

Marketing materials

The CSA have revised the amendments to NI 44-101 to broaden the class of persons who may receive bought deal marketing materials before the receipt of a preliminary prospectus to include any investor. The November 2011 proposals indicated that these materials could only be given to “permitted institutional investors” (as defined in the November 2011 proposals).

The CSA have also revised the amendments to provide that an investor who received marketing materials in relation to a bought deal need only receive a copy of the preliminary prospectus if, in response to the solicitation, the investor expressed an interest in acquiring the securities.

Bought deal road shows

The CSA have revised the amendments to include provisions for road shows after the announcement of a bought deal but before the filing of a preliminary prospectus. In this regard, the amendments relating to marketing materials for bought deals generally apply to marketing materials used in connection with road shows for bought deals.

Overnight marketed deals

Last, in respect of “overnight marketed deals” being conducted as an alternative to bought deals, the CSA have included companion policy guidance setting out the process that is typically followed in an overnight marketed offering.

Standard Term Sheets and Marketing Materials

Standard term sheets

The CSA have revised the amendments to distinguish between “standard term sheets” and “marketing materials”. With respect to standard term sheets, the amendments now provide for the following:

• Standard term sheets can only contain limited information in respect of an issuer, securities or an offering, as prescribed by the rule amendments.
• Standard term sheets must contain a prescribed legend (or words to the same effect) with cautionary language.
• Generally, other than contact information for the investment dealer or underwriters, any information in a standard term sheet concerning an issuer, securities or an offering must be disclosed in, or derived from, the relevant prospectus. However, if the offering is a bought deal, the information must be disclosed in, or derived from, the bought deal news release or the issuer’s continuous disclosure record on SEDAR, or the subsequent preliminary prospectus.
• Standard term sheets will not have to be filed on SEDAR or included or incorporated by reference in the relevant prospectus. As a result, standard term sheets will not be subject to civil liability, though the CSA have noted that standard term sheets will be subject to the existing statutory prohibitions on misleading or untrue statements.

Marketing materials

The CSA have indicated that the amendments relating to marketing materials are intended to apply to situations where issuers and investment dealers would like to provide investors with information that is more detailed than the limited information that can be contained in a standard term sheet. Marketing materials will generally be subject to the same conditions in the November 2011 proposals relating to “term sheets”, with certain revisions as follows:

•  The CSA have replaced the proposed definition of “term sheet” in NI 41-101 with a definition of “marketing materials”, defined as a written communication intended for potential investors regarding a distribution of securities under a prospectus that contains material facts relating to an issuer, securities or an offering. The definition of marketing materials excludes a prospectus or any amendment, a standard term sheet, a preliminary prospectus notice and a final prospectus notice.
• The CSA have also added companion policy guidance to clarify that marketing materials would not include a cover letter or e-mail that merely encloses a copy of a document such as a prospectus, a standard term sheet or marketing materials.

Comparables

The November 2011 proposals provided that comparables could only be given to permitted institutional investors (as defined in the November 2011 proposals) in the absence of civil liability. Based on the comments received, the CSA have made the following revisions:

• The CSA have defined comparables to include information that compares an issuer to other issuers.
• Comparables can be provided to any investor (i.e., institutional, accredited or retail) in marketing materials (including marketing materials provided in connection with a road show).
• Comparables will not be subject to civil liability, provided certain conditions are met. Specifically, the amendments provide that: (i) comparables can be removed from any version of marketing materials that is filed on SEDAR, and (ii) the relevant prospectus need only include, or incorporate by reference, the version of the marketing materials with the comparables removed. While not subject to statutory civil liability in these circumstances, the CSA have noted that comparables will be subject to statutory prohibitions on misleading or untrue statements.

Approval and filing of marketing materials

The revised amendments now require that before they are used, marketing materials must be approved in writing by the issuer and the lead underwriter, rather than all of the underwriters, and allow for the approval and use of a template form for marketing materials that would permit the addition of certain non-substantive information, without requiring subsequent approvals, into a limited-use version of the marketing materials. Where a template version of marketing materials that has been approved by the issuer and lead underwriter and has been filed is divided into separate sections, an investment dealer may provide a limited-use version of the marketing materials that includes only one or more of those sections.

The revised amendments now require that marketing materials (with comparables removed) be filed on SEDAR on the same day they are first used, rather than before they are used, and indicate that if a template form of marketing materials is filed, an investment dealer may make non-substantive changes to the template in a limited-use version of the marketing materials without filing the revised document.

Fair, true and plain requirement

The CSA have not retained the “fair, true and plain” requirement for marketing materials that was included in the November 2011 proposals. While marketing materials will not be subject to an express standard, the CSA have included companion policy guidance indicating that marketing materials are subject to provisions in securities legislation which prohibit misleading or untrue statements. In addition, the CSA have noted that the template version of the marketing materials must be included or incorporated by reference in the relevant prospectus and, accordingly, will form part of the prospectus document that is subject to the full, true and plain standard.

Permitted information

The CSA have revised the amendments to clarify that, other than contact information for the investment dealer or underwriters and any comparables, all information in marketing materials used in connection with an offering other than a bought deal must be either: (i) disclosed in the relevant prospectus, or (ii) derived from the relevant prospectus.

Where the offering is a bought deal, the amendments provide that, other than contact information for the Investment dealer or underwriters and any comparables, all information in the marketing materials must be disclosed in, or derived from: (i) the bought deal news release, (ii) the issuer’s continuous disclosure record on SEDAR, or (iii) the subsequent preliminary prospectus that is filed on SEDAR.

Road Shows

The November 2011 proposals contained separate requirements for road shows for permitted institutional investors and road shows for retail investors. The CSA have revised the amendments to include provisions that apply to all road shows, rather than distinguishing between the requirements applicable to road shows based on who can attend.

Bought deal road shows

The revised amendments also include road show provisions for bought deals. Marketing materials provided in connection with a road show for a bought deal are subject to the same conditions as other marketing materials for bought deals.

Materials provided at a road show

The revised amendments now:

• refer to “marketing materials” rather than “written material” provided at a road show,
• remove the requirement for investment dealers to restrict copying of materials provided at a road show,
• clarify that the road show provisions will generally only apply to written marketing materials used in connection with a road show, rather than oral statements, and
• include companion policy guidance regarding oral statements made at a road show.

Requirements for investment dealers

The revised amendments provide that an investment dealer conducting a road show must now establish and follow reasonable procedures to: (i) ask any investor attending the road show in person, by telephone conference call, on the internet or by other electronic means to provide their name and contact information, (ii) keep a record of any information provided by the investor, and (iii) provide the investor with a copy of the relevant prospectus.

Cautionary language

The CSA have revised the amendments to only require that a cautionary statement be read at the beginning of a road show if the investment dealer conducting the road show permits investors, other than accredited investors, to attend the presentation. The CSA have also shortened the prescribed language and indicated that the statement made at the road show can be a statement that is to the same effect as the prescribed language.

Permitted attendees

The CSA have removed the November 2011 proposals restrictions on who can attend a road show and have also revised the amendments to clarify that members of the media can attend road shows in their capacity as members of the media, rather than only as potential investors.

Road shows for certain U.S. cross-border prospectus offerings

In the notice that was published as part of the November 2011 proposals, the CSA indicated that issuers in U.S. cross-border initial public offerings would no longer have to apply for an order to conduct internet road shows in connection with such offerings. Based on comments indicating that issuers in U.S. cross-border offerings may not want to file marketing materials provided in connection with a road show on SEDAR due to concerns regarding potential class action lawsuits in the United States, the CSA have revised the amendments to provide an exception for issuers in certain U.S. cross-border prospectus offerings from the requirements to file the marketing materials on SEDAR and the requirement to include or incorporate the marketing materials in the final prospectus. The CSA have indicated that this is intended to be a limited exception and is to be subject to the following conditions: (i) the U.S. cross-border prospectus offering must be primarily intended to be sold in the United States, (ii) the issuer and underwriters must provide a contractual right of action to any investor who viewed the marketing materials, in the event that the marketing materials contain a misrepresentation, which contractual right of action must be disclosed in the prospectus, and (iii) a copy of the marketing materials must be confidentially delivered to securities regulators on SEDAR. The CSA have also provided companion policy guidance clarifying that the exception does not apply to marketing materials relating to the U.S. cross-border offering other than the marketing materials provided in connection with the road show.

Marketing After a Receipt for a Final Prospectus

The November 2011 proposals contained provisions prescribing when investment dealers could provide term sheets (now marketing materials) and conduct road shows after a receipt for a final prospectus and a final base shelf prospectus. Where the CSA have made changes to the conditions for marketing materials and road shows during the waiting period, the CSA have generally made the same changes for marketing materials and road shows after the receipt of a final prospectus, with certain accommodations for offerings pursuant to a draw-down under a final base shelf prospectus or an offering under the PREP procedures.

Shelf prospectuses

All information in standard term sheets (other than contact information for the investment dealer or underwriters) and marketing materials (other than contact information for the investment dealer or underwriters and comparables) for a draw-down under a final base shelf prospectus must: (i) currently be disclosed in, or derived from, the final base shelf prospectus, any amendment to the final base shelf prospectus or an applicable shelf prospectus supplement that has been filed, or (ii) later be disclosed in, or derived from, an applicable shelf prospectus supplement that is filed.

Base PREP prospectuses

All information in standard term sheets (other than contact information for the investment dealer or underwriters) and marketing materials (other than contact information for the investment dealer or underwriters and comparables) after the receipt for a final base PREP prospectus must: (i) currently be disclosed in, or derived from, the final base PREP prospectus, the supplemented PREP prospectus or any amendment that has been filed, or (ii) later be disclosed in, or derived from, the supplemented PREP prospectus that is filed.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.