Proposed amendments to prospectus marketing rules: use of term sheets during and after the waiting period

February 21, 2012

As we discussed in a post last year, the Canadian Securities Administrators (CSA) proposed amendments on November 25, 2011 intended to expand the scope of marketing activities that can be conducted in connection with prospectus offerings. This is our second in a series of posts on the subject. Our first considered the new "testing the waters" exemption for IPOs.

Once a preliminary prospectus has been filed and receipted (starting the “waiting period”), Canadian securities laws currently expressly permit only for the distribution of the preliminary prospectus or the solicitation of expressions of interest from prospective purchasers provided that, prior to making the solicitation or forthwith after the purchaser indicates an interest in purchasing, a copy of the preliminary prospectus is provided. The distribution of communications such as notices, circulars, advertisements or letters is also permitted. However, in addition to identifying the person from whom a copy of a preliminary prospectus may be obtained, such communications may only identify the security proposed to be issued, its price (if then determined), and the name and address of the person from whom the securities may be purchased.

The proposals endeavour to expand the scope of written communications that are expressly permitted by creating a new exemption to allow for the provision of terms sheets to potential investors (both during and after the waiting period). The Proposed Rule defines a “term sheet” as a written communication regarding a distribution of securities under a prospectus that contains information on the issuer or the securities, but does not include a prospectus or the type of notice, circular, advertisement, letter or other communication referred to above. According to the CSA, a term sheet may benefit investors by providing an initial “snap shot” of certain terms of the offering without compromising investor protection given the conditions that accompany this exemption.

Term Sheet Contents

In order to rely on the exemption, the disclosure contained in the term sheet is required to be “fair, true and plain.” This is a different standard than the “full, true and plain” standard that applies to the contents of a prospectus. The CSA advise in the proposed amendments to the Companion Policy to NI 41-101 that they would consider a term sheet to meet this standard if it is honest, impartial, balanced and not misleading, does not give undue prominence to a particular fact or statement in the prospectus and does not contain promotional language. In addition to meeting this standard, all information concerning the securities that is set out in the term sheet must be disclosed in the prospectus (other than contact information for the dealer). It is permissible, however, to summarize information from the prospectus or to include graphs or charts based on numbers in the prospectus. In this respect, the CSA note in the proposed Companion Policy to NI 41-101 that if an investment dealer wanted to include information in a term sheet that compares the issuer to other issuers (“comparables”), it could only do so if that information was also disclosed in the prospectus and therefore subject to prospectus liability. They also advise that information regarding comparables that is included in the prospectus should be accompanied by appropriate cautionary and risk factor language so that the prospectus does not contain a misrepresentation. A term sheet would also continue to be subject to other securities laws restrictions and requirements relating to advertising and promotional disclosure, such as prohibited representations regarding resales or the future value of the securities.

Additional requirements include that the term sheet must be dated, contain the same cautionary language as the face page and prospectus summary, and include prescribed cover page disclosure advising that the term sheet relates to the prospectus, a copy of the prospectus is required to be delivered with it and that the prospectus should be read as the term sheet does not provide full disclosure of all material facts, etc.

The term sheet itself must be incorporated by reference into the final prospectus (or will be deemed to be) and if its contents are modified or superseded by a statement contained in the final prospectus, the prospectus must indicate that such content is not part of the final prospectus and explain how the content in of the term sheet has been modified or superseded. The contents of a term sheet would be subject to prospectus liability as the term sheet would be incorporated by reference into a prospectus, however it would also be subject to secondary market civil liability as it would be required to be filed on SEDAR.

Procedural Requirements

The proposed amendments impose new procedural requirements in connection with the use of terms sheets as well. Notably, the term sheet must be approved in writing by the issuer and the underwriters and filed on SEDAR prior to being used. The proposed Companion Policy to NI 41-101 states that the lead underwriter may obtain this approval from the issuer and other underwriters in the syndicate by return email and the members of the syndicate may authorize the lead underwriter to approve the term sheet on their behalf. The CSA advise that a term sheet filed on SEDAR would generally be made public within one business day of being filed and while regulatory staff may review filed term sheets (and delay “clear for final” status for that purpose), term sheets will generally not be pre-cleared. Dealers must provide a copy of the prospectus together with the term sheet (and can only provide it in a local jurisdiction if a receipt for the preliminary or final prospectus was issued in that jurisdiction), and the issuer must distribute a revised term sheet to any purchaser who received the original term sheet and purchased securities under the prospectus if the final prospectus modifies a statement of a material fact that was contained in the original term sheet.

Green Sheets

While dealers would still be permitted to prepare summaries of the principal terms of an offering for distribution to their registered representatives, any such “green sheet” that is distributed to the public would be a “term sheet” under the proposed amendments and would therefore be subject to proposed requirements applicable to term sheets. The CSA caution that including material information in a green sheet or other marketing communication that is not contained in the prospectus could indicate a failure to provide full, try and plain disclosure in the prospectus.

This exemption permits term sheets to be provided once a preliminary prospectus has been receipted, and with applicable modifications, to the provision of term sheets after a final prospectus or final base shelf prospectus has been receipted. A more limited exemption is also proposed to allow for terms sheets to be provided to “permitted institutional investors” during the “pre-marketing” period in connection with bought deals.

Stayed tuned for the next installment in our series of posts about the CSA's proposals to amend NI 41-101, where we'll look at road shows during and after the waiting period.

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