Prospectus General Rule – Securities Regulation

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*Governed by NI 41-101 general requirements and 44-101 for short-form prospectus.

Two principle requirements of a prospectus under OSA:

  1. Prospectus must provide full, true and plain disclosure of all material facts (s. 56(1))
  • Not just a question of covering what is on a list, securities lawyers must decide what else needs to be included in order to meet this requirement, technical fulfillment of the statue is not sufficient – must not be misleading

A prospectus is a document that must be given to persons to whom securities are distributed. It is the document that is intended to provide information relevant to assessing the value of the securities.

2) Must comply with the requirements of the Securities Act (including 56, 58, 59) -Includes OSA, OSA regulation, OSC rules and the OSC director.

Section 56: (1) Full, true and plain disclosure and complying with all requirements of Ontario securities law; (2) Must also include any financial reports, statements or other docs required by the Act or regulations

Section 58(1) Issuer Certificate (signed by CEO, CFO and two directors that aren’t CFO/CEO, and any promoter of the issuer) – certifies prospectus is true

Section 59(1) Underwriter certificate (signed by any/all UWs in a contractual relationship with the issuer or selling securityholder distributing securities through the prospectus) – UW also certifies prospectus is true

• Note: can have 2 days to change your mind in securities law

  1. Misrepresentation

Misrepresentation- s.1(1): means (a) untrue statement of material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made.

If there is a misrepresentation, you can sue everyone involved (corp, directors, officers, underwriters). Very high bar – very diff to know if you’ve missed something.

Policy: Should tell everyone everything they need to know to make informed investment decisions

Recall when a prospectus is required

  1. Does the transaction involve a “security”?
  2. Does the transaction involve a “trade”?
  3. Does the “trade” in the “security” constitute a “distribution”?

Rule (s. 53 of the OSA): “No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company where such a trade would be a distribution of such security, unless a preliminary prospectus and a prospectus have been _ filed and receipts therefore obtained _ from the Director”,

  1. Dual Functions of a Prospectus: Selling + Liability Document
  2. Selling Document: Sec Act ensures regulator’s mandate of investor protection by saying only doc you can use to sell sec is the prospectus, can’t advertise in any meaningful way, can’t have fancy brochures, billboards, etc.
  3. Liability Document: Will need a lot of $, so client will want to be successful/shed the company in its most favourable light. Thus, regulator makes sure there is sig liability associated with a misrep (misstatement of a material fact/ omission)

Tension between 2 purposes (reckless selling v being too careful): You as a lawyer cannot allow client to recklessly sell in light of the prospectus (they’ll get sued), but you also can’t go so far to protect yourself/your client that you have a document that no one will buy securities with.

  • Obviously natural tension b/w the prospectus as a selling doc and prospectus as a liability document

o *Practice Note: Lawyers often spend too much time protecting themselves: You can’t legislate every eventuality, if you try, you won’t have a deal or you’ll have an unworkable document, or both

o What makes it challenging is not rules/what has to go in it, but how you properly strike that balance b/w assisting your client in prepping a document that is sufficiently comfortable to sell the securities and sufficiently comfortable to protect your client against liability (Judgment call)

  • Biggest ex of this tension (and of liability for both sides) is financial forecasts (see below)
  1. National Instrument 51-102 – Policy on future oriented financial statements in the prospectus

Per NI 51-102: no prospectus ever has to put future oriented financial info in it. The choice is always the business’ BUT (1) if you don’t put it in, you cannot talk about the future anywhere else; and (2) if you do put it in your prospectus you have to comply with national instrument 51-102 for disclosure Steps per NI 51-102:

  1. Company should not be disclosing forward-looking information unless it has a reasonable basis for that information
  2. A company must disclose in its prospectus that the information is forward-looking (this is a forecast), must caution users that actual results may vary, and identify material risks that could cause it to vary
  3. Forecast in prospectus has to state material facts/assumptions that were used in making the forecast
  4. Has to identify the method the company will use to update that forward looking information

a. As time passes, that forward looking info comes to be, if it’s off, has to be updated ^ must review it regularly for changes.

  1. A prospectus forecast must be updated between preliminary prospectus and final prospectus History:
  • Prior to 1982, OSC said none of us can predict the future and it’s too dangerous to let companies try, and investors will be hurt (outlawed) ^ Example of regulator “being a bad lawyer” (overly cautious)
  • Investors were unhappy ^ Protecting so much that you’re making us vulnerable, we want to know what the company thinks about the future since that’s the purpose of us buying the securities (taking away an important fact that we need to make an educated investment decision, so let us at least see what company thinks)
  • Come out with provisions in National Instrument 51-102 for financial forecasts

Financial Forecasts:

Two types of data forming financial forecasts: (1) Forecast (written estimate of most probable result of operations of a company for some pt in the future); (2) Projection (estimate of results that follow any set of reasonable assumptions)

  1. Forecast: Written estimate of the most probable result of operations of a company for some point in the future
  • e.g. four seasons hotel – how it’s going to do in 2013 (making assumptions) ^ if you assume that interest rates next year could be anywhere between 2 and 4%, but most probably, they’ll be 3%, use 3.
  1. Projection: Estimate of results that follow any set of reasonable assumptions -the assumptions always have to be reasonable but unlike a forecast they have to be the most probable, they just have to be reasonable. Reasonableness is left up to reader. (e.g. int rates could be b/w 1-3%, I use 3)
  • The only time you can use a projection vs. forecast is if it’s unreasonable to require you to do a forecast

Only where issuer is engaged in business w/ less than 24 months relevant operating history and must be accompanied by cautionary note about potential variance.

Difference is in assumptions:

  • In a forecast, company is bound to use what it believes to be the MOST PROBABLE assumptions
  • With Projection, always has to be REASONABLE, but the reasonableness of those assumptions are left to reasonableness/probability
  • Policy: Recognize tension between prospectus as selling document and prospectus as liability document -do not err on EITHER side -don’t be too hard and don’t be too soft, just be right

Policy Notes:

  • Tension: Need to include some information about future (make it attractive to investors), but not share too much to reduce likelihood of liab for misrepresentation (including omissions)

o The Form does not tell you that you need to put in financial forecasts, it’s optional. But if you put in forecasts, you have to comply with the law (National Policy 48). (and will probably want one, makes it more likely to sell if you can forecast good results)

  • Practice note: Just have to be right , but hard to do this -hard to harness your client because client can legitimately believe that the future for the business is great but you need to educate client that the marketplace understands the liability attached and understands that people are going to be more cautious in their predictions of the future then they would be if wasn’t projection process. They also understand what this is, and that there ought to be some discipline on the sale process.
  • Credibility: Companies shouldn’t spend their whole lives worried about being sued, but even so, credibility in the market place is extremely important

o You don’t get a second chance to make a first impression – so don’t be cavalier (even if you’re bullet proofed against being sued) – people are investing, they remember what it says, if it’s accurate = increases your credibility. If it’s wrong, hurts you. You won’t recover if you miss every quarter and keep updating your forecast ^ BE CAUTIOUS ABOUT PREPARATION

  • Find a happy medium: It’s better to under-reach future financial performance then to oversell and perform short of the future numbers.

o But also don’t want to be too negative, or no one will buy securities.

Note on FOFI (from text)

  • The information in a prospectus generally consists of verifiable existing facts.
  • Although future-oriented information may be quite valuable to investors attempting to assess potential future cash flows from a security, predictions about the future may be prone to abuse (and therefore, this is regulated ^ protecting investors)
  • It include information about prospective results of operations, financial position, or changes in financial position based on assumptions about future economic conditions and courses of action taken by the issuer
  • Note on proving unreasonableness: hard to prove that the information constituted misrepresentation later, since it would require showing that assumptions on which it was based were unreasonable at the time they were made ^ there is scope for overly optimistic projections)
  1. Full, True and Plain Disclosure of All Material Facts

Requirement for Full, true and plain disclosure: Section 56(1): A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law.

Definition of Material Fact: Section 1(1): Material Fact: When used in relation to securities issued or proposed to be issued, means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities.

*note that a Material Fact and Material Change are different!!!!!

If a Material Change Occurs, Amendment Required – 57(1): If there is a MATERIAL CHANGE after receipt is obtained for preliminary prospectus, and before receipt for final OR after receipt for final is obtained but prior to completion of distribution, amendment must be filed as soon as is practicable, and IN ANY EVENT, within TEN days of the change

Danier Leather SCC

Implications: Example of how to deal with forward-looking info. A forecast DOES have an implied representation of reasonableness, but that’s all -just has to be reasonable.

A change in a material fact does NOT have to be disclosed following the filing of the prospectus (only a material change)

Facts: lawsuit to SCC as to reasonableness of a forecast in a prospectus, but does not happen very often under prospectuses b/c (a) class action lawsuits are new here, (b) we’re less litigious than US, and (c) in order to sue under prospectus, have to know that you have one, find misrep, find lawyer, etc.


• If a material FACT occurs following the filing of the final prospectus that is NOT a material CHANGE, there is no obligation to update purchasers (only have to update if there’s a MATERIAL CHANGE in business, operations or capital of the issuer. Underwriters

Have to do due diligence, and can still be found liable under s. 130(1) for misrepresentation (see more on underwriters below), and also have a due diligence defence available to them.

• Case: BarChris (US)

Will often have distributions assisted by underwriters:

  1. Underwriting Agreement: issuer enters into an agreement with the underwriter, which sets out the terms of their arrangement (obligations of underwriter, various covenants/representations of the issuer, conditions pertaining to the underwriter’s obligations/rights, and rights of termination (including a market out clause)
  2. Syndicated Underwriting: for larger issues, because there may be substantial risk associated with the issue, underwriters may choose to reduce risk by syndicating it with other underwriters wiling to join the underwriting of the issue (other firms might become obligated to buy some portion of the issue, for example)

You can grab notes on other topic from here.

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