The Waiting Period, Vetting/ Comment Letter and Amendments

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  1. The Waiting Period, Vetting/ Comment Letter and Amendments
  • At this point, there’s a trade in a security that constitutes a distribution, filed a preliminary prospectus, obtained a receipt, then waiting period begins.
  • The preliminary prospectus is the sole document containing representations about the security during the waiting period. It gives potential investors time to consider the features of an investment.
  • Interval of time b/w when you get receipt for PPr when you get started gathering interest
  • Securities cannot be sold until the final prospectus is filed and a receipt is obtained.
  • Can be 3-4 weeks or longer

Section 65 of the OSA – Waiting period

s.65(1) “Waiting period” defined: In this section,“waiting period” means the period prescribed by regulation or, if no period is prescribed, the period between the Director’s issuance of a receipt for a preliminary prospectus relating to the offering of a security and the Director’s issuance of a receipt for the prospectus.

• (2) Distribution of material during waiting period: Despite section 53, but subject to Part XIII, it is

permissible during the waiting period,

o (a) communicate re: price and such, IF it has name of place where they can get prelim: to

distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained;

o (b) distribute prelim: to distribute a preliminary prospectus; and

o (c) soicit expressions of interest, IF a copy is then forwarded: to solicit expressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded to him, her or it.

  1. Purpose of the Waiting Period

Policy: 3 reasons for waiting period: 1) review for deficiencies; 2) giving investors time to review; 3) allowing for underwriter’s assessment of the market

  1. Deficiencies

a. When you deliver that PPr to the Securities Commission, they assign some accountant/lawyer to your prospectus and they review that document to list deficiencies you have to fix before you get a receipt for the final Prospectus (this is the lie – by saying they haven’t passed on merits, the OSC, lawyers, etc. go through and give a list of deficiencies)

  1. Investors have time to Review
  2. No point giving investors information if you don’t give them time to digest it.
  3. No fast sales-person tactics, impulse buying, instead, lots of time to read it.
  4. Underwriter’s Assessment of the Market

a. underwriter that’s going to sell them and be responsible for the sale has to assess the market, need time for company to deliver copies of Ppr to the investors, then communicate to underwriter to determine demand and therefore price

  1. Vetting & Comment Letter

When vetting is complete, a “comment letter” or “deficiency letter” will be provided.

Conflicts Between Issuer and Securities Commission

  • Accountant/lawyer at SC will issue the comment letter ^ issuer may not agree with deficiencies, can cause tensions. You can challenge the deficiencies.
  • Example: Pictures: OSC freaks out about pictures b/c don’t want it to be too flashy/salesman-ish. (e.g. pictures of chef in the prospectus for Four Seasons ^ not selling chefs ^ are you selling hockey, or Stanley cups?)
  • POLICY: You’re going to lose if you challenge the comments ^ they’re protecting the investing public.

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  1. Constrained selling activities during waiting period

Selling activities during the waiting period are constrained: You can only solicit expressions of interest (s. 65) and deliver the preliminary prospectus (s. 66), and have to keep a list of whoever you deliver it to (s. 67) in case you have to amend it. OSC can also stop any of these s. 65 “trading” activities cease until a revised prelim is filed if the prelim ends up being defective (s. 68)

All you CAN DO is: advertise that there IS a security, the price, and where you can get a copy of the prospectus (NI 41-101)

POLICY: Selling during the waiting period is constrained. The reason is that it would defeat the purpose of a prospectus with statutory liability for misrepresentation if selling were allowed. If representations were allowed prior to a final prospectus, the investor would not be protected by statutory liability for false representations.

OSA, Part XVI: Distribution Generally

Sections 65, 66 and 67

Section Description Page
65(2)(a)-(c):

Waiting

Period

(2) Distribution of material during waiting period

Despite section 53, but subject to Part XIII, it is permissible during the waiting period,

  1. to distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained;
  2. to distribute a preliminary prospectus; and
  3. to solicit expressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded to him, her or it.

Notes:

Can have some advertising, identifying security, price, where it can be bought, and can give out prelim prospectus (41-101)

66:

Distribution of Prelim Prospectus

Distribution of preliminary prospectus

Any dealer distributing a security to which section 65 applies shall, in addition to the requirements of clause 65 (2) (c), send a copy of the preliminary prospectus to each prospective purchaser who, without solicitation, indicates an interest in purchasing the security and requests a copy of such preliminary prospectus.

67:

Distribution

List

Any dealer distributing a security to which section 65 applies shall maintain a record of the names and addresses of all persons and companies to whom the preliminary prospectus has been forwarded.

Why?

In case there is a material change, so everyone who got a copy of the prelim can get a copy of the amendment

  1. Limitations on advertising during waiting period POLICY:
68: Defective preliminary prospectus .
Defective Where it appears to the Director that a preliminary prospectus is defective in that it
Prelim does not substantially comply with the requirements of Ontario securities law as to
Prospectus form and content, the Director may, without giving notice, order that the trading permitted by subsection 65 (2) in the security to which the preliminary prospectus relates shall cease until a revised preliminary prospectus satisfactory to the Director is filed and forwarded to each recipient of the defective preliminary prospectus according to the record maintained under section 67.

If you allow advertising, it circumvents the role of the prospectus ^ if you can advertise with glossy brochures with high lights and no low lights, you’ve circumvented the whole process because investors never get to read the risks via final prospectus

PART 6 OF NI 41-101 COMPANION POLICY: Advertising or Marketing During Waiting Period

OSC Test for Whether or not Advertising is Okay

All you can do in terms of advertising during the waiting period is: IDENTIFY the securities, state the price of the securities, and state the name/address of a person or company who you can buy them from, and where you can get the prospectus.

FACTUAL TEST^ in furtherance of a trade: OSC staff said in determining whether ads are prohibited, would apply factual test based on whether advertising could reasonably considered to be in furtherance of a trade no

forecasts, no projections, no predictions

  • OSC will look at why you’re advertising: normal corporate image advertising is acceptable, but acting in furtherance of a sale in securities will result in penalties (because it’s a TRADE without a prospectus)

This creates bizarre results

EXAMPLES

  • Eg. Sharon, Lois and Bram goes public ^ interviewed the elephant (No – Advertising during waiting period, can’t sell securities pursuant to the elephant)
  • E.g. Canwest Global goes public ^ in waiting period, 6:00 news, put their leading story to say guess what, we’re going public. SC says you can’t do that, advertising during waiting period (CTV’s gonna play it at the same time, SC – too bad)
  • E.g. The Brick ^ goes public, does that mean during 6 weeks of waiting period, can’t put ads on TV of no payment until 2078 ^ corporate image advertising is okay, but can’t use that to promote sale of securities.

Does this make sense?

  • E.g. in UK, no restrictions on advertising during waiting period ^ BP for instance.
  • OSC Argument:

o b/c capital markets are so fundamental to our operation as a country – can’t allow system to be governed by slick advertising, has to be governed by real integrity (need a legitimate, credible capital markets system that ppl can rely on)

o We can’t police the advertising, impossible, so have to make these rules to ensure that integrity of capital markets is paramount

  • Other Side:

o POLICY: All we’re doing is excluding the 99% of people benefitting from these transactions. The 1 % that has a broker and has access and knowledge and gets prospectuses/isn’t normal, gets the profit from the stuff and the entire public doesn’t.

  • People make lots of $ off public offerings ^ “we’re going to protect you so much that we deny you access to the capital markets, b/c as a normal person, won’t even know it exists (protecting you from big profit ^ don’t advertise so people don’t know about them)”
  • Legal Fiction ^ how can you advertise a preliminary prospectus is available if you can’t advertise? ^ you don’t, and you don’t get to play/participate!
  • They ’re saying if you’re not rich, you’re not smart enough to figure out the risks of the market

o Countering the huge risk argument ^ once it’s on the TSX, you can go buy them. Don’t have to be sophisticated, just have to be sophisticated when it first goes public for $6 *good question – should you be able to advertise them in a flashy way? *Exam

o Can just advertise the prospectus, maybe not the actual sale of it, say we’re gonna sell it, here’s where you can get a prospectus, and you should

o I think it’s elitist to assume people won’t understand it. Would need some protections, but none of us understood this until we heard it in this course

o Dumb b/c whole reason for prospectus fiction is to protect the investors (the big investors don’t need the protection, will hire lawyers/accountants to do protect themselves)

o Note: Perhaps this will change with social media/ internet – ppl will engage in uncontrolled advertising

  1. Amendments if there are changes during the waiting period

Because there’s a period of time b/w receipt for prelim and final prospectus, obviously there’s a risk that there

will be a change in the business (e.g. fire, new k)

If a material ADVERSE change occurs, you have to file an amendment ASAP or in any event within 10 days (s. 57(1)), and then send a notice to all investors under your s. 67 list (s. 57(3)).

Section Description Page
1(1): “material change”, .
Material (a) when used in relation to an issuer other than an investment fund, means,
Change (i) a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or
(ii) a decision to implement a change referred to in sub-clause (i) made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable, and [… investment blabla]
57(1):

Amendment

to

Preliminary on Material Change

(1) Where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days
after the change occurs. […]

(3) Notice of amendment

OSA – PART XV – Prospectus Distribution Sections 1(1), 57(1) and (3)

Amendments on Material Change

An amendment to a preliminary prospectus referred to in subsection (1) shall, forthwith after it has been filed, be forwarded to each recipient of the preliminary prospectus according to the record maintained under section 67.
***NOTE:

B/w prelim and final, only ADVERSE changes must be reported. B/w filing final and end of distribution, ANY CHANGE must be reported (adverse/not)

• Reason for difference: more important for investors to know about neg than pos things. HOWEVER, in the time btwn final prospectus and closing there is no other time to correct (must send amendment)

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