Canada: Proposed National Instrument Seeks To Harmonize Prospectus And Continuous Disclosure Requirements

The Canadian Securities Administrators published for comment proposed National Instrument 41-101 General Prospectus Requirements, two related proposed forms and a proposed companion policy (collectively, the Proposed Rule). The CSA also proposed consequential amendments to a number of national instruments, forms and policies. The Proposed Rule and consequential amendments represent another step towards harmonizing securities laws across Canada.

In Ontario, OSC Rule 41-501 General Prospectus Requirements came into force in December 2000. OSC Rule 41-501 has since been adopted as the long form prospectus rule by all other jurisdictions in Canada. Some jurisdictions, however, have maintained local rules and forms, such that prospectus issuers have the option of complying with local requirements.

A national short form prospectus regime was also adopted in December 2000. The short form prospectus requirements were streamlined and harmonized with the continuous disclosure regime when amended and restated National Instrument 44-101 Short Form Prospectus Distributions came into force in December 2005.

The stated purpose of the Proposed Rule is to create a comprehensive, seamless and transparent set of national prospectus requirements for all issuers. The following will highlight some of the significant provisions of the Proposed Rule.

One of the significant changes is the introduction of a "substantial beneficiary" concept (other than in Ontario, which is not adopting this concept). Substantial beneficiaries of an offering will be required to sign a prospectus, thereby attracting liability for misleading statements. Control of the issuer or a significant business of the issuer and direct or indirect receipt of 20% or more of the proceeds of a distribution are both required to bring a person or company under the definition of a "substantial beneficiary". This proposed change could impact offerings where the proceeds of a distribution are used to pay the vendor of an entity being acquired by the issuer.

The Proposed Rule retains the requirement to file material contracts with a final prospectus, and attempts to correct a general inconsistency with respect to material contracts filed by providing some clarity with respect to which contracts cannot be considered in the "ordinary course of business" and must therefore be filed. In addition, the Proposed Rule seeks to clarify the issue of redaction and omission. Contracts containing confidential or sensitive information may be redacted; however the CSA has clarified that a provision cannot be redacted or omitted if it contains information that would be necessary for the reader to understand the nature of the obligations of the contract.

Another proposed change will require issuers to disclose in the preliminary prospectus a bona fide estimate of the range within which the offering price or number of securities being distributed is expected to be set. This approach is generally consistent with the current practice in the United States, and in any event underwriters typically estimate pricing in "green sheets". Capitalization tables, earnings coverage information and other pro forma information are to be completed using the mid-point of the offering range, providing investors with meaningful information in a preliminary prospectus.

The Proposed Rule seeks to protect against the practice of so-called "back door underwriting" by limiting compensation securities to 5% of the base offering. The proposed change may have the effect of hindering the fundraising efforts of junior and mid-cap issuers, who often rely on compensation options and warrants to compensate investment dealers for the effort involved in financing a small offering.

The Proposed Rule would harmonize and consolidate the general prospectus requirements across Canada. The Proposed Rule would also substantially harmonize the general prospectus requirements with the continuous disclosure and short form prospectus regimes. For example, the significant acquisition requirements in the Proposed Rule have been harmonized with the business acquisition reports under Part 8 of NI 51-102, including taking into consideration the differences between requirements for venture and non-venture issuers.

The Proposed Rule takes into consideration changes in the principles underlying the existing general prospectus requirements that the CSA identified as a result of regulatory reviews, applications for exemptive relief, and public comment and consultation. In this respect, the Proposed Rule presents an opportunity to clarify confusing regulatory requirements and obligations in the existing general prospectus requirements, which should result in more efficient and effective regulation of capital markets.

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