The Prospectus Process
| Author | Christopher C. Nicholls, Jeffrey G. Macintosh |
| Pages | 139-174 |
CHAPTER
6
THE
PROSPECTUS
PROCESS
A
INTRODUCTION
1)
The
Cost
of
Assembling
a
Prospectus
When
an
issuer makes
a
public
offering
of its
securities,
it
must pre-
pare
a
prospectus.
A
prospectus
is a
lengthy, detailed disclosure docu-
ment containing information about
the
company issuing
the
securities.
In
theory,
the
purpose
of the
prospectus
is to
provide prospective
investors with
all the
information they need
to
make informed invest-
ment decisions.
In
practice, however,
it is
often
suggested that
the
length
and
complexity
of
prospectuses make them virtually inaccessi-
ble
to
anyone other than
financial
analysts
and
their lawyers.
In any
event,
assembling
a
prospectus
is
expensive.
The
average costs
incurred
by an
issuer
for a
multi-province
offering
of
approximately
$20
million have been estimated
at
about
$400,000.1
These expenses
include
1.
the
cost
of
hiring lawyers, underwriters, accountants,
and in
some
cases
other professionals, such
as
mining engineers
or
appraisers,
to
assemble
the
prospectus
or to
contribute expert reports
to be
included
in the
prospectus;
1
Paul
E.G.
Benson, "The Going Public Decision,"
Insight,
June 1993.
139
140
SECURITIES
LAW
2.
the
costs
of a
"roadshow," which
is the
promotional tour undertak-
en
by the
issuer
and its
investment bankers
to
sell
the
offering
to
the
public;
3. the
cost
of
printing
the
prospectus;
4. the
cost
of
translating
the
prospectus into French,
if the
offering
is
to
be
made
in
Quebec;
and
5. the
listing
fees
required
by
stock
exchanges.2
In
addition,
the
underwriter(s),
typically
an
investment banking
firm
or
consortium
of
firms,
must
be
compensated.
The
underwriter's sales
fee
is
calculated
as a
percentage
of the
total value
of the
offering.
Although
such
fees
can
range
widely,
they average about
4 to 7
percent
of the
offering
price.
In
net,
the
entire cost
of
selling
a $20
million
issue
through
a
prospectus could easily reach
or
exceed $1.5 million.
Costs
are not
strictly proportional
to the
size
of the
issue.
As a
gen-
eral
rule,
the
costs
of
assembling
a
prospectus
are
relatively
fixed.
Thus,
the
aggregate cost
of
floating
a $10
million issue through
a
prospectus
is not
significantly less than
for a $20
million issue. Indeed,
underwriting
fees
tend
to
rise
as the
offering
gets smaller. Moreover,
it
is
more
difficult,
and
hence more costly,
for
small
issuers
to
assemble
the
information required
to be put in a
prospectus. Thus,
the
aggregate
issue costs,
as a
proportion
of
offering
proceeds, tend
to
rise,
often
dra-
matically,
for
smaller
offerings.
2) The
Prospectus
Process
A
private placement
of
securities
via one of the
prospectus exemptions
greatly
reduces
the
costs
of
financing
and,
in
particular,
the
legal
and
other
costs described above associated with assembling
and
filing
a
prospectus. However, very
often
an
issuer will wish
to tap a
larger
number
of
potential buyers than
is
available through
a
private place-
ment.
A
public
offering,
via
prospectus, gives
an
issuer access
to the
broadest
possible market
for its
securities. This chapter explores
the
process leading
up to, and
culminating
in, an
issuance
of
securities
under
a
prospectus.
We
also
discuss
the
four
fundamental types
of
prospectus
offerings:
2
Note that
the
issuer
need
not
list
on a
stock
exchange
in
connection
with
a
pub-
lic
offering
of
securities,
but
most public
offerings
will
be
accompanied
by a
stock
exchange listing
to
facilitate
secondary market liquidity.
Long-form
prospectus
Short-form
prospectus
(formerly
referred
to as
prompt
offering
prospectus
(POP))
Shelf
prospectus
Post-receipt
pricing prospectus
(PREP)
B.
PRIMARY
AND
SECONDARY
OFFERINGS
There
are
essentially
two
types
of
distribution that require
the use of a
prospectus:
a
primary
offering
and a
secondary
offering.
A
primary
offering
refers
to a
distribution
of
securities
by the
issuer
of
those secu-
rities.
A
secondary
offering
refers
to a
sale
of
previously issued securi-
ties
of an
issuer,
not by the
issuer
itself,
but by a
control person
(i.e.,
a
person
referred
to in
clause
(c) of the
definition
of
"distribution"
in
subsection
1(1)
of the
OS
A).
As
discussed
in
chapter
7,
sales
of
securi-
ties
by
control persons
may
often
be
completed without
a
prospectus
in
reliance upon
an
appropriate exemption. Where
no
such exemption
is
available,
or
where
the
selling securityholder wishes
to
obtain
the
benefits
of
selling
freely
tradeable shares,
a
prospectus
is
required.
In
the
case
of
such
a
secondary
offering,
the
issuer,
its
directors,
and its
officers
still need
to
furnish
the
same information
and
certificates
even
though
the
securities
are
being sold
by a
holder
and not by the
issuer
itself.
The
issuer,
its
directors,
and its
officers
are
exposed
to the
same
liabilities
as in the
case
of a
primary
offering
by the
issuer
itself.
The
Director
has
authority under
the OSA to
order
the
issuer,
in
such cases,
to
provide
the
necessary information
and
material,3
and to
waive com-
pliance
with certain provisions where
the
issuer
has not
participated,
provided
that
all
reasonable
efforts
have been made
to
comply with
the
relevant
securities laws
and
that such
a
waiver
is not
otherwise likely
to
prejudice
any
person
or
company.4
In the
interest
of
simplicity, however,
for the
balance
of
this chap-
ter we
focus
on
prospectus
offerings
made
by the
issuer
of the
securi-
ties rather than
on
prospectus
offerings
made
by a
selling
securityholder.
3
Securities
Act
(Ontario),
R.S.O.
1990,
c. S.5
[OSA],
s.
64(1).
4
Ibid.
s.
64(2).
The
Prospectus Process
141
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