The prospectus process

• Author: Christopher Nicholls
• Pages: 145-193

145

CHA PTER 6

THE PROSPEC T US

PROCESS

A. INTRODUCTION

In June 2017, in a speech to the SEC Investor Advisory Committee,

SEC Chairman Jay Clay ton expressed concern about the “substanti al

decline in the number of US IPOs and publicly listed companie s in

recent years.”1He indicated that SEC staff was “actively exploring ways

in which we can improve the attractivenes s of listing on our public mar-

kets, while maintaining important investor protections.”2 The decline

in the number, and (arguably) even the quality of new public companies

in the United States has been widely noted. For example, Yale Law pro-

fessor Jonathan Macey in an “op-ed” piece in Januar y 2017,3 noted that

the number of public companies in the United States h ad declined from

9,113 in 1997 to fewer than 6,000 in 2016, despite a signif‌icant growth

in the US economy over that period. Macey argued t hat this decline was

highly problematic for a number of reasons, including the concern t hat

1 Jay Clayton, “Rem arks to the SEC Investor Advisor y Committee” (22 June 2017),

online: www.sec.gov/news/public-statement/clayton-6-22-17.

2 Ibid.

3 Jonathan Macey, “As IPOs Decline, t he Market Is Becoming More Eliti st” Los

Angeles Time s (10 January 2017). For a more detailed empiric al study of this

phenomenon, see Crag Doidge, G A ndrew Karolyi, & René M Stul z, “The US

Listing Ga p” (2017) 123 Journal of Financial Economics 4 64 at 464. The authors

indicate th at, “[c]ompared to other countrie s with similar in stitutions and eco-

nomic development, the U.S. now h as signif‌icantly fewer public ly listed f‌irms.”

SECU RITIE S LAW146

as promising busines ses increasingly sought private rather than public

f‌inancing, the number of avail able investment opportunities for retail

investors would shrink. Worse still, companies choosing to go public

might be perceived as inferior companies that had simply been unable

to attract private capital from sophist icated capital market participant s.

A similar phenomenon has been obser ved in Canada.4 In 2016, only

three companies went public on the Toronto Stock Exchange, and only

eight went public on all of Canada’s stock exchanges.5 Sanguine prac-

titioners have looked for signs in mid-2017 that the IPO market may

be recovering, and certai nly the level of IPO activity in f‌irst quarter of

2017 was markedly stronger,6 but time alone will tell.

This chapter will provide a general overview of many of the regula-

tory requirements facing a business that wi shes to sell its securities to

the public in Canada.

1) The Cost of Assembling a Prospectus

When an issuer makes a public offer ing of its securities, it must prepare

a prospectus. A prospectus i s a lengthy, detailed disclosure document

containing inform ation about the company issuing the securit ies. In

theory, the purpose of the prospectus i s to provide prospective invest-

ors with all the in formation 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 inaccessible to

anyone other than f‌inancial analysts and their l awyers. In any event,

assembling a prospectus is expensive. The average costs incurred by

an issuer for a multi-province offering have been e stimated to range

between $200,000 to $500,000 for a smaller offering and up to $1 mil-

lion for a larger offering,7 in addition to underwriters’ commissions

4 See, for example, Br yan Borzykowski, “Why 2016 Was Such a Terrible Year for

Canadia n IPOs” Canadian Business (14 Dec 2016), online: www.canadianbusiness.

com/invest ing/2016-the-year-the-ipo- died.

5 See PwC Canad a, News Release, “Disma l 2016 the Worst Year for Canadia n IPO

Market, PwC Sur vey Shows” (3 January 2017), online: www.pwc.com/ca/en/

media/r elease/dis mal-2016-the-worst-year-for-canadian-ipo -market.html.

6 See, for example, PwC Can ada, News Release, “Canad ian Innovators Drive

First Quar ter IPO Market Recovery, PwC Survey Shows” (3 Apri l 2017), online:

www.pwc.com/ca/en/media/release/canadian-in novators-drive-f‌irst-quarter-ipo-

market-recovery.html.

7 See, for example, P wC, “Going Public in Canada” (April 2 014) at 27, online:

www.pwc.com/ca/en/transaction-service/publications/pwc-guide-going-public-

canada-2014-05-en.pdf.

The Prospectu s Process 147

which are typically between 4 percent and 7 percent of the proceeds of

the offering.8 The ex penses of a public offering include

1) the cost of hiring law yers, underwriters, accountants, and in some

cases other professional s, such as mining engineer s or appraisers,

to assemble the prospectus or to contr ibute expert reports to be

included in the prospectus;

2) the costs of a “roadshow,” which is the promotional tour under-

taken by the issuer and its investment bankers to sell t he offering

to the public;

3) the cost of printing the prospectu s;

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.9

Costs are not strictly proportiona l to the size of the issue. As a gen-

eral rule, the costs of a ssembling a prospectus are relatively f‌ixed. Thus,

the aggregate cost of f‌loating a $10 million issue through a prospectu s

(excluding underwriters’ commissions) is not signif‌icantly less than

for a $20 million issue. 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 dramatically, 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 part icular, the legal and

other costs described above associated with as sembling and f‌iling a pro-

spectus. However, very often an issuer wil l wish to tap a larger number

of potential buyers than i s available through a private placement, includ-

ing buyers who are not willing to acquire shares in a private placement

either at all or only at a signif‌icant di scount (sometimes called a “liquid-

ity” or “illiquidity” discount) ref‌lecting the fact that shares received

in a private placement cannot be resold as freely as shares purchased

in a public offering.10 A public offering, via prospectus, gives an issuer

8 See, for example, Torys LLP, “Initia l Public Offerings in Can ada” (14 March

2011) at 4, online: ww w.torys.com.

9 Note that the iss uer need not list on a stock exchange in con nection with a

public offering of se curities, but most public offeri ngs will be accompanied by a

stock exchange l isting to facilitate se condary market liquidit y.

10 Detail s surrounding the rule s governing resales of sec urities acquired in a pr i-

vate placement are di scussed in Chapter 7.