The Prospectus Process

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, Western University
• Pages: 182-241

182

CHA PTER 6

THE PROSPEC T US

PROCESS

A. INTRODUCTION

When a corporation or other issuer distributes its securities to t he pub-

lic, it is required to produce a detailed dis closure document, a prospec-

tus, unless it is able to rely upon an exemption from the prospect us

requirement. The prospectus must be vetted by and ultim ately f‌iled

with securit ies regulators and provided to prospective investors. Invest-

ors are entitled to special st atutory rights when they acquire sec urities

issued under a prospectus, and i ssuers and others involved in the oer-

ing may be subject to liability i f the prospectus contains a m isrepre-

sentation. In many ways, the requi rement to produce, f‌ile, and deliver a

prospectus in connection with an oering of securities lie s at the heart

of Canadian securities regulation.

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

tory requirements facing a business that wi shes to sell its securitie s to

the public in Canada.

1) The Cost of a Public Oering

When an issuer makes a public oeri ng of its securitie s, it must prepare

a preliminar y and a f‌inal prospectus,1 unles s the oering is exempt. 2A

1 See, for example, OSA, s 53.

2 Exempt distr ibutions are discuss ed in detail in Chapter 7.

The Prospectu s Process 183

prospectus is a lengthy, detailed disclosure document containing infor-

mation about the company issuing the sec urities as well as detailed

disclosure about the secur ities being oered for sale. In theory, the

purpose of the prospectus is to provide prospective investors with all

the information they need to make informed investment decisions. In

practice, however, it is often suggested that the length and complexity

of prospectuses make them virtually i naccessible to anyone other than

f‌inancial an alysts and their law yers. In any event, completing a public

oering of securities i s expensive. While the most sign if‌icant cost will

typically be under writers’ commissions, which may range from 4 per-

cent to 7 percent of the proceeds of the oering,3 a public oering has

many additional expenses as well, including:

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

cases other professionals, such as mining engi neers or appraisers,

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

included in the prospectus;

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

taken by the issuer and its investment bankers to sell t he oering

to the public;

3) the cost of printing the prospectu s;

4) the cost of translating the prospect us into French, if the oering is

to be made in Quebec; and

5) the listing fees required by stock exchanges.4

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’ commis sions) is not signif‌icantly less th an for

a $20 million issue. Moreover, it is more dicult, and hence more costly,

for small issuers to assemble the information required to be put in a

prospectus. Thus, the aggregate is sue costs, as a proportion of oering

proceeds, tend to rise, often dramatically, for smaller oerings.

2) The Prospectus Process

A private placement of securities via one of the prospectus exemptions

discussed in Chapter 7 greatly reduces the costs of f‌inancing and, in

3 See, for example, Torys LLP, Initial Public Oe rings in Canada (April 2021) at 32,

online: www.torys.com/our-latest-thinking/resources/ipo-essentials.

4 Note that the issue r need not list on a stock exchange in con nection with a

public oering of sec urities, but most public oering s will be accompanied by a

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

SECU RITIE S LAW184

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 placement, including buyers who are not willing to acquire

shares in a private placement either at all or only at a signif‌icant discount

(sometimes called a “liquidity” or “illiquidity” discount) ref‌lecting the

fact that shares received in a private placement cannot be resold as freely

as shares purchased in a public oering.5 A public oering, via prospec-

tus, gives an issuer access to the broadest possible market for its secur-

ities, and also oers a number of other well-recognized benef‌its (along

with some equally well-understood costs).6 This chapter explores the

process leading up to, and culminating in, an issuance of securities under

a prospectus. We also discuss the following types of prospectus oerings:

• long-for m prospect us,

• short-form prospectus (formerly referred to as prompt oering pro-

spectus (POP)),

• shelf prospectu s,

• post-receipt pricing prospectus (PREP),

• reverse take-overs (or “backdoor listings”),

• Special Purpose Acqui sition Companies (SPACs), and

• Capital Pool Companies (CPCs).

B. PRIMARY AND SECONDARY OFFERINGS

There are essentially two types of dist ribution that require the use of

a prospectus: a prima ry oering and a secondar y oering. A primar y

oering refers to a distr ibution of securities by the i ssuer of those secur-

ities. A secondary oeri ng refers to a sale of previously issued securities

of an issuer, not by the issuer itself, but by a control person (i.e., as dis-

cussed in Chapter 3, a person who holds a sucient number of voting

securities of an is suer to aect materially control of that issuer, with

a person holding more than 20 percent of an is suer’s voting securities

deemed to be such a person). As discussed in Ch apter 7, sales of secur-

ities by control persons may often be completed wit hout a prospectus in

reliance upon an appropriate exemption. Where no such exemption is

5 Details surr ounding the rules govern ing resales of securit ies acquired in a pri-

vate placement are di scussed in Chapter 7.

6 For a det ailed review of some of the princ ipal advantages and dis advantages of

going public, see, Chr istopher C Nicholls, Corporate Finance and Can adian Law,

2d ed (Toronto: Carswell, 2013) at 216–18.