The Prospectus Process

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

182

CHAPTER 6

THE PROSPECTUS

PROCESS

A. INTRODUCTION

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

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

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

requirement. The prospectus must be vetted by and ultimately f‌iled

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

ors are entitled to special statutory rights when they acquire securities

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

ing may be subject to liability if the prospectus contains a misrepre-

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

prospectus in connection with an oering of securities lies 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 wishes to sell its securities 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 preliminary and a f‌inal prospectus,1 unless 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 Process183

prospectus is a lengthy, detailed disclosure document containing infor-

mation about the company issuing the securities as well as detailed

disclosure about the securities 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 inaccessible to anyone other than

f‌inancial analysts and their lawyers. In any event, completing a public

oering of securities is expensive. While the most signif‌icant cost will

typically be underwriters’ 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 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;

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

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

to the public;

3) the cost of printing the prospectus;

4) the cost of translating the prospectus 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 proportional 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 prospectus

(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 issue 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 RITIES 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-form prospectus,

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

spectus (POP)),

• shelf prospectus,

• post-receipt pricing prospectus (PREP),

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

• Special Purpose Acquisition Companies (SPACs), and

• Capital Pool Companies (CPCs).

B. PRIMARY AND SECONDARY OFFERINGS

There are essentially two types of distribution that require the use of

a prospectus: a primary oering and a secondary oering. A primary

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 issuer to aect materially control of that issuer, with

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

deemed to be such a person). As discussed in Chapter 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.