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 oer-
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 oering 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 Oering
When an issuer makes a public oeri ng of its securitie s, it must prepare
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 oered 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
oering 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 oering,3 a public oering 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 oering
to the public;
3) the cost of printing the prospectu s;
4) the cost of translating the prospect us into French, if the oering 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 dicult, 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 oering
proceeds, tend to rise, often dramatically, for smaller oerings.
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 Oe 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 oering of sec urities, but most public oering 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 oering.5 A public oering, via prospec-
tus, gives an issuer access to the broadest possible market for its secur-
ities, and also oers 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 oerings:
• long-for m prospect us,
• short-form prospectus (formerly referred to as prompt oering 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 oering and a secondar y oering. A primar y
oering refers to a distr ibution of securities by the i ssuer of those secur-
ities. A secondary oeri 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 sucient number of voting
securities of an is suer to aect 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.
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