Notice: OSC Rule - 41-501 - General Prospectus Requirements and Forms (Repealed by 41-801 on March 17, 2008)
Notice: OSC Rule - 41-501 - General Prospectus Requirements and Forms (Repealed by 41-801 on March 17, 2008)
NOTICE OF PROPOSED RULES AND COMPANION POLICY UNDER
FORM 41-501F1 INFORMATION REQUIRED IN A PROSPECTUS
FORM 41-501F2 COLLECTION OF PERSONAL INFORMATION
FORM 41-501F3 ISSUER FORM OF SUBMISSION
TO JURISDICTION AND APPOINTMENT OF AGENT FOR SERVICEOF PROCESS
FORM 41-501F4 NON-ISSUER
FORM OF SUBMISSION TO JURISDICTION AND
APPOINTMENT OF AGENT FOR SERVICE OF PROCESS
AND RESCISSION OF ONTARIO SECURITIES COMMISSION POLICY 5.7AND UNIFORM ACT POLICY 2-03
AND UNIFORM ACT POLICY 2-04 AND PORTIONS OF ONTARIOSECURITIES COMMISSION POLICY 5.1
Introduction
This Notice is accompanied by a proposed Rule, four Forms and a Companion Policy, eachof which is being published for review and comment. Rather than inviting interested partiesonly to comment on the specific changes discussed in this Notice, readers are encouraged toreview each of the instruments and provide comments on any aspect of the instrument. Theinstruments described in this Notice are:
Rule 41-501 General Prospectus Requirements
Form 41-501F1 Information Required in a Prospectus
Form 41-501F2 Collection of Personal Information
Form 41-501F3 Issuer Form of Submission to Jurisdiction and
Appointment of Agent for Service of Process
Form 41-501F4 Non-Issuer Form of Submission to Jurisdiction and
Appointment of Agent for Service of Process
Companion Policy 41-501CP General Prospectus Requirements
Rule 41-501 General Prospectus Requirements (the "Rule") is a proposed local rule thatconsolidates various provisions currently set forth in the Regulation to the Securities Act(Ontario) (the "Act") and in various policy statements and notices of the Ontario SecuritiesCommission (the "Commission") and Commission staff concerning the preparation,certification, filing and receipting of preliminary prospectuses and prospectuses. The Ruleprescribes the use of proposed Form 41-501F1 Information Required in a Prospectus (the"Prospectus Form") as the form of prospectus to be used by issuers that currently file long-form prospectuses using Forms 12, 13 or 14 of the Regulation. The Rule prescribes the useof proposed Form 41-501F2 Collection of Personal Information ("Form F2") to grant theCommission authority under the Freedom of Information and Protection of Privacy Act(Ontario) to collect personal information on promoters and the directors and executiveofficers of an issuer and, if a promoter is a corporation, directors and executive officers of thepromoter, in certain circumstances. The Rule also prescribes the use of proposed Form 41-501F3 Issuer Form of Submission to Jurisdiction and Appointment of Agent for Service ofProcess ("Form F3") by an issuer that is incorporated or organized under a foreign jurisdictionor does not have an office in Canada. Similarly, proposed Form 41-501F4 Non-Issuer Formof Submission to Jurisdiction and Appointment of Agent for Service of Process ("Form F4")is prescribed for a selling securityholder, promoter or guarantor that is incorporated ororganized under a foreign jurisdiction or resides outside of Canada. The Prospectus Form,Form F2, Form F3 and Form F4 (the "Forms") will be adopted as rules.
Together, the proposed Rule and the Prospectus Form prescribe a comprehensive set ofrequirements governing the form and content of prospectuses, including general provisionsas to prospectus style, certification and filing, for all issuers of securities. The proposed Rulewill be complemented by other rules that are specific to certain types of issuers (for example,mutual fund issuers) or offerings or that address specific circumstances. In some cases, theserules will supplement the proposed Rule and Prospectus Form and in other cases differentprovisions will apply instead of those in the proposed Rule and Prospectus Form.
The proposed Rule, Prospectus Form and Companion Policy 41-501CP General ProspectusRequirements (the "Companion Policy") are not a reformulation of National Policy StatementNo. 36, entitled "Mutual Funds: Simplified Prospectus Qualification System", National PolicyStatement No. 44, entitled "Rules for Shelf Prospectus Offerings and for Pricing OfferingsAfter the Final Receipt is Issued", National Policy Statement No. 45, entitled "Multi-Jurisdictional Disclosure System" or National Policy Statement No. 47, entitled "PromptOffering Qualification System" ("NP 47"). Separate proposed national instrumentsimplementing the reformulated versions of each of these instruments will be published at alater date.
As a result of the implementation of the proposed Rule, Forms and Companion Policy, mostof the provisions in Part III of the Regulation to the Act concerning the form, content,certification, filing and receipting of preliminary prospectuses and prospectuses will no longerbe necessary and it is proposed that the Lieutenant Governor in Council be asked to revokethese provisions. Attached to this Notice is a table of concordance which indicates how eachof the relevant sections in the Regulation, Ontario Securities Commission Policy 5.1 ("Policy5.1"), Ontario Securities Commission Policy 5.7 ("Policy 5.7") and certain other existinginstruments are to be treated in the proposed Rule, Forms and Companion Policy.
It is also proposed that a national instrument (National Instrument 41-101 ProspectusDisclosure Requirements) be implemented that combines existing National Policy StatementsNos. 12, 13, 32 and 35 and section 50 of the Regulation to the Act, each of which prescribesprospectus content requirements.
Substance and Purpose of Proposed Rule, Forms and Companion Policy
The Rule
The substance and purpose of the proposed Rule are to consolidate certain provisionscurrently set forth in the Regulation and in various policy statements and notices of theCommission and Commission staff concerning the preparation, certification, filing andreceipting of preliminary prospectuses and prospectuses. The proposed Rule is intended tocontain basic prospectus requirements that may be supplemented by other rules dealing withrequirements that apply to particular types of issuers (for example, mutual fund issuers) orthat apply in particular circumstances (for example, rules relating to restricted shares or futureoriented financial information). Section 1.1 of the proposed Rule expressly provides that allprospectuses must be prepared, certified, filed and receipted in accordance with the proposedRule and the Prospectus Form. Therefore, if it is intended that a particular provision in theproposed Rule or Prospectus Form not apply to a particular issuer or in particularcircumstances or that a different prospectus form be used, it will be necessary to expresslyoverride that provision in another rule.
Proposed Rule 41-502 Prospectus Requirements for Mutual Funds, which will be publishedfor comment at a later date, will provide that prospectuses of mutual funds be prepared usingdifferent forms and, among other things, with different financial statement disclosurerequirements that are more appropriate for mutual fund issuers. Otherwise, except asspecifically identified in proposed Rule 41-502 Prospectus Requirements for Mutual Funds,the proposed Rule will apply to mutual fund issuers. Provisions of the proposed Rule thatwill not apply to mutual funds are identified below under Summary of Proposed Rule, Formsand Companion Policy.
Rule 56-501 Restricted Shares prescribes additional disclosure obligations for issuersdistributing restricted shares under a prospectus.
The majority of the provisions in the proposed Rule have been derived from Part III of theRegulation and from Policy 5.1 and Policy 5.7. In many cases, these provisions have beenincluded in the proposed Rule with some modifications but no substantive changes. In othercases, existing provisions have been amended to reflect current practice, and in still othersparticular provisions of the Regulation or Policy 5.1 or Policy 5.7 are not reflected in the Ruleas a result of a decision by the Commission that the provisions are no longer appropriate ornecessary. In the second column beside each provision in the copy of the proposed Rule thataccompanies this Notice is an indication of the source of the provision. In some cases, acomment in the third column explaining why changes to the existing provision have beenmade is also included. Neither the second nor the third columns will form part of the finalRule.
The Form
The substance and purpose of the Prospectus Form are to consolidate existing Forms 12, 13and 14 and restate the prospectus disclosure requirements from the Regulation, Policy 5.1 andPolicy 5.7. The existing forms contain many items that are identical. In some instances, slightdifferences in wording exist between items but there appears to be no rationale for thedifferences. In other instances, no policy rationale can be discerned for additional disclosureobligations that are unique to one of the forms. The Prospectus Form attempts to rationalizeexisting prospectus forms by eliminating duplication, avoiding the uncertainty that currentlyarises due to similarly but not identically worded items. Substantively different disclosurerequirements for categories of issuer are retained only if there is a sound policy basis for sodoing such as the special disclosure required in respect of natural resource operations. TheProspectus Form does not include most of the unique disclosure requirements currentlyimposed on finance companies by Form 13, as it was concluded that these requirements arecovered by the requirement in section 3.1 of the Rule to include financial statementinformation prepared in accordance with Canadian GAAP and are therefore no longernecessary.
The Prospectus Form attempts to parallel, as closely as possible, the substantive disclosureobligations imposed on POP-eligible issuers under existing NP 47 through a combination ofthe Annual Information Form and Short Form Prospectus requirements of Appendix A andAppendix B, respectively, to NP 47 except if (i) there is a sound policy basis fordistinguishing between POP-eligible and non-POP eligible issuers, or (ii) an existing provisionin Appendix A or Appendix B to NP 47 is itself in need of updating. The intention is that anychanges resulting from a need to update existing provisions in NP 47 will also be reflected inproposed National Instrument 44-101 Prompt Offering Qualification System, which willreplace NP 47.
Form F2
The substance and purpose of Form F2 are to prescribe a standard form to be completed bya promoter and, in certain circumstances, by a director or executive officer of an issuer or,if a promoter is a corporation, a director or executive officer of the promoter. Form F2grants the Commission authority under the Freedom of Information and Protection ofPrivacy Act (Ontario) to collect personal information about these individuals. Form F2 isbased very closely on Appendix A to Policy 5.7.
Form F3 and Form F4
The substance and purpose of Form F3 and Form F4 are to prescribe standard forms ofsubmission to jurisdiction and appointment of agent for service of process for issuers, sellingsecurityholders, promoters or guarantors that are incorporated or organized outside ofCanada or reside outside of Canada. Form F3 and Form F4 are based very closely onAppendix A and Appendix B, respectively, to Policy 5.1.
Companion Policy 41-501CP
The substance and purpose of the Companion Policy are to consolidate and update certainprovisions in Policy 5.1 and Policy 5.7 that are not mandatory, to provide interpretiveguidance as to certain of the provisions in the proposed Rule and Prospectus Form and to setout the Commission's views as to how certain of these provisions ought to be administered.
Terms used in the Companion Policy that are defined or interpreted in the proposed Rule orthe definition instruments in force in Ontario should be read in accordance with the proposedRule or those definition instruments, unless the context otherwise requires.
Summary of Proposed Rule, Forms and Companion Policy
Rule 41-501
Rule 41-501 is divided into eight parts.
Part 1 of the proposed Rule deals with the application of the Rule.
Part 2 of the proposed Rule has been derived principally from provisions contained in Part IIIof the Regulation. These provisions include requirements as to printing and legibility ofprospectuses that will in some instances be affected by National Instrument 13-101 Systemfor Electronic Document Analysis and Retrieval ("SEDAR"). For example, section 4.7 ofSEDAR provides, in part, that a requirement in securities legislation relating to the format inwhich a document to be filed must be printed does not apply to an electronic filing made inaccordance with SEDAR.
Section 2.2 of the proposed Rule relaxes the restrictions on the use of graphs, photographsand maps currently found in section 46 of the Regulation, with the result that a graph,photograph, map or artwork will be permitted as long as it is relevant to the business of theissuer and not misleading. Section 1.3 of the Companion Policy makes it clear that there isno obligation to pre-clear the use of this material with the Commission.
Part 3 of the proposed Rule deals with financial matters and has been principally derived fromsections 53 to 66 of the Regulation. A number of substantive changes to the currentprovisions regarding financial disclosure have been made.
First, the discretion granted to the Director in several of the existing sections in theRegulation to "permit or require" certain financial statement disclosure has been eliminatedon the basis that open-ended discretion is inappropriate to be included in a rule. The authorityto "permit" non-compliant disclosure is now contained in the general authority to grantexemptions in Part 8 of the proposed Rule. The authority to "require" additional disclosureis inherent in the Director's "blue sky" discretion under section 61 of the Act.
The Commission is proposing, in subsection 3.1(1) of the Rule, that the current requirementin subsection 53(1) of the Regulation that a prospectus of an issuer contain audited financialstatements of the issuer for each of the last five financial years be amended to reduce thedisclosure requirement to three years (or such shorter period as the issuer has been inexistence). The Commission is of the view that three years of audited financial statementinformation is sufficient for the public to assess the historical financial performance of anissuer. This change is consistent with the existing requirement in section 23(d) of Policy 5.1concerning financial statement disclosure of an acquired business. Other provincial securitiescommissions are considering adopting this change. The Commission considered adopting therequirement in SEC Form S-K to include three years of audited financial statements but fiveyears of unaudited selected financial information "where trend information is relevant" to anunderstanding of the business of the issuer. The Commission was reluctant to impose thisrequirement in all instances, as the Commission was not confident that the resulting benefitswould outweigh the related costs but welcomes comments concerning this matter inparticular. It should be noted that in section 2.6 of the Companion Policy, the Commissionencourages issuers to include five years of unaudited summary financial statement informationif the information would be helpful to an understanding of trends affecting the business orfinancial condition of the issuer.
Consideration was given to adding a provision similar to section 6.3(7) of NP 47 that wouldpermit an issuer to rely upon third quarter interim financial statements if the issuer files apreliminary prospectus before the directors of the issuer have approved the comparativeaudited financial statements for the issuer's last financial year. The Commission rejected thispossibility as it was concerned that with the reduction in the requirement for five years offinancial statements to three years, a further "automatic" reduction to two years of auditedfinancial statements plus third quarter unaudited statements would not be appropriate for anon-POP issuer which lacks the size, market capitalization and market following of a POPissuer. As noted in section 2.1 of the Companion Policy, it will still be possible for an issuerto apply for relief from the requirement of subsection 3.1(1) of the Rule by applying for anexemption under Part 8 of the Rule.
Proposed Rule 41-502 Prospectus Requirements for Mutual Funds will provide that section3.1 of the proposed Rule is inapplicable for mutual funds and will prescribe financial statementdisclosure requirements for "long-form" prospectus mutual fund issuers.
Section 3.2 of the proposed Rule deals with the use of non-Canadian generally acceptedaccounting principles ("GAAP") in prospectuses. The current provisions governing the useof foreign GAAP by an issuer are contained in subsection 1(4) and sections 57 and 58 of theRegulation. Subsection 1(4) permits an issuer incorporated or organized in a jurisdictionoutside Canada to use foreign GAAP if the notes to the issuer's financial statements soindicate. Section 57 establishes the basic requirement that all financial statements in aprospectus that are not prepared in accordance with Canadian GAAP be reconciled toCanadian GAAP. However, because a reconciliation does not require any examination of theinherent soundness of the accounting principles and standards that are being reconciled,section 58 in effect provides the Director with the ability to require a full restatement offinancial statements in accordance with Canadian GAAP if, for example, an issuer's homejurisdiction GAAP is not well known to Canadian investors. Section 3.2 of the proposed Rulenow permits non-Canadian issuers to use foreign GAAP and a reconciliation to CanadianGAAP without obtaining the consent of the Director, subject to an overriding obligation onthe Director to refuse to issue a receipt if the resulting financial statements appear to bemisleading as to the financial condition or prospects of the issuer. The effect of thereformulated provisions is intended to be the same in practice as is presently the case.
Amendments have also been made to the provisions governing the inclusion of financialstatements of an acquired business currently reflected in section 56 of the Regulation and item23 of Policy 5.1. Subsection 3.3(1) of the proposed Rule requires that financial statementsof an acquired business be included in a prospectus for any completed material acquisitionand for any material acquisition that is intended to be completed as disclosed in theprospectus. The financial information concerning the acquired business is not required,however, if the financial results of the acquired business have been included in the auditedconsolidated financial statements of the issuer for a period of at least 6 months. Thesubsection does not contain the alternative test, currently set forth in paragraph 23(c) ofPolicy 5.1, that the financial statements of an acquired business must be included if 40% ormore of the proceeds of the issue are to be applied, directly or indirectly, to finance theacquisition of the business whether or not the acquisition is material. The Commissionconcluded that the key determination should be the materiality of the acquisition to the issuer,not the amount or percentage of the proceeds that are to be applied towards the purchase.A discussion of the meanings of "business" and "materiality" for this purpose is set out insection 2.4 of the Companion Policy.
In revising the requirements for financial disclosure in connection with business acquisitions,the Commission considered SEC Release No. 33-7355; 34-37802; International SeriesRelease No. 1021 dated October 10, 1996, which amended the existing provisions set forthin Rule 3-05(b) of Regulation S-X under the United States Securities Act of 1933 regardinginclusion of financial statements of acquired businesses (the "SEC Release"). Under SECRule 3-05(b), the extent of financial statement disclosure of an acquired business isdetermined not on the basis of whether the proceeds of the issue are to be applied to theacquisition, but instead on the basis of the significance of the acquisition to the business ofthe issuer determined by reference to a "sliding scale". The effect of the SEC Release is toraise the thresholds of "significance" that determine whether financial statements must beincluded so as to encourage issuers to offer their securities under registered offerings ratherthan unregistered offerings under Regulation S. The Commission chose not to adopt the"sliding scale approach" reflected in the SEC Release as the current disclosure requirementbased on materiality appears to work well in practice.
In proposing the requirement to include the financial history of an acquired business unlessthe financial results of the acquired business have been included in the audited consolidatedfinancial statements of the issuer for a period of at least six months, the Commission is tryingto strike a balance between providing prospective investors with relevant historical financialinformation of an acquired business and ensuring that the disclosure requirements for issuersare not overly onerous. At a certain point in time the results of the acquired business willhave formed part of the issuer's historical financial disclosure so that a separate historyrelating to the acquired business is not necessary. The Commission is of the view that aftersix months there would be sufficient history to provide an understanding of the financialresults.
Although the Commission has proposed that the financial information concerning an acquiredbusiness be provided unless the "6 month test" is met, the Commission recognizes that eachacquisition is to some extent fact specific and that it is difficult to set out one test that can beapplied consistently to each fact situation. For that reason, the Commission would welcomeany comments concerning the proposed test and any suggested alternative tests which shouldbe considered. For example, one alternative may be to combine the "6 month test" with aprovision that indicates that disclosure would not be required for acquisitions which tookplace longer than 12 months ago even if the there was less than 6 months of auditedconsolidated financial information.
Proposed Rule 41-502 Prospectus Requirements for Mutual Funds will provide that section3.3 of the Rule is inapplicable to mutual funds.
The proposed Rule discontinues the current requirement in section 15 of Policy 5.1 to includedisclosure of dilution of the securities being offered. No dilution disclosure is required underNP 47 and the Commission has concluded that disclosure of dilution is unnecessary for longform issuers as well.
Part 4 of the proposed Rule deals with matters relating to pricing and costs. Currently, NP47 provides that POP-eligible issuers may reduce the offering price of securities from theinitial public offering price fixed in a short form prospectus without the need to file aprospectus amendment. The ability to reduce the offering price is subject to certainconditions, including that the proceeds to be received by the issuer or selling securityholderremain unaffected and that disclosure is made that the underwriters' compensation will bedecreased accordingly. At the time that NP 47 was amended to permit reduced priceofferings, it was felt that non-POP issuers should not be permitted to avail themselves of theseprovisions because of concerns relating to possible market manipulation. However, based ona reconsideration of this issue and the experience arising from the introduction of the reducedprice offering provisions in NP 47, the Commission is extending the reduced price offeringprovisions to non-POP issuers in subsection 4.1(3) of the proposed Rule. The Commissionbelieves that this change may help to reduce the dilemma faced by an underwriter that isunable to market an offering at the stipulated offering price. In these circumstances, theunderwriter may be uncertain as to when it is safe to declare the distribution to be completeso as to be able to sell the securities below the offering price without a prospectus. To permitreduced price offerings under the proposed Rule is preferable from a policy perspective as itreduces the incentive on an underwriter to find "accommodation" purchasers of the unsoldportion of a distribution and increases the likelihood of all purchasers receiving a copy of theprospectus.
The Commission considered and rejected the possibility of continuing the requirementcurrently set forth in section 4.3 of Policy 5.7 of requiring that a selling securityholder bearits proportionate share of the expenses of a combined treasury and secondary offering. TheCommission also considered that a rule mandating a pro rata sharing of expenses might beaccompanied by an exemption for bona fide agreements providing otherwise, which had beennegotiated by the issuer and selling securityholder in advance of the offering before the sellingsecurityholder became an insider. The Commission ultimately concluded that sharing ofexpenses is a matter best left to the parties involved in an offering and that it may not alwaysbe in the best interests of an issuer and its securityholders for the Commission to mandate apro rata sharing of expenses. Accordingly, the Commission determined that this is best dealtwith as a disclosure matter. Item 1.4(6) of the Prospectus Form requires disclosure in theprospectus of who is paying the expenses of an offering and the reasons for thesearrangements.
Proposed Rule 41-502 Prospectus Requirements for Mutual Funds will make all of Part 4inapplicable to mutual fund issuers.
Part 5 of the proposed Rule deals with certification of prospectuses. Section 5.1 carriesforward the requirement in section 64 of the Regulation that the approval of financialstatements included in a prospectus be evidenced by the signatures of two directors on thebalance sheet, but discontinues the requirement that an issuer's audit committee first considerthe statements. The Commission is of the view that the proposed Rule should avoidregulating matters relating to corporate governance. Section 5.2 of the proposed Ruleprovides that if disclosure concerning the guarantor is required by a prospectus form, thepreliminary prospectus and prospectus must contain a certificate of the guarantor in the formrequired by subsection 58(1) of the Act. This requirement mirrors the requirement in item20(3) of Appendix B of NP 47. As noted below in the discussion relating to the ProspectusForm, there is an explicit requirement in the Prospectus Form that disclosure be providedconcerning a guarantor of securities. This requirement parallels the requirement underparagraph 5 of Item 16 of Appendix B of NP 47.
Part 6 of the proposed Rule deals with matters relating to filing of preliminary prospectusesand prospectuses. Sections 6.1, 6.2 and 6.3 are based on the relevant provisions in Part IIIof the Regulation, Policy 5.7 and National Policy Statement No. 1 (which is expected to bereformulated as a National Policy and published for comment at a later date). Where possible,the filing requirements have been simplified. For example, the requirement to file certifiedcopies of directors resolutions has been eliminated, as the Commission concluded that this isa matter of corporate governance that need not be subject to review by Commission staff.
The current requirement to pre-clear green sheets set forth in the Commission notice of July7, 1989 Use of "Green Sheets" and Other Marketing Material During the Waiting Period(1989) 12 O.S.C.B. 2641 has also been discontinued. Section 65(2) of the Act is clearconcerning what advertising and other material may be distributed during the waiting period.Accordingly, the Commission is of the view that it is up to issuers and their legal advisors todetermine what it is permissible to distribute, and that pre-clearance should not be necessary.However, section 6.5 of the proposed Rule provides that an issuer may be required, at therequest of the Director, to file all advertising and sales literature used in connection with thedistribution. The requirement is based upon a similar requirement which the Commissionmay impose upon registered dealers under section 50 of the Act.
Part 6 of the proposed Rule does not deal with the "mechanics" of filing or deliveringdocuments to the Commission, as this is covered in SEDAR.
Currently, section 80 of the Regulation provides that if more than three underwriters havesigned the certificate contained in a prospectus, a separate certificate must be filed with thefinal prospectus indicating the total public offering price represented by the portion of thedistribution underwritten by each underwriter that has signed the certificate. The certificateneed not be filed if the required information is disclosed in the prospectus. The originalrationale for section 80 seems to relate to the fact that underwriters' liability under the Act islimited to the amount actually sold by each underwriter in the distribution to which theprospectus relates. The section imposes additional costs with no apparent benefit, and is notrequired to be filed by a number of other Canadian securities regulatory authorities.Accordingly, this requirement is not included in the proposed Rule.
Section 59 of the Act provides that where there is an underwriter, a prospectus shall containa certificate of the underwriter in the required form. Section 12 of Policy 5.1 expands uponsection 59 of the Act by indicating that, subject to exceptions, a receipt for a prospectus willnot be issued unless the prospectus contains an underwriter's certificate. The Commission isof the view that section 12 of Policy 5.1 may be inappropriate in certain instances. Therequirement to include an underwriter's certificate can be very costly for an issuer and doesnot necessarily enhance the quality of the prospectus disclosure, particularly if an underwriteris asked to sign a certificate in the final stages of a proposed financing solely in order tosatisfy the regulatory requirements. Accordingly, section 12 of Policy 5.1 is not included inthe proposed Rule, although section 1.5 of the Companion Policy states that the due diligenceinvestigation that the underwriter and its advisers undertake in relation to the business of theissuer should result in enhanced quality of disclosure in the prospectus. For that reason theCommission encourages underwriter participation in the prospectus process, particularly inthe case of initial public offerings. In addition, the Companion Policy reminds issuers that theDirector has discretion under section 61(1) of the Act to refuse to issue a receipt for aprospectus if it is in the public interest to do so, including in the case of a prospectus thatcontains disclosure that is considered deficient. The Prospectus Form also includes arequirement, where there is no underwriter, to make a statement, in bold type, on the frontpage of the prospectus alerting readers that no underwriter has been involved in thepreparation of the prospectus.
Currently, item 15 of Policy 5.1 requires that an issuer file copies of the underwriting oragency agreement and any other material contract requested by Commission staff. Thecurrent forms require that every material contract be made available for inspection at areasonable time and place during distribution of the securities being offered. Theserequirements are continued in section 6.4 of the proposed Rule and Item 27 of the ProspectusForm. The Commission considered limiting these requirements so that only those materialcontracts that govern the terms of, or that affect the rights and obligations of the holders ofthe offered securities would be required to be made available. The Commission determinedhowever that all material contracts should be available for inspection for a reasonable periodof time in the interests of transparency and full disclosure. Section 4.2 of the CompanionPolicy indicates that the Commission will consider applications for relief from this requirementin circumstances where requiring access to the material contracts or portions thereof forpublic inspection purposes would be unduly detrimental to the company and would not benecessary in the public interest.
The requirements of section 25 of Policy 5.1 concerning international offerings have beenchanged to include a selling securityholder, promoter and guarantor in the list of partiesrequired to file a submission to jurisdiction and to remove general partners of limitedpartnerships and certain others from the scope of the provisions. Section 6.8 of the proposedRule requires that an issuer, selling securityholder, promoter or guarantor incorporated ororganized outside Canada or residing outside of Canada file a submission to jurisdiction andappointment of agent for service using either Form F3 or F4, as appropriate. Item 1.10 of theProspectus Form prescribes language to be included in the prospectus in these circumstances.
The provisions in the proposed Rule dealing with amendments and amended prospectusesreflect substantial changes (see sections 6.9, 6.10 and 6.11). In the past, a distinction has attimes been made between an "amendment" to a preliminary prospectus or a prospectus andan "amended preliminary prospectus" or "amended prospectus" . The proposed Rule makesit clear that a change to a preliminary prospectus or a prospectus is in all cases effected bymeans of an "amendment" and that an amendment can be in the form of either a separateamending document or a restatement of the entire preliminary prospectus or prospectus. Theproposed Rule also provides that all amendments shall be certified and receipted.
Section 6.12 of the proposed Rule provides that if the amendment has been filed as a resultof the occurrence of a material adverse change after the date of the preliminary prospectusor to add a class or series of security in addition to the class or series of security for whichthe preliminary prospectus was filed there will be a ten day waiting period between theissuance of a receipt for the amendment and a receipt for the prospectus. This is consistentwith the rationale underlying section 65 of the Act.
Part 7 of the proposed Rule concerns procedures and requirements for granting receipts. Thegeneral rules are set forth in section 7.1 and have been derived from section 38 of theRegulation. Subsection 7.1(5) of the proposed Rule extends the current 60 day maximumdistribution period for best efforts offerings to 90 days to match the time period currentlyprovided for in the securities laws of certain other provinces. Section 4 of Policy 5.1 providesthat during the distribution period, funds must be held by a trust company or other acceptabledepository. Subsection 7.1(5) of the proposed Rule now provides that only trust companiesand Canadian chartered banks are acceptable depositories for this purpose. The Commissionalso considered permitting brokers or lawyers to act as depositories for this purpose.However, the Commission is of the view is that the purpose behind the requirement is toensure that investors subscriptions are protected in the hands of an arm's length third partyinstitution which is in the business of safeguarding assets in its custody until the minimumoffering is either attained or the subscription monies returned to investors. Accordingly, theCommission determined that only trust companies and banks should be identified asacceptable depositories under the proposed Rule.
Part 8 of the proposed Rule deals with exempting powers. Section 8.1 contains the generalexempting power contained in all local rules. Section 8.2 provides that if an issuer proposingto file a prospectus anticipates not being in a position to comply with one or more of theprovisions of the proposed Rule, the issuer will be required to notify the Director in writingprior to or contemporaneously with the filing of the preliminary prospectus and, as regardsthe matters so notified, relief shall be deemed to have been granted if a receipt in respect ofthe prospectus is issued. This provision is modelled on section 7.3 of NP 47 and is designedto minimize paperwork associated with the granting of exemptive relief for prospectus-relatedmatters.
Form 41-501F1
The Prospectus Form was prepared with a view to establishing one form of prospectus foruse by all types of issuers, other than issuers for which a different form of prospectus isprescribed. The Prospectus Form includes all of the disclosure requirements currently foundin the Regulations, the forms, Policy 5.1 and Policy 5.7. In this regard the Prospectus Form(i) eliminates unnecessary differences in wording between Forms 12, 13 and 14, as well asdiffering substantive requirements that are not justified on a policy basis, (ii) parallels thesubstantive disclosure obligations imposed on POP eligible issuers in the short formprospectus and documents incorporated by reference, (iii) re-orders the items to more closelyreflect the order in which they generally appear in long-form prospectuses (without actuallyrequiring that any particular order be followed), and (iv) provides more extensive instructions,including General Instructions at the beginning of the Prospectus Form, to provide greaterassistance in the preparation of prospectuses. As a result, the Prospectus Form contains alarge number of changes to the wording that currently exists in Forms 12, 13 and 14. Thedraft of the Prospectus Form accompanying this Notice contains footnotes that identify themore significant of these changes and, where appropriate, provides an explanation of thereasons for the changes. In certain instances, changes have been made to conform theProspectus Form with disclosure requirements in other provinces of Canada.
Proposed Rule 41-502 Prospectus Requirements for Mutual Funds will provide that mutualfunds may use either the "long-form" mutual fund prospectus, presently set out as Form 15to the Regulation to the Act or the simplified prospectus system set out in National PolicyStatement No. 36 ("NP 36"). Mutual funds that are labour sponsored investment funds mustuse the prospectus form presently set out as Form 45 to the Regulation to the Act. Mutualfunds that are commodity pools must use Form 15; NP 36 does not permit such issuers to usethe simplified prospectus system.
The Prospectus Form includes General Instructions for preparation of a prospectus and setsout 32 items for disclosure. Item 1 - Front Page Disclosure - of the Prospectus Form setsforth in one item the various matters that are required, under the current prospectus forms andrelated provisions in the Regulation and national and local policy statements, to be includedon the front page of prospectuses. With regard to Item 1.4 Distribution, the Commissionconsidered whether the requirement currently in Item 1, Instruction 5 of Form 14 (naturalresource companies) that the securities of the selling securityholder not be sold until thedistribution of the issuer's securities is complete, should be a requirement for all types ofissuers. The Commission decided not to extend this requirement to all types of issuers. Itfurther determined that there was no compelling justification for mandating, in the case ofnatural resource issuers, that the distribution of the issuer's securities should be completedbefore any of the selling securityholders securities are sold.
Section 39 of the Regulation under the Act provides that a receipt shall not be issued for aprospectus of a finance company relating to a debt security not issued under a trust indentureunless the outside front cover of the prospectus states that the debt security has not beenissued under a trust indenture. The reason for this provision and the policy basis fordistinguishing finance company debt securities from those of other types of issuers in unclear.As a result, the provision is not included in the proposed Rule or the Prospectus Form.
Subsection 38(3) of the Act prohibits any representation that any security will be listed on anystock exchange or that application has been or will be made to list the security upon any stockexchange except with the written permission of the Director. Currently, item 7 of Policy 5.1prohibits a listing representation from appearing in a preliminary prospectus in anycircumstance, and permits a representation in a prospectus only if conditional listing approvalfrom the applicable exchange has been obtained. This prohibition was made in part torespond to concerns of the Canadian exchanges that representations may be made by issuersin situations where there is no reasonable likelihood of such issuers obtaining a listing. Item1.7 of the Prospectus Form sets out listing representations which may be made in preliminaryprospectuses and prospectuses in certain circumstances. This item provides that if applicationhas been made to list the securities and if any securities of the issuer are currently listed ona stock exchange then a statement may be included in the preliminary prospectus thatapplication has been made to list the securities distributed under the prospectus. The reasonfor this approach is that issuers who have securities listed would have a reasonable possibilityof obtaining a listing and listing representations in such circumstances raise no regulatoryconcerns. Although item 1.7 of the Prospectus Form only applies to the prospectus context,it is proposed that similar provisions be incorporated into other rules dealing with other typesof disclosure documents to obviate the need for issuers to apply for listing representationapproval in many circumstances.
One alternative approach that could be adopted would be to permit a statement to be includedin the preliminary prospectus that application has been made to list the securities even insituations where the issuer does not have any securities currently listed. This alternative wouldbe similar to the approach taken in the United States where prior SEC approval is notrequired before making listing representations. Instead such representations are regulated andsubject to the SEC's general disclosure requirements. Listing representations are subject toRule 10b-5 which imposes statutory civil liability for fraud or deceit, including misleadingdisclosure.
Item 5 - Business of the Issuer - contains significantly more detailed provisions concerningdisclosure of the business of the issuer. These parallel the requirements for disclosureconcerning a business in the Annual Information Form for a POP issuer. Item 5.3 sets out theprospectus disclosure requirements concerning any material acquisitions or dispositions in thethree financial years prior to the prospectus. The current two year requirement was extendedto three years to match the financial statement disclosure requirements.
Item 6 - Description of Property - provides for different disclosure for industrial companies,mining companies and oil and gas companies. The requirements have been changed toconform to the disclosure requirements in NP47 and have been updated.
A substantive change in the Prospectus Form is found in Item 8 - Summary FinancialInformation and Management's Discussion and Analysis. While there is not currently anyrequirement to include summary financial information in a prospectus it has become commonpractice to include the information immediately before Management's Discussion of OperatingResults. For that reason the Prospectus Form includes a requirement to provide summaryfinancial information consistent with the similar requirements in NP 47. Item 8.3 of theProspectus Form requires the issuer to include Management's Discussion and Analysis in theform required in proposed Rule 51-501 Management's Discussion and Analysis that willreplace existing Policy 5.10.. This item replaces Item 13 of Form 12 - Variations in OperatingResults by expressly requiring the disclosure.
Item 9 - Earnings Coverage - requires that a prospectus relating to an issue of debt securitieshaving a term to maturity of longer than one year or to an issue of preferred shares containa statement of earnings coverage for a specified period. The requirement to provide assetcoverage currently set forth in section 59 of the Regulation has not been included in theProspectus Form as the Commission has concluded that asset coverage is not an accuratemeasurement of risk. In the Commission's view, asset coverage is based on book values andtherefore does not reflect the true value of an issuer's assets. The SEC does not require assetcoverage information to be included in a registration statement. A further difficulty with therelevance of asset coverage information is that it is not possible to include the value ofintangible property in the asset coverage calculation.
Item 10 - Description of Securities sets out the requirement for a description of the attributesof the securities being distributed. The requirements are consistent with the requirements inNP 47. Item 10.4 is a new requirement that any ratings received from one or more approvedrating organizations be disclosed whether or not it is an approved rating. This is consistentwith paragraph (4) of Item 8 of Appendix B of NP 47.
Item 25 - Guaranteed Securities has been added. This item requires disclosure concerninga guarantor of securities and parallels the requirement under paragraph 5 of Item 16 ofAppendix B of NP 47. Subsection 53(4) of the Regulation to the Act currently requiresfinancial statement disclosure for the guarantor only for an offering of guaranteed debtsecurities.
Form 41-501F2
As noted above, Form F2 is based very closely on Appendix A to Policy 5.7. The informationprovided in the form enables the Commission to conduct investigations of promoters and ofthe directors and executive officers of an issuer or, if a promoter is a corporation, thedirectors and executive officers of a promoter, so that the Director can fulfil his or herobligations under clause 62(1)(e) of the Act.
Form 41-501F3 and Form 41-501F4
As noted above, Form F3 and Form F4 are based very closely on Appendix A and AppendixB, respectively, of Policy 5.1. The Commission is of the view that an issuer, sellingsecurityholder, promoter or guarantor that is incorporated, organized or otherwise governedunder the laws of a foreign jurisdiction or resides outside of Canada should be required tosubmit to the jurisdictions of the courts and administrative tribunals of Ontario and to appointan agent for service in Ontario. Forms F3 and F4 provide a standard form to accomplishthese purposes.
Companion Policy 41-501CP
As noted above, the Companion Policy relates to the proposed Rule and has been derivedprincipally from OSC Policies 5.1 and 5.7. A footnote to each section in the CompanionPolicy indicates the source of the section.
Authority for the Proposed Rule and Forms
The following sections of the Act provide the Commission with authority to adopt theproposed Rule and Forms. Paragraph 143(1)13 authorizes the Commission to make rulesregulating trading or advising in securities to prevent trading or advising that is fraudulent,manipulative, deceptive or unfairly detrimental to investors. Paragraph 143(1)16 authorizesthe Commission to make rules varying the application of the Act to establish procedures foror requirements in respect of the preparation and filing of preliminary prospectuses andprospectuses and the issuing of receipts therefor that facilitate or expedite the distribution ofsecurities or the issuing of the receipts, including requirements in respect of pricing ofdistributions of securities after the issuance of a receipt for the prospectus filed in relationthereto. Paragraph 143(1)39 authorizes the Commission to make rules requiring orrespecting the media, format, preparation, form, content, execution, certification,dissemination and other use, filing and review of all documents required under or governedby this Act, the regulations or the rules and all documents determined by the regulations orthe rules to be ancillary to the documents, including preliminary prospectuses andprospectuses.
Alternatives Considered
No alternatives to the proposed Rule or the Forms were considered, as both the proposedRule and the Forms carry forward the basic prospectus form, content and filing requirementscurrently in effect, requirements that the Commission feels have generally worked well.However, as noted above, both the proposed Rule and the Prospectus Form contain a largenumber of changes to the provisions currently in Part III of the Regulation, the prospectusforms and Policy 5.1 and Policy 5.7 to update these requirements and make the prospectusrules more user friendly and reflective of current practice.
Related Instruments
The proposed Rule, Forms and Companion Policy are all related to each other. TheCompanion Policy is also related to sections 56, 58, 59, 61, 62 and 63 of the Act.
Unpublished Materials
In proposing the Rule, the Forms and the Companion Policy, the Commission has not reliedon any significant unpublished study, report, decision or other written material.
Anticipated Costs and Benefits
Purchasers of securities and issuers and selling securityholders and their advisors shouldbenefit from the proposed Rule and Forms. The effect of the proposed Rule is to (i)consolidate the existing provisions currently set forth in the Regulation and various policystatements that relate to the preparation, certification, filing and receipting of prospectuses,and (ii) update these provisions to reflect current administrative practice and the views of theCommission. Together, the proposed Rule and Prospectus Form consolidate existing Forms12, 13 and 14 and similarly update the disclosure provisions in those forms to reflect currentpractice. The resulting prospectus regime should be more concise and easier to use than thecurrent system. Although some of the discretion granted to the Director in Part III of theRegulation to permit deviations from the financial statement requirements is not replicatedin Part 3 of the proposed Rule, the provisions in Part 8 of the proposed Rule concerningexemptions should result in the same degree of flexibility in applying the proposed Rule ascurrently exists. Accordingly, the proposed Rule and Prospectus Form should not result ingreater delays or in obtaining exemptive relief, if necessary. The investing public shouldbenefit from the modernization of the prospectus rules and from any reduction in the costsincurred by issuers and selling securityholders in complying with those rules.
Regulations to be Revoked
The Commission will request the Lieutenant Governor in Council to revoke the followingprovisions in the Regulation:
(i) Sections 33 to 66, inclusive; and(ii) Sections 80 to 82, inclusive.
Comments
Interested parties are invited to make written submissions with respect to the proposed Rule,the Forms and the Companion Policy. Submissions received by September 2, 1997 will beconsidered.
Submissions should be sent in duplicate to:
Daniel P. Iggers, SecretaryOntario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
A diskette containing an electronic copy of the submissions (in DOS or Windows format,preferably WordPerfect) should also be submitted. As securities legislation in certainprovinces requires that a summary of written comments received during the comment periodbe published, confidentiality of submissions received cannot be maintained.
Questions may be referred to:
Susan Wolburgh JenahManager, Market OperationsOntario Securities Commission
(416) 593-8245
or
Vicky Edwards
Legal Counsel, Market Operations
Ontario Securities Commission
(416) 593-3687
Proposed Rules, Forms and Companion Policy
The text of each of the proposed Rule, Forms and Companion Policy follows, together withfootnotes that are not part of the proposed Rule, Forms or Companion Policy, but which havebeen included to provide background and explanation.
Rescission of Policies
The proposed Rule and Forms will result in the rescission of the following CommissionPolicies: Policy 5.1 except Part A of section 10, section 19, section 24 and section 26 andPolicy 5.7. The proposed Rule and Forms will also result in the rescission of the followingUniform Act Policies: Uniform Act Policy 2-03 and Uniform Act Policy 2-04. The text of theproposed rescission will be as follows:
"Policy 5.1, except Part A of section 10, section 19, section 24 and section26, Policy 5.7, Uniform Act Policy 2-03 and Uniform Act Policy 2-04 arehereby rescinded."
DATED: May 2, 1997.