Rules covering IPOs are changing

If your firm handles IPOs and your clients want in, watch for new rules.

Last November, the CSA proposed changes to rules around the pre-marketing and marketing of prospectus offerings.

The proposals include:

• Term sheets, which give a short rundown of the investment offering, will be permitted as long as all the information they contain also appears in the prospectus. The term sheet will also have to be included or incorporated by reference in the final prospectus;
• Road shows will be permitted if they meet certain conditions, including restricted access and recordkeeping requirements. Road-show presentations will count as term sheets for the IPO issuers’ and agents’ liability purposes;
• Changes to the size and syndicate for bought deals will be allowed within limits, including execution of a formal or informal plan agreed on prior to the deal; and
• The process for gauging interest in potential IPOs will change to let issuers communicate confidentially with certain institutional investors, provided those communiqués meet certain conditions.

New proposals will liberalize restrictions on marketing prospectus offerings. Current rules view marketing activities as “acts in furtherance of a trade,” which means they fall under the general prospectus requirement in securities laws.

As a result, many firms don’t create marketing materials in addition to prospectuses.

The CSA recognizes this long-held regulatory viewpoint ignores 40 years of industry changes, so they’re providing greater certainty around current practices—such as the use of term sheets and road-show presentations. While this sounds like it will simplify matters, it may not. By detailing specific rules for formerly uncertain practices, the proposals may change the way firms sell prospectus offerings:

• The issuer will have to incorporate by reference or otherwise include term sheets in its prospectus. The ability to use term sheets to add information to a prospectus could lead to novel marketing practices, because these documents are not formal prospectus amendments. but it will also provide greater flexibility for issuers and investment bankers alike.
• Road-show presentations will have to be filed publicly and meet the same disclosure standards as a term sheet—a significant change from current practices.
• Different rules relating to the use of information that compares the issuer to other companies, when marketing to investors, would change the long-standing practice that all investors receive the same level of disclosures about securities offered in the prospectus.

Many comments made to the CSA on these proposals focus on their high level of detail and the fact that the rules will likely change current practices. Some say potential differences with U.S. rules could impede cross-border transactions; others question whether the CSA has struck the right balance between increased flexibility and investor protection.

The number of comments received so far means the CSA will likely modify its proposals, and may even request further comment.

But if they are adopted as is, make sure you:

• Carefully draft term sheets, given the liability stemming from the incorporation of these documents by reference, and hence the new disclosure standards that will apply to these term sheets;
• Keep accurate records and take additional care over presentations at road shows, given the additional liability;
• Only approach institutional clients when gauging interest in a potential IPO, and make sure you follow the rules strictly