It has been several months since the prompt offering procedure (the “POP system”) in National Instrument (NI) 44-101 was opened up to smaller reporting issuers. Many of these issuers have found the POP system to be a quick and efficient means to raise capital. Others have found it to be a painful process, full of stumbling blocks. Several keys to quick and efficient POP offerings are set out below.
The POP system permits eligible issuers to distribute a short prospectus (as short as 10 pages in many instances) to investors. The short form prospectus focuses on the details of the offering and use of proceeds. It contains minimal information about the issuer. Material information about the issuer that is contained in the issuer’s continuous disclosure documents (the annual information form, financial statements, information circulars, management’s discussion and analysis, and material change reports) is incorporated by reference into the prospectus. Those continuous disclosure documents then become part of the prospectus, investors are deemed to have read them, and the civil liability provisions will apply to any misrepresentations in them.
Under the POP system, if the issuer elects to follow certain procedures, securities regulators review and comment on the short form prospectus within three business days, significantly shortening the time required to clear the prospectus through the regulatory process.
One of the biggest advantages of the POP system for a smaller issuer is the ability to issue “free-trading” securities, making the offering more attractive to institutional investors. Previously, smaller issuers raised capital almost exclusively through private placements, with the result that investors were required to hold the securities for four months before resale. In order to make a private placement attractive to institutional investors, it was sometimes necessary for the issuer to offer units, consisting of a share and a share purchase warrant, as a compensation for the hold period. Now, with a POP offering, that is no longer necessary and capital can be raised with less of a diluting impact on the issuer.
Another advantage of the POP system is the ability to complete the offering quickly, lessening the risk of missing market windows. The usual timeframe for a marketed POP offering is about four to five weeks from announcement to closing (compared with three months for a traditional prospectus offering). The usual timeframe for a bought-deal POP offering (where the underwriters commit upfront to buy a fixed number of securities) is about three weeks from announcement to closing.
However, because POP offerings happen very quickly, there is little room in the timetable for glitches. It is vital that the issuer be organized and prepared, before the offering is announced. For example:
* the issuer must have a current annual information form on file;
* the issuer must have an effective POP notice (defined below) on file, or be grandfathered;
* supporting documents, such as technical reports, certain consent forms, and pro forma financial statements, must be filed at the same time as the preliminary short form prospectus;
* if the offering occurs in Quebec, French language versions of the preliminary and final short form prospectuses must be filed at the same time as the English versions;
* in a bought deal, the issuer must file its preliminary short form prospectus within four business days after the commitment letter is signed with the underwriters (this is a condition on which underwriters are permitted to market the offering before the preliminary prospectus is filed);
* board approvals and officers’ signatures will be required on short notice; and
* auditors’ comfort letters, expert opinions and consents may be required for the prospectus.
The commitment letter and underwriting agreement will require that the issuer meet strict deadlines for filing the prospectus documents and closing the transaction. If the issuer is not prepared and delays occur in the process, the success of the offering could be jeopardized.
Eligibility
The first step for POP offerings is to determine eligibility. To access the POP system, an issuer must have securities listed on a Canadian stock exchange, have a current annual information form on file under continuous disclosure rules and file a notice that it intends to be qualified to access the POP system.
The POP notice is a one-time notice that must be filed by all issuers who were not grandfathered under NI 44-101. Once filed, the POP notice is effective after the expiry of 10 clear business days. The preliminary short form prospectus for a POP offering cannot be filed with securities commissions until the POP notice becomes effective.
As previously mentioned, an issuer’s continuous disclosure record (excluding news releases) is incorporated by reference into the short form prospectus. An issuer should review its continuous disclosure record and update it where necessary. Have all material agreements been filed on SEDAR? Are there material agreements containing competitively sensitive or confidential information that should be removed before filing?
The issuer should also review its business records. Underwriters will want to review the records as part of their due diligence process. To make this process efficient, an issuer should review its records periodically to ensure they are complete and up-to-date. Copies of property records, permits and licences, insurance policies, title opinions, patents, and material agreements should be organized in binders for easy access.
Legal counsel
POP offerings, like any other offering, require a great deal of planning. An issuer contemplating a POP offering should consult its lawyers early, and certainly before the issuer signs any engagement letter or commitment letter with underwriters.
The issuer should also evaluate how the offering proceeds will be used. The use of proceeds may dictate additional disclosure in the short form prospectus, which will require extra lead-time. For example, if more than 10% of the proceeds will be used to acquire assets, the prospectus must contain a description of the assets (requiring the co-operation of the seller and its advisers). Where the acquisition qualifies as a significant acquisition of a business under securities legislation, financial statements relating to the business and to its impact on the issuer will be required (necessitating the co-operation of the seller and its advisers, as well as the involvement of the issuer’s auditors).
Engage auditors
The issuer will need to engage auditors to prepare and review financial statements and to provide comfort. In most cases, the short form prospectus will incorporate by reference the issuer’s latest interim financial statements. The POP system rules require a review of those statements by the issuer’s auditors. As mentioned above, the auditors may need to prepare pro forma financial statements for inclusion in the short form prospectus. In addition, the underwriters will require the issuer’s auditors to provide a comfort letter to them with respect to all financial matters in the prospectus and the documents incorporated by reference before the final short form prospectus is filed.
The issuer should engage its auditors well before an offering is announced so that the necessary review and audit work can be completed before the relevant deadlines.
If an issuer is a reporting issuer in Quebec, it must file a French language version of the prospectus documents, as well as French language versions of all documents incorporated by reference. Often the documents incorporated by reference are lengthy and cannot be translated by the time the preliminary short form prospectus is filed. In this case, it is possible to obtain an order from the Quebec regulatory authorities, permitting
late filing.
Quebec legal counsel should be consulted early to ensure that the necessary order can be obtained and that translation can begin as soon as possible. The issuer or its auditors will also need to arrange for translation of relevant financial statements.
During the offering process, it will be necessary to obtain directors’ approvals, officers’ signatures and experts’ consents. It is imperative that the issuer be able to contact the needed individuals quickly. An issuer should prepare a list that contains contact information for all directors and officers, as well as any experts who have contributed reports or opinions on which disclosure in the prospectus is based. The contact list should contain information as to specific whereabouts of the individuals during the offering process (for example, the remote cottage on the lake or island where the chair of the board spends her weekends).
All directors, officers and experts should be informed that they will be asked to approve documents and provide signatures during the offering process.
A successful offering is a co-operative, co-ordinated effort by the issuer, underwriters, auditors and legal counsel.
An issuer should ask its legal advisers to provide a transaction plan for the offering so that the issuer will know what events will occur at each step and can then manage expectations. The transaction plan is similar to a timetable, but sets out the process step-by-step, assigns responsibility for each item, and lists all the documents and events required to complete the offering.
Mineral Issuers
A mineral resource issuer will need to consider a few additional matters.
Has there been any material change of a scientific or technical nature on any project that requires the filing of a technical report, or the updating of a previously filed technical report?
If so, must the technical report be prepared by an independent qualified person?
If the proceeds of the offering will be used to acquire mineral properties, will a technical report be required?
Does the issuer have up-to-date contact information for the various qualified persons who have authored technical reports for material properties (since their consents, and possibly updated certifications, will be required during the offering process)?
Following these key steps will prepare an issuer for a POP offering. Even so, an issuer should expect to be frustrated from time to time during the offering process since not all issues can be anticipated, or dealt with, in advance. At the same time, however, an issuer should expect its advisers to guide it through the process and, where possible, to quickly resolve issues that arise during the offering.
— The author is a partner with the law firm, Lang Michener LLP in Vancouver. As chair of the Corporate Governance Group, Ms. Morganti practices in the areas of corporate finance and commercial law, with a focus on the mining sector. She can be reached at 604-691-7458 or cmorganti@lmls.com.
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