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12.4.1 When Prospectus Is Required

Learn about when a prospectus is required for the distribution or sale of securities, including scenarios for new issues and obligations in various provinces in Canada.

When Prospectus Is Required?

Unless an exemption has been granted, all provincial securities acts in Canada mandate that a prospectus be filed and delivered if the offering or sale of securities is considered to be a distribution to the public. In simplified terms, a prospectus is the investment contract between the investor and the corporation offering its securities for sale. It is designed to provide full, true, and plain disclosure concerning the material facts about the security in question. On this basis, investors considering purchasing the security can evaluate it and make an informed decision.

Types of Trades Requiring a Prospectus

The prospectus requirement generally applies to three types of trades in securities:

  • Trades by or on behalf of an issuer: This includes new issues from treasury.
  • Trades from a control position: Except in Quebec, these trades require a prospectus unless a prospectus exemption applies.
  • Trades in securities previously acquired by way of a prospectus exemption: Unless the subsequent trade is made under a further prospectus exemption.

New Issues

When a company raises equity capital in the marketplace, it issues securities from its own treasury. These issues are new securities as compared to those already traded publicly in what is known as the secondary market. New securities are issued directly by the company and then sold to the public. The proceeds from these sales go to the company issuing the securities. If the company is issuing securities for the first time, this is considered an Initial Public Offering (IPO), and a prospectus must first be filed with the regulators.

Newly issued securities are often referred to as new issues. However, a new issue isn’t necessarily an IPO; it may also be additional capital raised by a reporting issuer (an already public company). In such cases, a prospectus is typically required unless a prospectus exemption is available. The prospectus of a reporting issuer may be less detailed than one associated with an IPO, as information about the reporting issuer is already available to the public.

Key Takeaways

  • A prospectus is vital for ensuring transparency and providing essential information to investors.
  • Provincial securities acts enforce the requirement for a prospectus unless an exemption is provided.
  • Prospectus exemptions play a significant role, especially for control positions and subsequent trades of exempt securities.
  • An IPO always necessitates a prospectus, ensuring first-time investors have all the material facts.
  • Existing public companies can issue new securities with a less detailed prospectus, leveraging pre-existing public disclosures.

FAQs

1. What is a prospectus?

A prospectus is a formal document required by provincial securities acts, which lays out all material information about the security being offered to help investors make an informed decision.

2. When is a prospectus required?

A prospectus is generally required for any new issue of securities by an issuer, for trades from a control position (except in Quebec), and for securities previously acquired using a prospectus exemption unless subsequent trades qualify for another exemption.

3. What is an Initial Public Offering (IPO)?

An IPO is the first time a company offers its securities to the public. This requires the company to file a prospectus with the regulators to ensure all potential investors have access to the material facts.

4. Are there exemptions to filing a prospectus?

Yes, various prospectus exemptions exist which can relieve issuers from the obligation of filing a prospectus under certain conditions.

Glossary

  • Prospectus: A legal document providing details about an investment offering for sale to the public.
  • Securities Act: Legislation governing securities trading within a jurisdiction.
  • Distribution: The sale of securities, often referring to a new issue.
  • IPO (Initial Public Offering): The first sale of stock by a private company to the public.
  • Secondary Market: Where investors buy and sell securities they already own.
  • Prospectus Exemption: Circumstances under which an issuer can sell securities without a prospectus.

Summary

    graph TD;
	    A[Issuer Plans Equity Issue] -->|Files and Delivers| B(Prospectus);
	    B -->|Offers Securities to| C(Public);
	    C -->|Provides| E(Proceeds to Issuer);
	    subgraph Public Markets
	        D(Secondary Market)
	    end
	    C -->|Trades Securities in| D;

CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

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## Under what circumstances is a prospectus generally required in Canadian provincial securities acts? - [ ] When securities are offered privately - [x] When the offering or sale of securities is deemed to be a distribution to the public - [ ] When a company is issuing debt, not equity - [ ] When securities are traded only within the original shareholder group > **Explanation:** A prospectus is required when securities are deemed to be distributed to the public, to provide full, true, and plain disclosure of all material facts about the security. ## What is the primary purpose of a prospectus? - [ ] To increase the company's stock price - [x] To provide full, true, and plain disclosure regarding the material facts about the security - [ ] To exempt the company from regulatory oversight - [ ] To prevent retail investors from trading > **Explanation:** The purpose of a prospectus is to give potential investors the information needed to make an informed decision about an investment. ## Which types of trades generally require a prospectus? - [ ] Trades in closed markets - [ ] Trades by anonymous traders - [x] Trades by or on behalf of an issuer, trades from a control position, and trades in securities acquired by way of a prospectus exemption - [ ] Trades within private placement agreements > **Explanation:** A prospectus is required for trades by or on behalf of an issuer, from a control position (unless exempt), and trades of securities acquired by prospectus exemption (unless subject to further exemption). ## What is the difference between a new issue and an IPO? - [ ] There is no difference; they are the same - [ ] An IPO does not require a prospectus - [x] A new issue can be an additional raising of capital from an already public company, while an IPO is when a company first raises equity capital from the public - [ ] A new issue is only offered to existing shareholders > **Explanation:** An IPO is a company's first issuance of equity to the public, whereas a new issue can include additional capital raising from an already public company. ## What must be filed with regulators before a company can conduct an IPO? - [ ] A dividend reinvestment plan - [ ] A limited partnership agreement - [x] A prospectus - [ ] An employee stock option plan > **Explanation:** Before conducting an IPO, a company must file a prospectus with the regulators to ensure comprehensive disclosure. ## Can a new issue ever be exempt from requiring a prospectus? - [x] Yes, if a prospectus exemption is available - [ ] No, a prospectus is always required - [ ] Only if the company is private - [ ] Only if the securities are debt instruments > **Explanation:** A new issue might not require a prospectus if a prospectus exemption is available. ## What does a prospectus of a reporting issuer generally contain in comparison to an IPO prospectus? - [ ] More detailed information - [x] Less detailed information because the issuer's information is already public - [ ] It contains speculative future performance reports - [ ] No financial details are required > **Explanation:** A prospectus of a reporting issuer may be less detailed than an IPO prospectus, since some information is already public. ## What financial instrument is primarily discussed in the context of a prospectus? - [x] Securities - [ ] Loans - [ ] Insurance policies - [ ] Real estate properties > **Explanation:** A prospectus primarily discusses securities being offered to the public. ## What happens to the proceeds from the sale of new issue securities? - [x] The proceeds go to the company issuing the securities - [ ] They are distributed among existing shareholders - [ ] They are deposited in a government fund - [ ] The proceeds are used for investor dividends > **Explanation:** Proceeds from the sale of new issue securities are received by the company that issues the securities. ## Which statement is true concerning trades from a control position? - [ ] They are exempt from all regulations - [ ] They can never be exempt from a prospectus requirement - [x] They may require a prospectus unless traded under a prospectus exemption - [ ] They are not regulated by securities laws > **Explanation:** Trades from a control position require a prospectus unless traded under a prospectus exemption.

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Sunday, July 21, 2024