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12.4.2 Preliminary Prospectus

A comprehensive guide to understanding the Preliminary Prospectus in Canadian securities regulations, including its definitions, requirements, and the Passport System.

Preliminary Prospectus

Most provinces require the filing of both a preliminary prospectus (also called a red herring prospectus) and a final prospectus. The preliminary prospectus must have on its front cover, in red ink, a statement indicating it has been filed, is not in final form, and is subject to completion or amendment. This warning states that the securities cannot be sold and offers to buy cannot be accepted until a receipt for the final prospectus has been obtained from the provincial securities commission leading the review.

That regulator is typically the securities commission located in the principal jurisdiction or head office of the issuing company.

All provinces other than Quebec require a preliminary prospectus to be filed; in Quebec, a preliminary prospectus may be filed. When an offering is made in more than one province, or when soliciting expressions of interest, a preliminary prospectus is required. It allows the distributor of a new issue to gauge public interest while the securities commission reviews it prior to its pricing and distribution.

The form and content of the preliminary prospectus must substantially comply with the requirements of provincial securities legislation, which are essentially harmonized. It must cover the form and content of a final prospectus but may omit information on the price paid to the underwriter and the price at which the securities will be offered to investors. The auditor’s report can also be excluded from the preliminary prospectus.

Dealers may also prepare an internal-use document known as a greensheet, which highlights the salient features of the new issue to aid sales representatives in soliciting public interest.

Passport System

All jurisdictions of the Canadian Securities Administrators, except Ontario, have adopted Multilateral Instrument (MI) 11-102 Passport System. MI 11-102 provides issuers streamlined access to the capital markets in multiple jurisdictions.

Under this system, the issuer files a prospectus in its principal jurisdiction with its principal regulator, meeting the requirements of harmonized laws. The principal regulator issues a receipt, and the issuer notifies local jurisdictions where it would otherwise file the prospectus. These jurisdictions then automatically issue a deemed receipt.

The Passport System can be used in specified jurisdictions: British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, and Nova Scotia. Approval applies across all other passport provinces and territories.

Even though Ontario did not adopt MI 11-102, it remains a principal regulator under the instrument. This status allows Ontario issuers access to capital markets in other passport jurisdictions by dealing only with the Ontario Securities Commission for prospectus filing or exemption applications. The underwriter, agent, or company must keep records of all entities that received a preliminary prospectus. If a preliminary prospectus is deemed defective, an amended or revised preliminary prospectus must be sent to each recipient once available.

Key Takeaways

  • A preliminary prospectus is a pre-final document filed to solicit interest and gauge public response before final pricing and issuance of securities.
  • It must include a red-ink disclaimer and generally is compelled in all provinces except Quebec, although Quebec allows its optional filing.
  • The Passport System provides simplified access to multi-jurisdiction capital markets, enhancing regulatory efficiency except in Ontario.
  • Ontario participated as a principal regulator under MI 11-102, affording its issuers broader market accessibility.

Frequently Asked Questions (FAQs)

What is a Red Herring Prospectus?

A Red Herring Prospectus is another name for a preliminary prospectus. It includes key information about the offer but omits final pricing and auditor’s reports.

Why is the Passport System beneficial for issuers?

The Passport System allows issuers to meet the regulatory requirements of multiple jurisdictions through a single principal regulator, significantly simplifying the process.

What is the purpose of a greensheet?

A greensheet is an internal-use document prepared by dealers to summarize and highlight the key aspects of a new issue, facilitating sales representatives’ efforts in gathering public interest.

Glossary

Preliminary Prospectus: A document filed by an issuer initially, subject to regulator review and not in its final form.

Red Herring: Another term for a preliminary prospectus, named for the required red-ink disclaimer.

Passport System: A regulatory system facilitating streamlined multi-jurisdictional filings within Canada, covered by MI 11-102.

Greensheet: An internal document used by dealers to present a summary and highlight significant points of a new securities issue.

Principal Regulator: The main securities commission that reviews and approves prospectus submissions in the issuing company’s principal jurisdiction.

Diagrams

Securities Filing Process

    flowchart TD
	    A((Filing Preliminary Prospectus)) --> B((Review by Principal Regulator))
	    B --> C{Preliminary Prospectus Approved?}
	    C -->|Yes| D((Principal Regulator Issues Receipt))
	    C -->|No| E((Revised Preliminary Prospectus))
	    D --> F(((Notice to Other Jurisdictions)))
	    F --> G(((Deemed Receipt Issued by Other Jurisdictions)))

Conclusion

Understanding the requirements and processes associated with the preliminary prospectus, as well as the advantages of the Passport System, is crucial for navigating the Canadian securities regulatory environment. This knowledge ensures compliance and efficiency in dealing with securities’ public offerings.


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markdown ## What is another name for a preliminary prospectus? - [ ] Green herring prospectus - [ ] Blue sheet prospectus - [x] Red herring prospectus - [ ] White swan prospectus > **Explanation:** A preliminary prospectus is also known as a red herring prospectus due to the red ink warning on its cover. ## Which province does not require a preliminary prospectus to be filed? - [ ] Ontario - [x] Quebec - [ ] Alberta - [ ] British Columbia > **Explanation:** Quebec does not require a preliminary prospectus to be filed, though it may be filed voluntarily. ## What must be included on the front cover of a preliminary prospectus? - [ ] The price paid to the underwriter - [ ] Auditor’s report - [x] A statement that the prospectus is not in final form and is subject to completion or amendment - [ ] Final price at which securities will be offered > **Explanation:** The front cover of a preliminary prospectus must include a statement indicating that the prospectus is not final and is subject to completion or amendment. ## Who leads the review of the prospectus filing? - [ ] Central Bank of Canada - [x] Provincial securities commission in the principal jurisdiction - [ ] Federal Treasury - [ ] Stock Exchange Commission > **Explanation:** The provincial securities commission located in the principal jurisdiction or head office of the issuing company typically leads the review of the prospectus filing. ## What is the purpose of a greensheet? - [ ] To provide final pricing details - [ ] To register the securities - [ ] To provide an auditor’s report - [x] To help sales representatives solicit interest from the general public > **Explanation:** A greensheet is an internal document that highlights the critical features of the new issue to aid sales representatives in soliciting public interest. ## Which of the following is true about the Passport System? - [ ] It applies to all jurisdictions including the U.S. - [x] It streamlines access to capital markets in multiple jurisdictions in Canada - [ ] It only applies to Ontario - [ ] It is used for private offerings only > **Explanation:** The Passport System streamlines access to capital markets in various Canadian jurisdictions by allowing an issuer to meet the requirements of one set of harmonized laws. ## Which province did not adopt MI 11-102 Passport System but is still considered a principal regulator under the instrument? - [x] Ontario - [ ] Saskatchewan - [ ] Quebec - [ ] Nova Scotia > **Explanation:** Ontario did not adopt MI 11-102 but remains a principal regulator, allowing issuers in Ontario to access other passport jurisdictions' capital markets. ## Under the Passport System, what happens after the principal regulator issues a receipt for the prospectus? - [x] Other jurisdictions automatically issue a deemed receipt - [ ] Issuer needs to file prospectus separately in each jurisdiction - [ ] Issuer receives immediate approval from the federal regulator - [ ] Issuer must submit additional documentation to local jurisdictions > **Explanation:** After the principal regulator issues a receipt, the other jurisdictions automatically issue deemed receipts under the Passport System. ## When must a revised preliminary prospectus be provided? - [ ] Only if requested by the principal regulator - [ ] When the underwriter changes - [x] If it is determined to be defective or if an amendment is made - [ ] Only with the final prospectus > **Explanation:** A revised preliminary prospectus must be provided if it is deemed defective or if there are any amendments or changes. ## Who must maintain a record of persons and companies to whom a preliminary prospectus has been sent? - [ ] Provincial securities commission - [x] The underwriter, agent, or company distributing securities - [ ] The auditor - [ ] Provincial regulators > **Explanation:** The underwriter, agent, or company distributing the securities is responsible for maintaining a record of all persons and companies to whom a preliminary prospectus has been sent.

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Tuesday, July 23, 2024