Canada: Overhaul of the Short Form Prospectus System

Effective December 30, 2005, the system for the use of short form prospectuses in Canada was substantially overhauled. Certain requirements that an issuer had to meet have been removed, leaving a more streamlined system. We issued an advisory bulletin outlining these changes last November, which can be found at www.blgcanada.com at Publications; go to Current then Capital Markets. We’ve summarized that information here and have also included some additional information respecting developments since the changes came into effect.

Before the overhaul, the basic qualifications which an issuer was required to meet in order to use a short form prospectus included having a 12-month reporting issuer history prior to the filing of its initial annual information form (AIF) and having an aggregate public float of $75,000,000 for its equity securities.

Under the new Instrument, the short form prospectus system has been changed to remove:

1. the minimum public float requirement;
2. the requirement that an issuer be a reporting issuer for a minimum length of time prior to using a short form prospectus; and
3. the requirement for regulatory review of an issuer’s initial AIF before an issuer can file a short form prospectus.

The basic qualifications for the use of a short form prospectus under the new regime include the requirements that the issuer:

1. is an electronic filer under SEDAR;
2. is a reporting issuer in at least one jurisdiction of Canada;
3. is current in its filing obligations in each jurisdiction in which it is a reporting issuer;
4. has filed, in at least one jurisdiction in which it is a reporting issuer, (i) current annual financial statements, and (ii) a current AIF;
5. has equity securities that are listed and posted for trading or quoted on a "short form eligible exchange" (the new rules define this term to mean each of the Toronto Stock Exchange, Tier 1 and Tier 2 of the TSX Venture Exchange, and the Canadian Trading and Quotation System Inc.); and
6. is not an issuer (i) whose operations have ceased, or (ii) whose principal asset is cash, cash equivalents or its exchange listing (for example capital pool companies).

Alternative qualification criteria remain in place for issuers of certain specified securities.

Issuers are now required to file a notice declaring their intention to be qualified as a user of the short form prospectus system at least 10 business days prior to the issuer filing its first preliminary short form prospectus. Issuers that were previously eligible to use a short form prospectus are deemed to have filed this notice on December 14, 2005, ten business days before the new rules came into force.

However, before relying on this deeming provision, issuers should check to make sure they are on the list, published by the CSA, of "Current AIF Issuers" as at December 29, 2005. This list will be used by the staff of the CSA to determine who is grandfathered into the new short form prospectus regime. If an issuer is not on the list but believes they ought to be, they should contact the appropriate staff member to correct that oversight. Failure to do so could delay their ability to use a short form prospectus.

For those issuers who are not on the list, the question will be whether or not to file the notice when there is no current intention to undertake a public offering in order to be ready to move quickly if the opportunity arises. Put another way, is there a downside to filing the notice? A short form eligible national reporting issuer is subject to additional fees of about $9,500. This cost has to be weighed against the likelihood of needing to act quickly. If the issuer does not currently translate its continuous disclosure documents, it should also take into account the time it would take to do so (assuming a national offering).

• A long form prospectus will still be required in some circumstances, including (a) for IPOs, (b) for offerings by dormant or inactive issuers, and (c) if the offering is for the purpose of financing a material change in the issuer’s business.

• For bought deals, the deadline to file the preliminary short form prospectus has been extended from two business days to not more than four business days after the date of the bid letter.

• If the offering is a refinancing of existing indebtedness and (a) more than 10 percent of the net proceeds will be used to reduce or retire indebtedness, and (b) the indebtedness was incurred within the two preceding years, the "Use of Proceeds" section in the short form prospectus must now contain a description of the principal purposes for which the proceeds of the indebtedness were used and, if the creditor is an insider, associate or affiliate of the issuer, must identify the creditor and the nature of its relationship to the issuer and the outstanding amount owed.

• The rules about disclosure regarding "significant acquisitions", including the requirements for historical and pro forma financial statements, have been, in effect, conformed to the continuous disclosure obligations under NI 51-102, specifically the Business Acquisition Report. In particular, there is no longer a requirement for additional disclosure relating to dispositions or multiple acquisitions.

• While the issuer’s auditors are still required to review unaudited financial statements included in the prospectus, no comfort letter evidencing that review will be required to be filed with the regulators.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.