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Ontario|Investments & SecuritiesThe Stock Market 277 What is a Prospectus? A prospectus is a document that provides relevant information about a company for the purpose of allowing investors to evaluate the securities of the company before making a purchase.
A prospectus must be given to persons to whom securities are to be "distributed" in order for them to assess the merits of their investment.
A prospectus is required when securities are to be "distributed" to the public. A distribution occurs in any of the following 4 situations:
1. when there is an initial issuance of securities from treasury,
2. when there is a resale of securities returned to the company,
3. when there is a sale by a person holding 10% or more of a company's shares, or
4. in certain circumstances, when there is a resale of securities that were otherwise issued pursuant to a prospectus exempt distribution.
- Content of a Prospectus
A prospectus must contain "full, true and plain" disclosure of all material facts relating to the securities of the company being offered. A material fact is a fact that significantly affects or would reasonably be expected to have a significant effect on the market price or value of the securities.
Although some of the forms provided by the Ontario Securities Act vary depending on the type of company, the general requirement is open-ended in that it requires full, true and plain disclosure of all "material facts" relating to the securities being offered.
A prospectus includes recent financial statements of the company and generally contains verifiable existing facts. The inclusion of a forecast is possible and is guided by additional policies. Any future oriented financial information included in a prospectus must be prepared in accordance with the Canadian Institute for Chartered Accountants Handbook, and projections can only be included in certain circumstances.
- Prospectus Process
The prospectus process involves the filing of a preliminary prospectus by the company with the appropriate provincial securities regulatory authorities where the purchasers are resident. The preliminary prospectus can be used by the company and its securities dealer, called an underwriter, to market the securities.
The securities regulatory authorities will review the preliminary prospectus and provide comments to the issuer. After receiving the comments, the issuer will make any amendments necessary and then file a final prospectus. The time period during which the securities regulatory authorities review the preliminary prospectus is called the "waiting period".
The issuer must make amendments to the preliminary prospectus if any material adverse change in the affairs of the issuer occurs during the waiting period. Also, during the waiting period, the selling activities of the issuer and its dealer are limited to distributing the prospectus and using very limited advertising regarding the extent of the offering.
A dealer, upon receiving an order or subscription for a security offered in a distribution, must send the purchaser a copy of the final prospectus before, or within two business days of entering into a written confirmation of the sale of a security. The purchaser is then entitled to a "cooling-off" period. The purchaser has 2 business days from receiving the final prospectus to withdraw from the obligation to buy the securities. This provides the purchaser with an opportunity to review the final version of the prospectus. In order to withdraw from the obligation to buy, the purchaser must give notice not to be bound to the dealer from whom the securities were purchased.
- Purchaser's Options if the Prospectus Contains a Misrepresentation
If the prospectus contains a "misrepresentation", any purchaser who purchased securities during the period of distribution is considered to have relied upon such misrepresentation if it was a misrepresentation at the time of the purchase. The purchaser has a legal right to sue for damages against any of the following 5 persons:
1. the company, or any selling shareholder on whose behalf the distribution was made,
2. every person who was a director of the company at the time the prospectus was filed,
3. each underwriter of the offered securities,
4. every person or company whose consent was required to be filed with the prospectus, such as lawyers and accountants, but only with respect to reports, opinions or statements that were made by them, and
5. every other person who signed the prospectus, such as promoters.
Instead of suing, a purchaser who relied on misrepresentations contained in the prospectus may elect to exercise their right of recission against the company or any selling security holder or underwriter. The right of recission means that the purchaser can return the securities and get back the money they paid.
- Misrepresentations contained in a Prospectus
A misrepresentation can include any of the following 3:
1. an untrue statement of a material fact,
2. an omission to state a material fact that is required to be stated, or
3. an omission to state a material fact that is necessary to make another statement not misleading in light of the circumstances in which it was made.
If a prospectus contains a misrepresentation, the company or those selling the securities, have no defence except in the case where the purchaser bought the securities with knowledge of the misrepresentation.
A director or officer who signed the prospectus, and who believed that the prospectus did not contain any misrepresentations, does have certain defences. Such a director or officer may withdraw his or her consent to the filing of the prospectus prior to the purchase of securities by the purchaser and may rely on a due diligence defence.
To succeed in proving due diligence, the defendant must prove 3 things:
1. the defendant must prove that he or she had an actual belief that there were no misrepresentations contained in the prospectus,
2. the defendant must have had reasonable grounds to believe that there were no misrepresentations, and
3. the defendant must show that he or she had conducted reasonable investigations to support such a belief.
The company's lawyers and the underwriters co-ordinate and assist in the due diligence process, which is largely completed prior to the filing of the preliminary prospectus.
For legal assistance with the issuance or examination of a prospectus, you should consult an investments and securities law lawyer.
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