Area of Law: Investments and Securities
Answer # 279
What is a prospectus?Region: Ontario Answer # 279
A prospectus provides relevant information about a company, allowing purchasers to assess the merits of their investment before actually making a securities purchase. It is a document that is required when securities are to be distributed to the public.
A distribution occurs in any of the following four situations:
- When there is an initial issuance of securities from the company’s treasury,
- When there is a resale of securities that have been returned to the company,
- When there is a sale by a person holding 10% or more of a company’s shares, or
- 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 generally contains:
1. Full, true and plain disclosure of all material facts. 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 material fact is a fact that significantly affects or would reasonably be expected to have a significant affect on the market price or value of the securities.
2. Recent financial statements of the company.
3. Verifiable existing facts.
4. Forecast. 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.
The prospectus process involves the filing of a preliminary prospectus by the company (called the issuer) 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.”
If, during the waiting period, there is any material adverse change in the affairs of the issuer, the issuer must make amendments to the preliminary prospectus. 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 two 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. 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.
Misrepresentation in prospectus
1. What is considered a misrepresentation?
A misrepresentation can include:
- An untrue statement of a material fact,
- An omission to state a material fact that is required to be stated, or
- 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.
2. Purchaser’s options
If the prospectus contains a “misrepresentation,” any purchaser who purchased securities during the period of distribution is considered to have relied upon such misrepresentation at the time of the purchase. The purchaser has a legal right to sue for damages against any of the following five persons:
- The company, or any selling shareholder on whose behalf the distribution was made,
- Every person who was a director of the company at the time the prospectus was filed,
- Each underwriter of the offered securities,
- 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
- 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 rescission against the company or any selling security holder or underwriter. The right of rescission means that the purchaser can return the securities and get back the money they paid.
3. Directors’ and officers’ defence
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 before the purchase of securities by the purchaser, and may rely on a due diligence defence. The due diligence process is largely completed before the filing of the preliminary prospectus by the company’s lawyers and underwriters.
To succeed in proving due diligence, the director or officer must prove three things:
- That he or she had an actual belief that there were no misrepresentations contained in the prospectus,
- That he or she had reasonable grounds to believe that there were no misrepresentations, and
- That he or she had conducted reasonable investigations to support such a belief.
Reporting issuers in Ontario are exempt from having to provide a prospectus when selling securities to people who are existing securities holders. According to the Ontario Securities Commission:
“reporting issuers in Ontario will now be able to raise funds more
efficiently by connecting with their existing shareholder base, which
does not require the same level of disclosure provided by a prospectus.”
The exemption only applies if the following conditions are met:
- The issuer has a class of equity securities listed on the TSX, TSX-V, or CSE and has filed all required timely and periodic disclosure documents;
- The offering consists only of the class of equity securities listed on the TSX, TSX-V, or CSE, or units consisting of the listed security and a warrant to acquire the listed security;
- The issuer makes the offering available to all existing security holders who hold the same type of listed security;
- The issuer issues a news release disclosing the proposed offering, including details of the use of the proceeds;
- Each investor confirms in writing to the issuer that, as at the record date, the investor held the type of listed security that the investor is acquiring under the exemption;
- The investor invests no more than an aggregate of $15,000 in a 12-month period under this exemption, unless the investor has obtained suitability advice from a registered investment dealer; and
- The offering would not increase the number of outstanding listed securities of the issuer by more than 100%.
The exemption is not available for distributions in Ontario where the issuer is an investment fund.
For legal assistance with the issuance or examination of a prospectus, you should consult an investments and securities lawyer.
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