Certain terms used in section 3509 are defined in the following subsections:
- “commencement of distribution”, “distribution” and “distribution discussions” are defined in subsection 3502(1), and
- “equity security” is defined in subsection 1201(2).
For the purposes of section 3509, the definition of equity security is not meant to include preferred shares that carry a soft redemption or soft retraction feature. Preferred shares with these features enable the issuer to:
- pay the redemption price (when it redeems preferred shares), or
- pay the retraction price (when the holder exercises their right to redeem the shares)
by issuing equity shares at a discount to market price, rather than paying the redemption or retraction price in cash. The issuer will usually opt to pay the redemption price or retraction price in cash, except in extenuating circumstances. By paying cash, the issuer avoids paying a higher cost of capital than would be dictated by the market. Accordingly, preferred shares with a soft redemption or soft retraction feature resemble debt securities and should be considered as such.
Defining “commencement of distribution”
Commencement of distribution refers to the time when the Dealer Member (Dealer):
- has had distribution discussions with
- an issuer
- a selling security holder, or
- another underwriter that has had discussions with an issuer or selling security holder
- distribution discussions are of sufficient specificity that it is reasonable to expect that the Dealer (alone or with the other underwriter) will propose an underwriting of securities to the issuer or selling security holder.
The definition of “commencement of distribution” ensures that confidential information about an issuer’s intentions regarding a proposed financing is not communicated to potential purchasers. Private discussions would fall under this definition.
However, the definition of “commencement of distribution” generally does not include the following:
- a public announcement by an issuer of its financial intentions, such as at a public meeting attended by a Dealer, unless the Dealer quickly follows with an offer, or
- instances where there is a significant time lag between the discussions and the offer, since this would generally indicate either:
- the discussions were not of sufficient specificity, or
- the Dealer declined to pursue the distribution.
If there were no distribution discussions and the issuer simply accepts a Dealer’s offer to underwrite a distribution, then the commencement of distribution discussions occurs immediately upon the acceptance of the offer. In that case, distribution discussions may end virtually immediately with the issuance of a press release announcing the signing of an underwriting agreement.
Timing of commencement of distribution discussions
The commencement of distribution discussions will vary among Dealers according to their different underwriting processes. At the latest, it commences at the time the offer to underwrite is made to the issuer.
For some Dealers, the Dealer’s underwriting committee makes the final decision to make an offer. However, this committee’s decision may only be a formality. For example, when personnel believe that the committee will follow their recommendation, the decision to make the recommendation could constitute commencement of distribution discussions. As a result, the distribution will have started before the committee’s decision is made. In these circumstances, once the recommendation has been made, there can be no further discussion with potential purchasers by anyone with knowledge of the distribution discussions, or anyone instructed by personnel with knowledge.
Although three events define the starting point for communications with potential investors, a press release announcing the distribution achieves the following:
- ensures that there is equal access to information, and
- meets concerns about tipping and trading based on undisclosed material information.
Section 7.2 of National Instrument 44-101 Short Form Prospectus Distributions requires an issuer to issue and file a news release immediately upon entering into a bought deal agreement. This would precede communications with potential investors and the filing of a preliminary prospectus.
Subsection 3509(3) provides that a press release will be deemed to have been issued when it is released to a news distribution service. For listed securities, press releases must be disseminated according to the timely disclosure policies of The Toronto Stock Exchange or the TSX Venture Exchange, as applicable. The Toronto Stock Exchange’s Policy Statement on Timely Disclosure requires dissemination of a full text press release via a wire service (or combination of services) with national and simultaneous coverage to the entire financial community.
Market stabilization and principal trading
The commencement of distribution discussions under section 3509 is not affected by the commencement of the restricted period under the Universal Market Integrity Rules (UMIR) and Ontario Securities Commission Rule 48-501 Trading During Distributions, Formal Bids And Share Exchange Transactions (OSC Rule 48-501).
Generally, the commencement of distribution discussions occurs prior to the restrictions on principal trading activities and trading of solicited orders by underwriters under section 7.7 of UMIR and under OSC Rule 48-501. The restrictions under OSC Rule 48-501 commence on the later of:
- the date two trading days prior to the day the offering price is determined, and
- the date on which a Dealer reaches an agreement or understanding to participate in a distribution.
Normally, this will be later than when discussions with an issuer or selling security holder are of sufficient specificity that it is reasonable to expect the Dealer to propose an underwriting.
Additionally, subsection 3509(4) prohibits informed persons from engaging in principal trading in securities that are the subject of distribution discussions. This prohibition applies for the same period of time as the restrictions on communications set out in subsection 3509(2) and reflects the legal prohibition on “insider trading” by persons in possession of material non-public information.
Principal trading for purposes of market stabilization under OSC Rule 48-501 and section 7.7 of UMIR is only permitted under certain conditions. The trading restrictions under OSC Rule 48-501 and section 7.7 of UMIR continue until the date the selling process ends and all stabilization arrangements are terminated.
Exempt distributions and special warrants
A Dealer will not be subject to the premarketing restrictions set out in subsection 3509(2) where a Dealer and issuer or selling security-holder can show a bona fide intention to distribute the equity securities pursuant to a prospectus exemption. When a Dealer reasonably expects that an exempt distribution will be abandoned, any subsequent pre-marketing activities will be subject to the Rule.
This interpretation applies to conventional private placements of securities where securities are intended to be issued and held under the “closed system”. This includes special warrant offerings by issuers not eligible to use the short form prospectus system. However, the premarketing restrictions of the Rule are applicable to special warrant offerings by issuers if it is intended that the underlying securities are to be qualified by a short form prospectus.
IIROC may grant an exemption from this provision if there will be a significant delay before the preliminary short form prospectus is filed. The following will not generally be considered a significant delay:
- a delay for the purpose of filing a notice under section 2.8 of NI 44-101, or
- a delay arising from the translation of documents to be incorporated by reference.
IIROC Rules this Guidance Note relates to:
- section 3502, and
- section 3509.
Previous guidance notes
This Guidance Note replaces the following:
- C-61 – Pre-Marketing of Distributions, and
- MR0471 – Guidelines for Compliance with IDA By-law 29.13.
This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.