12.4.1 When Prospectus Is Required

When Prospectus Is Required?

Unless an exemption has been granted, all provincial securities acts in Canada mandate that a prospectus be filed and delivered if the offering or sale of securities is considered to be a distribution to the public. In simplified terms, a prospectus is the investment contract between the investor and the corporation offering its securities for sale. It is designed to provide full, true, and plain disclosure concerning the material facts about the security in question. On this basis, investors considering purchasing the security can evaluate it and make an informed decision.

Types of Trades Requiring a Prospectus

The prospectus requirement generally applies to three types of trades in securities:

• Trades by or on behalf of an issuer: This includes new issues from treasury.
• Trades from a control position: Except in Quebec, these trades require a prospectus unless a prospectus exemption applies.
• Trades in securities previously acquired by way of a prospectus exemption: Unless the subsequent trade is made under a further prospectus exemption.

New Issues

When a company raises equity capital in the marketplace, it issues securities from its own treasury. These issues are new securities as compared to those already traded publicly in what is known as the secondary market. New securities are issued directly by the company and then sold to the public. The proceeds from these sales go to the company issuing the securities. If the company is issuing securities for the first time, this is considered an Initial Public Offering (IPO), and a prospectus must first be filed with the regulators.

Newly issued securities are often referred to as new issues. However, a new issue isn’t necessarily an IPO; it may also be additional capital raised by a reporting issuer (an already public company). In such cases, a prospectus is typically required unless a prospectus exemption is available. The prospectus of a reporting issuer may be less detailed than one associated with an IPO, as information about the reporting issuer is already available to the public.

Key Takeaways

• A prospectus is vital for ensuring transparency and providing essential information to investors.
• Provincial securities acts enforce the requirement for a prospectus unless an exemption is provided.
• Prospectus exemptions play a significant role, especially for control positions and subsequent trades of exempt securities.
• An IPO always necessitates a prospectus, ensuring first-time investors have all the material facts.
• Existing public companies can issue new securities with a less detailed prospectus, leveraging pre-existing public disclosures.

FAQs

1. What is a prospectus?

A prospectus is a formal document required by provincial securities acts, which lays out all material information about the security being offered to help investors make an informed decision.

2. When is a prospectus required?

A prospectus is generally required for any new issue of securities by an issuer, for trades from a control position (except in Quebec), and for securities previously acquired using a prospectus exemption unless subsequent trades qualify for another exemption.

3. What is an Initial Public Offering (IPO)?

An IPO is the first time a company offers its securities to the public. This requires the company to file a prospectus with the regulators to ensure all potential investors have access to the material facts.

4. Are there exemptions to filing a prospectus?

Yes, various prospectus exemptions exist which can relieve issuers from the obligation of filing a prospectus under certain conditions.

Glossary

• Prospectus: A legal document providing details about an investment offering for sale to the public.
• Securities Act: Legislation governing securities trading within a jurisdiction.
• Distribution: The sale of securities, often referring to a new issue.
• IPO (Initial Public Offering): The first sale of stock by a private company to the public.
• Secondary Market: Where investors buy and sell securities they already own.
• Prospectus Exemption: Circumstances under which an issuer can sell securities without a prospectus.

Summary

    graph TD;
	    A[Issuer Plans Equity Issue] -->|Files and Delivers| B(Prospectus);
	    B -->|Offers Securities to| C(Public);
	    C -->|Provides| E(Proceeds to Issuer);
	    subgraph Public Markets
	        D(Secondary Market)
	    end
	    C -->|Trades Securities in| D;