12.4.3 Permitted Activities During Waiting Period

Permitted Activities During the Waiting Period

The period between the issuance of a receipt for a preliminary prospectus and a receipt for a final prospectus is known as the waiting period. This period is crucial for underwriters and issuers to prepare for the final sale of securities. During this time, certain activities are permitted while others are strictly prohibited. Understanding these guidelines ensures compliance with Canadian securities regulations.

Key Terms

• Preliminary Prospectus: An initial document provided to potential investors containing the essential facts about the prospects of a new security issue before the final prospectus is seen and approved.
• Final Prospectus: Detailed legal documentation approved by securities regulators that allows securities to be sold to the public. It includes comprehensive financial statements and essential managerial discussions.
• Underwriters: Financial specialists, typically investment banks, that evaluate and assume the risk of bringing new securities to market.

Permitted Activities

During the waiting period, underwriters may engage in several activities, provided they adhere to specific limitations:

1. Solicit Expressions of Interest: Underwriters may solicit expressions of interest from potential purchasers. This helps gauge market interest and readiness for the security.

   For example, underwriters may converse with mutual fund managers or seek input from individual investors without binding any parties into a sale agreement.

2. Distribution of Preliminary Prospectus: Anyone who expresses interest, whether solicited or unsolicited, must be given a copy of the preliminary prospectus. This document helps inform potential investors without binding commitment terms.

Restricted and Prohibited Activities

Certain activities aimed at encouraging actual transactions or misleading the public are restricted during the waiting period:

• Encouraging Trade: Activities such as executing agreements to purchase the securities in question are prohibited. This includes any contractual obligations or firm sale commitments.
• Material Distribution: Apart from the preliminary prospectus and a few allowed informational materials, no other promotional materials or selling documents should be distributed.

Information Disclosure

While certain promotional activities are restricted, underwriters can distribute the following information to the public:

• Available Preliminary Prospectus: Advertisements must focus on letting the public know a preliminary prospectus is available and where it can be accessed.
• Price: If the issue price is determined, it can be included in the communication.
• Dealer Information: Contact information and the address of the dealer member or registrant from whom the securities can be purchased must be disclosed.

Compliance Tip

Underwriters must ensure all activities during the waiting period are meticulously documented and should seek legal counsel checks to remain compliant with regulatory standards.

Frequently Asked Questions (FAQs)

Q1: Can underwriters hold roadshows during the waiting period?

• A1: Yes, underwriters can hold roadshows to discuss the offering and provide potential investors with the preliminary prospectus. However, they cannot execute sales agreements or distribute non-approved materials.

Q2: Is it possible to change the information in the preliminary prospectus during the waiting period?

• A2: Yes, modifications can occur, but any material change necessitates updating the preliminary prospectus and redistributing it to interested parties.

Q3: What penalties can arise from violating permitted activities guidelines during the waiting period?

• A3: Violations can lead to severe penalties, including fines, withdrawal of the offering, or other enforcement actions by securities regulators.

Key Takeaways

• The waiting period is crucial for compliance, preparation, and gauging market interest before finalizing a securities offering.
• Soliciting interest and providing the preliminary prospectus are permitted, while executing actual sales agreements is not allowed during this period.
• Accurate and compliant information release is essential, including terms like price and dealer details.

Glossary

Preliminary Prospectus: A document that contains basic information about a new security issue, provided to potential investors before the filing of the final prospectus.

Final Prospectus: The comprehensive legal document reviewed by securities regulators that allows public sale of the security.

Underwriters: Entities responsible for evaluating risks, structuring the deal, and marketing the new securities to the public.