While nattering with one of our clients, I was discussing the merits of employing a term sheet over an offering memorandum. The client asked, “What’s an ‘offering memorandum’?” to which I moronically responded “Anything more than a term sheet!”
I’m hard on myself because my glib response obscured the rather technical structure of a term sheet in the context of securities law and why it is often preferable to an offering memorandum.
USE A TERM SHEET BECAUSE:
- Expedient, inexpensive disclosure document for raising money in the “exempt market”
- Succinct expression of transaction to sophisticated investor
- Not required to give a right of rescission
- Not required to give a contractual right of action for damages resulting from misrepresentation
- No “cooling off” period following subscription
- Typically employed only with Accredited Investors
A term sheet is an abbreviated soliciting document that carries significantly less regulatory burden than an offering memorandum. A term sheet does not have to be filed with the regulator nor does it need to provide (and thereby require to describe therein) the rights described in section 130.1 of the Securities Act (Ontario) that requires an issuer to provide to a prospective purchaser under offering memorandum a statutory right of action for damages against the issuer or a right of rescission against the issuer if the offering memorandum contains a misrepresentation.
What is an “offering memorandum”?
OSC Rule 14-501 “Offering Memorandum” means a document purporting to describe the business and affairs of an issuer that has been prepared primarily for delivery to and review by a prospective purchaser so as to assist the prospective purchaser to make an investment decision for a security being sold in a distribution to which section 53 of the Act would apply but for the availability of one or more of the exemptions contained in Ontario securities law. When used with any exemption other than the Offering Memorandum Exemption of National Instrument 45-106, there are no particular form requirements for the offering memorandum except it is required to have a description of the statutory rights set out in section 130.1 of the Securities Act (Ontario).
Under the Offering Memorandum Exemption of N.I. 45-106 the form of offering memorandum is actually prescribed. The basic form mandated is set out Form 45-106F2 for non qualifying issuers (i.e., non-reporting private entities) and Form 45-106F3 (i.e., reporting entities listed on SEDAR). That form requires the issuer to grant a subscriber contractual rights of action and rescission and a two day cooling-off period.
What is a “term sheet”?
A term sheet is distinctive from an offering memorandum as first laid out in Companion Policy 45-501CP to Ontario Securities Commission Rule 45-501. This was the “old” exempt market distribution regime in Ontario in effect before NI 45-106. Term sheets were and continue to be preliminary offering material. Though much has been repealed and replaced by NI 45-106, Rule 45-501, and its Companion Policy, remains in force. Part 5 at s.5.6 of 45-501CP it provides:
- The only material delivered to a prospective purchaser in connection with a distribution made in reliance on a prospectus exemption referred to in section 5.1 of the Rule should be:
- a “term sheet” (representing a skeletal outline of the features of a distribution without dealing extensively with the business or affairs of the issuer of the securities being distributed)[emphasis added] . . .,
- an offering memorandum describing the rights referred to in section 130.1 of the Act available to purchasers and complying in all other respects with Ontario securities legislation, and
- in the case of an offering memorandum prepared in accordance with section 2.9 of NI 45-106, OM marketing materials, as that term is defined in NI 45-106; . . . . .
As a term sheet is distinct from an offering memorandum, it does not require the issuer to provide the rights set out at section 130.1 of the Securities Act (Ontario) and a description of such. What then is a term sheet?
Definition of a “Standard Term Sheet”For the purposes of determining what constitutes the content of a “term sheet”, we look to National Instrument 41-101, Prospectus Contents, for guidance and specifically section 13.4, “Testing the Waters” exemption.
Under the definition set out in N.I. 41-101, “term sheet” means a written communication intended for potential investors regarding a distribution of securities under a prospectus that contains no information other than that referred to in subsections 13.5(2) and (3), . . .
13.5(2) is not relevant for our purposes.
13.5(3) A standard term sheet . . . may contain only the following information in respect of the issuer, the securities or the offering:
- the name of the issuer;
- the jurisdiction or foreign jurisdiction in which the issuer’s head office is located;
- the statute under which the issuer is incorporated, continued or organized or, if the issuer is an unincorporated entity, the laws of the jurisdiction or foreign jurisdiction under which it is established and exists;
- a brief description of the business of the issuer;
- a brief description of the securities;
- the price or price range of the securities;
- the total number or dollar amount of the securities, or range of the total number or dollar amount of the securities;
- the terms of any over-allotment option;
- the names of the underwriters;
- whether the offering is on a firm commitment or best efforts basis;
- the amount of the underwriting commission, fee or discount;
- the proposed or expected closing date of the offering;
- a brief description of the use of proceeds;
- the exchange on which the securities are proposed to be listed, provided that the standard term sheet complies with the requirements of securities legislation for listing representations;
- in the case of debt securities, the maturity date of the debt securities and a brief description of any interest payable on the debt securities;
- in the case of preferred shares, a brief description of any dividends payable on the securities;
- in the case of convertible securities, a brief description of the underlying securities into which the convertible securities are convertible;
- in the case of exchangeable securities, a brief description of the underlying securities into which the exchangeable securities are exchangeable;
- in the case of restricted securities, a brief description of the restriction;
- in the case of securities for which a credit supporter has provided a guarantee or alternative credit support, a brief description of the credit supporter and the guarantee or alternative credit support provided;
- whether the securities are redeemable or retractable;
- a statement that the securities are eligible, or are expected to be eligible, for investment in registered retirement savings plans, tax-free savings accounts or other registered plans, if the issuer has received, or reasonably expects to receive, a legal opinion that the securities are so eligible;
- contact information for the investment dealer or underwriters.
13.5(4) For the purposes of subsection (3), “brief description” means a description consisting of no more than three lines of text in type that is at least as large as that used generally in the body of the standard term sheet.
Term sheets are an expedient way to promote a transaction under the exempt market rules where an offering memorandum is not mandated. As stated above, it carries significantly less regulatory burden than an offering memorandum and does not have to be filed with the regulator. Finally, it does not need to provide the rights described in section 130.1 of the Securities Act (Ontario) or a “cooling-off” period. For these reasons, term sheets are widely employed by issuers raising capital in the exempt markets.