The Canadian Securities Administrators has issued a notice regarding the pre-marketing of underwriters’ options on bought deals.

The existing rules provide an exemption from the prospectus requirement for pre-marketing bought deals.

However, the CSA notice reports that, “A practice has developed on bought deal offerings for issuers to grant underwriters an option, exercisable prior to closing, to purchase securities in addition to the securities the underwriters agreed to purchase under the underwriting agreement. Rather than being underwritten securities, the securities that are the subject of the underwriters’ option are in effect ‘agency securities’.”

In the CSA’s view, the prospectus exemption, “does not extend to pre-marketing of the optioned securities because they are not the subject of an enforceable agreement with an underwriter who has agreed to purchase the securities.”

The regulators indicate that they intend to review the regulatory restrictions on pre-marketing and to specifically consider the issue of whether the prospectus exemption should be amended to permit pre-marketing of optioned securities.

The CSA also acknowledges that the exemption also does not extend to the pre-marketing of securities underlying post-closing over-allotment options, also known as greenshoe options. “To the extent that there is pre-marketing of securities underlying a greenshoe option, exemptive relief will be required before such pre-marketing occurs,” it says, adding, “We are willing to consider recommending such relief on a case-by-case basis.”