BOND PROSPECTUS

What is a Bond Prospectus?

The bond prospectus, also known as the “offering document”, is a legal document that provides all relevant details pertaining to a bond offering for sale to the public. It is filed to the relevant securities commissions (e.g. SEC in United States, OSC in Ontario) and should contain all facts regarding the issuer and the offering that investors need to make an informed investment decision.

Preliminary and Final

There are generally two types of prospectuses: preliminary and final.

1. The preliminary prospectus is the first offering document provided by an issuer. It contains details of the business and the nature of the filing transaction including business description, management structure, strategic initiatives, financial statements, and ownership structure. In the United States, due to a requirement by the SEC to print red ink on the left side of the cover page, this document is colloquially known as the “red herring”.


2. The final prospectus is filed after the bond issuance has been finalized and completed. This document contains the final details of the transaction. This document is made available to all the investors who are considering investing in the bond because, unlike the preliminary prospectus, the final prospectus contains the issue price and size. An offering circular is an abbreviated version of the final prospectus that highlights key information regarding a new issue.

The preliminary prospectus does not state the issue price and size because the bond issuance is not effective (i.e. no bonds can be sold and no offers accepted) until the final prospectus is filed. The preliminary prospectus is used as marketing material to solicit interest from potential investors.

Prospectus Types

There are three types of corporate bond offerings used by corporations to raise debt:

1. Public Prospectus – this type of offering is available to both investment grade and non-investment grade issuers. It is a one-time offering to the public that permits the sale of the bonds specified in the prospectus. Upon completion of the transaction, a final prospectus is filed with the final details of the offering.


2. Public Shelf Prospectus – this type of offering is typically only available to well-established corporate issuers.
   
   
   1. In U.S., “automatic registration” applies to well-known, seasoned issuers (WKSI) and can be used to issue bonds, common stocks, preferred shares, and other types of securities. A WKSI is a company that has filed all annual, quarterly and current reports in a timely manner, and either has a greater than $700 million market capitalization or has issued $1 billion in registered debt offerings over the past three years.
   
   
   2. In Canada, a shelf prospectus has an active life of twenty-five months and can be used to issue bonds, common stocks, preferred shares, and other types of securities that are sold to investors. A shelf prospectus is filed with the maximum dollar amount of issuance that can be completed throughout the shelf prospectus’ life. Issuers with a shelf prospectus file a pricing supplement when they wish to issue bonds.
   
   


3. Private Placement – this type of offering is completed by filing an offering memorandum. These issuers are not required to meet the strict registration regulations of a public registration and are sold to sophisticated institutional investors.

Issuers filing for a public shelf prospectus undergo a strict filing process with stringent requirements. As a result, successful shelf prospectuses, on average, have a lower level of risk. In contrast, private placements have significantly less regulation, making them much less predictable than public offerings. In general, there is a correlation with prospectus shelves and low risk, while there is more volatile risk with private placements. It is important to note that many private placements are issued by high quality corporations due to unique issuer-specific needs.

Short Form or Long Form (Canada)

When a corporation files a public prospectus, it can either file a short form or a long form prospectus. A short form prospectus for a bond issuance can only be used by issuers with current annual financial statements, current annual business information form, and has equity securities listed on an eligible exchange in the issuance region. A short form prospectus permits issuers to reference the above mentioned information from existing disclosure records, significantly reducing the filing process. If a short for prospectus cannot be filed, a long form prospectus must be filed with all pertinent information regarding the issuer written in full. The review period for these prospectuses also (three days for short form versus ten days for long form in Ontario) differs greatly. A shorter prospectus filing process can reduce the potential for any adverse factors that may affect the issuer’s offering.