You have asked me to write about the issues and potential solutions as we act as underwriter counsel to Buffay Phalange Group in the offering from Bluemingdale. I have made general comments with respect to the possible issues with the deal along with possible solutions, and I also included more specific comments for the bought deal letter and term sheet.

Timing

Public Offering

Currently, the timeframe is too tight between the receipt for the preliminary prospectus and the receipt for the final prospectus. Remember, first comments on the preliminary prospectus are usually issued after about two weeks and the entire review process takes around four to five weeks until the receipt of a final prospectus. To be safe, we should aim for five weeks for the receipt of the final prospectus. As such, we will change the November 22, 2021 final prospectus receipt date to December 24, 2021. We should also update the closing date accordingly and set it to December 31, 2021.

The new dates are also necessary to reflect the constraints around the flow of the deal. I appreciate that we have a tight timeline to raise money for R&D, but we need to ensure that the people on the deal have enough time for their respective roles. For instance, we need to give sufficient time for auditors for the comfort letter, we need to give time for the company to prepare their materials for due diligence, and we need to align with regulatory timelines—many of these aspects are beyond our control. We can consider adding a “time of the essence” provision to ensure that any delays in performance of the contract can contribute to damages against anybody who is late with their respective roles. In any case, we can be timely with things within our control, such as drafting the agreements, prospectus, and conducting diligence.

Private Placement

We only have Geller Funds who is willing to buy shares, so a roadshow for the private placement may not be necessary. If there is more interest in buying under the prospectus offering after the public offering, then we do not need a separate marketing campaign for the private placement.

In case we do need further marketing for the private placement—especially with respect to attracting more institutional investors, as outlined below—we should be wary of the timeline. Typically, the road show usually begins after the preliminary offering memorandum is made available to potential investors and before we land on a price for the securities. Although the concept of “marketing materials” does not apply to private placements, any pitch or communication must be consistent with the preliminary offering memorandum. While there is no requirement to provide investors with the offering memorandum, any information provided to potential investors can trigger disclosure and representation requirements.

The private placement is currently closing concurrently with the public offering, so it will also close on December 31, 2021. However, we do not need the longer timeline for the private placement, especially since we do not need the review and comments from the OSC. Since this is a treasury offering, there should be no issues with respect to coordinating with the public offering.

Roadshow and Marketing

Pre-marketing

While there are restrictions on communications between the deal announcement and the preliminary prospectus receipt (see s 65(2), 66, 67 OSA), we can rely on the bought deal exemptions for pre-marketing (see s 7 NI 44-101). There is no issue with soliciting expressions of interests as long as, before the solicitation, we enter into the bought deal agreement with fixed terms and file a press releasing announcing this agreement. We also need to file a preliminary prospectus within four days after entering the bought deal; once we receive the receipt for the preliminary prospectus, we need to send a copy of the preliminary prospectus to everyone we are soliciting. We can use a standard term sheet to solicit interest, but it cannot go beyond the information in the press release and the prospectus (see s 7.5 NI 44-101). We can also do a road show (see 7.7 NI 44-101), as needed, and use marketing materials during this time (see s 7.6 NI 44-101). However, I suggest we conduct the roadshow during the waiting period—that is, after the receipt for the preliminary prospectus but before the receipt for the final prospectus.

Waiting Period

The waiting period has further restrictions on marketing (see s 13.7 NI 41-101) and we are allowed to conduct road shows during this period (see s 13.9 NI 41-101). There are some requirements to keep in mind for the road show. We have to be careful around the requirements for marketing materials (s 65 OSA). We have to ensure that all contact information is on the marketing material, we need to include cautionary language in bold on the cover page, we need to have it approved by the issuer, and we need to have a template version filed on SEDAR on or the day before the material is presented. We should also be clear that marketing materials are distributed to only folks who qualify for a prospectus exemption and have received a risk-acknowledgement form; if not, we have to include the appropriate legend and collect their information. Even if we pitch to sophisticated institutional investors, it is important to minimize liability (see s 130 OSA).

We should review the contents of the presentation and ensure that any oral presentations are also limited to the language and information in the preliminary prospectus. I also recommend consulting specialists to get the language around this right, particularly in terms of the risks around intellectual property, environmental, and tax. Again, we have to avoid any misleading or untrue statement which would reasonably be expected to have a significant effect on the market price. In the same vein, we should check the company’s website and ensure compliances with restrictions on electronic media (see NP 47-201). Any marketing materials must be clear in its scope and limits.

Representations and Disclosure

We should be careful about any representations we make in our disclosure, especially around financial information (see NP 51-201). Remember, we have a role in seeking out and questioning all relevant material facts to the best of our knowledge, information and belief. We need a full, true and plain disclosure as to why they burn cash quickly and always need more money, and whether they made a real profit or not. We should schedule a meeting to assess the veracity of the CEO’s statements and warn that directors and officers have secondary market liability for any misrepresentations (see s 138 OSA; see also s 122 OSA).

We need to take extra precautions around discussing the potential M&A with Seers Inc, Relaxi Taxi, and the new beauty products arm. This should be disclosed in the prospectus, but, if not, we absolutely cannot discuss beyond what is in the prospectus. Information that conflicts or goes materially beyond the preliminary prospectus can be a misrepresentation, or worse, insider trading or tipping. We need to ensure that any discussions or communications do not contain material non-public information or else any non-public information should be simultaneously disclosed to the public (see NI 51-201). We cannot disclose selectively. We have to ensure that some investors are not able to make a profit at the expense of those who did not have access to the same information, so we cannot give special information to selective investors.

We should also check the marketing material for how non-GAAP or other financial measures are presented (see NI52-112). Please also make sure to include disclaimers for forward-looking statements, and, as applicable, consider the guidelines around the electronic delivery of documents (NP 11-201). Additionally, we should provide notice to purchasers of their statutory rights of action available to them (MI 45-107). Finally, at closing, we should check for the disclosure of any non-public information; at launch, we should check if we need any non-ordinary course filing.

Terms and Business Considerations

Public Offering

There is a potential conflict of interest in our positions in the debt as a part of the syndicate (see NI 33-105). There might be a “connected issuer” conflict since we are part of a syndicate that lent material amounts of funds through the loan facility. While there is no explicit fiduciary relationship between underwriter and issuer—which I assume is made explicit in the underwriting agreement—we need to be explicit about our interest in the use of proceeds and our debtor relationship with Bluemingdale. The use of proceeds in this manner can materially affect the market price of the shares, and we should disclose anything that questions our independence as underwriters or will affect our performance (see NI 33-105CP). If we cannot be independent, then we may need another independent underwriter to participate in the transaction (see NI 33-105).  We should disclose details around the debt, such as the amount, compliance, and secured property; in any case, the financial position of the issuer must be disclosed whether or not the proceeds will be used to pay the debt.

There is also a potential conflict with the CEO doing a merger with her sister’s company. We should remind the CEO of an officer’s fiduciary duty and to disclose all potential conflicts. Importantly, there should be an impartial business justification for the merger.

The compensation arrangement we currently have is not problematic on the face of it (see s 11.1 NI 41-101). To ensure that there are no restrictions on our ability to resell the shares, we need to look carefully at lock-up periods (see NI 45-102). The exemptions allow underwriters to sell in certain cases (see 2.13 NI 45-102). Remember, regulators are concerned about prospectus exempt parties selling their securities and the more onerous resale rules restrict exempt transactions that can be abused (see s 2.5 NI 45-102). The seasoning period requires the issuer be reporting for four months and the date of distribution is not relevant; however, the restricted or hold period requires a holding of security for four months from the date of distribution, and that they are reporting issuer for four months prior to the trade. If they fall under the restricted period, shares are not freely tradeable and must stay within the closed system. We can doublecheck that the company is a reporting issuer for four months and confirm that there is no concern for triggering resale restrictions—here, we can check the date of the initial prospectus.

Strategically, since the company may be upset about the share price, we can consider doing a post receipt pricing to omit the pricing and related information for the offering (see NI 44-103). While underpricing may give us minimal risk in this bought deal, we can hold off on the pricing and make a new assessment. Since the share price closed at $49.50, we can keep Bluemingdale happy by reconsidering the price, and, after we showed reasonable efforts to raise the share price, land back at $45 per share if necessary. For this route, we should review PREP prospectus procedures (see s 3 NI 44-103). However, I am hesitant to pursue this route as we would have to delay completing the underwriting agreement since we are leaving out the price (see s 4.10 and s 9 NI 44-103). This would affect our approach to marketing, as enumerated above (see s 4A NI 44-103). If we still want to pursue PREP, we should consider seeking an exemption from Ontario Securities Commission to PREP requirements (see s 6 NI 44-103).

Alternatively, we may also consider a dual offering in the United States, or even a private placement to qualified institutional buyers. If so, we would be subjective to the multi-jurisdictional disclosure system (see NI 71-101) and need to fill out SEC Form F-10. Perhaps this will increase the demand for the company and allow us to offer the shares at a better price. If we decide against an U.S. offering, we should add a legend, “Not for distribution to U.S. news wire services or dissemination in the U.S.”

Procedurally, I assume we are eligible to file a short form prospectus and that we have a base shelf prospectus filed (see NI 44-101). We should also be wary of testing the waters, Pre-Marketing and Marketing Amendments to Prospectus rules and any recent amendments to NI 44-101. Note also that the offering of 10 million shares exceeds 20% of outstanding securities for an inadvertent takeover bid, but we can sidestep this by relying on the statutory exception (see s 4 NI 62-104).

More generally, we can try to minimize diligence costs and time by doing a thorough diligence of the company for the public offering and using that for the private offering. The ultimate aim is to establish a due diligence defense, and this can be done by going through the diligence process once to check for any material misstatements or omissions. Although, we should be wary of timing and any outdated diligence that we may need to update. We should talk to the client about the scope of the diligence and the threshold for materiality.

Private Placement

We need to ensure that there are no restrictions or hold periods for Geller Funds since they need their shares to be freely resold in Canada (see NI 45-102CP). First trades under exemptions from the prospectus are considered “distributions” unless some conditions are met, and these conditions restrict some resale (see s 2.4 NI 45-106). It is important to remember what the CSA considers a “distribution.” A distribution commences when we discuss the selling of the distribution and it is sufficiently specific or that it is reasonable to expect that we will underwrite them. Since they already hold shares, we can rely on the private issuer exemption whereby they would be subject to a seasoning period for four months; moreover, placements through an offering memorandum counts as an exception (see Appendix D NI 45-106). We should also consider the fact that they are technically a foreign company (see s 2.15 NI 45-102). As such, we should file Form 72-503F on their behalf electronically within thirty days (see OSC rule 72-503).

We should warn Geller Funds that 13 million of the common shares would come close to the 20%—namely 14 million shares—which triggers a takeover bid (see NI 41-101). Therefore, we may need to search more aggressively for institutional investors for subsequent private placements.

We should make sure that your pitch to the bankers about the prospectus offering are acceptable communications, especially with respect to the timing outlined above. Also, they would not need to rely on exemptions to restrictions on resale because they can freely resell under the prospectus.

We may need to get creative with our approach to attracting other institutional investors. The institutional investors who want to help “top up” the company’s balance sheet seem worried about the performance of the public offering and are not willing to accept the risks of the private placement. We may be able to explore the possibility of subscription receipts, since there is a potential M&A with Seers Inc. Investors can hedge risks of the M&A transaction not closing; that is, if it does not close, they can get their money back. Alternatively, we may also consider special warrants (NI 41-101CP). In any case, please remember that we cannot provide for any other option to increase the number of securities purchased, except with an over-allotment option (see s 7.1 of NI 44-101). We should also be wary of TSX restrictions (see s 607 TSX Company Manuals).

Bought Deal Letter

Dates

We should update the dates with respect to the prospectus receipts and closing to reflect the general comments above. The same changes should be reflected in the term sheet below.

Confirmation Clause

A bought deal cannot be conditional on having additional underwriters agreeing to purchase securities from the offering, except for some confirmation clauses (see s 7.4 NI 44-101). To be sure, if a confirmation clause will be used, please provide the issuer with a copy of the bought deal agreement and have them sign it on the same; moreover, it must occur the business day after the bought deal is signed (see s 7.4 NI 44-101). We also need to discuss with the other underwriters regarding their participation and provide notice to issuer confirming the specific terms of the bought deal agreement within one business day after signing.

Liability

We do not want joint and several liability. Joint liability is problematic as it ties us to the actions of the other underwriters. We should specify we will be “severally (and not jointly)” liable. We should be only responsible for our portion and we should not be required to take on any liability for the other underwriters.

Filing

We do not need to obtain a receipt for the preliminary short form prospectus in each jurisdiction is Canada. We have a passport system (see MI 11-102) and only need the receipt from our jurisdictional regulator, the OSC. We can change the language to say, “to qualify the distribution in all the provinces and territories of Canada (other than Quebec).”

We should also add language around closing procedures and further procedural details around the transfer of funds.

Termination

The “ratings out” and “market-out” clauses are not appropriate for bought deals (see s 7.1 of NI 44-101). We should replace them with “disaster out”, “regulatory out”, and “material change out” along with “any other termination that are customary in underwriting agreements.” We should also note that any indemnities and termination rights apply equally to the agreement.

Additionally, for the underwriting agreement, we should consider our registration rights and piggyback rights, as well as other representations and warranties or any lock-up provisions.

Blackout

We may want to specify the additional restriction not to enter into any agreements or arrangement for the transfer or acquisition which have the economics consequence of share ownership. When we start the distribution, we cannot have any market making, communications, or other trading activities (see s. 3 of OSC Rule 48-501). To this end, we can add language to “halt the trading of units of BLUE at the TSX.”

Marketing

We should have explicit language in the letter authorizing us to immediately release a press release upon acceptance of the offer.

Additionally, we should receive authorization to distribute copies of the term sheet to potential investors as well as any other marketing materials.

Diligence

We can be more detailed in our language around diligence. We need broad cooperation from the company in providing information for preparing marketing materials. We should add that the issuer is required to file the marketing material (see s 7.6 NI 44-101). We may also want a termination right tethered to diligence in case we identify some material adverse fact or a failure of their representations and warranties (see s 7.3 NI 44-101).

Term Sheet

Option

We should specify that it is an overallotment option (see s 11 NI 41-101; see also s 2 and 6 NI 41-101CP), or else we could be offside for bought deals. We also need to reduce the 3 million shares to 1.5 million, since any overallotment option cannot exceed 15% of the base offering (NI 41-101).

Use of Proceeds

We can specify that it is for repaying debt and R&D, along with other general corporate purposes.

Resale Restrictions

We should be explicit about resale restrictions and note that shares can be subject to a four month hold period, with some exceptions (NI 42-102). We should also build in lock-ups for directors and officers, since they are also exempt from resale restrictions (see s 2.24 NI 45-106).