Cross-Border Counselor

Way back in 2017, one of our earliest posts discussed the legal and financial risks to both the issuer and the finder if an issuer pays a finder’s fee in connection with a sale of securities in the United States, and the person receiving the fee is not a U.S. registered broker-dealer. In many cases, this type of fee violates U.S. securities laws. However, this continues to occur from time to time, especially in deals where U.S. counsel is not consulted prior to the closing. For a brief summary of the risks of paying this type of finder’s fee, and an example of one issuer that declared bankruptcy as a result, read on. The Securities and Exchange Commission (SEC) has taken the position that a person receiving a finder’s fee with respect to a purchase of securities by a U.S. investor will, in many cases, be treated as having acted as a “broker” within the meaning of federal securities laws.[1] In those cases, the unregistered finder has violated the federal securities laws. Similarly, the issuer may have violated the federal securities laws (under an agency theory, or otherwise) by having paid such fee. In many states, state regulators take similar positions under applicable state law. The filing of post-closing notices of sale with the SEC and the states disclosing such a fee may result in federal and state regulatory enforcement actions to seek injunctions, monetary penalties or criminal sanctions against the issuer and/or finder. Perhaps more importantly, the payment of the fee may provide the relevant investor(s) with a right to rescind their investment, and create uncertainty about whether and the extent to which such rights should be reflected in the issuer’s financial statements. Such disclosures may adversely affect the issuer’s ability to raise funds, and may further increase the risk of such a rescission claim or regulatory enforcement action. One real life example is the case of Neogenix Oncology Inc. In a series of financings, Neogenix paid finder’s fees to unregistered persons.  In Q4 2011, the SEC initiated a regulatory inquiry.  Neogenix was soon dealing both with the SEC and its auditors.  Neogenix disclosed that its auditors were unwilling to review or audit Neogenix’s financial statements because of their uncertainty as to how to reflect any possible rescission rights. Without that review and audit, Neogenix was unable to timely complete and file with the SEC its quarterly report for Q3 2011, its annual report for FY 2011, and its quarterly reports for 2012. As a result, Neogenix was also unable to raise additional funds.  Several directors and employees departed, and in July 2012 Neogenix filed for bankruptcy protection under Chapter 11. [1] This blog post does not address the exemption available under federal securities law to “M&A brokers” with respect to certain transactions involving a transfer of control of a private company.    

As discussed in our eUpdate published today, the SEC on January 24, 2024 adopted final rules amending the disclosure and registration requirements applicable to special purpose acquisition companies (SPACs) and shell companies that register or file reports with the SEC. These amendments impose significant new requirements on SPAC IPOs, as well as de-SPAC and similar transactions for SEC reporting shell companies. The new SEC rules do not apply to Canadian capital pool companies, SPACs, or shell companies unless they register or file reports with the SEC. As part of the final rule package, the SEC also amended its guidance for all SEC reporting companies on how to make economic projections in SEC filings, as well as issuing guidance on when a SPAC may be considered an investment company. We will address this Investment Company Act guidance in a further post.

Did you know that the Canada-U.S. multijurisdictional disclosure system (MJDS) includes an SEC form that does not include any minimum market capitalization requirement, and can be used to complete a public offering of securities in the United States without triggering any ongoing SEC reporting requirements?  It’s true. Form F-7 allows certain TSX and TSXV-listed Canadian companies to extend a rights offering to its United States shareholders on a public offering basis, provided they satisfy certain form eligibility requirements.  U.S. information legends are included in the Canadian offering documents, which are filed with the SEC under cover of Form F-7, together with certain consents.  A Form F-7 is not normally reviewed by the SEC.  The shares issued to U.S. shareholders are “free trading” and are issued without any U.S. restrictive legend.  Exemptions from state registration requirements are available in most states.  A company does not need to satisfy any minimum market capitalization in order to use Form F-7, nor must it be an SEC reporting company.  Perhaps most surprisingly, filing a Form F-7 and completing the rights offering does not subject the company to ongoing SEC reporting requirements, so the form can be used by companies that wish to avoid the Sarbanes-Oxley Act and other ongoing SEC requirements. Form F-7 can be a useful tool in a Canadian company’s toolkit.

As many of our readers will have heard, the Canadian Securities Administrators (“CSA”) has announced the adoption of a new prospectus exemption for certain reporting issuers listed on a Canadian stock exchange (the “Listed Issuer Financing Exemption”), effective November 21, 2022.  To date, little attention has been given to the potential effect of the Listed Issuer Financing Exemption on the practices of Canadian listed companies raising funds from U.S. investors.  In this post, we discuss those implications and suggest methods for relying on the Listed Issuer Financing Exemption while still preserving the ability to raise funds from U.S. investors. Overview of the Listed Issuer Financing Exemption The Listed Issuer Financing Exemption will allow certain reporting issuers listed on a Canadian stock exchange to complete a public offering of securities in Canada for cash to raise up to C$5 million (up to C$10 million for larger companies), with no investor qualifications, no legends or hold periods on the securities sold in the public offering, and no prospectus (an “Offering”).  As such, the Listed Issuer Financing Exemption may become an important fundraising tool for Canadian public companies, especially those with smaller market capitalizations. Many Canadian law firms have published summaries of the Listed Issuer Financing Exemption and its requirements.  The most important requirements for our purposes are that the issuer publish a press release describing the Offering, and file and post on the issuer’s website a completed Form 45-106F19 which outlines certain brief information about the Offering (the “Offering Document”).  The intention of the CSA appears to have been to reduce the burdens on reporting issuers when conducting a relatively small Offering, as long as the issuer is current in its continuous disclosure requirements, meets certain other requirements, and publishes certain basic information about itself and the Offering. Overview of U.S. Private Placement Exemptions The U.S. federal securities laws do not provide an equivalent exemption to the Listed Issuer Financing Exemption.  Most Canadian public companies that offer and sell securities to U.S. investors as part of an Offering (a “U.S. Offering”) conduct the U.S. Offering either: In a fully underwritten offering, as resales by the underwriter to U.S. qualified institutional buyers in reliance upon Rule 144A under the U.S. Securities Act; or In non-brokered or agency offerings, as a sale by the issuer exclusively to U.S. accredited investors, without any general solicitation or general advertising, pursuant to Rule 506(b) of Regulation D under, or Section 4(a)(2) of, the U.S. Securities Act. Therefore, outside of underwritten Rule 144A offerings, most U.S. Offerings by Canadian public companies are undertaken on the basis that no general solicitation or general advertising has been made in the U.S. Offering. General solicitation and general advertising includes, without limitation: Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and Subject to limited exceptions, any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. As the internet became more prevalent, the SEC issued an interpretation confirming that the “use of an unrestricted, publicly available website to offer or sell securities constitutes a general solicitation and is not consistent with the prohibition on general solicitation and advertising … if the website contains an offer of securities”. Notwithstanding the foregoing, the SEC has published rules governing the purpose, content and use of press releases which, if complied with, provide a safe harbor under which a press release will not be deemed to be general solicitation or general advertising for a U.S. Offering. Rule 506(c) of Regulation D under the U.S. Securities Act is an alternative exemption that allows an issuer to make sales to U.S. accredited investors in an Offering in which general solicitation or general advertising is employed, but only if the issuer takes certain steps that the SEC deems to be “reasonable” in verifying the accuracy of the investor’s claim of being an accredited investor.  The SEC has provided some non-exclusive examples of steps that may be considered reasonable, include obtaining and reviewing an individual investor’s tax returns to establish net income, or obtaining a recent certification from the investor’s U.S. broker, lawyer or accountant.  To date, this exemption has been used relatively rarely, due to the significant additional burden on issuers and investors of satisfying this due diligence requirement, and the risk that asking for this information will scare off investors who consider it an invasion of privacy. Planning a U.S. Offering Under the Listed Issuer Financing Exemption An issuer that consults with its U.S. counsel in advance should be able to ensure its ability to proceed with a U.S. Offering as a part of a broader Offering under the new Listed Issuer Financing Exemption.  Whichever U.S. exemption will be used, the issuer’s forms of offering documents will need to be updated.  More importantly, issuers that intend to continue relying on the Rule 506(b) or Section 4(a)(2) exemptions must ensure that their use of the Listed Issuer Financing Exemption for the Offering will not involve any general solicitation or general advertising for purposes of the U.S. Offering.  Of particular concern are the purpose, content and use of the mandated press release, the method of using and posting the Offering Document on the issuer’s website, and the method by which U.S. investors are brought into the U.S. Offering.  Issuers that intend to allow general solicitation and rely on the Rule 506(c) exemption must prepare new due diligence procedures. To ensure compliance under the new rules, the following matters should be discussed with U.S. counsel in advance: The issuer’s eligibility for, and selection of, the U.S. securities exemption for the U.S. Offering; The purpose, content and use of the press release announcing the Offering – in many cases, the names of underwriters or agents participating in the Offering may not be included in the press release; The approach toward posting the Offering Document on the issuer’s website, including whether the issuer should employ geofencing or geoblocking technology, mandatory questionnaires or other means to prevent users in the United States from accessing the Offering Document on the website; The description of the U.S. Offering restrictions within the Offering Document and/or in a U.S. “wrap” around the Offering Document that is used for purposes of explaining the U.S. Offering; The portions of the subscription agreement to be completed by U.S. investors, or separate U.S. subscription agreement, if applicable; The response to any prospective U.S. investor that became interested in the U.S. Offering by viewing the press release or Offering Document, and how to reduce the risk of this occurring; In a Rule 506(c) offering, the method of verifying an investor’s status as an accredited investor; Any underwriters, agents or finders, or the payment of fees or commissions to U.S. persons or for soliciting U.S. investors; and Any applicable U.S. notice filing or state securities law requirements.

More special purpose acquisition vehicles (common known as “SPACs”) completed their initial public offering (“IPO”) in 2021 than in any prior year. In 2021, approximately 613 SPACs completed their IPO within the United States alone. An increasing number of Canadian companies are being approached by U.S. and tax haven SPACs with significant US shareholders. A SPAC is organized with no business operations and minimal direct assets (cash raised from private investors in the IPO is held in a trust account) for the purpose of acquiring a private company, effectively resulting in that company being taken public. Such acquisition is generally referred to as a “qualifying transaction” (or “de-SPAC” transaction). Private companies generally find de-SPAC transactions attractive because they can result in significant cash infusions and access to public markets while avoiding the complications of a direct IPO. Common de-SPAC transaction structures include: (i) re-domiciling the SPAC to Canada prior to the acquisition of the Canadian company; (ii) acquiring the Canadian company utilizing an exchangeable share structure; (iii) structuring the de-SPAC transaction as an acquisition of the SPAC by the Canadian company; or (iv) forming a new Canadian holding company to acquire the SPAC and the Canadian company. The re-domiciling of a SPAC to Canada will generally result in application of the U.S. anti-inversion tax rules unless the SPAC is organized in a non-U.S. jurisdiction. If the anti-inversion rules apply, the SPAC will continue to be classified as a U.S. domestic corporation for U.S. federal income tax purposes notwithstanding the re-domiciliation to Canada. As a result, U.S. SPACs are generally not re-domiciled to Canada. Properly designed exchangeable share structures whereby the SPAC acquires an interest in the Canadian company and shareholders of the Canadian company receive shares exchangeable for SPAC shares can result in the deferral of taxes by shareholders of the Canadian company until they liquidate their holdings. However, the use of exchangeable share structures often adds cost, time and complexity. The acquisition of a SPAC by the Canadian company, or a newly-formed Canadian corporation organized to acquire both the SPAC and the Canadian company, can result in tax-deferral for the shareholders of the Canadian company and the SPAC if certain detailed requirements are met including, with respect to a direct acquisition of the SPAC by the Canadian company, that such Canadian company have been engaged in an active trade or business (as defined for U.S. federal income tax purposes) for the 36 months preceding the acquisition of the SPAC. Ultimately, the de-SPAC transaction structure to be utilized depends on the particular facts applicable to the Canadian company, the SPAC and their respective shareholders. Involving U.S. tax counsel early in the discussion process can make the de-SPAC transaction process more efficient and avoid unforeseen U.S. tax issues.

In conjunction with the OTC Markets, Dorsey has updated its Guide to Joining the OTCQX or the OTCQB Markets for Canadian and other Foreign issuers. Canadian issuers who trade on a qualified foreign stock exchange (which include the Toronto Stock Exchange, TSX Venture Exchange, Canadian Securities Exchange and the NEO Exchange) and who meet certain financial criteria can trade in the United States on the OTCQX or the OTCQB by relying on their Canadian disclosure and without needing to register with the United States Securities and Exchange Commission. The OTCQX is for more established companies that meet higher financial standards while the OTCQB is for early-stage and developing companies. The OTCQX and OTCQB provide trading platforms in the United States that offer many of the benefits of traditional U.S. stock exchanges with less regulatory burden and lower reporting costs. Most Canadian issuers will require an approved sponsor to assist with joining the OTCQB and OTCQX. Dorsey is an approved sponsor and we have assisted over 150 issuers with their trading on the OTCQX or OTCQB. The Guide to Joining the OTCQX or the OTCQB Markets for Canadian and Other Foreign Issuers can be found here.

The OTC Markets has published proposed rule changes that would, effective September 23, 2021, require that in order to be quoted on the OTCQX International, a company must either be an SEC reporting company, file reports with the SEC under the Regulation A+ reporting system, or be exempt from SEC reporting requirements by virtue of Rule 12g3-2(b).  Companies relying on the Rule 12g3-2(b) exemption must annually certify to the OTC Markets that they continue to comply with that exemption.  Another alternative, which had allowed companies to be quoted on the OTCQX International if they are exempt from SEC reporting requirements for other reasons, is being eliminated.  Companies previously relying on that exemption may transfer to the OTCQB tier of the OTC Markets if they satisfy the OTCQB requirements. While many publicly traded Canadian companies comply with Rule 12g3-2(b), and therefore will be able to continue to be quoted on the OTCQX International, the proposed rule changes may adversely affect three groups of companies: Companies whose trading volumes in the United States are sufficiently high that during the course of their most recently completed fiscal year, less than 55% of worldwide trading occurred in the one or two countries constituting the primary non-U.S. trading market; Newly public companies who are seeking an OTC quotation during the same fiscal year in which they have first begun trading in Canada or another foreign country; and Companies that fail the SEC’s “foreign private issuer” test under Rule 3b-4, because a majority of their voting securities are beneficially held by U.S. residents and they have an additional strong nexus to the United States. These companies would not satisfy the requirement of Rule 12g3-2(b) to be a “foreign private issuer” with a “primary trading market” outside the United States, and therefore would not be eligible to apply to the OTCQX International or in the case of a company already quoted on the OTCQX International, to continue such quotation, unless they were SEC or Regulation A+ reporting companies.  They could, however, apply for quotation on the OTCQB and later upgrade to the OTCQX International if they gained or regained compliance with Rule 12g3-2(b).

As discussed in more detail here, on August 6, 2021, the United States Securities and Exchange Commission (the “SEC”) approved NASDAQ Rules 5605(f) and 5606, which require each NASDAQ listed company (subject to certain narrow exceptions) to (i) publicly disclose, to the extent permitted by applicable law, information on the voluntary self disclosed gender, racial characteristics and LGBTQ+ status of the issuer’s board members, and (ii) have at least two “diverse” board members or explain why it does not have two diverse members meeting the applicable requirements. Issuers with five or fewer board members are required only to have one “diverse” board member. Canadian issuers that are NASDAQ listed are subject to the new rules. However, a Canadian issuer that is either (i) a “foreign private issuer” as defined under SEC rules or (ii) any other issuer that is incorporated under the laws of a jurisdiction other than the United States and has its its principal executive office outside the United States, may satisfy the board composition requirements by having at least two female directors, or one female director and one director who is either (i) an underrepresented individual (based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the county in which the issuer’s principal executive office is located) or (ii) a member of the LGBTQ+ community. The new rules are subject to a transition period, but will begin to take effect for all on the later of August 7, 2023, or the date the issuer files the proxy or information statement (or Form 10-K or 20-F) for the issuer’s annual shareholder meeting in 2023. While the new rules affect only NASDAQ listed companies, the SEC’s rule making agenda indicates that it may also propose new values regarding board diversity disclosure, which suggests that similar rules may be applicable to a broader range of listed companies in the future.

On September 28, 2021, companies trading in the United States over-the-counter securities markets (“OTC Markets”) that do not comply with amended Rule 15c-211 will no longer be eligible for quotation on the OTC Markets, effectively eliminating their public quotation in the United States. Amended Rule 15c-211 requires that broker-dealers obtain and review basic information about an issuer and its security before initiating or resuming quotation of a security in the OTC Markets. The amendments should have no effect on companies that are traded on a national securities exchange (i.e., NASDAQ, New York Stock Exchange, NYSE American, etc.), the OTCQX or OTCQB. Companies trading on the OTC Pink or OTC Grey Market will need to have current and public disclosure available to broker-dealers and investors and verified before a broker-dealer can initiate or resume quotation of a security in the OTC Markets. OTC Markets Group has created a program for Rule 15c-211 verification for companies that trade on the OTC Pink through the OTC Disclosure & News Service that can be relied upon by broker-dealers. Immediate action is required for these companies if they intend to remain eligible for quotation in the United States OTC Markets. If not already done, Canadian issuers trading on the OTCQX or OTCQB will need to verify compliance with Rule 12g3-2(b) on their OTCIQ profile immediately so that OTC Markets compliance team can confirm Rule 15c-211 compliance. Companies that satisfy the Rule 15c-211 public information eligibility requirements include (i) issuers that are subject to reporting under the Securities Exchange Act of 1934, as amended, Regulation A or Regulation Crowdfunding; (ii) foreign private issuers that are exempt from registration under the Exchange Act pursuant to Rule 12g3-2(b); and (iii) issuers that provide disclosure specified in Rule 15c-211. Other exemptions are for unsolicited quotations and seasoned issuers that satisfy trading and capitalization requirements. Companies that are quoted for trading on over-the-counter securities markets should consult with their legal advisor at Dorsey & Whitney LLP on the application of Rule 15c-211 on eligibility for quotation in the United States.

One of the hottest going-public trends in 2020 and 2021 has been the rise of SPACs – Special Purpose Acquisition Companies – as a vehicle for private companies to go public. SPACs are shell companies that are formed, funded and taken public for the purpose of later acquiring an operating company. By merging with a SPAC, the private company effects a reverse takeover, inheriting the SPAC’s existing cash and taking over its management. SPAC mergers have quickly increased from being occasional to outpacing the number of traditional IPOs. A SPAC merger involves different players that can have different motivations than a traditional IPO. In a traditional IPO, a private company may slowly prepare to become a public company, augmenting staffing and systems over a period of years, before engaging with underwriters that will conduct an initial public offering of securities for the company. By comparison, in a SPAC merger, the SPAC typically has a limited window of time, usually 12-24 months, in which it can identify, negotiate and close a qualifying transaction. Failure to complete a transaction by the end of that period requires the SPAC to return capital to its investors. This limited timeframe puts great pressure on the private company to be ready to go public more quickly. In addition, the SEC imposes certain disabilities on successors to SPACs. On March 31, 2021, the SEC issued two new guidance documents highlighting these and other important issues that a private company should consider before going public by merging with a SPAC. First, the SEC’s Division of Corporation Finance issued a Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies, which reminds private companies that if they go public through a SPAC merger, the combined public company will be subject to a number of special rules applicable to former shell companies, which include: Financial statements for the acquired business satisfying the SEC’s standards must be filed within four business days of the completion of the merger, as part of a larger filing that must include extensive additional information regarding the combined business, similar to the information that would be required in an SEC registration statement or prospectus (referred to as Form 10 information); The combined public company cannot use incorporation by reference in a Form S-1 registration statement for three years after the completion of the merger; The combined public company cannot use Form S-8 to register compensatory securities offerings until at least 60 days after the combined company has filed current Form 10 information; The combined public company will be an “ineligible issuer”, as defined by the SEC, which means that for three years following the completion of the merger, the issuer: Cannot qualify as a well-known seasoned issuer; May not use a free writing prospectus; May not use a term sheet free writing prospectus available to other ineligible issuers; May not conduct a roadshow that constitutes a free writing prospectus, including an electronic roadshow; and May not rely on the Rule 163A safe harbor, which protects certain pre-filing communications from being considered impermissible offers of securities; The combined public company will be subject to the Exchange Act’s requirements relating to adequate books and records, internal control over financial reporting and disclosure controls and procedures; and If the SPAC was listed on a national securities exchange, such as the New York Stock Exchange or NASDAQ, the exchange will require the combined public company to satisfy all quantitative and qualitative standards applicable to an initial listing in order to remain listed after the merger. Further, while not mentioned in the Staff Statement, Rule 144 is not available to permit resales of securities of a former shell company until one year after the resulting issuer has filed current Form 10 information, and thereafter, its availability is always conditioned upon the combined public company continuing to be an SEC reporting company that is current in its SEC filings. Concurrent with the Staff Statement, Paul Munter, the SEC’s Acting Chief Accountant, issued a public statement on Financial Reporting and Auditing Considerations of Companies Merging with SPACs. This statement highlights a number of things for private companies to consider before completing a SPAC merger, generally seeking to impress upon private companies that a SPAC merger should be approached with the same seriousness, planning and rigor as a traditional IPO: Marketing and Timing Considerations. While a private company may spend years preparing for a traditional IPO, SPAC mergers are often sought to be completed within a few months. It is, therefore, essential that target companies have a comprehensive plan in place to address the resulting demands of being a public company on an accelerated timeline. This includes preparing for robust financial reporting and filing requirements, as well as an evaluation of various functions, including people, processes and technology, that will need to be in place to meet SEC filing, audit, tax, governance and investor relations need post-merger. It is essential for the combined public company to have a capable, experienced management team that understands what the reporting and internal control requirements and expectations are of a public company and can effectively execute the company’s comprehensive plan on an accelerated basis; Financial Reporting Considerations. The combined public company should have sufficiently knowledgeable personnel, appropriate staffing and processes in place to produce high quality financial reporting that is in compliance with all SEC rules and regulations. Management should be prepared for various financial reporting challenges that may arise in the process of the SPAC merger, including complex accounting issues such as the determination of the appropriate accounting principles, identification of the combined company’s predecessor entity for financial statement purposes, the form and content of the required financial statements and pro forma information, which entity should be treated as the acquirer for accounting purposes, accounting for any earn-out or compensation arrangements, transitioning from private to public company accounting principles and potential acceleration of adoption of recent accounting standards; Internal Control Considerations. Management should understand the requirements relating to internal control over financial reporting and disclosure controls and procedures, including the timing of management’s first required reports on these topics, and any required auditor attestation of internal control over financial reporting; Corporate Governance and Audit Committee Considerations. Companies should understand the importance and role of the board and audit committee of each party to the SPAC merger, and the combined public company, including the range of skills, experience and independence of the board of the combined public company; and Auditor Considerations. The private company’s annual financial statements should be audited in accordance with the Public Company Accounting Oversight Board (PCAOB) standards by a public accounting firm registered with the PCAOB and compliant with both PCAOB and SEC independence requirements. This requires thoughtful consideration, and may require changes to previously prepared financial statements, the auditor or the audit team. Auditor independence, in particular, can be an issue in SPAC mergers. SPAC mergers provide an important alternative to a traditional IPO, but as discussed above, they should be approached with the same seriousness, planning and rigor as a traditional IPO.

The Financial Industry Regulatory, Inc. (“FINRA”) has recently provided our firm with informal guidance that, in accordance with the principles of the multijurisdictional disclosure system (“MJDS”), a Canadian issuer that is undertaking a U.S. registered public offering may count its reporting history in Canada (along with any reporting history in the United States) toward the 36 month requirement in FINRA Rule 5110.  This has the effect of providing an exemption from filing with FINRA for Canadian issuers with a combined Canadian and U.S. reporting history of at least 36 months, even if they have a shorter reporting history in the United States.  This guidance will save qualifying Canadian issuers the time and financial cost of submitting materials to FINRA and obtaining FINRA clearance prior to offering securities in the United States. In September 2020, FINRA amended Rule 5110, which deals with registered corporate financing transactions.  FINRA added an exemption from the requirement to file offerings with FINRA (and pay FINRA filing fees) for an “experienced issuer.”  An experienced issuer is defined as an issuer that has: a reporting history of 36 calendar months immediately preceding the filing of the registration statement, and at least US$150 million aggregate market value of voting stock held by non-affiliates; or alternatively, the aggregate market value of the voting stock held by non-affiliates of the issuer is US$100 million or more and the issuer has had an annual trading volume of such stock of three million shares or more. Many Canadian issuers satisfy the market cap prong of the test but do not have a 36 month reporting history in the United States.  The new guidance will significantly increase the number of Canadian issuers that are eligible for the FINRA filing exemption.

Effective December 8, 2020, the SEC’s definition of an “accredited investor” that is eligible to purchase securities in a private placement will be expanded to cover additional categories of investors, including investment advisers, individuals with certain professional certifications, and certain family offices, Indian tribes, governmental bodies, LLCs, funds and others.  For more details, click here. To take advantage of the new, broader definition, Canadian issuers should reach out to their U.S. counsel to update their applicable subscription agreement and other investment forms.

On October 7, 2020, the Securities and Exchange Commission (”SEC”) proposed a new limited, conditional exemption from broker-dealer registration requirements of Section 15(a) of the Securities and Exchange Act of 1934, as amended (“Exchange Act”) for “finders” who assist issuers with raising capital in private markets from accredited investors. The proposed exemption would permit natural persons to engage in certain defined and limited activities involving accredited investors without registering with the SEC as brokers. The proposed exemption seeks to assist small businesses to raise capital and to provide regulatory clarity to investors, issuers, and the finders who assist them. There will be a 30-day comment period for the proposed exemption following publication in the Federal Register. The SEC published a series of 45 questions at the end of the proposal seeking feedback. For additional information, see this eUpdate.

In conjunction with the OTC Markets, Dorsey has updated its Guide to Joining the OTCQX or the OTCQB Markets for Canadian and other Foreign issuers. Canadian issuers who trade on a qualified foreign stock exchange (which include the Toronto Stock Exchange, TSX Venture Exchange, Canadian Securities Exchange and the Aequitas NEO Exchange) and who meet certain financial criteria can trade in the United States on the OTCQX or the OTCQB by relying on their Canadian disclosure and without needing to register with the United States Securities and Exchange Commission. The OTCQX is for more established companies that meet higher financial standards while the OTCQB is for early-stage and developing companies. The OTCQX and OTCQB provide trading platforms in the United States that offer many of the benefits of traditional U.S. stock exchanges with less regulatory burden and lower reporting costs. Most Canadian issuers will require an approved sponsor to assist with joining the OTCQB and OTCQX. Dorsey is an approved sponsor and we have assisted over 150 issuers with their trading on the OTCQX or OTCQB over the past 10 years. The Guide to Joining the OTCQX or the OTCQB Markets for Canadian and Other Foreign Issuers can be found here.

2020 is shaping up to the be the biggest year ever for at-the-market (ATM) financing programs, and Canada-US cross-listed companies are getting their share of the financing.  In the last three months alone, at least 14 Canadian issuers that are listed on a NYSE or Nasdaq exchange have filed with the SEC for at-the-market (ATM) financing programs across a spectrum of industries, including mining, life sciences, technology, royalty and commodity trust issuers. Find out more about raising money through an ATM by: Reading our newly-published Guide to At-the-Market Programs for MJDS Issuers; Participating in one of our ATM webinars; or Calling your Dorsey contact.

In response to the COVID-19 pandemic, NASDAQ and NYSE are providing temporary relief from certain continued listing standards. As of now, NYSE American has not provided similar relief from its continued listing standards as a result of COVID-19. Specifically, NASDAQ is providing relief from the continued listing bid price ($1.00) and market value of publicly held shares listing requirements through June 30, 2020. While NASDAQ will continue to notify companies about new instances of non-compliance with bid price and market value of publicly held shares requirements during this period, compliance periods for any newly identified non-compliance will not begin until July 1, 2020. In addition, the compliance periods for any company previously notified about non-compliance will be suspended and resume on July 1. Starting on July 1, companies would receive the balance of any pending compliance period in effect at the start of the tolling period to regain compliance. NASDAQ will continue to monitor securities to determine if a company regains compliance during the relief period. A company can regain compliance by satisfying the minimum requirement for a minimum of 10 consecutive days. The NASDAQ’s Listing Center FAQ for COVID-19 can be found at the link below: https://listingcenter.nasdaq.com/assets/Listing%20Center%20Coronavirus%20FAQs%20for%20Nasdaq-listed%20Companies.pdf Similarly, the New York Stock Exchange (“NYSE”) has announced a number of measures to assist companies during this tumultuous time. NYSE has agreed to toll any applicable compliance periods through June 30, 2020, related to having (i) both stockholders’ equity of less than $50 million and an average global market capitalization over a consecutive 30 trading-day period of less than $50 million (the “$50 Million Standard”) or (ii) an average closing price of a company’s shares below $1.00 over a consecutive 30 day trading period (“Dollar Price Standard”). NYSE will continue to identify companies that fall below the $50 Million Standard and the Dollar Price Standard and such companies will be required to (i) comply with the standard disclosure requirements set out in the Listed Company Manual (the “Manual”), and (ii) submit compliance plans within the standard time frames set out in the Manual. However, the time period to cure such deficiency (i.e., 18 months for the $50 Million Standard and six months for the Dollar Price Standard) will only commence on July 1, 2020. Companies that are currently in a compliance period will have their compliance period tolled and it will recommence on July 1, 2020. A company can regain compliance during the tolling period by satisfying the standard cure requirements set out in the Manual. NYSE has also suspended until June 30, 2020, the requirement that companies maintain an average global market capitalization over a consecutive 30 trading-day period of at least $15 million (the “Market Capitalization Standard”). Under the suspension of NYSE’s Market Capitalization Standard, companies will not be notified of new events of noncompliance during the suspension period. However, following the temporary rule suspension, any new events of noncompliance with NYSE’s Market Capitalization Standard would be determined based on a consecutive 30 trading-day period commencing on or after July 1, 2020. In addition, NYSE has instituted a partial waiver of the application of Section 312.03(b) of the Manual, which requires shareholder approval of any issuance to a director, officer or substantial security holder of the company (each a "Related Party") or to an affiliate of a Related Party if the number of shares of common stock to be issued, or if the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. The waiver eliminates the shareholder approval requirement through June 30, 2020, but is specifically limited to transactions that involve the sale of the company’s securities for cash at a price that meets the Minimum Price requirement as set forth in Section 312.04 of the Manual. In addition, to qualify for this waiver, a transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors. Furthermore, this temporary exemption may not be available if the proceeds are used to fund an acquisition. Furthermore, NYSE has instituted a waiver of the shareholder approval requirement of Section 312.03(c) of the Manual until June 30, 2020, such that no shareholder approval is required to (i) issue on a private placement basis, greater than 20% of an issuer’s issued and outstanding shares, (ii) issue greater than 5% of the company’s issued and outstanding shares to a single investor, and (iii) undertake a “bona fide private financing” during that period in which there is only a single purchaser, so long as the issuances are for cash at a price greater than the Minimum Price. If any purchaser in such a transaction is a Related Party, the transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors. The SEC’s releases related to the rule changes can be found at the following links: sec.gov/rules/sro/nyse/2020/34-88572.pdf; sec.gov/rules/sro/nyse/2020/34-88441.pdf; sec.gov/rules/sro/nyse/2020/34-88717.pdf

The OTC Markets Group Inc. (the “OTC”) has announced that due to the Covid-19 pandemic, it is providing relief to certain OTCQB and OTCQX issuers until June 30, 2020. Until June 30, 2020, no new compliance deficiency notices will be sent related to having a low bid price, low market capitalization, or low market value of public float (as those terms are used in the OTCQB Standards, the OTCQX Rules for International Companies or the OTCQX Rules for U.S. Companies, as applicable). Additionally, any OTCQX or OTCQB company that has already received a compliance notice related to bid price, market capitalization, or market value of public float with a cure period expiring between March and June will automatically receive an extension until June 30, 2020, to cure the deficiency. The OTC is also extending the implementation date for compliance with Sections 2.3(3) and 2.3(4) of the OTCQB Standards regarding having at least 50 beneficial shareholders and having a minimum public float of 10% or $2 million in market value of public float, respectively, until June 30, 2020. This extension applies only to companies that were traded on the OTCQB as of May 20, 2018, as all other companies were subject to the requirements effective May 20, 2018. The OTC’s notices related to COVID-19 can be found at the following website: otcmarkets.com/learn/resources-for-companies-impacted-by-covid19.

On March 25, the SEC issued CF Disclosure Guidance Topic No. 9 that provides the Division of Corporation Finance’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. In the guidance, the SEC recognizes that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. Never the less, the guidance is clear that the SEC considers COVID-19 developments to be material and that public companies have an obligation to address these risks even as the business risks are evolving and impacts on a specific company are uncertain. As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements. The guidance provides a checklist of topics related to COVID-19 to be considered by public companies as they prepare their periodic reports and other public disclosures: The impact of on the company’s financial condition and results of operations in the near term and longer term. The impact of on the company’s capital and financial resources, including liquidity, cost and access to capital (such as access to revolving credit facilities), sources and uses of cash, the company’s ability to meet financial covenants, new material expenditures in response to COVID-19 and other matters. The impact on the company’s balance sheet and assets, including any impairment charges. The impact on operations, including remote work, productivity, human resources, supply chain, product distribution and travel restrictions. The impact on demand for the company’s goods and services. The impact on internal controls, disclosure controls, accounting judgments or financial statements. The guidance highlights public companies’ obligations to address management’s expectations for future periods and to discuss trends and uncertainties. The guidance notes that these statements are likely to be forward looking information, based on assumptions and expectations regarding future events, which may be covered by the safe harbor protections. The guidance further notes that the disclosure should be tailored for the specific company and allow investors to see the impact of COVID-19 through the eyes of management. The guidance reminds companies that as they consider the impacts of COVID-19 on their financial condition and operations, their directors and officers, and other corporate insiders, who are aware that COVID-19 has affected their companies in ways that would be material to investors, should refrain from trading in the companies’ securities until such information is disclosed to the public. The guidance also reminds companies to take the necessary steps to avoid selective disclosures by disseminating material information related to the impacts of COVID-19 broadly to the public. In addition, the guidance addressed earnings releases and non-GAAP financial measures. As to earning releases the guidance is primarily a caution to prepare early to address novel issues and accounting judgments that may arise from COVID-19. To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, the guidance is that the disclosure should highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations. The guidance also states that if a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments, requiring additional information and analysis to complete, the staff would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on reasonable estimates, or a range of reasonably estimable GAAP results. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges. Under the guidance, a company presenting non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting. The guidance is clear that the other rules for disclosure of non-GAAP financial measures continue to apply, including that companies should avoid “cherry-picking”. In addition, companies should limit the measures they present to those non-GAAP financial measures they are using to report financial results to their Boards of Directors.

On March 4, 2020, the Securities and Exchange Commission (the “Commission”) proposed amendments to the private offering exemptive framework under the Securities Act of 1933, as amended (the “Securities Act”) to “simplify, harmonize, and improve certain aspects of the framework” with the goal of promoting capital formation while maintaining investor protections. The current private offering framework is a set of exemptions and safe harbors which permit issuers to raise capital through various, differing rules which don’t require the filing of a registration statement with the Commission under the Securities Act. These rules are meant to provide issuers with a less expensive and more efficient alternative to a registered public offering in exchange for certain limitations and requirements being placed on the offering, typically regarding the number and type of investors, the type and context of solicitations, the size of the offering and individual investments and certain limited information requirements. The conflicting requirements of the current, differing rules and the potential integration (determination of whether multiple transactions are part of the same offering) of offerings conducted under this “patchwork system” has resulted in a complex and sometimes confusing regulatory framework where the interaction of offerings conducted under the various exemptions and safe harbors is often uncertain, leading to potential violations of the Securities Act. As Chairman Clayton stated in relation to the proposed amendments, “[t]he complexity of the current framework is confusing for many involved in the process, particularly for those smaller companies whose limited resources spent on navigating our overly complex rules are diverted from direct investments in the companies’ growth.” As noted in the Commission’s press release, “[t]he Commission’s proposed amendments are intended to reduce potential friction points to make the capital raising process more effective and efficient to meet evolving market needs.” The proposed amendments would: address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering; increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits; provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions. For more information on the proposed rules, see our recent eUpdate here.

On March 2, the Securities and Exchange Commission adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. The final amendments amend Rule 3-10 of Regulation S-X and partially relocate its provisions to new Rule 13-01 and completely relocate Rule 3-16 into new Rule 13-02 (Rule 3-16 will continue to exist during the transition period). The Commission stated that the amendments are intended to: Improve existing Rules 3-10 and 3-16 by requiring disclosures that focus investors on the information that is material given the specific facts and circumstances and by making the disclosures easier to understand; Reduce the cost of compliance for registrants and encourage potential issuers to offer guaranteed or collateralized securities on a registered basis, thereby affording investors protections they may not be provided in offerings conducted on an unregistered basis; and Facilitate, through lower costs and burdens of compliance, issuers' flexibility to include guarantees or pledges of affiliate securities as collateral when they structure debt offerings, which may increase the number of registered offerings that include these credit enhancements and could result in a lower cost of capital and an increased level of investor protection. The amendments as adopted are substantially similar to the amendments proposed by the Commission on July 24, 2018. The amendments will be effective on January 4, 2021, but voluntary compliance will be permitted in advance of the effective date. Amendments to Rule 3-10 and New Rule 13-01 Prior to the amendments, Rule 3-10 required financial statements to be filed for all issuers and guarantors of securities that are registered or being registered, subject to several exceptions. Under the amendments, Rule 3-10 will continue to permit the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees. Similar to the existing rule, the amended rule will provide the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements. New Rule 13-01 sets forth the accompanying amended disclosure requirements, as follows: The condition that a subsidiary issuer or guarantor be 100%-owned by the parent company is replaced with a condition that it be consolidated in the parent company's consolidated financial statements; The condensed consolidating financial information, as specified in existing Rule 3-10, is replaced with certain new financial and non-financial disclosures. The amended financial disclosures will consist of summarized financial information of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented. The amended non-financial disclosures, among other matters, will expand the qualitative disclosures about the guarantees and the issuers and guarantors. Consistent with the existing rule, disclosure of additional information about each guarantor will be required if it would be material for investors to evaluate the sufficiency of the guarantee; The amended disclosures may be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings; and The amended financial and non-financial disclosures are required for as long as an issuer or guarantor has an Exchange Act reporting obligation with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding. Amendments to Rule 3-16 and New Rule 13-02 Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, based on a numerical threshold, for any class of registered securities as if the affiliate were a separate registrant. Under the amendments, the requirements in Rule 3-16 will be replaced with the disclosure requirements in new Rule 13-02 (although existing Rule 3-16 will remain in place for transitional purposes). Among other things, the amendments will: Replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with amended financial and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the consolidated financial statements of the registrant that issues the collateralized security. The registrant will be permitted to provide the amended financial and non-financial disclosures outside the footnotes to its audited annual and unaudited interim consolidated financial statements in all filings; and Replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the registered securities with a requirement to provide the proposed financial and non-financial disclosures in all cases, unless they are immaterial.

In connection with the order issued by the Securities and Exchange Commission on March 4 providing filing relief for companies that are affected by the coronavirus, the Commission reminded all companies to be vigilant regarding their disclosure obligations related to the evolving coronavirus scenario. A company’s assessment of, and plans for addressing, material risks to its business and operations resulting from the coronavirus can be material to investors, and companies are encouraged, to the fullest extent practicable, to keep investors and markets informed of material developments. As a reminder, under the federal securities laws: When a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and take steps to prevent its directors, officers and other corporate insiders who are aware of these matters from initiating such transactions until investors have been appropriately informed about the risk. When a company does disclose material information related to the impacts of the coronavirus, it should take the necessary steps to avoid selective disclosures and to disseminate such information broadly in compliance with Regulation FD. Companies should consider whether they may need to revisit, refresh or update previous disclosure to the extent that such information becomes materially inaccurate. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding the coronavirus, should take steps to avail themselves of the safe harbor in Section 21E of the Securities Exchange Act of 1934 for this information. While the need to seek filing relief due to the coronavirus will hopefully be limited to very few companies, these disclosure obligations are likely to impact most companies.

Issuers quoted on the OTCQB are now required to promptly disclose the issuance of any promissory notes, convertible notes, convertible debentures, or any other debt instruments that may be converted into a class of the issuer’s equity securities. In addition, OTCQB issuers are now required to promptly post copies on the OTC Disclosure & News Service or, if an SEC reporting company, on the SEC’s EDGAR reporting system, of the securities purchase agreement(s) or similar agreement(s) setting forth the terms of such arrangement, any related promissory notes or similar evidence of indebtedness, and any irrevocable transfer agent instructions. These new listing requirements will apply to OTCQB issuers even if applicable Canadian and U.S. laws do not otherwise require such disclosure. We have been informed by the OTC that redacting personal information is permitted and if there are multiple investors that have signed identical agreements, only the “form of” the relevant agreement needs to be filed. Investors’ names are required to be disclosed unless there are multiple identical definitive agreements and the issuer elects to file only the “form of.” Issuers should ensure that any confidentiality clauses in the relevant agreements are drafted taking into account these new disclosure requirements. In addition, issuers are now required as part of their initial and annual OTCQB Certification to list out promissory notes, convertible notes, convertible debentures, or any other debt instruments that may be converted into a class of the issuer’s equity securities that were issued or outstanding at any time during the last completed fiscal year and any interim period between the last fiscal year end and the date of the OTCQB Certification. The updated form of OTCQB Certification can be found at the following link: otcmarkets.com/files/OTCQBCertificationTemplate.docx.

SEC registration statements and certain annual reports require consents of experts (e.g., technical experts, audit firms, and investment banks that provide fairness opinions) named in the disclosure document. A recent development in Canada is that audit partners are now named in audit reports filed with audited financial statements. From an SEC perspective, the naming of both the audit partner and the audit firm in the audit report could require both parties to provide consent to the inclusion of the audit report in an SEC filing. The SEC has recently provided our firm informal guidance that in accordance with the principles of the multijurisdictional disclosure system (“MJDS”), the SEC will not require a separate consent of the audit partner for an issuer’s initial MJDS registration statement and for any subsequent MJDS registration statement filed before the issuer’s first SEC annual report, if the issuer was required to include the name of the audit partner in the Canadian filing and the audit partner did not provide a consent when the audit report was originally filed in Canada. This guidance only applies to U.S. filings made in accordance with MJDS (e.g., Form 40-F, F-7, F-8, F-10 and F-80). We understand that the SEC is not extending this informal exemption to an issuer’s first SEC annual report or to any subsequent filings, because Canadian issuers can choose to follow PCAOB guidelines for audit reports included with the issuer’s first annual report filed with the SEC and audit partners are not required to be named in a PCAOB compliant audit report. The SEC is also not extending this informal exception to issuers who file with the SEC on non-MJDS forms. SEC registered Canadian issuers should discuss the consent requirements with their auditors and determine if they are permitted, and it makes sense, to prepare a PCAOB audit report going forward to eliminate the need for a consent of the audit partner.

Many of our Canadian clients have decided to list their stock in the United States on the NYSE American exchange, instead of Nasdaq. Why? Stock price flexibility is a big factor. In Canada, it’s considered perfectly normal for a company to have stock with a price of $2, $1, $0.50 or even $0.10 per share. Not in the United States. Here, there is a long tradition of regulations and stock exchange rules disfavoring companies whose shares trade at low prices, regardless of their total market capitalization. Back in the 1990s, there were three main stock exchanges – Nasdaq, the American Stock Exchange, and for larger companies, the NYSE. While each of the exchanges imposed minimum stock price requirements, the American Stock Exchange rules permitted the exchange to grant exceptions in appropriate cases. The availability of this exception allowed the American Stock Exchange to become the preferred choice of Canadian companies with lower stock prices who did not want to complete a reverse stock split in order to list in the United States. Over time, so many Canadian companies listed there, instead of Nasdaq, that Canadian companies with higher stock prices began to join them. Things have changed a bit since those days. The American Stock Exchange has become part of the NYSE family, now known as the “NYSE American” exchange, and its rules no longer allow a waiver of its minimum stock price requirements. That said, the NYSE American has continued the tradition of being the most flexible of the major U.S. stock exchanges when it comes to stock price. For an initial listing, the NYSE American requires a minimum stock price of $2 in many cases, and $3 in others. Nasdaq allows these prices only on its lower tier Capital Market, and subject to certain restrictions that are not imposed by the NYSE American. For the Nasdaq Global Market, a price of $4 is required. Perhaps more importantly, a company that is listed on Nasdaq is subject to delisting if its stock price declines and stays below $1. For the NYSE American, the threshold is a much lower $0.20.[1] While every company hopes that its stock price will increase, the reality is that many companies have volatile stock prices. In areas such as mining, energy, cannabis, and technology, a change in market conditions, a financing overhang, or the failure of a single property or product can result in steep stock price declines. The stock price may also decline slowly over time as a company grows, issues more shares, and becomes a much larger, more valuable company. It’s here where the NYSE American rules really shine, in helping companies minimize the risk that they will be delisted due to a low stock price, or required to undertake a potentially value-damaging reverse stock split in order to avoid a delisting. To see how this works in practice, consider a company listing on the Nasdaq Capital Market at $2. This company could be delisted or required to complete a reverse split if its stock experiences an overall price decline, during the lifetime of the listing, of more than 50%. For a company listing on the Nasdaq Global Market at $4, this threshold is an improved 75%, but only due to the higher starting price. By comparison, a company with a stock price of $2 listing on the NYSE American must lose more than 90% of its stock price before the NYSE American would consider delisting the stock due to low stock price. While many Canadian companies still list on Nasdaq, stock price flexibility continues to give the NYSE American a leg up when all other things are equal.   [1] The NYSE American Company Guide permits the exchange to delist a security if it trades at a “low price” for a substantial period of time. As a matter of policy, the NYSE American considers a price below $0.20 to be a “low price.”