Cross-Border Counselor

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.

On January 24, 2024, the SEC issued new guidance on when a special purpose acquisition company (SPAC) may run afoul of the U.S. Investment Company Act (the Act).  While this guidance was directed at SPACs that register or file reports with the SEC, it is also instructive for other types of shell companies, including Canadian capital pool companies, SPACs, and similar shell companies that do not file reports with the SEC. Why Care About the U.S. Investment Company Act? If a Canadian issuer is deemed to be an investment company that has failed to register under the Act, it is prohibited from engaging in any business in the U.S. or offering or selling any securities in the U.S., its contracts may be voidable to the extent they are subject to U.S. jurisdiction, commonly used securities exemptions such as Regulation S are unavailable to it, and if it violates the Act, persons associated with it may be held criminally liable. Registration is also not generally an option for Canadian issuers. The Act prohibits a non-U.S. entity from registering as an investment company absent special SEC action. Registration is also impractical for an operating company or a company that intends to become an operating company upon completing an acquisition. Accordingly, avoiding investment company status is important for any Canadian issuer that intends to have any connection with the United States. What is an Investment Company? Subject to certain exceptions, the Investment Company Act defines an investment company to include any issuer which: is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities; is engaged or proposes to engage in the business of issuing face-amount certificates of the installment type, or has been engaged in such business and has any such certificate outstanding; or is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. federal government securities and cash items) on an unconsolidated basis. Operating companies typically avoid investment company status by having a different core business purpose – such as mining, drug development, or making widgets – and by having significant non-cash, non-investment assets. Shell companies that do not have significant non-cash, non-investment assets, and that do not have an operational business, are at greater risk of being deemed an investment company. What to Do? To avoid investment company status, capital pool companies, SPACs, and similar shell companies that have, or intend to have, any connection with the United States should review the SEC’s new guidance* and structure their assets and operations accordingly.  Assuming that the company has the intention to become an operating company as soon as possible through an acquisition of an operating company whose business would become the company’s primary business, it would be prudent for the company to: Describe itself and its intentions in a manner consistent with this purpose. Ensure that the company’s directors, officers, and employees are actively engaged and focused on seeking and completing the transaction that would result in the company being an operating company. Complete its acquisition as quickly as possible. In its new guidance, the SEC stated that “while the duration of a SPAC is not the sole determinant of its status under the Investment Company Act, a SPAC’s activities may become more difficult to distinguish from those of an investment company the longer the SPAC takes to achieve its stated business purpose.” The SEC noted that an exemption under the Act for a transient investment company can be available for up to 12 months, and that escrow accounts of certain blank check companies with a term limited to 18 months were not regulated under the Act, before saying that a “SPAC that operates beyond these timelines raises concerns that the SPAC may be an investment company, and these concerns increase as the departure from these timelines lengthen.” The SEC acknowledged that exchange listing rules contemplate potentially longer SPAC lifespans but said that those rules were adopted for a different regulatory purpose and do not address investment company status concerns. Pending the completion of its acquisition, avoid holding or investing in any assets that would be deemed “investment securities” under the Investment Company Act. This term is quite broad, and includes equity and debt securities, most government bonds, and several common types of term deposits.  For this reason, shell companies should pay very close attention to the types of accounts they create with their banks, and the types of investments they hold pending their transformative acquisition. Cash and U.S. federal government securities are not “investment securities”. Pending the completion of the acquisition, minimize the amount of time spent on managing investments, and do not emphasize to investors the quality or return on such investments. Ensure that its acquisition target is not an investment company, and that it will be an operating company and not an investment company upon completion of the acquisition. The analysis of whether a company is an investment company can be quite complex. The above is only an overview of factors that could be relevant for determining whether a capital pool company, SPAC, or similar shell company is an investment company. Companies should seek legal advice to determine their own status. *The SEC’s new guidance was included in the SEC’s final release adopting new rules for SPACs, beginning on page 360. See Final rule: Special Purpose Acquisition Companies, Shell Companies, and Projections (sec.gov)

On October 10, 2023, the Securities and Exchange Commission approved amendments to the Regulation 13D-G reporting regime for persons who beneficially own more than 5% of a class of securities (“5% Owners”) that is registered under Section 12 of the Securities and Exchange Act of 1934, as amended.  The amendments accelerate the deadlines by which 5% Owners must file initial reports and amendments on Schedule 13D or 13G, mandate the use of machine-readable language in those reports, and provide for additional amendments and guidance.  The amendments apply to 5% Owners of all Section 12 registered securities, including 5% Owners of Canadian foreign private issuers and MJDS filers listed on Nasdaq, the New York Stock Exchange and the NYSE American. For more information, see our eUpdate.

Canadian issuers that are reporting issuers with the Securities and Exchange Commission should be aware of new rules that impose disclosure requirements regarding cybersecurity risk management, strategy, governance and incidents. The new rules have two basic components.   First, certain issuers will have new disclosure requirements regarding the registrant’s processes and policies for cybersecurity risk management, strategy and governance.  These disclosures (which we refer to as “risk management disclosures”) will be required in the registrant’s annual report. The new risk management disclosures apply to nearly all domestic SEC reporting issuers (including Canadian issuers that report on domestic forms) and those foreign private issuers that report on Form 20-F. Second, in the event of a material unauthorized occurrence on or conducted through a company’s information systems (which we refer to as a “cybersecurity incident”) all reporting issuers will need to provide current disclosure regarding that incident on the appropriate form (either 6-K or 8-K).    The cybersecurity incident disclosure requirements apply to all SEC reporting issuers, including those Canadian issuers that report on Form 40-F. For Canadian issuers that report on either Form 20-F or 40-F, in the event of a material cybersecurity incident, the issuer must furnish on Form 6-K that information that the issuer (i) makes or is required to make public pursuant to the law of the jurisdiction of its domicile or in which it is incorporated or organized, or (ii) files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange, or (iii) distributes or is required to distribute to its security holders. For Canadian issuers that report on Form 20-F, the risk management disclosures will be required in the annual report for fiscal years beginning on or after December 15, 2023.  The applicable risk management disclosure requirements for 20-F filers are contained in Item 16K of Form 20-F. For Canadian issuers that file on either 40-F, 20-F or 10-K (other than smaller reporting companies), the disclosures required in connection with a cybersecurity incident will be required after December 18, 2023.  Issuers that file on Form 10-K (including Canadian issuers) that qualify as “smaller reporting issuers” will have an additional 180 days before they are required to comply with the cybersecurity incident reporting requirements, so after June 15, 2024. Issuers must tag the new disclosures in Inline XBRL, including by block text tagging narrative disclosures and detail tagging quantitative amounts, beginning one year after the initial compliance date for the issuer for the related disclosure requirement. A summary of the new rules can be found here and the adopting release for the new rules can be found here.

As discussed in our Governance & Compliance Insider blog and a recent Dorsey eUpdate, all companies with securities listed on NYSE, NYSE American, or Nasdaq will be required to adopt and comply with updated clawback policies governing the recovery of erroneously awarded compensation by December 1, 2023, pursuant to rules proposed by each stock exchange and approved by the SEC under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The new clawback requirements will apply to substantially all listed companies, including foreign private issuers and Canadian MJDS filers.

On December 14, 2022, the SEC adopted final rules amending Rule 10b5-1, a safe harbor from liability under the U.S. insider trading rules.  The safe harbor permits directors, executive officers and others, including issuers, to engage in securities transactions while in possession of material non-public information, by entering into a binding contract, instruction or plan adopted prior to effecting the transaction and at a time when the seller or buyer was not in possession of material non-public information about the issuer. The new rules include a number of measures intended to limit certain potentially abusive strategies permitted under the old rules and certain new disclosure requirements intended to enhance investors’ understanding of the use of Rule 10b5-1 by insiders as well as other related disclosures. The final rules will become effective February 27, 2023. Canadian issuers, particularly those that are cross-listed in the United States, should be aware that: Canadian compliant “automatic plans” may not meet the technical requirements of new Rule 10b5-1, and thus may not provide a safe harbor under the U.S. insider trading rules. The reach of the U.S. insider trading rules may extend further than anticipated; the SEC staff has demonstrated an expansive view of its jurisdictional authority, in circumstance in which it concludes there are good policy reasons to do so. The U.S. insider trading prohibitions do not apply only to U.S. listed companies or SEC registrants; transactions involving securities of issuers in the OTC markets would also be subject to the rules. Canadian issuers, as well as their directors, officers and shareholders, should review their existing insider trading policies and disclosure practices prior to the effective date, and determine what amendments or updates are appropriate in their circumstances. A summary of the new rules can be found here and a copy of the adopting release can be found here.

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.

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.

On April 29, 2020, the SEC issued new Compliance & Disclosure Interpretations (the “New C&DIs”) that clarified the compliance deadline for many mining companies that file with the SEC on non-MJDS forms such as Form 10-K or Form 20-F to comply with the SEC’s new mining disclosure rules in Subpart 1300 of Regulation S-K. The New C&DIs follow closely on the heels of the National Mining Association having submitted a letter on April 24, 2020, to the SEC’s Chairman, Jay Clayton, requesting a one-year delay in the Subpart 1300 compliance deadline in light of the COVID-19 pandemic. The SEC’s adopting release for Subpart 1300 on October 31, 2018, had required that mining companies begin complying with the new rules, including the filing of technical report summaries, beginning with the annual report filed for the company’s first fiscal year beginning on or after January 1, 2021 (in other words, in early 2022 for calendar year companies, and later in 2022 or very early 2023 for other companies). However, that timeline was to be accelerated for new registrants and also, apparently, for companies accessing the public markets, with compliance required beginning January 1, 2021, for any registration statement filed on or after that date. The treatment of shelf takedowns from existing registration statements after January 1, 2021, was not specifically addressed. The New C&DIs provide much-needed clarity regarding the Subpart 1300 compliance deadline for many mining companies: For non-calendar year companies, Subpart 1300 will not apply until the beginning of the company’s first fiscal year on or after January 1, 2021. For example, a company with a June 30 fiscal year end will not in any circumstance become subject to Subpart 1300 until July 1, 2021. If a company files a Securities Act registration statement after the beginning of its first fiscal year on or after January 1, 2021, and prior to its annual report for such fiscal year,[1] it is not required to comply with Subpart 1300 in the Securities Act registration statement if the form being used permits incorporation by reference of information from a prior annual report that was not subject to Subpart 1300, and such disclosure is not otherwise prohibited under the SEC’s rules. For example, if a calendar-year end company files a Form S-3 or Form F-3 during 2021, it may incorporate its annual report on Form 10-K or Form 20-F for the fiscal year ended December 31, 2020, even if that report contains disclosure in accordance with SEC Industry Guide 7. As a result of the New C&DIs, many mining companies that are working on implementing Subpart 1300 will not be required to comply with the new rules until the date in 2022 when they file their annual report for their first fiscal year beginning on or after January 1, 2021. The exception to this rule will be companies that file an initial Exchange Act registration statement or a Securities Act registration statement that does not permit incorporation by reference[2] after the start of their first fiscal year beginning on or after January 1, 2021. Those filings will trigger early compliance with Subpart 1300. The New C&DIs are available at sec.gov/divisions/corpfin/guidance/regs-kinterp.htm#section155. The SEC’s adopting release for Subpart 1300 is available at sec.gov/rules/final/2018/33-10570.pdf. Links for Dorsey's prior Q&A and webinar regarding Subpart 1300 are available at dorsey.com/newsresources/publications/client-alerts/2019/02/new-mining-disclosure-rules-2019 and dorsey.com/newsresources/events/videos/2019/02/webinar-playback-sec-new-mining-rules, respectively.   [1] Technically, the New C&DIs refer to the date on which audited financial statements for such fiscal year are required to be included in the Securities Act registration statement. [2] For example, Forms F-1 and S-1, the SEC’s equivalents to a “long form” prospectus, do not permit incorporation by reference if the company (i) is a new registrant, (ii) has not yet filed its SEC annual report for its most recently completed fiscal year, (iii) is delinquent in its SEC reports, (iii) is or was, or has a predecessor that was, within the last three years, a blank check company, a shell company, or a registrant for an offering of penny stock, or (iv) is registering a business combination. Forms F-4 and S-4, which are used to register business combinations, also include restrictions on incorporation by reference, depending on the nature of the registrant and the company being acquired.

During the current coronavirus crisis, the SEC has issued an Order providing filing extensions that apply to Canadian issuers. The following is a summary of the SEC’s new filing requirements. Form 40-F For Canadian issuers eligible to file their SEC annual report on Form 40-F under the Canada-U.S. Multi-jurisdictional Disclosure System (“MJDS”), Form 40-F continues to be required to be filed on the date on which the included Canadian documents (in most cases, the Annual Information Form) is filed in Canada. We understand that the Canadian Securities Administrators have temporarily provided a blanket 45-day filing extension for Canadian filings, including the Annual Information Form. Therefore, as a practical matter, Form 40-F filers have also automatically received a 45-day filing extension for the filing of the Form 40-F. We have confirmed with the SEC that such 45-day filing extension is available to Form 40-F filers notwithstanding that it could result in a Form 40-F being filed later than the filing deadline for an Annual Report on Form 20-F (four months after the applicable year end). We have also confirmed with the SEC that MJDS filers taking advantage of such filing deadline extension are not required to comply with the SEC’s conditional filing relief described below. Other SEC Filings For non-MJDS filers, the SEC has issued an Order that provides a conditional 45-day filing extension for SEC filings due prior to July 1, 2020. In order to be eligible to utilize the provided relief, the person making the filing must meet the following conditions: (a)  the filer must be unable to meet a filing deadline due to circumstances related to COVID-19 (i.e. it is not a blanket exemption); (b)  any person relying upon the SEC’s Order must furnish a Form 6-K or Form 8-K to the SEC by the original filing deadline of the applicable report, stating: a.  it is relying on this Order; b.  a brief description of the reasons why it could not file such report, schedule or form on a timely basis; c.  the estimated date by which the report, schedule, or form is expected to be filed; d.  a company specific risk factor or factors explaining the impact, if material, of COVID-19 on its business; and e.  if the reason the subject report cannot be filed timely relates to the inability of any person, other than the registrant, to furnish any required opinion, report or certification, the report must include as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report or certification on or before the date such report must be filed. Therefore, Canadian issuers that file on Form 20-F or Form 10-K might be ineligible to fully benefit from the 45-day filing extension provided by the Canadian Securities Administrators. Form 6-K Reports on Form 6-K continue to be due “promptly” following the filing or required public disclosure of the included information in Canada.

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.

For Form 10-K filers, the SEC's March 12 amendments to the “accelerated filer” definition made sense and helped better coordinate the “smaller reporting company” definition with the “accelerated filer” definition. The amendments would, in part, exclude from the definition of “accelerated filer” and “large accelerated filer” issuers that are eligible to be a smaller reporting company and which do not have $100 million in revenues in their most recent fiscal year for which audited financial statements are available. As a result, the amendments will expand the number of Form 10-K filers which are exempted from having to provide an auditor attestation report on internal control over financial reporting in the annual report they file with the SEC. A more detailed discussion of the amendments can be found here: governancecomplianceinsider.com/sec-amends-definition-of-accelerated-and-large-accelerated-filer/. However, for foreign private issuers that file their annual report on Form 20-F or Form 40-F, the benefits from the March 12 amendments are limited. A foreign private issuer filing on Form 20-F or Form 40-F is not eligible to use the requirements for smaller reporting companies, and so is excluded from the expanded accelerated filer exemption. The following table helps illustrate the disparity: Relationships between SRCs, Non-Accelerated and Accelerated Filers under the Final Amendments for 10-K Filers and 20-F or 40-F Filers Public Float Annual Revenues 20-F or 40-F Filer Status* 10-K Filer Status Less than $75 million N/A Non-Accelerated SRC and Non-Accelerated $75 million to less than $700 million Less than $100 million Accelerated SRC and Non-Accelerated $75 million to less than $250 million $100 million or more Accelerated SRC and Accelerated Filer $250 million to less than $700 million $100 million or more Accelerated Accelerated Filer (not SRC) Note: This table addresses initial determinations of filer status and does not consider requirements for transitions between filer status. In other words, if a 10-K filer, a 20-F filer and a 40-F filer each had a public float of $90 million and no revenue, only the 20-F filer and the 40-F filer would be categorized as an accelerated issuer and required to provide an auditor attestation report on its internal control over financial reporting. The final release noted that foreign private issuers reporting on the forms available to them (20-F or 40-F) have other accommodations that 10-K filers do not have. While that is true, it may be cold comfort for an issuer faced with the expense and effort associated with getting an auditor attestation on its internal control over financial reporting. The amendments will become effective 30 days after publication in the Federal Register. The final amendments will apply to annual report filings due on or after the effective date.