SEC to lift restriction on foreign fundraising

Under new rules, some smaller Canadian companies could qualify to raise up to $50 million per year in cross-border markets, with reduced filing requirements and associated costs. Amendments effective June 19, 2015, under Regulation A of the US Securities and Exchange Commission (SEC), will enable duly qualified smaller US and Canadian companies to sell up to $50 million (US) in securities in both countries during a 12-month period, up from the previous $5-million limit, an SEC news release says. There are two exemptions ...

 

 

 

 

Under new rules, some smaller Canadian companies could qualify to raise up to $50 million per year in cross-border markets, with reduced filing requirements and associated costs.

Amendments effective June 19, 2015, under Regulation A of the US Securities and Exchange Commission (SEC), will enable duly qualified smaller US and Canadian companies to sell up to $50 million (US) in securities in both countries during a 12-month period, up from the previous $5-million limit, an SEC news release says. There are two exemptions under Reg A: Tier I for offerings up to $20 million (US); and Tier II, for offerings up to $50 million. Tier II, also called Regulation A+, eliminates the need to comply with separate securities laws of 50 US states and the District of Columbia.

Critics of state regulatory requirements have said that, under so-called state blue-sky laws, as many as two-thirds of states typically conduct “merit reviews” on the quality of each company’s offering, as well as imposing their own disclosure requirements. The SEC has estimated the resulting cost to become fully registered and listed on a major stock exchange in the US is $2.5 million, exclusive of ongoing annual filing costs of roughly $1.5 million.

The Regulation A+ exemption, available only to US and Canadian companies, reduces or eliminates many of these costs. Regulation A+ securities receive SEC review and are immediately tradable on secondary markets in both countries.

“Under Regulation A+, a company could raise $100 million in a year and a day,” said Guy Lander of New York-based Carter Ledyard & Milburn LLP. “However, it may not satisfy the needs of many Canadian companies, particularly those that are able to access US capital through traditional private placements under Reg D or Rule 144A.

Lander said companies already listed in Canada can far more easily do a traditional private placement, which in many cases can result in the securities being freely resold in Canada by US investors. Alternatively, companies can list in the US or register their offerings with the SEC under the Multi-Jurisdictional Disclosure System (MJDS). This permits the SEC to accept the disclosure documents of Canadian securities agencies, such as the Ontario or Alberta securities commissions, with “little or no SEC review,” he said.

“If you’re listed in Canada, you’ve got to wonder why you wouldn’t just do a traditional private placement or use the MJDS. But if you can’t use the MJDS, Reg A+ might be useful.”

US and Canadian companies can become qualified under the new Regulation A+ (Tier II) if they: are not SEC reporting companies; provide audited financial statements (Canadian companies can use IFRS); are not seeking to engage in M&A as a primary business; do not sell asset-backed securities; file annual, semi-annual and current event reports; limit purchases by non-accredited (less wealthy) investors to no more than 10 per cent of any offering of $20 million or more; are not subject to an order under the US Exchange Act, section 12(j) that deregistered them after being inactive; and are not disqualified as “bad actors.”

Get to know more about asset-backed securities in Canada and how to use it with this article.

Lander said that Reg A+ qualification will allow companies to be listed on OTCQB or OTCQX markets without further obligations.

Andrew Beck, with Torys LLP‘s New York office, said such listings are essentially invisible to retail investors, while institutional investors are more attuned to private placements. “I don’t think it’s going to revolutionize the cross-border capital markets,” Beck said.

He said Reg A+ may be of greater interest to small US companies seeking to list in Canada. US companies listing on the TSX have previously been restricted to selling paper securities for a year and those papers could not be sold to a US citizen during that time.

Under Reg A+, electronically issued securities would be immediately tradable — but US companies would face the need to reconcile Canadian IFRS accounting standards with US GAAP accounting requirements.

“As of right now, it’s not seamless,” Beck said. “There will be some Canadian companies that, because of unique circumstances, will take a look at it. But for most companies in Canada, it’s just not going to be useful.”

Lawyer(s)

Andrew J. Beck

Firm(s)