Given our countries' geographic proximity and a fair degree of common ground in our respective securities law, Canadian companies often seek to raise money from U.S. investors at the same time as they raise money in Canada. These cross-border offerings may be public or private in Canada, but the U.S. component is usually a private placement. The JOBS Act, signed by President Obama on April 5, 2012, expands the possibilities for and reduces certain legal risks related to U.S. private placements. This dovetails with another feature of the JOBS Act, namely its relaxation of the rules that trigger SEC reporting thresholds, which may enable companies to remain private longer.
Fully exploiting the opportunity will require keeping an eye on new rules that the SEC has been directed to issue. Although the JOBS Act also contains quite a number of attractive features for "emerging growth companies" that conduct IPOs and become SEC reporting companies, this article takes into account that Canadian companies generally prefer not to raise U.S. money in an SEC-registered public offering.
Concurrent Cross-Border Offerings - Time to Revise U.S. Purchaser Documents?
In order to ensure that the private offering cannot be construed as an unregistered public offering in the U.S., Canadian companies nearly always rely on the safe harbor afforded by Rule 506 of Regulation D under the Securities Act of 1933. Rule 506 in its present form, however, prohibits general advertising or general solicitation of investors. That can sharply limit the range of potential investors or, as a practical matter, require a Canadian company to work through a U.S. broker-dealer that can locate (for a fee) U.S. investors without running afoul of the limitation.
The JOBS Act eliminates the prohibition against general solicitation and advertising, provided the company takes reasonable steps to verify that the only purchasers are "accredited investors" - meaning those persons or entities that meet certain asset or income standards. Under the current rule, the company need only "reasonably believe" that an investor is accredited. Many Canadian private placement subscription agreements include a U.S. investor addendum that requires an investor only to check a box to indicate the applicable category of "accredited investor," and that serves as the basis for the reasonable belief test.
The JOBS Act directs the SEC to issue new rules within a few weeks concerning what is needed to verify that purchasers who invest based on public advertising or solicitation are actually accredited investors. This could have several consequences. First, Canadian companies will have a freer hand in developing U.S. investor interest without being concerned that public statements (e.g., via a website or news release) result in loss of the exemption. Second, the companies may be able to conduct a private offering on two tracks - one using standard Canadian documents for investors located in traditional ways (through preexisting relationships or identified by an intermediary such as a registered broker-dealer) and another using expanded documents to meet the verification criteria for investors who come to a company based on public advertising. The U.S. portion of current Canadian purchaser documents (typically an addendum) may need to be expanded or supplemented based on the SEC rules to be issued shortly. Keeping tabs on these developments will be important. In a similar vein, the extensive representations now found in standard Canadian documents to support compliance with the prohibition against general solicitation and advertising will need revision.
1934 Act Reporting Threshold Relaxed
Compared to other countries, Canada has by far the largest number of companies that file reports with the SEC. Although some Canadian companies choose to do so voluntarily in order to access U.S. capital markets or increase public visibility, others have been compelled to register simply because they cross the reporting thresholds under the Securities Act of 1934 for a class of securities (usually common shares): 500 record holders worldwide, of which at least 300 beneficial owners are U.S. residents, and assets of at least $10 million. Public Canadian companies that are foreign private issuers (as nearly all are) could make use of the Rule 12g3-2(b) exemption if listed on, e.g., the TSX or TSX-V, and they make publicly available, as on a company website, the information required to be made public (such as SEDAR) or filed under Canadian or securities exchange rules.
But Rule 12g3-2(b) isn't available for private companies that may exceed the share ownership limits. The JOBS Act increases the threshold to 2,000 shareholders, so long as no more than 500 are not accredited. The limit on non accrediteds does not apply to banks and bank holding companies. The SEC within a year must issue rules specifying how companies will determine whether shareholders are accredited. Companies not concerned about exceeding the 500-shareholder limit may in the meantime benefit from the increased threshold.