U.S. changes affecting your business: Refresher on three key U.S. securities law fundamentals

Canadian companies will sometimes encounter questions related to fundamental aspects of U.S. securities law. We take a closer look at three topics of special interest below: 10b-5 letters, Regulation FD and SEC comment letters.

1. At a glance: 10b-5 letters

Background. 10b-5 letters are named after Rule 10b-5 under the Securities Exchange Act of 1934—an overarching rule prohibiting fraud in the U.S. capital markets. 10b-5 letters are sometimes called negative assurance letters or disclosure letters or, inaccurately, 10b-5 opinions (they are not legal opinions because they consist of factual statements by counsel rather than counsel’s views on questions of law).

An issue of liability. Under U.S. securities laws, issuers and underwriters are liable for material misstatements and omissions in securities offering materials. Unlike issuers, however, underwriters have a defense to liability if they exercise due diligence in the offering process. The same is true under Canadian law.

What’s in a 10b-5 letter? Despite the legal similarities, U.S. and Canadian offering practices differ in that, as a key component of their due diligence, U.S. underwriters typically require their own counsel and issuer’s counsel and to deliver 10b-5 letters. A 10b-5 letter states that, after reasonable investigation, nothing has come to counsel’s attention that leads them to believe that the offering materials provided to investors contain a materially misleading statement or omit to make a statement without which the offering materials would be materially misleading.

What’s not in a 10b-5 letter? The factual matters addressed in 10b-5 letters are restricted to those within counsel’s purview; financial statements and other accounting information, and some quantitative statistical information, are excluded from their scope.

Relevant transactions. 10b-5 letters are provided in public securities offerings registered with the SEC; often they are also provided in underwritten private placements that are not registered with the SEC but where an offering memorandum is given to investors containing almost the same information as would be given to investors in a registered offering.


Delivering a 10b-5 letter requires a substantial due diligence investigation by counsel, including document review, visits to company facilities, verifying all facts in the offering materials and questioning company management. The scope of the investigation can sometimes be circumscribed, for example, when a seasoned company is offering investment-grade debt securities to sophisticated institutional investors. The scope of work is heaviest when a young company is conducting an initial public offering of common equity to retail investors. Many offerings fall somewhere between these extremes. The precise scope of the investigation needed to underpin the 10b-5 letters should be discussed among the company, underwriters and counsel as early as possible in the securities offering process.

2. At a glance: Regulation FD enforcement

Ensuring confidentiality. Both sides of the Canada-U.S. border have strict rules about maintaining the confidentiality of company information until it is broadly released to the marketplace as a whole—usually by news release. With limited exceptions for communications that are necessary in the course of business, companies are prohibited from disclosing material non-public information to analysts, institutional investors and other select groups.

Cross-border nuances. The U.S. selective disclosure rules are in Regulation FD (fair disclosure). Technically, the rule does not apply to Canadian MJDS companies or other Foreign Private Issuers, but Canadian companies face equivalent restrictions under Canadian law.

A recent cautionary tale. Earlier this year, the SEC brought a Regulation FD enforcement action—the first in six years—against pharmaceutical company TherapeuticsMD. The case was settled with a fine of $200,000. In one instance of alleged wrongdoing, the company, after a meeting with the Food and Drug Administration, emailed several analysts and told them that the meeting was positive and productive.

The company also told one analyst that it was pleasantly surprised by how accommodating the FDA had been. The next day, the company’s stock traded heavily and rose 19%. The NYSE contacted the company about the unusual trading, but the company’s representatives said that they were unaware of any material information to explain it.


The case indicates that the impugned information in a Regulation FD case need not be financial or another quantitative metric—the key information given to analysts was simply that the FDA meetings were favourable, followed by a notable stock price increase and, importantly, the company had no Regulation FD preventative measures in place. Companies should work to prevent improper selective disclosure by maintaining robust corporate disclosure policies that include training for company spokespersons, and protocols for drafting and approving company communications.

3. At a glance: SEC comment letters

SEC review. Canadian cross-border companies that file disclosure materials with the SEC under the multijurisdictional disclosure system (MJDS) may believe that the SEC does not review those documents. That is generally true for public offerings of securities registered on Form F-10. However, the SEC does periodically review MJDS companies’ annual filings on Form 40-F, which consist primarily of a company’s Canadian AIF, annual financial statements and MD&A.

Timing. Upon receiving a comment letter from the SEC, a company has 10 business days to respond, although extensions are sometimes possible.

Trends in focus of review. Recently, the SEC’s comments have tended to focus on: compliance with accounting standards; internal controls (including a company’s status as an emerging growth company for purposes of determining whether its auditors must provide an internal control attestation); mineral resource disclosures, such as the proper classification of reserves; revenue breakdowns by product and geography; and business contacts with U.S.-sanctioned countries.


The underlying philosophy of the MJDS is that the SEC and Canadian regulators each defer to the laws of the other country when regulating companies domiciled in the other country. However, the SEC will still critically assess the responses that a Canadian company provides to its comments and will go so far as to cite applicable Canadian rules where it believes appropriate.

With lawyers across capital markets, M&A, private equity, financing, tax, infrastructure and litigation, Torys New York has decades of experience advising on complex and high-profile U.S. work.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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