Q3 | Torys QuarterlySummer 2022

What Canadian companies need to know when raising U.S. capital

Canadian companies across all sectors are increasingly seeking to raise capital in U.S. markets, often by a cross-listing on a U.S. stock exchange (e.g., NYSE or Nasdaq) and registering with the U.S. Securities and Exchange Commission (SEC) under the U.S./Canada multijurisdictional disclosure system (MJDS).

One reason for cross-listing on a U.S. stock exchange may be to increase the company’s capital raising options. U.S. cross-listing makes a Canadian company’s securities more accessible to U.S. investors and allows the company to reach a broader investor base. Cross-listing also provides greater flexibility to issue equity-based compensation to U.S. employees, and may increase the attractiveness of issuing equity as consideration for the acquisition of U.S. companies.

Below are some of the key considerations that a Canadian company should look at before embarking on the journey south of the border in reliance on the MJDS.

U.S. stock exchange considerations

Many Canadian companies that have previously listed on a Canadian stock exchange may find the requirements of the NYSE or Nasdaq to be relatively straightforward in comparison. The process for approval can be completed on a confidential basis over the course of several weeks, and public announcement can be deferred until relatively shortly before listing. The key initial considerations are financial/liquidity tests and corporate governance requirements. Larger, seasoned Canadian companies with strong balance sheets will have little difficulty with the financial/liquidity tests, and any company that qualifies as a “foreign private issuer”1 (FPI) can take an exemption from most of the corporate governance requirements, although certain new rules do apply to all listed companies (e.g., the new Nasdaq board diversity rules)2. In addition, the U.S. stock exchanges generally do not issue comments on company disclosure. As such, most Canadian-listed companies find that the U.S. stock exchange listing process does not require any substantial changes to the company’s existing governance or disclosure.

SEC registration under the MJDS

Canadian companies that are cross-listing in the United States, however, must also register with the SEC. The speed and efficiency of SEC registration largely depends on whether the company can rely on the MJDS, which is a U.S./Canadian bilateral arrangement whereby the SEC will generally decline review of a Canadian company’s disclosure and expedite approval of U.S. registration. To be MJDS-eligible, a Canadian company must have a 12-month reporting history in Canada and a “public float”3 of at least US$75 million, and must qualify as a “foreign private issuer”. If the company can rely on the MJDS, the company can register with the SEC by either filing a Form 40-FR, which is a form that files historical material SEDAR filings as exhibits, or a Form F-10, which is a U.S. shelf registration statement that includes the company’s Canadian shelf prospectus. Either way, the SEC will generally decline to review the company’s disclosure and will usually approve the registration relatively quickly. Accordingly, an MJDS-eligible company will not need to make any substantial revisions to existing disclosure, and its historical financial statements can remain prepared under IFRS without reconciliation to U.S. GAAP or a re-audit under PCAOB auditing standards.

A U.S. cross-listing may also be a good time for a fresh look at the company’s disclosure and to re-assess the company’s approach to investor relations.

Once registered with the SEC, Canadian companies relying on the MJDS are required to furnish all material SEDAR filings on a Form 6-K, and can satisfy the SEC’s annual report requirement by filing their Canadian annual filings on Form 40-F. Canadian companies relying on the MJDS, however, will need to confirm their ability to continue to rely on the MJDS prior to filing each year’s 40-F as well as prior to the filing of any F-10 shelf registration.

SEC rule changes to watch for

Recently, the SEC has proposed several rule changes, including stricter requirements for so-called “10b5-1 plans” (the U.S. equivalent of automatic securities purchase/disposition plans in Canada); more frequent and detailed disclosure requirements for issuer share repurchases; increased disclosures for cybersecurity-related incidents; and a substantial new regime for climate change-related disclosures4. Canadian companies eligible to rely on the MJDS, however, are expected to be exempt from most of the new disclosure requirements. However, Canadian companies will need to be mindful of certain new substantive rules, if and when they are enacted, for example, those relating to 10b5-1 plans, which are necessary to establish an affirmative defense to a claim of insider trading, particularly in connection with issuer share repurchases and dispositions of securities by insiders.

Other U.S. listing considerations

U.S. listing will require the company to update its D&O insurance policies, the cost of which has steadily been increasing in recent years. For both legal and marketing reasons, a U.S. cross-listing may also be a good time for a fresh look at the company’s disclosure and to re-assess the company’s approach to investor relations (e.g., the content and frequency of press releases and investor meetings and presentations) in order to increase appeal to U.S. investors and analysts, which may be further boosted by a U.S.-marketed public securities offering. Ultimately, the success of a Canadian company’s U.S. capital raising strategy may require more than a U.S. listing alone.

Watch our video, “U.S.-Canadian cross-border IPOs”, for more from our cross-border capital markets practice.

  1. “Foreign private issuer” means any non-U.S. issuer other than a foreign government, unless: (1) more than 50 percent of the issuer’s outstanding voting securities are directly or indirectly held of record by residents of the United States; and (2) any of the following: (a) the majority of the directors of the issuer are United States citizens or residents; (b) the majority of the executive officers of the issuer are United States citizens or residents; (c) more than 50 percent of the assets of the issuer are located in the United States; or (d) the business of the issuer is administered principally in the United States.
  2. Market capitalization less shares held by shareholders beneficially owning 10% or more of the company’s outstanding equity securities.

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.

For permission to republish this or any other publication, contact Janelle Weed.

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