On February 9, 2011, the U.S. Securities and Exchange Commission (SEC) issued a proposal to eliminate Form F-9, the registration statement form that currently allows certain eligible Canadian issuers to register investment grade debt or investment grade preferred securities1 under the U.S. Securities Act of 1933 (the U.S. Securities Act) using the U.S.-Canada Multi-jurisdictional Disclosure System (MJDS).2 Although most issuers currently eligible to use Form F-9 will be able to use Form F-10 to continue to register their securities under MJDS instead, there are certain eligibility requirements for use of Form F-10 that some issuers may not be able to meet. As a result, if the proposal is adopted, these issuers will be precluded from being able to use MJDS forms for their investment grade securities offerings or for their annual reports required to be filed with the SEC. The SEC is also proposing to revise the eligibility criteria for use of short-form registration statement Forms S-3 and F-3 so that they no longer provide an alternative eligibility test based on securities ratings. As a result, issuers who do not meet the other eligibility requirements for use of those forms for primary offerings, and who do not meet a new alternative eligibility requirement being proposed by the SEC, will no longer be able to use Forms S-3 or F-3 to register primary offerings of non-convertible investment-grade securities for cash.
These changes are being proposed in connection with the implementation of the provisions of Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the SEC to remove references to or requirements relying on credit ratings in its regulations and to substitute alternative standards of credit-worthiness.
SEC's Rationale for Eliminating Form F-9
Currently, the investment grade requirement for Form F-9 is met if a security has been rated investment grade by at least one nationally recognized statistical rating organization (NRSRO).3 Under Form F-9, an eligible issuer is able to register investment grade securities using audited financial statements prepared pursuant to Canadian generally accepted accounting principles (GAAP) without having to include a U.S. GAAP reconciliation in the Form F-9 registration statement or in subsequent annual reports filed on Form 40-F, which is the MJDS annual report form. This feature has historically represented a material difference from MJDS Form F-104, which requires a U.S. GAAP reconciliation in accordance with Item 18 of Form 20-F for the Form F-10 registration statement itself, and a reconciliation either in accordance with Item 17 or Item 18 of Form 20-F in subsequently filed annual reports on Form 40-F. Under current SEC rules however, foreign private issuers preparing their financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board are no longer required to prepare a U.S. GAAP reconciliation. As CSA rules now require most Canadian reporting companies to prepare their financial statements pursuant to IFRS beginning in 20115, the SEC stated in its proposal that it no longer believes that keeping Form F-9 as a distinct form would serve a useful purpose. Specifically, because Canadian issuers will not have to perform a U.S. GAAP reconciliation under IFRS, the SEC concluded that Form F-9 has become dispensable as the primary difference between F-9 and Form F-10 will be eliminated. The SEC also cites the infrequent use of Form F-9 as a reason why it is no longer needed.
Despite the SEC's conclusion that Form F-9 has become dispensable because of the transition to IFRS reporting by Canadian issuers, there are other important differences remaining between Form F-9 and Form F-10 that do not relate to U.S. GAAP reconciliation requirements. For example, in order to use Form F-10, an issuer must have a public float of equity securities of at least US$75 million (excluding preferred securities), unless the securities being issued are guaranteed by a parent meeting this public float requirement. In addition, Form F-10 prohibits the registration of derivative securities (other than certain warrants, options, rights and convertible securities).
The SEC also proposes to eliminate all references to Form F-9 in its rules and forms, including the references to Form F-9 in Form 40-F, the MJDS form used for annual reports. As a result, a Canadian company that currently has a reporting obligation under the U.S. Securities Exchange Act of 1934 (the Exchange Act) solely with respect to investment grade securities registered on Form F-9, and which does not meet the US$75 million public float eligibility requirement of Form 40-F, would be required to file annual reports on Form 20-F despite previously having been eligible to file annual reports on Form 40-F.6 The requirement to file an annual report using Form 20-F would result in a significant change for affected companies because such issuers would no longer be able to rely primarily on their Canadian disclosure documents when meeting their annual Exchange Act reporting obligations.7 In its proposal, the SEC does not describe a policy reason for requiring affected Canadian issuers to make this switch to Form 20-F reporting.
Form S-3 and Form F-3 Eligibility
Forms S-3 and F-3 are the "short form" registration statements used by eligible issuers to register securities offerings under the U.S. Securities Act. These forms allow eligible issuers to rely on reports they have filed under the Exchange Act, and will file under the Exchange Act in the future, to satisfy many of their disclosure requirements under the U.S. Securities Act through incorporation by reference.
To be eligible to use Forms S-3 or F-3 an issuer must meet the relevant form's eligibility requirements, which generally requires having a reporting history under the Exchange Act, and also meeting at least one of the form's transaction requirements. One such transaction requirement permits registrants to register primary offerings of non-convertible securities if they are rated investment grade by at least one NRSRO, even if the issuer does not meet the requirement to have a public float of at least US$75 million, which is generally necessary for primary offering registrations on those forms (other than limited primary offerings by U.S. listed issuers not exceeding one-third of the market value of the issuer's public float in any 12 month period). The SEC is proposing to replace this investment grade rating eligibility criteria with transaction criteria based on the issuer having issued at least US$1 billion of non-convertible securities in transactions registered under the U.S. Securities Act, other than equity securities, for cash during the past three years (as measured from a date within 60 days of the filing of the registration statement) and satisfying the other relevant requirements of Form S-3 or F-3. This criteria is similar to the method used by the SEC for determining an issuer's status as a "well-known seasoned issuer," or WKSI8, for the purposes of registering debt securities if the issuer does not meet the US$700 million public float requirement necessary for registering equity securities. The SEC anticipates that the proposed change will result in some high-yield debt issuers that are not currently eligible to use Form S-3 or F-3 becoming eligible. Also, some issuers currently eligible to use Form S-3 or F-3 may lose their eligibility.
Changes to eliminate references to credit ratings and ratings reliance are also being made to certain other SEC forms and rules. The SEC has requested comments by March 28, 2011 on whether or how its proposals should be implemented. We would be pleased to discuss any aspects of the proposed rules and any comments you may be considering making to the SEC.
This publication is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Recipients of this publication are advised to seek specific legal advice by contacting members of Osler regarding any specific legal issues. The information in this publication is current as of its original date of publication, but should not be relied upon as accurate, timely or fit for any particular purpose. Receipt of or use of this publication does not create a lawyer-client relationship.
Footnotes
1. Securities registered on Form F-9 must either be non-convertible or not convertible for a period of at least one year from the date of issuance and thereafter generally may only be convertible into a security of another class of the same issuer.
2. MJDS is a reciprocal initiative adopted by the SEC and the CSA designed to facilitate cross-border public offerings of securities by allowing issuers to meet their disclosure obligations in both Canada and the United States by complying with the issuer's home country disclosure standards, and permitting the review of that disclosure solely by the securities regulator in the issuer's home country.
3. Form F-9 also refers to, and permits the use of a rating by, an "Approved Rating Organization", as defined in National Policy Statement No. 45 of the CSA. That National Policy Statement has been replaced by National Instrument 71-101 of the CSA, although the term "Approved Rating Organization" is currently defined for the purposes of Canadian securities laws in National Instrument 51-102 of the CSA. It should be noted that in proposed National Instrument 25-101, the CSA has published for comment a proposal that would replace the concept of an "Approved Rating Organization" with the concept of a "Designated Rating Organization" meeting certain requirements. In practice, however, the reference to a Canadian "Approved Rating Organization" in Form F-9 is no longer significant, as the Canadian rating agencies currently falling within that definition generally also qualify as NRSROs.
4. Form F-10 can be used by eligible Canadian issuers to register any kind of security, including common shares, debt and preferred shares, except a derivative security (other than certain warrants, options, rights and convertible securities). Among the eligibility criteria for the use of Form F-10 is the requirement for the Canadian issuer to have a public float of its outstanding equity securities (other than preferred shares) of at least US$75 million.
5. Certain issuers in rate-regulated industries have been permitted to delay their transition to IFRS until 2012.
6. It also appears that reporting on Form 20-F will be required for a registrant that has registered securities guaranteed by its parent using Form F-10, relying on the parent guarantor's public float rather than its own public float, as permitted by Form F-10.
7. Form 40-F is primarily comprised of the Canadian issuer's annual information form, audited annual financial statements and management's discussion of financial condition and results of operations.
8. In determining compliance with the proposed US$1 billion threshold, the SEC would use the same standards that are used in determining whether an issuer is eligible to register debt securities as a WKSI: (i) issuers would be permitted to aggregate the amount of non-convertible securities, other than common equity, issued in registered primary offerings during the prior three years; (ii) issuers would be permitted to include only such non-convertible securities that were issued in registered primary offerings for cash – they would not be permitted to include registered exchange offers; and (iii) parent company issuers only would be permitted to include in their calculation the principal amount of their full and unconditional guarantees, within the meaning of Rule 3-10 of Regulation S-X, of non-convertible securities, other than common equity, of their majority-owned subsidiaries issued in registered primary offerings for cash during the three-year period.
Jason Comerford's primary emphasis is on assisting Canadian and U.S. clients with U.S. corporate finance and mergers and acquisitions transactions.Kevin Cramer practices U.S. mergers & acquisitions and securities law. Rob Lando is a cross-border corporate and securities lawyer with significant practice experience in the United States and Canada. Jim Lurie practice covers corporate financing, M&A and U.S. securities law matters for U.S., Canadian and other foreign clients.
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