US mining companies have had success raising funds in Canada because the Canadian capital markets are particularly sophisticated when it comes to the mining sector. It is likely that US mining companies will continue to take advantage of Canadian and US securities rules which permit US issuers to access the Canadian markets using a US style prospectus reviewed only by the Securities and Exchange Commission.
The multijurisdictional disclosure system (MJDS) was adopted by
Canadian securities regulatory authorities and the United States
Securities and Exchange Commission (the SEC) in 1991 to provide
North American issuers with access to capital markets in both
Canada and the United States. MJDS permits eligible Canadian
issuers to access the US markets and publicly offer securities
south of the border while relying on a Canadian-compliant
prospectus that is reviewed only by Canadian securities regulatory
authorities (Southbound MJDS). The prospectus is filed with the
SEC, however the SEC does not review the prospectus. Similarly,
MJDS permits a US issuer to access Canadian capital markets by
complying with US disclosure obligations for public offerings
(Northbound MJDS). In this case, however, the SEC is the primary
reviewer as would be the case for a US-only offering. In either
case, supplemental disclosure is required (commonly referred to as
a "wrapper") to qualify the securities for the offering;
for example, in the case of Northbound MJDS additional disclosure
of rescission rights available to purchasers and certification of
the disclosure in the prospectus is required.
Based on the number of offerings that use MJDS, it is clear that Southbound MJDS is the more commonly used mechanism for cross-border public offerings. For the most part, Southbound MJDS provides relatively easy access for a Canadian issuer to the much larger US market. On the contrary, Northbound MJDS is only used infrequently – the Canadian capital markets are not as attractive to US issuers given the size of the pool of available capital. However, given the strength of the Canadian capital markets in the mining sector, it is understandable that eligible companies in the mining sector based in the United States choose to take advantage of the MJDS system. Recent examples of Northbound MJDS offerings include public offerings in 2009 by Newmont Mining Corporation, Royal Gold, Inc. and US Gold Corporation.
The following are some of the novel issues which must be considered when undertaking a Northbound MJDS transaction:
- Each of the Newmont, Royal Gold and US Gold offerings were completed by way of base shelf prospectus and prospectus supplements. Each of Royal Gold and US Gold prepared "preliminary prospectus supplements." Such a document does not formally exist under Canadian securities laws. While a base shelf prospectus requires the filing of a preliminary prospectus and a final prospectus (each of which must be receipted by the Canadian securities regulatory authorities), the supplement does not require approval. The preliminary prospectus supplement was required because, while the Canadian "bought deal" rules permit solicitations of expressions of interest on a binding agreement, the same flexibility is not available under US securities laws.
- Underwriting agreements must balance cross-border issues. Standards of disclosure differ in the United States and Canada and liability for a "misrepresentation" has a different meaning in each jurisdiction. Underwriters' counsel must ensure that representations and warranties provided by an issuer with respect to a misrepresentation satisfy (or exceed) the minimum thresholds for a misrepresentation in both jurisdictions.
- National Instrument 71-101 – The Multijurisdictional Disclosure System, which implements MJDS in Canada requires a reconciliation of financial statements to generally accepted Canadian accounting principles. However, other Canadian securities requirements do not necessarily require a reconciliation. Given the time required to prepare a reconciliation, parties should be aware of the requirements regarding reconciliation and the possible exemptions from the requirements.
Given the success of US mining companies raising funds in the Canadian capital markets, it is likely that more issuers in this industry will try to take advantage of the Northbound MJDS rules. All parties should be aware of the differences between the US and Canadian requirements for an MJDS public offering, some of which are discussed above. In addition, it is important to be aware that the rules do not exempt reporting issuers from compliance with other rules in Canada, including, for mining issuers, compliance with National Instrument 43-101 – Standards of Disclosure for Mineral Projects.
David is Co-Chair of Osler's Mining Group and practises primarily in public and private mergers and acquisitions and corporate finance. James' practice focuses on mergers and acquisitions, corporate finance and securities, mining and general corporate matters.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.