This is an update on three recent developments in U.S. securities regulation: the U.S. Securities and Exchange Commission’s public offering reforms, the New York Stock Exchange’s proposed corporate governance amendments and the SEC’s proposal to allow easier termination of SEC reporting by certain foreign private issuers.
SEC Offering Reforms
On December 1, 2005, the SEC implemented major changes to the rules on registering and marketing securities in U.S. public offerings. Some of the liberalized rules benefit only well-known, seasoned issuers (WKSIs). These are companies with a one-year SEC reporting history that file Form 20-F or 10-K annual reports and that (a) have a worldwide public float of at least US$700 million, or (b) have sold at least US$1 billion of non-convertible, non-common equity securities in registered offerings over the previous three years.
Canadian companies filing annual reports on Form 40-F (the MJDS form) are not eligible for WKSI status, but they may become eligible by filing annual reports on Form 20-F instead of Form 40-F. There are advantages and disadvantages of seeking WKSI status and it is too early to predict how many Canadian companies will do so. We expect most will take a wait-and-see approach until the impact of the new rules on U.S. capital market activity is better known.
Advantages and Disadvantages of Seeking WKSI Status
The disclosure in Form 20-F is very similar, but not identical, to Canadian annual disclosure requirements. Form 20-F may be filed in Canada in lieu of a Canadian AIF. Both Form 20-F and Form 40-F are subject to SEC review, although the Form 20-F review may involve a broader range of disclosure items.
The SEC’s reforms permit WKSIs to communicate freely with potential investors at any time, even during the period leading up to a public offering, whereas non-WKSIs must observe a quiet period for 30 days before an offering. Before the quiet period, non-WKSIs are permitted to communicate freely, with two major exceptions: they may not publicize a public offering and, if they engage in publicity outside the ordinary course of business, they must take reasonable steps to prevent this publicity from being repeated during the quiet period.
The new rules allow all companies to use virtually any kind of document in the U.S. marketing effort. This freedom does not depend on WKSI status. These "free writing prospectuses" may include email messages, term sheets, news articles and more. Their content is unrestricted, but they may not conflict with the statutory prospectus or tell a different story.
Canadian regulation of pre-offering publicity and marketing securities is substantially more restrictive than the new U.S. rules. Cross-border companies may face special complications in attempting to take advantage of the liberalized U.S. regime, such as controlling improper publicity and selective disclosure.
WKSIs are eligible to file a shelf registration statement without SEC review. These so-called automatic shelves are flexible from a disclosure and an administrative perspective. But as they will be used only for U.S. offerings, cross-border companies may still need a Canadian shelf. The required disclosure for offerings on each side of the border is similar, but not identical. For example, a U.S. GAAP reconciliation will be required in the U.S. shelf, along with quarterly updates incorporated by reference. Having two shelves is possible, but some companies may find it impractical and unnecessary, given that MJDS shelves already enjoy the most important advantage of automatic shelves: no SEC review nor the consequent risk of delaying a public offering.
NYSE Corporate Governance Standards
The NYSE has proposed several changes to its corporate governance standards. The proposals are subject to a comment period and SEC approval, so it is unclear whether they will be adopted in time for the upcoming annual reporting season.
Existing NYSE rules generally allow cross-border issuers to follow their home country corporate governance practices instead of the NYSE’s standards as long as the material differences between a company’s practices and the NYSE’s standards are disclosed. The NYSE is proposing that the disclosure about material differences be posted on companies’ websites. It also proposes that listed companies, including foreign private issuers, be required to notify the exchange promptly when an executive officer becomes aware of any non-compliance with a mandatory NYSE requirement. Finally, the NYSE is proposing stricter disclosure requirements about (a) waivers of codes of ethics, and (b) directors’ independence. These amendments clarify existing disclosure rather than add new requirements for independence. The disclosures are not mandatory for foreign private issuers, although some companies will comply voluntarily.
Streamlining Procedures for Exiting the U.S. Reporting System
The increased burden of SEC reporting under the Sarbanes-Oxley Act of 2002, particularly internal control reporting, has caused some companies to delist or consider delisting from U.S. stock exchanges. The SEC’s current rules, however, require continued reporting even after delisting unless the company can show that it has fewer than 300 U.S. shareholders. The SEC is proposing to make it easier for companies to exit U.S. capital markets by adding alternative exit tests based on the percentage of a company’s shareholders resident in the United States or the relative volume of trading in a company’s securities over a U.S. exchange.
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