Canadian companies embarking on a U.S. offering or including
U.S. investors in a Canadian offering can make the process go more
smoothly if they answer the following questions while they are
still in the planning stages.
1. Is the company a "foreign private issuer"? If
a company is not a foreign private issuer under SEC rules, it may
face restrictions under U.S. securities laws in conducting a
Canadian offering. In addition, the company will not be eligible
for exemptions from SEC reporting requirements that are otherwise
available to non-U.S. companies. Companies organized outside the
U.S. will not meet the requirements for foreign private issuer
status if a majority of their voting securities are held by U.S.
residents and any of the following is true: a majority of their
directors or executive officers are U.S. citizens or residents; 50%
or more of their assets are located in the United States; or their
business is administered from the United States.
2. Is the company an "investment company"? The
U.S. Investment Company Act of 1940 regulates companies that are
engaged primarily in the business of investing in securities.
Operating companies are sometimes caught within the definition of
investment company as a result of significant holdings in cash or
investment securities. Research and development companies and real
estate companies may be eligible for exemption, and other companies
may be able to avoid becoming investment companies through careful
planning. Absent an exemption, a non-U.S. investment company may
not offer its securities in the United States, except in certain
private offerings.
3. Is the company a "PFIC"? Under U.S. tax law,
U.S. investors in a passive foreign investment company, or PFIC,
face adverse tax consequences. A non-U.S. corporation is classified
as a PFIC if either (i) 75% or more of its gross income is passive
income for the taxable year or (ii) on average for the taxable
year, 50% or more (by value or, in certain cases, by adjusted
basis) of its assets produce or are held for the production of
passive income. While many companies that are PFICs find that they
can still market their securities successfully in the United
States, PFIC status may affect pricing and will require
disclosure.
4. Is the company an "operating company" for purposes
of ERISA? Under the U.S. Employee Retirement Income Security
Act, or ERISA, special rules apply to companies that are engaged in
the passive investment of capital. If U.S. "benefit plan
investors" hold at least 25% of the outstanding equity in such
companies, then the companies themselves may be subject to ERISA
fiduciary obligations, including prohibitions from engaging in
certain transactions. Privately held companies are generally able
to limit benefit plan investment, and other companies may be able
to structure their business so as to qualify as operating
companies.
5. Is the company MJDS eligible? The Multijurisdictional
Disclosure System gives certain Canadian companies a number of
advantages in filing registration statements and reports with the
SEC. With a few exceptions, these advantages are only available if
the company has been subject to continuous reporting requirements
in Canada for at least one year and has a "public float"
of at least $75 million. The public float is the market value of
the company's securities that are held by persons anywhere who
are not affiliated with the company. For this purpose, affiliates
are persons who, directly or indirectly, own or control more than
10% of the company's outstanding equity securities. Companies
that have previously relied on MJDS may lose eligibility if their
stock price declines.
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.
