Canada: Testing The Waters, Cryptocurrencies And More: U.S.-Canada Public Markets Update

There are a number of recent developments in U.S. securities regulation that will be noteworthy to some Canadian companies.

While we cover a broad range of matters here, generally these developments can be categorized as addressing two focal points of U.S. federal securities regulators in recent years: decreasing the burdens of public capital raising and adapting the U.S. securities regime to new technological developments.

Testing the waters

The SEC may soon permit any company to test the waters for a U.S. public offering. Currently, only emerging growth companies (annual revenue US$700 million) and their investment banks are permitted to test the waters by talking to sophisticated institutional investors. For details, including a Canadian comparison, see " U.S. public offerings: All companies may soon be permitted to test the waters."

In Torys' recent letter to the OSC on reducing securities regulatory burdens, we suggested expanding the Canadian rules on testing the waters to permit it for all offerings, not just IPOs. This would harmonize better with the U.S. rule and streamline cross-border capital markets activities, as companies and bankers could get earlier indications of investor interest in offerings.

Reducing regulatory burden

Securities regulators on both sides of the border are considering ways they can reduce the number and complexity of rules governing public companies. One area of focus is earnings releases and quarterly reports. The SEC has solicited feedback on their costs and benefits, including whether they cause companies to focus too much on short term results. Moving to a system of semi-annual reporting, as in Europe, would be a significant change for the North American capital markets, and the views of institutional investors will be an important factor for regulators to consider. For details about the OSC's burden reduction task force, see " Reducing regulatory burdens for market participants: new Ontario task force." Torys has submitted a comment letter to the OSC in which two key themes are cross-Canada harmonization and Canada-U.S. harmonization.

Focus on cybersecurity

The SEC's Division of Enforcement recently cautioned public companies that they may need to reassess their internal accounting controls in light of cyber threats. A report on investigations of nine public companies representing a variety of industries shows that they lost a combined US$100 million as a result of cyber fraud. No enforcement actions were brought against the companies but the report states that public companies must calibrate their internal accounting controls to the current risk environment.

In Canada, OSFI recently published a bulletin laying out its expectations for cybersecurity incident reporting by the financial institutions it regulates. The bulletin complements OSFI's 2013 cybersecurity self-assessment guidance on incident management. OSFI expects financial institutions to report, within 72 hours, cybersecurity incidents of high or critical severity that materially impact normal operations. Reports must include the known or suspected root causes and impacts of the incident, whether it originated at a third party, and mitigation actions taken by the financial institution. Updates for the duration of the incident, and a post-incident review, are also required. These reporting obligations became effective March 31.

Non-GAAP measures

Companies' non-GAAP financial measures in earnings releases and MD&A are under scrutiny by the SEC and Canadian securities regulators. The SEC recently settled enforcement charges against ADT Inc., imposing a fine of US$100,000—not a large fine but symbolically important because ADT was not alleged to have misled the market. Instead, ADT simply gave greater prominence to non-GAAP measures than GAAP measures in its earnings releases by putting non-GAAP measures in the headlines and highlights section. Styling earnings releases this way is fairly common among Canadian public companies, despite guidance from securities regulators that this is impermissible. The Canadian regulators recently took steps to ensure better compliance by proposing clear rules matching the SEC's regime on how non-GAAP measures can be presented. For details, see " Non-GAAP Financial Measures: Canada's Securities Regulators Propose Stricter Rules."

Hedging policies

For several years, U.S. and Canadian public companies have had to disclose to the market whether directors and executives are permitted to hedge their holdings of company securities (whether acquired as compensation or otherwise). Now, the SEC is broadening its rule to cover all employees, not just executives. Companies that do not have a hedging policy must disclose that fact (or indicate that the company permits hedging). Companies are not required to disclose actual hedging transactions that have occurred.

U.S. companies must comply with the new SEC rule in their proxy statements for fiscal years ending on or after July 1, 2019, except that emerging growth companies and smaller reporting issuers have an extra year's grace period. Most Canadian companies are exempt from the new SEC rule. The comparable Canadian hedging disclosure rule covers only the highest-paid executives. As a matter of good governance, we believe that more and more companies are likely to adopt anti-hedging policies in line with the expanded SEC rule.

Critical audit matters

Auditors will soon have to describe critical audit matters (CAMs) in their audit reports. The change will be phased in for large companies in 2020 and other companies in 2021. CAMs are matters arising from an audit that were communicated (or should have been communicated) to the audit committee relating to material accounts or disclosures or involving challenging, subjective or complex judgments by the auditor. All SEC-reporting companies will be affected, even MJDS companies.

The Canadian equivalent to CAMS are Key Audit Matters (KAMs). The Canadian deadline for KAM disclosure has been harmonized with the U.S. timeline; auditors of TSX-listed companies (except investment funds) will have to disclose KAMs in their audit reports beginning in 2020.

Auditors of cross-border public companies will have to comply with the CAM and KAM rules. We understand that accounting firms are currently considering whether this will be possible in a single audit report.

Disclosure on board diversity

There are regulations pending under the CBCA that will, if enacted, require disclosure addressing board composition in terms of gender, visible minorities, aboriginal people and people with disabilities. An open question is whether CBCA companies, in order to make the required disclosure, will have to formally request directors to identify themselves as belonging to one or more of the enumerated categories. Directors of CBCA companies may or may not want to do this, and those who do may want the opportunity to consent (or not) before the company discloses sensitive information about diversity on the board.

Recent SEC guidance may be helpful if the CBCA regulations are enacted without addressing the matter of consent. (The SEC guidance is technically limited to companies that are subject to the U.S. proxy rules—not MJDS companies or other foreign private issuers, who file annual reports on Form 40-F or 20-F.) The guidance indicates that if directors self-identify (i.e., voluntarily identify) their race, gender identity, ethnicity, religion, nationality, disability, sexual orientation or cultural background, that information should inform the company's disclosure about board diversity, if the individual has consented to the disclosure.

Digital assets and the scope of securities laws

The growing popularity of digital assets like cryptocurrency has raised the question whether these assets fall within the regulatory ambit of U.S. and Canadian securities laws. The SEC's FinHub recently published guidance to help market participants determine whether a digital asset is a "security." If so, the offer, sale and resale of the digital asset must comply with securities laws, including the requirement to register with the SEC (or ensure an exemption is available) and the prohibition on disseminating misleading information to investors. Similarly, in 2018 Canadian securities regulators published cautionary guidance about token offerings—see " Token Offerings: Caution and Advice from Securities Regulators" for details.

The investment contract test in the seminal 1946 U.S. Supreme Court decision in SEC v. W.J. Howey is critical in assessing whether a unique or novel instrument is a security. The same test is applied under Canadian case law. Howey established that an investment contract exists when someone invests money in a common enterprise with a reasonable expectation of profit to be derived from the managerial efforts of others. Factors affecting whether there is an expectation of profit from the efforts of others include:

  • the role played by management (e.g., developing, enhancing and promoting a digital asset's network, creating and supporting a liquid market for the asset, and making decisions about the rights associated with the digital asset and other key managerial and governance judgments);
  • the rights of holders of the asset (e.g., the opportunity to share in the enterprise's income or profits or to realize gain from capital appreciation); and
  • how and to whom the digital asset is marketed (e.g., targeting users who care most about the functionality of the asset vs. targeting financial contributions from investors who care most about the financial features of the asset).

Applying the Howey test, SEC staff recently issued a no-action letter to Turnkey Jet Inc. (TKJ) stating that the Division of Corporation Finance would not recommend enforcement action against TKJ's sale of tokens, provided that:

  • the tokens are marketed for their functionality - to purchase air charter services – and not for their potential to increase in market value over time;
  • the tokens will be immediately usable for their intended purpose and will not be transferable except to wallets within TKJ's platform;
  • the tokens will be sold for US$1 each, representing an obligation of TKJ to supply air charter services worth US$1 per token; and
  • TKJ is not using the funds from the sale of tokens to develop its platform, network or app.

Nasdaq listings of non-convertible bonds

Nasdaq had decided to begin listing non-convertible bonds. The principal amount outstanding or the market value must be ≥ US$5 million, and the issuer must have equity securities listed on Nasdaq or the NYSE.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions