Article by Don Ross, Kevin Cramer, Rob Lando, Sue Krembs and Jason Comerford
On December 1, 2005, the U.S. Securities and Exchange Commission (the SEC) reforms relating to public offerings of securities in the United States came into effect. One of the key components of the reforms is the concept of a well-known seasoned issuer (WKSI)1. The reforms are designed to provide WKSIs, which generally are large and well-capitalized public companies with established reporting histories, with quicker access to the U.S. public capital markets. WKSIs are able to register unspecified amounts of securities in the United States under a shelf registration statement that can be used for all primary and secondary offerings (except for those in connection with business combinations) that will automatically become effective upon filing with the SEC. However, most senior Canadian issuers already have access to a system that allows them to file an automatically-effective registration statement. Taking into account the special treatment accorded Canadian issuers by the SEC under the Multijurisdictional Disclosure System (MJDS), and the fact they must also comply with Canadian law, we believe Canadian issuers would derive little incremental benefit from WKSI status at the present time when conducting a public offering in the United States.
The SEC has confirmed that Canadian issuers filing annual reports on Form 40-F under MDJS, which allows Canadian issuers to meet their U.S. filings requirements by using Canadian disclosure documents, will not qualify for WKSI status. WKSI status is limited only to those issuers filing annual reports on Form 20-F and Form 10-K. The inability of Canadian Form 40-F filers to qualify as WKSIs has prompted a number of commentaries suggesting that Canadian Form 40-F filers who would otherwise qualify for WKSI eligibility should consider filing future annual reports on Form 20-F or Form 10-K to be able to benefit from WKSI status. Before deciding to leave the MJDS regime behind, however, Canadian companies should assess the costs and benefits of doing so.
Since its introduction in 1991, MJDS has played a key role in allowing Canadian companies conducting public offerings in Canada to extend those offerings to the U.S. public with a minimum amount of additional cost, effort or time. Canadian issuers can use MJDS forms to offer securities publicly in the U.S. based on a Canadian prospectus that is only subject to review by Canadian securities regulators. In addition, MJDS allows eligible Canadian companies to meet their ongoing U.S. public annual reporting requirements by wrapping a Form 40-F around their annual information form filed with the Canadian securities regulators and filing that Form 40-F with the SEC. Canadian companies are not obligated to use MJDS and may instead file annual reports with the SEC on Form 20-F or follow the same disclosure requirements that apply to U.S companies by filing annual reports on Form 10-K. Utilizing either of these two approaches, however, will increase their disclosure workload. Becoming a Form 20-F filer involves drafting an annual report that responds to the specific information requirements of Form 20-F, which are distinctly different from the disclosure requirements for Canadian annual information forms. As Form 20-F is based on IOSCO international standards, it is also different from the disclosure requirements applicable to U.S. companies. Choosing to become a Form 10-K filer involves not only submitting to the even more stringent disclosure standards that apply to annual reports of U.S. companies, but also to the requirement to file quarterly reports on Form 10-Q and current reports on Form 8-K, with most Form 8-Ks due within four business days of the triggering event. By opting out of the Form 40-F regime under MJDS in order to become WKSI-eligible, Canadian issuers must be prepared to assume the burden of complying with an additional set of different, ongoing disclosure obligations and to bear the cost, effort and time that accompanies those extra obligations.
Would becoming a WKSI bring enough benefit to a Canadian issuer planning to make U.S. public offerings to offset the additional compliance burden?
For the most part, we believe the answer is no. The MJDS regime already provides Canadian issuers with an expedited and streamlined U.S. offering process comparable to what the new WKSI concept is designed to bring to other issuers. For example, Canadian issuers conducting a public offering concurrently in Canada and the United States using MJDS forms will receive comments from the provincial securities regulator leading the Canadian review process within three business days (as compared to the 30-day review period typically imposed by the SEC). The other provincial securities regulators will provide any additional comments they may have within less than two business days afterwards. Upon the issuance of a final receipt by the securities regulators in Canada, the SEC will automatically declare a Canadian issuer’s registration statement on the applicable MJDS form effective in the United States. For a Canada/U.S. cross-border offering, the Canadian review process will still be required notwithstanding any changes in the U.S. rules. If Canadian issuers anticipate that even this short review period may create a hardship if they require quick market access in the future, there is always the option of filing a shelf prospectus in Canada, also without SEC review under MJDS, that can be used for immediate future take-downs in both Canada and the United States.
Finally, even if a Canadian issuer decides to bear the cost of becoming a WKSI in order to expedite U.S.-only registered offerings without the need for a previously-filed shelf prospectus, Canadian companies may still be subject to Canadian legal requirements that could eliminate the benefits of WKSI status. For example, if a Canadian WKSI has TSX-listed equity securities and is offering securities of that class in the United States, the potential for flowback of shares not qualified by a Canadian prospectus into Canada in the aftermarket will nonetheless require that a prospectus be filed with and cleared by Canadian securities regulators. In addition, if a Canadian WKSI based in Alberta or British Columbia offers any securities, including debt or other unlisted securities in a U.S.-only offering, it will still have to file a prospectus for review in that province because the Alberta and British Columbia securities commissions require companies based in their jurisdictions to file a Canadian prospectus with them whenever such companies conduct a public offering, even if all of the purchasers are U.S. investors.
For these reasons, we do not believe that Canadian issuers would derive sufficient benefits from WKSI status at this time to offset the additional compliance costs.
For more information on the topics covered in this update, please contact the authors named above.
Footnotes
Authors credit: Don Ross is a partner in Osler’s Business Law Department, where he practises corporate and securities law. He is also Chair of the firm’s Cross-Border Practice. Kevin Cramer is a partner in the Business Law Department of Osler’s New York office, where he practices U.S. corporate and securities law. Rob Lando is the managing partner of the firm's New York office, where he practises Ontario and New York law. Sue Krembs is a partner in the Business Law Department of the New York office, with a practice devoted to U.S. legal matters covering a wide spectrum of M&A deals and public and private financings. Jason Comerford is an associate in the New York Business Law Department, with a primary area of emphasis on corporate finance.
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