Welcome to Canada! Using Regulation A+ to List on the CSE, TSX or TSX Venture Exchange

Using Regulation A in conjunction with listing on the CSE, TSX, or TSX Venture Exchange in Canada is an option that will become more practical for United States (US) based issuers once proposed changes to Regulation A (Regulation A+) are adopted.

Regulation A+

Regulation A+ exempts limited issuances of securities from the registration and prospectus requirements under the US Securities Act of 1933 (1933 Act) . Securities issued under a Regulation A+ offering are not “restricted securities” and therefore not subject to a hold period.

Regulation A+ is only available to issuers who:

  • are not a reporting issuer under the United States Securities Exchange Act of 1934 (1934 Act);
  • are organized under and have their principal place of business in the US or Canada;
  • are not an investment company or blank check company;
  • are not issuing fractional undivided interests in oil and gas rights, or a similar interest in mineral rights;
  • do not have its securities suspended or revoked under the 1934 Act;
  • are not disqualified under the “bad actor” disqualification rules; and
  • have filed all required Regulation A+ exempt distribution reports during the past two years.

Regulation A+ creates two tiers of offerings. Under both tiers issuers are required to prepare a disclosure document in the required form. Issuers may offer equity securities, debt securities, and debt securities convertible or exchangeable for equity interests, including any guarantees of such securities under Regulation A+. These securities may be offered to anyone  subject to certain investment limits.

Tier 1 of Regulation A+ predominately mirrors the existing Regulation A rules which allows issuers to raise a maximum of  US $5 million in a 12 month period. Issuers may provide unaudited financial statements if audited financial statements are not otherwise available. Regulation A+ Tier 1 offerings are subject to state Blue Sky laws and review.

Tier 2 of Regulation A+  allows non-reporting issuers in the US to raise a maximum of US $50 million in a 12 month period.  Issuers are required to provide audited financial statements and have ongoing disclosure obligations.  Regulation A+ Tier 2 offering are preempted from state Blue Sky laws and review.  It is this new Tier 2 that makes Regulation A+ an attractive addition to a going public transaction in Canada.

Why List in Canada?

Regulation A+ aims to stimulate capital formation of micro-cap and nano-cap companies. Micro-cap companies are generally defined as companies with a market capitalization of less than US $250 million. Nano-cap companies are companies with a market capitalization of less than US $50 million.

In Canada we love nano-cap and micro-cap issuers.  In fact, you could say our entire public market is a micro-cap market. 99% of the issuers on the TSX Venture Exchange and 65% of the issuers on the TSX have a market capitalization of less than CDN $250 million.  93% of the issuers of the TSX Venture Exchange have a market capitalization under CDN $50 million and an average market capitalization of $17.8 million.

Issuers from around the world list on Canada’s public market for several reasons:

  • Institutional and retail investors worldwide respect the TMX group of equity exchanges – 40% of the trading in these markets come from outside of Canada;
  • Canada’s public markets are well established, transparent, and have very little fraud despite the micro-cap status of their issuers;
  • No Sarbanes Oxley like requirements;
  • Right-sized regulations for smaller issuers;
  • US resident issuers may use US GAAP or IFRS GAAP;
  • Mobility of capital and securities fluid across our borders;
  • Regulators and professionals speak the same language;
  • Sophisticated investment community;
  • Despite our size significant amounts of capital are raised by issuers listed on our capital markets;
  • No US Rule 144 equivalent dribble out rules for insiders;
  • Shorter hold periods for private placement securities;
  • Significantly lower listing fees then US trading markets; and
  • Listing timeline for non-Canadian issuers almost identical to timeline for domestic issuers (tax planning and accounting compliance main differences).Listing in Canada is almost mandatory if you are resource issuer in the mining or oil and gas sector. 57% of the world’s public mineral exploration and mining companies are listed in Canada. 35% of the world’s oil and gas companies are listed in Canada. Canada is also number one in the world in terms of the number of cleantech companies listed. If you are looking for analyst coverage and investor interest in these sectors you need to be listed in Canada.

Using Regulation A+ When Listing in Canada

Listing on a Canadian stock exchange can be accomplished by a US private issuer through an initial public offering, qualifying transaction with a capital pool corporation or a reverse merger transaction with a legacy listed shell.  The securities laws in both Canada and the US must be considered when undertaking these transactions.

A US private issuer that does not file a registration statement with the US Securities and Exchange Commission (SEC) in connection with its listing in Canada must qualify for an exemption under the 1933 Act. Traditionally this means common stock is offered and sold outside of the US pursuant to Regulation S and in the US pursuant to Regulation D Rule 506 or to qualified institutional buyers under Rule 144A.  All securities are considered restricted securities in the US and safeguards must be put in place to prevent distribution into the US.  The trading symbol of these companies include a “.s” on the end of them to signal to the market these securities may not be sold in the US.  None of the 175 US issuers listed in Canada currently trade under the Regulation S exemption, although the option remains.

Regulation A+  – Tier 2 offers a new choice to US issuers who list in Canada and do not otherwise not want to file a registration statement with the SEC or become a US reporting issuer under the 1934 Act.  The issuer would file a Form 1-A offering statement with the SEC to qualify the securities for sale in the US and outside the US (similar to when US issuers rely on Regulation D Rule 506).  The issuer would remain a private issuer in the US while the securities offered under the Regulation A+ offering would be non-restricted securities and therefore not subject to a hold period. Regulation A has always been available to US issuers going public in Canada but the lack of preemption from state Blue Sky laws made it unattractive to US issuers and their legal counsel.

US issuers when going public in Canada may also qualify from exclusions from the 1934 Act based on the number of shareholders of record and other factors. This is largely a structuring issue that can be managed by legal counsel and the use of registered dealers in the offering.

Closing Comments

US issuers who have a market capitalization under US $250 million should consider a listing on a stock exchange in Canada.  Regulation A+ opens up new opportunities to offer a cost effective method to raise a significant amount of capital while avoiding the costs of being a US reporting issuer.

Once listed in Canada, subsequent financings into the US can also be conducted using Regulation A+ – Tier 2, avoiding the need to ever becoming a US reporting issuer.

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Disclaimer

The articles on this blog are not intended to create and do not create, an attorney-client relationship. You should not act or rely on information on this website without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. You are advised to contact legal counsel prior to undertaking any securities transaction. Laws change and there are subtle nuances to the rules that may apply in your particular circumstance.