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.


If you have any questions concerning the foregoing, please contact Bonnie Roe, Gerald Shepherd or Scott Tayne in our New York office at 212.588.5500.

Davies Ward Phillips & Vineberg LLP, with over 250 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.