U.S. LISTING AND CONTINUOUS REPORTING. Reporting Under the Securities Exchange Act of 1934

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1 Fundamentals of U.S. Securities Law: What Canadian Lawyers Need to Know Thursday, March 26, 2015 U.S. LISTING AND CONTINUOUS REPORTING Reporting Under the Securities Exchange Act of 1934 DORSEY & WHITNEY LLP U.S. & Canadian Cross-border Practice Group Kenneth Sam Partner Dorsey & Whitney LLP 1400 Wewatta Street, Suite 400 Denver, CO Phone: (303)

2 Table of Contents Page Chapter 1. LEVELS OF SECURITIES REGULATION... 1 Section 1.01 Federal Regulation of Securities and Certain Federal Statutes... 1 Section 1.02 State Regulation... 2 Section 1.03 Integrated Disclosure System... 3 Section 1.04 Special Issuer Categories... 3 Chapter 2. THE U.S. TRADING MARKETS... 8 Section 2.01 The National Securities Exchanges... 8 Section 2.02 Over-the-Counter Markets... 8 Section 2.03 Penny Stock Rules... 9 Chapter 3. EXCHANGE ACT REGISTRATION AND DEREGISTRATION FOR CANADIAN ISSUERS Section 3.01 Exchange- and OTC-Traded Issuers Section 3.02 Requirement to Register Section 3.03 Exemptions From Exchange Act Registration for Securities of Foreign Private Issuers Section 3.04 Successor Registration Section 3.05 Exiting the Sec Reporting System Chapter 4. EXCHANGE ACT REGISTRATION AND REPORTING FOR CANADIAN FOREIGN PRIVATE ISSUERS Section 4.01 Registration and Reporting on Form 20-F Section 4.02 Registration and Reporting on Form 40-F Section 4.03 Registration on Form 10 and Reporting on Form 10-K Section 4.04 Current Reports Section 4.05 SOX Certifications Section 4.06 Other Reporting Requirements Section 4.07 Beneficial Ownership Reporting Requirements Section 4.08 NYSE, NASDAQ, NYSE-MKT Chapter 5. CORPORATE GOVERNANCE Section 5.01 The Sarbanes-Oxley Act Section 5.02 Dodd-Frank Wall Street Reform and Consumer Protection Act Chapter 6. FAIR DISCLOSURE & LIABILITY Section 6.01 Selective Disclosure and Regulation FD Section 6.02 Disclosure Policies Section 6.03 Disclosure Related to Cybersecurity Section 6.04 Liability i

3 INTRODUCTION Material content used in this paper has been prepared by member attorneys of the U.S. & Canada Crossborder Practice Group of Dorsey & Whitney LLP and edited by Kenneth Sam, a partner and co-chair of Dorsey s Mining Industry Group, for this presentation. The U.S. & Canada Cross-border Practice Group of Dorsey & Whitney LLP represents issuers, investment banks, institutional investors and their advisors on United States legal matters. This paper is intended as a general summary for use by Canadian issuers and their advisors in understanding the registration and reporting requirements under the Securities Exchange Act of 1934, as amended (the Exchange Act ), and on-going listing requirements of NYSE, NASDAQ and NYSE-MKT. It is not intended as a definitive treatment of the statutes and regulations described, and should not be relied on in determining the application of the statutes and regulations to particular circumstances without reference to the particular provisions involved. This paper covers the principal statutes and regulations of interest to the Canadian issuers of securities and their reporting obligations under the Exchange Act. It does not cover statutes or regulations principally involving the offer or sale of securities under the Securities Act of 1933, as amended (the Securities Act ), or the financial services industry such as the regulation of investment companies, investment advisors or securities broker dealers. About Kenneth Sam Kenneth Sam is a partner in the Denver office of Dorsey & Whitney and a member of the firm s U.S. & Canada Cross-border Practice Group. Ken was resident in the firm s Seattle office from , the firm s Denver office from and Partner-in-Charge of Dorsey s Toronto office from before rejoining the Denver office in Ken is a leading international corporate finance attorney who represents companies, underwriters, agents and investors on U.S. legal matters, including SEC registration, securities offerings, debt offerings, SEC reporting, mergers and acquisitions, takeover defense and other related issues. Ken has significant experience in the Mining and Natural Resources Industry and serves as co-chair to the firm s Mining Industry Group. Ken holds a B.S. (Business Administration) and M.S. (Marketing) from the University of Colorado-Denver and a J.D. from the University of Seattle School of Law. He is a member of the Washington State Bar and Colorado Bar and qualified Foreign Legal Consultant, Law Society of Upper Canada. Ken can be contacted at (303) or sam.kenneth@dorsey.com. 1

4 CHAPTER 1. LEVELS OF SECURITIES REGULATION Section 1.01 FEDERAL REGULATION OF SECURITIES AND CERTAIN FEDERAL STATUTES (a) The Securities Act of 1933 The Securities Act of 1933, as amended (the Securities Act ), regulates the distribution of securities to the public, directly or indirectly, by an issuer and/or its affiliates. All sales of securities by or to any person whatsoever in the United States require registration under the Securities Act, unless an exemption is available thereunder. There are broad exemptions, which cover bona fide market trades by persons who are not affiliates of the issuer. However, an issuer and its officers, directors, or significant shareholders, or a person who has purchased shares from any of them, should carefully consider whether an exemption from the registration requirements of the Securities Act is available before securities are offered or sold. In Canada, any distribution of securities (whether to the public or not) is subject to the prospectus requirements of the relevant Canadian provincial and territorial securities acts, unless an exemption is available. Accordingly, an issuer proposing a sale of securities in the U.S. will have to consider whether the sale is subject to the registration requirements of the Securities Act. In addition, the issuer will have to consider whether the sale in the U.S. (in and of itself or together with any sale in Canada) may also be a distribution of securities subject to Canadian securities laws. This paper does not cover the registration requirements or exemptions available under the Securities Act in connection with the offer and sale of securities. (b) The Securities Exchange Act of 1934 The Securities Exchange Act of 1934, as amended (the Exchange Act ), is intended to regulate the trading markets for securities. Among other things, the Exchange Act: establishes a system of continuous reporting and disclosure for public comparables to provide for the availability of information to support the public trading markets; regulates the process and disclosure involved in tender offers and proxy solicitation; regulates securities brokers and dealers and securities professionals; and regulates stock exchanges and trading markets. This paper addresses the continuous reporting and disclosure system and the regulation of tender offer and proxy solicitation, but does not address broker-dealer regulation or the regulation of stock exchanges and the like. To facilitate the availability of information to support the public trading markets, the Exchange Act requires registration (not to be confused with registration under the Securities Act) of any class of securities which: is traded on a U.S. securities exchange, or is a class of equity security of an issuer with $10,000,000 1 in assets which is held by 2,000 or more holders of record or 500 or more holders of record that are not accredited investors. In order to have a class of securities listed on a U.S. stock exchange, including the New York Stock Exchange ( NYSE ), Nasdaq, NYSE-MKT or the OTC Bulletin Board 2, a Canadian issuer must register the class under the Exchange Act. 1 All dollar amounts are in U.S. dollars unless otherwise indicated. 1

5 In addition, Section 15(d) of the Exchange Act requires issuers that have offered securities pursuant to a registration statement under the Securities Act to file reports under the Exchange Act, but not necessarily to register the class of securities under the Exchange Act. Note that the Exchange Act does not limit the requirement for Exchange Act registration to U.Sincorporated issuers or specify where the assets or holders of record are located. Thus, any company, U.S. or foreign, with $10,000,000 in assets and a class of equity securities with 2,000 or more holders of record, or 500 or more holders of record that are not accredited investors must address questions of Exchange Act registration. There are exemptions for non-u.s. companies that do not wish to have a U.S. trading market or to register or report under the Exchange Act. (c) Distinction between Securities Act Registration and Exchange Act Registration Initially, it is necessary to distinguish between registration under the Securities Act and registration under the Exchange Act. Registration under the Securities Act arises from an offering of securities being made by or on behalf of an issuer (or persons controlling an issuer) and involves the filing of a registration statement with the U.S. Securities and Exchange Commission (the SEC ) and the distribution of a prospectus to persons to whom the offer is being made. Registration of a class of securities under the Exchange Act, on the other hand, is not triggered by an offering of securities but is required of all securities listed on a U.S. national securities exchange (including NYSE, Nasdaq and NYSE-MKT) or quoted on the OTC Bulletin Board and, subject to certain exemptions for non-u.s. issuers, of any class of equity securities with 2,000 or more holders of record worldwide or 500 or more holders that are not accredited investors, in each case issued by an issuer with $10,000,000 in assets. Although there are procedures available that permit simplification in the registration process under certain circumstances if a security has been previously registered under the other Act, the two registrations are separate and distinct and registration under one does not constitute registration under the other. Section 1.02 STATE REGULATION Each state has its own securities or blue sky laws governing the offer and sale of securities within that state. The vast majority of these laws require registration of the securities offered and sold in the state, unless an exemption is available. Accordingly, when securities are offered in the U.S., the blue-sky laws of the states involved must be consulted. Likewise, when a secondary trading market develops in the U.S., it is necessary to verify that exemptions exist under the applicable states blue sky laws to permit secondary trades of the securities in question. State securities laws also typically require registration with the state securities regulatory authorities of broker-dealers doing business with investors in the state. In October 1996, Congress adopted the National Securities Market Improvement Act, also known as NSMIA, which preempts (i.e., nullifies) the state securities laws as they apply to certain transactions. In particular, certain private placements to accredited investors and sales of securities listed on U.S. national stock exchanges are not subject to complex state qualification or exemption requirements, although notice filings and the payment of fees are still required in some cases. 2 The OTC Bulletin Board (or OTCBB) is an interdealer quotation system that is used by subscribing Financial Industry Regulatory Authority ( FINRA ) members to reflect market making interest in OTCBB-eligible securities. FINRA is in the process of winding down the OTCBB. 2

6 Section 1.03 INTEGRATED DISCLOSURE SYSTEM (a) Regulation S-K and Regulation S-X Disclosure related to an issuer s reporting and registration of securities under the Securities Act and Exchange Act is dictated by the requirements of an integrated disclosure system. The integrated disclosure system is a set of rules and regulations that govern general disclosure in Securities Act and Exchange Act filings to ensure the disclosures required by one Act are, to the extent reasonably possible, the same as those required by the other. Regulation S-K contains the disclosure requirements related to non-financial disclosures and Regulation S-X contains the disclosure requirements for financial disclosure. The integrated disclosure system permits an issuer to take disclosure prepared under one Act and use it to help satisfy the requirements imposed by the other. In addition, many of the registration and reporting forms under the Securities Act and the Exchange Act permit an issuer to incorporate by reference information contained in another registration statement or report filed with the SEC. It should be noted that many of the forms foreign private issuers (as defined below) have stand-alone line item disclosure and instructions that may vary from those required in Regulation S-K and Regulation S-X. (b) EDGAR Filing System SEC rules require public companies to file virtually all documents required under the Securities Act and Exchange Act, including amendments and exhibits thereto and all correspondence and related supplemental information, with the SEC through EDGAR. EDGAR is the SEC s Electronic Data Gathering, Analysis and Retrieval system, which permits submission of documents to the SEC in electronic format in accordance with Regulation S-T. The system is intended to provide time savings in document delivery and improve dissemination of information to the public through faster access. Documents filed with EDGAR are available through the SEC s website at The Securities and Exchange Commission has adopted rules that will require companies to provide their financial information in interactive data format using extensible Business Reporting Language ( XBRL ), a computer language that defines or tags data using certain standard definitions. The new format will allow readers to download financial information directly into spreadsheets which, according to the SEC, will facilitate the comparison of financial and business performance across companies, reporting periods and industries. Companies will be required to tag their financial statements and footnotes, as well as any applicable financial statement schedules. Foreign private issuers that do not prepare their financial statements in accordance with U.S. GAAP or IFRS are not required to provide interactive data in XBRL format. The SEC has not adopted a specified IFRS taxonomy. Until such time, foreign private issuers reporting in accordance with IFRS will not need to prepare and file interactive data files in XBRL format. Section 1.04 SPECIAL ISSUER CATEGORIES An issuer s reporting obligations under the Exchange Act, including the use of forms, are determined in part by the characteristics of the issuer based on the size of the issuer, exposure to the U.S. markets and nexus to the United States. (a) Foreign Private Issuer The SEC has recognized that non-u.s. issuers must comply with laws and customs in their home jurisdictions, and that imposition of U.S. laws on these issuers can interfere with the opportunity of U.S. investors to trade in foreign stocks and can give rise to issues involving the interference with national sovereignty. On the other hand, the SEC believes application of U.S. laws to non-u.s. issuers is justified when those issuers seek access to the U.S. capital and trading markets. The SEC has resolved these 3

7 issues by developing the concept of foreign private issuer, which is governed by somewhat less burdensome requirements than those imposed on U.S. issuers. The first thing a company has to look at in assessing how the U.S. securities laws apply to its activities is whether it is a foreign private issuer as defined under the Securities Act and the Exchange Act. A company cannot use the US-Canada Multi-Jurisdictional Disclosure System ( MJDS ) or forms reserved for foreign issuers unless it is a foreign private issuer. Exemptions that exclude non- U.S. issuers from the Exchange Act s proxy rules and insider trading reporting and forfeiture provisions only apply to foreign private issuers. And compliance with the Regulation S safe harbors to avoid U.S. registration of offshore offers and sales is much more burdensome if a company is not a foreign private issuer, making it virtually impossible to do an offshore public offering without registration in the U.S. The term foreign private issuer means any non-u.s. issuer (other than a foreign government) except any issuer meeting the following conditions as of the last day of its most recently completed second fiscal quarter: More than 50 percent of the outstanding voting securities of such issuer are directly or indirectly owned of record by residents of the United States; and any of the following: the majority of the executive officers or directors are United States citizens or residents, more than 50 percent of the assets of the issuer are located in the United States, or the business of the issuer is administered principally in the United States. For purposes of the foreign private issuer test, the issuer is required to look through the record holder to its customers where securities are registered in the name of a bank, broker or depository that is located in the U.S. the issuer s home jurisdiction, or the jurisdiction that is the primary market for the issuer s voting securities, if different from the issuer s home jurisdiction. The issuer also must take into account information as to U.S. ownership that has been provided to the issuer or that appears in public filings. For most purposes, the test is run as of the last day of the second quarter of an issuer s fiscal year, but for the use of MJDS registration statement forms, it is run prior to filing the registration statement. If the majority of the issuer s officers and directors are not U.S. citizens or residents, the majority of its assets are outside the U.S. and its business is principally administered outside the U.S., it will remain a foreign private issuer even if U.S. ownership of its voting securities goes over 50%. On the other hand, for companies relying on the 50% test, and these companies should regularly review their U.S. ownership levels to confirm their status as foreign private issuers. Issuers are only required to test their status as a foreign private issuer annually on the last business day of their second fiscal quarter. An issuer that no longer qualifies as a foreign private issuers on the last business day of its second fiscal quarter is required to comply with the reporting requirements for 4

8 U.S. domestic companies beginning on the first day of the fiscal year following the determination of change in status. For example, an issuer with a December 31 year end that ceased to qualify as a foreign private issuer as of the end of its second fiscal quarter in 2014 would be required to file a Form 10-K in 2015 for its 2014 fiscal year. Also, as of January 1, 2015, the issuer would also be subject to the U.S. proxy rules, and its insiders would become subject to short swing trade reporting and forfeiture processions of Section 16 of the Exchange Act. An issuer that has been treated as a U.S. domestic issuer under the definition qualifies as a foreign private issuer on the last day of its second fiscal quarter, it is able to immediately use the foreign private issuer forms and follow the reporting requirements applicable to foreign private issuers, beginning on the determination date on which it establishes its eligibility as a foreign private issuer. Be particularly careful to notify directors, executive officers and 10% shareholders well in advance if there is a change in the issuer s status, because they will become subject to the Exchange Act s short swing trading reporting and forfeiture provisions, and could make embarrassing and expensive mistakes if they trade in the issuer s securities while unaware of the change. Issuers reporting under the Exchange Act that do not qualify as foreign private issuers are ineligible to use the F series forms under the Exchange Act or the Securities Act and are required to file their Exchange Act reports on the domestic forms (Form 10-K, Form 10-Q and Form 8-K), become subject to the proxy rules and the requirements of Regulation FD. (b) Large Accelerated Filer A large accelerated filer means an issuer after it first meets the following conditions as of the end of its fiscal year: An aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $700 million or more, as of the last business day of the issuer s most recently completed second fiscal quarter; The issuer has been subject to the reporting requirements of section 13(a) or 15(d) of the Exchange Act for a period of at least twelve calendar months; The issuer has filed at least one annual report pursuant to section 13(a) or 15(d) of the Exchange Act; and The issuer is not eligible to use the requirements for smaller reporting companies (discussed below) for its annual and quarterly reports. Once an issuer becomes a large accelerated filer, it will remain a large accelerated filer unless the issuer determines at the end of a fiscal year that the aggregate worldwide market value of the voting and nonvoting common equity held by non-affiliates of the issuers was less than $500 million, as of the last business day of the issuer s most recently completed second fiscal quarter. If the issuer s aggregate worldwide market value was $50 million or more, but less than $500 million, as of the last business day of the issuer s most recently completed second fiscal quarter, the issuer becomes an accelerated filer. If the issuer s aggregate worldwide market value was less than $50 million, as of the last business day of the issuer s most recently completed second fiscal quarter, the issuer becomes a non-accelerated filer. (c) Accelerated Filer An accelerated filer means an issuer after it first meets the following conditions as of the end of its fiscal year: An aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $75 million or more, but less than $700 million, as of the last business day of the issuer s most recently completed second fiscal quarter; 5

9 The issuer has been subject to the requirements of section 13(a) or 15(d) of the Exchange Act for a period of at least twelve calendar months; The issuer has filed at least one annual report pursuant to section 13(a) or 15(d) of the Exchange Act; and The issuer is not eligible to use the requirements for smaller reporting companies (discussed below) for its annual and quarterly reports. Once an issuer becomes an accelerated filer, it will remain an accelerated filer unless the issuer determines at the end of a fiscal year that the aggregate worldwide market value of the voting and nonvoting common equity held by non-affiliates of the issuer was less than $50 million, as of the last business day of the issuer s most recently completed second fiscal quarter. (d) Smaller Reporting Companies Under the SEC s disclosure regime smaller reporting companies have disclosure requirements that are scaled to reflect the characteristics and needs of smaller companies and their investors. Generally, the smaller reporting company category includes most companies that qualify as non-accelerated filers. A smaller reporting company means an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that: Had a public non-affiliate float in its common equity of less than $75 million as of the last business day of its most recently completed second fiscal quarter; In the case of an initial registration statement under the Securities Act, or the Exchange Act for shares of its common equity, had a public float of less than $75 million as of a date within 30 days of the date of the filing of the registration statement, computed by multiplying the aggregate worldwide number of such shares held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of such shares included in the registration statement by the estimated public offering price of the shares; or In the case of an issuer whose public float for common equity was zero, had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available. Once an issuer fails to qualify for smaller reporting company status, it will remain unqualified unless it determines that its public float was less than $50 million as of the last business day of its second fiscal quarter or, if that calculation results in zero because the issuer had no public equity outstanding or no market price for its equity existed, if the issuer had annual revenues of less than $40 million during its previous fiscal year. (e) Emerging Growth Company The Jumpstart Our Business Startups Act of 2012 (the JOBS Act ) creates emerging growth companies as another category of issuer eligible for favorable treatment under certain circumstances. An emerging growth company is a company with annual gross revenues of less than $1 billion during its most recent fiscal year. A company retains emerging growth company status until the earliest of: The end of the fiscal year in which its annual revenues exceed $1 billion. The end of the fiscal year in which the fifth anniversary of its IPO occurred. For example, if a company with a December 31 fiscal year-end completed its IPO on March 1, 2014, it would cease to be an emerging growth company by December 31,

10 The date on which the company has, during the previous three-year period, issued more than $1 billion in non-convertible debt. The date on which the company qualifies as a large accelerated filer. A company cannot be an emerging growth company if it completed its IPO or issued securities under a Securities Act Registration Statement on or before December 8, Emerging growth companies are entitled to reduced regulatory and reporting requirements under the Exchange Act. The category of emerging growth company does not exclude foreign private issuers that otherwise meet the definition. (f) MJDS Eligible - Multi-Jurisdictional Disclosure System The U.S.-Canada Multi-Jurisdictional Disclosure System ( MJDS ) was developed in 1991 as a coordinated registration and reporting system for certain qualifying U.S. and Canadian companies. Canadian companies that meet certain eligibility criteria are able to use less burdensome MJDS forms for registration and reporting under the Exchange Act, Form 40-F, and registration under the Securities Act, including Form F-7, F-8, F-10 or F-80. Form 40-F is an MJDS form and may be used to register securities of certain substantial Canadian issuers under Section 12 of the Exchange Act or to file Exchange Act annual reports. To qualify for use of Form 40-F as an Exchange Act registration statement or annual report, an issuer must: be a foreign private issuer or crown corporation organized under the laws of Canada or any province or territory thereof; have been subject to the periodic reporting requirements of any securities commission or stock exchange in Canada for a period of at least 12 calendar months and be in compliance with those requirements; and have outstanding equity shares held by non-affiliates with an aggregate market value of at least $75 million. Any person who owns directly or indirectly, or exercises control or direction over more than ten percent of the outstanding equity shares of an issuer at the end of the previous fiscal year is deemed to be an affiliate for the purpose of Form 40-F. Equity shares include common shares, non-voting equity shares and subordinate or restricted voting equity shares, but not preferred shares. The market value of shares held by non-affiliates is determined as of a date (chosen by the issuer) within 60 days prior to filing the registration statement or report. Note that affiliate status is determined for this purpose at the end of the last fiscal year a holder that climbs above the ten percent threshold after year end is not an affiliate for the purpose of the market value calculation, and its shares are included when calculating shares held by non-affiliates, but a ten percent holder that drops below the ten percent threshold after year end remains an affiliate, and its shares are excluded from the calculation. 7

11 CHAPTER 2. THE U.S. TRADING MARKETS Section 2.01 THE NATIONAL SECURITIES EXCHANGES The principal markets on which securities are traded in the U.S. are the New York Stock Exchange ( NYSE ), the NYSE-MKT (formerly the American Stock Exchange) and the Nasdaq Stock Market ( Nasdaq ), each qualifies as a national securities exchange. Section 12(b) of the Exchange Act requires registration under the Exchange Act of all classes of securities listed on any of the national securities exchanges and certain regional stock exchanges. Securities of issuers not listed on the NYSE, NYSE- MKT, Nasdaq or these other exchanges may be traded in the over-the-counter ( OTC ) market. Section 2.02 OVER-THE-COUNTER MARKETS A security may be traded in the over-the-counter market through the electronic OTC Bulletin Board service of the Financial Industry Regulatory Authority ( FINRA ) or on the various market tiers of the OTC Markets Group Inc. (the OTC Markets Group ). The OTC Bulletin Board is available to FINRA member firms on the Nasdaq computer system, and bid and asked quotes are updated continuously throughout the day. Registration under the Exchange Act is required to qualify for quotation on the OTC Bulletin Board. OTC Markets Group provides electronic quoting and trading technology for the U.S. OTC market. OTC Markets Group s inter-dealer quotation system OTC Link is used by broker-dealers to quote and trade OTC securities. OTC Markets Group s OTC Link system and the OTC Bulletin Board are competing interdealer quotation systems for OTC securities. The OTC Bulletin Board does not support electronic trading which is available through the OTC Link system. OTC Markets Group has three primary markets OTCQX, OTCQB, and OTC Pink (formerly known as the Pink Sheets ). The OTCQX marketplace is the premier tier of the OTC Markets Group and lists companies that meet the certain financial standards and undergo a qualitative review. The OTCQB is the next tier of the OTC Markets Group and lists companies that report with the SEC (either pursuant to registration under the Exchange Act or pursuant to ongoing reporting obligations under Section 15(d) of the Exchange Act) or a U.S. banking regulator. There are no financial or qualitative standards for the OTCQB. The OTC Pink is the bottom tier of the OTC Market Group and provides quotations for companies for which a market maker has submitted an application to FINRA to publish quotations on OTC Link. OTC Pink does not have any qualitative or reporting standards and is a highly speculative market. The OTC Pink is further divided into tiers based on the currency of information the quoted company has made available to the public. In recent years, there has been a growth in the popularity of the OTC Markets Group s OTCQX and OTCQB market tiers. These tiers have largely eclipsed the OTC Bulletin Board as the preferred markets to quote and trade OTC securities with approximately 95% of all OTC market quotes being published on OTC Link and approximately 5% being quoted on the OTC Bulletin Board. The OTCQX has seen rapid growth in the past few years with many well-respected foreign private issuers listing on the International Premier tier of this market. The OTCQX market is divided into U.S. and International tiers, which list US domestic companies and international companies, respectively. Both the U.S. and International markets are divided into standard and premier tiers. Registration under the Exchange Act is not required to list on the OTCQX, but for companies that are not filing reports with the SEC there are ongoing annual and quarterly financial reporting obligations on OTCQX.com. Among other requirements, to list on the OTCQX U.S. domestic companies must satisfy the following criteria: (i) ongoing operations (no shells, blank check or special purpose acquisition companies); (ii) a minimum bid price of $0.10 (for preceding 90 business days); (iii) at least 50 beneficial shareholders, each owning at least 100 shares of the Company s common stock; and (iv) $2 million in total assets. In 8

12 addition, for the most recent fiscal year, companies must have at least one of the following: (a) $2 million in revenue, (b) $1 million in net tangible assets, (c) $500,000 in net income, or (d) a market value of at least $5 million of listed securities. OTCQX U.S. Premier is designed to identify issuers that are of the size and quality to list on a national stock exchange. The requirements for listing on OTCQX U.S. Premier incorporate the financial qualifications of the NASDAQ Capital Market Continued Listing Standards. International exchange listed companies may qualify to list on one of the OTCQX international tiers if they are listed on a qualified foreign exchange, such as the Toronto Stock Exchange or the TSX Venture Exchange, for at least 40 days. Companies must either have a class of securities registered under Section 12(g) of the Exchange Act (and be current and compliant with its SEC reporting obligations) or be eligible to rely on the exemption from SEC registration provided by Exchange Act Rule 12g3-2(b). International companies relying on the exemption under Section 12g3-2(b) should monitor their primary trading market status once the Company s shares are being traded in the U.S. In addition to being listed on a qualified foreign exchange, among other requirements, to list on the OTCQX International companies must satisfy the following criteria: (i) $2 million in total assets, and (ii) for the most recent fiscal year, companies must have at least one of the following: (a) $2 million in revenue, (b) $1 million in net tangible assets, (c) $500,000 in net income, or (d) a global market cap of at least $5 million. To qualify for listing on the OTCQX International Premier market a company must meet the qualifications for listing securities under the financial standards of the Worldwide (Non-U.S.) Listing Standards of the New York Stock Exchange, except that the company is not required to have a class of securities registered under Section 12 of the Exchange Act or meet the bid price of such qualifications. The OTCQB marketplace is the second tier of the marketplaces operated by OTC Markets Group, below OTCQX and above OTC Pink. The OTCQB marketplace permits Canadian and other international companies to join even if they are not SEC Reporting Companies. Unlike the OTCQX marketplace, there are no minimum financial standards on the OTCQB marketplace other than a US$0.01 minimum bid price. The rules of the SEC under the Exchange Act impose information requirements on brokers who publish quotations on the OTC Bulletin Board or on the OTC Link, which covers the OTCQX, OTCQB, and OTC Pink. Rule 15c2-11 provides that it is unlawful for a broker or dealer to publish any quotation for a security or, directly or indirectly, to submit any quotation for publication in any quotation medium unless it has certain information in its files. If a security is registered under the Exchange Act, copies of the issuer s mandatory Exchange Act filings satisfy this requirement. Alternatively, Rule 15c2-11(a)(5) permits OTC Link quotations by a broker or dealer if it has and makes reasonably available upon request to any person expressing an interest in a proposed transaction in the security, a rather lengthy and detailed list of items of information about the issuer. Rule 15c2-11 provides as another alternative that, a broker or dealer may issue quotes on OTC Link for a security of a foreign private issuer exempted from Exchange Act registration by Rule 12g3-2(b) if the broker has the information that the issuer was required to furnish to the SEC pursuant to that rule. Accordingly, many small Canadian issuers seeking to have U.S. broker-dealers issue quotations for their shares on OTC Link voluntarily seek the Rule 12g3-2(b) exemption. Given the burdensome nature of the information requirement of Rule 15c2-11(a)(5), many broker-dealers will not issue quotations in reliance upon it. Any broker electing to publish quotations for an issuer on the OTC Bulletin Board must submit an application to FINRA. A similar application process must be completed by a broker electing to publish quotations on OTC Link, except that the application is initially made to the OTC Markets Group. Section 2.03 PENNY STOCK RULES Rules 15g-1 through 15g-9 under the Exchange Act impose additional requirements on broker-dealers who deal in or recommend purchases of low-priced over-the-counter securities of small issuers. Prior to 9

13 effecting transactions in these securities, a broker-dealer must, among other things, make a documented determination that the investment is suitable for the purchaser and obtain from the purchaser a written agreement to the transaction. The broker-dealer must disclose certain information to the customer, including the compensation of the broker and any affiliated persons in connection with the transaction and current price quotations for the security. In addition, brokers are required to provide to the customer a standardized disclosure document explaining the risks of investing in penny stocks. In general, the penny stock rules are not applicable to transactions in securities that (i) are registered, or approved for registration, on an exchange, (ii) are authorized, or approved for authorization, for listing on Nasdaq, (iii) are issued by a registered investment company or the Options Clearing Corporation, (iv) are issued by an issuer having net tangible assets in excess of $2,000,000 if the issuer has been in continuous operation for three years (otherwise $5,000,000), or average revenue of $6,000,000 for the last three years or (v) have a price of $5.00 or more. A number of reputable brokerage firms will not, as a matter of policy, trade in penny stocks (as defined by the SEC) as a result of concern about liability for inadvertent violation of these rules. 10

14 CHAPTER 3. EXCHANGE ACT REGISTRATION AND DEREGISTRATION FOR CANADIAN ISSUERS Section 3.01 EXCHANGE- AND OTC-TRADED ISSUERS All Canadian issuers with a class of securities traded on a U.S. stock exchange or quoted on the OTC Bulletin Board must register the class of securities under the Exchange Act. Section 3.02 REQUIREMENT TO REGISTER Subject to the exceptions for foreign private issuers described below, a Canadian issuer will also be required to register a class of equity securities under the Exchange Act if, on the last day of any fiscal year, it has: total assets exceeding US$10,000,000; and a class of equity securities held of record by either 2,000 or more persons worldwide, or 500 or more persons worldwide who are not accredited investors as defined in Regulation D. In determining the number of record holders an issuer may exclude persons who acquired their securities through employee benefit plans in transactions that were exempt form regulation under the Securities Act The holder of record of a security will generally be the person whose name appears in the record of security holders maintained by or on behalf of the issuer; however, in the case of a commercial depositary such as CDS & Co. or Cede & Co., each account for which the commercial depositary holds securities must be treated as a separate record holder. Section 3.03 EXEMPTIONS FROM EXCHANGE ACT REGISTRATION FOR SECURITIES OF FOREIGN PRIVATE ISSUERS (a) Exchange Act Rule 12g3-2(a) Exchange Act Rule 12g3-2(a) exempts from registration under the Exchange Act any class of security of a foreign private issuer not listed on a U.S. stock exchange or quoted on the OTC Bulletin Board, with fewer than 300 beneficial holders (as opposed to shareholders of record) resident in the U.S. The issuer does not have to take any action to qualify for the exemption. Note that, as stated earlier, all issuers with a class of equity securities held of record by fewer than 2,000 persons worldwide, or 500 or more persons worldwide who are not accredited investors as defined in Regulation D are automatically exemption from Exchange Act registration requirements. (b) Exchange Act Rule 12g3-2(b) Exchange Act Rule 12g3-2(b) exempts securities of foreign private issuers (including Canadian foreign private issuers) that qualify for the rule from registration under the Exchange Act. Under recently adopted amendments to Rule 12g3-2(b), a foreign private issuer may claim the Rule 12g3-2(b) exemption without having to submit a written application to the SEC, if: the issuer currently maintains a listing of the subject class of securities on one or more exchanges in its primary trading market, which is defined to mean that: at least 55 percent of the trading in the subject class of securities on a worldwide basis took place in, on or through the facilities of a securities market or markets in a single foreign jurisdiction or in no more than two foreign jurisdictions during the issuer s most recently completed fiscal year; and 11

15 if a foreign private issuer aggregates the trading of its subject class of securities in two foreign jurisdictions, the trading for the issuer s securities in at least one of the two foreign jurisdictions is greater than trading in the United States for the same class of the issuer s securities; the issuer is not required to file reports under Section 13(a) or 15(d) of the Exchange Act; and the issuer has published English-language versions of the applicable documents from the first day of its most recently completed fiscal year, on its website or through an electronic information delivery system generally available to the public in its primary trading market (unless claiming the exemption upon or following Exchange Act deregistration). The documents that must be may available include all material information that the issuer: made, or was required to make, public pursuant to the laws of the country of its domicile or in which it was incorporated or organized; filed or was required to file with a stock exchange on which its securities are traded and which was made public by such exchange; and distributed or was required to distribute to its security holders. To maintain the Rule 12g3-2(b) exemption, an issuer must continue to publish electronically, on its website or through an electronic information delivery system in its primary trading market such as SEDAR, the information listed above. An issuer need only furnish such information that is material to an investment decision. A foreign private issuer meeting the requirements of the amended Rule 12g3-2(b) exemption will maintain the exemption until: the issuer ceases to be a foreign private issuer; the issuer no longer electronically publishes the information listed above required to maintain the exemption; the issuer no longer maintains a listing for the subject class of securities on a non- U.S. securities market; the United States becomes the largest trading market for the securities or trading in the United States exceeds 45% of worldwide trading during a fiscal year (see the definition of primary trading market above); or the issuer registers a class of securities under Section 12 of the Exchange Act or incurs SEC reporting obligations, for example by conducting a U.S. public offering, listing on a U.S. stock exchange or acquiring an Exchange Act registered company in a share-forshare transaction. Because the definition of primary trading market uses a trading volume standard for the issuer s most recently completed fiscal year, a foreign private issuer will have to reevaluate its relative U.S. and foreign trading volumes annually to determine whether it still falls within the terms of the amended rule. Section 3.04 SUCCESSOR REGISTRATION Under the SEC s successor reporting rules, a Canadian issuer may have a class of its securities deemed to be registered under the Exchange Act if it issues securities of that class to the shareholders of an Exchange Act registered company in connection with the acquisition of the Exchange Act registered company. An exception to this rule exists under MJDS, when the issuer complies with the Rule 12g3-2(b) 12

16 exemption prior to the acquisition, the target company is a qualifying Canadian foreign private issuer, and the acquisition transaction is registered with the SEC on MJDS Forms F-8 or F-80. A Canadian issuer whose securities are deemed registered under the Exchange Act may, in certain circumstances, be eligible to immediately deregister its securities. Section 3.05 EXITING THE SEC REPORTING SYSTEM (a) Deregistration on Form 15 The reporting requirements of Section 13(a) of the Exchange Act continue until terminated or suspended in accordance with the rules promulgated by the SEC. In general, there are two alternatives for termination that may be available to the issuer: filing a Form 15 under Rule 12g-4 under the Exchange Act; or filing a Form 15F under Rule 12h-6 under the Exchange Act. The issuer need only satisfy one of these alternatives in order to terminate its Exchange Act reporting obligations; however, if it satisfies the requirements for both alternatives, only one of the alternatives may be followed. In most cases, filing a Form 15F is preferable when both forms are available. (i) Conditions Pursuant to Rule 12g-4, an issuer may affect termination if the registered class of securities is held of record by either (i) less than 300 persons on a worldwide-basis, or (ii) less than 500 persons on a worldwide-basis, where the total assets of the issuer have not exceeded $10 million on the last day of each of the issuer s most recent three fiscal years. The term holders of record is defined by Rule 12g5-1. Generally speaking, each holder identified on the record of security holders counts as one record holder. This includes a broker-dealer holding the securities in street name for a number of clients. Institutional custodians, however, such as CDS, Cede & Co. and other commercial depositories, do not count as one record holder. Instead, the issuer must look through one level of ownership for securities held by a depository by obtaining the list of accounts for which the securities are held by the depository and treating each of the accounts as a separate record holder. No further look-through of the beneficial ownership of the depository s accounts are required. (ii) Deregistration Process Termination of a registered class of securities will take effect 90 days, or such shorter period as the SEC may determine, after the issuer certifies to the SEC on Form 15 that the registered class of securities satisfies either (i) or (ii) above. During this 90-day period, the issuer s Section 13(a) reporting requirements are suspended. However, if the Form 15 is withdrawn or denied prior to the effective date, all reports that would have been required to be filed, absent the suspension, must be filed within 60 days of the withdrawal or denial of the Form 15. During this 90-day period, other reporting requirements, such as the requirements of Section 13(d) (beneficial ownership reports) continue in effect. (iii) 12g3-2(b) Exemption A foreign private issuer that has filed a Form 15 may claim a Rule 12g3-2(b) exemption if: (i) the issuer furnishes the SEC with a list of information which it is required to file or make public under the laws of its domicile or regulations of its non-u.s. exchanges or which it has distributed to its security holders generally (collectively, home country disclosures ), copies of all such information published since the beginning of the issuer s last completed fiscal year and certain other information concerning the extent of U.S. holdings of its securities; and (ii) the issuer either designates to the SEC a website where all future home country disclosures will be posted and made available to the public, or furnishes copies of such home country disclosures to the SEC as and when disclosed. 13

17 However, the Rule 12g3-2(b) exemption is not available until 18 months after the issuer s Section 12 registration and/or its Section 15(d) reporting obligation is terminated. Accordingly, the issuer must wait 18 months and, only if it qualifies after such time may it claim the exemption. (b) Deregistration on Form 15F Pursuant to Rule 12h-6, a foreign private issuer must satisfy several conditions to effect termination on Form 15F. (i) Condition One An issuer may meet the first condition by satisfying either one of two alternatives, each of which is discussed below. Alternative 1: The 5% Average Daily Trading Volume Test Equity securities will be eligible for deregistration if the average daily trading volume ( ADTV ) of that class of securities during a recent 12-month period in the United States has been 5% or less of the ADTV of those same securities on a world-wide basis. In order to calculate the percentage of U.S. ADTV, the numerator consists of U.S. ADTV, which includes both on-exchange and off-exchange transactions. The denominator consists of U.S. ADTV and on-exchange transactions outside the United States and may include off-exchange transactions outside the United States. Off-exchange transactions outside the United States may include transactions conducted through alternative trading systems, provided that the issuer has obtained the information concerning the off-exchange transactions from publicly available sources or third-party information service providers, upon which the issuer has reasonably relied in good faith and the off-market transaction information does not duplicate any other trading volume information obtained. Lastly, trading volume related to equity-linked securities, such as convertible debt securities, options and warrants, should be excluded when calculating ADTV. Alternative 2: The 300 Holder Test Alternatively, an issuer may deregister if, on a date within 120 days before the filing date of the Form 15F, the issuer has less than (i) 300 record holders on a worldwide-basis, using the test described above, or (ii) 300 record holders who are U.S. residents. Under the counting method for U.S. residents, an issuer need only look through the accounts of brokers, banks and other nominees located in the United States, the jurisdiction in which the issuer is organized and, if different, the jurisdiction of its primary trading market to make this calculation. Additionally, if an issuer aggregates the trading volume in two jurisdictions for purposes of determining its primary trading market, it must look through nominee accounts in both jurisdictions for purposes of calculating the number of U.S. holders. In undertaking this analysis, the issuer will be able to rely on an independent information services provider. If, after reasonable inquiry, an issuer is unable without unreasonable effort to obtain information concerning the amount of securities held by nominees for the accounts of customers resident in the United States, the issuer may assume that the customers are residents of the jurisdiction in which the nominee has its principal place of business. When publicly filed reports of beneficial ownership or other reliable information that is provided to the issuer indicates that the securities are held by U.S. residents, the issuer must count the securities as held by U.S. holders. (ii) Additional Conditions In addition to satisfying one of the foregoing alternatives, the issuer must satisfy all of the following three conditions: The issuer must have at least twelve months of Exchange Act reporting history, including having filed at least one Exchange Act annual report, and the issuer must have filed all reports required to have been filed. 14

18 Subject to limited exceptions, the equity securities that the issuer seeks to deregister must not have been sold through a registered public offering under the Securities Act during the twelve months leading up to the attempted deregistration. Securities sold via an exemption to the Securities Act are not subject to this limitation. As a result, Rule 144A or Rule 506 offerings, among other registration exemptions, that took place within the previous year will not prevent deregistration. An issuer seeking to deregister must have had that class of securities listed on an exchange in the issuer s primary trading market for at least twelve months preceding the deregistration filing in the United States. (iii) Deregistration Process Form 15F Disclosure An issuer must file a Form 15F with the SEC on EDGAR to commence the deregistration process for a class of securities. The filing of a Form 15F will immediately suspend an issuer s Exchange Act reporting obligations, and an issuer will have no further duty to conduct inquiries regarding its eligibility to remain deregistered. However, an issuer who has filed Form 15F must withdraw its filing if it becomes aware that any of its material submissions no longer hold true as at the date of the original Form 15F filing. By filing a Form 15F, the issuer certifies that: (i) it meets all of the conditions for terminating its Exchange Act reporting obligations specified in Rule 12h-6; and (ii) there are no classes of securities other than those that are the subject of its Form 15F filing for which the issuer has Exchange Act reporting obligations. Form 15F will also require the issuer to provide information that it relied upon in reaching its decision to cease its reporting obligations. This may include disclosure of its reporting history, its last sale of registered securities and, whichever applies, the primary trading market, trading volume data or number of record holders of the subject class of securities. Post-Filing Waiting Period Once the issuer files its Form 15F, the SEC will have 90 days to make any objections to the filing. If the SEC has no objections, the class of securities will automatically become deregistered and the related Exchange Act reporting obligations will cease. On the other hand, if the SEC denies the Form 15F or the issuer withdraws it, the issuer will then have 60 days to file with the SEC all reports that would have been required had the issuer not filed the Form 15F. Public Notice Period To alert U.S. investors about the issuer s intended withdrawal, an issuer must: (i) publish, either before or on the date that it files its Form 15F, a notice in the United States asserting its intent to terminate obligations; (ii) publish such notice through means reasonably designed to provide broad dissemination to the public in the United States; and (iii) submit to the SEC a copy of the notice, either as an exhibit to the Form 15F, or by means of a Form 6-K that is filed before or at the time of filing of the Form 15F. 12g3-2(b) Exemption A foreign private issuer that has filed a Form 15F may claim a Rule 12g3-2(b) exemption in the same manner as an issuer that has filed a Form 15, except that an issuer that has filed a Form 15F may claim the Rule 12g3-2(b) exemption immediately, and need not wait 18 months. (c) U.S. Trading After Exiting If the issuer deregisters, its common shares will no longer be eligible for trading on the OTC Bulletin Board. The issuer s common shares, may, however, be eligible for trading on the OTCQX or OTCQB, markets maintained by the OTC, Markets Group. However, all trades will be subject to compliance with 15

19 U.S. states securities laws. In order to facilitate OTCQX or OTCQB trading, some companies will obtain a listing in a securities manual, which qualifies the common shares for secondary trading in most (but not all) of the U.S. states. 16

20 CHAPTER 4. EXCHANGE ACT REGISTRATION AND REPORTING FOR CANADIAN FOREIGN PRIVATE ISSUERS A Canadian foreign private issuer has several choices of Exchange Act forms available to use for registration statements and annual reports: Form 20-F The standard form for Exchange Act registration statements and annual reports by foreign private issuers. Form 40-F The MJDS Form for Exchange Act registration statements and annual reports by qualifying Canadian foreign private issuers. Form 10 and Form 10-K The forms for Exchange Act registration statements (Form 10) and annual reports (Form 10-K) available to all issuers and normally used by U.S. domestic issuers. The following summary describes registration and reporting for Canadian issuers that qualify as foreign private issuers. You should consult your Dorsey & Whitney contact for guidance with respect to registration and reporting requirements for your specific circumstances. In addition to filing annual reports Canadian issuers filing annual reports on Form 20-F and Form 40-F are required to furnish current reports on Form 6-K. Canadian issuers filing annual reports on Form 10-K are required to file current reports on Form 8-K. See, Current Reports, below. Section 4.01 REGISTRATION AND REPORTING ON FORM 20-F Form 20-F may be used by foreign private issuers both as an initial registration statement under the Exchange Act and as an annual report. Form 20-F requires somewhat less detail than the Form 10 registration statement and Form 10-K annual reports required of issuers that do not qualify for Form 20-F. The annual report on Form 20-F must be filed within four months after the end of each fiscal year. Note that if the foreign private issuer maintains a shelf registration statement under the Securities Act, the annual report on Form 20-F must be filed within 90 days after the end of each fiscal year to maintain its ability to offer securities under the shelf due to the financial statement requirements. (a) Financial Statement Requirements An Exchange Act registration statement or annual report on Form 20-F must contain audited consolidated statements of income and cash flow for the issuer s three most recently completed fiscal years and balance sheets as of the end of the two most recently completed fiscal years. The financial statements must be prepared either (i) in accordance with or reconciled to U.S. GAAP or (ii) in accordance with IFRS as issued by the International Accounting Standards Board (IASB), in which case no U.S. GAAP reconciliation is required. (i) U.S. GAAP Reconciliation When a Form 20-F is used for an Exchange Act registration statement (as opposed to an annual report) and is filed more than nine months after the end of the last fiscal year for which audited financial statements are included, the registration statement must also include interim financial statements (which need not be audited but must be reconciled to U.S. GAAP) covering at least the first six months of the fiscal year. 17