Interlisting on US OTCQX About To Get Much Easier: We Can Help!

OTC Markets Group has published proposed amendments for qualification rules to list on the OTCQX for all companies, including Canadian and other International public companies. These rules are scheduled to become effective on January 1, 2017.

Reserved for global companies listed on a qualified non-U.S. stock exchange to trade their shares, OTCQX International allows companies to establish a secondary market for U.S. investors without the costly and restrictive regulatory requirements of a U.S. exchange listing. Companies on OTCQX may use their home country disclosure in English in lieu of SEC reporting.

Many Canadian listed public companies could qualify for OTCQX if they have Net Tangible Assets of $5 million with less than 3 years operations, or $2 million with 3 or more years of operations, all in $USD. There are other qualifications, none of which should be a problem for TSX, TSX Venture or CSE listed companies.

These proposed amendments reduce the cost and time for companies to list on OTCQX, with the following proposed changes:
OTCQX Rules for International Companies:

Companies are no longer required to retain a PAL on an ongoing basis, and instead must have a qualified attorney, investment bank, or their ADR bank act as an OTCQX Sponsor during the initial qualification process. The Sponsor is primarily responsible for writing a Letter of Introduction to OTC Markets Group on behalf of the Applicant.
Elimination of Annual PAL Letter.
International Companies will no longer be required to provide an annual Issuer Compliance Statement to their PAL.
Removal of the requirement to be included in a Recognized Securities Manual that qualifies for the Blue Sky Manual Exemption. OTC Markets Group is working with the North American Securities Administration Association (“NASAA”) and individual states to gain recognition for OTCQX for the purposes of “Blue Sky Manual Exemption” for secondary trading.

Since 2014, Clark Wilson LLP has been qualified to act as a principal advisor liason, or PAL, for OTC market listings. See this article. We believe that having a local law firm assist in the OTC listing process can save our clients time and money.

The OTC Markets’ comment period on the proposed amendments ends on November 14, 2016.

If you would like assistance with listing on the OTCQX or any OTC Markets exchange, contact Bernard Pinsky at bpinsky@cwilson.com.

November 15 Conference: How to Fund Great Companies

We are a proud sponsor of and will also be speaking at the upcoming TSX Ignite event, Essentials for Building and Funding Great Companies, taking place on Tuesday, November 15, 2016 at the Segal Building at SFU located at 500 Granville Street. For more information and to register, go to http://campaign.r20.constantcontact.com/render?m=1106521103043&ca=81cc64e5-e1fb-43b7-81ee-e7af48457b78

SEC Amends Form 10-K

The Securities and Exchange Commission today announced it has approved an interim final rule that allows Form 10-K filers to provide a summary of business and financial information contained in the annual report.  The rule implements a provision of the Fixing America’s Surface Transportation (FAST) Act.

The interim final rule provides filers with flexibility in preparing the summary and those opting to provide it must include hyperlinks to the related, more detailed disclosure in the Form 10-K.  It also requests comment on whether the rule should include specific requirements or guidance for the form and content of the summary and whether the rules should be expanded to include other annual reporting forms.

The Commission recently adopted rules to revise Forms S-1 and F-1 to permit emerging growth companies to omit certain historical financial information from registration statements provided that all required financial information is included at the time of the offering.  The Commission also adopted rules to reflect statutory changes to the 12(g) thresholds for registration, termination of registration and suspension of reporting for savings and loan holding companies.

The FAST Act, enacted in December 2015, includes several provisions related to the federal securities laws.  Some of the provisions are self-executing and others require Commission rulemaking or study.

The rule will become effective when published in the Federal Register and the public comment period will remain open for 30 days.

Rule 144 General Information for Affiliates

Further to our blog post about Rule 144 for non-affiliates, we would like to provide some general guidance on Rule 144 for affiliates in this post. Please note, however, that Rule 144 is complicated and this post is only intended to provide limited background information. If you intend to resell pursuant to Rule 144, we urge you to consult with a qualified professional.

Short Answer

The following short answer applies to a seller who is an affiliate of the company whose securities are to be sold, and applies only to securities of a company that is not currently a “shell company” and that has been a reporting company in the United States for at least 90 days immediately prior to the sale.

In the situation described above, Rule 144 may be available for resale by a seller if the following conditions are satisfied:

  1. the seller owned the securities for at least six months;
  2. the company is current in its U.S. reporting obligations (other than Form 8-K reports);
  3. the volume limitation requirement must be satisfied. For example, if the company’s shares trade on the OTCBB, OTCQX or OTCQB, the amount of shares sold, together with all sales of shares of the same company sold within the three months prior to the Rule 144 sale cannot exceed 1% of the outstanding shares of the company;
  4. the manner of sale limitation requirement must be satisfied. One of the permitted manners of sale is to sell the shares using a broker who (a) does no more than execute the order to sell the shares as an agent for the seller, (b) receives no more than the usual and customary broker’s commission, (c) neither solicits nor arranges for the solicitation of the customers’ orders to buy the shares in anticipation of or in connection with the Rule 144 sale, and (d) after reasonable inquiry is not aware of circumstances indicating that the seller is an underwriter or that the Rule 144 sale is a part of a distribution of securities of the company; and
  5. if the amount of securities to be sold in reliance upon Rule 144 during any period of three months exceeds 5,000 shares or other units or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with the Securities and Exchange Commission (the “SEC”) and any U.S. national securities exchange, if the securities are listed.

Rule 144 cannot be used to resell securities of a “shell company”. If the securities to be sold were initially issued by a shell company or a former shell company that has since ceased to be a shell company, Rule 144 can be used if:

  1. the company is subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports and other materials required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, other than Form 8-K reports; and
  2. at least one year has elapsed since the company filed a document (typically on Form 8-K) containing the type of disclosure about the company and its business that would normally be included in a Form 10 initial registration statement, reflecting the company’s status as an entity that is no longer a shell company. Form 10 is the initial registration form used to register a company as a reporting company with the SEC under the Securities Exchange Act of 1934.

Background Information

For the background information about Rule 144, please see our blog post about Rule 144 for non-affiliates.

Two very important classifications are key to any use of Rule 144. First, is the company a reporting company and, second, is the seller an affiliate of the company? Different conditions apply depending on the answers to those questions.

Reporting Company

Rule 144 has different conditions for reporting companies and non-reporting companies. Companies that have been reporting companies for less than 90 days are considered non-reporting companies. Also voluntary filers (e.g. companies that did not file a registration statement on Form 10 or Form 8-A) are also considered non-reporting companies.

This blog post discusses Rule 144 as it applies to reporting companies only.

Affiliates

Rule 144 has different conditions for affiliates and non-affiliates. An affiliate of a company is “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with” such company. Officers, directors and stockholders owning 10% or more of the company’s outstanding securities are generally presumed to be affiliates, but such presumption may be rebuttable depending on facts and circumstances.

This blog post considers Rule 144 as it applies to persons who are affiliates or were affiliates at any time during the three months before the date of sale.

Rule 144 Conditions

An affiliate wishing to sell the restricted securities of a reporting company must comply with at least five conditions: holding period requirement, current information requirement, volume limitations, manner of sale limitations, and Form 144 notice filing requirement. If the restricted securities were initially issued by a shell company or a former shell company, Rule 144 imposes additional conditions.

Holding Period Requirement

For restricted securities, the seller must have held the securities for at least six months.

Current Information Requirement

Adequate current public information with respect to the company that issued securities must be available. For reporting companies, such information is deemed to be available only if the following conditions are satisfied:

  1. the company is, and has been for a period of at least 90 days immediately before the Rule 144 sale, subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934;
  2. the company must have filed all reports required by section 13 or 15(d) of the Securities Exchange Act of 1934 (e.g. Forms 10-K and 10-Q) during the 12 months preceding such sale, other than Form 8-K reports; and
  3. the company must have submitted electronically and posted on its corporate website, if any, every interactive data file (XBRL) required to be submitted and posted during the 12 months preceding such sale.

Volume Limitations

Rule 144 imposes a limit on the amount of securities sold for the account of an affiliate of a company. The amount of securities sold, together with all sales of securities of the same class sold for the account of the affiliate within the three months prior to the Rule 144 sale cannot exceed the greatest of:

  1. 1% of the shares or other units of the class outstanding as shown by the most recent report or statement published by the company;
  2. The average weekly reported volume of trading in such securities on all national securities exchanges and/or reported through the automated quotation system of a registered securities association (e.g. New York Stock Exchange, NASDAQ, and NYSE MKT) during the four calendar weeks preceding the filing of Rule 144 notice, or if no such notice is required the date of receipt of the order to execute the transaction by the broker or the date of execution of the transaction directly with a market maker; or
  3. The average weekly volume of trading in such securities reported pursuant to an effective transaction reporting plan or an effective national market system plan (as defined in Rule 600 of Regulation NMS) during the four-week period specified above.

Manner of Sale Limitations

Rule 144 requires an affiliate to sell the securities in one of the following manners:

  1. Brokers’ transactions executed upon customers’ orders on any exchange or in the over-the-counter market.

Such brokers’ transactions include transactions by a broker where such broker;

(a) does no more than execute the order or orders to sell the securities as agent for the affiliate;

(b) receives no more than the usual and customary broker’s commission;

(c) neither solicits nor arranges for the solicitation of customers’ orders to buy the securities in anticipation of or in connection with the Rule 144 sale; and

(d) after reasonably inquiry is not aware of circumstances indicating that the affiliate is an underwriter or that the Rule 144 sale is a part of a distribution of securities of the company;

  1. Transactions directly with a market maker.

The term “market maker” means any specialist permitted to act as a dealer, any dealer acting in the capacity of block positioner, and any dealer who, with respect to a security, holds himself out (by entering quotations in an inter-dealer communications system or otherwise) as being willing to buy and sell such security for his own account on a regular or continuous basis; or

  1. Riskless principal transactions where:

(a) The offsetting trades must be executed at the same price (exclusive of an explicitly disclosed markup or markdown, commission equivalent, or other fee);

(b) The transaction is permitted to be reported as riskless under the rules of a self-regulatory organization; and

(C) The requirements of paragraphs (1)(b)(applicable to any markup or markdown, commission equivalent, or other fee), (1)(c), and (1)(d) above are met.

The term “riskless principal transaction” means a principal transaction where, after having received from a customer an order to buy, a broker or dealer purchases the security as principal in the market to satisfy the order to buy or, after having received from a customer an order to sell, sells the security as principal to the market to satisfy the order to sell.

In addition, an affiliate must not:

  1. Solicit or arrange for the solicitation of orders to buy the securities in anticipation of or in connection with such transaction, or
  2. Make any payment in connection with the offer or sale of the securities to any person other than the broker or dealer who executes the order to sell the securities.

Form 144 Notice of Proposed Sale

If the amount of securities to be sold in reliance upon Rule 144 during any three month period exceeds 5,000 shares or other units or has an aggregate sale price in excess of $50,000, an affiliate must file a notice on Form 144 with the SEC and any national securities exchange, if the securities are listed.

The Form 144 must be filed concurrently with either the placing with a broker of an order to execute a sale of securities or the execution directly with a market maker of such a sale. The person filing the Form 144 must have a bona fide intention to sell the securities referred to in the Form 144 within a reasonable time after the filing of the Form 144.

Requirements for Former Shell Companies

Rule 144 imposes additional conditions for the resale of securities initially issued by a shell company or a former shell company. A shell company is an issuer that has (A) no or nominal operations and (B) either: (1) no or nominal assets; (2) assets consisting solely of cash and cash equivalents; or (3) assets consisting of any amount of cash and cash equivalents and nominal other assets.

Additional conditions are:

  1. such company must have ceased to be a shell company;
  2. the company must be subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934;
  3. the company must have filed all reports and other materials required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, other than Form 8-K reports;
  4. the company must have filed current “Form 10 information” with the SEC reflecting its status as an entity that is no longer a shell company; and
  5. at least one year has elapsed since the date that the company filed “Form 10 information” with the SEC.

Do The New Registration Thresholds in the U.S. Really Help? New Rule 12g-1

The Jumpstart Our Business Startups Act (known as the JOBS Act), which became law in 2012, was intended to encourage investment in small businesses by easing securities regulation.  Among other things, it amended Section 12(g)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which, until recently, required an issuer to register a class of equity securities with the Securities and Exchange Commission (the “SEC”) if, on the last day of a fiscal year, it had total assets of (US)$1,000,000 and a class of equity securities held of record by 500 or more shareholders.  The JOBS Act increased these thresholds to (US)$10,000,000 and 2,000 shareholders, or 500 shareholders who are not “accredited investors”.

Although the JOBS Act amended the Exchange Act, it left a few details to the SEC under its rulemaking authority and the SEC just adopted a final rule on May 3, 2016 (to take effect on June 9, 2016). As amended, Exchange Act Rule 12g-1 carries the definition of an “accredited investor” over from Rule 501(a) of the SEC’s Regulation D.  However, the rule requires that issuers determine the status of accredited investors as at the last day of their most recently completed fiscal year.  In other words, an issuer cannot assume that a person that was an accredited investor at the date of the original investment is still an accredited investor at the end of each fiscal year.  As the SEC observed in its Final Rule Release [No. 33-10075; 34-77757], outdated information can be unreliable.  But as a practical matter, the final rule requires that an issuer with more than (US)$10,000,000 in assets and more than 500 shareholders of record at the end of its last fiscal year must either register or be in a position to establish that, based on facts and circumstances available to it at the end of that fiscal year, it had less than 500 shareholders of record that were not, or that it reasonably believed were not, at the time, accredited investors.

This effort to ease securities regulation adds a layer of complexity for companies that have between 500 and 2,000 shareholders of record.

CSA Targets Brokers to Raise Conduct Standards

By Bernard Pinsky

On April 28, 2016, the Canadian Securities Administrators (“CSA”) published CSA Consultation Paper 33-404 (“CP 33-404”) which proposes for discussion regulatory action to hold securities advisors, dealers and representatives (“Advisors”) to a higher standard in dealings with their clients.

The following areas of Advisor conduct were found to be deficient:
1.Conflicts of interest, including
a.firms and Advisers must have a reasonable basis for concluding the client fully understands the implications and consequences of the conflict
b.responding to material conflicts in a way that prioritizes the interests of clients ahead of the interests of the firm and advisor, including guidance on impact of incentives
2.Know Your Client, including that the KYC process results in a thorough understanding of the client, including the client’s risk profile
3.Know Your Product, including understanding the impact of all fees, costs and charges connected to the products they recommend
4.Determining investment suitability, including
a.taking into account product costs and investment strategies
b.considering the client’s target rate of return and whether the proposed investment meets the client’s needs
c.considering not only the suitability of a trade but also of the portfolio on an ongoing basis
5.Relationship Disclosure, including
a.disclosure of the actual nature of the client-advisor relationship
b.disclosure by firms in restricted registration categories or that only offer proprietary products that there may be securities products they don’t sell that may be more suitable
6.Proficiency, including requiring
a.increased proficiency on product costs and investment strategies that can impact investment outcomes
b.continuing education
7.Misleading Titles of Advisors; some Advisor titles exaggerate their proficiency or the services they actually provide.

CP 33-404 attempts to establish clear, practical, and enforceable requirements for Brokers to follow and for regulators and courts to enforce.

Comments must be submitted in writing by August 26, 2016 to any member Securities Commission of the CSA.

For more information, please contact any member of Clark Wilson’s Corporate Finance & Securities Group.