Canada Cross-Border Transactions

On October 7, 2020, the Securities and Exchange Commission (”SEC”) proposed a new limited, conditional exemption from broker-dealer registration requirements of Section 15(a) of the Securities and Exchange Act of 1934, as amended (“Exchange Act”) for “finders” who assist issuers with raising capital in private markets from accredited investors. The proposed exemption would permit natural persons to engage in certain defined and limited activities involving accredited investors without registering with the SEC as brokers. The proposed exemption seeks to assist small businesses to raise capital and to provide regulatory clarity to investors, issuers, and the finders who assist them. There will be a 30-day comment period for the proposed exemption following publication in the Federal Register. The SEC published a series of 45 questions at the end of the proposal seeking feedback. For additional information, see this eUpdate.

In conjunction with the OTC Markets, Dorsey has updated its Guide to Joining the OTCQX or the OTCQB Markets for Canadian and other Foreign issuers. Canadian issuers who trade on a qualified foreign stock exchange (which include the Toronto Stock Exchange, TSX Venture Exchange, Canadian Securities Exchange and the Aequitas NEO Exchange) and who meet certain financial criteria can trade in the United States on the OTCQX or the OTCQB by relying on their Canadian disclosure and without needing to register with the United States Securities and Exchange Commission. The OTCQX is for more established companies that meet higher financial standards while the OTCQB is for early-stage and developing companies. The OTCQX and OTCQB provide trading platforms in the United States that offer many of the benefits of traditional U.S. stock exchanges with less regulatory burden and lower reporting costs. Most Canadian issuers will require an approved sponsor to assist with joining the OTCQB and OTCQX. Dorsey is an approved sponsor and we have assisted over 150 issuers with their trading on the OTCQX or OTCQB over the past 10 years. The Guide to Joining the OTCQX or the OTCQB Markets for Canadian and Other Foreign Issuers can be found here.

2020 is shaping up to the be the biggest year ever for at-the-market (ATM) financing programs, and Canada-US cross-listed companies are getting their share of the financing.  In the last three months alone, at least 14 Canadian issuers that are listed on a NYSE or Nasdaq exchange have filed with the SEC for at-the-market (ATM) financing programs across a spectrum of industries, including mining, life sciences, technology, royalty and commodity trust issuers. Find out more about raising money through an ATM by: Reading our newly-published Guide to At-the-Market Programs for MJDS Issuers; Participating in one of our ATM webinars; or Calling your Dorsey contact.

The IRS has released a new webpage dedicated to the marijuana industry to help growers, processors, researchers and retailers understand and comply with their U.S. federal income tax responsibilities. The IRS Marijuana Industry webpage covers numerous topics that may be relevant for businesses directly engaged in, or related to, the cultivation, processing and sale of marijuana, including, without limitation, common U.S. federal income tax filing obligations, options for satisfying U.S. federal income tax liabilities, and penalties which will be assessed if such payment obligations are not satisfied on a timely basis. Perhaps of most significance, the IRS Marijuana Industry webpage also contains a series of FAQs including information on a number of common questions, including the potential application of Section 280E of the U.S. Internal Revenue Code to taxpayers in the marijuana industry. The IRS webpage dedicated to the Marijuana Industry can be accessed at: https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry

We are seeing a significant increase in cases where a qualified person (QP) or related engineering firm has prepared a technical report or other required disclosure for a mining company, but then resisted, or outright refused, to provide the written consent that the mining company is required to obtain in order to be permitted to disclose the name of the QP and the conclusions of the QP in a prospectus that forms part of an SEC registration statement for a public offering or for the mining company’s annual report that is filed with the SEC.  This can be costly and damaging to the mining company, because it may put the company in a position where it cannot satisfy both the SEC consent requirements and the requirements of Canada’s National Instrument 43-101 (NI 43-101) without having another QP redo the first QP’s work. The incidence of QPs taking this position seems to be increasing as the SEC’s new mining disclosure rules under subpart 1300 come into effect.  For companies that file with the SEC on non-MJDS forms (Forms 10-K, S-1 and S-3 for domestic issuers, and Forms 20-F, F-1 and F-3 for foreign private issuers), the subpart 1300 rules will impose new requirements on QPs that will increase their exposure to potential liability.  The subpart 1300 rules will not apply to MJDS forms.  For the many Canadian mining companies that file with the SEC under the MJDS system (e.g., Forms 40-F and F-10), their QPs will not be subject to any increased exposure.  Nevertheless, we are seeing QPs taking a more cautious approach to consents as they become more aware of the potential liability to which they have always been subject as “experts”. To avoid the potential for unpleasantness at a later date, mining companies that may require an SEC consent from a QP should raise this requirement with the QP as part of the process of initially engaging the QP and consider building the QP’s obligation to provide any required consents into the express terms of any written agreement with the QP.

On August 16, 2020, the United States re-imposed Section 232 tariffs on Canadian-origin primary aluminum imports, adding another twist to the long-standing trade dispute with Canada over its aluminum exports to the United States.  This tariff action followed a proclamation issued by President Trump dated 6 August 2020.[1]  Citing an 87% surge in imports of primary aluminum from Canada since a tariff truce announced in May 2019, the Trump administration re-imposed a 10% tariff on these imports.  This re-imposition of tariffs is happening despite the recent entry into force of the U.S.-Mexico-Canada Agreement (“USMCA”) in July 2020.  Canada promptly retaliated in kind by announcing countermeasure tariffs on certain U.S. aluminum goods. In early 2018, after a year-long investigation under Section 232 of the Trade Expansion Act of 1962, the Trump administration determined that aluminum imports from around the world threatened to impair U.S. national security.  In March 2018, the Trump administration imposed a 10% tariff on various aluminum imports, sourced from anywhere in the world.  (At the same time, the Trump administration also imposed a 25% tariff on various steel imports from around the world under Section 232.) Canadian aluminum products then became subject to whiplash in having tariffs imposed and removed.  Initially, Canadian aluminum products, along with Mexican products, were exempt, possibly in consideration of ongoing negotiations to replace the North American Free Trade Agreement (“NAFTA”).  Then, in June 2018, Canadian and Mexican aluminum products were added back onto the tariff list, which prompted Canadian and Mexican retaliatory tariffs on U.S. products. Despite this tit-for-tat mutual imposition of tariffs, the three countries nevertheless signed the USMCA in November 2018 to replace NAFTA.  To facilitate USMCA’s ratification by their national legislatures, the three countries declared a tariff truce in May 2019.  The Trump administration once again exempted Canadian and Mexican aluminum from the Section 232 tariffs, while Canada and Mexico rescinded their retaliatory tariffs against U.S. products.  The Trump administration also agreed not to re-impose Section 232 tariffs unless there was a surge of Canadian and Mexican imports beyond historic levels, and negotiations to address that surge are unsuccessful.  This truce paved the way for the USMCA’s entry into force on July 1, 2020. The U.S. tariff action affects only imports of unwrought, unalloyed aluminum from Canada – which are primary products made from raw bauxite that are used to fabricate downstream aluminum products.  This class of goods constitutes the largest share of Canadian aluminum exports to the United States.  Assuming this 10% tariff proceeds, it could significantly impact the aluminum market, from competing U.S. producers of primary aluminum, to producers of secondary aluminum from recycled goods that could compete with imported primary aluminum, and to downstream users of aluminum across all industries. Canada promptly imposed retaliatory tariffs on a variety of U.S. aluminum goods, as expressly allowed under the May 2019 tariff truce.[2]  Canada is imposing a 10% “surtax” on items ranging from raw aluminum ore to finished household appliances that use aluminum.  The May 2019 tariff truce had reserved Canada’s right to impose such countermeasures, albeit limited only to goods in the aluminum sector. If you have any questions about the Section 232 tariffs or other trade matters, Dorsey’s international trade attorneys profiled below would be happy to assist.  Dorsey’s attorneys at its offices in Canada and the United States are also prepared to assist clients with any other legal issues that may arise in cross-border transactions.[1] https://www.govinfo.gov/content/pkg/FR-2020-08-14/pdf/2020-17977.pdf. [2] https://www.canada.ca/en/department-finance/programs/consultations/2020/notice-intent-impose-countermeasures-action-against-united-states-response-tariffs-canadian-aluminum-products.html.

The CARES Act, signed into law on March 27, 2020 in the wake of the onset of the Covid-19 pandemic, contained numerous changes to U.S. federal income tax law. One such change applied to the deductibility of net operating losses (“NOLs”). Legislation enacted in December 2017 commonly known as the “Tax Cuts and Jobs Act” (the “TCJA”) prohibited the carrying back of NOLs to prior tax years and limited the amount of NOLs which could be deducted in any particular tax year to 80% of a corporate filer’s taxable income. Reversing course, Section 2303 of the CARES Act delayed the effective date of certain limitations in the TCJA by allowing a corporate taxpayer’s NOLs arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to be carried back to the five years preceding the taxable year of such loss. In addition, the CARES Act eliminated the taxable income limitation applicable to the deductibility of NOLs for tax years beginning after December 31, 2017 and before January 1, 2021 (with additional rules applying to tax years beginning after January 1, 2021). Recent SEC filings suggest that SEC-registered companies anticipate receiving refunds, in the aggregate, in excess of $5 billion. Due to the reduction of the U.S. corporate tax rate from 35% to 21% as a result of the TCJA, some corporate taxpayers may benefit significantly more than others, due to the ability to carry NOLs back to tax years in which a higher U.S. federal income corporate tax rate applied. Other corporate taxpayers may be unable to fully, or even partially, utilize accumulated NOLs due to not having taxable income in the five tax years preceding the year of a particular loss. NOL provisions in merger and acquisition agreements should be carefully analyzed in the wake of the CARES Act to ensure that the potentially significant benefits from the ability to carry back NOLs are appropriately negotiated.

Current closures at the Internal Revenue Service (“IRS”) have caused significant delays in obtaining an Employer Identification Number (“EIN”) for some U.S. businesses formed by Canadians, including new U.S. subsidiaries formed by Canadian companies. An EIN is a nine-digit number that the IRS assigns to businesses, which is necessary for many essential tasks, including making U.S. federal tax filings, hiring employees, or opening and maintaining a U.S. bank account. Applicants with a “U.S. Responsible Party” (i.e., a CEO, CFO, or President with a U.S. Social Security Number or Individual Taxpayer Identification Number) are generally able to obtain an EIN through the IRS’ online application portal, which remains open. Most applicants lacking a U.S. Responsible Party must submit their applications to the IRS via telephone, fax, or mail. However, due to the COVID-19 outbreak, the IRS has temporarily closed its EIN call center, fax lines, and mail-processing center. Accordingly, applicants lacking a U.S. Responsible Party may not be able to obtain an EIN until the IRS reopens one of these channels. As the IRS has not yet indicated when such reopening might occur, applicants lacking a U.S. Responsible Party are left with only one course of action. These applicants can submit a Form SS-4 via certified mail to the IRS for processing when the IRS reopens its mail-processing center. In doing so, such applicant can attest to having “applied for” an EIN and provide the official date of its application (being the date the application was mailed). While an EIN submitted via certified mail will generally be processed in the order received, the actual processing of the application will not begin until the IRS reopens its mail-processing center. In the ordinary course of business, the EIN-by-mail process can take up to one month. However, given the ongoing uncertainty surrounding COVID-19, the actual processing time of EIN applications submitted via certified mail may be far longer.

On April 29, 2020, the SEC issued new Compliance & Disclosure Interpretations (the “New C&DIs”) that clarified the compliance deadline for many mining companies that file with the SEC on non-MJDS forms such as Form 10-K or Form 20-F to comply with the SEC’s new mining disclosure rules in Subpart 1300 of Regulation S-K. The New C&DIs follow closely on the heels of the National Mining Association having submitted a letter on April 24, 2020, to the SEC’s Chairman, Jay Clayton, requesting a one-year delay in the Subpart 1300 compliance deadline in light of the COVID-19 pandemic. The SEC’s adopting release for Subpart 1300 on October 31, 2018, had required that mining companies begin complying with the new rules, including the filing of technical report summaries, beginning with the annual report filed for the company’s first fiscal year beginning on or after January 1, 2021 (in other words, in early 2022 for calendar year companies, and later in 2022 or very early 2023 for other companies). However, that timeline was to be accelerated for new registrants and also, apparently, for companies accessing the public markets, with compliance required beginning January 1, 2021, for any registration statement filed on or after that date. The treatment of shelf takedowns from existing registration statements after January 1, 2021, was not specifically addressed. The New C&DIs provide much-needed clarity regarding the Subpart 1300 compliance deadline for many mining companies: For non-calendar year companies, Subpart 1300 will not apply until the beginning of the company’s first fiscal year on or after January 1, 2021. For example, a company with a June 30 fiscal year end will not in any circumstance become subject to Subpart 1300 until July 1, 2021. If a company files a Securities Act registration statement after the beginning of its first fiscal year on or after January 1, 2021, and prior to its annual report for such fiscal year,[1] it is not required to comply with Subpart 1300 in the Securities Act registration statement if the form being used permits incorporation by reference of information from a prior annual report that was not subject to Subpart 1300, and such disclosure is not otherwise prohibited under the SEC’s rules. For example, if a calendar-year end company files a Form S-3 or Form F-3 during 2021, it may incorporate its annual report on Form 10-K or Form 20-F for the fiscal year ended December 31, 2020, even if that report contains disclosure in accordance with SEC Industry Guide 7. As a result of the New C&DIs, many mining companies that are working on implementing Subpart 1300 will not be required to comply with the new rules until the date in 2022 when they file their annual report for their first fiscal year beginning on or after January 1, 2021. The exception to this rule will be companies that file an initial Exchange Act registration statement or a Securities Act registration statement that does not permit incorporation by reference[2] after the start of their first fiscal year beginning on or after January 1, 2021. Those filings will trigger early compliance with Subpart 1300. The New C&DIs are available at sec.gov/divisions/corpfin/guidance/regs-kinterp.htm#section155. The SEC’s adopting release for Subpart 1300 is available at sec.gov/rules/final/2018/33-10570.pdf. Links for Dorsey's prior Q&A and webinar regarding Subpart 1300 are available at dorsey.com/newsresources/publications/client-alerts/2019/02/new-mining-disclosure-rules-2019 and dorsey.com/newsresources/events/videos/2019/02/webinar-playback-sec-new-mining-rules, respectively.   [1] Technically, the New C&DIs refer to the date on which audited financial statements for such fiscal year are required to be included in the Securities Act registration statement. [2] For example, Forms F-1 and S-1, the SEC’s equivalents to a “long form” prospectus, do not permit incorporation by reference if the company (i) is a new registrant, (ii) has not yet filed its SEC annual report for its most recently completed fiscal year, (iii) is delinquent in its SEC reports, (iii) is or was, or has a predecessor that was, within the last three years, a blank check company, a shell company, or a registrant for an offering of penny stock, or (iv) is registering a business combination. Forms F-4 and S-4, which are used to register business combinations, also include restrictions on incorporation by reference, depending on the nature of the registrant and the company being acquired.

In response to the COVID-19 pandemic, NASDAQ and NYSE are providing temporary relief from certain continued listing standards. As of now, NYSE American has not provided similar relief from its continued listing standards as a result of COVID-19. Specifically, NASDAQ is providing relief from the continued listing bid price ($1.00) and market value of publicly held shares listing requirements through June 30, 2020. While NASDAQ will continue to notify companies about new instances of non-compliance with bid price and market value of publicly held shares requirements during this period, compliance periods for any newly identified non-compliance will not begin until July 1, 2020. In addition, the compliance periods for any company previously notified about non-compliance will be suspended and resume on July 1. Starting on July 1, companies would receive the balance of any pending compliance period in effect at the start of the tolling period to regain compliance. NASDAQ will continue to monitor securities to determine if a company regains compliance during the relief period. A company can regain compliance by satisfying the minimum requirement for a minimum of 10 consecutive days. The NASDAQ’s Listing Center FAQ for COVID-19 can be found at the link below: https://listingcenter.nasdaq.com/assets/Listing%20Center%20Coronavirus%20FAQs%20for%20Nasdaq-listed%20Companies.pdf Similarly, the New York Stock Exchange (“NYSE”) has announced a number of measures to assist companies during this tumultuous time. NYSE has agreed to toll any applicable compliance periods through June 30, 2020, related to having (i) both stockholders’ equity of less than $50 million and an average global market capitalization over a consecutive 30 trading-day period of less than $50 million (the “$50 Million Standard”) or (ii) an average closing price of a company’s shares below $1.00 over a consecutive 30 day trading period (“Dollar Price Standard”). NYSE will continue to identify companies that fall below the $50 Million Standard and the Dollar Price Standard and such companies will be required to (i) comply with the standard disclosure requirements set out in the Listed Company Manual (the “Manual”), and (ii) submit compliance plans within the standard time frames set out in the Manual. However, the time period to cure such deficiency (i.e., 18 months for the $50 Million Standard and six months for the Dollar Price Standard) will only commence on July 1, 2020. Companies that are currently in a compliance period will have their compliance period tolled and it will recommence on July 1, 2020. A company can regain compliance during the tolling period by satisfying the standard cure requirements set out in the Manual. NYSE has also suspended until June 30, 2020, the requirement that companies maintain an average global market capitalization over a consecutive 30 trading-day period of at least $15 million (the “Market Capitalization Standard”). Under the suspension of NYSE’s Market Capitalization Standard, companies will not be notified of new events of noncompliance during the suspension period. However, following the temporary rule suspension, any new events of noncompliance with NYSE’s Market Capitalization Standard would be determined based on a consecutive 30 trading-day period commencing on or after July 1, 2020. In addition, NYSE has instituted a partial waiver of the application of Section 312.03(b) of the Manual, which requires shareholder approval of any issuance to a director, officer or substantial security holder of the company (each a "Related Party") or to an affiliate of a Related Party if the number of shares of common stock to be issued, or if the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. The waiver eliminates the shareholder approval requirement through June 30, 2020, but is specifically limited to transactions that involve the sale of the company’s securities for cash at a price that meets the Minimum Price requirement as set forth in Section 312.04 of the Manual. In addition, to qualify for this waiver, a transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors. Furthermore, this temporary exemption may not be available if the proceeds are used to fund an acquisition. Furthermore, NYSE has instituted a waiver of the shareholder approval requirement of Section 312.03(c) of the Manual until June 30, 2020, such that no shareholder approval is required to (i) issue on a private placement basis, greater than 20% of an issuer’s issued and outstanding shares, (ii) issue greater than 5% of the company’s issued and outstanding shares to a single investor, and (iii) undertake a “bona fide private financing” during that period in which there is only a single purchaser, so long as the issuances are for cash at a price greater than the Minimum Price. If any purchaser in such a transaction is a Related Party, the transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors. The SEC’s releases related to the rule changes can be found at the following links: sec.gov/rules/sro/nyse/2020/34-88572.pdf; sec.gov/rules/sro/nyse/2020/34-88441.pdf; sec.gov/rules/sro/nyse/2020/34-88717.pdf

The OTC Markets Group Inc. (the “OTC”) has announced that due to the Covid-19 pandemic, it is providing relief to certain OTCQB and OTCQX issuers until June 30, 2020. Until June 30, 2020, no new compliance deficiency notices will be sent related to having a low bid price, low market capitalization, or low market value of public float (as those terms are used in the OTCQB Standards, the OTCQX Rules for International Companies or the OTCQX Rules for U.S. Companies, as applicable). Additionally, any OTCQX or OTCQB company that has already received a compliance notice related to bid price, market capitalization, or market value of public float with a cure period expiring between March and June will automatically receive an extension until June 30, 2020, to cure the deficiency. The OTC is also extending the implementation date for compliance with Sections 2.3(3) and 2.3(4) of the OTCQB Standards regarding having at least 50 beneficial shareholders and having a minimum public float of 10% or $2 million in market value of public float, respectively, until June 30, 2020. This extension applies only to companies that were traded on the OTCQB as of May 20, 2018, as all other companies were subject to the requirements effective May 20, 2018. The OTC’s notices related to COVID-19 can be found at the following website: otcmarkets.com/learn/resources-for-companies-impacted-by-covid19.

During the current coronavirus crisis, the SEC has issued an Order providing filing extensions that apply to Canadian issuers. The following is a summary of the SEC’s new filing requirements. Form 40-F For Canadian issuers eligible to file their SEC annual report on Form 40-F under the Canada-U.S. Multi-jurisdictional Disclosure System (“MJDS”), Form 40-F continues to be required to be filed on the date on which the included Canadian documents (in most cases, the Annual Information Form) is filed in Canada. We understand that the Canadian Securities Administrators have temporarily provided a blanket 45-day filing extension for Canadian filings, including the Annual Information Form. Therefore, as a practical matter, Form 40-F filers have also automatically received a 45-day filing extension for the filing of the Form 40-F. We have confirmed with the SEC that such 45-day filing extension is available to Form 40-F filers notwithstanding that it could result in a Form 40-F being filed later than the filing deadline for an Annual Report on Form 20-F (four months after the applicable year end). We have also confirmed with the SEC that MJDS filers taking advantage of such filing deadline extension are not required to comply with the SEC’s conditional filing relief described below. Other SEC Filings For non-MJDS filers, the SEC has issued an Order that provides a conditional 45-day filing extension for SEC filings due prior to July 1, 2020. In order to be eligible to utilize the provided relief, the person making the filing must meet the following conditions: (a)  the filer must be unable to meet a filing deadline due to circumstances related to COVID-19 (i.e. it is not a blanket exemption); (b)  any person relying upon the SEC’s Order must furnish a Form 6-K or Form 8-K to the SEC by the original filing deadline of the applicable report, stating: a.  it is relying on this Order; b.  a brief description of the reasons why it could not file such report, schedule or form on a timely basis; c.  the estimated date by which the report, schedule, or form is expected to be filed; d.  a company specific risk factor or factors explaining the impact, if material, of COVID-19 on its business; and e.  if the reason the subject report cannot be filed timely relates to the inability of any person, other than the registrant, to furnish any required opinion, report or certification, the report must include as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report or certification on or before the date such report must be filed. Therefore, Canadian issuers that file on Form 20-F or Form 10-K might be ineligible to fully benefit from the 45-day filing extension provided by the Canadian Securities Administrators. Form 6-K Reports on Form 6-K continue to be due “promptly” following the filing or required public disclosure of the included information in Canada.

As Covid-19 continues to spread, many countries, including the United States and Canada, are increasingly closing their borders in an attempt to slow the rate of infection. This precaution may, however, have unintended tax consequences for Canadians who find themselves stranded on the U.S. side of the border for the duration of the shutdown. Under the substantial presence test, Canadians who are present in the United States for at least 31 days during the current year, and 183 days in the aggregate during the current calendar year and the two preceding calendar years, will be considered U.S. residents for U.S. federal income tax purposes. Specifically, this three-year test is calculated by adding: (i) all days present in the United States during the current year; plus (ii) one-third of any days present in the United States during the previous year; plus (iii) one-sixth of any days present in the United States for the year before that. If that sum equals or exceeds 183 days, then such Canadian citizen may be subject to U.S. federal income tax on their worldwide income. Accordingly, it is important for Canadians that are currently stranded in the United States to take proactive steps to avoid this potentially adverse result. To do so, there are a number of measures an individual can take depending on their circumstances. If a Canadian citizen is in the United States based on a certain type of visa (e.g., teachers, trainees, or students) or overstays due to a medical condition that prevents them from leaving, then such individual may be able to exclude days from the substantial presence calculation by filing an IRS Form 8843. This form allows the individual to claim an exemption and maintain their status as a nonresident of the United States for U.S. federal income tax purposes. Alternatively, Canadian citizens that are not in the United States under a qualifying visa or prevented from leaving due to a medical condition may file an IRS Form 8840 to claim a “Closer Connection Exemption.” Under this exemption, Canadian citizens that meet or surpass the 183-day threshold can still be treated as nonresidents of the United States by substantiating that they have closer connections to Canada based on residential ties including, without limitation, family, location of principal home, social ties, economic ties, etc. However, the Closer Connection Exemption is only available if the Canadian citizen was present in the United States for fewer than 183 days during the current taxable year. If neither of the above exemptions apply, a stranded Canadian citizen can still avoid U.S. taxation by claiming an exemption under the United States-Canada Tax Treaty. To do so, the individual should file an IRS Form 1040NR, i.e., a U.S. Nonresident Alien Income Tax Return, and attach a completed IRS Form 8833, which specifies the treaty provisions under which the taxpayer is claiming an exemption. If pursuing this course of action, Canadian filers should be sure to include reference to Covid-19-related travel bans as justification for meeting the substantial presence test. To further bolster their position, a stranded Canadian citizen should also maintain documentation that evidences their attempts, as well as inability, to return to Canada, which could help further corroborate their position as a non-U.S. resident. While little can be done about the current shutdown, stranded Canadian citizens can consider prudent measures to take in the meantime so as to avoid any unnecessary U.S. tax liability. Dorsey & Whitney regularly represents taxpayers in navigating the above process. If you have any questions or would like to learn more, please contact us.

On March 25, the SEC issued CF Disclosure Guidance Topic No. 9 that provides the Division of Corporation Finance’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. In the guidance, the SEC recognizes that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. Never the less, the guidance is clear that the SEC considers COVID-19 developments to be material and that public companies have an obligation to address these risks even as the business risks are evolving and impacts on a specific company are uncertain. As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements. The guidance provides a checklist of topics related to COVID-19 to be considered by public companies as they prepare their periodic reports and other public disclosures: The impact of on the company’s financial condition and results of operations in the near term and longer term. The impact of on the company’s capital and financial resources, including liquidity, cost and access to capital (such as access to revolving credit facilities), sources and uses of cash, the company’s ability to meet financial covenants, new material expenditures in response to COVID-19 and other matters. The impact on the company’s balance sheet and assets, including any impairment charges. The impact on operations, including remote work, productivity, human resources, supply chain, product distribution and travel restrictions. The impact on demand for the company’s goods and services. The impact on internal controls, disclosure controls, accounting judgments or financial statements. The guidance highlights public companies’ obligations to address management’s expectations for future periods and to discuss trends and uncertainties. The guidance notes that these statements are likely to be forward looking information, based on assumptions and expectations regarding future events, which may be covered by the safe harbor protections. The guidance further notes that the disclosure should be tailored for the specific company and allow investors to see the impact of COVID-19 through the eyes of management. The guidance reminds companies that as they consider the impacts of COVID-19 on their financial condition and operations, their directors and officers, and other corporate insiders, who are aware that COVID-19 has affected their companies in ways that would be material to investors, should refrain from trading in the companies’ securities until such information is disclosed to the public. The guidance also reminds companies to take the necessary steps to avoid selective disclosures by disseminating material information related to the impacts of COVID-19 broadly to the public. In addition, the guidance addressed earnings releases and non-GAAP financial measures. As to earning releases the guidance is primarily a caution to prepare early to address novel issues and accounting judgments that may arise from COVID-19. To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, the guidance is that the disclosure should highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations. The guidance also states that if a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments, requiring additional information and analysis to complete, the staff would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on reasonable estimates, or a range of reasonably estimable GAAP results. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges. Under the guidance, a company presenting non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting. The guidance is clear that the other rules for disclosure of non-GAAP financial measures continue to apply, including that companies should avoid “cherry-picking”. In addition, companies should limit the measures they present to those non-GAAP financial measures they are using to report financial results to their Boards of Directors.

On March 4, 2020, the Securities and Exchange Commission (the “Commission”) proposed amendments to the private offering exemptive framework under the Securities Act of 1933, as amended (the “Securities Act”) to “simplify, harmonize, and improve certain aspects of the framework” with the goal of promoting capital formation while maintaining investor protections. The current private offering framework is a set of exemptions and safe harbors which permit issuers to raise capital through various, differing rules which don’t require the filing of a registration statement with the Commission under the Securities Act. These rules are meant to provide issuers with a less expensive and more efficient alternative to a registered public offering in exchange for certain limitations and requirements being placed on the offering, typically regarding the number and type of investors, the type and context of solicitations, the size of the offering and individual investments and certain limited information requirements. The conflicting requirements of the current, differing rules and the potential integration (determination of whether multiple transactions are part of the same offering) of offerings conducted under this “patchwork system” has resulted in a complex and sometimes confusing regulatory framework where the interaction of offerings conducted under the various exemptions and safe harbors is often uncertain, leading to potential violations of the Securities Act. As Chairman Clayton stated in relation to the proposed amendments, “[t]he complexity of the current framework is confusing for many involved in the process, particularly for those smaller companies whose limited resources spent on navigating our overly complex rules are diverted from direct investments in the companies’ growth.” As noted in the Commission’s press release, “[t]he Commission’s proposed amendments are intended to reduce potential friction points to make the capital raising process more effective and efficient to meet evolving market needs.” The proposed amendments would: address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering; increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits; provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions. For more information on the proposed rules, see our recent eUpdate here.

For Form 10-K filers, the SEC's March 12 amendments to the “accelerated filer” definition made sense and helped better coordinate the “smaller reporting company” definition with the “accelerated filer” definition. The amendments would, in part, exclude from the definition of “accelerated filer” and “large accelerated filer” issuers that are eligible to be a smaller reporting company and which do not have $100 million in revenues in their most recent fiscal year for which audited financial statements are available. As a result, the amendments will expand the number of Form 10-K filers which are exempted from having to provide an auditor attestation report on internal control over financial reporting in the annual report they file with the SEC. A more detailed discussion of the amendments can be found here: governancecomplianceinsider.com/sec-amends-definition-of-accelerated-and-large-accelerated-filer/. However, for foreign private issuers that file their annual report on Form 20-F or Form 40-F, the benefits from the March 12 amendments are limited. A foreign private issuer filing on Form 20-F or Form 40-F is not eligible to use the requirements for smaller reporting companies, and so is excluded from the expanded accelerated filer exemption. The following table helps illustrate the disparity: Relationships between SRCs, Non-Accelerated and Accelerated Filers under the Final Amendments for 10-K Filers and 20-F or 40-F Filers Public Float Annual Revenues 20-F or 40-F Filer Status* 10-K Filer Status Less than $75 million N/A Non-Accelerated SRC and Non-Accelerated $75 million to less than $700 million Less than $100 million Accelerated SRC and Non-Accelerated $75 million to less than $250 million $100 million or more Accelerated SRC and Accelerated Filer $250 million to less than $700 million $100 million or more Accelerated Accelerated Filer (not SRC) Note: This table addresses initial determinations of filer status and does not consider requirements for transitions between filer status. In other words, if a 10-K filer, a 20-F filer and a 40-F filer each had a public float of $90 million and no revenue, only the 20-F filer and the 40-F filer would be categorized as an accelerated issuer and required to provide an auditor attestation report on its internal control over financial reporting. The final release noted that foreign private issuers reporting on the forms available to them (20-F or 40-F) have other accommodations that 10-K filers do not have. While that is true, it may be cold comfort for an issuer faced with the expense and effort associated with getting an auditor attestation on its internal control over financial reporting. The amendments will become effective 30 days after publication in the Federal Register. The final amendments will apply to annual report filings due on or after the effective date.

On March 2, the Securities and Exchange Commission adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. The final amendments amend Rule 3-10 of Regulation S-X and partially relocate its provisions to new Rule 13-01 and completely relocate Rule 3-16 into new Rule 13-02 (Rule 3-16 will continue to exist during the transition period). The Commission stated that the amendments are intended to: Improve existing Rules 3-10 and 3-16 by requiring disclosures that focus investors on the information that is material given the specific facts and circumstances and by making the disclosures easier to understand; Reduce the cost of compliance for registrants and encourage potential issuers to offer guaranteed or collateralized securities on a registered basis, thereby affording investors protections they may not be provided in offerings conducted on an unregistered basis; and Facilitate, through lower costs and burdens of compliance, issuers' flexibility to include guarantees or pledges of affiliate securities as collateral when they structure debt offerings, which may increase the number of registered offerings that include these credit enhancements and could result in a lower cost of capital and an increased level of investor protection. The amendments as adopted are substantially similar to the amendments proposed by the Commission on July 24, 2018. The amendments will be effective on January 4, 2021, but voluntary compliance will be permitted in advance of the effective date. Amendments to Rule 3-10 and New Rule 13-01 Prior to the amendments, Rule 3-10 required financial statements to be filed for all issuers and guarantors of securities that are registered or being registered, subject to several exceptions. Under the amendments, Rule 3-10 will continue to permit the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees. Similar to the existing rule, the amended rule will provide the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements. New Rule 13-01 sets forth the accompanying amended disclosure requirements, as follows: The condition that a subsidiary issuer or guarantor be 100%-owned by the parent company is replaced with a condition that it be consolidated in the parent company's consolidated financial statements; The condensed consolidating financial information, as specified in existing Rule 3-10, is replaced with certain new financial and non-financial disclosures. The amended financial disclosures will consist of summarized financial information of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented. The amended non-financial disclosures, among other matters, will expand the qualitative disclosures about the guarantees and the issuers and guarantors. Consistent with the existing rule, disclosure of additional information about each guarantor will be required if it would be material for investors to evaluate the sufficiency of the guarantee; The amended disclosures may be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings; and The amended financial and non-financial disclosures are required for as long as an issuer or guarantor has an Exchange Act reporting obligation with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding. Amendments to Rule 3-16 and New Rule 13-02 Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, based on a numerical threshold, for any class of registered securities as if the affiliate were a separate registrant. Under the amendments, the requirements in Rule 3-16 will be replaced with the disclosure requirements in new Rule 13-02 (although existing Rule 3-16 will remain in place for transitional purposes). Among other things, the amendments will: Replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with amended financial and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the consolidated financial statements of the registrant that issues the collateralized security. The registrant will be permitted to provide the amended financial and non-financial disclosures outside the footnotes to its audited annual and unaudited interim consolidated financial statements in all filings; and Replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the registered securities with a requirement to provide the proposed financial and non-financial disclosures in all cases, unless they are immaterial.

In connection with the order issued by the Securities and Exchange Commission on March 4 providing filing relief for companies that are affected by the coronavirus, the Commission reminded all companies to be vigilant regarding their disclosure obligations related to the evolving coronavirus scenario. A company’s assessment of, and plans for addressing, material risks to its business and operations resulting from the coronavirus can be material to investors, and companies are encouraged, to the fullest extent practicable, to keep investors and markets informed of material developments. As a reminder, under the federal securities laws: When a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and take steps to prevent its directors, officers and other corporate insiders who are aware of these matters from initiating such transactions until investors have been appropriately informed about the risk. When a company does disclose material information related to the impacts of the coronavirus, it should take the necessary steps to avoid selective disclosures and to disseminate such information broadly in compliance with Regulation FD. Companies should consider whether they may need to revisit, refresh or update previous disclosure to the extent that such information becomes materially inaccurate. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding the coronavirus, should take steps to avail themselves of the safe harbor in Section 21E of the Securities Exchange Act of 1934 for this information. While the need to seek filing relief due to the coronavirus will hopefully be limited to very few companies, these disclosure obligations are likely to impact most companies.

Issuers quoted on the OTCQB are now required to promptly disclose the issuance of any promissory notes, convertible notes, convertible debentures, or any other debt instruments that may be converted into a class of the issuer’s equity securities. In addition, OTCQB issuers are now required to promptly post copies on the OTC Disclosure & News Service or, if an SEC reporting company, on the SEC’s EDGAR reporting system, of the securities purchase agreement(s) or similar agreement(s) setting forth the terms of such arrangement, any related promissory notes or similar evidence of indebtedness, and any irrevocable transfer agent instructions. These new listing requirements will apply to OTCQB issuers even if applicable Canadian and U.S. laws do not otherwise require such disclosure. We have been informed by the OTC that redacting personal information is permitted and if there are multiple investors that have signed identical agreements, only the “form of” the relevant agreement needs to be filed. Investors’ names are required to be disclosed unless there are multiple identical definitive agreements and the issuer elects to file only the “form of.” Issuers should ensure that any confidentiality clauses in the relevant agreements are drafted taking into account these new disclosure requirements. In addition, issuers are now required as part of their initial and annual OTCQB Certification to list out promissory notes, convertible notes, convertible debentures, or any other debt instruments that may be converted into a class of the issuer’s equity securities that were issued or outstanding at any time during the last completed fiscal year and any interim period between the last fiscal year end and the date of the OTCQB Certification. The updated form of OTCQB Certification can be found at the following link: otcmarkets.com/files/OTCQBCertificationTemplate.docx.

For many mining and infrastructure projects in the United States, a primary cause of permitting uncertainty, expense, and delay is compliance with the environmental review process under the National Environmental Policy Act (NEPA). On January 10, 2020, the Council on Environmental Quality (“CEQ”) proposed comprehensive revisions to the regulations implementing the NEPA. 85 Fed. Reg. 1684. NEPA documentation is generally required for any project, public or private, that requires approvals from the federal government. The proposed revisions to the NEPA regulations are part of the Trump administration’s efforts to streamline their NEPA review processes. The proposed regulatory revisions include the following changes, among others: More Exemptions from NEPA Review – The proposed rules encourage expanded use of categorical exemptions, which exclude projects for the environmental review requirements of NEPA. In addition, the proposed rules require that the governmental agency making a permitting decision undertake a “threshold NEPA applicability analysis” to formally determine whether NEPA applies. The rules also propose to define a new category of “non-major” federal actions that have minimal federal involvement or funding and do not require NEPA review. Revisions to front-load public comments and strengthens waiver defenses – CEQ proposes to require agencies to solicit public input on alternatives, impacts, and information early in the process following the preparation of the Notice of Intent to Prepare an EIS (“NOI”). If commenters fail to provide information in response the NOI, they may be subject to a waiver defense if they try to bring up new issues they could have raised at the NOI stage. Limits on agency jurisdiction – The proposed rules provide that agencies are not required to analyze environmental effects and alternatives over which they have no jurisdiction or control. In addition, the new regulations would eliminate the distinction between “direct” and “indirect” effects, and require agencies to only analyze those impacts that have a “reasonably close causal connection to the proposed action and alternatives.” Elimination of Requirement to Analyze Cumulative Effects – CEQ proposes to eliminate the need to analyze cumulative effects, on the grounds that it is not required under the statute, and such analyses have been difficult, confusing, and unhelpful to decision makers. Timing and Page Limits – The new regulations would impose a 75 page/1 year time limit for Environmental Assessments, and a 300 page/2 year limit for EIS’s, which could only be waived in writing by agency official at the Assistant Secretary level or higher. Greater Role for Applicants and Contractors – The proposed regulations would eliminate many of the current restrictions on the role of the applicant and contractor(s) in preparing NEPA documents. Applicants and contractors would be able to directly prepare and submit draft NEPA documents for agency review, under agency guidance. The agency must still certify that it independently reviewed and adopted the information provided. The CEQ has requested public comments on the proposed regulations, which must be received by CEQ no later than March 10, 2020. The proposed rules and opportunity to comment present a valuable opportunity for Canadian companies with mining or infrastructure projects in the United States and other interested parties to help influence the revisions to the NEPA regulation. CEQ will be under significant political pressure to finalize the regulations before the 2020 election, and early enough to minimize exposure under the Congressional Review Act. Dorsey regularly represents companies in rulemaking processes through the submission of comments that communicate to the regulatory agencies our clients’ concerns and objectives. If you have any questions or would like to learn more about participating in this important comment process, please contact us.

A recent trend in U.S. employment law has been the adoption of stricter and stricter tests for when a worker may be classified as an independent contractor rather than an employee. Independent contractor relationships are often less expensive and easier for employers to administer since employers are not responsible for providing healthcare benefits to independent contractors and do not have to pay employment taxes for their independent contractors. Many workers also prefer to be classified as independent contractors because they believe that they will have more freedom to work on behalf of multiple customers as independent contractors.[1] The actual legal test for whether a worker may be classified as an independent contractor varies significantly from state to state. While some states apply what is referred to as the “Control and Direction Test,” which, as the name suggests, puts a significant emphasis on the degree to which the company controls the manner in which the putative contractor’s work is performed, many U.S. states apply what is called the “ABC Test,” which is far stricter. States applying some version of the ABC test include California, Connecticut, Delaware, Illinois, Indiana, Massachusetts, Nebraska, Nevada, New Hampshire, New Jersey, Vermont, Washington, and West Virginia. The first part of the ABC test begins with the same concept as the “Direction and Control Test,” but applied more strictly. The worker must be free from control or direction by the company, both under the terms of the parties’ contract and as a matter of reality. U.S. courts repeatedly emphasize that it is the reality of the worker’s work for the company that matters, not just what the parties’ contract says. If the parties’ contract prohibits the company from exercising direction or control over the worker, but the company’s agents and employees in fact exercise such control, the worker will be deemed an employee not an independent contractor. The second part of the ABC test requires that the worker perform work that is outside the usual course of the hiring entity’s business. Put another way, the work the worker is performing for the company cannot be the same work that the company is primarily engaged in for its customers. For example, a company in the business of installing cable windows could not hire a worker to install windows as an independent contractor. However, a company in the financial services industry could hire a window installer as an independent contractor to install windows in buildings it owns or leases. The third part of the ABC test requires that the worker be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company. Put another way, the worker needs to have his or her own ongoing business with multiple customers and the work done for the company has to be the same kind of work the worker’s own separate business engages in on behalf of other customers. To refer back to the example in the second part of the test, the window installer needs to have his or her own separate business installing windows for other customers. The consequences for misclassifying workers as independent contractors can be dire. Many misclassified workers work long hours and can rack up substantial overtime. That computer programmer you retained as an independent contractor for $5,000 a week to assist with a project at crunch time and who worked 70 hours a week for 10 weeks could be owed an additional $32,000 over the $50,000 you already paid. What is worse, if you did not track the worker’s hours, a U.S. court will presume that the number of hours the worker claims to have worked is accurate. You could end up paying for 80 hours of work a week even if the worker only worked 60. In addition, companies will be held liable for unpaid employment taxes and, if the IRS thinks you intentionally misclassified workers, criminal penalties of up to a year in jail and up to a $500,000 fine. Companies that are required to comply with the Affordable Care Act will have to pay additional penalties for failing to provide health care coverage to employees where required. The independent contractor test in the United States is often significantly more strict than that in Canada. Canadian companies looking to retain independent contractors for their U.S. operations should take care to familiarize themselves with the increasingly strict independent contractor test in the United States. Those that ignore their independent contractor ABCs could face substantial liability. [1] This belief is actually erroneous. An employer and an employee can agree that the employee is free to work for other employers.

On January 17, 2020, the Committee on Foreign Investment in the United States (“CFIUS”) published two new rules that will greatly expand the scope of minority investments by foreign persons in U.S. businesses that are subject to CFIUS review. The rules take effect on February 13, 2020. Importantly for certain Canadian investors, the rules include an exemption for the next two years. These new rules implement changes in U.S. law mandated by Congress in its 2018 Foreign Investment Risk Review Modernization Act (“FIRRMA”). The first rule expands coverage over minority investments by foreign persons in U.S. businesses that involve critical technologies, critical infrastructure, or sensitive personal data (as those terms are defined in the rules). Depending on the investor involved and the nature of the U.S. business, the parties to the transaction are required to either submit a “mandatory declaration” to CFIUS 30 days before closing or file a voluntary notice with CFIUS. If the investment is subject to this new rule and the parties fail to file a declaration with CFIUS, CFIUS could impose a potential civil penalty in an amount equal to the entire transaction value (and the deal could be potentially unwound if CFIUS were to determine there was a national security threat). For two years from the rule’s effective date, CFIUS will exempt certain investors from Canada, Australia, and the United Kingdom. However, not all Canadian, Australian, and U.K. investors will benefit from this exemption. The exemption expressly excludes foreign individuals with non-exempt dual nationalities; firms that exceed certain thresholds for foreign ownership, board membership, or voting interests held by persons with non-exempt nationalities; investors who fall under any of the listed national security-related exclusions; and certain investors who lose eligibility for the exemption within three years after completing the relevant transaction. The second rule addresses foreign investments in most forms of real estate. In general, a foreign real estate investment will now be subject to scrutiny if it involves properties located within, or that function as part of, major U.S. airports or seaports, or that are within one mile (about 1.6 km) of a listed military installation in urban environments. Further, outside of urban areas, this “proximity” standard under the new real estate rule extends up to 100 miles (about 160 km) from certain U.S. military facilities and, in certain instances, includes entire counties of a U.S. state. This real estate rule contains the same exemption for Canadian, Australian and U.K. investors and is subject to the same express exclusions as noted for the first new rule. Foreign investors should understand that both of these new CFIUS rules are in addition to its previous well-known jurisdiction over investments that transfer control of a U.S. business to a foreign party. Moreover, that existing jurisdiction over change-of-control transactions does not contain the above carve-out for Canadian, Australian or U.K. investors. For more information about the new CFIUS rules, please see this synopsis of the proposed texts released in late 2019 (and which remain mostly unchanged in the final rules as promulgated): dorsey.com/newsresources/publications/client-alerts/2019/10/cfius-proposed-regulations-expanding-jurisdiction.

On January 30, 2020, the SEC issued new guidance on the use of metrics in a company’s MD&A, as well as proposed amendments that would significantly simplify and modernize the requirements for MD&A and related financial disclosures. The guidance and proposed amendments will be of most interest to companies that file with the SEC on Form 20-F or 10-K. For more details, see governancecomplianceinsider.com/sec-provides-guidance-on-the-use-of-metrics-in-mda-also-proposes-amendments-to-simplify-and-modernize-mda-and-related-financial-disclosures/.

The OTC Markets Group published this week proposed amendments to the OTCQX Rules for U.S. Companies, U.S. Banks and International Companies. The rules will become effective on December 12, 2019; comments will be accepted until December 11, 2019. To qualify for the OTCQX, International Companies must, among other qualifications, have a class of securities traded on a Qualified Foreign Exchange (includes the Toronto Stock Exchange, the TSX Venture Exchange and the Canadian Securities Exchange), be an SEC Reporting Company or be a Regulation A Reporting Company. The proposed rules contain several amendments for International Companies, which will be the focus of this update. First, if an International Company applying to trade on the OTCQX is not listed on a Qualified Foreign Exchange, the applicant must meet the following corporate governance requirements: Have a board of directors that includes at least two independent directors, meeting the qualifications in the OTCQX proposed rules; Have an audit committee, a majority of the members of which are independent directors; and Conduct annual shareholders’ meeting and make annual financial reports available to shareholders at least 15 calendar days prior to such meeting. A company must continue to comply with the corporate governance requirements to maintain its eligibility on the OTCQX. International Companies with securities not listed on a Qualified Foreign Exchange that are traded on the OTCQX when the proposed rules become effective will not need to comply with the corporate governance requirements until January 1, 2021. Second, applications to the OTCQX will now include Background Check Authorization Forms. This form will authorize the OTC Markets Group to conduct background checks during the application process on certain persons associated with the companies applying to be on the OTCQX. Third, with some limited exceptions, companies applying to be on the OTCQX must have an OTCQX Sponsor that has been approved by the OTC Markets Group to deliver a Letter of Introduction. Dorsey & Whitney LLP is an approved OTCQX Sponsor. Under the proposed rules, a company that trades on a Qualified Foreign Exchange or that has been an SEC Reporting Company and publicly traded for at least one year might be able to rely on a Letter of Introduction from its primary outside securities counsel under certain limited circumstances. Fourth, Canadian companies that are on the OTCQX must retain a transfer agent that participates in the Transfer Agent Verified Shares Program. This program has been required for U.S. Companies for several months, but the proposed rules extend the requirement to Canadian companies. Many Canadian transfer agents are already part of the program, but it will be important to confirm that the company’s current transfer agent has opted into this program. Finally, the proposed rules modify the initial disclosure obligations. Under the proposed rules, a company will be required to disclose annual reports for the prior three years (or such shorter time as the company has been in existence) and any interim reports released during the prior three years. For Canadian issuers, we would recommend filing annual audited financial statements, the annual MD&A and the Annual Information Form, if applicable, in order to comply with the annual report requirement. Additionally, a company must disclose all other material disclosures made after its last annual report. In addition to the application changes, the OTC Markets Group made one significant change to the ongoing responsibilities of a company to maintain eligibility on the OTCQX. Companies are now required to notify the OTC Markets Group if a Change of Control occurs. A Change of Control is defined as any event that results in: (i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becoming the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; (ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; (iii) A change in the composition of the Company’s board of directors occurring within a two (2) year period, as a result of which fewer than a majority of the directors are directors immediately prior to such change; or (iv) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation. If a Change of Control occurs, the Company is required, within 20 calendar days of the change, to notify the OTC Markets Group by submitting a Change of Control Notification as well as a new OTCQX Application and application fee. Failure to notify the OTC Markets Group may result in suspension or removal from the OTCQX. If the proposed rules are adopted, OTCQX companies will need to pay particular attention to calculating whether any change in the composition of the board of directors, combined with other changes over the preceding 24 months, constitutes a Change of Control under part (iii) of the test.

On September 17, 2019, the Financial Post reported that British Columbia Investment Management Corporation (BCIMC), one of Canada’s largest pension funds, inadvertently failed to report to the U.S. Securities and Exchange Commission (SEC) $2.46 billion of its holdings in 98 Canadian companies, accounting for more than 20 percent of the investments required to be reported to the SEC. The reason – it appears that BCIMC’s investments in Canadian companies that report with the SEC (often referred to as “cross-listed” companies) were inadvertently omitted. The Financial Post reported that this was not the first time BCIMC had made errors in its SEC filings, citing a series of prior amendments filed to correct data from 2010 to 2015. The ramifications for BCIMC are currently uncertain. The first step in avoiding this type of mistake is being aware that a Canadian investor may be required to file reports with the SEC regarding certain of its investments – not just investments in U.S. public companies, but also investments in Canadian securities that are listed on a U.S. national securities exchange, such as the NYSE, the NYSE American, or Nasdaq, or that are otherwise subject to ongoing SEC reporting requirements. The second step is to learn about investor-side SEC reports and their different triggers. For example, a Canadian investor may be required to file with the SEC, among other things: Form 13F.  Any institutional investment manager (including both an entity that invests for its own account, and an individual or entity that exercises investment discretion over others’ accounts) that exercises investment discretion over US$100 million or more in equity securities that are registered with the SEC under Section 12 of the Securities Exchange Act of 1934, equity securities of closed-end investment companies and certain other equity securities (collectively referred to as Section 13(f) Securities), and that uses any instrumentality of U.S. commerce in the course of its business, must file quarterly reports with the SEC on Form 13F, reporting its holdings in all Section 13(f) Securities. Section 13(f) Securities include securities of Canadian companies that are cross-listed on the NYSE, the NYSE American or Nasdaq, or that are otherwise the subject of SEC reporting obligations. Therefore, a Canadian investment manager may become subject to Form 13F filing requirements even if it invests exclusively in securities of Canadian companies. Schedules 13D or 13G.  Any person, wherever located, that beneficially owns more than 5% of a class of Section 13(f) Securities, including any class of Canadian securities that is a Section 13(f) Security, must file beneficial ownership reports on either Schedule 13D or 13G regarding this specific holding. In determining whether a person beneficially owns more than 5% of a class, the person’s ownership must be calculated as if the person had exercised any options, warrants and other rights that the person is permitted to exercise within the next 60 days. Form 13H.  Any person that is a large trader of NMS securities must periodically file a Form 13H with the SEC. NMS securities include securities listed on a U.S. national securities exchange, such as NYSE, the NYSE American or Nasdaq, and certain related securities. A large trader is a person that effects transactions in NMS securities, as principal or as agent, using any instrumentality of U.S. commerce or the facilities of any U.S. national securities exchange, in an aggregate amount equal to or greater than (i) during one day, either two million shares or shares with a fair market value of US$20 million, or (ii) during one month, either twenty million shares or shares with a fair market value of US$200 million. Forms 3, 4 and 5.  Any person, wherever located, that is a director or executive officer, or the beneficial owner of more than 10% of any class of equity securities, of a “domestic issuer” that is registered with the SEC pursuant to Section 12 of the Securities Exchange Act, but excepting certain passive institutional investors, must file beneficial ownership and trading reports on these forms. While most Canadian cross-listed issuers are not considered “domestic issuers,” some Canadian companies (typically those that file SEC reports on Forms 10-K, 10-Q and 8-K) are, due to their level of U.S. ownership and other U.S. ties. The third step is to work with counsel to understand, in greater depth than this post can provide, whether the investor may be required to file any of these forms. Counsel can discuss with you corporate and decision-making structures and investment limits that can help restrict the circumstances requiring a report, as well as the information required to be included in reports, and how best to ensure the required information is gathered, processed, and filed on a timely basis. Investment managers with large and diverse portfolios often have the most significant work to do, due to the number of their public investments.

As reported earlier today on our Cannabis blog, the Delaware Secretary of State’s office is now threatening to prevent the formation of companies that it identifies as having the purpose of being involved in the cannabis industry. For more information, see dorseycann.com/delaware-takes-action-against-formation-of-cannabis-companies/.

In November 2018, the U.S. Securities and Exchange Commission (SEC) adopted new mining disclosure standards applicable to all SEC reporting companies, except those that report exclusively under the Multijurisdictional Disclosure System (MJDS). While the new rules will not take effect until 2021, that date is quickly approaching. Mining and mineral royalty companies should brook no further delay in their preparations. Below are a few of the important steps to get ready to comply with the new standards: Determining whether the company must or should comply with the SEC’s new requirements.  Does the company file a Form 20-F or Form 10-K annual report with the SEC? If the company files on MJDS Form 40-F, how certain is it that the company will remain MJDS eligible, will remain a foreign private issuer, and will not need to use any non-MJDS registration forms? Does the company envision a future U.S. registration and listing? Does it have joint venture or other partners that will require an SEC-compliant technical report? Will an SEC-compliant technical report be useful for other reasons, such as marketing the property, the company, or a royalty on the property? Updating technical reports, as necessary.  If an SEC-compliant technical report will be required, or useful, a company’s qualified persons (QPs) under Canada’s National Instrument 43-101 (43-101) will need to be advised. The company will need to confirm whether the existing QPs are eligible to be QPs under SEC standards and whether they have a sufficient understanding of the new SEC rules to update the technical reports as required. A timeline and budget will need to be agreed with the QPs. In updating the reports, the QPs will need to determine whether the methodology used and determinations made under 43-101 are consistent with the new SEC standards and add to the report all SEC-mandated disclosures. Companies that are commissioning new technical reports may avoid the need for amendments by ensuring the standards used for the initial report satisfy both 43-101 and the SEC rules. Evaluating the agreements between the company and its QPs regarding the provision of any necessary expert consents.  While QPs named in certain SEC filings have long been required to provide expert consents, this requirement will expand to additional forms. The passage of the SEC’s new rules has increased awareness among QPs and within large engineering firms of the potential liability associated with being named as a QP. Some engineering firms have already started to push back, in a manner similar to audit firms, requiring new engagements or assurance procedures as a condition to providing a consent or resisting consent in situations in which they feel exposed. Companies should evaluate any existing agreements with their QPs regarding the provision of expert consents and consider whether changes may be appropriate to help ensure that such consents can be reliably obtained for a reasonable cost. Planning for new disclosures in SEC filings.  Companies that file on non-MJDS forms such as Form 20-F or Form 10-K should begin to map out the other technical disclosures that will need to appear in their SEC annual reports and other filings. For companies not already subject to 43-101, this may include obtaining technical reports for the first time. Quality assurance.  Mining companies have long asked their Canadian counsel for assistance in working with QPs, reviewing draft technical reports, and reviewing other technical disclosures to help verify compliance with 43-101. Companies subject to the SEC rules should now involve U.S. counsel in a similar manner and allow additional time for review of the technical disclosure as a result of the newness of the rules.