Canadian companies increasingly look south of the border for growth capital, drawn by deeper U.S. markets and sophisticated investor bases. However, navigating U.S. securities laws requires careful attention to both registration exemptions and broker-dealer requirements.
U.S. securities laws require registration of all securities offerings unless a specific exemption applies. For Canadian issuers, full SEC registration involves significant time, cost, and ongoing compliance obligations that may not align with immediate capital needs or business timelines. The key exemptions include:
Section 4(a)(2) – Private Offering Exemption
This is the original statutory exemption that allows companies to raise unlimited capital from sophisticated investors without registration but requires careful legal analysis since there are no bright-line rules to follow to follow without safe harbor protection. As the statutory foundation for private offerings, it requires careful fact-specific analysis and creates the conceptual framework that underlies all modern private placement exemptions.
Unlike Canadian prospectus exemptions which provide clear numerical thresholds (such as the $150,000 minimum investment exemption), Section 4(a)(2) relies on judicial interpretation and SEC guidance, making it inherently less predictable but more flexible for sophisticated transactions.
The following are the requirements for the private offering exemption:
Offeree Sophistication: Each offeree must have sufficient knowledge and experience to evaluate the investment’s merits and risks, or access to such information through advisors. Courts apply the “fend for himself” standard. This standard is more subjective than Canadian “accredited investor” definitions, requiring case-by-case analysis of each investor’s business experience, financial knowledge, and ability to bear economic risk.
Access to Information: Offerees must have access to the same type of information available in a registration statement, or the issuer must reasonably believe they have such access – typically satisfied through comprehensive private placement memoranda and management presentations. This requirement often exceeds Canadian disclosure obligations under NI 45-106, necessitating more detailed risk factor analysis and financial statement presentation.
Investment Intent: Purchasers must acquire securities for investment, not immediate distribution – demonstrated through investment letters and transfer restrictions. Canadian securities laws similarly require investment intent, but U.S. practice demands more detailed documentation of holding period intentions and resale restrictions.
Limited Numbers: While no bright-line test exists, courts typically scrutinize offerings with more than 25-35 offerees – count includes all persons approached, not just purchasers. This contrasts sharply with Canadian exemptions that focus on purchaser qualifications rather than the total number of persons solicited.
No General Solicitation: Marketing limited to pre-existing relationships – “substantial relationship” test requires meaningful prior contact.
Documentation: Comprehensive private placement offering memorandum with registration-quality disclosure, including detailed business model analysis, comprehensive risk factors, competitive landscape assessment, and management compensation details that often exceed Canadian OM requirements; investor questionnaires establishing sophistication and accredited status with more detailed financial and experience verification than typically required under Canadian regulation; investment representation letters confirming investment intent and resale restrictions; and a subscription agreement with detailed representations and warranties.
Rule 506(b) – Private Placement Safe Harbor
This safe harbor rule provides clear guidelines for private placements, allowing unlimited fundraising from accredited investors plus up to 35 sophisticated non-accredited investors, with no general advertising permitted. Rule 506(b) serves as the practical workhorse for most private placements, offering greater certainty than Section 4(a)(2) while maintaining flexibility for sophisticated offerings.
The rule’s structure mirrors certain Canadian exemptions but with more rigorous verification requirements. While Canadian regulations often rely on investor self-certification, Rule 506(b) places greater due diligence burdens on issuers to verify investor qualifications.
Rule 506(b) provides certainty through specific compliance requirements:
Accredited Investor Definition: Natural persons with $1+ million net worth (excluding primary residence) or $200K+ annual income ($300K+ joint) – updated definitions include certain professionals and knowledgeable employees.
Non-Accredited Investor Limits: Maximum of 35 purchasers who must be sophisticated (able to evaluate investment merits) – issuer bears burden of demonstrating sophistication. This mixed investor class approach is unique to U.S. regulations; Canadian exemptions typically require all investors to meet specific qualification criteria without allowing sophisticated but non-accredited participants.
Disclosure Obligations: For non-accredited investors, issuers must provide audited financial statements and information comparable to Part I of Form S-1 – which creates a two-tier disclosure system. This tiered disclosure requirement is more complex than Canadian systems, which generally apply uniform disclosure standards regardless of investor accreditation status.
Form D Filing: Issuers must file within 15 days of first sale – failure doesn’t destroy exemption but triggers SEC enforcement risk.
Bad Actor Disqualification: Comprehensive background checks required for covered persons – includes issuer, predecessors, affiliates, directors, officers, and 20%+ shareholders.
Rule 506(c) – General Solicitation Permitted
Rule 506(c) represents a significant departure from traditional private placement restrictions, allowing public advertising and general solicitation in exchange for enhanced investor verification requirements. This exemption is particularly valuable for Canadian issuers seeking to access broader U.S. investor networks through digital marketing and public presentations. Enhanced verification requirements in exchange for marketing flexibility:
Reasonable Steps Standard: Issuers must take reasonable steps to verify accredited investor status – objective standard based on facts and circumstances. This verification standard is significantly more rigorous than Canadian self-certification approaches, requiring documentary evidence and third-party confirmations.
Acceptable Verification Methods: Tax returns, W-2s, 1099s for income tests; bank/brokerage statements, appraisals for net worth test; written confirmation from a registered broker-dealer, investment adviser, licensed attorney, or CPA. Third-party confirmations must be dated within 90 days. Existing accredited investor certifications (with limitations) – the issuer cannot rely solely on investor self-certification.
Regulation S – Offshore Safe Harbor
This exemption allows Canadian companies to raise capital outside the U.S. without any registration requirements, provided they implement procedures to ensure no U.S. persons participate and observe a 40-day restriction period. Regulation S is particularly valuable for Canadian issuers conducting concurrent offerings in multiple jurisdictions, as it provides a clear framework for excluding U.S. persons while accessing international capital markets.
Requirements (Category 2) typical for Canadian issuers include:
40-day distribution compliance period: During this time, securities cannot be sold to U.S. persons – begins from later of offering commencement or last allotment.
Offering restrictions: No directed selling efforts in the U.S. – includes advertising, seminars, or other promotional activities targeting U.S. markets.
Purchaser representations: Confirmation of non-U.S. person status – requires reasonable procedures to verify offshore status by the issuer.
Resale restrictions: Appropriate legends and transfer restrictions – the issuer must prevent flowback during compliance period.
Rule 144A – Institutional (QIB) Market Access
This exemption targets large institutional investors (those with $100+ million in assets) and provides access to a liquid secondary trading market, making it ideal for larger offerings to sophisticated institutions.
QIB requirements include:
$100 million threshold: Institutions must own/invest at least $100 million in securities of non-affiliates – calculated on discretionary basis for investment managers.
Information rights: Reasonable current information must be available to holders and prospective purchasers – satisfied through ongoing reporting or upon request basis.
Rule 144 – Resale Safe Harbor
Rule 144 provides the critical bridge between private placements and public trading, establishing the framework for resale of restricted securities. For Canadian issuers, Rule 144 compliance is essential for maintaining investor liquidity expectations and supporting secondary market development.
The key requirements for resale safe harbor are:
Holding Period: Minimum one-year holding period for securities acquired in private placements from reporting companies; two years for non-reporting companies (Canadian issuers without SEC reporting obligations typically fall into this category).
Current Information: Issuer must have current public information available (Form 10-K, 10-Q, 8-K filings or equivalent) – Canadian issuers can satisfy this through continuous disclosure filings in Canada if properly structured.
Volume Limitations: Sales limited to 1% of outstanding shares or average weekly trading volume over preceding four weeks – requires careful coordination with Canadian market trading patterns
Manner of sale: Sales must be conducted in ordinary brokerage transactions without solicitation – prohibits special selling efforts or premium pricing arrangements.
Notice requirements: Form 144 filing required for sales exceeding specified thresholds – creates ongoing compliance obligations for selling.
For Canadian companies, the U.S. capital markets offer unparalleled depth and sophistication, but success requires understanding that U.S. securities regulation operates on different principles than Canadian law. Canadian issuers must carefully structure their U.S. private placements to facilitate US securities compliance, including maintaining appropriate disclosure standards and coordinating with Canadian securities law requirements.
For more insights on cross-border securities offerings and U.S. capital markets access, contact Robb Miller at rmiller@baxsecuritieslaw.com or Barbara Hendrickson at bhendrickson@baxsecuritieslaw.com.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.