The U.S. Securities and Exchange Commission (SEC) had a busy rulemaking year in 2015.
Consistent with the reforms that began in 2012 with the Jumpstart Our Business Startups Act,
Congress and the SEC continued their push to improve access to capital across the spectrum of
issuers – from small private enterprises raising capital through crowdfunding to more mature
companies preparing for an IPO. The SEC also proposed new rules for resource extraction
issuers under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act). This update provides an overview of the following significant U.S. securities law and
regulatory developments in 2015:
1. The FAST Act: Improving the registration process for emerging growth companies
2. The FAST Act: New exemption for private resales to accredited investors
3. Regulation A: Expanded capital-raising alternatives for non-reporting U.S. and Canadian
4. Pay ratio disclosure rule for reporting U.S. issuers
5. Crowdfunding regulation for non-reporting U.S. issuers
6. Proposed new rules for all reporting U.S. and foreign resource extraction issuers
7. Proposed new rules requiring U.S. securities exchanges to adopt listing standards
requiring all U.S. and foreign listed companies to adopt and implement policies to
recover erroneously awarded executive compensation
Although some of these rules are applicable only to U.S. issuers, we believe that these
developments should be of interest to market participants abroad, as well as Canadian issuers
and their advisers.
1. The FAST Act: Improving the Registration Process for Emerging Growth Companies
The Fixing America's Surface Transportation Act (FAST Act) enacted on December 4, 2015,
contains several legislative amendments that will help improve the registration process for
emerging growth companies (EGCs). For example, for an EGC that has confidentially submitted
its registration statement to the SEC for review, the FAST Act reduces the period of time that
the issuer must wait before it may commence its initial public offering (IPO) road show after it
publicly files its registration statement with the SEC. And to help reduce IPO costs, the FAST
Act contains a long-awaited amendment enabling EGCs to omit from their preliminary
registration statements certain financial information, and it mandates the SEC to review and
simplify the extensive disclosure requirements in Regulation S-K.
2. The FAST Act: New Exemption for Private Resales to Accredited Investors
The FAST Act added a new section 4(a)(7) to the Securities Act of 1933, as amended (the
Securities Act), which provides a non-exclusive safe harbor exemption that will help facilitate
private resales of securities by shareholders to accredited investors if certain conditions are
3. Regulation A: Small Company Capital Formation
On March 25, 2015, the SEC adopted final rules to amend Regulation A under the Securities
Act to modernize and expand the framework for capital-raising by smaller companies.
Regulation A is available to U.S. and Canadian entities that have their principal place of
business in the United States or Canada and are not subject to SEC reporting obligations under
the Securities Exchange Act of 1934, as amended (Exchange Act). The types of securities that
may be offered under Regulation A are limited to equity securities, debt securities and debt
securities convertible into or exchangeable into equity securities, including any guarantees of
4. Pay Ratio Disclosure Rule
On August 5, 2015, the SEC adopted final rules to amend Item 402 of Regulation S-K under the
Securities Act to require most SEC-registered U.S. companies to disclose the ratio of the
compensation of their chief executive officer (or any equivalent position) to the median
compensation of their other employees. Foreign private issuers, Canadian multijurisdictional
disclosure system (MJDS) filers, smaller reporting companies and EGCs are exempt from
providing pay ratio disclosure.
5. Regulation Crowdfunding
The SEC adopted Regulation Crowdfunding in October 2015 to address evolving methods of
raising capital through the Internet. These rules, which will become effective on May 16, 2016,
allow individuals to invest in securities through crowdfunding transactions, subject to certain
investment limits. The rules also limit the amount of funds an issuer can raise using the
crowdfunding exemption, require issuers to disclose certain information about their business
and securities offerings, and create regulatory frameworks for the broker-dealers and funding
portals that facilitate the crowdfunding transactions.
6. Resource Extraction Proposal
In December 2015, the SEC proposed Rule 13q-1 and an amendment to Form SD. The
proposed rules would require all Exchange Act reporting issuers, including Canadian and other
foreign companies, that are engaged in the commercial development of oil, natural gas or
minerals to report information about payments made to the U.S. federal government or foreign
governments that are related to the commercial development of these resources. The stated
purpose of the rule is to increase the transparency of payments made by these companies to
governments in order to help combat global corruption and empower citizens of resource-rich
countries to hold their governments accountable for the wealth generated by those resources.
7. Proposed Rule 10D-1: Listing Standards for the Recovery of Erroneously Awarded
On July 1, 2015, the SEC proposed a new rule to implement section 954 of the Dodd–Frank
Act. Under proposed Rule 10D-1, U.S. national securities exchanges must adopt listing rules
that will require all listed issuers, including Canadian companies and other foreign private
issuers, to adopt, publicly disclose and implement written policies to recover from the issuer's
current and former executive officers any incentive-based compensation received that was
based on materially erroneous financial information.
The FAST Act: Improving the Registration
Process for Emerging Growth Companies
The Fixing America's Surface Transportation Act (FAST Act) enacted on December 4, 2015,
contains several legislative amendments that will help improve the registration process for
emerging growth companies (EGCs).1 For example, for an EGC that has confidentially
submitted its registration statement to the U.S. Securities and Exchange Commission (SEC) for
review, the FAST Act reduces the period of time that the issuer must wait before it may
commence its initial public offering (IPO) road show after it publicly files its registration
statement with the SEC. And to help reduce IPO costs, the FAST Act contains a long-awaited
amendment enabling EGCs to omit from their preliminary registration statements certain
financial information, and it mandates the SEC to review and simplify the extensive disclosure
requirements in Regulation S-K.
Reduced Waiting Period Before the Road Show
Under the Jumpstart Our Business Startups Act, an EGC may confidentially submit to the SEC
a draft registration statement for review so long as that registration statement and all
amendments thereto are publicly filed with the SEC no later than 21 days before the EGC
commences its IPO road show. The FAST Act reduces the wait period to 15 days, from 21 days.
Reduced IPO Costs: Company May Omit Certain Financial Information from Initial SEC
Filing or Submission
The FAST Act allows an EGC that is filing (or confidentially submitting) a Form S-1 or Form F-1
registration statement to omit from the registration statement annual audited financial
information that relates to a prior fiscal year if the issuer reasonably believes that the omitted
information need not be included in the registration statement at the time of the contemplated
offering. To take advantage of this potential cost-saving measure, the issuer must, prior to
distributing a preliminary prospectus, amend its registration statement to include all financial
information that is required under the rules at the time of amendment. The amendment should
help reduce IPO costs for some issuers by eliminating the need to incur audit fees and other
incremental costs associated with including audited financial statements for a prior year that will
not be included in the IPO prospectus.
1 An "emerging growth company" is defined as an issuer that has not completed an IPO of common
equity securities prior to December 9, 2011, and that had "total annual gross revenues" of less than US$1
billion during its most recently completed fiscal year. An issuer's EGC status terminates on the earliest of
(i) the last day of the first fiscal year of the issuer during which it had total annual gross revenues of US$1
billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of
the issuer's initial public offering; (iii) the date on which the issuer has issued more than US$1 billion in
non-convertible debt during the previous three-year period; and (iv) the date on which the issuer is
deemed to be a "large accelerated filer" under the Securities Exchange Act of 1934, as amended
(Exchange Act) (i.e., it has a public float of at least US$700 million and has been a reporting issuer for at
least one year).
For example, an EGC whose a fiscal year coincides with the calendar year and is planning an
IPO in 2017 after its 2016 annual audited financial statements become available may omit its
2014 annual financial statements from a registration statement that it files with (or confidentially
submits to) the SEC before its 2016 annual audited financial statements become available.
Prior to distributing a preliminary prospectus in 2017, the issuer will need to file an amended
registration statement that includes the required 2015 and 2016 annual audited financial
statements. The amendment enables the issuer in this example to avoid incurring incremental
costs (that would have otherwise been incurred) to include its 2014 financial statements in the
earlier version of the registration statement.
An EGC will not be able to omit from its registration statement interim financial information that
will be replaced in a subsequent amended filing at the time of the offering with more recent or
updated financial information covering a subsequent interim or annual period. For example, in
the case of the calendar year EGC discussed above that is planning an IPO in 2017 after its
2016 annual audited financial statements become available, that issuer may not omit its ninemonth
2016 interim financial statements from a prior SEC filing (or confidential submission)
because those financial statements include relevant financial information relating to the 2016
fiscal year that will be covered in the issuer’s 2016 annual audited financial statements, which
must be included in the registration statement at the time of the offering.
Relief for an Issuer that Ceased to Qualify as an EGC During the SEC Review Process
The FAST Act enacts a "grace period" for an issuer that qualified as an EGC when it initiated its
IPO registration process (either by confidentially submitting or publicly filing its IPO registration
statement), but subsequently ceased to qualify as an EGC. Such an issuer is now
"grandfathered" as an EGC until the earlier of the consummation of its IPO and the expiration of
one year after ceasing to be an EGC. This amendment will permit such an issuer to continue
with the confidential review process (rather than having to prematurely publicly file its IPO
registration statement to continue the review process) and comply with the rules and regulations
applicable to non-EGC issuers during the review process.2
Forward Incorporation for Smaller Reporting Companies
The FAST Act requires the SEC to revise the Form S-1 registration statement to permit a
smaller reporting company (generally, an issuer with a public float of less than US$75 million) to
incorporate by reference into the registration statement any reports that such issuer files with
the SEC after the effective date of such Form S-1.3 This change should eliminate the additional
costs and time incurred by smaller reporting companies (that are not eligible to use Form S-3 or
2 Prior to the FAST Act, if that issuer confidentially submitted its IPO registration statement to the SEC for
review and later ceased to qualify as an EGC during the SEC review process, the issuer was required to
(i) publicly file its IPO registration statement to continue the review process and (ii) comply with the rules
and regulations applicable to non-EGC issuers. Only EGCs that publicly filed their IPO registration
statement before they ceased to qualify as an EGC during the SEC review process could continue to rely
on the EGC rules through the effective date of their registration statement.
3 Under the previous rules, registration statements on Form S-1 that were declared effective could be
updated only by filing post-effective amendments because forward incorporation by reference to
subsequent Exchange Act filings was permitted only on short-form registration statements on Form S-3 or
F-3 registration statements) by enabling them to keep their registration statements on Form S-1
current for continuous offerings that commence promptly after effectiveness and continue for a
period in excess of 30 days after effectiveness.4
In January 2016, the SEC approved interim final rules implementing the required changes to
Form S-1. The interim final rules contain certain eligibility requirements that must be satisfied for
a smaller reporting company to forward incorporate by reference.5 For instance, as is the case
with historical incorporation by reference, in order to utilize forward incorporation by reference, a
smaller reporting company must have filed under the Exchange Act (i) an annual report for its
most recently completed fiscal year and (ii) all required reports and materials during the 12
months immediately preceding filing of the Form S-1 (or such shorter period in which the smaller
reporting company was required to file such reports and materials).
Simplified Disclosure Requirements in Registered Offerings: SEC Must Examine
By June 1, 2016, the SEC must revise Regulation S-K, the disclosure regulation for domestic
issuers, to scale back or eliminate requirements in order to reduce the burden for EGCs,
accelerated filers and smaller reporting companies, and to eliminate, for all issuers, provisions
of Regulation S-K that are duplicative, overlapping, outdated or unnecessary. Additionally, by
November 28, 2016, the SEC must conduct a study of Regulation S-K and issue a report to
Congress containing detailed recommendations for simplifying the disclosure requirements
under Regulation S-K. The SEC then has an additional 360 days after it issues its report to
Congress to propose rules to the recommendations contained in its report.
4 The revisions to Form S-1 do not affect the current requirement that issuers must conduct delayed
offerings under Rule 415(a)(1)(x) according to the Securities Act of 1933, as amended, using Form S-3 or
5 The SEC is soliciting comments on the interim final rules, including on whether the interim final rules
should be extended to other registrants or forms. Therefore, although the FAST Act does not specifically
reference the Form F-1 registration statement used by foreign private issuers, it remains to be seen
whether similar revisions may be adopted for the Form F-1.
The FAST Act: New Exemption for Private
Resales to Accredited Investors
The Fixing America's Surface Transportation Act added a new section 4(a)(7) to the Securities
Act of 1933, as amended (Securities Act), which provides a non-exclusive safe harbor
exemption that will help facilitate private resales of securities by shareholders to accredited
investors if certain conditions are met.6
Section 4(a)(7) exempts from registration under the Securities Act resales of securities that
meet the following conditions:
• Each purchaser must be an accredited investor.
• No form of general solicitation or general advertisement may be used in the offer or sale
of the securities.
• The securities must be part of a class that has been authorized and outstanding for at
least 90 days.
• The issuer must be engaged in a business and must not be in the organizational stage,
bankruptcy or receivership, and must not be a blank check, blind pool or shell company
that has no specific business plan or has indicated that its primary business plan is to
engage in a merger, business combination or acquisition.
• The seller cannot be the issuer or a direct or indirect subsidiary of the issuer.
• The securities must not be part of an unsold allotment to, or a subscription or
participation by, a broker or dealer as an underwriter of the securities or a redistribution.
• Neither the seller nor any person that receives remuneration or a commission in
connection with his or her participation in the offer or sale of the securities, including
solicitation of purchasers, may be subject to an event that would disqualify the issuer or
other covered person under the "bad actor" provisions of Regulation D or be subject to
certain "statutory disqualifications" under the Securities Exchange Act of 1934, as
• In the case of non-reporting issuers, the seller and the purchaser must obtain from the
issuer (at the request of the seller), and the seller must make available to the purchaser,
specified general and financial information about the issuer and the securities. A seller
who is a control person with respect to the issuer must provide a brief statement
regarding the nature of the affiliation and also certify that the seller has no reasonable
grounds to believe that the issuer is in violation of the securities laws or regulations.
Securities acquired under section 4(a)(7) are considered "restricted securities" and cannot be
transferred by the acquirer in the absence of another exemption under the Securities Act. In
6 Market participants may continue to rely on other available resale exemptions, such as Rule 144, Rule
144A and even the so-called section 4(a)(1½) resale exemption.
addition, securities sold under the exemption are "covered securities" under the Securities Act
and, consequently, are preempted from state "blue sky" registration requirements.
Regulation A: Small Company Capital
On March 25, 2015, the U.S. Securities and Exchange Commission (SEC) adopted final rules to
amend Regulation A under the Securities Act of 1933, as amended (Securities Act) to
modernize and expand the framework for capital-raising by smaller companies. Regulation A is
available to U.S. and Canadian entities that have their principal place of business in the United
States or Canada and are not subject to SEC reporting obligations under the Securities
Exchange Act of 1934, as amended (Exchange Act).7 The types of securities that may be
offered under Regulation A are limited to equity securities, debt securities and debt securities
convertible into or exchangeable into equity securities, including any guarantees of such
Regulation A may offer smaller companies a viable capital-raising alternative that is less timeconsuming
and costly, more efficient than a traditional public offering and more attractive than a
private placement. The final rules became effective on June 19, 2015, so it remains to be seen
whether Regulation A will be a "game changer" for smaller companies.
The final rules established two tiers of offerings: (i) offerings of up to US$20 million in any 12-
month period, including up to US$6 million in secondary sales (Tier 1 offerings); and
(ii) offerings of up to US$50 million in any 12-month period, including up to US$15 million in
secondary sales (Tier 2 offerings). Under each tier, the amount of securities that selling
securityholders can sell at the time of an issuer's first Regulation A offering and within the
following 12-month period is limited to 30% of the aggregate offering price of a particular
offering. After the expiration of the first 12-month period after an issuer's initial qualification of an
offering statement under Regulation A, the amount of securities that affiliated securityholders
can sell in a Regulation A offering in any 12-month period is limited to US$6 million in Tier 1
offerings and US$15 million in Tier 2 offerings. Sales by non-affiliated securityholders are not
subject to this limit after the initial 12-month period, but are aggregated with sales by the issuer
and its affiliates for the purpose of the maximum offering limit for each tier.8
Tier 2 offerings are subject to a number of additional requirements for investor protection. Most
notably, Tier 2 offerings are subject to investment limits – a non-accredited investor is not
permitted to invest more than 10% of the greater of the investor's annual income or the net
worth in any single Tier 2 offering.9 The investment limits do not apply to Tier 2 offerings of
securities that will be listed on a national securities exchange upon qualification. Issuers in Tier
2 offerings must include audited financial statements in the offering statement and will be
7 Regulation A is not available to issuers that are delinquent in their Regulation A filings or subject to
certain "bad actor" disqualification events, such as orders of the SEC or other federal or state regulators.
8 The final rules eliminated the prohibition on resales by affiliates unless the issuer has had net income
from continuing operations in at least one of its last two fiscal years.
9 Non-accredited, non-natural persons are also subject to an investment limit and should calculate the
limit on the basis of no more than 10% of the greater of the purchaser's revenue or net assets (as at the
purchaser's most recent fiscal year-end).
subject to ongoing reporting requirements. In light of the additional requirements for Tier 2
offerings, securities offered and sold in Tier 2 offerings are exempt from registration and
qualification under state securities laws.
An issuer that seeks to conduct a Regulation A offering must prepare, file electronically on
EDGAR and qualify an offering statement before any sale of securities can occur. The core of
the offering statement is the offering circular, a disclosure document much like the prospectus
required of smaller reporting companies in a registered offering.10 No filing fees are associated
with Regulation A filings and the qualification process.
The final rules modernize the Regulation A offering process in a manner consistent with
regulatory developments in the registered offering process, including the following:
• The offering statement and all other documents required to be submitted or filed with the
SEC under Regulation A, such as ongoing reports, must be submitted or filed electronically
• An issuer that has not previously sold securities under Regulation A or under an effective
registration statement is permitted to make a confidential submission of the offering
statement. Confidential submissions (including subsequent amendments and SEC
correspondence regarding these submissions) are required to be publicly filed as exhibits to
the offering statement not less than 21 days before qualification of the offering statement.
• When a preliminary offering circular is used during the pre-qualification period to offer
securities to potential investors, issuers (or broker-dealers participating in the offering) are
required to deliver a preliminary offering circular to potential investors at least 48 hours in
advance of the sale.11 If the sale was made in reliance on the delivery of a preliminary
offering circular, a final offering circular must be delivered within two business days of the
sale but (under the "access equals delivery approach" used in registered offerings) issuers
and intermediaries are permitted to satisfy their delivery requirements by filing the final
offering circular on EDGAR. Likewise, electronic-only offerings of Regulation A securities (in
which investors are permitted to participate only if they agree to accept the electronic
delivery of all documents and other information in connection with the offering) are permitted
under the final rules, provided that issuers and intermediaries comply with relevant SEC
• Issuers are permitted to "test the waters" by publicly soliciting indications of interest from any
potential investor both before and after the filing of the offering statement. Solicitation
materials must include certain disclaimers and satisfy certain other requirements and are
subject to the anti-fraud and other civil liability provisions of federal securities laws. Issuers
must submit or file all solicitation materials as an exhibit when the offering statement is
either submitted for non-public review or filed with the SEC (and update for substantive
changes in such solicitation material after the initial non-public submission or filing).
10 The provisions of section 11 of the Securities Act do not apply to Regulation A offerings. However,
other anti-fraud and civil liability provisions of the securities laws do apply to Regulation A offerings,
including the liability provisions of sections 12(a)(2) and 17 of the Securities Act and Rule 10b-5 under the
11 A final offering circular would continue to be required to accompany or precede any written
communications that constitute an offer in the post-qualification period.
Solicitation materials used by Regulation A issuers that file an offering statement with the
SEC will be publicly available as a matter of course. Any solicitation materials used after the
public filing of an offering statement would need to be preceded or accompanied by a
preliminary offering circular or contain a notice informing potential investors where and how
to obtain the most current preliminary offering circular. This requirement could be satisfied
by providing the URL link to the preliminary offering circular or offering statement on
Issuers of Tier 1 offerings are not subject to ongoing reporting obligations, but must provide on
Form 1-Z no later than 30 days after the termination or completion of the offering certain
summary information concerning the offering, including the date on which the offering was
qualified and commenced, the number of securities qualified and sold in the offering, the price of
the securities sold, the fees associated with the offering and net proceeds to the issuer.12
Issuers of Tier 2 offerings, however, are required to file annual reports on Form 1-K, semiannual
reports on Form 1-SA and current reports on Form 1-U, and to provide notice to the SEC of the
suspension of their ongoing reporting obligations on Part II of Form 1-Z.13
An issuer of Regulation A securities does not take on Exchange Act reporting obligations unless
it separately registered a class of securities under section 12 of the Exchange Act or conducted
a registered public offering. Section 12(g) of the Exchange Act, however, requires issuers with
total assets exceeding US$10 million to register under the Exchange Act any class of equity
securities held of record by either 2,000 persons or 500 persons who are not accredited
investors. Securities of a class issued in a Tier 2 offering are exempt from the provisions of
section 12(g) so long as the issuer (i) engages the services of a transfer agent registered with
the SEC under the Exchange Act with respect to such class; (ii) remains subject to, and is
current in, its Regulation A periodic reporting obligations; and (iii) has a public float of less than
US$75 million as of the last business day of its most recently completed semiannual period, or,
in the absence of a public float, has annual revenues of less than US$50 million as of its most
recently completed fiscal year.14
Regulation A offerings are not integrated with (i) prior offers or sales of securities; or (ii) certain
subsequent offers and sales of securities, including offers and sales that are made under the
new crowdfunding rules, provided that each offering complies with the requirements of the
12 Issuers conducting Tier 2 offerings are also required to provide this information on Form 1-Z at the time
of filing an exit report, if not previously provided on Form 1-K as part of their annual report.
13 A Tier 2 issuer may suspend its reporting obligations by filing a Form 1-Z at any time after completing
its reporting for the fiscal year in which the offering statement was qualified, provided that (i) the issuer
has filed all required ongoing reports for the shorter of the period since the issuer became subject to such
reporting obligations or its most recent three fiscal years and the portion of the current year preceding the
date of filing the Form 1-Z; (ii) the securities of each class to which the offering statement relates are held
of record by fewer than 300 persons; and (iii) offers or sales made in reliance on a qualified offering
statement are not ongoing. Regulation A reporting requirements are automatically suspended if the issuer
registers a class of securities under Section 12 of the Exchange Act or if a registration statement filed by
the issuer under the Securities Act becomes effective.
14 An issuer that exceeds either of the thresholds, in addition to exceeding the threshold in section 12(g)
of the Exchange Act, is granted a two-year transition period before it would be required to register its
class of securities under section 12(g), provided that it timely files all ongoing reports due during such
exemption that is being relied upon for the particular offering. For example, an issuer conducting
a concurrent exempt offering for which general solicitation is not permitted will need to be
satisfied that purchasers in that offering were not solicited by means of the offering made in
reliance on Regulation A. Alternatively, an issuer conducting a concurrent exempt offering for
which general solicitation is permitted must not include in any such general solicitation an
advertisement of the terms of a Regulation A offering unless that advertisement also included
the necessary legends for, and otherwise complied with, Regulation A.
Unlike in Rule 506 and 144A offerings, securities that are issued under Regulation A offerings
are not "restricted" or subject to transfer restrictions. In addition, Regulation A does not limit the
number of offerees or investors that can participate in an offering; nor does it impose any
requirement that investors be accredited or financially sophisticated. Finally, Regulation A
securities can be offered to the public by way of general solicitation.
On the other hand, Rule 506 offerings do not limit the amount of securities that may be sold in
the offering or the amount of securities that a non-accredited investor may purchase. Rule 506
also pre-empts state securities law requirements, whereas Tier 1 offerings are still subject to
state securities requirements. Finally, Rule 506 offerings do not involve any review of the
offering documents by the SEC, whereas Regulation A offering documents are subject to review
by the SEC staff (and state securities regulators in the case of Tier 1 offerings).
Pay Ratio Disclosure Rule
On August 5, 2015, the U.S. Securities and Exchange Commission (SEC) adopted final rules to
amend Item 402 of Regulation S-K under the Securities Act of 1933, as amended, to require
most SEC-registered U.S. companies to disclose the ratio of the compensation of their chief
executive officer (or any equivalent position) to the median compensation of their other
employees. Foreign private issuers, Canadian multijurisdictional disclosure system (MJDS)
filers, smaller reporting companies and emerging growth companies are exempt from providing
pay ratio disclosure.
All other domestic registrants are required to disclose the following: (i) the annual total
compensation of the chief executive officer; (ii) the median of the annual total compensation of
all other employees, which is calculated by identifying a registrant's "median employee"; and (iii)
the ratio of the figures in (i) and (ii) expressed either as a ratio in which the median
compensation of all other employees equals one or, narratively, as the multiple that the chief
executive officer compensation bears to the median compensation of all other employees.
Subject to certain exemptions provided in the rule, all employees of a registrant and its
consolidated subsidiaries worldwide must be taken into account in calculating the median
compensation of all other employees, including part-time, seasonal and temporary employees.
Pay ratio disclosure is required in annual reports on Form 10-K, registration statements (other
than registration statements on Form S-1 or Form S-11 for an initial public offering and
registration statements on Form 10) and proxy and information statements. A registrant must
provide pay ratio disclosure for a completed fiscal year upon the filing of an annual report on
Form 10-K for that fiscal year or the filing of a definitive proxy or information statement for the
next annual shareholders' meeting, whichever is later. In any event, however, the pay ratio
disclosure must be provided within 120 days of the end of that fiscal year.
Registrants must commence providing pay ratio disclosure for their first fiscal year beginning on
or after January 1, 2017. A new registrant's first pay ratio disclosure must be provided for the
first fiscal year beginning after the registrant (i) has been subject to the requirements of sections
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), for a period
of at least 12 calendar months commencing on or after January 1, 2017; and (ii) has filed at
least one annual report under section 13(a) or 15(d) of the Exchange Act that does not contain
the pay ratio disclosure.
The U.S. Securities and Exchange Commission (SEC) adopted Regulation Crowdfunding in
October 2015 to address evolving methods of raising capital through the Internet. These rules,
which will become effective on May 16, 2016, allow individuals to invest in securities through
crowdfunding transactions, subject to certain investment limits. The rules also limit the amount
of funds an issuer can raise using the crowdfunding exemption, require issuers to disclose
certain information about their business and securities offerings, and create regulatory
frameworks for the broker-dealers and funding portals that facilitate the crowdfunding
Unlike the regulatory regime for crowdfunding in Canada, the U.S. regime explicitly prohibits
issuers from raising funds via crowdfunding if they are required to file reports with the SEC
under sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange
Act). Thus, while the U.S. regime may be attractive to non-reporting companies, publicly listed
companies will not be eligible to crowdfund in the United States. In addition, non-U.S.
companies and companies that have no specific business plan or have indicated that their
business plan is to engage in a merger or acquisition with an unidentified company will not be
eligible to crowdfund in the United States.
New Regulation Crowdfunding: Section 4(A)(6)
Under Regulation Crowdfunding, an issuer can raise a maximum aggregate amount of
US$1 million through crowdfunding offerings in a 12-month period. There are no restrictions on
the type of securities that can be crowdfunded. Securities sold under other federal securities law
exemptions do not count toward the cap of US$1 million per 12 months. An offering made under
Regulation Crowdfunding would not be integrated with another exempt offering made by the
issuer, such as an exempt offering made in reliance on Rule 506(c) of Regulation D, if each
offering meets the requirements of the applicable exemption that is being used for that offering.
Individual investors, over a 12-month period, may invest in the aggregate across all
crowdfunding offerings up to either (i) if their annual income or net worth is less than
US$100,000, the greater of US$2,000 or 5% of the lesser of their annual income or net worth; or
(ii) if both their annual income and net worth are equal to or more than US$100,000, then 10%
of the lesser of their annual income or net worth. Furthermore, during the 12-month period, the
aggregate amount of securities sold to an investor through all crowdfunding offerings may not
Securities purchased in a crowdfunding offering generally cannot be resold for one year, unless
they are transferred to the issuer; to an accredited investor; as part of a registered offering; or to
certain members of the purchaser's family, to the purchaser's trust (or a family trust) or in
connection with the purchaser's death or divorce. The resale restrictions apply to any purchaser
during the one-year period beginning when the securities were first issued and not only to the
Reporting and Disclosure Requirements
In addition, issuers have annual reporting obligations and must also make certain disclosures to
the SEC and to their prospective investors relating to the offering and the issuer. All filings under
Regulation Crowdfunding are made under the new Form C. Notable required disclosures
include the price of the securities and/or the method used to calculate the price of the securities,
the issuer's financial condition and financial statements (with varying requirements for
certification or audit depending on the size of the offering), the issuer's business and proposed
purpose for the proceeds of the offering, information on the officers and any owners holding
20% or more of the equity of the issuer, and related-party transactions.
Regulation Crowdfunding also provides for the creation of so-called funding portals that can
facilitate crowdfunding offerings without registering with the SEC as broker-dealers. Under the
final rules, funding portals must take measures to reduce the risk of fraud in the offerings they
host and are subject to various disclosure requirements. Funding portals organized or domiciled
outside the United States may participate in crowdfunding offerings but are subject to additional
Holders of crowdfunded securities will not count toward the threshold that requires an issuer to
register its securities under Exchange Act section 12(g) if the issuer is current in its annual
reporting obligations, retains the services of a registered transfer agent and has less than
US$25 million in total assets as of the end of its most recently completed fiscal year.
Resource Extraction Proposal
In December 2015, the U.S. Securities and Exchange Commission (SEC) proposed Rule 13q-1
and an amendment to Form SD. The proposed rules would require all reporting issuers under
the Securities Exchange Act of 1934, as amended (Exchange Act), including Canadian and
other foreign companies, that are engaged in the commercial development of oil, natural gas or
minerals to report information about payments made to the U.S. federal government or foreign
governments that are related to the commercial development of these resources.15 The stated
purpose of the rule (which implemented a provision of the Dodd–Frank Wall Street Reform and
Consumer Protection Act) is to increase the transparency of payments made by these
companies to governments in order to help combat global corruption and empower citizens of
resource-rich countries to hold their governments accountable for the wealth generated by those
resources. In many respects, the proposed rules are consistent with corresponding regulations
in the European Union (EU) and in Canada, and the SEC has framed its proposal as a further
step in supporting international transparency efforts.
Under Rule 13q-1 as re-proposed, a "resource extraction issuer" (meaning an issuer that is
required to file with the SEC annual reports on Forms 10-K, 20-F or 40-F under the Exchange
Act and engages in the commercial development of oil, natural gas or minerals) would be
required to disclose in a Form SD no later than 150 days after the end of such issuer's fiscal
year certain payments made to the U.S. federal government or a foreign government for each
project. The SEC did not extend this requirement to issuers that are exempt from Exchange Act
registration and reporting under Rule 12g3-2(b), which provides relief to foreign private issuers
that are not currently Exchange Act reporting companies (i.e., they are not listed nor have made
a registered offering in the United States) and whose primary trading market is located outside
the United States.16
The proposed rules would require resource extraction issuers to disclose, among other things,
the type and total amount of non-de minimis payments to the U.S. federal government or any
foreign government related to the commercial development of oil, natural gas or minerals for
each project.17 Such payments include taxes, royalties, fees (including license fees), production
entitlements, bonuses and other material benefits. The SEC added two categories of payments
that were not required to be disclosed under the prior rules: dividends (except for dividends paid
to a government as a common or ordinary shareholder of the issuer and therefore paid to the
government under the same terms as other shareholders) and payments for infrastructure
improvements, such as building a road or railway to further the development of oil, natural gas
15 Rules implementing section 13(q) were originally adopted by the SEC in 2012; however, the U.S. District Court for
the District of Columbia vacated these rules on the basis of two findings: first, that the SEC misread section 13(q) to
compel the public disclosure of issuers' reports; and second, the SEC's explanation for not granting an exemption
when disclosure is prohibited by foreign governments was arbitrary and capricious.
16 Imposing a resource extraction reporting requirement on such issuers would go beyond what is contemplated by
section 13(q), which defines a "resource extraction issuer" as an issuer that is "required to file an annual report with
17 The proposed rules define "not de minimis" as any payment, whether a single payment or a series of related
payments, that equals or exceeds US$100,000 during the same fiscal year.
Under the proposed rules, and consistent with the transparency regulations adopted in the EU
and Canada, resource extraction issuers are not required to disclose social or community
payments, such as payments to build a hospital or school. As the SEC noted, it is unclear
whether these types of payments are part of the commonly recognized revenue stream for the
commercial development of oil, natural gas or minerals.
In a change from the 2012 rules, the proposed rules define "project" as operational activities
governed by a single contract license, lease, concession or similar legal agreement that forms
the basis for payment liabilities to a government. Although similar to the EU directives and the
Canadian draft definitions, the SEC's proposed definition would allow issuers additional
flexibility to treat multiple agreements that are both operationally and geographically
interconnected as a single project without the additional requirement that the agreements also
have "substantially similar terms" – as required by the EU and Canadian draft definitions. The
SEC opted to define "project" using the same core elements used in the EU directives and the
Canadian draft definitions to help reduce compliance costs for issuers that are listed in both the
United States and the EU or Canada by not requiring different disaggregation standards for
project-related costs. In addition, such an approach might enable issuers to take advantage of
equivalency provisions available in other jurisdictions.
The proposed rules do not provide for exemptions for countries that prohibit the mandated
resource extraction disclosures; however, the SEC noted that it will consider using its existing
authority under the Exchange Act to provide exemptive relief at the request of a resource
extraction issuer. This case-by-case approach to exemptive relief, according to the SEC, is
preferable to either adopting a blanket exemption for a foreign law prohibition (or for any other
reason) or providing no exemptions and no avenue for exemptive relief.
In light of similar disclosure laws adopted by other countries and with a view to reducing
compliance costs, the SEC proposed a provision that is consistent with the Canadian and EU
frameworks. The provision allows issuers to meet the requirements of the proposed rule by
providing disclosures that comply with a foreign jurisdiction's rules or that meet the U.S.
Extractive Industries Transparency Initiative reporting requirements if the SEC determines that
those rules or requirements are substantially similar to the proposed rules.
The SEC has proposed an extensive comment process and expects to vote on the proposed
rules in June 2016, although the SEC noted that a number of factors may cause it to depart
from this expedited schedule.
Proposed Rule 10D-1: Listing Standards to
Recover Erroneously Awarded Executive
On July 1, 2015, the U.S. Securities and Exchange Commission (SEC) proposed a new rule to
implement section 954 of the Dodd–Frank Wall Street Reform and Consumer Protection Act.
The comment period for proposed Rule 10D-1 of the Securities Exchange Act of 1934, as
amended (Exchange Act), ended in September 2015; however, to date a final rule has not been
released. Under proposed Rule 10D-1, U.S. national securities exchanges must adopt listing
rules that will require all listed issuers, including Canadian companies and other foreign private
issuers, to adopt, publicly disclose and implement written policies to recover from the issuer's
current and former executive officers any incentive-based compensation received that was
based on materially erroneous financial information.18
The recovery policy would apply to all incentive-based compensation received by executive
officers during the three completed fiscal years immediately preceding the date on which the
issuer is required to prepare an accounting restatement to correct an error that is material to its
previously issued financial statements.19 The issuer's obligation to prepare the restatement will
trigger the application of the recovery policy. Recovery of the excess compensation will be on a
pre-tax, no-fault basis and the issuer cannot indemnify or reimburse the affected officers.
"Incentive-based compensation" is defined in the proposed rule as any compensation that is
granted, earned or vested wholly or in part upon the attainment of any financial reporting
measure. Financial reporting measures are measures that are determined and presented in
accordance with the accounting principles used in preparing the issuer's financial statements,
any measures derived wholly or in part from such financial information, and stock price and total
shareholder return, regardless of whether such measures are included in an SEC filing or the
issuer's financial statements. In the case of compensation based on stock price or shareholder
return, the issuer must calculate the recovery amount by making a reasonable estimate of the
accounting restatement's effect on the applicable measure. The recovery policy would not apply
to compensation awarded strictly on the basis of discretionary, subjective, operational or
strategic measures that are not financial reporting measures.
18 Rule 10D-1, as proposed, will apply to all issuers with any securities listed on a U.S. national securities
exchange, including issuers with only debt securities listed.
19 The term "executive officer" is defined to include the issuer's president, principal financial officer,
principal accounting officer (or if there is no such accounting officer, the controller), any vice-president of
the issuer in charge of a principal business unit, division or function (such as sales administration or
finance), any other officer who performs a policy-making function, or any other person who performs
similar policy-making functions for the issuer. Executive officers of the issuer’s parent or subsidiaries are
deemed executive officers of the issuer if they perform such policy-making functions for the issuer. The
proposed rule would require recovery of excess incentive-based compensation received by an individual
who served as an executive officer of the listed issuer at any time during the performance period for that
incentive-based compensation. Incentive-based compensation would be subject to the issuer's recovery
policy under the proposed rule to the extent that it is received while the issuer has a class of securities
listed on an exchange or an association.
The SEC proposed only two exceptions to the mandatory enforcement of the recovery policy.
First, listed issuers can decide not to recover excess incentive-based compensation if recovery
is impractical because the direct cost of recovery is greater than the recovery amount.20
Second, foreign private issuers do not have to enforce their recovery policy if it would violate the
laws of their home country.21 Any listed issuer making use of either exception must provide
detailed supporting documentation to its listing exchange.
Rule 10D-1, as proposed, will impose various disclosure obligations on a listed issuer, including
the requirement to file its written recovery policy as an exhibit to its Form 10-K (or, in the case of
a foreign private issuer, Form 20-F or Form 40-F, as applicable). Each listed issuer will be
required to disclose annually how it has applied its recovery policy if at any time during its last
completed fiscal year it completed either a restatement that required recovery of excess
incentive-based compensation under its recovery policy or there was an outstanding balance of
excess incentive-based compensation from the application of that policy to a prior restatement.
The required disclosure would include the date of the accounting restatement, the recovered
amount and the applicable incentive measure. A listed issuer that decides not to recover excess
incentive-based compensation because recovery would be impractical must disclose the name
of the applicable officer, the amount that would have been recovered and the issuer's reasons
for not recovering such amount.
Domestic listed issuers would include the proposed disclosure in their annual reports on
Form 10-K and any proxy and consent solicitation materials that require executive
compensation disclosure under Item 402 of Regulation S-K. Foreign private issuers, including
Canadian issuers using the multijurisdictional disclosure system, would be required to provide
the same disclosure in, and to file their recovery policies as an exhibit to, the annual reports
they file with the SEC on Form 20-F or Form 40-F, as applicable. Because foreign private
issuers are exempt from section 14(a) of the Exchange Act, they would not be required to
disclose the information in any proxy or consent solicitation materials with respect to their
20 To prevent potential conflicts of interest, any determination that recovery would be impractical would
need to be made by the issuer's committee of independent directors that is responsible for executive
compensation decisions. In the absence of a compensation committee, the determination would need to
be made by a majority of the independent directors serving on the issuer's board of directors. Such a
determination, as with all determinations under proposed Rule 10D-1, would be subject to review by the
21 The relevant home country law must have been adopted in the home country prior to the publication in
the Federal Register of proposed Rule 10D-1. Interestingly, there is no corresponding exception for a
recovery that would violate the laws of the executive officer's home country.
If you have any questions regarding the foregoing, please contact Jeffrey Nadler
(212.588.5505), Scott D. Fisher (212.588.5596), Paul Watkins (212.588.5547), Nir Servatka
(212.588.5579) or Jennifer Liu (212.588.5543) in our New York office.
Davies Ward Phillips & Vineberg LLP is an integrated firm of approximately 240 lawyers with
offices in Toronto, Montréal and New York. The firm focuses on business law and is consistently
at the heart of the largest and most complex commercial and financial matters on behalf of its
clients, regardless of borders.
The information and comments herein are for the general information of the reader and are not
intended as advice or opinions to be relied upon in relation to any particular circumstance. For
particular applications of the law to specific situations, the reader should seek professional