Proposed FINRA Rule Would Affect U.S. Private Placements by Canadian Issuers
The Financial Industry Regulatory Authority, Inc. (FINRA), which regulates broker-dealers in the United States, has proposed a new rule that would affect the way Canadian issuers and their placement agents conduct private placements in the U.S. If adopted, the rule will make it more important for each of the issuer and the placement agent to engage U.S. counsel early in the offering process to ensure compliance with the rule.
Subject to certain exceptions, the proposed new rule would impose certain disclosure and filing obligations for all private placements where a FINRA member firm makes offers or sales, or participates in the preparation of a private placement memorandum, term sheet or other disclosure document in connection with such private placement. Generally speaking, Rule 144A and offshore Regulation S offerings would be exempt from the rule, but many Regulation D offerings (including most Regulation D offerings made to natural persons) would not be exempt from the rule.
If the new rule is adopted in the form filed with the U.S. Securities and Exchange Commission, the following requirements and restrictions would be introduced for all non-exempt private placements in which a member firm participates.
- The offering document containing “detailed” disclosure regarding the following items would have to be provided to each investor prior to the sale of the securities:
- the use of proceeds;
- the amount and type of offering expenses; and
- the amount and type of compensation provided or to be provided to sponsors, finders, consultants, and FINRA members and their associated persons in connection with the offering.
- The offering document (including exhibits) would be required to be filed with FINRA by the FINRA member or associated person no later than 15 calendar days after the date of first sale. Any material amendments to the offering document, or any amendments to the disclosures required by the rule, must be filed with FINRA no later than 15 calendar days after the date the document is provided to any investor or prospective investor.
- Each member firm that participates in the offering (not the issuer) would have the obligation to ensure that an offering document containing the required disclosures was filed with FINRA and provided to each prospective investor prior to the sale.
- Generally speaking, Rule 144A and Regulation S offerings, offerings to employees and affiliates of the issuer or its control entities, and offerings to existing securityholders of securities issued in conversions, stock splits and other types of restructuring transactions where there is no need for payment of additional consideration by the investor would be exempt from the rule. In addition, exemptions would be available for private placements to “institutional accounts” (which differs from the definition of “institutional accredited investor” in Regulation D and would generally exclude accredited investors that are natural persons), and for certain other offerings.
- FINRA would accord confidential treatment to all documents and information filed pursuant to the rule, and would use the documents and information solely for the purpose of determining compliance with FINRA rules or other applicable regulatory purposes.
If the new rule is adopted, issuers and broker-dealers should be aware of the impact on private placements in the U.S. Issuers, and broker-dealers would need to plan ahead, each engage U.S. counsel early in the offering process, be explicitly aware of prospective investor qualifications, and budget additional expense.
About Troutman Sanders’ Canadian Practice:
With a diverse practice mix, workforce and footprint, Troutman Sanders has cultivated its reputation for a higher commitment to client care for over 120 years. Ideally positioned to help clients across sectors realize their business goals, the firm’s 650 attorneys transact for growth, resolve mission-threatening disputes and navigate complex legal and regulatory challenges. See troutman.com for more information.
The members of Troutman Sanders’ Canadian Practice team regularly advise Canadian companies on U.S. securities law matters. They represent issuers and investment banks in a variety of public and private equity and debt financings, including financings under the U.S.-Canada Multijurisdictional Disclosure System (MJDS), other cross-border public offerings, and U.S.-Canadian private placements (including Rule 144A, Regulation D and Regulation S offerings). They also advise Canadian issuers with respect to the U.S. securities law aspects of mergers and acquisitions (including stock and asset acquisitions, plans of arrangement, takeover bids, and capital pool company acquisitions), corporate restructurings and spin-offs. In addition, they advise Canadian issuers in connection with initial listings on the NYSE, Nasdaq and the NYSE Amex, and on the continuous reporting and corporate governance requirements under the U.S. federal securities laws, including the Sarbanes-Oxley Act of 2002 and the rules of the NYSE, Nasdaq and NYSE Amex.
Recent Recognition:
- Ranked #4 on the list of Canada Equity & Equity-related – Issuer Legal Advisor in Thomson Reuters’ First Half 2011 Global Capital Markets Review;
- Ranked #5 on the list of Canada Equity & Equity-related – Manager Legal Advisor in Thomson Reuters’ First Half 2011 Global Capital Markets Review.