Canada: Avoiding The Traps: The Top Five Questions To Ask Before A
U.S. Or Cross-Border Offering

November 2008

Canadian companies embarking on a U.S. offering or including U.S.
investors in a Canadian offering can make the process go more smoothly
if they answer the following questions while they are still in the
planning stages.

1. Is the company a "foreign private issuer"? If a company is not a
foreign private issuer under SEC rules, it may face restrictions under
U.S. securities laws in conducting a Canadian offering. In addition,
the company will not be eligible for exemptions from SEC reporting
requirements that are otherwise available to non-U.S. companies.
Companies organized outside the U.S. will not meet the requirements
for foreign private issuer status if a majority of their voting
securities are held by U.S. residents and any of the following is
true: a majority of their directors or executive officers are U.S.
citizens or residents; 50% or more of their assets are located in the
United States; or their business is administered from the United States.

2. Is the company an "investment company"? The U.S. Investment Company
Act of 1940 regulates companies that are engaged primarily in the
business of investing in securities. Operating companies are sometimes
caught within the definition of investment company as a result of
significant holdings in cash or investment securities. Research and
development companies and real estate companies may be eligible for
exemption, and other companies may be able to avoid becoming
investment companies through careful planning. Absent an exemption, a
non-U.S. investment company may not offer its securities in the United
States, except in certain private offerings.

3. Is the company a "PFIC"? Under U.S. tax law, U.S. investors in a
passive foreign investment company, or PFIC, face adverse tax
consequences. A non-U.S. corporation is classified as a PFIC if either
(i) 75% or more of its gross income is passive income for the taxable
year or (ii) on average for the taxable year, 50% or more (by value
or, in certain cases, by adjusted basis) of its assets produce or are
held for the production of passive income. While many companies that
are PFICs find that they can still market their securities
successfully in the United States, PFIC status may affect pricing and
will require disclosure.

4. Is the company an "operating company" for purposes of ERISA? Under
the U.S. Employee Retirement Income Security Act, or ERISA, special
rules apply to companies that are engaged in the passive investment of
capital. If U.S. "benefit plan investors" hold at least 25% of the
outstanding equity in such companies, then the companies themselves
may be subject to ERISA fiduciary obligations, including prohibitions
from engaging in certain transactions. Privately held companies are
generally able to limit benefit plan investment, and other companies
may be able to structure their business so as to qualify as operating
companies.

5. Is the company MJDS eligible? The Multijurisdictional Disclosure
System gives certain Canadian companies a number of advantages in
filing registration statements and reports with the SEC. With a few
exceptions, these advantages are only available if the company has
been subject to continuous reporting requirements in Canada for at
least one year and has a "public float" of at least $75 million. The
public float is the market value of the company's securities that are
held by persons anywhere who are not affiliated with the company. For
this purpose, affiliates are persons who, directly or indirectly, own
or control more than 10% of the company's outstanding equity
securities. Companies that have previously relied on MJDS may lose
eligibility if their stock price declines.
The content of this article is intended to provide a general guide to
the subject matter. Specialist advice should be sought about your
specific circumstances.

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