of the securities on file with the Commission, and incorporates a warning legend re-
garding the potential tax consequences of an investment, the fact that remedies for
securities law violations may have to be pursued outside the United States, and the
fact that financial statements were not prepared in accordance with U.S. GAAP.
In order to be eligible to participate in the multijurisdictional system, an issuer
must have a one-year history of reporting to Canadian securities regulators and be in
compliance with the periodic reporting requirements of those authorities at the time
of filing with the SEC. In offerings of securities other than investment-grade non-
convertible securities, or pursuant to rights offerings, the issuer must have a mini-
mum capitalization of US$75 million. Where securities are offered in a rights, ex-
change, or tender offer, that offer must be primarily of a Canadian nature; that is, no
more than a specified percentage of offerees may be U.S. residents. In the case of
rights and exchange offers, or when investment grade debt (rated by either U.S. or
Canadian rating agencies) or preferred stock is offered, the system is at its simplest.
The SEC allows such offerings to be made in the United States entirely on the basis
of Canadian disclosures. This is because such rights and exchange offerings are of a
Canadian nature, and investment grade securities generally trade on the basis of yield
and rating. For investment grade debt and preferred securities, the financial state-
ments filed as incorporated by reference under cover of Form F-9 need not be recon-
ciled to U.S. GAAP. The financial information pertaining to liquidity and capital re-
sources, which in the SEC’s view is not substantially different from U.S. and
Canadian GAAP, is most relevant to the decision to invest in such securities.
In the case of offerings of securities other than investment grade debt and pre-
ferred stock, reconciliation of financial statements to U.S. GAAP is required. While
the SEC stated that financial statements prepared in accordance with Canadian
GAAP are “relevant and reliable,” it stated that financial statement reconciliation
would increase comparability of financial information, which is of greater impor-
tance to investment decisions with respect to equity and other investment-grade se-
curities. It should be noted that the Commission in its original proposal expressly
asked for comment as to whether such reconciliation is necessary or whether Cana-
dian financial statements would provide investors with adequate information for
comparative analysis purposes in some or all cases. A majority of commenters felt
that financial information in accordance with Canadian GAAP provided a sufficient
basis for an informed investment decision and that reconciliation was not necessary.
The SEC, however, retained the requirement to reconcile.
(iii) Cross-Border Tender and Exchange Offers. The Commission has long expressed
its concern that, where U.S. investors comprise a small portion of a foreign com-
pany’s security holders, foreign bidders and issuers in tender and exchange offers
may try to avoid U.S. jurisdiction and may exclude U.S. investors from multinational
offerings because the cost of compliance with U.S. laws and regulations outweighs
the benefits of extending the offer to U.S. security holders. U.S. investors may thus
be denied investment opportunities.
The Commission particularly noted that, in the case of exchange offers, which
must be registered under the Securities Act, one of the most significant barriers to in-
clusion of U.S. security holders in an offshore exchange offer has been the need for
adherence to, or reconciliation with, U.S. GAAP and auditing standards.
The Commission has traditionally addressed the practice of excluding U.S. secu-
rity holders in such cases in two principal ways. First, it has asserted its regulatory
14.5 RESPONSE TO GLOBALIZATION 14 • 15