Look at Canadian law. Let me know what you find about their rules and regulations about shorting stocks on American Exchanges. They do not have to borrow, nor deliver those shares.
Research conducted by Global Stock Transfer of Denver, CO indicates that DTC accepts numerous "exemptions" to delivering shares that are sold, including, but not limited to: a. "We hold a convertible security that represents the shares we sold" -- (see "death spiral financing") b. "Our regulations do not require us to deliver shares sold in this fashion" -- (see Canadian IDA Rule 100 which outlines margin requirements to short sell US stocks -- including penny stocks -- without borrowing the shares or ever delivering them).