Foreign Private Issuers
Anthony L.G., PLLC, provides a wealth of experience and depth of knowledge for foreign companies looking to go public in the U.S., dual list or seek assistance in ongoing SEC, Nasdaq and NYSE/NYSE American disclosure requirements and capital markets transactions.
Both the Securities Act of 1933, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”) contain definitions of a “foreign private issuer.” Generally, if a company does not meet the definition of a foreign private issuer, it is subject to the same registration and reporting requirements as any U.S. company.
The determination of foreign private issuer status is not just dependent on the country of domicile, though a U.S. company can never qualify regardless of the location of its operations, assets, management and subsidiaries. There are generally two tests of qualification as a foreign private issuer, as follows: (i) relative degree of U.S. share ownership and (ii) level of U.S. business contacts.
As with many securities law definitions, the overall definition of foreign private issuer starts with an all-encompassing “any foreign issuer” and then carves out exceptions from there. In particular, a foreign private issuer is any foreign issuer, except one that meets the following as of the last day of its second fiscal quarter:
(i) a foreign government
(ii) more than 50% of its voting securities are directly or indirectly held by U.S. residents and any of the following: (a) the majority of the executive officers or directors are U.S. citizens or residents, (b) more than 50% of the assets are in the U.S. or (c) the principal business is in the U.S. The principal business location is determined by considering the company’s principal business segments or operations, its board and shareholder meetings, its headquarters and its most influential key executives.
That is, if less than 50% of a foreign company’s shareholders are located in the U.S., it qualifies as a foreign private issuer. If more than 50% of the record shareholders are in the U.S., the company must further consider the location of its officers and directors, assets and business operations.
Registration And Reporting Obligations
Like U.S. companies, when a foreign company desires to sell securities to U.S. investors, such offers and sales must either be registered or there must be an available Securities Act exemption from registration. The registration and exemption rules available to foreign private issuers are the same as those for U.S. domestic companies, including, for example, Regulation D (with the primarily used Rules 506(b) and 506(c)) and Regulation S) and resale restrictions and exemptions such as under Section 4(a)(1) and Rule 144.
When offers and sales are registered, the foreign company becomes subject to ongoing reporting requirements. Subject to the exemption under Exchange Act Rule 12g3-2(b) discussed below, when a foreign company desires to trade on a U.S. exchange or the OTC Markets, it must register a class of securities under either Section 12(b) or 12(g) of the Exchange Act. Likewise, when a foreign company’s worldwide assets and worldwide/U.S. shareholder base reach a certain level ($10 million in assets; total shareholders of 2,000 or greater or 500 unaccredited with U.S. shareholders being 300 or more), it is required to register with the SEC under Section 12(g) of the Exchange Act.
The SEC has adopted several rules applicable only to foreign private issuers and maintains an Office of International Corporate Finance to review filings and assist with registration and reporting questions. Of particular significance:
(i) Foreign private issuers may prepare financial statements using either US GAAP, International Financial Reporting Standards (“IFRS”) or home country accounting standards with a reconciliation to US GAAP.
(ii) Foreign private issuers are exempt from the Section 14 proxy rules.
(iii) Insiders of foreign private issuers are exempt from the Section 16 reporting requirements and short swing trading prohibitions; however, they must comply with Section 13.
(iv) Foreign private issuers are exempt from Regulation FD.
(v) Foreign private issuers may use separate registration and reporting forms and are not required to file quarterly reports (for example, Form F-1 registration statement and Forms 20-F and 6-K for annual and periodic reports).
(vi) Foreign private issuers have a separate exemption from the Section 12(g) registration requirements (Rule 12g3-2(b)) allowing the trading of securities on the OTC markets without being subject to the SEC reporting requirement.
(vii) Foreign private issuers may rely on home country rules instead of many of the corporate governance rules imposed by Nasdaq and the NYSE/NYSE American.
Although a foreign private issuer may voluntarily register and report using the same forms and rules applicable to U.S. issuers, they may also opt to use special forms and rules specifically designed for and only available to foreign companies. Form 20-F is the primary disclosure document and Exchange Act registration form for foreign private issuers and is analogous to both an annual report on Form 10-K and an Exchange Act registration statement on Form 10. Form F-1 is the general registration form for the offer and sale of securities under the Securities Act and, like Form S-1, the form is to be used when the company does not qualify for the use of any other registration form.
A Form F-3 is analogous to a Form S-3. A Form F-3 allows incorporation by reference of an annual and other SEC reports. To qualify to use a Form F-3, the foreign company must, among other requirements that are substantially similar to the S-3, have been subject to the Exchange Act reporting requirements for at least 12 months and have filed all reports in a timely manner during that time. The company must have filed at least one annual report on Form 20-F. A Form F-4 is used for business combinations and exchange offers, and a Form F-6 is used for American Depository Receipts (ADR). Also, under certain circumstances, a foreign private issuer can submit a registration statement on a confidential basis.
Once registered, a foreign private issuer must file periodic reports. A Form 20-F is used for an annual report and is due within four months of fiscal year-end. Quarterly reports are not required. A Form 6-K is used for periodic reports and captures: (i) the information that would be required to be filed in a Form 8-K, (ii) information the company makes or is required to make public under the laws of its country of domicile and (iii) information it files or is required to file with a U.S. and foreign stock exchange.
As noted above, a foreign private issuer may elect to use either U.S. GAAP, International Financial Reporting Standards (“IFRS”), or home country accounting standards with a reconciliation to U.S. GAAP in the preparation and presentation of its financial statements. Regardless of the accounting standard used, the audit firm must be registered with the PCAOB.
All filings with the SEC must be made in English. Where a document or contract is being translated from a different language, the SEC has rules to ensure that the translation is fair and accurate.
The SEC rules do not have scaled disclosure requirements for foreign private issuers. That is, all companies, regardless of size, must report the same information. A foreign private issuer that would qualify as a smaller reporting company or emerging growth company should consider whether it should use and be subject to the regular U.S. reporting requirements and registration and reporting forms. The company should also consider that no foreign private issuer is required to provide a Compensation Discussion and Analysis (CD&I). If the foreign company opts to be subject to the regular U.S. reporting requirements, it must also use U.S. GAAP for its financial statements.
American Depository Receipts
An ADR is a certificate that evidences ownership of American Depository Shares (ADS) which, in turn, reflect a specified interest in a foreign company’s shares. Technically, the ADR is a certificate reflecting ownership of an ADS, but in practice, market participants just use the term ADR to reflect both. An ADR trades in U.S. dollars and clears through the U.S. DTC, thus avoiding foreign currency issuers. ADRs are issued by a U.S. bank, which, in turn, either directly or indirectly through a relationship with a foreign custodian bank, holds a deposit of the underlying foreign company’s shares. ADR securities must either be subject to the Exchange Act reporting requirements or be exempt under Rule 12g3-2(b). ADRs are always registered on Form F-6.
Exchange Act Rule 12g3-2(b)
Exchange Act Rule 12g3-2(b) permits foreign private issuers to have their equity securities traded on the U.S. over-the-counter market without registration under Section 12 of the Exchange Act (and therefore without being subject to the Exchange Act reporting requirements). The rule is automatic for foreign issuers that meet its requirements. A foreign issuer may not rely on the rule if it is otherwise subject to the Exchange Act reporting requirements.
The rule provides that an issuer is not required to be subject to the Exchange Act reporting requirements if:
- The issuer currently maintains a listing of its securities on one or more exchanges in a foreign jurisdiction, which is the primary trading market for such securities.
- The issuer has published, in English, on its website or through an electronic information delivery system generally available to the public in its primary trading market (such as the OTC Market Group website), information that, since the first day of its most recently completed fiscal year, it (a) has made public or been required to make public pursuant to the laws of its country of domicile (b) has filed or been required to file with the principal stock exchange in its primary trading market and which has been made public by that exchange and (c) has distributed or been required to distribute to its security holders.
Primary Trading Market means that at least 55 percent of the trading in the subject class of securities on a worldwide basis took place in, on or through the facilities of a securities market or markets in a single foreign jurisdiction or in no more than two foreign jurisdictions during the issuer’s most recently completed fiscal year.
In order to maintain the Rule 12g3-2(b) exemption, the issuer must continue to publish the required information on an ongoing basis and for each fiscal year. The information required to be published electronically is information that is material to an investment decision regarding the subject securities, such as information concerning:
(i) Results of operations or financial condition
(ii) Changes in business
(iii) Acquisitions or dispositions of assets
(iv) The issuance, redemption or acquisition of securities
(v) Changes in management or control
(vi) The granting of options or the payment of other remuneration to directors or officers
(vii) Transactions with directors, officers or principal security holders
At a minimum, a foreign private issuer shall electronically publish English translations of the following documents:
(i) Its annual report, including or accompanied by annual financial statements
(ii) Interim reports that include financial statements
(iii) Press releases
(iv) All other communications and documents distributed directly to security holders of each class of securities to which the exemption relates.