Accessing the U.S. Capital Markets — A Brief Overview for Foreign Private Issuers
The following discussion reflects the views of the staff of the Division of Corporation Finance of the United States Securities and Exchange Commission (the "Commission"). It is not a Commission statement and the Commission has neither approved nor disapproved its contents.
In the discussion that follows, we present a general outline of various U.S. federal securities law issues applicable to Foreign Private Issuers, as well as additional matters these issuers may wish to take into account when considering having their securities trade in the U.S. capital markets. It is not a comprehensive manual on the regulation of foreign issuers under the U.S. federal securities laws and the information presented may not be current. It is not intended to provide legal advice of the Commission or the staff and is not a substitute for, and may not be relied on instead of, the federal securities laws, the Commission’s regulations and forms, and the advice of knowledgeable advisors.
This document includes links to various statutes and rules that may lead to pages with lists of rules and regulations. Before clicking on a link, please remember the name or number of the rule or regulation that you seek.
The U.S. capital markets have long been a favored destination for foreign companies wishing to raise capital or establish a trading presence for their securities. The following information provides a general overview of the relevant laws and regulations governing the U.S. securities markets with which foreign companies wishing to access the U.S. capital markets should be familiar.
Two of the most important laws applicable to companies wishing to access the U.S. capital markets are the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). In very broad overview, the Securities Act requires companies wishing to offer and sell securities in the United States to register the transaction with the Commission or to follow the requirements of an exemption from the registration requirements. The Exchange Act requires companies to register classes of equity securities in order to list these securities on a national securities exchange in the United States, or if certain asset and shareholder thresholds are exceeded. The Exchange Act also requires companies to make periodic filings with the Commission to disclose information about their business operations, financial condition, and management.
In the discussion that follows, this overview outlines several considerations for foreign companies wishing to raise capital or establish a presence for their securities in the United States, specifically with reference to foreign private issuers. These include:
conducting a registered offering under the Securities Act;
conducting an offering exempt from registration under the Securities Act;
registering a class or classes of securities under the Exchange Act;
establishing and maintaining exemptions from registration under the Exchange Act;
meeting reporting obligations under the Exchange Act; and
establishing an American Depositary Receipt (ADR) program.
This discussion does not address special regulatory provisions such as the Multijurisdictional Disclosure System available to Canadian issuers, the special regulations applicable to blank check or shell companies, the provisions of the U.S. federal securities laws relating to foreign governmental issuers eligible to register transactions on Schedule B, or the rules applicable to cross-border rights offers, tender offers, exchange offers, or business combinations.
II. Foreign Private Issuer Status
A key consideration for a foreign company is whether it qualifies as a foreign private issuer as defined in Rule 405 of Regulation C under the Securities Act and Rule 3b-4 under the Exchange Act. If a company does not qualify as a foreign private issuer, it is subject to the same registration and disclosure requirements applicable to domestic U.S. entities.
>A. Definition and Determination of Eligibility
There are two tests to determine whether a foreign company qualifies as a foreign private issuer: the first relates to the relative degree of its U.S. share ownership, and the second relates to the level of its U.S. business contacts. Foreign private issuer status is not determined solely by the country in which a company is organized. Companies organized under the laws of a foreign country that have certain characteristics that make them substantially similar to U.S. companies will not be considered foreign private issuers. In contrast, a company that is incorporated in a state, territory, or possession of the United States can never qualify as a foreign private issuer, regardless of the location of its shareholders, assets, or management.
A foreign company will qualify as a foreign private issuer if 50% or less of its outstanding voting securities are held by U.S. residents; or if more than 50% of its outstanding voting securities are held by U.S. residents and none of the following three circumstances applies: the majority of its executive officers or directors are U.S. citizens or residents; more than 50% of the issuer’s assets are located in the United States; or the issuer’s business is administered principally in the United States. These tests are found in Securities Act Rule 405 and Exchange Act Rule 3b-4.
If a foreign company determines that 50% or less of its outstanding voting securities are held by U.S. residents, it would qualify as a foreign private issuer and it need not consider the second test relating to business contacts. If a foreign company, however, determines that over 50% of its outstanding voting securities are held by U.S. residents, the foreign company must consider the extent of its U.S. business contacts. The tests are discussed further below.
>>1. Shareholder Test
As an initial matter, a foreign company must determine whether more than 50% of its outstanding voting securities are held “of record” by U.S. residents. For purposes of this test, foreign companies must “look through” the record ownership of brokers, dealers, banks, or nominees holding securities for the accounts of their customers, and also consider any beneficial ownership reports or other information available to the issuer.
In recognition of the global nature of modern-day securities holdings and the potentially significant burden created by requiring a “look through” in jurisdictions where the likelihood of finding U.S. holders is small, foreign companies need only examine voting securities held of record in three jurisdictions: the United States; the issuer’s home jurisdiction; and the primary trading market for the issuer’s voting securities, if different from the issuer’s home jurisdiction. Additionally, if the issuer is not able to obtain information about the record holders’ accounts after reasonable inquiry, the issuer may rely on the presumption that such accounts are held in the broker’s, dealer’s, bank’s, or nominee’s principal place of business.
>>2. Business Contacts Tests
If more than 50% of a foreign company's voting securities are held by U.S. residents, the determination of foreign private issuer status will depend upon the business contacts the issuer has with the United States. Specifically, an issuer must consider whether:
the majority of its executive officers or directors are U.S. citizens or residents;
more than 50% of the issuer's assets are located in the United States; or
the issuer's business is administered principally in the United States.
If a foreign company has more than 50% of its voting securities held by U.S. residents and any of the above factors is true, then an issuer will not qualify as a foreign private issuer.
a) Citizenship and Residency
Under the foreign private issuer definition, a foreign company must determine whether a majority of both its executive officers and directors are either U.S. citizens or U.S. residents. The citizenship and residency of each of the foreign company’s executive officers and directors must be analyzed separately. The terms "executive officer" and "director" may have different meanings in jurisdictions outside of the United States; therefore, foreign companies should refer to the definition of "executive officer" contained in Securities Act Rule 405 and Exchange Act Rule 3b-7 (a person or position involved in performing policy making functions for the issuer) to determine the individuals for which they should perform the analysis. When performing the analysis for "directors," foreign companies should consider individuals that perform the functions generally performed by a board of directors of a U.S. company.
b) Location of Assets
Under the foreign private issuer definition, a foreign company must consider the location of its assets, including both tangible and intangible assets.
c) Administration of Business
Under the foreign private issuer definition, a foreign company must determine whether its business is administered principally in the United States. To make this determination, a foreign company could consider certain factors, including the locations of:
the company’s principal business segments or operations;
its board and shareholders' meetings;
its headquarters; and
its most influential key executives (potentially a subset of all executives).
>B. Timing of Determination
Generally speaking, a foreign company must determine its status as a foreign private issuer on an annual basis, as of the end of its second fiscal quarter. When filing a registration statement under the Securities Act or the Exchange Act for the first time, a foreign company may, however, make a determination as to foreign private issuer status up to 30 days before filing its initial registration statement. Upon registration, a foreign company would determine its status on an annual basis, as of the end of its second fiscal quarter.
If a registrant determines that it no longer meets the definition of a foreign private issuer, it must transition to domestic reporting status and it becomes subject to the reporting requirements for a domestic company beginning on the first day of the next fiscal year. An issuer that no longer qualifies as a foreign private issuer as of the end of its second fiscal quarter in 2012, for example, would file a Form 10-K in 2013 for its 2012 fiscal year. The issuer would also begin complying with the proxy rules and Section 16, and become subject to reporting on Forms 8-K and 10-Q, on the first day of its 2013 fiscal year.
Once an issuer that is registered under the Securities Act or the Exchange Act no longer meets the definition of a foreign private issuer because it incorporates in a state, territory or possession of the United States, it must immediately begin filing domestic reports.
III. Registration and Ongoing Reporting Obligations
The Commission has adopted specific rules applicable to foreign private issuers that are designed to recognize international and home jurisdiction standards. In general, and subject to certain conditions discussed below, the rules provide that:
Foreign private issuers are exempt from the proxy rules under Rule 3a12-3(b) of the Exchange Act;
Insiders of foreign private issuers are exempt from filing beneficial ownership reports required by Section 16(a) of the Exchange Act and are not subject to the short-swing trading rules under Section 16(b) of the Exchange Act;
Foreign private issuers are exempt from the disclosure requirements of Regulation FD;
Foreign private issuers may use particular registration and reporting forms designed specifically for them; and
Additionally, on April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the "JOBS Act"), which amends the Securities Act and the Exchange Act in several respects. Relevant JOBS Act amendments to the Securities Act and the Exchange Act are encompassed in the discussions below, including section "III.B.1.c — JOBS Act and Emerging Growth Companies."
>A. Activities and Circumstances Requiring Registration
Under the U.S. federal securities laws, a foreign private issuer must register an offering of its securities under the Securities Act or a class of securities under the Exchange Act, or both, as explained below, in the following circumstances:
The foreign private issuer wishes to conduct a public offering of its securities in the United States;
The foreign private issuer's worldwide assets and worldwide/U.S. shareholder bases reach certain levels.
The particular registration requirements depend upon whether the foreign private issuer is registering a transaction or a class of securities, as outlined below. After registration under either the Securities Act or the Exchange Act, a company becomes subject to periodic reporting requirements, and is required to report information to the Commission in annual and other reports, as discussed below.
>>1. U.S. Public Offering
Under the U.S. federal securities laws, every offer or sale of securities must either be registered pursuant to the Securities Act or exempt from such registration. Although specific exemptions exist with respect to both the type of security and type of transaction at issue, those most often relevant to foreign private issuers include offerings made on a limited basis (either not to the general public or outside the United States). Please see below for a general overview of exemptions and safe harbors available to foreign private issuers. If no exemption or safe harbor applies, offers and sales must be effected by means of a publicly-filed Securities Act registration statement.
>>2. U.S. Listing
Under Section 12(b) of the Exchange Act, registration under the Exchange Act is required for securities to be listed on a national securities exchange such as the New York Stock Exchange, the NYSE Amex and the NASDAQ Stock Market.
>>3. Quotations in the U.S. Over-the-Counter Market
Under the rules relating to the OTCBB, in order to be quoted on the OTCBB, an issuer must be required to file reports under the Exchange Act. To meet this requirement, issuers may voluntarily register a class of securities under Section 12(g) of the Exchange Act. Once registered under Section 12(g), the Exchange Act requires an issuer to file periodic and current reports to the same extent as issuers with a class of securities registered pursuant to Section 12(b) and listed on an exchange. Foreign private issuers may also register a class of securities under Section 12(g) to facilitate trading in other U.S. over-the-counter markets. Foreign private issuers interested in having a class of securities quoted in other segments of the over-the-counter market should review the information on the over-the-counter market on the Commission’s website.
>>4. Asset and Shareholder Thresholds; Rule 12g3-2(b) Exemption
Foreign private issuers may be required to register a class of equity securities under the Exchange Act based upon the size of the company and the nature of its share ownership, both globally and within the United States. Under Exchange Act Section 12(g), Rule 12g-1, and Rule 12g3-2(a), a foreign private issuer is generally required to register a class of equity securities if:
the issuer has over $10 million in assets as of the end of its fiscal year;
the number of its record holders is either 2,000 or greater worldwide, or 500 persons who are not accredited investors or greater worldwide; and
the number of its U.S. resident holders is 300 or more.
In measuring the number of shareholders, issuers must "look through" the record ownership of brokers, dealers, banks, or nominees holding securities for the accounts of their customers, and consider any beneficial ownership reports or other information provided to the issuer in order to determine the residency of shareholders. In addition to raising the asset and record holder thresholds, the JOBS Act made certain changes to the definition of "held of record" that may be considered by issuers in determining whether Section 12(g) registration is required.
Under Rule 12g3-2(b), a foreign private issuer is provided an automatic exemption from registration under Section 12(g) if it meets the following three conditions:
The foreign private issuer is not required to file reports under Exchange Act Sections 13(a) or 15(d) (such obligations arising generally as a result of a public offering of securities, a listing on a national securities exchange, or voluntary registration under the Exchange Act);
The foreign private issuer maintains a listing of the subject class of securities on one or two exchanges in a non-U.S. jurisdiction(s) that comprise more than 55% of its worldwide trading volume (its "Primary Trading Market"); and
The foreign private issuer publishes in English on its website (or through an electronic information delivery system generally available to the public in its Primary Trading Market) material items of information that:
It has made public or been required to make public pursuant to the laws of the country of its incorporation, organization or domicile;
It has filed or been required to file with the principal stock exchange in its Primary Trading Market on which its securities are traded and which has been made public by that exchange; or
It has distributed or been required to distribute to its security holders.
The exemption provided by Rule 12g3-2(b) is self-executing; it does not require foreign private issuers to make a formal application to the Commission for the exemption or submit materials to the Commission to maintain the exemption.
To establish the exemption initially, the foreign private issuer must have published electronically in English its non-U.S. disclosure documents published since the first day of its most recently completed fiscal year. To maintain the exemption, the foreign private issuer’s non-U.S. disclosure documents must, on an on-going basis, be electronically published in English on its website promptly.
>B. The Process of Registration and Periodic Reporting for Foreign Private Issuers
>>1. Disclosure by Foreign Private Issuers Under the Securities Act and the Exchange Act
As noted earlier, an issuer may register a public offering of securities under the Securities Act or may register a class of equity securities under the Exchange Act (or both). In either case, a registration statement containing information required by the Commission’s regulations must be filed with the Commission and become effective. Under the Securities Act, a registration statement contains a prospectus, along with other information required by the Commission’s regulations.
The Commission has adopted a series of forms available to foreign private issuers consisting of the "F" series registration statements and Forms 20-F and 6-K disclosure forms for annual and current reports, respectively. As discussed below, the disclosure forms available to foreign private issuers have been designed with reference to international disclosure standards, both in scope and timing requirements for filing. Most foreign private issuers opt to file under those forms instead of the forms available to domestic issuers. While foreign private issuers may voluntarily choose to register and report using domestic forms (e.g., "S" series registration statements and Forms 10-K, 10-Q, and 8-K), they lose some of the provisions available to foreign private issuers using the foreign filing regime (for example, foreign private issuers using the domestic forms must meet the earlier filing deadline of Form 10-K, file Form 10-Q quarterly reports, and file Form 8-K current reports).
a) Form 20-F
Form 20-F is the primary disclosure document for foreign private issuers under both the Securities Act and the Exchange Act. Although Form 20-F is most often filed as an annual report under the Exchange Act, it is also used to register classes of securities under the Exchange Act. In addition, the disclosure required by each Securities Act registration statement form cross-references the disclosure requirements of Form 20-F.
The disclosure requirements of Form 20-F are, in large part, very similar to those required of domestic issuers. There are, however, several significant differences, mostly with respect to financial statement and executive compensation disclosure. These differences include:
Foreign private issuers may provide financial statements prepared in accordance with U.S. GAAP, IFRS as issued by the IASB, or home country accounting standards that comprise a comprehensive basis of accounting. If a foreign private issuer prepares financial statements pursuant to home country accounting standards or non-IASB IFRS, it must also provide a reconciliation to U.S. GAAP, consisting of a discussion and quantification of the material differences between the financial statements presented and the requirements of U.S. GAAP.
The Division of Corporation Finance has published informal, non-authoritative guidance on financial reporting matters in its Financial Reporting Manual; in particular, Topic 6 of this manual addresses matters specific to foreign private issuers.
Foreign private issuers are permitted to disclose executive compensation on an aggregate basis and need not supply a Compensation Discussion & Analysis, as is required for domestic companies. To the extent a foreign private issuer discloses more extensive executive compensation information in accordance with home market requirements or voluntarily, such information must also be disclosed under Form 20-F.
b) Smaller Reporting Companies
If a foreign private issuer chooses to use the domestic forms, it may be able to present its disclosure in Commission filings in compliance with alternative, scaled disclosure requirements if it qualifies as a "smaller reporting company," which is defined in Securities Act Rule 405 and Exchange Act Rule 12b-2 as a company with a public float (the aggregate worldwide value of shares of its voting and non-voting common equity held by non-affiliates) of less than $75 million. If an issuer has no common equity outstanding, or there is no market price for its outstanding common equity, it may qualify as a smaller reporting company if it had less than $50 million in revenues in the last fiscal year.
Importantly, all eligible companies (including foreign private issuers) that elect to use the scaled disclosure regime for smaller reporting companies must file on the forms applicable to domestic issuers and present their financial statements in accordance with U.S. GAAP.
c) JOBS Act and Emerging Growth Companies
The JOBS Act created a new category of issuer under the federal securities laws: an "emerging growth company," which is defined in the Securities Act and the Exchange Act as an issuer with "total annual gross revenues" of less than $1 billion during its most recently completed fiscal year. Foreign private issuers that qualify as emerging growth companies may take advantage of applicable provisions of the JOBS Act to the same extent as U.S. companies.
The JOBS Act provides modified disclosure requirements for emerging growth companies, including, among other things, two years of audited financial data in the Securities Act registration statement for an initial public offering of common equity securities and no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting.
The JOBS Act also permits emerging growth companies to submit initial Securities Act registration statements for review on a confidential basis, as discussed below.
d) Other Financial Disclosure Issues
(1) Registration with the PCAOB
Foreign audit firms whose audit reports on the financial statements of issuers are included in SEC filings are required to be registered with the Public Company Accounting Oversight Board (the "PCAOB"). Under Section 102 of the Sarbanes-Oxley Act, it is unlawful for any audit firm that is not registered with the PCAOB to prepare, issue, or participate in the preparation or issuance of any audit report with respect to any issuer.
(2) Quality of Audits and Reconciliations to US GAAP
A foreign auditor practicing before the SEC must comply with the requirements of Article 2 of Regulation S-X and is expected to demonstrate sufficient knowledge and experience in applying U.S. GAAP, IFRS as issued by IASB, PCAOB Auditing Standards, SEC financial reporting rules, and SEC independence requirements.
In addition, in April 2003, the PCAOB adopted interim quality control standards and related rules. The rules established minimum requirements (commonly referred to as "Appendix K") for the review of foreign private issuer filings and "Draft Registration Statements" by a designated "filing reviewer" within the U.S. firm or international organization knowledgeable about U.S. GAAP, PCAOB Auditing Standards, SEC financial reporting rules, and SEC independence requirements.
>>2. The Process of Registration and Filing of Registration Statements
All registration statements and other material filed with the Commission must be submitted in electronic format on the Commission’s Electronic Data Gathering and Retrieval ("EDGAR") system and are subject to staff review and comment. The Division of Corporation Finance has published a description of its review process on its website.
Various registration forms are available exclusively to foreign private issuers under the Securities Act and Exchange Act, depending upon the purpose for registration. In general, each form applies to the following circumstances:
Securities Act Offerings:
Form F-1 is the form prescribed for initial public offerings and other first-time registrations by foreign private issuers. It is also the default form for transactions for which no other form is authorized or prescribed.
Form F-3 is a "short form," providing for incorporation by reference of an annual report and other reports filed with the Commission. Form F-3 is available to foreign private issuers that have been subject to Exchange Act reporting requirements for at least 12 months, have filed all required reports in a timely manner for at least the last 12 months, have filed at least one annual report on Form 20-F, have not defaulted on certain payment obligations, and have an aggregate worldwide public float of common stock of at least $75 million. Form F-3 may be available in other circumstances as well.
Form F-4 is the form prescribed for business combinations and exchange offers.
Form F-6 is the form for American Depositary Receipts.
Exchange Act Registration:
Form 20-F is the form generally used by foreign private issuers that wish to register their securities under Section 12(b) of the Exchange Act and list on a national securities exchange. Foreign private issuers that wish to voluntarily register their securities under Section 12(g) may also file a Form 20-F to register their securities under the Exchange Act. Foreign private issuers that meet certain shareholder and asset thresholds both globally and within the United States and that do not qualify for the Rule 12g3-2(b) exemption are also required to register using Form 20-F under Section 12(g) of the Exchange Act.
a) Pre-Filing Issues
When foreign companies plan to list or offer securities in the United States, management may identify many procedural or substantive compliance questions. Issuers are encouraged to contact the staff of the Office of International Corporate Finance to discuss these questions. Questions about the required financial statements or unusual accounting and financial reporting issues may be directed to the Chief Accountant’s Office in the Division of Corporation Finance.
While the staff will often respond to inquiries about form requirements or procedures informally, more complex or sensitive disclosure and accounting issues are usually best submitted to the staff on a pre-filing basis in writing. The inquiry should identify clearly the company, its country of organization and the issue on which staff guidance or relief is requested. Where an inquiry relates to financial disclosures, as the form, content and periods of financial information required in an SEC filing may vary depending on the securities or transaction being registered, the request should also describe the company’s capital structure and listing or offering plans. The request should also identify the comprehensive basis of accounting and reporting currency to be used in the company’s financial statements, as well as the number of periods being reconciled to U.S. GAAP (if any). The request should indicate whether the company’s auditor has been consulted about the matter, and whether it concurs with the company’s conclusion. The extent of information provided about the company’s business will depend on the nature of the issue, but should be sufficient to permit the staff to make an informed analysis of the question. The request should explain clearly the basis for the company’s conclusion or need for relief.
b) Non-Public and Confidential Registration Submissions
The Division of Corporation Finance staff recognizes that foreign private issuers and foreign governments often face unique circumstances when accessing U.S. public markets in connection with the initial registration of their securities. The Division affords certain first-time foreign private issuers and foreign governments the ability, in limited circumstances, to submit registration statements and amendments to the staff on a non-public basis. This allows the staff to review and comment on the disclosure for certain issuers and the issuers to respond to staff comments before a public filing is made through the EDGAR system. The Division’s notice on non-public submissions from foreign private issuers summarizes the limited circumstances under which an issuer may submit non-public registration statements in connection with an initial registration of securities. As with any registration statement filed with the Commission, a registration statement confidentially submitted to the staff must be complete in all material respects at the time of first submission. The staff will defer the review of an incomplete or deficient non-public registration statement.
In addition, Section 106 of the JOBS Act added Section 6(e) to the Securities Act under which an emerging growth company may confidentially submit to the Commission an initial registration statement under the Securities Act for confidential, non-public review by the Commission staff before public filing, provided that the initial confidential submission and all amendments thereto are publicly filed not later than 21 days before the date on which the issuer conducts a road show, as this term is defined in Securities Act Rule 433(h)(4).
After a foreign private issuer has completed an offering registered under the Securities Act or registered as a class of securities under the Exchange Act, it is required to file reports with the Commission on an ongoing basis. In broad outline, these reporting obligations are as follows:
Annual Reports — foreign private issuers file annual reports on Form 20-F. Foreign private issuers are required to file Form 20-F within four months of the end of the fiscal year.
Other Reports — foreign private issuers meet their other reporting obligations under the Exchange Act by filing reports on Form 6-K. Quarterly reports are not required. Foreign private issuers must disclose on Form 6-K the material information that the foreign private issuer (i) makes or is required to make public pursuant to the law of its domicile, incorporation, or organization, (ii) files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange, or (iii) distributes or is required to distribute to its security holders. Form 6-K refers to general areas of disclosure, including:
changes in business;
changes in management or control;
acquisitions or dispositions of assets;
bankruptcy or receivership;
changes in registrant’s certifying accountants;
the financial condition and results of operations;
material legal proceedings;
changes in securities or in the security for registered securities;
defaults upon senior securities;
material increases or decreases in the amount outstanding of securities or indebtedness;
the results of the submission of matters to a vote of security holders;
transactions with directors, officers or principal security holders;
the granting of options or payment of other compensation to directors or officers; and
any other information which the foreign private issuer deems of material importance to security holders.
Form 6-K must be filed promptly after the material contained in the report is made public. Under the Form 6-K reporting regime, interim reporting for foreign private issuers parallels the requirements of the issuer’s home country regulatory and stock exchange practices.
English Translations — All filings made with the Commission must be in English. If a filing or submission requires the inclusion of a document that is in a foreign language, the issuer must submit instead a fair and accurate English translation of the foreign language document pursuant to Rule 403 under the Securities Act and Rule 12b-12 under the Exchange Act. Whereas summaries may be provided for certain documents, others require a full translation. Among other requirements, any summary submitted must both fairly and accurately summarize the terms of each material provision contained in the foreign language document as well as describe the terms that have been omitted or abridged.
>C. Beneficial Ownership Disclosure Obligations Arising from Registration
One of the consequences for investors in a corporation registered under the Exchange Act is the application of beneficial ownership reporting requirements. Exchange Act Sections 13(d) and 13(g) and corresponding Exchange Act Regulation 13D-G establish a comprehensive reporting system for information relating to an issuer’s beneficial ownership (generally defined as the direct or indirect ability to vote or dispose of voting equity securities registered under Section 12 of the Exchange Act). This system is designed to provide investors and the issuer with information about accumulations of securities that may have the potential to change or influence control of the issuer. These requirements are the same for foreign private issuers as for other companies.
In 2007, the Commission adopted a separate regime that facilitates the ability of foreign private issuers to deregister and terminate their reporting obligations under the Exchange Act, should a foreign private issuer decide that registration of its securities is no longer desired.
>>1. Equity Securities
For equity securities, there are two alternatives for deregistration. The first, pursuant to Exchange Act Rule 12h-6(a)(4)(i), permits deregistration of equity securities if the average daily trading volume of the subject class in the United States for a recent 12-month period is no more than five percent of the average daily trading volume of that class of securities on a worldwide basis for the same period.
The second, pursuant to Exchange Act Rule 12h-6(a)(4)(ii), permits deregistration of equity securities if, on any date within 120 days before filing for deregistration, the foreign private issuer has less than 300 record holders worldwide. As with measuring such shareholders for the purpose of registration, deregistration requires issuers to "look through" the record ownership of brokers, dealers, banks, or nominees holding securities for the accounts of their customers, and also consider any beneficial ownership reports or other information provided to the issuer in order to determine the residency of shareholders.
In addition to the specific requirements for each alternative, a foreign private issuer must also meet three general conditions in order to deregister. First, a registrant must have at least one year of Exchange Act reporting, be current in filing all reports under the Exchange Act, and have filed at least one Exchange Act annual report. Second, the registrant must not have sold securities in a registered offering in the United States during the 12 months preceding deregistration, except for specified exceptions noted in the rule. Third, the registrant must have maintained a listing of the subject class of securities in the registrant’s primary trading market for at least the 12 months preceding deregistration.
>>2. Debt Securities
A foreign private issuer may deregister and terminate its reporting obligations for debt securities registered under the Exchange Act if two conditions are met, as provided in Exchange Act Rule 12h-6(c). First, the foreign private issuer must have filed or furnished all reports required under the Exchange Act, including at least one Exchange Act annual report. Second, the foreign private issuer must, on any date within 120 days before filing for deregistration, have had less than 300 record holders worldwide.
IV. Exemptions from Securities Act Registration — Initial Distributions and Resales
Foreign private issuers may raise capital in the United States through a registered offering of securities or through offerings that are exempt from the registration requirements. Exemptions from registration are strictly construed, however, and the burden of proof is on the issuer claiming the exemption. As a result, issuers must take precautions when offering and selling securities pursuant to an exemption, to ensure, if assessed at a later time, that the facts surrounding the issuance supported such an exemption.
>A. Private and Limited Offering Exemptions
Foreign private issuers may make private or limited offerings of securities in the United States by relying on exemptions from the registration requirements of the Securities Act. These exemptions are described in "Small Business and the SEC," and most are generally available to foreign private issuers. Two of the most frequently used means by which issuers make private or limited offerings are by the exemption provided in Securities Act Section 4(a)(2) and the safe harbor provisions outlined in Regulation D of the Securities Act.
>B. Offshore Sales and Regulation S
Regulation S provides that offers and sales of securities occurring outside of the United States are not subject to the registration requirements contained in Section 5 of the Securities Act. Regulation S sets forth non-exclusive safe harbors for extraterritorial offers, sales, and resales of securities in Rules 903 and 904 under the Securities Act. If an offering fails to qualify for coverage under Regulation S, it may still qualify as a valid non-public offering under one of the other available exemptions. Additionally, securities may be offered and sold outside the United States pursuant to Regulation S at the same time as those offered and sold pursuant to Regulation D. In such cases, the number of purchasers and the total proceeds raised pursuant to Regulation S are not included in calculating the limits set forth in Regulation D.
The structure of Regulation S consists of General Conditions applicable to any offshore transaction, followed by an Issuer Safe Harbor and a Resale Safe Harbor.
>>1. General Conditions
In general, an offering may qualify for non-registration pursuant to Regulation S if it meets two conditions:
The offer or sale is made in an "offshore transaction"; and
There are no “directed selling efforts” in the United States.
An Offshore Transaction is defined as one in which:
The offer is not made to a person in the United States; and
At the time the buy order is originated, the buyer is outside the United States, or the seller and any person acting on the seller’s behalf reasonably believe that the buyer is outside the United States; or
For the purposes of:
the issuer safe harbor, the transaction is executed in, on or through a physical trading floor of an established foreign securities exchange that is located outside the United States; or
the resale safe harbor, the transaction is executed in, on or through the facilities of a designated offshore securities market, and neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States.
Directed Selling Efforts means any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the securities being offered in reliance on Regulation S, including placing an advertisement in a publication “with a general circulation in the United States” that refers to the offering of securities being made in reliance upon Regulation S.
>>2. Issuer Safe Harbor
The issuer safe harbor contains three categories of offerings, based on the nationality and reporting status of the issuer, and degree of U.S. market interest in its securities. The three categories have varying levels of procedural safeguards imposed which are designed to assure that the securities offered pursuant to a Regulation S offering are not part of an unregistered distribution of securities in the United States.
a) Category 1
The first issuer safe harbor under Regulation S contains the least restrictive conditions and is for offerings of securities of foreign companies with no substantial U.S. market interest in these securities, securities offered and sold in overseas directed offerings, securities backed by the full faith and credit of a foreign government, and securities offered and sold pursuant to certain employee benefit plans. For offerings in this category, there are no requirements other than the Regulation S General Conditions.
b) Category 2
The second issuer safe harbor under Regulation S applies to offerings that are not eligible for Category 1 and are equity securities of a reporting foreign company, or debt securities of a reporting issuer (either foreign or U.S. domestic) or a non-reporting foreign company. In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a U.S. person or for the account or benefit of a U.S. person (other than a distributor) for a period of 40 days.
c) Category 3
The third issuer safe harbor under Regulation S contains the most restrictive conditions and applies to all securities not eligible for Categories 1 and 2. This includes equity securities of a reporting U.S. domestic issuer, any securities of a non-reporting U.S. domestic issuer, and equity securities of a non-reporting foreign company that has a substantial U.S. market interest in its equity securities. In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a U.S. person or for the account or benefit of a U.S. person (other than a distributor) for the following periods:
Equity securities of non-reporting issuers: one year
Equity securities of reporting issuers: six months
Debt securities: 40 days
>C. Resales of Securities Sold in Unregistered Offerings
The registration requirement under Section 5 of the Securities Act generally applies on a transaction-by-transaction basis. As a result, securities sold initially pursuant to an exemption or safe harbor from registration may not then be resold unless either an exemption is available or the resale is then registered under the Securities Act. The availability of resale exemptions should be an important consideration to a foreign private issuer; it may not only affect the price and ability to initially place the issuer’s securities, but the availability of the issuer’s initial exemption or safe harbor as well.
>>1. Resales — Rule 144
Rule 144 under the Securities Act provides a safe harbor under which non-affiliates of an issuer may resell "Restricted Securities" (as described below) without registration and affiliates of an issuer may resell any type of security (restricted or not) without registration. Resales of securities by ordinary investors (persons that are not issuers, underwriters or dealers) are generally exempt from registration under Section 4(a)(1) of the Securities Act. However, in certain circumstance, investors may be deemed underwritiers if they act as links in a public distribution of securities. Rule 144 supplies a safe harbor for resales of restricted securities by providing that a resale will not be deemed a public distribution if particular criteria are met. In this way, the selling security holder will not be deemed an underwriter, and the Section 4(a)(1) exemption will be available.
Pursuant to Rule 144, an affiliate is defined as a person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, an issuer. "Restricted Securities" include those that are acquired:
directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering;
from the issuer and subject to the resale limitations under Regulation D;
in a transaction or chain of transactions involving Rule 144A; or
equity securities of a U.S. issuer that were acquired in a transaction or chain of transactions subject to the conditions of Regulation S.
To qualify for the Rule 144 safe harbor, resale transactions involving “restricted securities” must meet the following requirements, depending upon whether the seller is an affiliate:
Non-affiliates may resell restricted securities of a reporting issuer that is current in its reporting obligations without any other restriction after a six-month holding period. Non-affiliates holding restricted securities of a reporting issuer that is not current in its reporting obligations, or securities of a non-reporting issuer, must meet a one-year holding period.
As long as an issuer’s current public information requirements have been met and the resale is effected in compliance with Rule 144’s manner of sale, volume, and filing requirements, affiliates may resell restricted securities of a reporting issuer after a six-month holding period, and those of a non-reporting issuer after a one year holding period.
Rule 144 should be carefully followed by affiliates and non-affiliates who seek to rely on the Rule.
>>2. Resales — Regulation S
The resale safe harbor under Regulation S is available for any securities of an issuer, not simply those initially acquired in a Regulation S transaction. This safe harbor is available for resales by any persons other than the issuer, a distributor or their respective affiliates, any officer or director of the issuer who is an affiliate solely by virtue of holding such position, and persons acting on such persons’ behalf. In addition to the two Regulation S General Conditions, certain additional restrictions are imposed for resales by dealers and persons receiving selling concessions, as well as resales by certain affiliates.
>>3. Resales — Rule 144A
Rule 144A provides another safe harbor for the resale of restricted securities.
In order to qualify for the safe harbor under Rule 144A, the following conditions must be met: the securities at issue must be offered and sold only to Qualified Institutional Buyers ("QIBs"), which are large institutions meeting specific requirements outlined in Rule 144A, or entities the seller (or person acting on its behalf) reasonably believes to be QIBs; the seller (or person acting on its behalf) must take reasonable steps to ensure that the purchaser is aware the seller may rely on the safe harbor provided by Rule 144A; the securities sold must not, when issued, be of the same class as a class listed in the United States; and purchasers are entitled upon request to receive reasonably current information about the issuer.
Issuers subject to reporting under the Exchange Act, foreign governments and other entities eligible to register offerings under Schedule B, and foreign private issuers exempt from registration pursuant to Rule 12g3-2(b) are all exempt from such information requirement.
V. The Use of American Depositary Receipts ("ADRs")
Many foreign companies use American Depositary Receipts ("ADRs") as a means of raising capital or establishing a trading presence in the United States. An ADR is a negotiable certificate that evidences ownership of American Depositary Shares ("ADSs") which, in turn, represent an interest in a specified number (or fraction) of a foreign company’s shares. The use of a ratio allows ADSs to be priced at an amount more typical for U.S. markets. While an ADR is the physical certificate evidencing an ADS, the terms ADR and ADS are often used interchangeably by market participants. ADRs trade in U.S. dollars and clear through U.S. settlement systems, allowing ADR holders to avoid effecting transactions in a foreign currency.
ADRs are issued by a depositary bank in the United States, and represent the deposit of the foreign company’s shares in a custodian bank, usually in the foreign company’s home jurisdiction. Pursuant to the terms of the underlying deposit agreement, ADR holders may exchange ADRs for the representative number of shares in the foreign company. Conversely, those holding shares in the underlying foreign company may deposit such shares in exchange for ADRs.
ADRs may be "sponsored" or "unsponsored." Sponsored ADRs are those in which the foreign private issuer enters into an agreement directly with the U.S. depositary bank to arrange for record keeping, the forwarding of shareholder communications, the payment of dividends, and other services as described above. An unsponsored facility is set up without the cooperation of the foreign private issuer and may be initiated by a broker-dealer wishing to establish a trading market.
An ADR facility may not be established unless the issuer is either subject to the reporting requirements under the Exchange Act or is exempt from the reporting requirements pursuant to Rule 12g3-2(b). Because an ADR essentially represents two separate securities, ADSs and the underlying shares of the foreign company, a registration analysis must be made for each security.
ADSs are always registered on Form F-6. Disclosure under Form F-6 relates only to the contractual terms of deposit under the deposit agreement and includes copies of the agreement, a form of ADR certificate, and legal opinions. A Form F-6 registration statement contains no information about the foreign private issuer. If a foreign private issuer with ADRs wishes to raise capital in the United States, it would separately file a registration statement on Form F-1, F-3 or F-4, as described earlier.
Market participants have generally categorized ADRs into three "levels," depending on the extent to which the foreign company has accessed the U.S. markets:
Level 1 ADR programs establish a securities market presence in the United States but may not be used to raise capital. It is the only type of facility that may be unsponsored and, as a result, may be quoted only on the over-the-counter market. Form F-6 would be the only form required to be filed, because exemption from registration pursuant to Rule 12g3-2(b) is sufficient to establish eligibility for an ADR facility.
Level 2 ADR programs establish a securities market presence in the United States (on a national securities exchange) but may not be used to raise capital. Again, Form F-6 would be used to register the ADRs. Filing a Form 20-F would also be necessary in order to register the underlying class of securities the ADR represents.
Level 3 ADR programs may be used not only to establish a securities market presence in the United States, but also to raise capital for the foreign company. As such, in addition to the Form F-6 used to register the ADSs, a registration statement on Form F-1, Form F-3 or Form F-4 must be filed with the Commission.
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