Although many years ago I wrote a high-level review of foreign private issuer (FPI) registration and ongoing disclosure obligations, I have not drilled down on the subject until now. While I’m at it, in the multi part blog series, I will cover the Nasdaq corporate governance requirements for listed FPIs.
In Part 1 in this series, I covered the definition of a foreign private issuer (FPI), registration and ongoing reporting requirements – see HERE. In this Part 2 I will cover Rules 801 and 802 of the Securities Act, which give FPI’s registration exemptions for rights offerings and exchange offers, respectively.
Rule 801 – Exemption in Connection with Rights Offerings
Rule 801 provides an exemption from registration for certain rights offerings by FPIs. A “rights offering” is defined for these purposes as the sale for cash of equity securities in which existing securities holders of a particular class (including holders of ADRs) are granted the right to purchase additional securities of that class, and the number of additional securities the holders may purchase is in proportion to the amount of securities they hold on the record date of the offering.
Rule 801 does not impose a dollar limitation on the value of securities sold to U.S. investorFs in an exempt transaction, but unlike Rule 802 discussed below, only foreign private issuers may rely on Rule 801. Rule 801 provides an exemption only for the issuer of securities and not for affiliates of the issuer or any person who seeks to resell the securities. Securities issued pursuant to Rule 801 take on the same characteristic to the same extent and proportion of the securities held by the security holder of the class with respect to which the rights offering was made, as of the record date for the rights offering. That is, if the held securities at the time of the rights offering were restricted, the new securities are restricted and if the held securities are unrestricted, the new securities are unrestricted.
The conditions to rely on Rule 801 include:
- The issuer must be an FPI on the date the securities are first offered to U.S. investors;
- S. holders must be permitted to participate in the rights offer on terms at least as favorable as those offered to any other holders. Rule 801 does not pre-empt state law and accordingly, the offeror does not need to extend the offer in any jurisdiction that requires registration.
- If the offeror publishes or otherwise disseminates written documentation or information on the offer, it must file the information with the SEC, in English, on Form CB no later than the first business day after publication or dissemination. If the issuer is a foreign company it must also file a Form F-X to designate a U.S. agent for service of process.
- The issuer must disseminate any informational document to U.S. holders, including any amendments thereto, in English, on a comparable basis to that provided to security holders in its home jurisdiction.
- If the issuer disseminates by publication in its home jurisdiction, it must publish the information in the U.S. in a manner reasonably calculated to inform U.S. holders of the offer.
- The securities offered in the rights offering must be equity securities of the same class as the securities held by offerees in the U.S. directly or through ADRs.
- The rights offering must prohibit the transfer of the rights by U.S. holders, except in accordance with Regulation S.
- The following legend must appear on the cover of any informational document:
This rights offering is made for the securities of a foreign company. The offer is subject to the disclosure requirements of a foreign country that are different from those of the United States. Financial statements included in the document, if any, have been prepared in accordance with foreign accounting standards that may not be comparable to the financial statements of United States companies.
It may be difficult for you to enforce your rights and any claim you may have arising under the federal securities laws, since the issuer is located in a foreign country, and some or all of its officers and directors may be residents of a foreign country. You may not be able to sue the foreign company or its officers or directors in a foreign court for violations of the U.S. securities laws. It may be difficult to compel a foreign company and its affiliates to subject themselves to a U.S. court’s judgment.
Rule 802 – Exemption in Connection with Exchange Offers and Business Combinations
Securities Act Rule 802 provides an exemption from registration for offers and sales in any exchange offer for a class of securities of an FPI, or in an exchange of securities for the securities of a FPI in any business combination. The term “exchange offer” means a tender offer in which securities are issued as consideration, while the term “business combination” means a statutory amalgamation, merger, arrangement, or other reorganization requiring the vote of security holders of one of the participating companies, as well as statutory short-form mergers that do not require a vote.
Like Rule 801, Rule 802 does not impose a dollar limitation on the value of securities sold to U.S. investors, and both domestic issuers and FPIs may rely on the rule. Rule 802 provides an exemption only for the issuer of securities and not for affiliates or any person who seeks to resell the securities. Securities exchanged in a Rule 802 transaction take on the same character as the exchanged securities. That is, if the exchanged securities were restricted, the new securities are restricted and if the exchanged securities are unrestricted, the new securities are unrestricted. Note that this is the same concept as in a Section 3(a)(9) transaction.
Exchange offers, such as in a tender offer or other business combination, are generally subject to numerous regulations including the Section 14 tender offer rules (including filing a Schedule TO), and where applicable, Rules 13e-3 and 13e-4 in the case of a going private transaction or issuer self-tender offer. In certain circumstances, these rules are not required to be complied with, although all transactions remain subject to the antifraud provisions of the federal securities laws.
The conditions to rely on Rule 802 include:
- Except in the case of an exchange offer or business combination that is commenced during the pendency of a prior exchange offer or business combination made in reliance on Rule 802, U.S. holders of the foreign company may not comprise more than 10% of the securities subject to the exchange offer or business combination. In the case of a business combination in which the securities are to be issued by a successor registrant, U.S. holders may hold no more than 10 percent of the class of securities of the successor registrant, as if measured immediately after completion of the business combination.
- S. holders must be permitted to participate in the exchange offer or business combination on terms at least as favorable as those offered to any other holders. Rule 802 does not pre-empt state law and accordingly, the offeror does not need to extend the offer in any jurisdiction that requires registration, however, in such case the offeror must offer a cash alternative to the holder.
- If the offeror publishes or otherwise disseminates written documentation or information on the offer, it must file the information with the SEC, in English, on Form CB no later than the first business day after publication or dissemination. If the offeror is a foreign company it must also file a Form F-X to designate a U.S. agent for service of process.
- The following legend must appear on the cover of any informational document:
This exchange offer or business combination is made for the securities of a foreign company. The offer is subject to disclosure requirements of a foreign country that are different from those of the United States. Financial statements included in the document, if any, have been prepared in accordance with foreign accounting standards that may not be comparable to the financial statements of United States companies.
It may be difficult for you to enforce your rights and any claim you may have arising under the federal securities laws, since the issuer is located in a foreign country, and some or all of its officers and directors may be residents of a foreign country. You may not be able to sue a foreign company or its officers or directors in a foreign court for violations of the U.S. securities laws. It may be difficult to compel a foreign company and its affiliates to subject themselves to a U.S. court’s judgment.
You should be aware that the issuer may purchase securities otherwise than under the exchange offer, such as in open market or privately negotiated purchases.
In addition to Rule 801, other tender offer rule relief is available for FPIs. A Tier 1 tender offer is generally exempt from Section 14 and Rules 13e-3 and 13e-4 rules. The conditions for a Tier 1 tender offer include: (i) target must be an FPI; (ii) U.S. securities holders cannot hold more than 10% of the class of securities subject to the tender offer; (iii) the bidder must permit US securities holder to participate in the offer on terms at least as favorable as those offered to other holders (except where state blue sky law prohibits it, or if the issuer decides to offer U.S. holders cash only); (iv) U.S. holders must receive documents, in English, which provide comparable disclosure as provided non U.S. holders; and (v) the issuer in the tender offer cannot be an Investment Company.
A Tier II tender offer is limited to an issuer self-tender offer under Rule 13e-4. A Tier II offer is exempt from multiple provisions of the Section 14 tender offer rules. The conditions for a Tier II tender offer include: (i) U.S. securities holders cannot hold more than 40% of the class of securities subject to the tender offer; (ii) target must be an FPI; and (iii) target cannot be an investment company.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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