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.
Definition of a Foreign Private Issuer
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” (“FPI). Generally, if a company does not meet the definition of an FPI, it is subject to the same registration and reporting requirements as any U.S. company.
The determination of FPI 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, an FPI is any foreign issuer, except one that meets the following as of the last day of its second fiscal quarter (or if registering with the SEC for the first time, within 30 days of filing such initial registration statement under either the Securities Act or Exchange Act):
(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. 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 fewer than a foreign company’s shareholders are located in the U.S., it qualifies as an FPI. 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.
Determining U.S. Ownership of Record
U.S. record ownership is determined by adding: (i) shareholders “of record” on the company’s shareholder list with a U.S. address; (ii) accounts held under Cede by a broker dealer, bank or nominee located in the U.S.; (iii) accounts held under Cede in a brokerage, bank or nominee where the beneficial owner is located in the U.S. On point (iii) a company may rely on information supplied by the brokerage, bank or nominee. Moreover, if the brokerage, bank or nominee fails to provide such information after reasonable inquiry, the company may assume the customers are residents of the jurisdiction in which the nominee has its principal place of business.
Registration
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 FPIs 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)), Regulation S, and resale restrictions and exemptions such as under Section 4(a)(1) and Rule 144.
Although an FPI 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. A Form F-1 is the general registration form for the offer and sale of securities under the Securities Act and, like Form S-1, is the form 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 S-3, have been subject to the Exchange Act reporting requirements for at least 12 months and filed all reports in a timely manner during that time. The company must have filed at least one annual report on Form 20-F. For more on F-3 eligibility see HERE). 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, an FPI can submit a registration statement on a confidential basis (for more on confidential submittal of registration statements see HERE.
Importantly, financial statements for an FPI go stale more slowly than for a U.S. company. Financial statements for a U.S. company go stale every 135 days. Financial statements for an FPI cannot be older than 9 months and the audit cannot be older than 12 months in an IPO and 15 months for follow on registration statements. Interim financial statements must cover at least six months, as opposed to three months for U.S. companies.
Ongoing Reporting Obligations
When offers and sales are registered, the FPI becomes subject to ongoing reporting requirements. Subject to the exemption under Exchange Act Rule 12g3-2(b) for OTC Markets, when an FPI 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 an FPIs worldwide assets and worldwide/U.S. shareholder base reaches a certain level ($10 million in assets and 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 unless it is already registered under Section 12(b).
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.
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 the translation is fair and accurate.
The SEC has adopted several rules applicable only to FPIs and maintains an Office of International Corporate Finance to review filings and assist in registration and reporting questions. Of particular significance:
(i) An FPI 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;
(ii) FPIs are exempt from the Section 14 proxy rules (see HERE, HERE, and HERE;
(iii) Insiders of FPIs are exempt from the Section 16 reporting requirements and short swing trading prohibitions; however, they must comply with Section 13 (for a review of Section 13 see HERE and HERE and for Section 16 see HERE);
(iv) FPI’s are not required to file quarterly reports (though Nasdaq and NYSE require semi-annual financial statements be filed in a 6-K);
(v) An FPI’s annual report is not due until 120 days following its year end;
(vi) FPIs are exempt from Regulation FD (for a review of Regulation FD see HERE);
(vii) FPIs 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). Moreover, the disclosure rules related to registration statements and reports often reference specific items in Form 20-F as an alternative to Regulation S-K and S-X and the specific FPI disclosures are generally less demanding;
(viii) As examples of less demanding disclosure obligations, an FPI has fewer specific requirements for a description of business; disclosure of executive compensation may be in the aggregate; and disclosures of related party transactions are far less arduous (see HERE);
(ix) Periodic reports on Form 6-K are “furnished” (U.S. Form 8-K’s are generally “filed”) (for more see HERE);
(x) FPIs 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; and
(xi) As discussed further in this blog series, FPI’s are subject to different corporate governance requirements when trading on a national exchange such as Nasdaq or the NYSE;
The SEC rules do not have scaled disclosure requirements for FPIs. That is, all companies, regardless of size, must report the same information. An FPI 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.
Deregistration
The deregistration rules for a FPI are different from those for domestic companies. A FPI may deregister if: (i) the average daily volume of trading of its securities in the U.S. for a recent 12-month period is less than 5% of the worldwide average daily trading volume; or (ii) the company has fewer than 300 shareholders worldwide. In addition, the company must: (i) have been reporting for at least one year and have filed at least one annual report and be current in all reports; (ii) must not have registered securities for sale in the last 12 months; and (iii) must have maintained a listing of securities in its primary trading markets for at least 12 months prior to deregistration.
American Depository Receipts (ADRs)
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 issues. ADR’s 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). ADR’s are always registered on Form F-6.
Exchange Act Rule 12g3-2(b)
Exchange Act Rule 12g3-2(b) permits FPIs 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 FPI is not required to be subject to the Exchange Act reporting requirements if:
(i) the FPI 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; and
(ii) 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% 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 FPI 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; and
(vii) Transactions with directors, officers or principal security holders.
At a minimum, a FPI must 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; and
(iv) All other communications and documents distributed directly to security holders of each class of securities to which the exemption relates.
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.
Contact Anthony, Linder & Cacomanolis, PLLC. Inquiries of a technical nature are always encouraged.
Follow Anthony, Linder & Cacomanolis, PLLC on Facebook, LinkedIn, YouTube, Pinterest and Twitter.
Anthony, Linder & Cacomanolis, PLLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.
© Anthony, Linder & Cacomanolis, PLLC
