It is almost time for foreign companies that operate as foreign private issuers (FPIs) under the US federal securities laws to assess their status as FPIs. An FPI is required to reassess its status as an FPI annually as of the last business day of its second fiscal quarter, which is Friday, June 30, 2017, for those issuers with a December 31 fiscal year-end.1

This annual determination is a critical exercise for FPIs. If an issuer no longer meets the requirements for qualifying as an FPI, then it will be required to comply with the more onerous US Securities and Exchange Commission (SEC) reporting obligations applicable to domestic US issuers beginning on the first day of the issuer’s next fiscal year.2

Testing Eligibility as an FPI

An FPI, as defined in Rule 405 under the US Securities Act of 1933, as amended (the Securities Act), and Exchange Act Rule 3b-4, is any issuer, other than a foreign government, incorporated or organized under the laws of a foreign country, except an issuer that fails both the “Shareholder Test” and the “Business Contacts Test.”

  1. Shareholder Test – An issuer fails this test if more than 50% of the issuer’s outstanding voting securities are held of record, directly or indirectly, by US residents as of the determination date. If the issuer passes this test, then it qualifies as an FPI and no further analysis is required.
  • Determination of share ownership is based on record ownership. Issuers, however, must look through the record ownership of certain nominee holders, such as brokers, dealers or banks holding securities for the accounts of their customers, to determine the residency of those customers.
  • The SEC staff only requires FPIs to “look through” the record ownership in jurisdictions that should account for most of the relevant issuer’s trading volume and that would be likely to produce the greatest number of US beneficial owners. These jurisdictions include the US, the issuer’s home jurisdiction and the primary trading market for the issuer’s securities, if different from the issuer’s home jurisdiction.
  • The “look through” process often results in additional layers of nominees. Under SEC guidance, if the “look through” process results in additional nominees then the issuer should continue to inquire about the beneficial owners until it becomes clear that responsive information is unavailable. The SEC staff expects all issuers to make a reasonable, good-faith effort to obtain the information.
  • Issuers conducting the “look through” process must also assess whether a shareholder is a publicly or privately held entity.
    • Publicly Held Entity: The SEC staff has issued informal guidance stating that, in the case of a shareholder that is a publicly held entity, an issuer is not required to analyze the proportion of such entity’s security holders that reside in the US In other words, the entity can be viewed as one shareholder, and its place of organization or incorporation can be treated as its place of residence.
    • Privately Held Entity: If, instead, the shareholder is a privately or closely held entity, the SEC staff has informally taken the position that an issuer is required to look through to the underlying security holders only where the facts and circumstances demonstrate that such security holders would be deemed to be the beneficial owners of the issuer’s securities under Exchange Act Rule 13d-3 (i.e., the security holders exercise either voting or investment control over the issuer’s securities). An issuer will not be required to look through to the security holders of the entity if such security holders can validly disclaim beneficial ownership of the issuer’s securities.
  • An issuer must also consider actual knowledge it has about its shareholders and any beneficial ownership reports that have been filed publicly, such as those filed with the SEC on Schedule 13D or Schedule 13G, or that have been provided to the issuer.
  1. Business Contacts Test – If an issuer fails the Shareholder Test, then it must perform an analysis under the Business Contacts Test, which is tripped if any of the following factors are true: (a) a majority of the issuer’s executive officers or directors are US citizens or residents; (b) more than 50% of the issuer’s assets are located in the US; or (c) the issuer’s business is administered principally in the US.
  • Citizenship and Residency of Executive Officers and Directors – This factor is triggered if (1) a majority of the issuer’s executive officers are US citizens or residents of the US; or (2) a majority of the issuer’s directors are US citizens or residents of the US. Both the citizenship and residency of the executive officers, as a group, and the directors, as a group, must be analyzed separately.
    • With regard to determining the relevant group of executive officers to analyze, the issuer should refer to the definition of “executive officer” set forth in Exchange Act Rule 3b-7 or Securities Act Rule 405, both of which definitions include the “president, any vice president . . . in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions of the [issuer].” Please note that this definition may also include officers of an issuer’s subsidiaries.
  • Location of Assets – This factor is triggered if more than 50% of the issuer’s assets are located in the US When conducting this analysis, an issuer must consider the location of both its tangible and intangible assets. The determination of the location of assets requires a case-by-case approach given the nature of the assets and how the issuer accounts for such assets. The allocation or measurement methodology an issuer uses in its financial statements likely serves as a suitable methodology to employ in this analysis; however, other tests or methodologies may also be appropriate, depending on the situation.
    • The SEC staff has confirmed, informally, that it likely will not object to a specific allocation or measurement methodology so long as the methodology is rational and strictly applied; an issuer must not consider the results of the applied methodology in advance.
  • Administration of Business – This factor is triggered if an issuer’s business is administered principally in the US There are several factors that an issuer could consider in conducting this analysis, including, but not limited to, the following: (i) the location of its principal business segments or operations; (ii) the locations of board and shareholder meetings; (iii) the location of its headquarters and where the most influential key executives are located or spend most of their time; (iv) the percentage of working days key executive officers spend inside the US; (v) the locations where principal business functions are administered; and (vi) the percentage of overall sales derived from outside of the US.

What If an Issuer Fails To Qualify as an FPI?

If an FPI fails both the Shareholder Test and the Business Contacts Test on the last business day of its second fiscal quarter, it will remain eligible to use the forms and follow the reporting requirements designated for FPIs until the end of that fiscal year. Beginning on the first day of the fiscal year following the determination date, however, the issuer will be required to comply with the forms and reporting requirements designated for domestic US issuers, and will continue to be subject to such rules until it requalifies as an FPI on the last day of a subsequent second fiscal quarter. Upon a subsequent requalification as an FPI, an issuer can immediately revert to following the FPI rules.


The annual determination of FPI status is a critical exercise for foreign issuers, and the loss of such status is a significant event. Issuers whose US ownership of voting securities is approaching or above 50% should periodically monitor any factors under the Business Contacts Test that may disqualify them from FPI status. 1 A foreign issuer filing a registration statement with the SEC for the first time must determine its status as an FPI as of a date within 30 days prior to the filing of such registration statement.

2 For example, the issuer would be required to file quarterly reports on Form 10-Q, current reports on Form 8-K, annual reports on Form 10-K and reports pursuant to Section 16 of the US Securities Exchange Act of 1934, as amended (the Exchange Act), regarding insiders’ transactions in the issuer’s securities. The issuer would also become subject to, among other items, US proxy rules and Regulation FD, and would lose its exemption from being required to comply with the more onerous executive compensation disclosure requirements applicable to domestic US issuers.