Effective October 10, 2008, the Securities and Exchange Commission (“SEC”) amended rules under the Securities Exchange Act of 1934 (the “Exchange Act’) to reduce the burden upon foreign issuers seeking exemption under Rule 12g3-2(b) from registering a class of equity securities under Section 12(g) of the Exchange Act. The amendments enable foreign private issuers listed on a foreign exchange to automatically claim the exemption under specified conditions. The amendments also replace paper Rule 12g3-2(b) submissions with electronic posting of specified disclosure documents in English.

Background

Section 12(g) requires an issuer to file an Exchange Act registration statement regarding a class of equity securities within 120 days of the last day of its fiscal year if the number of its record holders is 500 or greater and its total assets exceed $10 million. To reduce the registration burden upon foreign private issuers with limited U.S. nexus, the SEC adopted Rule 12g3-2 in 1967 establishing two exemptions.

The first exemption, under Rule 12g3-2(a), exempts a foreign private issuer whose equity securities are held of record by less than 300 U.S. residents, although it has 500 or more record holders on a worldwide basis. A foreign private issuer that relies on this exemption must reassess the number of its U.S. security holders at the end of each fiscal year in order to determine whether the exemption remains valid. By contrast, the second exemption, under Rule 12g3-2(b), focuses on investor access to material information provided to the SEC by the foreign private issuer.

Prior Rule 12g3-2(b) Requirements

Under prior provisions, in order to obtain the Rule 12g3-2(b) exemption, a non-reporting foreign private issuer was required to submit to the SEC a written application along with copies of non- U.S. disclosure documents that have been published since the end of its last fiscal year. The foreign private issuer then was required to submit on an ongoing basis information that it made public or was required to make public under the laws of its jurisdiction of incorporation, pursuant to its non-U.S. stock exchange filing requirements, or that it had distributed or was required to distribute to its security holders. These documents technically were available for review by U.S. investors through the SEC’s public reference facilities in Washington, D.C. (which, as a practical matter, is not readily accessible for most investors).

Prior Rule 12g3-2(b) also required that a foreign private issuer claiming the exemption submit all of the necessary non-U.S. disclosure documents before the date that an Exchange Act registration statement would otherwise have become due under Section 12(g). Once a foreign private issuer timely submitted its application and obtained the exemption, the foreign private issuer could surpass the record holder thresholds as long as it maintained the exemption by submitting the required non-U.S. documents. After it obtained the exemption, the foreign private issuer could have its equity securities traded on a limited basis in over-the-counter markets in the United States.

New Amendments to Rule 12g3-2(b)

The SEC now has eliminated the written application and paper submission requirements. The new approach parallels the SEC’s March 2007 adoption of Rule 12h-6 allowing foreign private issuers to terminate registration under specified conditions.

The new Rule 12g3-2(b) exemption is available if, regardless of the number of its U.S. security holders, the foreign private issuer:

  • does not have reporting obligations under Section 13(a) or 15(d) of the Exchange Act; 
  • maintains a listing of the subject securities on one or more exchanges in its “primary trading market” (Primary trading market” is defined to mean that at least 55 percent of the trading in the issuer’s securities took place in no more than two foreign jurisdictions during the issuer’s most recently completed fiscal year. If two foreign jurisdictions are used as the primary trading market, the trading for the foreign private issuer’s securities in at least one of the two foreign jurisdictions must be larger than the trading in the United States for the same class of the foreign private issuer’s securities.); and 
  • electronically publishes in English (on its website or via another electronic information delivery system (other than EDGAR)), specified non-U.S. disclosure documents published since the beginning of its most recently completed fiscal year that were generally available to the public in its “primary trading market,” unless the foreign private issuer is claiming the exemption in connection with its deregistration under Rule 12h-6.

All foreign private issuers that meet these requirements immediately are exempt from Exchange Act registration under Rule 12g3-2(b) without having to apply to or notify the SEC concerning the exemption. A foreign private issuer also immediately may claim the exemption upon the effectiveness of or following its recent Exchange Act deregistration, whether pursuant to Rules 12g-4, 12h-3, or 12h-6, or the suspension of its reporting obligations under Section 15(d), so long as it met those requirements (absent the electronic publication condition for its most recently completed fiscal year).

To remain eligible for this exemption (in addition to maintaining its foreign listing, continuing to meet its trading volume requirement, and not incurring Exchange Act reporting obligations), a foreign private issuer must continue to electronically publish material non-U.S. disclosure documents in English for subsequent fiscal years promptly after the information has been made public. At a minimum, a foreign private issuer must electronically publish English translations of the following documents: its annual report; interim reports that include financial statements; press releases; and all other communications and documents distributed directly to security holders.

To transition to the new regime, the SEC will permit current Rule 12g3-2(b)-exempt issuers a period of three years to qualify under the amended rule or otherwise register under the Exchange Act. In addition, the SEC will accept and process non-U.S. application disclosure documents submitted in paper for three more months; thereafter, on approximately January 8, 2009, the SEC will no longer process paper Rule 12g3-2(b) submissions.

Impact

The new Rule 12g3-2(b) responds to the increasing globalization of the capital markets and is designed to make it easier for U.S. investors to (i) gain access to a foreign private issuer’s material information, and (ii) reach more informed decisions regarding whether to invest in foreign securities. The amended rule should encourage more foreign private issuers to claim the Rule 12g3-2(b) exemption automatically and without regard to the number of its U.S. security holders, which is often a complicated and timely burden to complete. This could result in the establishment of additional ADR facilities, make it easier for broker-dealers to fulfill their obligations under Exchange Act Rule 15c2-11 to investors with respect to the equity securities of a non-reporting foreign issuer, and facilitate the resale of a foreign issuer’s securities under Rule 144A.