On September 5, the SEC published amendments to Rule 12g3-2(b) under the Securities Exchange Act of 1934, which allows a foreign private issuer that submits certain information to the SEC to have a class of equity securities traded in the U.S. over-the-counter market without registering the class under Section 12(g) of the Exchange Act. Section 12(g) registration would subject the foreign company to SEC reporting and other obligations, including compliance with the Sarbanes-Oxley Act. Under the amended rule, a foreign private issuer without a U.S. securities exchange listing will qualify for an automatic exemption from Section 12(g) registration if its equity securities are listed in the issuer’s primary trading market outside the United States and if the issuer electronically publishes English-language translations of specified non-U.S. disclosure documents. The SEC expects that the new amendments will make it easier for foreign private issuers to use the exemption, while improving the access of U.S. investors to important information about these issuers.
The rule amendments, which will become effective on October 10 and are subject to the transition provisions summarized below, are discussed in Release No. 34-58465.
Section 12(g) Registration Exemptions. A company is required to register a class of its equity securities under Section 12(g) of the Exchange Act if it has over $10 million of assets and 500 or more record holders of the class on the last day of its fiscal year. Foreign private issuers may claim two exemptions from Section 12(g) registration. A “foreign private issuer” is a non-U.S. company that either has 50% or less of its outstanding voting securities held of record by U.S. residents or that has more than 50% of its outstanding voting securities held by U.S. residents and has no other specified nexus with the United States.
Under Rule 12g3-2(a), equity securities of any class issued by a foreign private issuer are exempt from Section 12(g) registration if the class has fewer than 300 holders resident in the United States. If the number of the issuer’s U.S. resident holders is 300 or more, the issuer may rely on the registration exemption afforded by Rule 12g3-2(b), which requires the issuer to furnish the SEC on an ongoing basis with information it has made public or is required to make public under its homecountry laws or non-U.S. stock exchange filing requirements, or that it has distributed or is required to distribute to its security holders. Neither exemption is available to a foreign private issuer that has a class of equity securities listed on a U.S. national securities exchange or traded on the OTC Bulletin Board, or that has filed a registration statement under the Securities Act.
Benefits of Rule 12g3-2(b) Exemption.The SEC estimates that every year over 1,000 foreign private issuers claim exempt status under Rule 12g3-2(b). Quotations of the equity securities of many Rule 12g3-2(b) companies are published by services, such as the “pink sheets,” that do not require the quoted company to be subject to SEC reporting obligations. The Rule 12g3-2(b) exemption permits a foreign private issuer to have established an unlisted American Depositary Receipt (ADR) facility under which the company’s equity securities are traded as ADRs in the U.S. over-the-counter market for the convenience of U.S. investors, even if the number of U.S. investors exceeds the Section 12(g) shareholder thresholds. The exemption also permits the non-reporting foreign private issuer to have its equity securities traded in the form of ordinary shares in the U.S. over-the-counter market, makes it easier for broker-dealers to fulfill their Exchange Act obligations with respect to the issuer’s equity securities, and facilitates the resale of the issuer’s securities to qualified institutional buyers in offerings pursuant to Rule 144A under the Securities Act.
Disadvantages of Current Rule. Two requirements of current Rule 12g3-2(b) have limited its appeal to some foreign companies.
- Application Process. To establish the exemption under the current rule, a foreign private issuer is required to submit a written “application” to the SEC containing a list of the issuer’s non-U.S. disclosure requirements and other specified information, including the number of U.S. resident holders of the issuer’s equity securities and a brief description of how its U.S. holders acquired the securities. The issuer is required to file its application within 120 days following the end of the fiscal year in which it first becomes subject to Section 12(g) registration.
- Paper Submissions. Foreign private issuers claiming the Rule 12g3-2(b) exemption are required to furnish the SEC their initial application materials and non-U.S. disclosure documents on an ongoing basis in paper form rather than via EDGAR. Because of the difficulty and costs involved in retrieving paper filings, investors have not readily been able to obtain Rule 12g3-2(b) submissions from the SEC.
Rule 12g3-2(b) Amendments
The SEC’s amendments to Rule 12g3-2(b) addressed both of the foregoing limitations by eliminating the exemption application process and the ongoing submission of an exempt issuer’s non-U.S. disclosure documents in paper form. In crafting the amendments, the SEC carried over many of the concepts reflected in the rules it adopted in 2007, and which we discussed in our SEC Update of April 20, 2007, that are intended to ease prior restrictions on the ability of foreign private issuers to terminate the Exchange Act registration of their securities and to cease filing reports with the SEC.
New Conditions to Rule 12g3-2(b) Exemption. The amended rule will eliminate the requirement that a foreign private issuer file a written application with the SEC to establish the Rule 12g3-2(b) exemption. Instead, the issuer may claim the Rule 12g3-2(b) exemption automatically, without applying to or notifying the SEC, if it satisfies the following three conditions:
- Foreign Listing. The issuer must currently maintain a listing of the applicable class of equity securities on one or more exchanges in its “primary trading market.” The rule defines a primary trading market as a securities market or markets in a single foreign jurisdiction, or in no more than two foreign jurisdictions, that accounted for at least 55% of the trading in the class on a worldwide basis during the issuer’s most recently completed fiscal year. If the issuer aggregates the trading of the class in two foreign jurisdictions for this calculation, the trading of the class in at least one of the foreign jurisdictions must have exceeded the trading of the class in the United States. The purpose of the foreign listing condition is to help ensure that the issuer is subject to a non-U.S. regulator with principal authority for regulating the issuance and trading of the issuer’s securities and the issuer’s disclosure of information to investors.
- Non-Reporting Status Under Exchange Act. The issuer must not be required to file or furnish SEC reports under Section 13(a) or 15(d) of the Exchange Act. Under the revised exemptive scheme, a foreign private issuer whose Exchange Act reporting obligations are suspended upon its deregistration by a filing on SEC Form 15 or Form 15F, or because it had fewer than 300 U.S. holders of its equity securities as of the beginning of its most recently completed fiscal year, will satisfy the non-reporting requirement upon the effectiveness of its deregistration filing or as of the date it determines that it had fewer than 300 U.S. holders.
- Electronic Publication of Information. The foreign private issuer must publish in English, from the first day of its most recently completed fiscal year, on its Internet website or through an electronic information delivery service generally available to the public in its primary trading market, the same types of non-U.S. disclosure documents which Rule 12g3-2(b) companies are currently required to submit in paper form. The amended rule, like the current one, will require English translations of the disclosure documents rather than brief English descriptions or English versions of the documents. The purpose of the electronic publication condition is to help ensure that U.S. investors in the issuer’s securities have ready access to material information about the issuer.
A foreign private issuer that meets the foregoing requirements will be immediately exempt from Exchange Act registration under Rule 12g3-2(b) even if, on the last day of its most recently completed fiscal year, it exceeded the asset and shareholder thresholds for Section 12(g) registration, and even if the 120-day period for filing a registration statement under Section 12(g) has elapsed. Further, the issuer may immediately claim the Rule 12g3-2(b) exemption upon the effectiveness of or following its Exchange Act deregistration, or the suspension of its reporting obligations under Section 15(d) of the Exchange Act, if it met the three requirements (other than the electronic publication condition) for its most recently completed fiscal year.
Continuing Eligibility Requirements. An exempt foreign private issuer would not be required to take further action to maintain its exemption under amended Rule 12g3-2(b). The issuer, however, would lose its exemption if it::
- Fails to publish electronically in English its specified non-U.S. disclosure documents;
- No longer meets the foreign listing condition; or
- Incurs Exchange Act reporting obligations.
Although the SEC declined to incorporate a “cure period” concept into the amendments, it noted that an issuer experiencing one of these deficiencies may be able to avoid Section 12(g) registration by re-establishing compliance with the applicable condition (for example, by relisting its securities in its primary trading market).
Elimination of Successor Issuer Prohibition. The amendments will eliminate the provision in the current rule that precludes an issuer from obtaining the Rule 12g3-2(b) exemption if, following the issuance of shares to acquire another issuer by merger, consolidation, exchange of securities or acquisition of assets, it has succeeded to the Exchange Act reporting obligations of that issuer. The SEC eliminated the prohibition to encourage successor issuers to claim the Rule 12g3-2(b) exemption and electronically publish in English their material non-U.S. disclosure documents.
Effectiveness Transition Periods. The SEC has established a three-year transition period for any foreign private issuer that is relying on the exemption under current Rule 12g3-2(b), but that would not qualify for the exemption under the amended rule. An issuer in these circumstances will have three years following effectiveness of the rule amendments on October 10, 2008 either to comply with the exemption conditions in the amendments or to register its class of equity securities under Section 12(g) of the Exchange Act. The SEC also has established a three-month transition period during which the SEC will accept and process any non-U.S. disclosure documents submitted in paper form by Rule 12g3-2(b)-exempt issuers. Following the three-month period, the SEC will no longer process Rule 12g3-2(b) paper submissions.
In addition to the foregoing changes to Rule 12g3-2(b), the SEC issued a number of conforming rule amendments to reflect those changes and to eliminate obsolete rule provisions tied to the current Rule 12g3-2(b) exemption.
The Rule 12g3-2(b) amendments represent one of a number of rule-making initiatives undertaken by the SEC in the past three years to reduce U.S. regulatory impediments faced by foreign private issuers that have U.S. trading interest in their securities or that wish to engage in capital-raising transactions or other securities activities in the United States. The new Rule 12g3-2(b) exemptive regime should benefit both foreign private issuers and U.S. holders of their equity securities. The elimination of the cost and administrative burdens associated with the application process and the paper submission requirements of the current rule should encourage additional foreign private issuers to claim the exemption, which would foster increased access to the U.S. securities marketplace by non-U.S. companies without subjecting them to SEC regulation. By requiring the issuer to publish electronically in English its material non-U.S. disclosure documents, the amendments should make it easier for U.S. investors to obtain access to those documents and to make better informed decisions regarding whether to invest in the issuer’s equity securities.