Issuers are generally required to register their securities with the Securities and Exchange Commission (the “SEC”) if they have 500 or more shareholders of record and $10 million or more in total assets, under Section 12(g) and Rule 12g-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). However, there are two exemptions from the registration requirements that are available to foreign private issuers.1 These exemptions are intended to facilitate access to U.S. capital markets and permit limited trading of foreign securities on the U.S. over-the-counter market, while enabling foreign private issuers to avoid SEC registration and the related regulatory requirements, including compliance with the Sarbanes-Oxley Act of 2002.
The first exemption is available to foreign private issuers with limited U.S. market impact if they satisfy the disclosure requirements under Rule 12g3-2(b) of the Exchange Act. The SEC recently amended this rule in order to reduce compliance costs and simplify the process of qualifying for the exemption. The revised Rule 12g3-2(b) became effective on October 10, 2008.The full text of the revised rule is available at http://www.sec.gov/rules/final/2008/34-58465.pdf.
The second exemption is available to foreign private issuers that have less than 300 U.S. resident shareholders, as calculated under Rule 12g3-2(a) of the Exchange Act. The requirements of this exemption can be burdensome to satisfy because the calculation of the number of U.S. resident shareholders is difficult to determine and continually changing. The issuer must look through brokers, dealers and banks, to determine the number of separate accounts in which the issuer’s securities are held by U.S. residents. This rule was not amended.
A brief comparison of the previous and current requirements necessary for a foreign private issuer to qualify for the exemption under Rule 12g3-2(b) is set forth below.
The Previous Requirements
In order to qualify for the exemption under the previous requirements of Rule 12g3-2(b), a foreign private issuer was required to:
- claim the exemption within 120 days after its last fiscal year;
- submit an initial paper application to the SECthat includes information regardingU.S. holders of the issuer’s securities and the issuer’s non-U.S. disclosure requirements;
- submit information that is material to an investment decision in paper and in English on a continual basis to the SEC;
- not have an obligation to file or furnish reports under Sections 13(a) or 15(d) of the Exchange Act; and
- not have registered a class of securities under Section 12 of the Exchange Act or had an active or suspended reporting obligation under Section 15(d) of the Exchange Act during the past 18 months.
The SEC determined that these requirements were overly burdensome and adopted the amendments described below to enable U.S. investors to make better informed investment decisions with respect to equity securities of foreign companies.
The Revised Requirements
Under the revised requirements of Rule 12g3-2(b), the following apply to a foreign private issuer seeking to qualify for the exemption:
- the issuer may automatically avail itself of the exemption at any time without the submission of an application to the SEC;
- the class of securities for which the exemption is claimed must continue to be listed in the issuer’s “Primary Trading Market,” which is defined as one or two foreign exchanges in which at least:
- 55 percent of the worldwide trading volume must have taken place during the issuer’s last fiscal year; and
- one of the exchanges had a greater trading volume than the trading volume in the United States during the issuer’s last fiscal year;
- the issuer must promptly publish, in English, either on its website or through an electronic information delivery system generally available to the public in its Primary Trading Market, information that is material to an investment decision; and
- the issuer must have no current requirement to file or furnish reports under Sections 13(a) or 15(d) of the Exchange Act.
The requirement to publish material information generally includes information the issuer has or is required to have (a) published pursuant to the laws of its home jurisdiction, (b) filed with the principal stock exchange in its PrimaryTradingMarket or (c) distributed to its shareholders. At a minimum, the issuer must publish its annual report, interim reports, press releases and all communications distributed directly to its shareholders, and an issuer must initially publish material information for its most recently completed fiscal year, as well.
It is important to note that in order for its securities to be listed on a national securities exchange or traded on the OTC Bulletin Board, a foreign private issuer is still required to register its securities under the Exchange Act, pursuant to Section 12(a) of the Exchange Act and FINRA Rule 6530.