On February 19, 2008, the Securities and Exchange Commission (“SEC”) proposed amendments to Exchange Act Rule 12g3-2(b) (“Rule 12g3-2(b)”) that would make it less burdensome for foreign private issuers to have their equity securities exempt from registration and be traded on a limited basis in the over-the-counter market in the United States. Rule 12g3-2(b) provides foreign private issuers with an exemption from registering a class of equity securities under Section 12(g) of the Exchange Act by submitting to the SEC specific information that was published by the issuer outside the United States.
Specifically, the proposed amendments would enable foreign private issuers to automatically claim the exemption under specified conditions and replace the paper submission requirements with electronic access to the specified disclosure documents in English. The proposals respond to the increasing globalization of the capital markets and are designed to make it easier for U.S. investors to gain access to a foreign private issuer’s material information and reach more informed decisions regarding whether to invest in their equity securities. The proposals are consistent with the theme of other recent SEC measures, particularly in the proxy access field. The SEC is seeking comments on these proposals on or before April 25, 2008.
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, on that date, the number of its record holders is 500 or greater, and the issuer’s total assets exceed $10 million. Under its Section 12(g) rulemaking authority to exempt securities of foreign private issuers when in the public interest, the SEC adopted Rule 12g3-2 in 1967, establishing two exemptions.
The first exemption, found in 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. An issuer that relies on this exemption must reassess the number of its U.S. shareholders at the end of each fiscal year in order to determine whether the exemption remains valid. Conversely, the second exemption, under Rule 12g3-2(b), does not employ the traditional shareholder test and, instead, focuses on investor access to material information provided to the SEC by the issuer.
Current Rule 12g3-2(b) Requirements
Currently, in order to obtain the Rule 12g3-2(b) exemption, a nonreporting issuer must initially submit to the SEC written non-U.S. disclosure documents (as defined below) that have been published since the end of its last fiscal year. An issuer must then continue to submit such information on an ongoing basis that it has made public or is 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 has distributed or is required to distribute to its security holders (collectively, its “non-U.S. disclosure documents”). These documents are available for review by U.S. investors through the SEC’s public reference facilities. Only copies of non-U.S. disclosure documents that are material to an investment decision must be submitted to the SEC. Such material information (which is not deemed filed for liability purposes of Section 12) includes the following:
- Financial condition or results of operations
- Changes in its business
- The acquisition or disposition of assets
- The issuance, redemption or acquisition of securities
- Changes in management or control
- The granting of options, payments or transactions with directors, officers or principal security holders
Rule 12g3-2(b) currently requires that an issuer claiming the exemption submit all of the necessary non-U.S. disclosure documents before the date a registration statement would otherwise become due under Section 12(g). Once an issuer has timely submitted its application and obtained the exemption, the issuer may surpass the record holder thresholds, as long as it maintains the exemption by submitting the required non-U.S. documents. After it has obtained the exemption, the issuer may have its equity securities traded on a limited basis in the over-the-counter market in the United States. It is common for a foreign private issuer to obtain the exemption in order to (i) have established an unlisted, sponsored or unsponsored depositary facility for its American Depositary Receipts (“ADRs”), or (ii) facilitate resales of an issuer’s securities to qualified institutional buyers under Rule 144A.
Proposed Amendments to Rule 12g3-2(b)
The amendments would eliminate the paper submission requirements and automatically grant the exemption to a foreign private issuer that meets specified conditions regardless of the number of its U.S. shareholders. To claim the exemption as proposed, issuers must:
- Not have any reporting obligations under Section 13(a) or 15(d) of the Exchange Act;
- Maintain a listing of the subject securities on one or more exchanges in one or two foreign jurisdictions comprising its primary trading market;*
- Have U.S. trading volume of the subject securities no greater than 20 percent of its worldwide trading volume for its most recently completed fiscal year, unless the issuer is claiming the exemption in connection with its deregistration under Exchange Act Rule 12h-6; and
- Electronically publish in English specified non-U.S. disclosure documents required since the beginning of its most recently completed fiscal year on its website or via another electronic information delivery system (but not EDGAR) generally available to the public in its primary trading market, unless the issuer is claiming the exemption in connection with its deregistration under Rule 12h-6.
All foreign private issuers that meet these requirements would be immediately exempt from Exchange Act registration under Rule 12g3-2(b) without having to apply to or notify the SEC concerning the exemption. The proposed amendments also provide that an issuer could immediately claim the exemption upon the effectiveness of, or following its recent Exchange Act deregistration, whether pursuant to Rule 12g-4, 12h-3, or 12h-6, or the suspension of its reporting obligations under Section 15(d), so long as it met the 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 any Exchange Act reporting obligations), an issuer must continue to electronically publish material non-U.S. disclosure documents in English for subsequent fiscal years in a prompt basis after the information has been made public. At a minimum, a foreign private issuer must electronically publish English translations of the following documents if in a foreign language: its annual report, interim reports that include financial statements, press releases, and all other communications and documents distributed directly to security holders.
In the SEC release for the proposed amendments, the SEC acknowledged that it has re-evaluated foreign private issuer reporting obligations because of increased foreign company cross-border activities and greater U.S. investor interest in foreign companies that have resulted from increased globalization of securities markets, advances in information technology, and the greater use of ADRs by foreign companies to trade their securities in the United States.
The SEC noted that the proposed amendments should foster increased efficiency in the trading of an issuer’s securities for U.S. investors. By requiring the electronic publication in English of specified non-U.S. disclosure documents, the proposed amendments should make it easier for U.S. investors to gain access to a foreign private issuer’s material non-U.S. disclosure documents, and make better informed decisions regarding whether to invest in that issuer’s equity securities. The SEC is also hopeful that the proposed rule amendments will encourage more foreign private issuers to claim the Rule 12g3-2(b) exemption by enabling a qualified foreign private issuer to claim the exemption automatically and without regard to the number of its U.S. shareholders, which is often a complicated and timely burden to complete. This would enable 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 company, and facilitate the resale of a foreign company’s securities under Rule 144A.
The proposed amendments to Rule 12g3-2(b) are not the only proposals affecting foreign private issuers that are under consideration. On February 13, 2008, the SEC unanimously voted to propose amendments, known as the Foreign Issuer Reporting Enhancements, which would update Exchange Act filing requirements and enhance disclosure required by foreign private issuers in response to changes in foreign filing requirements and market practices. The SEC will likely submit these proposals and solicit comments in the next few months