The SEC has adopted amendments to Rule 12g3-2(b) promulgated under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). The Rule (sometimes referred to as the “information-supplying exemption”) is the principal means by which foreign private issuers that are not listed in the United States avoid Exchange Act registration that would otherwise be triggered by having a broad U.S. shareholder base (i.e., more than 300 U.S. resident shareholders). In a global market where securities may be purchased across borders with great ease, the Rule 12g3-2(b) regime provides significant comfort to foreign issuers that might otherwise find themselves having to become SEC reporting companies even though they took little or no action to create a following among U.S. investors.
The amendments make it easier for foreign private issuers to qualify for the Rule 12g3- 2(b) exemption – the exemption is automatically available to foreign private issuers that meet three conditions. These conditions are that the issuer has a listing of equity securities in its primary trading market located outside the United States, it publishes in electronic format specified non-U.S. disclosure in English and it is not otherwise an SEC reporting company.
The amendments are effective October 10, 2008. However, foreign private issuers that have a Rule 12g3-2(b) exemption under the current requirements have a three-year transition period to comply with the new conditions or to register under the Exchange Act if they cease to qualify by reason of their failure to satisfy one of the new conditions. Moreover, to enable foreign private issuers to comply with the new requirements, the SEC has adopted a three-month transition period (for issuers with current exemptions) during which paper submissions will continue to be accepted.
Foreign private issuers that currently benefit from a Rule12g3-2(b) exemption (obtained, for example, in connection with a Level I ADR program) in all likelihood will need to alter their procedures for complying with the information-supplying requirements of the Rule. See “Practical Effects” below.
Overview of the Rule 12g3-2(b) Exemption
Under Section 12(g) of the Exchange Act and the rules promulgated thereunder, an issuer is required to file an Exchange Act registration statement covering a class of equity securities within 120 days of its fiscal year-end if, as of the last day of the fiscal year, the number of record holders of that class of equity securities is 500 or greater, of which 300 or more are U.S. residents, and the issuer’s total assets exceed $10 million.
Rule 12g3-2(b) provides an exemption (the “Exemption”) from registration under Section 12(g) with respect to a class of equity securities of a foreign private issuer that would otherwise be subject to registration by reason of the fact that it has more than 300 shareholders resident in the United States. Were such an issuer to trigger Exchange Act registration, it would, among other things, become subject to SEC filing and disclosure rules following a registration process (which would call for information substantially similar to that required in a prospectus for an initial public offering in the United States).
The SEC views its rulemaking as encouraging the establishment of additional ADR programs in the United States (so-called Level I programs), as facilitating the ability of U.S. broker-dealers to fulfill their obligations under SEC Rule 15c2-11 and as facilitating the resale of securities under SEC Rule 144A. It may also have the effect of increasing the number of unsponsored ADR programs.
The Exemption is particularly useful for companies whose global brand attracts U.S. investors even though the company has taken no affirmative steps to enter the U.S. capital markets. The Exemption is also useful for companies that have accessed the U.S. capital markets under Rule 144A (having done so to avoid SEC registration of both the offering of securities under the U.S. Securities Act of 1933 (the “Securities Act”) and the class of securities under the Exchange Act).
Amendments to Rule 12g3-2(b)
Qualifying for the Exemption
Foreign private issuers that meet three conditions will be exempt from Exchange Act registration. The previously required written application and paper submissions have been eliminated. The three conditions an issuer must meet to claim the Exemption are:
- maintaining a listing of its equity securities in its “primary trading market” located outside the United States;
- not having current Exchange Act reporting obligations; and
- publishing electronically, in English, specified non-U.S. disclosure documents from the first day of its most recently completed fiscal year.
If an issuer claiming the Exemption ceases to meet any of the conditions (and for this purpose the publication condition applies to current specified disclosure on an ongoing basis), it loses the Exemption.
For purpose of the first condition, primary market is defined to mean at least 55% of the trading in the subject class of securities on a worldwide basis took place in, on or through the facilities of a securities market in a single foreign jurisdiction, or in no more than two foreign jurisdictions during the issuer’s most recently completed fiscal year. If a foreign private issuer aggregates the trading of its subject securities in two foreign jurisdictions, the trading for its securities in at least one of the two foreign jurisdictions must be greater than the trading in the United States for the same class of the securities.
In determining the foreign private issuer’s primary trading market, the foreign issuer must assess the average daily trading volume (“ADTV”) in accordance with Rule 12h-6 under the Exchange Act. Specifically, the issuer must include both on-exchange and off-exchange transactions in its calculation of ADTV in the United States. On the other hand, the issuer may include in its calculation of ADTV outside the United States both on-exchange and off-exchange transactions, including over-the-counter trades and trades through alternative trading systems. To do so, the information concerning off-exchange trading must have been obtained from publicly available sources or third-party information service providers that the issuer has reasonably relied upon in good faith and as long as the off-exchange information does not duplicate any other trading volume information regarding the subject class of securities. No specific source of data is mandated for assessing ADTV.
The foreign listing requirement is intended to help ensure that there is a non-U.S. jurisdiction that regulates and oversees the issuance and trading of the class of securities and the issuer’s disclosure obligations to investors. Note that there is no time period for this condition; an issuer may satisfy the condition concurrently with its initial public offering offshore.
To maintain the Exemption, an issuer must continue to meet the non-U.S. listing requirements. If it delists from its primary market, it can lose the Exemption.
For purpose of the second condition, at the time the Exemption is applicable, the foreign private issuer must not be required to file or furnish reports under Exchange Act Section 13(a) or 15(d).
Foreign private issuers will no longer be required to look back 18 months to determine whether they had any active or suspended reporting obligations under the Exchange Act during such period, and will not be required to seek the Exemption within the 120-day period during which a registration statement must otherwise be filed under Section 12(g) of the Exchange Act. An otherwise eligible foreign private issuer will also be able to claim the Exemption immediately upon the termination of its Section 12(g) registration or the suspension of its Section 15(d) reporting obligations. In addition, once exempt, a foreign private issuer must not otherwise incur any reporting obligations under the Exchange Act to maintain its Exemption.
Regarding the third condition, an exempt foreign private issuer must publish in English, on its internet web site or through an electronic information delivery system that is generally available to the public in its primary trading market, specified non-U.S. disclosure documents from the first day of its most recently completed fiscal year. These disclosure documents are identical to what was formerly required to be submitted to the SEC in paper to claim the Exemption. Note that the initial disclosure requirement does not apply when a foreign private issuer is claiming the Exemption upon or following its recent Exchange Act deregistration, since a recently deregistered issuer would already have filed its Exchange Act reports for its most recently completed fiscal year.
Required disclosure includes those documents containing the information that the foreign private issuer:
- has made or has been required to make public pursuant to the laws of its country of incorporation, organization or domicile;
- has filed or been required to file with the principal stock exchange in its primary trading market and which has been made public by that exchange; or
- has distributed or been required to distribute to its security holders.
In each case, publication is required only of information that is material to an investment decision, such as results of operations and financial condition; changes in business; acquisitions or dispositions of assets; the issuance, redemption or acquisition of securities; changes in management or control; the granting of options or the payment of remuneration to directors and officers; and transactions with directors, officers and principal security holders.
At a minimum, full English translations of the following must be electronically published on an ongoing basis, if originally prepared in a foreign language:
- the annual report (with the annual financial statements);
- interim reports that contain financial statements;
- press releases; and
- and all other communications and documents distributed directly to security holders of the class of securities to which the Exemption relates.
These documents are identical to documents required to be translated into English by issuers that have deregistered under Rule 12h-6. With respect to English translations of other information, the SEC has clarified that, generally, an issuer may provide an English summary for a non-U.S. disclosure document if such summary would be permitted for a document submitted under cover of Form 6-K or Exchange Act Rule 12b-12(d)(3).
The disclosure of these documents must be made promptly (typically on or around the same business day as the original publication of the document) after the information has been made public pursuant to the foreign private issuer’s home jurisdiction reporting obligations. What constitutes “promptly,” however, will depend on the type of document and the amount of time required to prepare an English translation.
Maintaining the Exemption
A foreign private issuer will lose its Exemption if it fails to publish electronically and in English the required disclosure documents, no longer meets the foreign listing/primary trading market condition or incurs Exchange Act reporting obligations. If a foreign private issuer has not complied with any one or more of the three conditions and thus is ineligible for the Exemption, the issuer must determine on the last day of the fiscal year whether it must register its securities under the Exchange Act. There is no cure period to cure a deficiency.
A foreign private issuer may obtain an Exemption, if, following a merger, consolidation, exchange of securities or acquisition of assets, it is the successor issuer that has succeeded to the Exchange Act reporting obligations of another issuer.
A Canadian issuer filing under the Multijurisdictional Disclosure System (“MJDS”) may not concurrently claim an Exemption. MJDS filers may obtain the Exemption on the same grounds as any other foreign private issuer. If the MJDS filer has recently exited the Exchange Act reporting regime, it can claim the Exemption.
Form F-6 (used to register ADRs under the Securities Act) has been revised to require a registrant to state that, if the issuer of deposited securities is not an Exchange Act reporting company, such issuer electronically publishes information in English as required to maintain the Exemption, and to disclose the internet web site address at which the required information can be accessed. In the case of an unsponsored ADR facility, a Form F-6 filer (i.e., the depositary bank) may base the above representation upon the filer’s reasonable, good faith belief after exercising reasonable diligence. The SEC declined to require that a depositary bank obtain the consent from, or at least notify, an issuer of its intention to establish an unsponsored ADR program.
Rule 15c2-11, which imposes due diligence requirements on broker-dealers before they can publish (or submit for publication) a quotation for an OTC security, has been amended to conform to the revisions to Rule 12g3-2(b).
As a result of the new regime:
- Foreign private issuers that today benefit from an Exemption and post their required information on their web sites (pursuant to 2007 modifications) need not do anything further. Issuers that have been “paper filers” now need to start posting the information on their web sites. No further action is required, unless an issuer would otherwise not meet the primary market/listing condition (in which case it has three years to meet the condition).
- Foreign private issuers seeking an Exemption will no longer need to submit written applications to the SEC obtain the Exemption.
- Foreign private issuers need not focus on the number of their U.S. shareholders or trading volume for purpose of relying on the Exemption. However, as was the case under the prior Rule, issuers should take steps to avail themselves of the Exemption before they reach the 300-U.S. shareholder threshold.
- The SEC will no longer take action to grant the Exemption; it is automatic provided the conditions are met. An issuer will not need to provide the shareholder information or the source of its disclosure obligations as had been the case under the prior regime.
- A foreign private issuer is unable to claim the Exemption if it is not listed offshore.
- A foreign private issuer deregistering under Rule 12h-6 can claim the Exemption immediately.
- The SEC will no longer maintain a list of issuers claiming the Exemption.
- An issuer claiming the Exemption should include a statement on its web site that it “electronically publishes specified non-U.S. disclosure in order to claim or maintain the Rule 12g3-2(b) exemption.” This is not required but will make it easier for market participants (such as broker-dealers and depositary banks) to know that the issuer is exempt under Rule 12g3-2(b).