Considerations For Foreign Companies Going Public
The U.S. markets are a preferred venue for foreign companies seeking to raise capital and/or create liquidity for shareholders by going public. There are unique requirements under U.S. securities laws for foreign issuers seeking to go public in order to access the U.S. capital markets.
The most significant regulations applicable to foreign issuers going public in the U.S. are the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). Generally, the Securities Act requires foreign issuers that offer and sell securities in the United States to file a registration statement with the SEC pursuant to the Securities Act’s registration requirements. The Exchange Act also applies to foreign issuers and requires them to register a class of equity securities in order to list their securities on a national securities exchange such as NASDAQ or the American Stock Exchange, or if certain asset and shareholder thresholds are met. Once a foreign issuer completes a going public transaction and registers with the SEC, the Exchange Act requires that the foreign company provide certain information to the general public in periodic reports published through its Electronic Data Gathering, Analysis, and Retrieval system also known as “EDGAR”. These periodic filings include reports on Form 10-K, 10-Q and Form 8-K.
This required public information includes information about the foreign issuer’s business operations, financial condition, and management.
Foreign private issuers seeking to go public have many options available to them for capital raising and going public. Going public transactions can be structured in a variety of ways, and foreign issuers should consider the following when designing their transactions:
• conducting a registered offering under the Securities Act;
• conducting an offering exempt from registration under the Securities Act;
• registering a class or classes of securities under the Exchange Act;
• establishing and maintaining exemptions from registration under the Exchange Act;
• meeting reporting obligations under the Exchange Act; and
• establishing an American Depositary Receipt (ADR) program.
What Is A Foreign Private Issuer?
Before structuring a going public transaction, a foreign private issuer should consider if it meets the SEC’s requirements to be designated as a “foreign private issuer”. The definition of a “foreign private issuer” is located in Rule 405 of Regulation C of the Securities Act and Rule 3b-4 under the Exchange Act. If a company cannot qualify as a foreign private issuer, it can still complete its going public transaction using the same rules that apply to U.S. based companies.
A company that is incorporated in the U.S. will not qualify as a foreign private issuer, regardless of the location of its shareholders, assets, or management. Foreign private issuer status is not determined solely by the country where a company is incorporated. If a foreign company has certain characteristics that make them substantially similar to U.S. companies it will not be deemed to be a foreign private issuer.
There are two tests to determine whether a foreign company qualifies as a foreign private issuer under the SEC’s definition. One is based upon U.S. share ownership, and the other is based upon the level of its U.S. business contacts.
A foreign company will qualify as a foreign private issuer if 50% or less of its outstanding voting securities are held by U.S. residents; or if more than 50% of its outstanding voting securities are held by U.S. residents and none of the following three circumstances applies: the majority of its executive officers or directors are U.S. citizens or residents; more than 50% of the issuer’s assets are located in the United States; or the issuer’s business is administered principally in the United States. These tests are found in the Securities Act Rule 405 and Exchange Act Rule 3b-4.
If a foreign company determines that 50% or less of its outstanding voting securities are held “of record” by residents of the U.S., it qualifies as a foreign private issuer under the SEC’s definition. A foreign company need only examine whether 50% of its voting securities held of record is in the U.S., the issuer’s country of incorporation, and the location of the primary trading market for the issuer’s voting securities, if different from the issuer’s home jurisdiction. If the foreign issuer is not able to obtain information about the record holders’ accounts after a reasonable inquiry, it may rely on the presumption that such accounts are held in the broker’s, dealer’s, bank’s, or nominee’s principal place of business.
If more than 50% of a foreign company’s outstanding voting securities are held by U.S. residents, it must meet an additional test based on its U.S. business contacts.
What is the Business Contacts Test?
If more than 50% of a foreign company’s voting securities are held by U.S. residents, the determination of foreign private issuer status will depend upon the extent of its business contacts with the United States. If a foreign company has more than 50% of its voting securities held by U.S. residents and any of the following criteria apply then it will not qualify as a foreign private issuer:
• the majority of its executive officers or directors are U.S. citizens or residents;
• more than 50% of the issuer’s assets are located in the United States; or
• the issuer’s business is administered principally in the United States.
Citizenship and Residency of Foreign Issuer’s Executive Officers and Directors
Under the definition of a foreign private issuer, a foreign company must determine whether a majority of both its executive officers and directors are either U.S. citizens or U.S. residents. The citizenship and residency of each of the foreign company’s executive officers and directors must be individually considered.
Location of Foreign Company’s Assets
Under the foreign private issuer definition, a foreign company must consider the location of its tangible and intangible assets when making a determination of whether 50% or more of its assets are located in the U.S.
Administration of Foreign Company’s Business
Under the SEC’s definition of a foreign private issuer, a foreign company must determine if its business is administered primarily in the U.S. To make this determination, a foreign company could consider the locations of:
• the company’s principal business segments or operations;
• its board and shareholders’ meetings;
• its headquarters; and
• its most influential key executives.
Timing of Foreign Private Issuer Status
A foreign company must determine its status as a foreign private issuer on an annual basis, as of the end of its second fiscal quarter. When filing a Securities Act or Exchange Act registration statement for the first time such as in a going public transaction, a foreign company may, however, make a determination as to foreign private issuer status up to 30 days before filing its initial registration statement. After its registration statement is declared effective and its going public transaction is complete, a foreign company would determine its status on an annual basis, as of the end of its second fiscal quarter.
If a foreign company concludes that it no longer meets the definition of a foreign private issuer, it must transition to domestic reporting status. Under these circumstances, the issuer becomes subject to the reporting requirements for a domestic company beginning on the first day of the next fiscal year. An issuer that no longer qualifies as a foreign private issuer as of the end of its second fiscal quarter in 2014, for example, would file a Form 10-K in 2015 for its 2012 fiscal year. The foreign company must also comply with the proxy rules and Section 16, and become subject to reporting on Forms 8-K and 10-Q, on the first day of its 2015 fiscal year.
If an issuer with securities registered under the Securities Act or the Exchange Act no longer qualifies as a foreign private issuer because it incorporates in a state, territory or possession of the United States, it must immediately begin filing domestic reports.
For further information, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real South, Suite 202 North, Boca Raton, FL, (561) 416-8956, or by email at [email protected]. This securities law Q & A is provided as a general or informational service to clients and friends of Hamilton & Associates Law Group, P.A. and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities & Going Public Lawyers
Brenda Hamilton, Going Public Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855