Information About Foreign Issuers and Foreign Companies
Two of the most important laws applicable to companies seeking to go public in the U.S. capital markets are the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). The Securities Act requires foreign companies that want to offer and sell securities in the United States to register the transaction with the Securities and Exchange Commission (SEC) or to follow the requirements of an exemption from the registration requirements. The Exchange Act requires companies to register classes of equity securities in order to list these securities on a US national securities exchange unless certain asset and shareholder thresholds are met. The Exchange Act also requires companies to make periodic filings with the SEC to disclose information about their business operations, financial condition, and management.
In the discussion that follows, this overview outlines several things to be considered by foreign companies that want to raise profits or establish a presence for their securities in the United States, specifically with reference to foreign private issuers. These include:
- 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.
This discussion does not address special regulatory provisions such as the Multijurisdictional Disclosure System available to Canadian issuers, the special regulations applicable to blank check or shell companies, the provisions of the U.S. federal securities laws relating to foreign governmental issuers eligible to register transactions on Schedule B, or the rules applicable to cross-border rights offers, tender offers, exchange offers, or business combinations.
1. Foreign Private Issuer Status
An important consideration for a foreign company is whether it qualifies as a foreign private issuer as defined in Rule 405 of Regulation C under the Securities Act and Rule 3b-4 under the Exchange Act. If a company does not qualify as a foreign private issuer, it is subject to the same registration and disclosure requirements that apply to domestic U.S. entities.
2. Definition and Determination of Eligibility
There are two tests to determine whether a foreign company qualifies as a foreign private issuer: the first relates to the relative degree of its U.S. share ownership, and the second relates to the level of its U.S. business contacts. The status of a foreign private issuer is not determined only by the country in which a company is organized. Companies organized under the laws of a foreign country that have certain traits that make them significantly similar to U.S. companies will not be considered foreign private issuers. In contrast, a company that is incorporated in a state, territory, or possession of the United States can never qualify as a foreign private issuer, regardless of the location of its shareholders, assets, or management.
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 mainly in the United States. These tests are found in Securities Act Rule 405 and Exchange Act Rule 3b-4.
If a foreign company learns that 50% or less of its outstanding voting securities are held by U.S. residents, it would qualify as a foreign private issuer and it does not need to regard the second test relating to business contacts. If a foreign company, however, determines that over 50% of its outstanding voting securities are held by U.S. residents, the foreign company must consider the extent of its U.S. business contacts. The tests are discussed further below.
3. Shareholder Test
As an initial matter, a foreign company must determine whether more than 50% of its outstanding voting securities are held “of record” by U.S. residents. For purposes of this test, foreign companies must evaluate the record ownership of brokers, dealers, banks, or nominees that hold securities for the accounts of their customers and consider any beneficial ownership reports or other information available to the issuer.
In recognition of the global nature of modern-day securities holdings and the possibly significant burden that the requirement of an examination in jurisdictions where the likelihood of finding U.S. holders is small, foreign companies need only observe voting securities held of record in three jurisdictions: the United States; the issuer’s home jurisdiction; and the primary trading market for the issuer’s voting securities, if different from the issuer’s home jurisdiction. Also, if the issuer is unable to gather information about the record holders’ accounts after a reasonable amount of inquiry, the issuer may rely on the assumption that such accounts are held in the broker’s, dealer’s, bank’s, or nominee’s primary place of business.
4. Business Contacts Tests
If U.S. residents hold more than 50% of a foreign company’s voting securities, the determination of the status of foreign private issuer will depend upon the business contacts the issuer has with the United States. Specifically, an issuer must consider whether:
- 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.
If U.S. residents hold over 50% of a company’s voting securities and any of the above factors is true, an issuer will not qualify as a foreign private issuer.
a) Citizenship and Residency
Under the foreign private issuer definition, 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 evaluated separately. The terms “executive officer” and “director” may have different meanings in jurisdictions outside of the United States; therefore, foreign companies should refer to the definition of “executive officer” enclosed in Securities Act Rule 405and Exchange Act Rule 3b-7 (a person or position involved in performing policy making functions for the issuer) to determine the individuals for which they should perform the analysis. When performing the analysis for “directors,” foreign companies should consider individuals that perform the functions generally performed by a board of directors of a U.S. company.
b) Location of Assets
Under the foreign private issuer definition, a foreign company must consider the location of its assets, including both tangible and intangible assets.
c) Administration of Business
Under the foreign private issuer definition, a foreign company must determine whether its business is administered primarily in the United States. To make this determination, a foreign company could consider certain factors, including the locations of:
- the company’s principal business segments or operations;
- its board and shareholders’ meetings;
- its headquarters; and
- its most influential key executives (potentially a subset of all executives).
5. Timing of Determination
Generally speaking, a foreign company must determine its status as a foreign private issuer on a yearly basis, as of the end of its second fiscal quarter. However, when filing a registration statement under the Securities Act or the Exchange Act for the first time, a foreign company may make a determination as to foreign private issuer status up to 30 days before filing its primary registration statement. Upon registration, a foreign company would determine its status on a yearly basis, as of the end of its second fiscal quarter.
If a registrant determines that it no longer meets the definition of a foreign private issuer, it must transition to domestic reporting status and it 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 2012, for example, would file a Form 10-K in 2013 for its 2012 fiscal year. The issuer would also begin complying 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 2013 fiscal year.
Once an issuer that is registered under the Securities Act or the Exchange Act no longer meets the definition of 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 about foreign issuer reporting, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855