Form F-1 Registration Statement Requirements, Filling, Effectiveness, Going Public
Typically, foreign companies seeking to raise capital attempt to obtain public company status. Foreign companies that go public in the U.S. can register shares with the Securities and Exchange Commission (“SEC”) pursuant to the Securities Act of 1933, as amended (the “Securities Act”) or register a class of securities pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”).
Foreign private issuers going public should consider Form S-1 filing requirements when contemplating their securities offering. Private companies seeking to raise capital often file a registration statement on SEC Form F-1 to meet certain requirements of the Financial Industry Regulatory Authority when going public. Upon filing, a Form S-1 is reviewed by the Securities and Exchange Commission, who may render SEC Comments. Once a Form S-F is declared effective by the SEC, the company becomes subject to scaled down SEC reporting requirements. Unlike a Form 10 registration statement which registers a class of securities, Form F-1 registers specific securities offerings or transactions and it does not become effective until all SEC comments have been resolved. Private companies going public should be aware of the expansive disclosure required in registration statements filed with the SEC prior to making the decision to go public.
Like domestic issuers, foreign companies have access to several means of raising capital during the going public process. A direct public offering (“Direct Public Offering”) allows an issuer to raise capital by selling securities directly to investors without the use of an underwriter. The Direct Public Offering for a foreign company involves registering a securities offering with the SEC, typically on a Form F-1 registration statement.
A Form F-1 registration statement permits the foreign company to use financial statements that comply with International Financial Reporting Standards (“IFRS”) instead of Generally Accepted Accounting Principles (“GAAP”). Filing a registration statement on Form F-1 to go public will eliminate many of the risks and expenses associated with reverse merger transactions and public shell companies, as well as the stigma currently attached to reverse mergers involving foreign issuers.
The SEC has specific rules for foreign companies that go public in the U.S. In order for a foreign company to qualify as a foreign private issuer under SEC rules, it must satisfy the definition contained in Securities Exchange Act Rule 3b-4(c) of the Exchange Act. After the initial determination that a foreign company is a foreign private issuer in connection with its initial public or going public transaction, the foreign company must test its status as a foreign private issuer annually on the last business day of its second fiscal quarter.
If a foreign company determines that it fails to qualify as a foreign private issuer it is required to start using the forms and complying with the rules applicable to domestic issuers beginning on the first day of the fiscal year following the determination date. It will not re-qualify as a private foreign issuer until it meets the criteria of 3b-4.
Rule 3b-4(c) provides the following do not qualify as foreign private issuers:
♦ an issuer with more than 50% of its outstanding voting securities held by U.S. residents;
♦ an issuer with a majority of its executive officers or directors are U.S. citizens or residents;
♦ an issuer with more than 50% of the issuer’s assets are located in the U.S.; or
♦ an issuer whose business is administered principally in the U.S.
U.S. Shareholder Test
Under the U.S. shareholder standard, a foreign company will be considered a foreign private issuer if more than 50 percent of its outstanding voting securities are directly held by non-U.S. residents or unless it satisfies the business contacts standard.
If any of the three criteria below are met, the issuer will not be deemed a foreign issuer:
♦ A majority of the foreign company’s directors or executive officers (president, vice president, any other officer who performs a policy making function or any other person who performs similar policy making functions for the issuer) are U.S. citizens or residents;
♦ More than fifty percent of the foreign company’s assets are located in the U.S.; or
♦ The foreign company’s business is administered primarily in the United States.
Citizenship and Residency of the Company’s Management
The first part of the business contacts test is based upon whether a majority of the foreign company’s directors or executive officers are U.S. citizens or residents. An “executive officer” is defined as a company’s president, any vice president in charge of a principal business unit, division or function, any other officer who performs a policy making function or any other person who performs similar policy making functions for the issuer.
Location of the Company’s Assets
The second part of the business contacts test focuses on whether more than 50 percent of the foreign company’s assets are located in the U.S.
Administration of the Company’s Business
The third part of the business contacts test is whether the foreign company’s business is administered principally in the U.S. Factors that might be considered for this purpose include:
♦ Where the foreign company’s principal business functions (and business segments) are administered;
♦ Where the foreign company’s management spends its working days;
♦ Where the foreign company’s board of directors meetings are held; and
♦ Where the foreign company’s shareholders meetings are held.
Reporting Obligations of Foreign Private Issuers
Once a foreign private issuer is public in the U.S. it must comply with the SEC’s reporting and disclosure requirements, including an ongoing requirement to file periodic reports. In some instances, these rules and regulations include special benefits to encourage more foreign companies to enter the U.S. capital markets by reducing the reporting obligations of foreign companies that become public companies. These benefits include, but are not limited to, the ability to file annual reports on Form 20-F (or Form 40-F for Canadian companies) instead of Form 10-K, and the option to prepare financial statements in accordance with U.S. GAAP, International Financial Reporting Standards (“IFRS”) or the company’s home country’s GAAP.
The Foreign Company Solution
Any foreign company seeking to enter the U.S. Capital Markets should proceed with caution when determining foreign private issuer status in connection with its going public transaction. Similarly, issuers should proceed with caution when considering whether to engage in a reverse merger transaction. Many reverse merger issuers fail to comply with the securities laws and the requirements for electronic trading through the Depository Trust Company (“DTC”). In light of these considerations, private companies need to consult a qualified and independent securities attorney to perform thorough research and due diligence before going public.
If a foreign private company is willing to expend the time and resources to become public, it should take the trouble to do so properly, by filing a registration statement with the SEC and conducting an underwritten or direct public offering, ensuring that the issuer will avoid the growing risks and new requirements involving reverse merger transactions and public shell companies.
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. For more information about going public with Form S-1, Form F-1 and Regulation A Securities Offerings, Rule 506 and Regulation CF crowdfunding, sponsoring market makers and Form 211, dual listings and foreign issuer listings and public company SEC reporting requirements, please contact Hamilton & Associates Law Group.
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Brenda Hamilton, Securities Attorney
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