Many companies that issue securities in the United States are based outside the country.
U.S. securities laws apply to these companies, but their U.S. reporting obligations vary widely. Non-U.S. companies may become subject to the SEC’s periodic reporting requirements:
If they have assets of over $10 million and over 2,000 shareholders of record worldwide (or 500 shareholders who are not accredited investors), of whom over 300 are in the United States;
By issuing securities in the United States in an SEC-registered offering; or
By listing securities on a national securities exchange (usually the NYSE or Nasdaq).
These non-U.S. reporting issuers can benefit from relief from several key SEC reporting requirements and securities exchange rules if they qualify as “foreign private issuers.” Non-U.S. reporting issuers that do not meet the very specific SEC definition of foreign private issuer generally must comply with U.S. securities laws as if they were based in the United States.
What Is a Foreign Private Issuer?
A foreign private issuer is a company that is organized under the laws of a jurisdiction outside the United States and for which:
- Non-U.S. Shareholders. At least half of its outstanding voting securities are owned by non-U.S. residents; or
- Based and Managed Outside the United States. If it fails the non-U.S. resident ownership test, each of the following applies:
- A majority of its directors and a majority of its executive officers are neither U.S. citizens nor residents;
- Over half of its assets are located outside the United States; and
- The business is not managed principally in the United States.
Table of Contents
- What Is a Foreign Private Issuer?
- Benefits of Being a Foreign Private Issuer: The Notable Nine
- Rule 12g3-2(b) Exemption
- SEC 1934 Act Reporting and Disclosure Requirements
- Annual Report: Form 40-F (for Canadian Companies) or 20-F (for All Others)
- Reports on Form 6-K
- Other Ongoing SEC Filing and Disclosure Requirements
- The NYSE and Nasdaq Exchange Requirements
In determining ownership of voting securities for purposes of the foreign private issuer test, the issuer must “look through” nominee accounts held in the United States, the company’s home jurisdiction, and the jurisdiction of its principal trading market if different from its home jurisdiction. If a company is able to show that it has less than 50% U.S. ownership or, even if it has over 50% U.S. ownership, that it is not located or managed in the United States, or managed by U.S. personnel, then the entity will be a foreign private issuer and be entitled to the benefits of less stringent reporting and governance requirements than U.S. based companies.
A company must initially test its foreign private issuer status as of a date within 30 days of its initial filing of a registration statement with the SEC; thereafter, it must test its continuing status as a foreign private issuer at least annually on the last business day of its second quarter. If it no longer meets the test, it generally must comply with U.S.-company registration and reporting obligations on the first day of its upcoming fiscal year.
Benefits of Being a Foreign Private Issuer: The Notable Nine
A foreign private issuer benefits from at least nine significant areas of relief from SEC reporting and governance obligations. Canadian and certain other foreign private issuers may be subject to separate home country requirements that limit the benefits otherwise generally available to foreign private issuers.
The nine principal benefits are:
- No Quarterly or Current Reports. Foreign private issuers need not file quarterly reports on Form 10-Q or current reports on Form 8-K. However, for those foreign private issuers listed on the NYSE, the NYSE requires the filing of semiannual unaudited interim financial information covering the company’s first two fiscal quarters.
- Section 16 Reporting and Short-Swing Relief. Insiders of foreign private issuers are not subject to 1934 Act Section 16(a) reporting of their securities transactions. In addition, Section 16(b)’s “short-swing” profit disgorgement requirements do not apply.
- SEC Proxy Rule Exemption. The SEC’s proxy statement disclosure requirements and proxy solicitation rules do not apply to foreign private issuers, which are governed by home country proxy rules.
- Dodd-Frank Act Exemptions. Several key corporate governance reforms of the Dodd-Frank Act do not apply to foreign private issuers, including those related to proxy statement matters, such as say-on-pay and golden parachute disclosure, and voting and disclosure relating to chair/CEO overlaps and performance-to-pay ratios.
- GAAP Flexibility. In preparing its financial statements to be provided to the SEC, a foreign private issuer can choose among U.S. GAAP, non-U.S. GAAP (with a reconciliation to U.S. GAAP) or the International Financial Reporting Standards.
- Reduced Executive Compensation Disclosure. Foreign private issuers may provide significantly reduced executive compensation disclosure compared to U.S. companies, including by having no requirement to file a compensation discussion and analysis disclosure and, in most cases, by having the ability to provide aggregate rather than individual disclosure of executive compensation.
- No Accelerated Filing. A foreign private issuer using a Form 20-F annual report may file the report up to 120 days after the end of the fiscal year.
- Exemption from Regulation FD. Regulation FD expressly exempts foreign private issuers from its requirements. As a result, Regulation FD does not mandate foreign private issuers to make simultaneous or prompt public disclosure of material nonpublic information. However, many foreign private issuers comply with Regulation FD as a “best practice,” even though they are exempt. To do otherwise could be the basis for liability for violation of U.S. and foreign securities law—not under Regulation FD but under the long-standing principles that form the basis of the regulation.
- NYSE and Nasdaq Corporate Governance Exemptions. Foreign private issuers listed on the NYSE or Nasdaq are generally exempt from most of the exchanges’ corporate governance rules, other than SEC Audit Committee requirements, to the extent not required by the issuer’s home country laws. The exemptions cover independence determinations, Compensation and Nominating & Governance Committees, and other matters, including certain shareholder approval requirements relating to equity-based compensation plans and issuances of shares in various situations otherwise requiring shareholder approval. Foreign private issuers are required to disclose how their corporate governance rules materially differ from those of U.S. companies.
In spite of these benefits, some foreign private issuers voluntarily become subject to all, or selectively adopt some, general SEC and NYSE/Nasdaq requirements due to potential market or investor preferences or proxy advisor policies.
Rule 12g3-2(b) Exemption
Rule 12g3-2(b) under the 1934 Act exempts foreign private issuers from any obligation to register a class of securities under the 1934 Act if the company and the applicable class of securities have a primary trading market outside the United States and meet certain requirements. A foreign private issuer can take advantage of the Rule 12g3-2(b) registration exemption without submitting a written application to the SEC as long as it continues to meet these requirements.
Qualifying foreign private issuers can use the Rule 12g3-2(b) exemption in establishing an unlisted American Depositary Receipts (ADR) program.
SEC 1934 Act Reporting and Disclosure Requirements
A foreign private issuer’s primary 1934 Act disclosure obligations are to file an annual report with the SEC and to disclose certain material information by furnishing to the SEC any required reports on Form 6-K. Nearly all SEC disclosures are required to be in English. An issuer’s failure to timely file an annual report will restrict the issuer’s ability to use a Form F-3 or S-3 “short form” registration statement for offerings of its securities.
Annual Report: Form 40-F (for Canadian Companies) or 20-F (for All Others)
Most foreign private issuers subject to reporting obligations under the 1934 Act file an annual report on Form 20-F rather than Form 10-K. Canadian companies meeting specific criteria may file on Form 40-F, which essentially includes a U.S. wrapper around the company’s Canada-required annual reporting materials. Form 20-F is due 120 days after the end of the company’s fiscal year and includes broad disclosure that generally is similar to that of a Form 10-K, subject to notable exceptions, such as streamlined executive compensation disclosure.
Reports on Form 6-K
Foreign private issuers “furnish” to the SEC supplementary reports on Form 6-K. The timing and content of these reports is less demanding than are counterpart Forms 10-Q and 8-K for U.S. companies. A foreign private issuer must “promptly” furnish a Form 6-K to the SEC to disclose certain material information that the foreign private issuer:
- Makes public in accordance with the laws of its home country;
- Files with any exchange on which its securities are traded and which information the exchange makes public; or
- Distributes or is required to distribute to its security holders.
The limited nature of the triggers above results in relatively few mandatory Form 6-K filing requirements, although many foreign private issuers file additional Form 6-Ks to voluntarily disclose additional information to the market or in connection with the disclosure requirements of the NYSE or Nasdaq.
Other Ongoing SEC Filing and Disclosure Requirements
Holders of 5% or more of applicable securities of a foreign private issuer must file with the SEC statements of beneficial ownership on Schedule 13D or 13G. (We discuss Schedules 13D and 13G in Chapter 6.)
The NYSE and Nasdaq Exchange Requirements
A public company generally must register its securities, including ADRs if applicable, under the 1934 Act before it may list the securities on a U.S. national securities exchange. The company must also qualify and apply for listing with the exchange. Foreign private issuers may qualify for listing on the NYSE under U.S. domestic listing standards or alternative listing standards for non-U.S. issuers. The NYSE and Nasdaq listing standards include quantitative and qualitative standards, including ongoing standards for continued listing.
Corporate Governance Standards
Foreign private issuers listed on the NYSE or Nasdaq are generally exempt from most of the exchange’s corporate governance rules to the extent compliance with those rules is not required by the issuer’s home country laws. However, the NYSE and Nasdaq require the foreign private issuer to disclose the significant differences in its corporate governance practices from those practices required of U.S. companies under the exchange’s corporate governance rules. This can be a brief general summary of any significant differences included in annual reports on Form 20-F. Foreign private issuers not using Form 20-F may include the “significant difference” disclosure on their websites in English or in their other annual reports.
Neither the NYSE nor Nasdaq exempts foreign private issuers from SEC rules governing the composition and independence of Audit Committees. In addition, the NYSE and Nasdaq require certain notifications, certifications and affirmations relating to compliance with corporate governance rules.
