United States: What's The Deal? – Foreign Private Issuers

What's the Deal?

Foreign companies enjoy a number of benefits by becoming U.S. public companies. These benefits include increased visibility, access to the U.S. capital markets, and the ability to offer equity-based compensation instruments to key employees.

However, companies may encounter obstacles when accessing capital in the United States. Becoming and remaining a U.S. public company is expensive and time-consuming and may require changing a company's operations in ways that a company would not necessarily choose absent U.S. requirements. Registering as an FPI affords foreign companies the ability to strike a healthy balance by providing access to the U.S. capital markets, while at the same time permitting foreign companies to benefit from certain disclosure, reporting, and corporate governance accommodations.

Assessing FPI Status

The federal securities laws define a "foreign issuer" as any issuer that is a foreign government, a foreign national of any foreign country or a corporation, or other organization incorporated or organized under the laws of any foreign country.

An FPI is any foreign issuer (other than a foreign government) incorporated or organized under the laws of a jurisdiction outside of the United States, unless more than 50% of the issuer's outstanding voting securities are held directly or indirectly of record by residents of the United States, and any of the following applies:

• the majority of the issuer's 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.

Calculating Outstanding Voting Securities. The percentage of outstanding voting securities held of record by a broker, dealer, bank, or nominee for the accounts of customers residing in the United States is based on the number of separate accounts for which the securities are held in the United States. In addition, any shares reported as beneficially owned by a U.S. resident in a filing made under Section 13(d) of the Exchange Act, or any comparable reporting provision of another country, shall be treated as owned of record by U.S. residents. If an FPI has multiple voting classes and wants to determine the percentage of its voting stock held by U.S. residents, it can either calculate the voting power of those classes on a combined basis or simply calculate the number of voting securities.

A person who has permanent resident status (i.e., a Green Card holder) is presumed to be a U.S. resident. The SEC Staff has explained that even individuals without permanent resident status may be deemed U.S. residents (for purposes of Rule 405 and Rule 3b-4(c)) based on tax residency, nationality, mailing address, physical presence, the location of a significant portion of the person's financial and legal relationships, or immigration status. The SEC Staff has not directed use of any one specific criteria when determining who is a U.S. resident. Rather, the SEC requires that the FPI determine the criteria it will use and apply them consistently.

Assessing whether an FPI's Executive Officer or Directors are U.S. Citizens or Residents. To determine whether a majority of an FPI's executive officers or directors are U.S. residents or citizens under Rule 405 and Rule 3b-4(c), the following factors must be assessed for each officer and director:

• the citizenship status of its executive officers,
• the residency status of its executive officers,
• the citizenship status of its directors, and
• the residency status of its directors.

Assessing an FPI's Assets. When determining if more than 50% of an FPI's assets are located in the United States, an FPI can either use the geographic segment information determined in the preparation of its financial statements or apply, on a consistent basis, any other reasonable methodology in assessing the location and amount of its assets.

Assessing Whether an FPI's Business is Administered Principally in the United States. There is no determinative factor to evaluate whether an FPI's business is administered principally in the United States. Rather, an FPI must analyze where its officers, partners, or managers primarily direct, control, and coordinate its activities. An FPI must review its status as an FPI on the last business day of its most recently completed second fiscal quarter. If an FPI no longer satisfies the required criteria for FPI status, it will become subject to U.S. domestic reporting requirements on the first day of its fiscal year immediately succeeding such determination.

FPI Becoming Subject to U.S. Reporting Requirements

An FPI will be subject to the reporting requirements under U.S. federal securities laws if it:

• registers with the SEC the public offer and sale of its securities under the Securities Act of 1933, as amended (the "Securities Act"),
• lists a class of its securities on a U.S. securities exchange, or
• within 120 days after the last day of its first fiscal year in which the issuer had total assets that exceed $10 million and a class of equity securities held of record by either: (1) 2,000 or more persons or (2) 500 persons who are not accredited investors in the United States (or, in the case of an FPI that is a bank holding company or a savings and loan holding company, had total assets that exceeded $10 million and a class of equity securities held of record by either 2,000 or more persons).

Going Public in the United States

An FPI seeking to raise capital in the United States publicly for the first time must register its shares on Form F-1. A registration statement on Form F-1 is similar to a Form S-1 filed by U.S. domestic issuers and requires extensive disclosure about the FPI's business and operations.

Once an FPI has been subject to the U.S. reporting requirements for at least 12 calendar months, it generally may use Form F-3 to offer securities publicly in the United States. Form F-3 is a short-form registration statement (analogous to Form S-3 for U.S. domestic issuers) and may be used by an FPI if the FPI meets both the form's registrant requirements and the applicable transaction requirements. Form F-3 permits an FPI to disclose minimal information in the prospectus included in the Form F-3 by incorporating by reference the more extensive disclosures already filed with the SEC under the Exchange Act, primarily in the FPI's most recent Annual Report on Form 20-F and its Forms 6-K. The scope of the prospectus will generally depend on marketing needs as determined by the FPI and its investment bankers.

An FPI may offer any type of securities that a U.S. domestic issuer is permitted to offer.

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