Late in 2008, the United States Securities and Exchange Commission (the “SEC”) adopted amendments to Rule 12g3-2(b) (the “Rule”) under the Securities Exchange Act of 1934 (the “Exchange Act”) in order to improve United States investors’ accessibility to material non-U.S. disclosure of foreign private issuers and to increase investors’ ability to make informed investment decisions. A “foreign private issuer” (“FPI”) is a corporation or other entity incorporated outside of the U.S. that has either (a) 50% or less of its outstanding voting securities held of record by U.S. residents; or (b) if more than 50% of its voting securities are held by U.S. residents, none of the following are true: (1) a majority of its executive officers or directors are U.S. citizens or residents; (2) more than 50% of its assets are located in the U.S.; and (3) its business is administered principally in the U.S.
Although the U.S. names these companies “foreign private” issuers, in fact the Rule applies only to foreign companies whose shares are listed for trading on a market outside the U.S. The Rule exempts FPIs from the requirement to register as a U.S. reporting company under Section 12(g) of the Exchange Act, while still allowing such FPIs to have classes of equity securities traded on U.S. over-the-counter markets, other than the OTC-Bulletin Board.
Using this Rule, a FPI looking to have a presence on U.S. trading markets can avoid the cost and time associated with SEC registration. The amendments have led to a wave of business for U.S. trading markets such as the OTCQX, the pink sheets’ premium market. An overview of OTCQX’s international market is found at www.otcqx.com/otcqx/int/overview.
Prior to the amendments coming into effect, an FPI had to submit a written application for exemption from Section 12(g) registration with the SEC, including a determination of the number of its U.S. shareholders and the circumstances under which U.S. shareholders acquired their shares, accompanied by paper copies of required disclosure documents. The amendments to the Rule allow FPIs to be automatically exempt from the registration requirements of Section 12(g) regardless of their number of U.S. shareholders and without having to apply to or otherwise notify the SEC, after three conditions are met:
- The FPI must not have a class of securities registered under the Exchange Act, which would generally require, among other things, registrants to file annual reports on Form 10-K, interim reports on Form 10-Q and current reports on Form 8-K;
- The FPI must currently have a class of securities listed on one or more non-U.S. exchanges in its “primary trading market”, which is defined to mean that:
- at least 55% of the trading in the class of securities on a worldwide basis took place through one or more exchanges in a single foreign jurisdiction or in no more than two foreign jurisdictions during the FPI’s most recently completed fiscal year; and
- if an FPI combines the trading of the subject class of securities in two foreign jurisdictions to meet the 55% threshold, the trading for the securities in at least one of the two foreign jurisdictions must be greater than the trading in the U.S. for the same class of securities.
- The determination of whether the foreign exchange or exchanges constitute a “primary trading market” is determined as of the FPI’s most recently completed fiscal year. Therefore, an FPI will have to re-determine its U.S. and foreign trading volumes on an annual basis. This is to ensure that an FPI’s principal trading market has not become the U.S. market, which would require the FPI to register under the Exchange Act.
- The FPI must publish, in English, on its website or through an electronic information delivery system generally available to the public in its primary trading market, such as SEDAR in Canada, certain non-U.S. disclosure documents, as further described below and in the Rule, that have been disclosed since the first day of its most recently completed fiscal year. This information will have to be published “promptly” after the information has been made public pursuant to the laws of the FPI’s home jurisdiction, non-U.S. exchange rules or shareholder meeting rules. It is the position of the SEC that although what constitutes “prompt disclosure” will depend on the type of document and the amount of time required to prepare an English translation, the disclosure must typically be electronically published on or around the same business day of its original publication. In order to meet the conditions for the exemption, an FPI must, at minimum, publish electronically the following documents in English:
- its annual report, including or accompanied by annual financial statements;
- interim reports that include financial statements;
- press releases; and
- all other communications and documents distributed directly to security holders of each class of securities to which the exemption relates.
The exemption from registration contained in the Rule will remain in effect until the FPI fails to meet any one of the necessary conditions. The SEC has not adopted a curing period during which an FPI may correct deficiencies with respect to meeting the above conditions. An FPI must re-establish compliance with the provisions in a reasonably prompt manner or else register under the Exchange Act if, as of the last day of its fiscal year: (i) it has 500 or more holders of record or 300 or more U.S. resident holders; and (ii) its total assets exceed $10 million.
The SEC is allowing a three year transition period, until October 10, 2011, to give sufficient time for any FPIs currently exempt from Rule 12(g) registration requirements that do not meet the conditions for exemptions under the new amendments to either comply with all of the conditions or register under the Exchange Act. However, FPIs will have to immediately post on their websites, or on an electronic information delivery system that is generally available to the public in its primary trading market, such as SEDAR, all specified non-U.S. disclosure documents as soon as possible.
The amendments to the Rule also eliminate the successor provisions of the Rule that precluded an FPI from obtaining exemption under the Rule if it succeeded to the Exchange Act reporting requirements of another issuer via merger, consolidation, exchange of securities or acquisition of assets.
If you have any questions about how the amendments to the Rule affect your company, please contact any member of Clark Wilson LLP’s Corporate Finance & Securities Group.