SEC Eases Burdens on Certain Non-U.S. Issuers and Facilitates OTC Trading of Their Securities in the U.S.
 
October 3, 2008
 
Francois Janson- New York

The Securities and Exchange Commission (SEC) recently adopted final amendments to its rule governing how non-U.S. companies having U.S. market interest may obtain an exemption from having to comply with U.S. registration and reporting obligations. The SEC received substantial comments on its proposed amendments, most of which were directed at the proposal to limit the exemption to issuers having no more than 20% of their worldwide trading market in the U.S. The SEC abandoned this new requirement in the adopting release.

The exemption becomes conditional upon, among other things, the issuer having its principal trading market outside the U.S. To qualify, a non-reporting foreign private issuer¹ will need to be listed on one or more non-U.S. exchanges and have at least 55% of its worldwide average trading volume outside the U.S. Foreign private issuers that trade over-the-counter (OTC)² in the U.S. but do not meet these requirements within three years after the rule is implemented will be required to register with the SEC.

Overview

Under Section 12(g) of the Securities Exchange Act of 1934 and Rule 12g-1, all foreign private issuers having 500 or more shareholders, of which 300 or more are resident in the U.S., and over $10 million in assets, must register their equity securities with the SEC. However, subject to certain conditions, Rule 12g3-2(b) exempts from that requirement all non-reporting foreign private issuers that furnish to the SEC their disclosure documents published outside the U.S. regardless of how many U.S. holders they have.

With these amendments, the SEC completes its rulemaking aimed at liberalizing the conditions under which foreign private issuers may withdraw or be exempt from registration under the U.S. securities laws. In June 2007, the SEC implemented Rule 12h-6 to allow foreign private issuers that have little U.S. market interest and have not made any U.S. registered public offerings in the prior 12 months to deregister, provided they meet a new test of U.S. market interest based on a comparison of U.S. trading volume relative to worldwide trading volume, using a 5% benchmark. The Rule 12g3-2(b) amendments now address how non-reporting foreign private issuers may be exempt from registration despite having substantial U.S. shareholder interest or securities trading OTC in the U.S.

The key points of the release are as follows:

• One new condition regarding foreign listing is introduced.
• The requirement to make a written application and subsequent ongoing submissions to the SEC to claim the exemption is eliminated.
• Electronic publishing becomes mandatory (paper submissions will no longer be accepted after January 10, 2009).
• The exemption is immediately available to all issuers which deregister or have their reporting obligations suspended.
• Exempt Canadian MJDS³ issuers will lose the exemption if they become subject to reporting obligations with respect to a class of debt securities.
• Previously exempt issuers that fail to qualify under the new rule must register under the Exchange Act within three years after the effective date of the rule.

The New Exemption

Under new Rule 12g3-2(b), any non-reporting foreign private issuer is exempt from registration if and for so long as the following conditions are met:

• it maintains a listing of the subject class of securities on one or more exchanges in a foreign jurisdiction that, either alone or together with the trading of the same class of the issuer’s securities in another foreign jurisdiction, constitutes the primary trading market for those securities
• the issuer has published in English, on its Internet Web site or through an electronic information delivery system generally available to the public in its primary trading market, its non-U.S. disclosure documents, and at a minimum its annual report, interim reports, press releases and all other communications and documents distributed directly to security holders

Exemption Remains Limited to Non-Reporting Issuers

To qualify for the exemption, a foreign private issuer must not have reporting obligations under Section 13(a) or 15(d) of the Exchange Act. The SEC is maintaining this requirement. However, the revised rule will no longer require that the issuer claim the exemption within 120 days after the last day of the fiscal year during which its obligation to register arises. The 120-days requirement was tied to the deadline for filing a registration statement under the Exchange Act when an issuer finds out on the last day of its fiscal year that it has exceeded the threshold for registration. Since the exemption will be available permanently regardless of how many U.S. shareholders the issuer may have, the 120-days deadline becomes irrelevant for purposes of claiming the exemption.

Exemption Becomes Available Immediately Upon Deregistration or Suspension of Reporting Obligations

When it adopted Rule 12h-6 and Form 15F, the form to be used for deregistering a class of securities on the basis of a 5% or lower U.S. trading volume, the SEC authorized issuers to claim the Rule 12g3-2(b) exemption immediately upon the effectiveness of their Form 15F. For those issuers, the SEC abandoned the requirement of Rule 12g3-2(d)(1) that they not have securities registered with the SEC or active or suspended reporting obligations for the preceding 18 months prior to claiming the exemption. With the amendments, the SEC extends that treatment to issuers that deregister using Form 15 in reliance on the recordholder tests of Rule 12g-4. The amendments also allow issuers that suspend their reporting obligations under Section 15(d) to claim the exemption immediately, whereas previously under Rule 12g3-2(d)(1) such issuers (except MJDS issuers) could never obtain the exemption.

Exemption Reserved to Issuers Listed on One or More Foreign Exchanges

Consistent with the approach taken in Rule 12h-6, the exemption is only available to foreign private issuers that are listed in at least one foreign jurisdiction and for which the principal trading market is outside the U.S. The principal trading market for an issuer’s securities is deemed to be outside the U.S. when at least 55% of worldwide trading in such securities occurs on one or more markets in no more than two foreign jurisdictions during the issuer’s most recent fiscal year. When an issuer aggregates trading in two jurisdictions for purposes of applying the principal trading market test, the rule requires that trading in at least one of the two jurisdictions be greater than U.S. trading for the same class of securities. Unlike for deregistration under Rule 12h-6, there is no additional requirement that the issuer has been listed for the preceding 12 months; the listing must simply be in place when the exemption is claimed. The foreign listing requirement aims at ensuring that the exemption is reserved to foreign private issuers that are otherwise subject to some regulatory oversight, which is the case of listed issuers, as most exchanges regulate the issuance and trading in listed securities and impose some disclosure obligations.

Non-U.S. Disclosure Documents Must Be Published Electronically

In order to claim and maintain the exemption, a foreign private issuer will be required to publish its non-U.S. disclosure documents on its Web site or through an electronic information delivery system generally available to the public in its primary trading market. The old written application and paper submissions are abandoned. To qualify for the exemption, an issuer needs to have made such publications since the beginning of its most recent completed fiscal year. This requirement is not applicable to deregistered issuers under Rule 12h-6, since the exemption is automatically available to them immediately upon deregistration. As submissions with the SEC will no longer be required and the SEC will stop publishing periodic lists of issuers claiming the exemption, issuers that want to inform the market that they are relying on the exemption are encouraged to state on their Web site that they are publishing their disclosure documents to claim or maintain the Rule 12g3-2(b) exemption.

The categories of information that must be published are unchanged. They must include all information that is material to an investment decision, such as results of operations; financial condition; changes in business; acquisitions or dispositions of assets; the issuance, redemption or acquisition of securities; changes in management or control; the granting of options or the payment of other remuneration to directors or officers; and transactions with directors, officers or principal security holders.

In addition, as is required from issuers that have deregistered under Rule 12h-6, an issuer that claims the Rule 12g3-2(b) exemption must at a minimum publish English versions of its annual report, interim reports, press releases and all communications distributed directly to its security holders.

Publication must occur promptly and the SEC takes the position that this means that a material press release must be posted on the issuer’s Web site or disseminated through an electronic information delivery system the same business day of its original publication. Publication through the electronic delivery system of a stock exchange or securities regulatory authority satisfies the electronic publication requirement of the rule if the public has ready access to the published information and other documents maintained on the system.

Exemption Can Be Lost if Conditions Are No Longer Met

Under the revised rule, the exemption remains effective until:

• the foreign private issuer no longer maintains a listing in a foreign jurisdiction
• a class of securities of the issuer is registered under Section 12 of the Exchange Act
• the issuer (including MJDS filers) incurs reporting obligations under Section 15(d) of the Exchange Act
• the issuer fails to satisfy the electronic publishing requirement

MJDS issuers will no longer be permitted to rely on Rule 12g3-2(b) after they become subject to reporting obligations with respect to a class of debt securities.

Successor Issuers

Issuers that had succeeded to the reporting obligations of another issuer were previously barred from claiming a Rule 12g3-2(b) exemption. Rule 12h-6 removed this prohibition for companies seeking to deregister and allowed them to take into account their predecessor’s reporting history for purposes of determining whether they met the Rule 12h-6 reporting conditions. The amendments remove the successor issuer prohibition for all foreign private issuers seeking to claim the exemption after completing a transaction that subjects them to Exchange Act registration.

Transition Period

The amendments introduce a three-year transition period for issuers that claimed the exemption, but fail to qualify under the new rule. These issuers must register their subject securities under the Exchange Act no later than October 10, 2011.

Effect of Amendments

These amendments complete the move to an all-electronic disclosure format for foreign private issuers and facilitate OTC trading of their equity securities at a time when a number of initiatives are under way to streamline trading on PORTAL⁴ and other U.S. platforms. They also make it easier to establish unlisted depositary facilities for American Depositary Receipts⁵ and in particular unsponsored facilities, because issuers will no longer be able to prevent the establishment of such facilities by not formally claiming the exemption. The amendments also enable brokers active on the OTC market to discharge their information delivery obligations under Rule 15c2-11 by simply providing customers with instructions regarding how to obtain the information electronically.

Holland & Knight’s Public Companies and Securities Practice Group can provide assistance with questions on the new rules.

For more information, contact:

Francois Janson
212.513.3266
francois.janson@hklaw.com
toll free: 1.888.688.8500

1 Any issuer that is incorporated in a jurisdiction other than the U.S. qualifies as a foreign private issuer unless (i) it has more than 50% of its shareholders resident of the U.S. and (ii) it is deemed to be based in the U.S. (which will be the case if any of the following is true: (A) a majority of the executive officers or directors of the issuer are U.S. citizens or residents; (B) more than 50% of the assets of the issuer are located in the U.S.; or (C) the business of the issuer is administered principally in the U.S.).

2 The over-the-counter markets for equity securities in the U.S. are the Bulletin Board maintained by NASDAQ (OTCBB) and the Pink Sheets (QTCQX). To be eligible for quotation on the OTCBB, securities must first be registered with the SEC under the Exchange Act. Securities exempt from registration under Rule 12g3-2(b) are eligible for quotation on the International QTCQX tier of the Pink Sheets.

3 The Multijurisdictional Disclosure System (MJDS) allows certain Canadian issuers to use their Canadian prospectuses and reports under MJDS cover to satisfy their SEC filing obligations under U.S. securities laws.

4 The Portal Market is the U.S. trading platform for Rule 144A securities.

5 An American Depositary Receipt (ADR) is a security that represents a foreign security deposited with a depositary.




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