SEC Proposes to Ease Burdens on Certain Non-U.S. Issuers and to Facilitate OTC Trading of Their Securities in the U.S.
 
February 29, 2008
 
Francois Janson- New York

On February 19, 2008, the Securities and Exchange Commission published for comments 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 comment period extends until April 25, 2008.

If the changes are adopted as proposed, the exemption will become automatically available to any non-reporting foreign private issuer¹ that meets all the following conditions:

1) its equity securities trade on one or more non-U.S. exchanges that constitute the primary trading market for such securities

2) no more than 20 percent of its world wide trading market is in the U.S.

3) it publishes electronically certain disclosure documents in English

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 proposed amendments, the SEC seeks to complete its rulemaking aimed at streamlining 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. underwritten 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 percent benchmark. Building on this new approach, the proposed Rule 12g3-2(b) amendments now address how non-reporting foreign private issuers that have substantial U.S. shareholder interest or securities trading over-the-counter (OTC)² in the U.S. may be exempt from registration using the same test as Rule 12h-6, with an increased 20 percent benchmark.

The key points of the release are as follows:

• Two new conditions regarding foreign listing and U.S. market interest are 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 three months after the effective date of the rule).
• 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 because they exceed the U.S. market interest threshold must register under the Exchange Act within three years after the effective date of the rule.

The Current Exemption

To obtain the exemption, a foreign private issuer must make application to the SEC and submit a list of all material information that it is required by its home jurisdiction law or stock exchange rules to make public, file with a stock exchange or provide to shareholders, along with paper copies of the corresponding disclosure documents that it published in the preceding fiscal year. To maintain the exemption, the issuer must update annually the list showing its material information (if necessary) and file periodically all the required disclosure documents.

The New Exemption

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

1) 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

2) the average trading volume of the subject class of securities in the U.S. for the issuer’s most recently completed fiscal year has been no greater than 20 percent of the average daily trading volume of that class of securities on a worldwide basis for the same period or the issuer has terminated its registration of a class of securities under Section 12(g) of the Exchange Act or terminated its obligation to file or furnish reports under Section 15(d) of the Exchange Act, pursuant to Rule 12h-6

3) 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 proposing to maintain this requirement. However, if adopted, the revised rule would no longer require that the issuer claims the exemption within 120 days after the last day of the fiscal year during which its obligation to register arose. 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 it is proposed that the exemption 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 under Rule 12h-6, 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 proposed amendments, the SEC extends that treatment to issuers that deregister using Form 15 under Rule 12g-4. The proposed amendments also allow issuers that suspend their reporting obligations under Section 15(d) by filing a Form 15 under Rule 12h-3 to claim the exemption immediately, whereas under existing 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 would only be 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 percent 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 have 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.

New U.S. Market Interest Condition Based on Measure of U.S. Trading Volume

A new U.S. market interest condition is introduced that somewhat narrows the availability of the exemption to foreign private issuers for which there is a relatively low level of U.S. market interest. The exemption is available regardless of the number of U.S. holders, as was the case in the old rule, but the proposed amendments provide that a foreign private issuer may avail itself of the exemption only if the average daily trading volume of its securities in the U.S. has been no greater than 20 percent of worldwide average daily trading volume during the issuer’s most recently completed fiscal year. The method of calculation of average daily trading volume is the same as in Rule 12h-6. OTC trades must be added to on-exchange transactions when measuring U.S. average daily trading volume and may, but need not, be added when measuring worldwide average daily trading volume. The 20 percent U.S. holder test does not apply to deregistered issuers under Rule 12h-6, as those issuers must satisfy the stricter 5 percent threshold prior to deregistering and subsequently claiming the Rule 12g3-2(b) exemption. With these amendments, the SEC moves toward adopting the same test of U.S. market interest for purposes of determining whether a foreign private issuer must register under the Exchange Act, may exit registration or is making an offshore offering under Regulation S.

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

In order to claim and maintain the exemption, a foreign private issuer would 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 would need 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.

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 U.S. Market Interest Exceeds 20 Percent Threshold

Under the revised rule, the exemption remains effective until:

• the foreign private issuer no longer maintains a listing in a foreign jurisdiction
• U.S. average daily trading volume exceeds the 20 percent threshold on the last day of the first fiscal year after the year in which the foreign private issuer first claimed the exemption
• 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.

Beginning with the first full fiscal year after it has claimed the exemption, the issuer will be required to monitor the U.S. market interest condition annually by measuring whether its U.S. average daily trading volume exceeds 20 percent at the end of each fiscal year, in which case the exemption would be lost. A foreign private issuer that first claims the exemption will therefore be assured that it will last for a period at least equal to the number of days remaining in the current year plus 12 months, regardless of any increase in its U.S. average daily trading volume, provided it continues to meet all the other requirements of the rule.

Successor Issuers

Under the current rule, issuers that had succeeded to the reporting obligations of another issuer were 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 proposed 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 had claimed the exemption, but would fail to qualify under the new rule because they exceed the U.S. market interest threshold. These issuers would need to have their subject securities registered under the Exchange Act within three years after the effective date of the rule.

Effect of Amendments

If adopted, these amendments would 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 would 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 would 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.

For more information or if you would like assistance with submitting comments on the proposed rule, email Francois Janson at francois.janson@hklaw.com, or contact any other member of the Public Companies and Securities group at Holland & Knight by calling 212.513.3200, or toll free 1.888.688.8500.

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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 percent 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 percent 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.