Corporate Alert
December 2008
Authors:
Phillip J. Kardis II
+1.202.778.9401
phillip.kardis@klgates.com
Lorraine Massaro
+1.212.536.4043
lorraine.massaro@klgates.com
Anthony C. Green
+1.202.778.9893
anthony.green@klgates.com
Anand D. Nair
+1.202.778.9241
anand.nair@klgates.com
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SEC Changes Foreign Private Issuer
Registration Exemption
Summary
Effective October 10, 2008, the U.S. Securities and Exchange Commission (the “SEC”)
amended Rule 12g3-2(b) (the “Amendment” or “Amended Rule 12g3-2(b)”) under the
Securities Exchange Act of 1934 (the “Exchange Act”).1 The Amendment exempts
most foreign private issuers whose securities are listed on markets in their home
countries (but not also listed in the U.S. markets) and who publish certain financial and
business information in English on their websites, from having to register their equity
securities under Section 12(g) of the Exchange Act. Many of these newly-exempt
foreign private issuers could be unaware that they need an exemption in the United
States. This is because, even without intending to reach U.S. investors, some foreign
private issuers who have assets in excess of $10 million at any fiscal year-end and 500
or more worldwide shareholders of record of a class of their equity securities at such
time, could fall subject to the registration requirements of the Exchange Act merely
because more than 300 of those shareholders are residents of the United States.
In addition, there may be some foreign private issuers who were exempt under Rule
12g3-2(b) before the Amendment but who will lose that exemption under the Amended
Rule 12g3-2(b). For this reason, the SEC has put in place a three-year transition
period for these issuers to meet the requirements of the Amended Rule 12g3-2(b) or
register their securities under the Exchange Act. Nevertheless, it is advisable that all
companies that were exempt under Rule 12g3-2(b) prior to the Amendment review their
disclosure practices as soon as possible to determine if they meet the requirements of
the Amended Rule 12g3-2(b).
Background
As noted above, Section 12(g) of the Exchange Act and Rule 12g-1 thereunder require
an issuer that has 500 or more worldwide record holders of a class of its equity
securities (of which more than 300 are residents of the United States) and assets in
excess of $10,000,000 at the end of its most recently completed fiscal year to file an
Exchange Act registration statement with respect to those securities within 120 days
of the last day of such fiscal year absent an available exemption.
1 See Exemption from Registration Under Section 12(g) of the Securities Exchange Act of 1934 for
Foreign Private Issuers, SEC Release No. 34-58465 (September 5, 2008).
Corporate Alert
Rule 12g3-2(a) exempts foreign private issuers
without further conditions if fewer than 300 of
such holders are resident in the United States.
This provision was not changed. Rule 12g3-2(b)
exempts from registration under certain conditions
a foreign private issuer otherwise falling within
the proscriptions of Section 12(g) and with more
than 300 of such holders who are resident in the
United States.
Prior to the Amendment, in order to obtain the Rule
12g3-2(b) exemption, a foreign private issuer that:
• was not listed on a U.S. stock exchange;
• did not file reports under the Exchange Act; and
• did not seek a public market for its securities in
the United States
was required to initially submit to the SEC, in
hard copy form, a list of the issuer’s home country
disclosure obligations as well as English-language
versions of information that the issuer had:
• made or was required to make public under the
laws of its jurisdiction of organization;
• made public pursuant to its foreign stock exchange
filing requirements; and
• distributed, or was required to distribute, to its
securityholders (collectively, the “non-U.S. disclosure documents”),
in each case since the beginning of its last fiscal year.
The initial hard copy submission to the SEC also
was required to include the number of U.S. holders
of the issuer’s equity securities and the percentage
of those securities held by those holders, as well as a
brief description of how they were believed to have
acquired those securities. The initial submission
to the SEC had to be made before the date that a
registration statement would otherwise have been
required to be filed under Section 12(g) (120 days
after the fiscal year end on which the number of U.S.
holders of the class of equity securities exceeded
300). After obtaining the Rule 12g3-2(b) exemption,
in order to maintain the exemption, an issuer was
required to furnish to the SEC on an ongoing
basis, English-language summaries of all non-U.S.
disclosure documents.2
Principal Changes Resulting from the
Amendment
Under Amended Rule 12g3-2(b) a foreign private
issuer is exempt from the registration requirements
of Section 12(g) if:
• it has no active Exchange Act reporting obligations
(voluntary or mandatory) under Section 13(a) or
Section 15(d) of the Exchange Act – meaning it
has not listed or publicly traded securities in the
United States;
• it maintains a listing of the applicable class of its
equity securities on one or more foreign stock
exchanges that comprise its primary trading market
(on which, alone or together, at least 55% of the
2 In March 2007, the SEC adopted Rule 12h-6 under the
Exchange Act, which permits a foreign private issuer to claim the
Rule 12g3-2(b) exemption immediately upon the effectiveness
of its termination of Exchange Act registration and reporting
obligations as long as the issuer publishes English-language
versions of its non-U.S. disclosure documents on an ongoing
basis on its Internet website or through an electronic information
delivery system generally available to the public in its primary
trading market. In addition, a foreign private issuer that had
previously established the Rule 12g3-2(b) exemption could elect
to publish its non-U.S. disclosure documents electronically in lieu
of continuing to make paper submissions of those documents to
the SEC.
Under Rule 12h-6, a foreign private issuer that published
its non-U.S. disclosure documents electronically had to, at a
minimum, publish English translations of:
• its annual report, including annual financial
statements;
• its interim reports that include financial statements;
• its press releases; and
• all other communications and documents distributed
directly to securityholders of each class of securities
to which the Rule 12g3-2(b) exemption applied.
December 2008
Corporate Alert
worldwide trading in the subject security takes
place , i.e., U.S. trading can represent no more than
45% of its worldwide trading volume);3 and
to be published electronically from those under
Rule 12g3-2(b) prior to the Amendment (see
footnote 2);
• it publishes in English on its website or some
other freely accessible electronic delivery system
established by a securities regulator (e.g., Canada’s
SEDAR system) the material information that it
makes public in its home country, files with the
principal stock exchanges in its primary trading
market or distributes to its securityholders (to
qualify for the exemption initially, the issuer must
electronically publish in English all of the relevant
documents that it has published, filed or distributed
since the beginning of its most recent fiscal year –
to maintain the exemption, the issuer must publish
the English documents promptly after publication
or distribution in the primary trading market(s)).
• required that the foreign private issuer promptly
publish full English translations of the documents
mandated by the electronic publishing option
included in the March 2007 amendments in
lieu of the less onerous requirement of English
“summaries” of such documents under the Rule
prior to the Amendment; 4
Thus, the Amendment:
• eliminated the requirement of a foreign private
issuer to proactively apply for the exemption
through the filing of a written application with the
SEC, and the foreign private issuer is not required
to make a public statement regarding any intention
to claim the exemption;
• eliminated the requirement of having to file paper
documents with the SEC in order to maintain the
exemption;
• allowed foreign private issuers exempt under Rule
12g3-2(b) prior to the Amendment a transition
period until January 10, to switch to electronic
publication of their non-U.S. disclosure documents
as the SEC will no longer accept paper filings after
that date;
• e stablished a three-year transition period for
foreign private issuers exempt under Rule 12g32(b) prior to the Amendment to satisfy the other
conditions of Amended Rule 12g3-2(b);
• did not change the types of “material” documents
3 The purpose of this foreign listing condition is to ensure
that there is a non-U.S. jurisdiction that principally regulates the
trading of the securities and the disclosure obligations to investors.
• made the exemption available automatically to
a foreign private issuer that met the specified
conditions without regard to the number of its
U.S. shareholders – that is, under Amended Rule
12g3-2(b), all foreign private issuers that meet the
above requirements will be immediately exempt
from Exchange Act registration under Rule 12g32(b) without having to apply to, or otherwise
notify, the SEC concerning the exemption and may
also immediately claim the exemption upon the
effectiveness of their Exchange Act deregistration,
whether pursuant to Rule 12g-4, 12h-3 or 12h-6,
or the suspension of their reporting obligations
under Section 15(d), if they meet the foregoing
requirements (other than the electronic publication
requirement for its most recently completed fiscal
year); and
• eliminated the prior provision prohibiting a foreign
private issuer of availing itself of the exemption if
the foreign private issuer had a reporting obligation
under the Exchange Act during the previous 18
months.
4 The translation requirement may raise issues for some
companies such as in the situation where an annual report may
contain information that would not be deemed material under
U.S. standards (e.g., tax consequences of owning the security to
non-U.S. investors). Such non-material information is not required
to be published at all. Of course, the tricky issue is identifying
information that would not be deemed material to a U.S. investor.
In the adopting release, the SEC clarified that, generally, an
issuer may provide an English summary of a non-U.S. disclosure
document if such a summary would be permitted for a document
submitted under cover of Form 6-K or pursuant to Exchange Act
Rule 12b-12(d)(3).
December 2008
Corporate Alert
The SEC believed that by permitting a qualified
foreign private issuer to claim the Rule 12g32(b) exemption automatically, without a written
application and without regard to the number of its
U.S. shareholders, the Amended Rule 12g3-2(b)
would encourage additional foreign private issuers
to claim the exemption which would (i) enable the
establishment of more ADR facilities, (ii) make it
easier for broker-dealers to meet their Rule 15c211 information requirements, and (iii) facilitate
the resale of its securities to qualified institutional
investors under Rule 144A under the Securities
Act of 1933, as amended (the “Securities Act”). In
addition, by requiring the electronic publication in
English of specified non-U.S. disclosure documents
for issuers claiming the exemption, U.S. investors
could have easier access to a foreign private issuer’s
material non-U.S. disclosure documents.
Maintaining the Exemption
In order to maintain the Rule 12g3-2(b) exemption,
a foreign private issuer:
• must electronically publish the specified nonU.S. disclosure documents in English for each
subsequent fiscal year on an ongoing basis;
• must continue to maintain a listing of the subject
securities on one or more exchanges in its primary
trading market; and
• m ay not otherwise incur any Exchange Act
reporting obligations (e.g., by conducting a public
offering in the United States or listing securities on
a U.S. national securities exchange).
If an issuer fails to meet any of the foregoing
conditions, it will lose its eligibility to claim the
Rule 12g3-2(b) exemption. The issuer would then
need to either re-establish compliance with the Rule
in a reasonably prompt manner or register under the
Exchange Act.
Other Changes
The SEC also eliminated:
• a prior provision that generally prohibited the
availability of the Rule 12g3-2(b) exemption to
successor issuers;
• a provision that allowed a Canadian issuer filing
under the Multijurisdictional Disclosure System
(MJDS) to obtain the Rule 12g3-2(b) exemption for
a class of equity securities while having Exchange
Act reporting obligations regarding a class of debt
securities;
• a prior provision that prohibited an issuer from
relying on the Rule 12g3-2(b) exemption if its
securities were traded through an automated
interdealer quotation system; and
• a related provision grandfathering Nasdaq-traded
companies meeting specified conditions from
Rule 12g3-2(b)’s automated inter-dealer quotation
system prohibition.
Effect on ADR Facilities
The Amendment could have a substantial impact
on foreign private issuers whose securities trade
in the U.S. over-the-counter markets. This is
because it likely facilitates the appearance of more
“unsponsored” ADR facilities, a prospect that is not
entirely favorable to the issuer. The amendment also
may affect offerings under Rule 144A.
Rule 12g3-2(b) has been used principally by foreign
private issuers wishing to establish an ADR facility
in the United States. Historically, a depositary bank
also could establish an ADR facility in the United
States (and elsewhere – dubbed GDRs) relating to
the shares of foreign private issuers without their
consent, thereby creating a possibility that the issuer
could end up with more than 300 U.S. shareholders
inadvertently, in which case, upon discovery of the
fact, the issuer would be forced to apply for the
exemption. Under the Amendment, the exemption
is automatically satisfied by a larger number of
foreign private issuers, and thereby automatically
increases the number of foreign private issuers
whose securities will be eligible for ADR facilities.
The consequence is that while the Amendment
makes it easier for foreign private issuers to
December 2008
Corporate Alert
establish their own “sponsored” ADR facilities
(through agreement with a depositary bank), the
creation of unsponsored ADR programs will be
facilitated.5 Why is this often not a happy prospect
for the issuer? A sponsored ADR facility is “tended
to” by the issuer since the issuer intends, through
the establishment of the facility, to create greater
market interest and awareness in its securities in
the United States. And the SEC will not permit
a foreign private issuer to establish a sponsored
facility if an unsponsored ADR facility for the same
underlying securities is already in place. In order
to eliminate the unsponsored facility, the issuer
will have to negotiate with the depositary bank that
established the unsponsored facility to terminate the
facility, which more than likely would involve the
payment of substantial fees to the bank or a great
incentive to use that bank, despite other preferences,
as the depositary for the sponsored facility. In
addition, unlike in sponsored facilities, the banks in
unsponsored facilities do not have a contractual (or
other) obligation to provide information about the
ADR holders to the issuer and, because the bank is
considered the sole owner of the shares underlying
the ADRs, this could have significant implications
in shareholder voting situations, and for distribution
of dividends, among others.
or else restrict access to those press releases to nonU.S. persons. Under Amended Rule 12g3-2(b),
this will not be possible in respect of material press
releases, unless, for example, the press release on
the website relating to the offering complies with
Rule 135c under the Securities Act, which limits the
information contained in those press releases. In so
doing the foreign private issuer must determine that
any additional information contained in the original
non-English press release is not material, and thus
is not required to be published to maintain the Rule
12g3-2(b) exemption.6
Other Concerns
Exempt foreign private issuers are required under the
Amendment to publish on their websites in English
press releases announcing share offerings. These
press releases must be reviewed carefully to ensure
that they do not result in a “general solicitation” or
“directed selling efforts” in the United States, which
would cause a violation of the Securities Act in the
absence of registration. In order to avoid this result,
foreign private issuers could refrain from publishing
English language press releases on their websites,
***
5 For example, the SEC amended the requirements applicable
to registration statements on Form F-6 to enable depositary banks
using Form F-6 in the context of unsponsored ADR programs
to represent on the basis of a “reasonable, good faith belief after
exercising reasonable diligence” that the issuer of the underlying
securities has published electronically the information required by
the Rule 12g3-2(b) exemption.
In addition, significant shareholders will more easily
be able to sell shares of exempt foreign private
issuers to U.S. “qualified institutional buyers”
pursuant to Rule 144A. Rule 144A requires, among
other things, that the issuer undertake to provide
basic business and financial information to investors
if the issuer is not exempt under Rule 12g3-2(b).
The availability of Rule 144A therefore is limited to
those selling shareholders with enough leverage to
obtain the issuer’s voluntary undertaking. For sales
of shares of exempt issuers under the Amendment,
the undertaking is not necessary, although the selling
shareholder will need to confirm that the issuer is in
compliance with the requirements of Rule 12g3-2(b)
to proceed on this basis.
The SEC’s adopting release including the full text
of the Amendment may be found at www.sec.gov/
rules/final/2008/34-58465.pdf.
6 Foreign private issuers that conduct offerings may also
publish press releases outside the United States pursuant to Rule
135e under the Securities Act, which does not contain content
limitations. In some jurisdictions it is the practice to include the
names of the underwriters and other information in home country
press releases, although these press releases are not generally
provided on the issuer’s website unless access is restricted to nonU.S. readers to avoid the risk of the issuer losing its exemption.
Under Amended Rule 12g3-2(b), a foreign private issuer would
have to either limit the content of its home country press releases
to the information permitted by Rule 135c or publish two separate
press releases, one for distribution outside the United States
pursuant to Rule 135e and the other for website publication,
containing only the information permitted by Rule 135c.
December 2008
Corporate Alert
This Corporate Alert does not purport to address
all of the requirements or issues raised by the
Amendment addressing disclosure and registration
requirements for foreign private issuers. If you wish
to obtain more information, please contact your
relationship lawyer or one of the authors of this
article listed below.
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This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied
upon in regard to any particular facts or circumstances without first consulting a lawyer.
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December 2008