K&LNG
JANUARY 2006
Alert
SEC announces proposed changes to
rules for de-registration of foreign
private issuers
The US Securities and Exchange Commission (SEC)
issued in late December 2005 its long-awaited
proposed amendments to the rules promulgated under
the Securities Exchange Act of 1934 governing the
ability of non-US issuers to de-register their debt or
equity securities and cease their ongoing reporting
requirements. Compliance with the ongoing
disclosure and reporting requirements of the
Exchange Act, particularly in the post-SarbanesOxley era, has been considered onerous and
expensive by many non-US issuers, industry groups
and market participants. Although the process to delist a security from a US securities exchange is
relatively straightforward, a company that is subject
to Exchange Act registration and reporting
requirements may find it virtually impossible to opt
out of the existing regime despite minimal US trading
volume in its securities or activity in the US.
What are the current
requirements?
Under the SEC's current rules, a “foreign private
issuer” may terminate registration of a class of
securities and terminate or suspend its reporting
obligations under the Exchange Act if the relevant
class of securities is not listed on a US securities
exchange or quoted on NASDAQ and that class of
securities is held by (i) less than 300 US residents or
(ii) less than 500 US residents and the issuer’s total
assets have not exceeded $10 million in each of the
last three fiscal years. In determining the number of
US resident holders, an issuer must make enquiries of
persons who are holding securities on behalf of
others (such as brokers, dealers, banks and nominees)
to establish the number of their customers who are
US residents. In practice, many foreign private
issuers have found it difficult to satisfy this test in
large part due to the difficulty of identifying
beneficial owners.
There has been growing pressure on the SEC in the
last two years to relax the present requirements which
were adopted more than 40 years ago - well before
the internationalisation of the securities markets or
the enactment of Sarbanes-Oxley.
How has the SEC proposed to
modify the existing rules?
The SEC's proposals would allow a foreign private
issuer to de-register its equity securities if:
it has filed SEC reports for at least two years, its
securities have not been sold in the US (publicly
or privately) for at least one year (subject to
limited exceptions (for example, offers to
employees)) and it has maintained a listing
(which is its primary trading market) on an
exchange in its home jurisdiction for the
preceding two years; and
five per cent or less of its publicly-traded
securities (excluding shares held by affiliates) are
held by US residents; or
the company is a “Well-Known Seasoned Issuer”
(broadly a company that is up to date with its
filings and has a market capitalization of at least
$700 million), its US trading volume is less than 5
per cent of its trading volume in its primary
market and 10 per cent or less of its public float is
held by US residents.
If a company cannot meet one of the tests set out
above it could still de-register debt or equity
securities if they are held by no more than 300 US
residents (based on "look-through" rules to determine
beneficial ownership) or 300 holders worldwide
(without applying the look-through rules).
Kirkpatrick & Lockhart Nicholson Graham LLP |
JANUARY 2006
De-registration would be permanent so long as
companies comply with a requirement to publish on
their website, in English, the annual report required
by their home country, material press releases and
certain other documents.
How to effect de-registration
Under the proposed rules, a foreign private issuer
would be able to file new Form 15F with the SEC
certifying its compliance with the requirements for
termination of its reporting obligations and supplying
various supporting information. The filing of Form
15F would automatically suspend the company's
reporting duties. If the SEC does not object within 90
days, the suspension becomes a permanent
termination.
Conclusion
Although the proposed rule changes are not as
permissive as many market participants had hoped,
they would represent a significant improvement on the
current regime. There remain, however, a number of
issues to be addressed, such as the potential disparate
impact of certain aspects of the rules on smaller
companies, methods of calculating trading volume
and number of investors, and limitations on certain
private offerings during the one-year dormancy
period.
The SEC is accepting written comments from
interested parties on the proposed rules until 28
February 2006.
THE K&LNG AIM TEAM
The K&LNG AIM team represents nine Nomads and Brokers, and have completed 23 AIM IPOs since 2004,
as well as advising on numerous placings, reverse takeovers and other transactions. In 2005, K&LNG were
also the first law firm to advise on the spin-out of a set of businesses onto AIM by a fully listed NASDAQ
company. K&LNG continues to represent a significantly increasing number of international and domestic
companies listed on or seeking an admission to AIM.
If you would like to discuss the potential impact of these proposals on your business or have general questions
about the applicability of the US registration and reporting regime, please contact:
LONDON
Jeremy Landau
Owen Waft
+44 (0)20 7360 8114
+44 (0)20 7360 8132
jlandau@klng.com
owaft@klng.com
+1 212 536 4898
barbara.jones@klng.com
NEW YORK
Barbara A Jones
www.klng.com
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JANUARY 2006