SEC Amends Rules Exempting Foreign Private Issuers from Registering Securities

September 25, 2008

The U.S. Securities and Exchange Commission (the “SEC”) recently published amendments to the rules exempting foreign private issuers1 from registering their securities with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in certain circumstances. Through these amendments, the SEC has simplified the process of obtaining and maintaining an exemption from registration under the Exchange Act and has reduced related costs. Foreign private issuers seeking to raise capital in the U.S. will still have to file a registration statement under the Securities Act of 1933, as amended (the “Securities Act”).

Under the previous rules, a foreign private issuer that had established an American Depositary Receipt program (often referred to as a Level I ADR program2) or that had 300 or more shareholders in the U.S. that wished to exempt itself from the registration and ongoing reporting requirements of the Exchange Act (including certain requirements of SarbanesOxley) was required to obtain and maintain the exemption provided by Rule 12g3-2(b) of the Exchange Act. The 12g3-2(b) exemption permitted a foreign private issuer’s shares to trade in the U.S. over-the-counter market in the form of ADRs without Exchange Act registration. The amendments to Rule 12g3-2(b) eliminate the currently required written application and paper submission to the SEC by automatically exempting from Section 12(g) of the Exchange Act the securities of any foreign private issuer that meets the following conditions:

  • The issuer is not required to make Exchange Act filings. The foreign private issuer must not be required to register and report under Sections 13(a) or 15(d) of the Exchange Act (essentially, registration and reporting is required of all companies that have made public offerings recently in the U.S. or are listed on a U.S. exchange). 
  • The issuer maintains a foreign listing. The issuer’s “primary trading market” must be a foreign exchange. To meet the definition of a “primary trading market,” at least 55% of the average daily trading volume (“ADTV”) of an issuer’s securities must take place on the non-U.S. market. The rule will allow an issuer to aggregate the trading volume on no more than two foreign markets, but at least one of the foreign exchanges must have a higher percentage of the ADTV than the ADTV for the issuer’s securities traded in the U.S.
  • Electronic publication of financial information. From the first day of its most recently completed fiscal year in which it would otherwise be required to register under the Exchange Act, the company must publish, in English, the information specified in Rule 12g3-2(b) by making such information available on the company's website or another electronic delivery system (such as a regulator's website). In order to maintain the exemption, the company must publish the same information on an ongoing basis, in English, and on the company's website or public electronic delivery system. English translations of certain disclosure documents must be made “promptly” after the information has been made public pursuant to the relevant foreign laws, rules or regulations. As under current SEC staff practice, what constitutes “promptly” will depend on the type of document and the amount of time required to prepare an English translation. It should be noted that publication by an issuer of the information specified in Rule 12g3-2(b) should not give rise to liability to the SEC for its contents or otherwise subject the issuer to SEC jurisdiction.

If the issuer fails to meet any of the above-mentioned conditions, the company will lose its exemption from registration under 12g3-2(b).

No application to the SEC will be required under the amended rule and the SEC will discontinue the maintenance of a list of exempt companies it had previously published from time to time. Issuers must continue to register their securities under the Exchange Act if they are to be listed on a U.S. national securities exchange or traded on the OTC Bulletin Board.

The SEC believes that most foreign private issuers that currently have a Rule 12g3-2(b) exemption will continue to be able to claim the exemption under the new rule. Nevertheless, the SEC will continue to process written submissions over a three-month transitional period and give companies that are no longer exempt a three-year transitional period to register under the Exchange Act.

As a consequence, these amendments should make establishing ADR programs in the U.S. more attractive to foreign private issuers. It should also ease the burden of foreign private issuers that inadvertently have fallen under the Exchange Act jurisdiction by having more than 300 US shareholders. At the same time, because the new rule does not require an issuer to make a submission in order to for a depositary to set up a program, we may see an increase in the creation of “unsponsored” ADR programs, whereby a financial institution can set up a Level I ADR program without the cooperation of the underlying issuer, although whether the current universe of depositaries will want to back unsponsored programs remains to be seen. The amendments will be effective October 10, 2008.


1) A foreign private issuer is any foreign issuer other than a foreign government except an issuer meeting the following conditions: (a) more than 50 percent of the issuer’s outstanding voting securities are directly or indirectly held of record by residents of the U.S.; and (b) any of the following: (i) the majority of the executive officers or directors are U.S. citizens or residents; (ii) more than 50 percent of the assets of the issuer are located in the U.S.; or (iii) the business of the issuer is administered principally in the U.S.
2) Level I programs (which do not involve capital raising) still require the filing of a registration statement on Form F-6 for the ADRs, which is done by the depositary bank establishing the program. Level II programs allow a foreign company to be listed on a U.S. exchange but in doing so, the issuer must file an annual report on Form 20-F with the SEC which will make it subject to SEC regulation. Level III programs involve a listing with a concurrent capital raising and the filing of a registration statement on Form F-1 for the offering as well as a Form 20-F annual report on an ongoing basis.

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