SEC Proposes To Ease Burdens On Certain Non-U.S. Issuers Whose Principal Trading Market Is Outside The U.S.

Thursday, May 1, 2008 - 01:00
François Janson

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.

If the changes to Rule 12g3-2(b) are adopted as proposed, the exemption will become conditional upon, among other things, the issuer having its principal trading market outside the U.S. To qualify, a non-reporting foreign private issuer1will need to be listed on one or more non-U.S. exchanges, have at least 55 percent of its worldwide average trading volume outside the U.S. and a U.S. average daily trading volume of 20 percent or less. Foreign private issuers that do not meet these requirements within three years after the rule is implemented will be required to register with the SEC. A substantial number of Canadian issuers that trade over-the-counter ("OTC") in the U.S. will be directly affected if these amendments are adopted. Others issuers with substantial U.S. market interest may need to monitor their trading volume to avoid becoming subject to SEC registration.

The comment period was still open as this article went to press. Depending on the nature and volume of comments received, the SEC may extend the comment period or amend its proposal.


Under Section 12(g) of the Securities Exchange Act of 1934 and Rules 12g-1 and 12g3-2(a), 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.

As proposed, the exemption would become automatically available to any non-reporting foreign private issuer 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 worldwide trading market is in the U.S.; and

3) it publishes electronically certain disclosure documents in English.

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. 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 five 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 OTC in the U.S. may be exempt from registration using the same test as Rule 12h-6, with an increased 20 percent benchmark.

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 furnish periodically to the SEC copies of 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, and

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 Reserved to IssuersWhose Principal Trading Market Is Outside The U.S.

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 non-U.S. 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 non-U.S. 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.

New U.S. Market Interest Condition Based On Measure Of U.S. TradingVolume

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 is the case in the current 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.

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 current written application and paper submissions to the SEC are abandoned. To qualify for the exemption, an issuer would need to have made such publications since the beginning of its most recently completed fiscal year. The categories of information that must be published are unchanged and must include all information that is material to an investment decision. 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.

Exemption Can Be Lost If U.S. Market Interest Exceeds 20 Percent Threshold

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 incurs reporting obligations under Section 15(d) of the Exchange Act, or

• the issuer fails to satisfy the electronic publishing requirement.

Impact On Canadian And Other Issuers That Trade OTC In The U.S.

The SEC staff estimates that, from the pool of non-reporting foreign private issuers for which it was able to compile daily trading volume information (340 companies out of a total of 471), only 5 percent of those having American Depositary Receipts (ADRs) traded in the U.S. (276) would fail to be eligible for the exemption if the new rule was adopted. This percentage rises to 50 percent for issuers whose securities trade directly in the U.S. market (64), and those are mostly Canadian issuers. These issuers would need to have their securities registered under the Exchange Act within three years after the effective date of the rule. Some of these issuers may elect instead to curtail U.S. trading in their securities or to expand overseas trading. Others may consider registering and moving to the OTCBB or, if they satisfy the listing conditions, a U.S. exchange.

Other Consequences

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 underway to streamline trading on PORTAL and other U.S. platforms. Broker-dealers active on the OTC market would be able to discharge their information delivery obligations under Rule 15c2-11 by simply telling customers how they may obtain the information electronically. The amendments would also make it easier to establish unlisted depositary facilities for ADRs and in particular unsponsored facilities, because issuers could no longer prevent the establishment of such facilities by not formally claiming the exemption.

1 A foreign private issuer is an issuer that (i) is incorporated in a jurisdiction other than the U.S., (ii) has no more than 50 percent of its shareholders resident of the U.S. and (iii) is not deemed to be based in the U.S. (which would be the case if any of the following was 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.).

François Janson is a Senior Counsel in Holland & Knight's Business Law group, based in the firm's New York office. His practice focuses on mergers and acquisitions and securities offerings, with an emphasis on U.S.-Canada and other cross-border transactions. He has represented Canadian and European clients in U.S. corporate finance transactions as well as U.S. and non-U.S. clients in mergers and acquisitions involving Canadian and U.S. companies. Mr. Janson is a member of the bars of New York, Paris and Quebec. Copyright © 2008 Holland & Knight LLP All Rights Reserved.

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