New rules of the Securities and Exchange Commission (SEC) governing disclosure by non-U.S. companies become effective on September 30, 2000. The new SEC rules are significant primarily because they adopt international disclosure standards of the International Organization of Securities Commissions. The SEC said it adopted them to encourage other countries to follow suit.
Although the SEC expects the new rules to eventually lead to harmonization of disclosure standards, they actually modestly increase rather than relax non-financial statement disclosure requirements for non-U.S. companies and leave strict U.S. financial statements requirements intact. The following is a summary, giving effect to the new SEC rules, of certain of the SEC's initial registration and continuing disclosure requirements applicable to foreign companies.
"Foreign Private Issuers" Under U.S. Securities Law
If a company organized outside the U.S. does not meet the SEC’s definition of "foreign private issuer"1 it becomes fully subject to the more extensive disclosure requirements applicable to domestic U.S. public companies. As an accommodation by the SEC to foreign practices, foreign private issuers are subject to slightly less burdensome prospectus disclosure compared with a U.S. company in conducting a registered public offering under the Securities Act of 1933 (the Securities Act) and significantly less required disclosure compared with a U.S. company in periodic reporting under the Securities Exchange Act of 1934 (the Exchange Act).
Under the new SEC rules, qualifying as a foreign private issuer may be somewhat harder for foreign companies with substantial U.S. operations and a large U.S. shareholder base. A company does not qualify if it fails both of two tests:
- the location test -- failed if the majority of executive officers or directors are U.S. citizens or residents, or more than 50% of the company's assets are located in the U.S. or the company's business is managed primarily in the U.S., and
- the share ownership test -- failed if 50% or more of outstanding voting securities of issuer are owned by U.S. residents. The new SEC rules replace a "held of record" method of ownership calculation with a beneficial ownership ("directly or indirectly owned") determination made pursuant to intricate rules that include provisions for "looking through" record ownership and taking notice of publicly available information in applicable jurisdictions.
U.S. Public Offerings by Foreign Private Issuers
Registration and General Prospectus Disclosure. Foreign private issuers conducting an IPO in the U.S. must generally register the offering on Form F-1, which requires much the same disclosure as domestic Form S-1. Foreign issuers are permitted to provide less information concerning individual executive compensation and transactions between the company and its directors and other management.
Foreign Issuer-Specific Disclosure. Some of the information required under Form F-1 as modified by the new rules is specific to the foreign company, including:
- governmental regulations applicable to the company which restrict the import or export of capital or affect the remittance of dividends, interest or other payments to security holders,
- limitations on the right to hold or vote securities applicable to persons who are not citizens or residents of the company’s home country,
- taxes applicable to U.S. security holders under the laws of the foreign country in which the company is organized and any applicable tax treaty,
- exchange rates between U.S. dollars and the home country currency,
- a complete description of organizational documents, the nature and extent of any principal non-U.S. trading market for the company’s securities, and
- tax disclosure covering U.S. and home jurisdiction taxation.
Financial Statement Staleness. Under the new SEC rules a registration statement generally must include audited financial statements no more than 15 months old (previously 18 months) and six month financial statements with U.S. GAAP information must be included if the audited financial statements are more than nine months old (10 months under the prior rules). These more stringent rules could have the effect of a "black-out" period in the second quarter of each fiscal year for companies that file their audited financial statements in the latter half of the six-months after their fiscal year end.
Ongoing Disclosure for U.S. Listed Foreign Private Issuers
A foreign private issuer with securities registered under the Exchange Act is:
- required to file with the SEC an annual report on Form 20-F, within six months following the end of each fiscal year (foreign private issuers with a fiscal year ending before September 30, 2000 may file the 20-F for such year under the old or the new rules),
- not required to file current reports on Form 8-K as is required of a U.S. company, but instead, is required to furnish to the SEC, under cover of Form 6-K, copies of all information that the company makes or is required to make public information under the laws of its home jurisdiction, files or is required to file under the rules of any stock exchange and which is made public by the exchange, or otherwise distributes or is required to distribute to its stockholders,
- not required to file quarterly reports on Form 10-Q, although it will need to furnish to the SEC quarterly earnings reports under cover of Form 6-K if it makes or is required to make such information public in its home jurisdiction, and
- exempt from the proxy solicitation requirements and its insiders are not subject to the Section 16 six-month, short-swing trading restrictions and reporting obligations (Forms 3, 4 and 5) that are applicable to insiders of companies subject to full SEC disclosure.