Foreign private issuers are treated differently than US domestic issuers under the US securities laws. Here’s a brief introduction to foreign private issuers, and a summary of some of the benefits they enjoy. For more information on this topic, see the Latham FPI Guide and our client alert Defining Foreign Private Issuers: Are You a Wizard or a Muggle?

What is a foreign private issuer?

A “foreign private issuer” is an issuer (other than a foreign government) incorporated or organized under the laws of a jurisdiction outside of the United States unless:

1. more than 50% of its outstanding voting securities are directly or indirectly owned of record by US residents; and
   
2. any of the following applies:
   1. the majority of its executive officers or directors are US citizens or residents;
   2. more than 50% of its assets are located in the United States; or
   3. its business is administered principally in the United States.
      

See Securities Act Rule 405 or Exchange Act Rule 3b-4 (they are identical).

How is US ownership of record determined?

The short answer is “there is no short answer.” The rules on counting US ownership for foreign private issuers are frankly tough to follow – you start with the definition of “foreign private issuer” in two rules (Rule 405 or Rule 3b-4); you then flip to another (Exchange Act Rule 12g3-2(a)), which sends you to yet another (Exchange Act Rule 12g5-1); and finally come full circle back home. Dizzy yet?

Here’s the black letter law. In order to determine the percentage of outstanding voting securities held of record by US residents, you begin with a review of the addresses of securityholders in the foreign private issuer’s records. But your inquiry does not end there. In particular, you first need to look through institutional custodians (such as Depository Trust Company, or DTC, and its nominee Cede & Co.) and other commercial depositories (such as Euroclear and Clearstream) to identify the participants in those systems (such as banks, broker-dealers and nominees). Then, you need to drill down beyond certain “street name” accounts – that is, accounts held by a broker-dealer, bank or nominee for someone else.¹ If you have an American Depositary Receipt (ADR) program, you need to ask the ADR depositary bank to do the same type of drilling down on ADR ownership.

Thankfully, you are not required to look through all street name accounts. Instead, your inquiry as to the amount of shares represented by US-resident accounts can be limited to those broker-dealers, banks and other nominees located in:

• the United States;
• the foreign private issuer’s jurisdiction of incorporation; and
• the jurisdiction that is the foreign private issuer’s primary trading market for its voting securities (if different than the jurisdiction of incorporation).

In making these inquires, the issuer may rely in good faith on information as to residency supplied by the broker-dealer, bank or nominee. If, after “reasonable inquiry,” the issuer is unable to obtain information about the amount of securities represented by accounts of customers resident in the United States, it may assume that these customers are residents of the jurisdiction in which the nominee has its principal place of business.

An example may help here. Let’s say we are trying to determine if Anglo Freedonian Mining SA, a company incorporated under the laws of Freedonia and trading in London, is a foreign private issuer. Anglo Freedonian has a total of one million issued and outstanding ordinary shares. To make the calculation, we would have to look through street name accounts in the United States, Freedonia and the United Kingdom. Let’s suppose that the company’s records show that Firefly & Teasdale, a broker-dealer located in Freedonia, is the owner of record of 600,000 ordinary shares. You would need to inquire whether any US residents hold securities through accounts at Firefly & Teasdale. If you discover that all 600,000 shares nominally held of record by Firefly & Teasdale are actually held by Messrs. Groucho Marx, Harpo Marx, Chico Marx and Zeppo Marx of Hollywood CA, it is starting to look like Anglo Freedonian is more than 50% owned of record by US residents.²

Of course, a non-US company with more than 50% US ownership can still be a foreign private issuer. To fall outside of the “foreign private issuer” classification, a foreign‑incorporated issuer must be both majority owned by US residents and meet any one of the criteria set forth in (2)(a), (2)(b) and (2)(c) above.

When is foreign private issuer status determined? And what happens if you lose foreign private issuer status?

For new registrants, you determine whether an issuer is a foreign private issuer as of a date within 30 days prior to the filing of the initial registration statement. See Rule 405/Rule 3b-4. Once an issuer qualifies as a foreign private issuer, it is immediately able to use the forms and rules designated for foreign private issuers. Thereafter, it must test its status annually, at the end of its most recently completed second fiscal quarter.

Let’s take an example. Freedonian Technologies SA is a company incorporated under the laws of Freedonia but reports as a domestic US issuer. It determines that it is a foreign private issuer as of the end of its second fiscal quarter. So, Freedonian Tech would no longer need to continue reporting on Forms 8-K and 10-Q for the remainder of the fiscal year in progress. Instead, it could immediately begin furnishing reports on Form 6-K, and would file an annual report on Form 20-F (rather than Form 10-K).

As you can see, the payoff of becoming a foreign private issuer is immediate. What about the reverse – what happens if an issuer fails the test for foreign private issuers at the end of its second fiscal quarter? The good news is that the issuer does not immediately have to start filing as a domestic issuer; instead, it remains eligible to use the forms and rules for foreign private issuers until the end of that fiscal year. Another way to look at it is that it does not lose its status as a foreign private issuer until the first day of the next fiscal year. Once an issuer fails to qualify for foreign private issuer status, it will remain unqualified unless it meets the test as of the last business day of its second fiscal quarter. What are some of the key benefits of being a foreign private issuer?

• Ability to Use US GAAP, IFRS or Local GAAP. US domestic companies must prepare financial statements in accordance with US GAAP. The financial statements of foreign private issuers, however, may be prepared using US GAAP, International Financial Reporting Standards (IFRS), or local home-country GAAP (local GAAP). In the case of foreign private issuers that use the English‑language version of IFRS as issued by the International Accounting Standards Board (IASB IFRS), no reconciliation to US GAAP is needed. By contrast, if local GAAP or non-IASB IFRS is used, the consolidated financial statements (both annual and in certain circumstances interim) must include a footnote reconciliation to US GAAP. See our publication Financial Statement Requirements in US Securities Offerings: What Non‑US Issuers Need to Know.

• Foreign Private Issuers Are Not Required to Report Quarterly and Their Financial Information Goes “Stale” Less Quickly. Unlike domestic US issuers, foreign private issuers are not required to file quarterly reports with the SEC, although foreign private issuers may be required to prepare quarterly reports under home country requirements or may choose voluntarily to report quarterly (e.g., for marketing reasons). The SEC’s rules also allow a foreign private issuer’s registration statement to contain financial information that is more “stale” than that allowed for domestic US issuers. In particular, there is no requirement for interim unaudited financial statements if a registration statement becomes effective less than nine months after the end of the last audited financial year. After that time, a foreign private issuer must provide interim audited consolidated financial statements (prepared in accordance with, US GAAP or IASB IFRS, or reconciled to US GAAP if presented in accordance with local GAAP or non-IASB IFRS) covering at least the first six months of the fiscal year. If a foreign private issuer has published more current financial information than is required under SEC rules (either because of home country requirements or voluntarily for marketing purposes), that financial information is required to be included in a registration statement. See Item 8(a)(5) of Form 20-F.

____________________

¹   Note a crucial difference with domestic US issuers: when looking at shareholders for a US company for Exchange Act purposes, you stop at the level of the depository’s accounts. Securities held in street name by a broker-dealer are held of record only by the broker-dealer (and not the beneficial owners of the street-name securities). See C&DI 152.01. This is one of the rare instances in which foreign private issuers are subject to a more onerous regime than domestic US companies.

²   See (or watch) “Duck Soup,” the classic 1933 Marx Brothers comedy (and the last Marx Brothers film in which Zeppo appears).