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December 12, 2016

SEC Staff Releases New Interpretations Relevant for Foreign Private Issuers and Rule 144A


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On December 8, 2016, the SEC’s Division of Corporation Finance released new “C&DI” interpretations, many of them applicable in particular to foreign private issuers. They provide welcome certainty for companies seeking to establish a US listing or maintaining an existing one. Other interpretations address the definition of US person in the Regulation S offshore placement exemption and the determination of “QIB” status under Rule 144A.

“Foreign Private Issuer” Status

The SEC’s rules[1] define “foreign private issuer” as a corporation or other organization incorporated or organized under the laws of a non-US jurisdiction, unless the company meets the following conditions as of the last business day of its most recent second fiscal quarter:

  • more than 50% of the company’s outstanding voting securities are directly or indirectly owned of record by US residents; and
  • any one or more of the following:
    • the majority of the company’s executive officers or directors are US citizens or residents; or
    • more than 50% of the company’s assets are located in the United States; or
    • the company’s business is administered principally in the United States.

The new interpretations provide guidance on how to apply these criteria.

Ownership Test. For the purpose of determining how many of the company’s voting securities are owned of record by US residents:

  • Where the company has multiple classes of voting stock with different voting rights, the company has choice, as long as it applies it consistently. It may either look to whether more than 50% of the voting power of those classes on a combined basis is owned by US residents, or alternatively the company may choose to make the determination based on the number of voting securities.
  • A person who has permanent resident status in the United States (a so-called Green Card holder) is presumed to be a US resident.
  • Other individuals without permanent resident status may also be US residents for these purposes. The company must decide what criteria it will use to determine residency and apply them consistently without changing the criteria to achieve a desired result. Such factors could include tax residency, nationality, mailing address, physical presence, the location of a significant portion of the shareholder’s financial and legal relationships or immigration status.

US Citizenship or Residence of Directors and Executive Officers. In determining whether a majority of the executive officers or directors are US citizens or residents, the tests must be applied separately for each group. In effect, there are four determinations: the citizenship status of executive officers, the residency status of executive officers, the citizenship status of directors and the residency status of directors. If the company has two boards of directors, it should make the determination with respect to the board that performs the functions most similar to those undertaken by a US-style board. If those functions are divided between both boards, the members of both boards may be aggregated for purposes of the determination.

Location of Assets. In determining whether more than 50% of the company’s assets are located in the United States, a company may use the geographic segment information determined in the preparation of its financial statements. Alternatively, it may apply any other reasonable methodology in assessing the location and amount of its assets, so long as the company is consistent in applying the methodology chosen.

Location Where Business Is Principally Administered. In determining whether a company’s business is administered principally in the United States, the company must assess on a consolidated basis the location from which its officers, partners or managers primarily direct, control and coordinate the company’s activities. However, there is no single factor or group of factors that are determinative in this analysis. Holding shareholder meetings or occasional board meetings in the United States would not necessarily, absent other factors, result in a determination that the company’s business is administered principally in the United States.

Regulation S: US Person

For purposes of the Regulation S safe harbor for offshore securities offerings, in determining whether a natural person is resident in the United States—and, therefore, a “US person”—the same factors should be considered as in the analysis of whether shareholders are US residents for purposes of the foreign private issuer definition, discussed above.

SEC Registered Debt Securities of Foreign Parent Companies With US Subsidiary Issuers or Guarantors

The new interpretations clarify that where a parent company that is a foreign private issuer guarantees securities issued by a subsidiary that is not a foreign private issuer, an F-series registration statement may be used to register the offering and, going forward, the company can use Form 20-F to comply with its Exchange Act reporting obligations. The same is true where a parent foreign private issuer issues securities that are guaranteed or co-issued by one or more subsidiaries that are not foreign private issuers. In both cases, the parent and subsidiary must be eligible to present consolidated financial information of the parent under Rule 3-10 of Regulation S-X or narrative disclosure, rather than separate financial statements of the subsidiaries.

Successor Registrants: Succeeding to the Reporting Obligations of a Reporting Foreign Private Issuer

Under Exchange Act Rule 12g-3, where a non-SEC-reporting issuer issues its securities to holders of securities of an SEC-reporting issuer in connection with a merger or similar transaction that qualifies as succession under Rule 12b-2 or related no-action letters, the acquiror automatically succeeds to the target’s SEC registration and Exchange Act reporting obligations. Where both the acquiror and the target are foreign private issuers, the new interpretations provide that the acquiror’s initial filing to evidence the succession should be a Form 6-K announcing the succession, filed on EDGAR using the Form 8-K submission type that is appropriate to the specific transaction. Thereafter, the successor issuer should make all other filings as appropriate.

Termination of Exchange Act Registration: Primary Trading Market

Under Exchange Act Rule 12h-6, a foreign private issuer may terminate its Exchange Act registration and its SEC reporting obligations if certain conditions are met. One of these conditions is that the company must have maintained a listing of the securities for at least 12 months on one or more exchanges in a non-US jurisdiction that, either singly or together with the trading of the securities in another foreign jurisdiction, constitutes the primary trading market for those securities. “Primary trading market” for these purposes means that at least 55% of the trading in the securities took place in a single foreign jurisdiction or in no more than two foreign jurisdictions during a recent 12-month period. The new interpretations provide that in making this determination, a company may consider all securities trading markets in the European Union as a single foreign jurisdiction.

Rule 144A: QIB Determination

The new interpretations provide additional clarity on the criteria for qualifying as a qualified institutional buyer (“QIB”), for purposes of the Rule 144A safe harbor for resales of securities. In order to qualify as a QIB, an institutional investor must own and invest on a discretionary basis at least $100 million in securities. The new interpretations provide that in determining whether the $100 million threshold is met, the institutional investor may include securities purchased or held on margin, as well as securities it owns but has loaned out. Borrowed securities and short positions do not count in calculating the $100 million threshold.

The interpretations also clarify that an investment company that is not registered under the Investment Company Act of 1940 may not aggregate the investments held by other funds in its family of funds.

Under Rule 144A, an entity is deemed a QIB if all of its equity owners are QIBs. In the case of a limited partnership, the equity owners are the limited partners, and the general partner need not be considered unless it is also a limited partner.


[1] Securities Act Rule 405; Exchange Act Rule 3b-4(c).

Authors and Contributors

Ilir Mujalovic


Capital Markets

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