United States: SEC Amends Rule 12g3-2(b) Registration Exemption For Foreign Private Issuers

Last Updated: October 1 2008
Article by Paul C. de Bernier and Laura D. Richman

Originally published September 25, 2008

Keywords: SEC, Rule 12g-3-2(b), Section 12(g), foreign private issuer, securities registration, over-the-counter market, disclosure

The US Securities and Exchange Commission (the "SEC") has adopted changes to its rules that exempt a non-US issuer that is a "foreign private issuer" from having to register a class of equity securities under Section 12(g) of the US Securities Exchange Act of 1934 (the "Exchange Act").1 Issuers, including foreign private issuers, are generally required to register their securities under the Exchange Act in order to have them listed on a national securities exchange or traded on the OTC Bulletin Board. However, an exemption under Rule 12g3-2(b) of the Exchange Act permits trading of a foreign private issuer's equity securities in the US over-the-counter market without registration under Section 12(g) of the Exchange Act. The amendments to the rules become effective as of October 10, 2008 (See Release No. 34-58465; International Series Release No. 1309, available at http://www.sec.gov/rules/final/2008/34-58465.pdf).

Background

Current Rule 12g3-2(b) under the Exchange Act provides an exemption from the Section 12(g) Exchange Act registration requirement for foreign companies that are not listed on a US national securities exchange or that have not otherwise sought a public market for their equity securities in the United States. Current Rule
12g3-2(b) exempts a foreign private issuer from Section 12(g) registration if, among other things, the issuer furnishes to the SEC on an ongoing basis information it has (i) made, or is required to make, public under the laws of its home jurisdiction, (ii) filed, or is required to file pursuant to its non-US stock exchange obligations, and which has been made public by the exchange, or (iii) distributed, or is required to distribute to its security holders.

Exemptions from Section 12(g) registration currently require a foreign private issuer to submit to the SEC a list of its non-US disclosure requirements as well as copies of its non-US disclosure documents published since the end of its last fiscal year, and the number and percentage of US holders of its equity securities as well as a brief description of how such holders acquired the equity securities. Continuous submission of these non-US disclosure documents to the SEC is required to maintain the Rule 12g3-2(b) exemption.

A Rule 12g3-2(b) exemption enables an eligible foreign private issuer to have its equity securities traded on a limited basis in the US over-the-counter market while avoiding Section 12(g) registration and associated reporting requirements. A Rule 12g3-2(b) exemption also has other benefits which include: (i) enabling a foreign private issuer to have established an unlisted, sponsored or unsponsored depository facility for American Depository Receipts (ADRs), (ii) enabling registered broker-dealers to fulfill their current information obligations in relation to a foreign private issuer's securities for which they seek to publish quotations and (iii) facilitating resales of an issuer's securities to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

Amended Rule 12g3-2

Amended Rule 12g3-2 will permit a foreign private issuer to claim a Rule 12g3-2(b) exemption from
Section 12(g) registration in relation to any particular issuance of equity securities without the need for an application or notification to the SEC if:

  • The issuer, at the time of issuance of the securities, maintains a listing of the subject class of securities on one or more non-US exchanges that constitute the primary trading market for those securities;2
  • The issuer is not required to file or furnish reports under Sections 13(a) or 15(d) of the Exchange Act; and
  • The issuer publishes, in English, on its Internet web site (or through an electronic information delivery system generally available to the public in its primary trading market) specified non-US disclosure documents that are required to be made public from the first day of its most recently completed fiscal year, unless the issuer is claiming the exemption upon or following its recent Exchange Act deregistration.

The SEC amendments eliminate the current written application and paper submission requirements under Rule 12g3-2(b) of the Exchange Act in favor of automatic exemptions from Section 12(g) for foreign private issuers that meet the conditions specified above. In order to maintain the exemption, the issuer must publish its non-US disclosure documents on an ongoing basis and for each subsequent fiscal year, in English, on its Internet web site or through an electronic information delivery system generally available to the public in its primary trading market. The issuer must maintain a non-US listing of the subject class of securities and not register a class of securities under Section 12 of the Exchange Act or incur reporting obligations under 15(d) of the Exchange Act.

Conditions for obtaining a Section 12(g) exemption under amended Rule 12g3-2

Foreign listing condition. In order to qualify for a Rule 12g3-2(b) exemption, a foreign private issuer must currently maintain a listing of the subject class of securities on one or more non-US exchanges that (either singly 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. If the foreign private issuer aggregates trading in more than one non-US jurisdiction, then trading for the securities in at least one of those jurisdictions must be larger than the trading in the United States for the same class of securities.

Non-Exchange Act reporting condition. The Rule 12g3-2(b) exemption from registration is only available to an issuer that does not have reporting obligations under Sections 13(a) or 15(d) of the Exchange Act. This means that a foreign private issuer with an effective registration statement filed with the SEC under Sections 12(b) or 12(g) of the Exchange Act could not claim the exemption. However, a reporting foreign private issuer that has suspended its Exchange Act reporting obligations will be able to satisfy the non-Exchange Act reporting condition upon the effectiveness of the issuer's deregistration — or, as the case may be, upon its determination that it had less than 300 shareholders as of the beginning of its most recent fiscal year — as long as the issuer has not otherwise become subject to additional Exchange Act reporting obligations.

Electronic publishing of non-US disclosure documents. Other than in connection with, or following, a recent Exchange Act deregistration, the Rule 12g3-2(b) exemption also requires a foreign private issuer to publish, on its Internet web site or through an electronic delivery system generally available to the public in its primary trading market, the issuer's non-US disclosure documents in English from the first day of its most recently completed fiscal year. The new rules only require the issuer to electronically publish such non-US disclosure documents relating to information that is material to an investment decision regarding the subject securities, such as results of operations or financial conditions, changes in business, acquisitions and dispositions, changes in management or control, the issuance, redemption or acquisition of securities and the granting of options, payment of other remuneration or transactions with directors or officers and transactions with principal security holders. In order to maintain the Rule 12g3-2(b) exemption, a foreign private issuer must publish its non-US disclosure documents in English on an ongoing basis and for subsequent fiscal years on its Internet web site or through an electronic information delivery system in its primary trading market. The amended rules specify that, at a minimum, foreign private issuers relying on the Rule 12g3-2(b) exemption must provide English translations of their annual reports, including or accompanied by annual financial statements, interim reports that include financial statements, press releases and other communications and documents that are distributed directly to security holders.

Duration Of The Amended Rule 12g3-2(b) Exemption

Once obtained, the Rule 12g3-2(b) exemption will remain in effect until the foreign private issuer either:

  • No longer electronically publishes, in English, the required non-US disclosure documents;
  • No longer maintains a listing for the subject class of securities on one or more exchanges in a primary trading market; or
  • Registers a class of securities under Section 12 of the Exchange Act or incurs reporting obligations under Section 15(d) of the Exchange Act.

Elimination Of Certain Provisions

Elimination of the written application requirement. Where the foreign private issuer satisfies the three new conditions described above, the new rules eliminate the current requirement that the issuer must submit written materials to the SEC in order to obtain a Rule 12g3-2(b) exemption. From time to time, the SEC staff compiles lists of issuers claiming the Rule 12g3-2(b) exemption based on a review of paper submissions. As part of its Rule
12g3-2(b) streamlining process, the SEC anticipates that it will no longer publish these lists subsequent to the effective date of the new rules.

Elimination of the successor issuer prohibition. The new rules eliminate the provision that precludes an issuer from obtaining the Rule 12g3-2(b) exemption if it has succeeded to the Exchange Act reporting obligations of another issuer following a merger, consolidation, exchange of securities or acquisition of assets.

Elimination of the Rule 12g3-2(b) exemption for MJDS filers. The new rules eliminate the provisions that make the Rule 12g3-2(b) exemption available to Canadian issuers that have only filed with the SEC specified registration statements under the Multijurisdictional Disclosure System (MJDS),3 although they may have filed such registration statements within the previous 18 months or to effect transactions in which they would succeed to Exchange Act reporting obligations. The new rules also eliminate the current ability of a Canadian issuer to retain the Rule 12g3-2(b) exemption for its equity securities where the issuer already claims a Rule 12g3-2(b) exemption, but subsequently acquires Exchange Act reporting obligations as an MJDS filer, for example in relation to a class of its debt securities. Under the new rules, an MJDS registrant will be eligible to claim the Rule 12g3-2(b) exemption on the same grounds as other foreign private issuers.

Elimination of the "Automated Inter-Dealer Quotation System" prohibition. The new rules eliminate the provisions prohibiting a foreign private issuer from claiming the Rule 12g3-2(b) exemption if it has securities or ADRs quoted in the United States on an automated inter-dealer quotation system (which, until recently, included the system administered by the National Association of Securities Dealers Inc., and known as Nasdaq, in view of the fact that the Nasdaq has become a national securities exchange).

Additional Amendments

Revisions to Form F-6. The SEC has adopted amendments to Form F-6, the registration statement used to register ADRs under the Securities Act. These amendments require a registrant of ADRs to state that, if the issuer of deposited securities is not an Exchange Act reporting company, such issuer publishes information in English required to maintain the Rule 12g3-2(b) exemption on its Internet web site or through an electronic information delivery system generally available to the public in its primary trading market. The registrant also has to disclose the issuer's address of its Internet web site or the electronic information delivery system in its primary trading market. However, in the case of an unsponsored ADR facility, a Form F-6 filer may base this representation upon the filer's reasonable, good faith belief after exercising reasonable diligence.

Amendment of Rule 15c2-11 of the Exchange Act. Rule 15c2-11 under the Exchange Act contains requirements that are intended to deter broker-dealers from initiating or resuming quotations for covered over-the-counter securities that may facilitate a fraudulent or manipulative scheme. The SEC has adopted amendments to Rule 15c2-11 that require a broker-dealer have available, prior to publishing (or submitting for publication), a quotation for a covered over-the-counter security in a quotation medium — i.e., the information that the issuer has published pursuant to the Rule 12g3-2(b) exemption since the beginning of the issuer's last fiscal year. A broker-dealer will also be permitted to fulfill its Rule 15c2-11 obligation — to make reasonably available upon request the information published pursuant to Rule 12g3-2(b) — by providing the requesting person with appropriate instructions regarding how to obtain the information electronically.

Transition Periods

The SEC has established a three-year transition period from the date the new rules become effective in order to provide foreign private issuers currently claiming a Rule 12g3-2(b) exemption but who will no longer qualify for the exemption under the new rules, with sufficient time to either comply with the new conditions or register under the Exchange Act.

In relation to the acceptance by the SEC of any paper submissions of non-US disclosure documents, effective three months from the effective date of the new rules, the SEC will cease to process non-US disclosure documents submitted in hard copy by Rule 12g3-2(b) exempt issuers. Prior to the end of this three-month period, the SEC will continue to process submissions and make them publicly available in the SEC's public reference room. Once the three-month transition period ends, any issuer that continues to make Rule 12g3-2(b) submissions in paper, and does not publish the submitted documents electronically as required, will no longer be able to claim the Rule 12g3-2(b) exemption.

Some Practical Considerations

  • Foreign private issuers who received an exemption under current Rule 12g3-2(b) should review the requirements of the amended rule to ascertain if they either satisfy the new requirements or can take steps to satisfy them during the transition period.
  • Ongoing electronic publication of non-US disclosure documents is required to maintain the exemption. Foreign private issuers relying on the Rule 12g3-2(b) exemption should ensure that personnel responsible for maintaining their Internet web sites understand the importance of posting the required documents in a timely fashion.
  • Foreign private issuers should consider implementing controls and procedures to ensure that their primary trading market remains outside of the United States.
  • Foreign private issuers with non-US disclosure documents in a language other than English should, at a minimum, translate into English their annual reports (including, or accompanied by, annual financial statements), interim reports that include financial statements, press releases and other communications and documents that are distributed directly to security holders.

Conclusion

The SEC's goal in amending Rule 12g3-2(b) was to adapt the Rule to significant developments that have occurred since the initial adoption of the rule, including the increased globalization of securities markets, advances in information technology and the increased use of ADR facilities by foreign companies to trade their securities in the United States — a phenomenon that has multiplied the number of foreign companies engaged in cross-border activities, as well as increased the amount of US investor interest in the securities of foreign companies. The SEC believes the adopted amendments should make it easier for US investors to gain access to a foreign private issuer's material non-US disclosure documents, thereby allowing investors to make better-informed decisions regarding whether to invest in a particular issuer's equity securities through the over-the-counter market in the United States or otherwise.

Footnotes

1. "Foreign private issuer" is any issuer 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 US; and (b) any of the following: (i) the majority of the executive officers or directors are US citizens or residents; (ii) more than 50 percent of the assets of the issuer are located in the US; or (iii) the business of the issuer is administered principally in the United States. Section 12(g) requires an issuer who has total assets that exceed US$10 million and a class of equity securities (other than exempted securities) held of record by 500 or more persons, 300 or more of whom are US residents, to register such equity securities with the SEC.

2. The new rules define "primary trading market" to mean that at least 55 percent of the worldwide trading in the issuer's subject class of securities took place in, on or through the facilities of a securities market or markets in a single foreign jurisdiction or in no more than two foreign jurisdictions during the issuer's most recently completed fiscal year.

3. The MJDS generally permits a qualified Canadian issuer to file with the SEC its Canadian registration statements and reports under the cover of the MJDS forms.

For information about Mayer Brown's Corporate & Securities Practice please visit www.mayerbrown.com.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2008. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

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