Since the Sarbanes-Oxley Act was adopted in 2002, non-U.S. issuers have become increasingly disenchanted with the regulatory burden of being listed on a U.S. stock exchange or otherwise having SEC reporting obligations. The most significant reason for non-U.S. issuers wanting to terminate their U.S. obligations is to avoid the internal control requirements under section 404 of S-Ox. In response to criticism that the criteria for exiting the U.S. markets were too stringent, the SEC has adopted new rules to make it easier for these issuers to terminate their reporting obligations when there is relatively little interest in their securities among U.S. investors.
Under the new rules, foreign private issuers will generally be entitled to deregister with the SEC and cease reporting if, during a recent 12-month period, the average daily trading volume of their equity securities on U.S. stock exchanges is 5% or less of the worldwide average daily trading volume. Under the existing rule—to be eliminated for equity securities—a foreign private issuer may terminate its registration and cease filing reports with the SEC only if there are fewer than 300 U.S. resident holders. (Issuers who fail to satisfy the 5% trading test may still deregister if they have fewer than 300 holders.)
If an issuer delists from a U.S. stock exchange in order to bring its trading volume below 5%, it will have to wait 12 months before terminating its SEC reporting obligations. The following additional conditions will apply before a foreign private issuer may deregister its equity securities and cease reporting with the SEC:
- The issuer must have been a reporting company under the Securities Exchange Act of 1934 for at least one year, must be current in its reporting and have filed at least one annual report;
- The issuer must not have sold securities in a registered public offering in the United States during the preceding 12 months, with limited exceptions (private placements are permitted); and
- The issuer must have been listed on a non-U.S. stock exchange for at least one year.
If a foreign private issuer’s reporting obligations arise from a public offering of debt securities (including an exchange offer following a Rule 144A private placement), there is no trading test and the current limit of 300 U.S. holders will remain, as will the requirement to file reports for the year during which the registration statement became effective, including at least one annual report.
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