United States: SEC Staff Issues New C&DIs Related To Foreign Issuers And Other Matters

The Securities and Exchange Commission (the "SEC") released new compliance and disclosure interpretations ("C&DIs") on December 8, 2016. These C&DIs provided the following:

Definition of Foreign Private Issuer.

FPIs are corporations or other organizations incorporated or organized under the laws of a foreign country, unless as of the last business day of its most recent second (2nd) fiscal quarter:

Fiscal Year End

Determination Date









the company meets the following conditions:

Component 1

More than fifty percent (50%) of the company's outstanding voting securities are directly or indirectly owned of record by United States ("U.S.") residents


Component 2(a)

The majority of the company's executive officers or directors (each as a separate group) are U.S. citizens or residents


Not a foreign private issuer


Component 2(b)

More than fifty percent (50%) of the company's assets are located in the U.S.


Not a foreign private issuer


Component 2(c)

The company's business is administered principally in the U.S.


Not a foreign private issuer

Each component requires due diligence and final determination by the company and its legal counsel. The recent C&DIs provided additional information on each of these components, as follows:

For Component 1

  • In determining residency, individuals with permanent resident status in the U.S. ("green card holders") are presumed to be residents of the U.S. (Question 203.18);
  • In determining residency, if an individual does not have permanent resident status, companies can determine that individual's residency using a variety of factors (including, but not limited to: tax residency, nationality, mailing address, physical presence, or immigration status); however, the factors must be applied consistently to each individual (Question 203.18); and
  • For companies with multiple classes of voting stock with different voting rights, companies may choose from two (2) methods (to be applied on a consistent basis) to determine whether fifty percent (50%) of its outstanding voting securities are directly or indirectly owned by residents of the U.S.:
    1. Determining whether U.S. residents own more than fifty percent (50%) of the voting power of the classes on a combined basis; or
    2. Determining whether U.S. residents own more than fifty percent (50%) of the number of outstanding voting securities (Question 203.17).

For Component 2(a)

  • In making a determination for this Component, there is a four (4)-part inquiry:
    1. Citizenship status of each executive officer;
    2. Citizenship status of each director;
    3. Residency status of each executive officer;
    4. Residency status of each director (Question 203.19).
  • If a company has two (2) boards, the determination should be made with regard to the board that most closely performs the functions of those undertaken by a U.S.-styled board of directors; if, however, the functions are divided between those two (2) boards, then the boards should be aggregated for the determination (Question 203.20)

For Component 2(b)

  • In making a determination for this Component, companies may use the geographic segment information prepared for its financial statements or any other reasonable methodology (Question 203.21)

For Component 2(c)

  • In making a determination for this Component, companies must assess the location from which its officers, partners or managers primarily direct, control and coordinate the company's activities on a consolidated basis (Question 203.22)
  • However, there is no single determinative factor; for instance, the SEC explicitly stated that: (a) holding an annual or special meeting of shareholders or (b) holding occasional meetings of the company's board of directors in the United States are not determinative (Questions 110.08 and 203.22)

Registration under the Securities Act.

The SEC clarified registration requirements where an FPI guarantees the securities of its subsidiary when the subsidiary is not an FPI. The SEC stated that Rule 3-10 of Regulation S-X permits modified reporting by subsidiary issuers of guaranteed securities and subsidiary guarantors.

If the parent is an FPI and the entities are able to (a) consolidate financial statements in accordance with Regulation S-X (specifically, Rules 3-10(b) through Rules 3-10(d)) and all other conditions of Rule 3-10 are followed, or (b) present narrative disclosure in lieu of condensed consolidating financial information under Rule 3-10, an F-series registration statement may be used to register an offering of guarantees and guaranteed securities that are issued by a non-FPI (Question 102.03).

Conversely, if a non-FPI subsidiary guarantees or co-issues securities issued by its parent FPI, an F-Series registration statement may be used if separate financial statements are not required under Rule 3-10(e) or 3-10(f) and all other conditions of Rule 3-10 are followed (Question 102.04).

Exchange Act Reporting.

The C&DIs addressed a few different scenarios and matters:

  • For a non-FPI subsidiary that registers its securities using an F-series registration statement (as discussed above in Registration under the Securities Act), the subsidiary may use Form 20-F with respect to any of its reporting obligations associated with the registration statement (Question 110.03). Additionally, a non-FPI subsidiary guarantor or co-issuer may use Form 20-F with respect to any of its reporting obligations associated with an F-series registration statement (as discussed above in Registration under the Securities Act) (Question 110.04).
  • If a non-reporting FPI acquires a reporting FPI using its shares as consideration for the holders of the securities of the acquired FPI, the acquiring FPI succeeds the acquiree's reporting obligations and should:
    • File Form 6-K announcing its succession using the Form 8-K submission type; and
    • Make all other Exchange Act filings as appropriate (Question 150.02).
  • FPIs may terminate their Exchange Act registration under Rule 12h-6. In order to terminate its registration, an FPI must maintain a listing of its securities for at least twelve (12) months on one (1) or more non-U.S. exchanges 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" means at least fifty-five percent (55%) of the trading in the securities took place in a single foreign jurisdiction or in no more than two (2) foreign jurisdictions during a recent twelve (12)-month period. Now, the SEC allows the European Union to be considered a single foreign jurisdiction for purposes of this test (Question 155.01).
  • Forms 20-F are due four (4) months after the end of a company's fiscal year. The SEC stated that, where the last day of the company's fiscal year is the last day of a month, the annual report is due four (4) complete months after that day. The SEC provided two (2) examples of this:
    • Where the company has a February 28 fiscal year end, Form 20-F is due June 30; and
    • Where the company has a February 20 fiscal year end, Form 20-F is due June 20 (Question 110.05).
  • Wholly-owned subsidiaries of FPIs are permitted to omit certain information from their Form 20-F in the same manner that a wholly-owned subsidiary may do so on its Form 10-K as long as the company includes a prominent statement on the cover page of its Form 20-F that it meets the conditions set forth in General Instruction I(1)(a) and (b) to Form 10-K (Question 110.06).
  • Exchange Act Rule 12b-23 permits incorporation by reference in answer, or partial answer, to any items required to be disclosed by Form 20-F, including previously filed Forms 6-K, as long as the reference is identified with specificity (Question 110.07).

Rule 144A.

  • For purposes of Rule 144A, a QIB must own and invest at least $100,000,000 in securities. The C&DIs provided insight into determining an entity's qualifications as a QIB, particularly in meeting the $100,000,000 threshold, including:
    • Securities purchased and continued to be held on margin may used in calculating the threshold, as long as they are not subject to a repurchase agreement (Question 138.05);
    • Securities owned but loaned to borrowers may be used in calculating the threshold (Question 138.06);
    • Securities borrowed may not be included in calculating the threshold (Question 138.07); and
    • Short positions in securities may not be included in calculating the threshold (Question 138.08).
  • In determining its status as a QIB under Rule 144A, an investment company that is not registered under the Investment Company Act of 1940 may not aggregate investments with other funds that are "part of [the same] family of funds." Only registered investment companies may use the aggregation method for determining QIB status under Rule 144A (Question 138.09).
  • Under Rule 144A, an entity will be deemed a QIB if all of its equity owners are QIBs. In the case of limited partnerships, the equity owners are the limited partners and, unless also a limited partner, general partners are not considered equity owners for this purpose (Question 138.10).

For a complete listing of the new C&DIs, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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