Today, the SEC issued a concept release to solicit public comment on the definition of foreign private issuer ("FPI"). It has been many years since the SEC last considered what it means to qualify as a FPI. While it is too early to predict how the SEC might ultimately revise the definition, the data and potential approaches outlined in the concept release suggest that the SEC may consider adopting a more stringent framework for determining FPI status.
In the concept release, the SEC Staff analyzed two decades of FPI reporting activity, comparing characteristics of FPIs in fiscal years 2003 and 2023. The analysis focused on the number of FPIs, the jurisdictions of FPIs in terms of incorporation and location of headquarters and the extent to which FPIs have equity securities trading in other jurisdictions.
The SEC Staff highlighted notable changes over the last two decades. In 2023, the most common jurisdiction of incorporation was the Cayman Islands, while the most common location of headquarters was mainland China—compared to Canada and the United Kingdom, respectively, in 2003. The SEC also noted that approximately 55% of reporting FPIs had no or minimal equity trading on non-U.S. markets as of fiscal year 2023.
Areas of Public Comment
As a result of these findings, the SEC is requesting comment on several possible changes to the FPI definition, including whether to:
- Update the current definition – The SEC is considering whether to revise the existing thresholds, such as lowering the shareholder test percentage or modifying the criteria for the business contacts test.
- Introduce a foreign trading volume test – The SEC is considering whether FPIs should be required to meet a minimum level of equity trading volume on non-U.S. exchanges. The SEC estimates that a one percent foreign trading volume threshold would cause over half of the currently reporting FPIs to lose FPI status.
- Require listing on a major foreign exchange – The SEC is evaluating whether FPI status should require listing on a "major foreign exchange," and how that term should be defined.
- SEC assessment of foreign regulation – The SEC is asking whether FPIs should be incorporated or headquartered in a jurisdiction that has a robust regulatory and oversight framework as determined by the SEC, such as those requiring annual reports with audited financial statements, reports disclosing interim financial results and material events which are subject to liability provisions for material misstatements.
- Expand mutual recognition systems – The SEC is considering whether to establish additional mutual recognition systems, such as the limited mutual recognition approach for Canadian issuers.
- Require international cooperation arrangement – The SEC is evaluating whether FPIs should be required to be incorporated or headquartered in a jurisdiction in which the foreign securities authority is a signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation, Cooperation, and the Exchange of Information or the Enhanced Multilateral Memorandum of Understanding Concerning Consultation, Cooperation, and the Exchange of Information.
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