On September 5, 2008, the U.S. Securities and Exchange Commission (SEC) published final rules which automatically grant foreign private issuers an exemption from registration under Rule 12g3-2(b) of the Securities Exchange Act of 1934 (Exchange Act) as long as specified conditions are met.1 The final rules should make it easier for U.S. investors to gain access to a foreign private issuer's material non-United States disclosure documents and thereby to make better informed decisions regarding whether to invest in that issuer's equity securities through the over-the-counter market in the United States or otherwise. The new rules are substantially similar to the proposed rule changes published by the SEC on February 19, 2008, with the exception that the U.S. trading volume limitations have been integrated into the foreign listing/primary trading market condition, as opposed to being considered a separate requirement.2 The new 12g3-2(b) exemption rules will take effect on October 10, 2008.
Current Rule 12g3-2(b) Requirements
Currently, in order to obtain a Rule 12g3-2(b) exemption, a foreign private issuer must:
- submit to the SEC a written Rule 12g3-2(b) application; and
- submit to the SEC paper copies of certain disclosure information, both as part of the initial application and on a ongoing basis.
Amended Rule 12g3-2(b) Requirements
In order to streamline the Rule 12g3-2(b) exemption process, the SEC has replaced the affirmative, paper-based application process with an automatic exemption, which can be maintained so long as:
- the issuer lists its equity securities on one or more foreign exchanges which constitute the primary trading market for those securities, which is defined to mean:
- at least 55% of the worldwide trading for the subject class of securities took place on the markets of either a single foreign jurisdiction or in no more than two foreign jurisdictions during the issuer's most recently completed fiscal year; and
- if a foreign private issuer aggregates the trading of the subject class of securities in two foreign jurisdictions, the trading in at least one of those foreign jurisdictions is greater than the trading in the U.S. for the same class of the issuer's securities;
- the issuer is not required to file or furnish reports under Exchange Act Section 13(a) or 15(d); and
- the issuer electronically publishes specified non-U.S. disclosure documents in English either on its Internet website or through an electronic information delivery system generally available to the public in its primary trading market.
If a foreign private issuer ceases to comply with one or more of the above requirements, it will no longer qualify for the Rule 12g3-2(b) exemption, although it may still be able to qualify for another exemption, such as (1) a statutory Section 12(g) exemption if the issuer has less than 500 shareholders worldwide, (2) a Rule 12g3-2(a) exemption if the issuer has less than 300 U.S. resident shareholders and (3) a Rule 12g-1 exemption if the issuer has less than $10 million in assets.
Foreign Listing Condition
The Rule 12g3-2(b) exemption rules maintain the foreign listing condition requirements of the proposed rules, but adopt trading volume limitations as part of the foreign listing conditions, as opposed to a separate quantitative standard. The rules require a foreign private issuer claiming the Rule 12g3-2(b) exemption to ensure that at least 55% 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. Further, if a foreign private issuer aggregates the trading volume of its subject class of securities in two foreign jurisdictions, the trading volume of such class of securities in at least one of the jurisdictions must be greater than the trading volume of that same class of securities in the U.S. This definition is consistent with the March 2007 amendments aimed at easing the deregistration process for foreign private issuers.3
The SEC's proposed rules received many comments on the proposed requirement that a foreign private issuer's U.S. average daily trading volume (ADTV) be no greater than 20% of its worldwide ADTV for its most recent fiscal year. Commenters were generally critical of this condition and either urged the SEC to eliminate it entirely or to increase the U.S. ADTV threshold to a higher percentage in order to avoid discouraging foreign private issuers for participating in the U.S. markets. After consideration of the comments, the SEC determined that adopting the final rules without the 20% ADTV threshold was consistent with the protection of U.S. investors in light of the non-U.S. market volume requirements imposed through the foreign listing conditions.
The SEC also declined to adopt an amendment that would have allowed unlisted foreign private issuers to claim a Rule 12g3-2(b) exemption as long as they were subject to a recognized foreign regulatory authority and a set of public disclosure obligations. The SEC felt that it would be difficult for market participants to determine whether an issuer is subject to a complying foreign regulatory regime and that listing involves an affirmative action on the part of issuers to become subject to applicable ongoing disclosure obligations.
A foreign private issuer that seeks a Rule 12g3-2(b) registration exemption must have no reporting obligations under the Exchange Act. An issuer can satisfy this non-reporting requirement if the issuer is either:
- an issuer who already had no reporting requirements under either Section 13(a) or 15(d); or
- an issuer that once had reporting requirements but has taken advantage of Exchange Act provisions that allow for termination or suspension of reporting requirements in certain situations.
The new rule eliminates the current rule's requirement that a foreign private issuer claim a Rule 12g3-2(b) exemption within 120 days of its most recently completed fiscal year, instead allowing such foreign private issuer to claim registration exemption at any point so long as the new requirements are met. The amendment also eliminates certain other anomalies of the current rule by (i) eliminating the requirement that a deregistered foreign private issuer wait 18 months before being able to avail itself of the Rule 12g3-2(b) exemption and (ii) allowing foreign private issuers with suspended Section 15(d) reporting obligations to take advantage of the Rule 12g3-2(b) exemption in certain circumstances. The SEC believes that eliminating these restrictions will hasten the publication of a foreign private issuer's non-U.S. disclosure documents, thereby improving access to information for U.S. investors.
Proposed Electronic Publishing of Non-U.S. Disclosure Documents
The final rules require that all information currently submitted to the SEC on paper be submitted electronically, either on the foreign private issuer's website or through an electronic information delivery system generally available to the public. The purpose of this condition is to improve U.S. shareholder access to a foreign private issuer's material corporate information.
In order to maintain exempt status under amended Rule 12g3-2(b), a foreign private issuer must electronically publish information that, from the first day of its most recently completed fiscal year, it has:
- made public or been required to make public pursuant to the laws of the country of its incorporation, organization, or domicile;
- filed or been required to file with the principal stock exchange in its primary trading market on which its securities are traded and which has been made public by that exchange; and
- distributed or been required to distribute to its security holders.
It is worth noting that the type of information the SEC requires foreign private issuers to make available in order to maintain their Rule 12g3-2(b) exemption is substantially similar to the Form 6-K requirements for reporting foreign private issuers. The electronic publishing condition set forth in amended Rule 12g3-2(b) more closely aligns the "accessibility of information" requirements of exempt foreign private issuers with those of reporting issuers.
The SEC adopted a transition period of three months from the effective date of the proposed amendments to allow foreign private issuers to take the necessary steps to adhere to the new electronic publishing requirement.
English Language Requirement
The SEC is adopting the English language translation requirements, as proposed. This rule requires that all of a foreign private issuer's electronically submitted disclosure documents be posted with an English language translation. Responding to the concerns of certain commenters, the SEC has clarified that only English summaries, as opposed to full translations, are necessary if such a summary would be permitted for a document submitted under Form 6-K or Exchange Act Rule 12b-12(d)(3).
Related Amendments to Revised Rule 12g3-2(b)
The SEC has also adopted certain amendments intended to remedy a number of inconsistencies which arise from the adoption of the final rules discussed above.
Elimination of the Successor Issuer Prohibition
Under the current Rule 12g3-2(b), an issuer may not obtain a registration exemption if it has succeeded to the Exchange Act reporting obligations of another issuer through an acquisition. As proposed, the amendments eliminate this successor issuer distinction if such issuer qualifies for deregistration under one of the exit rules or under Section 15(d).
Elimination of the Rule 12g3-2(b) Exception for MJDS Filers
When the SEC adopted its Multijurisdictional Disclosure System (MJDS) for Canadian issuers, it allowed MJDS filers to maintain Rule 12g3-2(b) exempt status even in cases where such issuers ceased to qualify for the exemption on one or more grounds. This exception was originally created to encourage use of the MJDS system. The final rules will now eliminate the MJDS filer exceptions and require that such Canadian issuers comply with the Rule 12g3-2(b) exemption on the same grounds as other foreign registrants.
Revisions to Form F-6
Form F-6 is the registration statement used to register ADRs under the Securities Act. Currently, this form references foreign private issuers' submitting paper reports and other documents to the SEC as part of their Rule 12g3-2(b) exemption. The final rules revision will update the form to reference the newly adopted electronic information submission contained in the Rule 12g3-2(b) amendments.
Amendment of Exchange Act Rule 15c2-11
Exchange Act Rule 15c2-11 currently prohibits a broker-dealer from publishing a quotation for a covered OTC security unless it has obtained reviewed current information from the issuer, which includes information furnished to the SEC by Rule 12g3-2(b) exempt foreign private issuers. As proposed, the final rules will conform the 15c2-11 requirement with the adopted amendments so that a broker-dealer must have available a foreign private issuer's electronically published information.
Our client alerts are for general informational purposes and should not be regarded as legal advice
1. SEC Release No. 34-58465; International Series Release No. 1309; File No. S7-04-08. A copy of the release is available on the SEC's website at www.sec.gov/rules/final/2008/34-58465.pdf.
2. For a discussion of the February 2008 proposal, see our Client Alert, "SEC Proposes Changes to Registration Exemption for Foreign Private Issuers Under Exchange Act Rule 12g3-2(b)," available on our website at www.chadbourne.com/publications.
3. For a discussion of the March 2007 amendments on deregistration, see our Client Alert, "SEC Adopts Long-Awaited Final Rules to Ease the Deregistration Process for Foreign Private Issuers," available on our website at www.chadbourne.com/publications.