April 4, 2008

On February 19, 2008, the U.S. Securities and Exchange Commission (SEC) published for comments proposed rule changes intended to automatically grant foreign private issuers the exemption from registration under Rule 12g3-2(b) of the Securities Exchange Act of 1934 (Exchange Act) as long as specified conditions are met. The proposed rule changes should "make it easier for U.S. investors to gain access to a foreign private issuer's material non-United States disclosure documents and 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."1

Current Rule 12g3-2(b) Requirements

Currently, in order to obtain a Rule 12g3-2(b) exemption, a foreign private issuer must:

  • Have no more than 300 U.S. resident shareholders; 
  • Submit to the SEC a written Rule 12g3-2(b) application which (i) describes its non-U.S. disclosure requirements, (ii) discloses the number of U.S. holders of its equity securities and the percentages held by them, and (iii) describes how the U.S. holders acquired those shares; and 
  • Submit to the SEC paper copies of information that, from the first day of its most recently completed fiscal year, the issuer is required (i) to make public pursuant to the laws of its incorporation, organization, or domicile, (ii) to file with the primary stock exchange on which its securities are traded, and (iii) to distribute to its security holders (its non-U.S. disclosure documents).

Furthermore, in order to maintain a Rule 12g3-2(b) exemption, a foreign private issuer must furnish such non-U.S. disclosure documents to the SEC on an ongoing basis and in paper form and shall inform the SEC of any changes in its non-U.S. disclosure requirements. Foreign private issuers are only required to submit information that is material to an investment decision, such as reports on financial condition and results of operations, changes in business and acquisitions or dispositions of assets.

Proposed Rule 12g3-2(b) Amendments

In order to streamline the Rule 12g3-2(b) exemption process, the SEC proposes to replace the affirmative, paper-based application process with an automatic exemption, which can be maintained so long as:

  • the issuer is not required to file or furnish reports under Exchange Act Sections 13(a) or 15(d); 
  • the issuer lists its equity securities on one or more foreign exchanges which constitute the primary market for those securities; 
  • either: 
    • the U.S. trading volume of the issuer's equity securities comprises no more than 20 percent of the worldwide trading volume for those securities; or 
    • the issuer has terminated its registration and reporting requirements under Exchange Act Rule 12h-6, which provides stricter trading volume limitations than does Rule 12g3-2(b); and 
  • the issuer electronically publishes specified non-U.S. disclosure documents in English either on its website or through an electronic delivery system.

The proposed amendments would eliminate the need for a foreign private issuer to submit a written Rule 12g3-2(b) application and allow the issuer to continue to claim the Rule 12g3-2(b) exemption without the need for continued paper submissions to the SEC, so long as it satisfies all of the above requirements. Should a foreign private issuer cease to comply with one or more of the requirements, it would then no longer qualify for the Rule 12g3-2(b) exemption, although it may still be able to qualify for another exemption.2

Proposed Non-Reporting Condition

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:

(i) an issuer who already had no reporting requirements under either Section 13(a) or 15(d); or
(ii) an issuer that once had reporting requirements but has taken advantage of Exchange Act provisions that allow for suspension of reporting requirements in certain situations.

The proposed amendment would eliminate the current rule's requirement that a deregistered issuer wait 18 months before being able to avail itself of the Rule 12g3-2(b) exemption. The proposed amendment would also eliminate the current anomaly which prevents an issuer with suspended Section 15(d) reporting obligations from ever being able to benefit from the Rule 12g3-2(b) exemption. 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 Foreign Listing Condition

The second condition for the proposed Rule 12g3-2(b) exemption would require foreign private issuers to maintain a listing of the class of securities for which the exemption is sought on one or more exchanges in a foreign jurisdiction which constitutes the primary trading market for those securities. The purpose of this requirement is "to help assure that there is a non-U.S. jurisdiction that principally regulates and oversees the issuance and trading of the issuer's securities and the issuer's disclosure obligations to investors."3 The SEC is also soliciting comments on whether unlisted foreign private issuers should be allowed to claim the benefit of this exemption if they voluntarily publish the same information as that required of listed issuers.

Proposed Quantitative Standard

Currently, a foreign private issuer must have no more than 300 U.S. resident shareholders as of the last day of its most recent fiscal year in order to qualify for the Rule 12g3-2(b) exemption. Consistent with the criteria adopted in other recent proposed amendments applicable to foreign private issuers, the SEC proposes to replace this requirement with a quantitative standard that the U.S. trading volume for the subject securities of the foreign private issuer must be 20 percent or less of its worldwide trading volume for the previous fiscal year.

Alternatively, should a foreign private issuer terminate its reporting requirements under Rule 12h-6, then it will automatically be deemed to have satisfied the Rule 12g3-2(b) trading volume limitation because the Rule 12h-6 U.S. trading volume restrictions are more stringent than those of Rule 12g3-2(b).

The new quantitative 20 percent test may prove burdensome for certain issuers that previously qualified for the Rule 12g3-2(b) exemption, but that cannot meet the new 20 percent test. Research by the Office of Economic Analysis (OEA) highlights the potential number of foreign private issuers burdened by the proposed test. A comment letter, dated March 10, 2008, from the OEA determined that as of September 2007 there were 471 foreign private issuers taking advantage of the Rule 12g3-2(b) exemption. The OEA was able to obtain trading volume information for 340 of the 471 foreign private issuers. Of those 340 issuers, only 295 would remain Rule 12g3-2(b) eligible under the proposed 20 percent test.

In order to accommodate issuers who would no longer be able to qualify for the Rule 12g3-2(b) exemption, the SEC proposes a transition period which would allow such issuers three years to gather the necessary information and formally register with the SEC on Form 20-F.

Proposed Electronic Publishing of Non-U.S. Disclosure Documents

Pursuant to the proposed amendments, the SEC would 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 the amended Rule 12g3-2(b), a foreign private issuer would have to electronically publish material information on an ongoing basis, promptly after the information has been made public, pursuant to the issuer's home jurisdiction, non-U.S. stock exchange rules, or shareholder rules and practices.

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 the amended Rule 12g3-2(b) would more closely align the "accessibility of information" requirements of exempt foreign private issuers with those of reporting issuers.

The SEC proposes 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.

Related Amendments to Revised Rule 12g3-2(b)

In addition to the proposed amendments to Rule 12g3-2(b) discussed above, the SEC has also proposed to remedy a number of inconsistencies that would arise from the adoption of the proposed amendments.

Proposed 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. The SEC proposes to eliminate this successor issuer distinction if such issuer qualifies for deregistration under one of the older exit rules or under Section 15(d).

Proposed 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 SEC now proposes to eliminate the MJDS filer exceptions and make such issuers seek Rule 12g3-2(b) exemptions on the same grounds as other foreign registrants.

Proposed 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 proposed revision would update the form to reference the newly proposed electronic information submission contemplated in the proposed Rule 12g3-2(b) amendments.

Proposed 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. The SEC proposes to conform the 15c2-11 requirement with the proposed amendments so that a broker-dealer must have available a foreign private issuer's electronically published information.

Comments Sought

Comments with regard to the SEC proposal are due by April 25, 2008. Information on submitting comments to the SEC can be found on the SEC’s website at www.sec.gov/rules/submitcomments.htm.

1. Release No. 34-57350; International Series Release No. 1307; File No. S7-04-08, Exemption from registration under section 12(g) of the Securities Exchange Act of 1934 for foreign private issuers, (February 19, 2008), available at http://www.sec.gov/rules/proposed/2008/34-57350.pdf.
2. Foreign private issuers have several different exemption options, including (i) a Section 12g exemption if the issuer does not have more than 500 shareholders worldwide, (ii) a Rule 12g3-2(a) exemption if the issuer does not have more than 300 U.S. resident shareholders and (iii) a Rule 12g-1 exemption if the issuer has less than $10 million in assets.
3. Release No. 34-57350, page 23.

Read about other SEC Proposals relating to foreign private issuers.