US Securities Act of 1933; US Securities Exchange Act of 1934

The two principal federal securities statutes in the US are the US Securities Act of 1933 (the Securities Act) and the US Securities Exchange Act of 1934 (the Exchange Act). To simplify considerably, the Securities Act governs the offer and sale of securities in the US, while the Exchange Act regulates the trading of securities on a US national securities exchange such as the New York Stock Exchange (the NYSE) or quotation on the Nasdaq Stock Market (Nasdaq), ongoing periodic and annual reporting, and tender and exchange offers.

The US Securities and Exchange Commission (the SEC) has issued a comprehensive body of rules and regulations under the Securities Act and the Exchange Act. These rules have the force of law.

Registration under the Securities Act and the Exchange Act

Registration is a core concept in the US federal securities laws. The Securities Act requires issuers to register transactions. By contrast, the Exchange Act requires issuers to register classes of securities.

(i) Securities Act registration

The Securities Act requires registration with the SEC of any transaction involving the offer or sale of a security, unless the security is of a type that is exempt from registration or the transaction is structured to take advantage of an available exemption from registration. The terms offer and sale and security are very broadly defined.

As we discuss in more detail below, registered transactions involve filing a registration statement with the SEC and meeting detailed and specific disclosure and financial statement requirements. In addition, registered transactions trigger the wide-ranging provisions of the US Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act or Sarbanes-Oxley) and a comprehensive liability scheme.

By contrast, the requirements of unregistered transactions are generally – but not invariably – less demanding. A foreign private issuer will not typically become subject to Sarbanes-Oxley merely by issuing securities in an unregistered transaction, and the liability regime governing unregistered transactions is more circumscribed. Foreign private issuers contemplating an unregistered transaction look to exemptions such as:

• Offshore transactions: offers and sales made outside of the US pursuant to Regulation S under the Securities Act (Regulation S);
• Private placements: offers and sales not involving a public offering pursuant to Section 4(2) of the Securities Act or Regulation D under the Securities Act (Regulation D); and
• Rule 144A transactions: private placements involving resales to "qualified institutional buyers" (QIBs) pursuant to Securities Act Rule 144A.

The decision whether to issue in a registered or unregistered transaction involves balancing business and legal objectives. Before 2005, one could broadly distinguish the two on the ground that registered transactions were more complex, time-consuming and carried greater liability risks. But the SEC's reforms to the US public offering process that took effect on December 1 2005 have sharply changed the landscape, especially for certain large-scale, seasoned issuers. In addition, not all securities issuances can take the form of an unregistered transaction. For example, if a foreign private issuer wishes to list its securities in the US, or to make a public offering of securities to retail investors in the US, the transaction will have to be registered.

(ii) Exchange Act registration; Rule 12g3-2(b) exemption

A foreign private issuer must register a class of securities under the Exchange Act if that class will be listed on a US national securities exchange (such as the NYSE or American Stock Exchange) or quoted on Nasdaq.^[2] In addition, if a foreign private issuer has assets in excess of $10 million^[3] and a class of equity securities held by at least 500 shareholders (of whom at least 300 are resident in the US) it must register those securities,^[4] unless it can claim the benefit of the exemption from registration provided by Exchange Act Rule 12g3-2(b).

In order to qualify for the Rule 12g3-2(b) exemption, a foreign private issuer must first submit an application to the SEC. Then, on an ongoing basis, the foreign private issuer must furnish to the SEC certain material information (such as information regarding the issuer's financial condition, changes in business and management, acquisitions or disposition of assets, issuances of securities, and transactions with management or principal security holders)^[5] that:^[6]

• it has made or is required to make public pursuant to the law of the country of its domicile or in which it is incorporated or organized;
• it has filed or is required to file with a stock exchange on which its securities are traded and that was made public by that exchange; or
• it has distributed or is required to distribute to its security holders.

Based on recently adopted amendments to Rule 12g3-2(b), foreign private issuers may now claim the Rule 12g3-2(b) exemption immediately upon termination of Exchange Act reporting under newly adopted Rule 12h-6 (rather than waiting 18 months as previously required), provided that the foreign private issuer publishes in English on its website its home country materials required by Rule 12g3-2(b). The amendments to Rule 12g3-2(b) also permit a non-reporting company using the 12g3-2(b) exemption, upon application to the SEC, to publish the required home country materials in English on its website. The SEC adopted these amendments in March 2007, in connection with its adoption of Rule 12h-6, which now governs the circumstances under which a foreign private issuer may terminate the registration of securities under the Exchange Act if it has been subject to Exchange Act reporting obligations for at least one year (including the filing of at least one annual report under the Exchange Act) and if the average daily trading volume of its securities in the US is no more than 5% of the average daily trading volume of its securities in its primary trading market. The amendments are expected to become effective in late spring 2007.

Exchange Act reporting

Once a foreign private issuer has registered a transaction with the SEC under the Securities Act or a class of securities under the Exchange Act (a reporting foreign private issuer), it must make certain filings with the SEC under the Exchange Act.^[7] Reporting foreign private issuers also become subject to various other provisions of the US federal securities laws.

(i) Annual report on Form 20-F

A reporting foreign private issuer must file an annual report on Form 20-F with the SEC within six months after the end of its fiscal year.^[8] Form 20-F contains detailed financial and non-financial disclosure requirements. We include a checklist for non-financial disclosure items in Annex A, below.

(ii) Current reports on Form 6-K

A reporting foreign private issuer must submit current reports to the SEC on Form 6-K.^[9] Form 6-K reports must contain all material information that the issuer:^[10]

• makes or is required to make public pursuant to the laws of its country of incorporation or organization;
• files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange; or
• distributes or is required to distribute to its security holders.

(iii) Other consequences of Exchange Act reporting

A reporting foreign private issuer becomes subject to a variety of other provisions of the US federal securities laws, including:

• Books and records; internal accounting controls:^[12] A reporting issuer must maintain and keep books, records and accounts that "accurately and fairly reflect" the transactions and dispositions of assets of the issuer, and design and maintain a system of adequate "internal accounting controls".
• Limitations on payments to foreign officials:^[13] A reporting issuer may not make corrupt payments to foreign officials, foreign political parties or their intermediaries.
• Audit requirements:^[14] A reporting issuer's audit must include procedures for the detection of illegal acts, and the issuer's auditors are required to take certain steps if illegal acts are found. Those steps include informing the issuer's management and audit committee, and potentially include a requirement to resign from the engagement or notify the SEC (if the issuer's board fails to take appropriate remedial action).
• Sarbanes-Oxley:^[15] A reporting issuer is subject to the provisions of the Sarbanes-Oxley Act.

Other relevant statutes

In addition to the Securities Act and the Exchange Act, a foreign private issuer may trigger a number of other statutes when it issues securities in the US, including:

• the Sarbanes-Oxley Act, which represents the most comprehensive restructuring of the regulatory system governing the US capital markets since the enactment of the Exchange Act in 1934;
• the US Investment Company Act of 1940 (the Investment Company Act), which regulates offers and sales of securities by investment companies. Some foreign private issuers may be "investment companies" within the meaning of the Investment Company Act even though their primary activities are not investment related;
• US federal tax laws, which impose particular tax treatment on securities of "passive foreign investment companies" (PFICs) within the meaning of the US Internal Revenue Code (the Code). Certain foreign private issuers may be PFICs despite their operational activities; and
• the US Trust Indenture Act of 1939, which requires that indentures used for public offerings of debt securities in the US meet various substantive and procedural requirements.

What is a foreign private issuer?

(i) Definition

A foreign private issuer means any issuer (other than a foreign government) incorporated or organized under the laws of a jurisdiction outside of the US unless:^[16]

• more than 50% of its outstanding voting securities are directly or indirectly owned of record by US residents; and
• any of the following applies:
  - the majority of its executive officers or directors are US citizens or residents;
  - more than 50% of its assets are located in the US; or
  - its business is administered principally in the US.

(ii) How is ownership determined?

Generally, an issuer may rely upon a review of the addresses of its security holders in its records in determining whether or not it is a foreign private issuer.^[17] However, securities held of record by a broker, dealer, or bank (or nominee for any of them) for the accounts of customers resident in the US will be counted as held in the US by the number of separate accounts for which the securities are held.^[18] The issuer may rely in good faith on information as to the number of these separate accounts supplied by brokers, dealers, banks or nominees.^[19]

An issuer's inquiry as to ownership of its securities by US residents may be limited to those brokers, dealers and banks (and other nominees) that are record holders of the issuer's securities and that are located in (i) the US, (ii) the issuer's jurisdiction of incorporation, and (iii) the jurisdiction of the issuer's primary trading market for its voting securities.^[20] If, after reasonable inquiry, the issuer is unable to obtain information about the amount of securities represented by accounts of customers resident in the US, it may assume that these customers are residents of the jurisdiction in which the nominee has its principal place of business.^[21]

(iii) Benefits for foreign private issuers

Under the US federal securities laws and the SEC's rules and practice, foreign private issuers are not regulated in precisely the same way as domestic US issuers. In particular, foreign private issuers are allowed a number of key benefits not available to domestic US issuers.

These include the following:

• Quarterly reports: Unlike domestic US issuers, foreign private issuers are not required to file quarterly reports (including quarterly financial information) with the SEC.^[22] Some foreign private issuers, however, choose (or are required by contract) to file the same forms with the SEC that domestic US issuers use. In that case, they must report quarterly as if they were a domestic US issuer.^[23]
• SEC staff policy on confidential submissions: Foreign private issuers that are registering for the first time with the SEC may generally submit registration statements on a confidential basis to the SEC staff. By contrast, domestic US companies must file their registration statements publicly. Confidential submissions can be a significant advantage because the procedure allows the complicated issues often encountered in an initial SEC review to be resolved behind closed doors. A foreign private issuer will still be required to file its registration statement publicly prior to going on a road show or selling its securities (and will have to file any future registration statements publicly).

• Foreign private issuers may use IFRS or home country Gaap but must reconcile to US Gaap: US domestic companies must prepare US Gaap financial statements. The financial statements of foreign private issuers, however, may be prepared using either US Gaap, International Financial Reporting Standards (IFRS), or local home country Gaap. If IFRS or local Gaap is used, the consolidated financial statements (both annual and interim) must include a footnote reconciliation to US Gaap^[24]. The SEC is evaluating the possibility of accepting IFRS financial statements without reconciliation, but final action on this is still some years off.
• Most listed European issuers are required by their home country regulations to use IFRS for their primary consolidated financial statements. By contrast, Chinese and Indian issuers typically compile their primary financial statements under US Gaap.
• Proxy rules: The US proxy rules – which specify the procedures and required documentation for soliciting shareholder votes – are not applicable to foreign private issuers.^[25]
• Regulation FD: Regulation FD (fair disclosure) requires issuers to make public disclosure of any "material non-public information" that has been selectively disclosed to securities industry professionals (for example, analysts) or shareholders.^[26] The Regulation provides that when a domestic US issuer, or someone acting on its behalf, discloses material non-public information to certain persons (including analysts, other securities market professionals and holders of the issuer's securities who could reasonably be expected to trade on the basis of the information), it must make simultaneous public disclosure of that information (in the case of intentional disclosure) or prompt public disclosure (in the case of non-intentional disclosure).^[27]

Foreign private issuers are expressly exempt from Regulation FD.^[28] But foreign private issuers that file reports with the SEC typically consider complying with Regulation FD (at least in part), particularly since the restrictions in their home jurisdictions in many cases overlap with Regulation FD's requirements.

• Beneficial ownership reporting; short-swing profit recapture rules: Under Section 16(a) of the Exchange Act, anyone who owns more than 10% of any class of equity security registered under the Exchange Act, or who is an officer or director of an issuer of such a security, must file a statement of beneficial ownership with, and report changes in beneficial ownership to, the SEC. Similarly, Section 16(b) requires any such shareholder, officer or director to disgorge to the issuer profits realized on purchases and sales within any period of less than six months. Securities of foreign private issuers are exempt from Section 16.^[29]
• Accelerated filing: Under the accelerated filing rules adopted by the SEC in 2002, seasoned domestic US filers will eventually be required to file annual reports 60 days after the end of their fiscal year.^[30] Although foreign private issuers fall within the definition of accelerated filers,^[31] they are not subject to accelerated filing, and accordingly may file annual reports within six months after the end of their fiscal year.^[32] A foreign private issuer that chooses, however, to file the same forms with the SEC that are required for domestic US issuers will be subject to accelerated filing.^[33]
• Sarbanes-Oxley Act exemptions: Although the Sarbanes-Oxley Act generally does not distinguish between domestic US issuers and foreign private issuers, the SEC has adopted a number of significant exemptions for the benefit of foreign private issuers in its rules under the Sarbanes-Oxley Act. These exemptions cover areas such as: (i) audit committee independence; (ii) black-out trading restrictions (Regulation BTR); and (iii) use of non-Gaap financial measures (Regulation G).

Endnotes

[2]

1934 Act Section 12(a) prohibits transactions on US national securities exchanges with respect to unregistered securities, while Section 12(b) sets out the requirement for that registration.

[3]

In the case of a foreign private issuer whose securities are quoted on Nasdaq, this threshold is $1 million, not $10 million. See 1934 Act Rule 12g-1.

[4]

1934 Act Section 12(g)(1); 1934 Act Rules 12g-1, 12g3-2(a).

[5]

1934 Act Rule 12g3-2(b)(3).

[6]

1934 Act Rule 12g3-2(b)(1)(i).

[7]

1934 Act Sections 13(a), 15(d).

[8]

Form 20-F, General Instructions A(b). See also 1934 Act Rule 13a-1 (each issuer with Section 12 registered securities must file an annual report within the time period specified in the relevant form).

[9]

1934 Act Rule 13a-16(a); Form 6-K, General Instruction A.

[10]

Form 6-K, General Instruction B.

[11]

Certification of Disclosure in Companies' Quarterly and Annual Reports, Securities Act Release 8124, Exchange Act Release 46427, Investment Company Act Release 25722, [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,720, at 86,125, 86,130 (August 28 2002) [Certification Adopting Release] (Section 302 certification not required for Form 6-K submissions); Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Securities Act Release 8400, Exchange Act Release 49424, [2003-2004 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,158, at 89,493 n.146 (March 16 2004) (Section 906 certification not required for Form 6-K submissions) [Additional Form 8-K Disclosure Adopting Release].

[12]

1934 Act Sections 13(b)(2)-(7); 1934 Act Regulation 13B-2. See also 1934 Act Rules 13a-15(a) and 15d-15(a) (reporting issuer must maintain "internal control over financial reporting").

[13]

1934 Act Section 30A. In addition, any "domestic concern" - whether or not registered with the SEC - is subject to substantially identical anti-bribery provisions. 15 U.S.C. Section 78dd-2(a). A domestic concern for these purposes means any US citizen, national or resident, or any entity (such as a corporation or a partnership) that has its principal place of business in the US or which is organized under the laws of a US state or territory. 15 U.S.C. Section 78dd-2(h)(1).

[14]

1934 Act Section 10A.

[15]

Sarbanes-Oxley Act, Section 2(a)(7) (definition of "issuer" subject to Sarbanes-Oxley).

[16]

1933 Act Rule 405; 1934 Act Rule 3b-4.

[17]

Instruction A to 1933 Act Rule 405; 1934 Act Rules 12g3-2(a)(1), 12g5-1(a).

[18]

1934 Act Rule 12g3-2(a)(1).

[19]

Id.

[20]

Instruction A to 1933 Act Rule 405.

[21]

Instruction B to 1933 Act Rule 405.

[22]

1934 Act Rule 13a-13(b)(2).

[23]

1934 Act Rule 13a-16(a)(3).

[24]

See Form 20-F, Items 17(c), 18.

[25]

1934 Act Rule 3a12-3(b).

[26]

Regulation FD, Rule 100.

[27]

Id.

[28]

Id. Rule 101(b)(ii).

[29]

1934 Act Rule 3a12-3(b). These securities remain subject to the beneficial ownership reporting requirements of Sections 13(d) and 13(g).

[30]

Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports, Securities Act Release 8128, Exchange Act Release 46464, Financial Reporting Release 63, [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,724, at 86,188 (September 5 2002) [Acceleration Release].

[31]

Under 1934 Act Rule 3b-2, an accelerated filer is any issuer (including a foreign private issuer) that:

• has an aggregate market value of voting and non-voting common equity held by its non-affiliates is $75 million or more;
• has been subject to SEC reporting for at least 12 calendar months;
• has filed at least one annual report with the SEC; and
• is not a US domestic small business issuer.

[32]

Acceleration Release, ¶ 86,724, at 86,199.

[33]

1934 Act Rule 13a-13(b)(2).