What are Foreign Private Issuers? (Going Public in the U.S.)

What are Foreign Private Issuers? (Going Public in the U.S.)

Navigating the U.S. capital markets as a Foreign Private Issuer (FPI) can be a complex process. Foreign companies, eligible for FPI status, are not required to comply with the same regulations as domestic U.S. companies under the US Securities Exchange Act of 1934, as amended (the Exchange Act). However, understanding the eligibility criteria, ongoing reporting requirements, and the process of going public in the U.S. is crucial for FPIs looking to raise capital and expand their investor base. In this article, we will cover:
  1. What is an Issuer?
  2. What is a Foreign Private Issuer?
  3. Who is Eligible?
  4. What is the Shareholder Test?
  5. What is the Business Contacts Test?
  6. Can a SPAC be a Foreign Private Issuer?
  7. How do Foreign Private Issuers go public in the U.S.?
  8. What are the Ongoing Reporting Requirements?
  9. When do Foreign Private Issuers Become Subject to U.S. Reporting Requirements?
  10. What Exchange Exemptions are Available to Foreign Private Issuers?
  11. What Happens When Issuers lose Foreign Private Issuer Status?
  12. How can Foreign Private Issuers Deregister their Securities?
  13. Navigating the U.S. Capital Markets as a Foreign Private Issuer

What is an Issuer?

An issuer is any organization, corporation, or government that issues securities to raise capital to fund operations and strategic initiatives. An issuer may issue various securities, each of which serves a unique purpose, for example, common or preferred equity securities, bonds, options, and warrants, to name a few.
Issuers that are looking to offer their securities for sale in the US, or list their securities on national US exchanges may require to register such securities under an SEC registration statement.

What is a Foreign Private Issuer?

Incorporated outside the United States, Foreign Private Issuers are not required to comply with the same regulations applicable to domestic U.S. companies. In comparison to domestic companies, FPIs are granted more freedom when it comes to compliance with rigorous reporting and disclosure standards of the U.S. capital markets.

Who is Eligible?

The Issuer must be incorporated or organized under the laws of a jurisdiction outside of the United States. An issuer qualifies as a foreign private issuer if it passes the following Shareholder Test or the Business Contacts Test, as set forth in Rule 405 of Regulation C under the Securities Act and Rule 3b-4 under the Exchange Act.

What is the Shareholder Test?

Issuer's outstanding voting securities

  • Less than 50% of the issuer's outstanding voting securities must be held by U.S. residents.
  • If a foreign private issuer has multiple voting classes and wants to gauge the proportion of its voting stock owned by U.S. residents, it can either analyze those classes together or simply count the number of available votes for each class. By doing so, corporations will be able to easily calculate their ownership percentage from domestic investors.

What is the Business Contacts Test?

If the issuer does not pass the Shareholder Test, it may still be able to qualify if it meets all of the following standards:
  1. The majority of the issuer's executive officers or directors are not U.S. residents.
  2. More than 50% of the issuer's assets are located outside the U.S.
  3. The issuer's business is administered principally outside the United States.

Can a SPAC be a Foreign Private Issuer?

Yes, a SPAC (special purpose acquisition company) can qualify as a foreign private issuer. To do so, it must meet the same eligibility criteria as any other potential foreign private issuer. Despite exemptions from certain regulations, many SPACs operating as foreign private issuers provide comparable information to all investors. The major advantage that foreign companies enjoy with FPI status is that it does not require SEC review for proxy statements regarding mergers by foreign private issuers.

How do Foreign Private Issuers Go Public in the U.S.?

Foreign private issuers can become a public company in the U.S. by filing a registration statement on Form F-1 with the SEC and listing their securities on an exchange such as NASDAQ or NYSE. The process of going public for foreign private issuers is similar to traditional IPOs, however, there are certain differences since FPIs are not subject to all of the same requirements as domestic companies.

Form F-1

Form F-1, which is also known as a Registration Statement, is a requirement under the Securities Exchange Act of 1933. F-1 registration statements are similar to Form S-1 filed by domestic companies and require extensive disclosures around but the majority of the disclosure centers around information about the business, risk factors, management and compensation, financial statements and notes to the statements, material changes with respect to accounting in the financial statements, and details on the securities offering. Issuers are required to file their audited financial statements along with Form F-1.

Form 20-F & Form 40-F

Foreign private issuers that are looking to directly list their stock on a U.S. national securities exchange or OTC markets and are not looking to raise capital, can use Form 40-F (for Canadian foreign private issuers) or Form 20-F (for non-Canadian foreign private issuers).

Form F-3

After having been subject to U.S. reporting obligations for a minimum of 12 months, a foreign private issuer can generally use Form F-3 to offer securities publicly within the United States. This form is similar to Form S-3 for domestic issuers and may be used by an FPI provided that both the registrant's criteria and applicable transaction requirements are met.

Form F-3 provides Foreign Private Issuers the opportunity to minimize their prospectus disclosure by referencing more comprehensive information that has already been filed with the SEC, primarily through Annual Reports and Current Reports. This way, FPIs can easily provide investors with a thorough understanding of their company without having to go through extensive paperwork.

What are the Ongoing Reporting Requirements?

Foreign private issuers are required to provide ongoing reporting requirements under the Exchange Act.

Annual Reports

Quarterly Reports

Semi-Annual Reports

Current Reports

International Financial Reporting Standards

U.S. Generally Accepted Accounting Principles

A foreign private issuer is exempt from reconciling its financial statements to U.S. Generally Accepted Accounting Principles (U.S. GAAP) as long as it reports its financials in IFRS as detailed above.

If there is a need for reconciliation, the foreign private issuer must either: (1) provide a statement of cash flows that adhere to U.S. GAAP or IAS No. 7; or (2) in a note accompanying the financial statements, precisely describe any noticeable discrepancies between cash/funds mentioned in the main financial records and those reported from preparation with U.S. GAAP standards applied on them.

These reconciliations may not be required for Financial statements pertaining to businesses that the foreign private issuer:
  • plans to or has recently acquired
  • is a minority interest holder in
  • is in a joint venture with

How can Foreign Private Issuers deregister their securities?

Form 15F

Form 15F, otherwise known as the "Certification of a Foreign Private Issuer's Termination of Registration" is a voluntary filing made by FPIs with the Securities and Exchange Commission (SEC).
  • Foreign private issuers that do not wish to raise capital in the U.S. capital markets or list their equity securities on a U.S. securities exchange can file a Form 15F with the SEC.
  • To be eligible to file Form 15F, a company is required to have 300 or fewer shareholders.
  • In order for a foreign private issuer to deregister its securities, it must submit an official notice of intent to register its securities via Form 6-K or attach the notice as an exhibit to Form 15F.
  • FPIs must also issue the notice as a press release.
  • The termination of registration goes effective under Section 12(b) 90 days after the form is filed.
  • Form 15F allows foreign private issuers to significantly reduce costs and save time by eliminating their reporting obligations imposed by the Exchange Act as well as The Sarbanes-Oxley Act of 2002.

Form 25

Upon deregistering securities, an FPI must also delist any securities listed on an exchange. To delist securities from a national exchange, such as the New York Stock Exchange or Nasdaq Stock Market, an FPI must file Form 25.
  • Form 25 is an application to withdraw from listing on the exchange under Rule 12d2-2 of the Securities Exchange Act of 1934.
  • Form 25 goes effective 10 days after the form is filed with the SEC.

When do Foreign Private Issuers Become Subject to U.S. Reporting Requirements?

A foreign private issuer will be subject to the reporting requirements under U.S. federal securities laws:
  • if the foreign issuer files a registration statement with the Securities and Exchange Commission
  • it lists a class of its securities on a U.S. national securities exchange or the OTC markets
Additionally, a foreign private issuer becomes subject to reporting requirements within 120 days after the first fiscal year when:
  • issuer's assets exceed $10 million and,
  • issuer's equity securities are held by 2,000 or more investors or,
  • issuer's equity securities are held by 500 non-accredited investors in the U.S.

What Exchange Exemptions are Available to Foreign Private Issuers?

A foreign private issuer listed on the NYSE or Nasdaq typically does not need to comply with many corporate governance rules of these exchanges, except for SEC Audit Committee requirements and any legal requirements of the FPI's home country.

What happens when issuers lose foreign private issuer status?

If a foreign private issuer no longer meets the qualifications to maintain its status as an FPI, it has to follow the same disclosure rules as domestic issuers starting from the day after its fiscal year ends.

Navigating the U.S. Capital Markets as a Foreign Private Issuer

Foreign private issuers have an opportunity to benefit from the advantages of going public in the U.S., including accessing capital, liquidity, and a greater investor base. By engaging a consultant that specializes in foreign issuers before going public, you can be better prepared and avoid any unexpected surprises. Going public and maintaining your reporting requirements as a foreign private issuer can be a complex process. Our Corporate Strategy & Finance experts help foreign private issuers navigate the complex landscape of U.S. capital markets, from filing a registration statement to setting up corporate governance practices to filing your financial statements.