SEC Guidance for Foreign Private Issuers

Canadian MJDS companies and other foreign private issuers enjoy the benefit of various exemptions under U.S. securities laws. For example, foreign private issuers are not subject to the U.S. proxy rules or the section 16(a) insider reporting requirements, they are provided with certain accommodations in connection with capital raising transactions and their ongoing reporting and corporate governance obligations are somewhat less onerous than the obligations of U.S. companies. On December 8, the SEC published new Compliance and Disclosure Interpretations (C&DIs) addressing several questions relevant to foreign private issuers. The new C&DIs are generally favourable to foreign private issuers and are consistent with past advice that we have given to our foreign private issuer clients. Below is a summary of the guidance provided in the C&DIs.

Foreign Private Issuer Definition

A company incorporated or organized outside the United States is a foreign private issuer for SEC reporting purposes unless

•  more than 50% of its outstanding voting securities are owned by U.S. residents, and

•  one or more of the following is true:

  • a majority of the company’s executive officers or directors are U.S. citizens or residents;
  • more than 50% of the company’s assets are located in the United States; or
  • the company’s business is administered principally in the United States.

Multiple Classes of Voting Securities

Companies with multiple classes of voting securities with different voting rights may assess the 50% U.S. ownership threshold either (i) by determining whether U.S. residents own more than 50% of the voting power of the classes on a combined basis or (ii) by determining whether U.S. residents own more than 50% of the number of outstanding voting securities. Whichever methodology is chosen must be applied consistently.

U.S. Residency

Individuals with permanent resident status—so-called Green Card holders—are presumed to be U.S. residents. Other individuals may also be U.S. residents, depending on factors such as tax residence, nationality, immigration status, mailing address, physical presence or the location of a significant portion of the individual’s financial and legal relationships. A company may decide for itself which criteria to use but must apply them consistently and not change them to achieve a desired result.

Executive Officers and Directors

Assessing whether a majority of a company’s executive officers or directors are U.S. citizens or residents requires four separate determinations: the citizenship of executive officers; the residency of executive officers; the citizenship of directors; and the residency of directors. 

Location of Assets

In determining the location of its assets, a company may rely on the geographic segment information from its financial statements or may rely on any other reasonable methodology, applied consistently.  

Administration of the Business

No single factor or group of factors is determinative in assessing whether a company’s business is administered principally in the United States. For example, holding a shareholders meeting or occasional board of directors meetings in the United States does not necessarily mean that the business is administered principally in the United States. The company should assess on a consolidated basis the location from which its officers, partners, or managers primarily direct, control and coordinate the company’s activities.

Offerings of Guaranteed Securities

If a parent company is a foreign private issuer and guarantees a subsidiary’s securities or offers its own securities guaranteed by a subsidiary, the offering may be registered with the SEC on an F-series registration statement and the parent may file periodic reports as a foreign private issuer, even if the subsidiary is not also a foreign private issuer. This accommodation is conditional on the parties being eligible to omit separate financial statements of the subsidiary under the SEC’s financial reporting rules. Such eligibility depends on, among other things, the subsidiary being 100% owned by the parent, the guarantee being full and unconditional, and the parent presenting condensed financial information (or, in some cases, explanatory narrative disclosure) in a footnote to its financial statements.    

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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