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SEC Proposes Amendments to Rule 12g3-2(b) Exemption From Registration Under Section 12(g) of the Securities Exchange Act of 1934 and Other Rules and Forms

On February 13, 2008, the U.S. Securities and Exchange Commission (the "SEC") proposed amendments to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act")[1] and to various other foreign issuer reporting requirements.[2]

The Rule 12g3-2(b) amendments would revise the rule to facilitate its use by foreign private issuers[3] and to reflect the SEC's views as to when such issuers should be required to register and report under Section 12(g) of the Exchange Act. The proposed amendments represent an important change from the current Rule 12g3-2(b) exemption in that the exemption would no longer be available, and therefore Exchange Act registration would be required, if U.S. investor interest in the foreign private issuer's equity securities, as measured by a new trading volume test, is deemed sufficient to warrant such registration. The SEC suggests, however, that these improvements will encourage more foreign private issuers to claim the exemption under Rule 12g3-2(b) and facilitate U.S. investors' decision-making processes.

The proposed changes to various foreign issuer reporting requirements would more closely align selected foreign private issuer and U.S. domestic company reporting requirements, ease foreign private issuer compliance with certain of those requirements and update various SEC rules and forms to reflect market and regulatory developments. As discussed below, a few of these proposals, such as that which would shorten the Form 20-F annual report filing deadline from six months to either 90 or 120 days, may impose additional burdens on foreign private issuers.

Comments on the proposed Rule 12g3-2(b) amendments must be received on or before April 25, 2008, and those relating to the other proposed rule and form amendments must be received on or before May 12, 2008.

Proposed Amendments to Exchange Act Rule 12g3-2(b)

Registration Under Section 12(g) of the Exchange Act. Under Section 12(g) of the Exchange Act and Rule 12g3-2(a) thereunder, an issuer must register a class of equity securities within 120 days of the last day of its fiscal year if, on that date, the number of its record holders was 300 or more and the issuer's total assets exceeded $10 million. Rule 12g3-2(b), exempts a foreign private issuer from Section 12(g) registration, regardless of the number of record holders of its equity securities, if among other requirements the issuer furnishes to the SEC on an ongoing basis information material to investors that it has made public or is required to make public under the laws of its jurisdiction of incorporation, organization, or domicile, pursuant to its non-U.S. stock exchange filing requirements, or that it has distributed or is required to distribute to its security holders.

Claiming the Exemption. Under the proposed amendments to Rule 12g3-2(b), a foreign private issuer that meets certain requirements would be able to claim the exemption from Exchange Act registration under that rule without having to apply to, or otherwise notify, the Commission. These requirements are:

  • the issuer is not required to file or furnish reports under Sections 13(a) or 15(d) of the Exchange Act;
  • the issuer currently maintains a listing of the subject class of securities on one or more exchanges in a foreign jurisdiction that, either singly or together with the trading of the same class of the issuer's securities in another foreign jurisdiction, constitutes the primary trading market for those securities;
  • either:
    • the average daily trading volume of the subject class of securities in the United States for the issuer's most recently completed fiscal year has been no greater than 20 percent of the average daily trading volume of that class of securities on a worldwide basis for the same period; or
    • the issuer has terminated its registration of a class of securities under Section 12(g) of the Exchange Act, or terminated its obligation to file or furnish reports under Section 15(d) of the Exchange Act, pursuant to Rule 12h-6 under that Act; and
  • unless claiming the exemption in connection with or following its recent Exchange Act deregistration, the issuer has published specified non-U.S. disclosure documents in English on its internet web site or through an electronic information delivery system generally available to the public in its primary trading market.

Under the proposed amendments to Rule 12g3-2(b), paper submissions to the SEC would be eliminated. In addition, issuers would be allowed to claim the Rule 12g3-2(b) exemption without regard to the number of holders of the subject class of equity securities. Annual and interim reports that include financial statements, press releases, and all other communications and documents distributed directly to security holders must be translated into English under the proposed amendments.

Maintaining the Exemption. To maintain the exemption, a foreign private issuer must:

  • continue to electronically publish in English on an ongoing basis the information material to investors specified in Rule 12g3-2(b);
  • maintain its foreign listing;
  • continue to meet the 20 percent trading volume limit for its most recently completed fiscal year other than the year in which it first claims the exemption; and
  • not otherwise incur any Exchange Act reporting obligations.

The proposed amendments would create a three-year transition period to allow foreign private issuers that cannot meet the 20 percent trading volume limit of amended Rule 12g3-2(b) sufficient time to prepare for and complete the Section 12 registration process.

The proposed changes to Rule 12g3-2(b) will eliminate the availability of the exemption when U.S. investor interest, as measured by the trading volume test, is deemed to be at a level that Exchange Act registration should be required. This reflects a change from the current Rule 12g3-2(b) exemption, which does not require registration under Section 12(g) of the Exchange Act as long as the issuer continues to furnish the information under the rule, regardless of the level of U.S. investor interest in the issuer's equity securities.

The SEC believes the proposed amendments will make it easier for foreign private issuers to claim the Rule 12g3-2(b) exemption and for U.S. investors to gain access to a foreign private issuer's material non-U.S. disclosure documents.

Proposed Amendments to Foreign Private Issuer Reporting Requirements

Foreign Private Issuer Eligibility.

Background. Foreign private issuers are entitled to various accommodations, including the use of foreign private issuer forms and reporting requirements and exemption from the SEC proxy rules and certain provisions of Section 16 of the Exchange Act. In order to receive these accommodations, foreign private issuers must monitor and confirm their foreign private issuer status on a continuous basis.

The Proposals. To enhance regulatory consistency and ease the issuer compliance process, the SEC's proposals would permit reporting foreign issuers to assess their status once a year, on the last business day of their second fiscal quarter. If a foreign issuer determines that it qualifies as a foreign private issuer, it may utilize the foreign private issuer accommodations beginning on the determination date on which it establishes its eligibility. If a foreign issuer determines that it no longer qualifies as a foreign private issuer, it would be required to comply with the reporting and other regulatory requirements and use the forms proscribed for domestic companies beginning on the first day of the fiscal year following the determination date.

Acceleration of the Reporting Deadline for Form 20-F Annual Reports.

Background. The SEC requires foreign private issuers to file an annual report on Form 20-F within six months after the end of the fiscal year covered by the report.

The Proposals. Citing technological advances, investor demand for faster access to information and an effort to modernize the periodic reporting system, the SEC has proposed amendments that would shorten the filing deadline for annual reports on Form 20-F filed by foreign private issuers. Specifically, after a two-year transition period, foreign private issuers would be required to file their annual reports on Form 20-F:

  • within 90 days after the foreign private issuer's fiscal year-end in the case of large accelerated and accelerated filers; and
  • within 120 days after the issuer's fiscal year-end for all other issuers.

The proposed accelerated filing deadlines may present difficulties for some foreign private issuers that are required to translate a significant amount of home country information, that must provide a reconciliation to U.S. GAAP, or that have home country filing deadlines that are later than those proposed by the SEC.[4] The SEC noted that the proposed accelerated deadlines for foreign private issuers remain longer than the deadlines for domestic companies.

Segment Data Disclosure.

Background. Item 17 of Form 20-F contains the requirements for financial statements in an annual report, registration statement, or transition report filed on Form 20-F. Instruction 3 to Item 17 of Form 20-F permits foreign private issuers to omit segment data from their financial statements if they present financial statements otherwise fully in compliance with U.S. GAAP.

The Proposals. The SEC's proposals would amend Form 20-F by eliminating the accommodation allowing foreign private issuers to omit segment data from their financial statements. The SEC views the accommodation as inconsistent with recent international developments in financial reporting, including the fact that International Financial Reporting Standards ("IFRS") includes a presentation of segment data.

Exchange Act Rule 13e-3.

Background. In March 2007, the SEC adopted amendments to the deregistration provisions applicable to foreign private issuers to permit them to terminate their reporting obligations by meeting a quantitative U.S. market interest benchmark focused on trading volume rather than the number of U.S. holders.[5] Rule 13e-3, the SEC rule governing going-private transactions by reporting issuers or their affiliates, does not currently reflect the recent amendments.

The Proposals. The SEC's proposals would amend Rule 13e-3 to reference the recently adopted deregistration amendments and make them applicable to going-private transactions by issuers or their affiliates under Rule 13e-3.

Solicitation of Comment on Additional Reporting Requirement Changes

In addition to the proposed amendments above, the SEC is considering whether to amend Form 20-F to revise the disclosure requirements for foreign private issuers' annual reports and registration statements. Specifically, the SEC is soliciting comment on the following.

Changes in and Disagreements with Certifying Accountant. The SEC requires U.S. issuers to report changes in and disagreements with their certifying accountants in a current report on Form 8-K and in certain registration statements. Because foreign private issuers currently are not required to disclose similar information, the SEC's proposals would require substantially the same type of disclosure currently provided by U.S. issuers relating to changes in and disagreements with their certifying accountants.

ADR Fees and Payments. The SEC currently requires disclosure of fees and other payments made by ADR holders to the depositary in the Form 20-F that is filed to register the deposited securities under the Exchange Act as well as in the form of ADR, but annual reports on Form 20-F do not require this disclosure. The SEC's proposals would require disclosure of ADR fees on an annual basis, including any fee for general depositary services. In addition, the issuer would be required to disclose in Form 20-F registration statements and annual reports all direct and indirect payments made by the depositary to the foreign private issuer whose securities underlie the ADRs.

Jurisdictional Differences in Corporate Governance Practices. Recognizing that foreign private issuers are subject to home country corporate governance practices that are different from those applicable to U.S. companies, many U.S. securities exchanges exempt foreign private issuers from certain of their corporate governance requirements. A foreign private issuer taking advantage of this exemption must provide disclosure detailing the differences between its home country corporate governance standards and those applicable to a U.S. company listed on the relevant exchange. Under the rules of the exchanges, this disclosure must be provided either on the issuer's web site or in its annual report. The SEC's proposals would require a foreign private issuer to provide in its annual report a concise summary of the significant ways in which the issuer's corporate governance practices differ from the corporate governance practices of U.S. companies listed on the same exchange.

Financial Information for Highly Significant Acquisitions. U.S. companies must present financial statements of significant acquired businesses and related pro forma financial information in current reports on Form 8-K and in registration statements under the Securities Act of 1933 (the "Securities Act") and the Exchange Act. Foreign private issuers currently provide this information only in registration statements under those Acts. The SEC's proposals would require foreign private issuers to provide in their annual reports on Form 20-F financial information regarding acquisitions completed during the most recent fiscal year that are considered "significant" under Rule 1-02(w) of Regulation S-X at the 50 percent level.[6]

Eliminating the Limited Item 17 U.S. GAAP Reconciliation Option. Currently, a foreign private issuer must provide in its Securities Act and Exchange Act registration statements and annual reports financial statements prepared in accordance with U.S. GAAP, IFRS, or prepared in accordance with another acceptable comprehensive body of accounting principles and reconciled to U.S. GAAP. In certain circumstances, such as when only listing a class of securities on a national securities exchange or filing an annual report on Form 20-F, a foreign private issuer may provide a more limited form of reconciliation allowed under Item 17 of Form 20-F. When conducting a public offering, however, a foreign private issuer must provide a reconciliation under Item 18 of Form 20-F, which requires the provision of all information required by U.S. GAAP and Regulation S-X, as well as the Item 17 reconciling information. To eliminate the distinction between the disclosure provided to the primary and secondary markets, the SEC's proposals would require Item 18 information for all U.S. GAAP reconciliations, subject to a few limited exceptions.

Lawyer Contacts

For further information, please contact your principal Firm representative or one of the lawyers listed below. General e-mail messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.

Thomas C. Daniels
1.216.586.7017
tcdaniels@jonesday.com

Alexander A. Gendzier
1.212.326.7821
agendzier@jonesday.com

Ted Kamman
1.212.326.3906
tkamman@jonesday.com

Christopher M. Kelly
1.216.586.1238/
1.212.326.3438
ckelly@jonesday.com

Richard M. Kosnik
1.212.326.3437
rkosnik@jonesday.com

Timothy J. Melton
1.312.269.4154
tjmelton@jonesday.com

Linda A. Hesse
+33.1.56.59.38.72
lhesse@jonesday.com

Jeffrey Maddox
+852.3189.7203
jmaddox@jonesday.com

David Neuville
+852-3189-7311
dneuville@jonesday.com

John T. Perugini
+44.20.7039.5133
jtperugini@jonesday.com

Benedict Tai
+86.10.5866.1185
btai@jonesday.com

Virginia Tam
+852.3189.7318
vtam@jonesday.com

Xiaowei Ye
+86.10.5866.1110
xye@jonesday.com

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our web site at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the author and do not necessarily reflect those of the Firm.


[1] Exemption from Registration Under Section 12(g) of the Securities Exchange Act of 1934 for Foreign Private Issuers, Exchange Act Release No. 34-57350 (Feb. 19, 2008), available at http://www.sec.gov/rules/proposed/2008/34-57350.pdf.

[2] Foreign Issuer Reporting Enhancements, Securities Act Release No. 33-8900, Exchange Act Release No. 34-57409 (Feb. 29, 2008), available at http://www.sec.gov/rules/proposed/2008/33-8900.pdf.

[3] Under Rule 405 of the Securities Act of 1933, "foreign private issuer" means any foreign issuer, other than a foreign government, except an issuer that meets the following conditions: (i) more than 50 percent of its outstanding voting securities are directly or indirectly owned of record by residents of the United States and (ii) any of the following:
    (a) the majority of the executive officers or directors are United States citizens or residents;
    (b) more than 50 percent of the assets of the issuer are located in the United States; or
    (c) the business of the issuer is administered principally in the United States.

[4] Fewer difficulties may be presented for foreign private issuers that prepare their financial statements according to International Financial Reporting Standards as issued by the International Accounting Standards Board and, therefore, are not required to provide a reconciliation to U.S. GAAP. For information on the SEC's rule amendments permitting foreign private issuers to prepare their financial statements according to International Financial Reporting Standards as issued by the International Accounting Standards Board without reconciliation to U.S. GAAP, see Jones Day Commentary, "SEC Allows Foreign Private Issuers to Use Financial Statements Prepared in Accordance With International Financial Reporting Standards" (Jan. 2008), available at https://www.jonesday.com/pubs/pubs_detail.aspx?pubID=S4876.

[5] Termination Of A Foreign Private Issuer's Registration of a Class of Securities Under Section 12(g) and Duty to File Reports Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, Exchange Act Release No. 34-55540 (Mar. 27, 2007), available at http://www.sec.gov/rules/final/2007/34-55540.pdf.

[6] Under Rule 1-02(w) of Regulation S-X, the significance of an acquired business is assessed by comparing (i) the registrant's investment in the acquired business to the registrant's total assets, (ii) the acquired business' total assets to the registrant's total assets, and (iii) the acquired business' pre-tax income to the registrant's pre-tax income.

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