Going Public Requirements for Foreign Issuers
Go Public 101
Typically foreign companies that go public in the U.S. complete a public offering by registering securities with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) or registering a class of securities under the Securities Exchange Act of 1934 (the “Exchange Act”).
Like domestic issuers, foreign issuers have several alternatives in how to obtain public company status. A direct public offering (“Direct Public Offering”) allows an issuer to sell its shares directly to investors without the use of an underwriter. The Direct Public Offering involves registering securities with the SEC often on Form S-1 (”S-1”), either on its own behalf in a primary offering or on behalf of its selling security holders in a secondary offering.
All issuers qualify to register securities on Form S-1 and foreign issuers who conduct direct public offerings often register their securities on Form S-1. Registration with the SEC eliminates many of the risks and expenses associated with reverse merger transactions with public shell companies as well as the stigma attached to reverse mergers involving foreign issuers. Reverse Merger risks include, but are not limited to undisclosed liabilities, sketchy corporate records, DTC Chills, Global Locks and SEC trading suspensions.
The SEC has special rules that apply to foreign private issuers. In order for a foreign company to qualify as a foreign private issuer under SEC rules, it must satisfy the definition in Securities Exchange Act Rule 3b-4(c) of the Exchange Act. After the initial determination that a foreign company is a foreign private issuer in connection with its initial public offering, the issuer must test its status as a foreign private issuer annually on the last business day of its second fiscal quarter.
If a foreign company determines that it fails to qualify as a foreign private issuer, it is required to start using the forms and complying with the rules applicable to domestic issuers beginning on the first day of the fiscal year following the determination date. It will not re-qualify as a private foreign issuer until it meets the criteria of 3b-4.
Rule 3b-4(c) provides the following do not qualify as foreign private issuers:
♦ an issuer with more than 50% of its outstanding voting securities held by U.S. residents;
♦ the majority of the issuer’s executive officers or directors are U.S. citizens or residents;
♦ more than 50% of the issuer’s assets are located in the U.S.; or
♦ the issuer’s business is administered principally in the U.S.
U.S. Shareholder Test
Under the U.S. shareholder standard, a non-U.S. issuer will be considered a foreign private issuer if more than 50 percent of its outstanding voting securities are directly held by non U.S. residents or unless it satisfies the business contacts standard.
Business Contacts
If any of the three criteria below are present, the issuer will not be deemed a foreign issuer:
♦ A majority of the issuer’s directors or executive officers (president, vice president, any other officer who performs a policymaking function or any other person who performs similar policy making functions for the issuer) are U.S. citizens or residents;
♦ More than fifty percent of the issuer’s assets are located in the U.S.; or
♦ The issuer’s business is administered primarily in the United States.
Citizenship and Residency of the Company’s Management
The first part of the business contacts test is based upon whether a majority of the issuer’s directors or executive officers are U.S. citizens or residents. An “executive officer” is defined as a company’s president, any vice president in charge of a principal business unit, division or function, any other officer who performs a policymaking function or any other person who performs similar policy making functions for the issuer.
Location of the Company’s Assets
The second part of the business contacts test focuses on whether more than 50 percent of the company’s assets are located in the U.S.
Administration of the Company’s Business
The third part of the business contacts test is whether an issuer’s business is administered principally in the U.S. Factors that might be considered for this purpose include:
♦ Where the company’s principal business functions (and business segments) are administered;
♦ Where the company’s management spends their working days;
♦ Where the company’s board of directors meetings are held; and
♦ Where the company’s shareholders meetings are held.
Reporting Obligations of Foreign Private Issuers
Once a foreign private issuer is public in the U.S. it must comply with the SEC’s reporting and disclosure requirements, including an ongoing requirement to file periodic reports. In some instances, these rules and regulations include special benefits to encourage more foreign issuers to enter the U.S. capital markets by reducing the reporting obligations of foreign issuers who become public companies. These benefits include, but are not limited to annual reports on Form 20-F instead of Form 10-K, having the option of preparing financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), International Financial Reporting Standards (“IFRS”) or their home country GAAP.
Conclusion
Any foreign private issuer seeking to enter the U.S. Capital Markets should proceed with caution when considering how to go public. Similarly, issuers should proceed with caution when considering whether to engage in a reverse merger transaction. Many reverse merger issuers fail to comply with the securities laws and the requirements for electronic trading through Depository Trust Company (“DTC”). In light of these considerations, private companies should consult a qualified and independent securities attorney to perform thorough research and due diligence before going public.
To the extent that a private company is willing to expend the time and resources to become public, it should do so the proper by way by filing a registration statement with the SEC and conducting an underwritten or direct public offering to avoid the growing risks and new requirements involving reverse merger transactions and public shell companies.
For further information about this article or how to go public, please visit www.gopublic101.com or contact Brenda Hamilton, Securities Attorney at bhamilton@securitieslawyer101.com or 561-416-8956. This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, Rule 144, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings or please contact Hamilton and Associates at 101 Plaza Real South, Suite 201, Boca Raton Florida, (561) 416-8956 or by email at info@gopublic101.com. Please note that the prior results discussed herein do not guarantee similar outcomes.