As capital markets continue to globalize, foreign companies that want exposure to American markets sometimes go through the process of getting listed as a public company in the U.S. Other times, they become what is known as a foreign private issuer, or FPI for short. Foreign private issuers have the benefit of access to U.S. markets and certain friendly accommodations without having to go through the entire process of getting listed. Attaining this regulatory classification means companies with FPI status gain access to U.S.-based investors and reduce certain reporting burdens. Although the status is attractive to many foreign companies because of the liquidity, investor depth, and valuation visibility of U.S. markets, being an FPI still necessitates SEC compliance for disclosure requirements. At the same time, these companies must be aware that the regulatory requirements for becoming an FPI are not lighter, merely different. Below, get an SEC foreign private issuers overview that includes the financial reporting requirements to know.
What is a Foreign Private Issuer?
A foreign private issuer is a nongovernmental company that is incorporated outside of the U.S. and does business in the U.S. A non-U.S. company can be either public or private in its home country. Becoming an FPI is not an automatic process, and involves FPI eligibility tests focused on share ownership and management and operations locations.
The special status allows these foreign companies some disclosure and reporting benefits that publicly traded companies in the U.S. enjoy. This status is reassessed on an annual basis.
How the SEC Determines Foreign Private Issuer Status
To determine if a foreign company qualifies as an FPI, the SEC applies a two-part test. The shareholder test determines whether more than 50% of voting securities are held by non-U.S. residents. The business contacts test assesses whether the majority of executive directors or officers are non-U.S. residents, its assets are primarily outside the United States, or if business is administered principally outside the U.S.
Foreign Private Issuer SEC Filing Requirements
FPIs are subject to SEC filing requirements in three use cases:
- Upon registering the ability to sell securities with the SEC
- Upon listing securities on a U.S. exchange
- Within a 120-day period of a fiscal year when the issuing company has assets worth over $10 million and equity shares held by over 2,000 persons
The key difference in terms of timing is annual vs. quarterly expectations.
Rule 12g3-2(b) Exemption
There are exceptions to note, including Rule 12g3-2(b). As a reminder, Rule 12g3-2(b) exempts FPIs from needing to register securities if the securities are primarily traded outside of the U.S. The company may self-certify and does not need to request exception from the SEC in this instance. Disclosure obligations must be met, or else there is a risk of losing the exemption.
Key SEC Forms for Foreign Private Issuers
Exceptions aside, there are SEC forms foreign private issuers must complete. Here’s what foreign issuers need to know about those forms:
- Form F-1: When an FPI intends to go public in the U.S., it must file this form.
- Form 20-F: Any FPI with shares listed on a U.S. exchange must file this form. Because Form 20-F includes fields that American-based publicly traded companies must fill out, it helps investors compare foreign and domestic companies when making investment decisions.
- Form 40-F: This form is similar to 20-F. However, it applies to Canadian companies only. Any other FPIs should use 20-F.
- Form 6K: This form is a cover page that FPIs should use whenever they make SEC filings. This form is intended as a catchall for any financial information that arises in between the required quarterly reports and the annual report. This form must be submitted in English and is required of all foreign private issuers.
How FPI Reporting Differs from U.S. Domestic Issuers
FPI companies are required to report annually instead of quarterly, with different proxy requirements and more flexibility in accounting standards. This means FPIs may face greater investor scrutiny and experience a higher burden on annual filings. To compensate, FPIs need strong internal controls and accurate, timely disclosures despite the lighter cadence.
Common Challenges for Foreign Private Issuers
Some of the biggest issues FPIs encounter include navigating the dual regulatory landscapes and meeting requirements for translation on documents. At the same time, they also have to ensure their existing reporting processes from their home countries also align with SEC standards. There’s also the risk of losing FPI status due to changes in ownership or operations.
Ensuring Foreign Private Issuer Compliance
By getting FPI status, companies enjoy access to U.S. markets while avoiding the lengthy process of becoming listed as a public company in the U.S. This comes with reporting obligations that are different but not necessarily simpler. Companies that go through this process must ensure they plan ahead as early as possible to make sure their filings, technology, and internal controls are in alignment.
At DFIN, our signature ActiveDisclosure software supports financial reporting with features such as built-in security, health checks and end-to-end encryption. We provide SEC-ready workflows, secure collaboration tools, and filing accuracy and health checks to make sure the process goes as smoothly as possible. Reach out today to learn more about what our solutions can do for you.
