Whether an issuer qualifies as a foreign private issuer, or FPI, will determine the filing regime it must follow with the Securities and Exchange Commission (SEC) and the applicable corporate governance requirements. The SEC and the exchanges in the United States give considerable deference to home-country requirements for an FPI and impose few additional requirements. An issuer’s FPI status is determined as of a date within thirty days before the initial filing of the registration statement with the SEC. Thereafter, FPI status is tested annually at the end of the second quarter of the issuer’s financial year.
A foreign private issuer is an entity (other than a government) incorporated or organized under the laws of a jurisdiction outside of the United States, unless the following two conditions apply:
- more than 50% of its outstanding voting securities are directly or indirectly owned of record by U.S. residents, and
- any of the following applies:
- the majority of its executive officers are U.S. citizens or residents,
- the majority of its directors are U.S. citizens or residents,
- more than 50% of its assets are located in the United States, or
- its business is administered principally in the United States.
A company incorporated under the laws of a non-U.S. jurisdiction will be treated as a U.S. issuer if more than 50% of its voting securities are held directly or indirectly by U.S. residents and it has any one of the enumerated U.S. contacts.
FPIs are allowed a number of benefits that are not available to U.S. issuers.
Determining FPI Status
Securities ownership. An issuer must look through record ownership of brokers, dealers, banks, and nominees holding securities for the accounts of their customers in the United States and in the issuer’s home country (and, in the case of an issuer with a public trading market, the country of its primary trading market if not the United States or its home country). Where an issuer cannot determine the ultimate residency of the owner of shares held by a nominee (either because the nominee will not provide the information or it imposes an unreasonable charge for the information), the issuer is entitled to presume that the residency of the nominee’s customers is the same as the nominee’s principal place of business. The issuer must also consider any beneficial ownership reports and any other information available. If an issuer has actual knowledge about the residency of its shareholders, it must consider that information in making the determination.
Non-voting securities are not included in the calculation.
If an issuer has more than one class of voting securities with different voting rights, the issuer can choose between two options: (1) calculating the percentage of voting power held by U.S. citizens or residents or (2) calculating the percentage of the number of securities. However, once the issuer chooses a method, it must apply that method consistently.
Residency and citizenship of officers and directors. The tests for officers and directors are separate, as are the tests for U.S. residency or U.S. citizenship. Dual citizens with U.S. citizenship are counted as U.S. citizens for these tests. Members of senior management with significant management responsibility or policy-making functions must be included as executive officers. Executive officers of subsidiaries must be treated as executive officers of the issuer if they perform policy-making functions for the issuer. A person with permanent resident status in the United States (sometimes known as a “green card” holder) must be counted as a U.S. resident. For other individuals who live in the United States but are not green card holders, the issuer must establish criteria to determine residency and apply the criteria consistently. Factors could include tax residency, nationality, mailing address, physical presence, or immigration status.
Location of assets. In determining the location of the issuer’s assets, an analysis of the balance sheet is required. Consideration should be given to the accounting treatment of the issuer’s assets in either a geographic segment footnote or other disclosures in the financial statements. However, additional analysis is required of the various categories of assets on the balance sheet. There may be considerable judgment in determining the location of assets. The issuer should adopt a documented methodology for making the determination and apply it consistently. In addition, the issuer’s auditors should review the methodology.
Location of administration. An issuer’s business is administered from the location where operational and policy decisions are made. In making the determination, the number of days the CEO spends at the issuer’s non-U.S. offices, the location of meetings of the board of directors and meetings of shareholders, and the location where each principal business function is administered should be considered.
This article is based on a CLE program titled “Disappearing Deference to Home Country Law for Foreign Private Issuers” that took place during the ABA Business Law Section’s 2023 Hybrid Spring Meeting. To learn more about this topic, view a recording of the program, free for members.