Foreign Companies, if they qualify as what the SEC defines as “foreign private issuers” have the option but not the obligation utilize another set of laws, rules and regulations to sell their stock.
Foreign Private Issuer
The term foreign private issuer means any foreign company other than a foreign government that meets the following conditions as of the last business day of its most recently completed second fiscal quarter:
- Less than 50 percent of the outstanding voting securities of such issuer are directly or indirectly owned of record by residents of the United States; and
- Any of the following:
- Less than the majority of the executive officers or directors are United States citizens or residents;
- Less than 50 percent of the assets of the company are located in the United States; or
- The business of the company is not administered principally in the United States.
A foreign private issuer can elect to be treated as a domestic U.S. company and follow the same rules and regulations described above. It has the option, but not the obligation, then to utilize a different series of SEC Forms to sell securities in the U.S.
Form F-1 for Registering Securities under the Selling Stock Act is available ONLY to Non-U.S. Companies
The disclosure requirements for the F forms are not found in Regulation S-K as for the S Forms but instead are primarily found in another form for foreign private issuers, Form 20-F, which is also used for on-going SEC filing requirements. Although the items to be disclosed in Form F-1 are essentially the same as those in Form S-1, there are subtle distinctions and differences.
It used to be that all financial statements in these filings had to be reconciled to U.S. Generally Accepted Accounting Principals, or GAAP. However, in December 2007, the SEC changed the rules. Now, the SEC will accept financial statements prepared in accordance with IFRS as issued by the IASB for financial statements for financial years ending after November 15, 2007 and interim periods within those years contained in filings made after December 2007.
American Depositary Receipts or ADR’s: Form F-6
Foreign companies can also register to have their shares traded in a form other than their original form as American Depositary Receipts or ADR’s. The foreign company deposits its shares with a U.S. depositary bank. The bank holds these American Depositary Shares, or ADS’s, and issues ADR’s. The deposit agreement between a foreign company and a U.S. depositary bank creates a sponsored ADR program. This deposit agreement is filed with the SEC using Form F-6.
Large foreign companies from all over the world in all types of industries such as the following all trade ADR’s on the Pink Sheets:
- Rossi Residencial - Brazil House Goods & Home Construction
- Ciba Specialty Chemicals - Switzerland Chemicals
- Trinity Mirror - United Kingdom Media
- First Pacific - Hong Kong Food Producers
- Australia and New Zealand Banking - Australia Banks
- ASAT - Hong Kong Tech, Hardware & Equipment
- Charoen Pokphand Foods - Thailand Food Producers
- Johnson Electric - Hong Kong Electron & Electric Equipment
- Brilliance China Automotive - China Automobiles & Parts
ADR’s are priced and dividends are paid in U.S. dollars. The majority of ADR’s are traded on the OTC Pink Sheets. That is because the foreign companies that use ADR’s do not want to become SEC reporting companies required to file reports under the 1934 “Filing Reports” Act discussed under the Button “SEC Reporting & Compliance” and as such are also not subject to the provisions of the Sarbanes-Oxley Act. If they trade on the Pink Sheets, SEC Rule 12g3-2 automatically and without submitting an application to the SEC exempts foreign companies from these requirements provided they meet the following:
- The company currently maintains a listing of the subject class of securities on one or more exchanges in its primary trading market.
- The company is not required to file or furnish reports under the 1934 Filing Reports Act
- The company has published in English specified non-US disclosure documents on its internet website or through an electronic information delivery system generally available to the public in its primary trading market and continue to publish such information promptly after it is made public.
An foreign issuer that meets the three conditions of Rule 12g3-2(b) as amended can automatically claim the exemption without having to submit a written application to or otherwise notifying the SEC.
The problem with ADR’s for many foreign companies is that, because they must be listed on the primary trading market in their country, many foreign companies won’t qualify to issue ADR’s.