The US Securities and Exchange Commission (the "SEC") has amended Rule 12g3-2(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act").1 This rule provides an exemption to a foreign private issuer2 from registering a class of equity securities under Section 12(g) of the Exchange Act.3 The Rule 12g3-2(b) exemption also enables a qualified foreign private issuer to have a class of its equity securities traded on a limited basis in the over-the-counter ("OTC") market in the United States (often in the form of American Depository Receipts), while avoiding the Exchange Act's periodic reporting requirements and provisions of the Sarbanes-Oxley Act of 2002. Foreign private issuers must continue to register a class of equity security under the Exchange Act if that class is listed on a national securities exchange or traded on the OTC Bulletin Board.4

The amendments follow the SEC's adoption of new rules regarding Exchange Act deregistration for foreign private issuers last year.5 The amendments greatly simplify qualifying for this exemption, including eliminating the 40-year-old requirement for a foreign private issuer to submit a burdensome written application to the SEC, and increase transparency to the investment community by requiring electronically posted disclosures by qualified foreign private issuers.6 The amendments are effective October 10, 2008. In certain respects, however, the amended standards for Rule 12g3-2(b) eligibility impose additional obligations on foreign private issuers in maintaining the exemption in the future.

Conditions

A foreign private issuer must satisfy the following three conditions to qualify for the revised Rule 12g3- 2(b) exemption:

  1. It must maintain a listing of the subject class of equity 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 jurisdiction, constitutes the primary trading market for those securities (the "foreign listing condition");
  2. It must not have any reporting obligations under Section 13(a) or 15(d) of the Exchange Act (the "non-Exchange Act reporting condition"); and
  3. It must promptly electronically publish in English its material non-US disclosure documents that were or were required to be publicized, filed or distributed to securityholders outside the United States since the beginning of its last fiscal year (the "electronic publishing condition"). Each of these requirements is briefly discussed below. Rule 12g3-2(b)'s

exemption is determined for each class of equity security (subject to a carve out for a class of compensatory stock options).

1.Foreign Listing Condition

The foreign listing condition requires a foreign private issuer to maintain a listing of the subject class of equity 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 jurisdiction, constitutes the primary trading market for those securities.7 The purpose of this condition, the SEC explained, is to assure that there is a non-US jurisdiction principally regulating the trading of the issuer's securities and the issuer's disclosure obligations to investors. The foreign listing condition does not require that a foreign private issuer maintain a listing of the subject securities on any particular foreign exchange or for any prior period of time. Absent a foreign market listing, the Rule 12g3-2(b) exemption is not available.

Primary Trading Market Outside the United States. The amendments define "primary trading market" to require that at least 55% of the trading in the subject class of equity securities on a worldwide basis took place in, on or through the facilities of a securities market or markets in a single foreign jurisdiction or in no more than two foreign jurisdictions during the issuer's most recently completed fiscal year. The amendments further provide that if a foreign private issuer aggregates the trading volume of the subject class of equity securities in two foreign jurisdictions for this purpose, the trading volume in at least one of those two foreign jurisdictions must be greater than the trading volume in the United States for such securities.8 Consequently, in order for a class of equity securities to have its primary trading market outside the United States, the trading volume for such class in the United States may not represent more than 45% of its trading volume worldwide, and any trading volume in the United States must be less than the trading volume in at least one foreign jurisdiction (in each case, measured with respect to the issuer's most recently completed fiscal year).

Currently, a foreign private issuer may claim the Rule 12g3-2(b) exemption without regard to trading volume of the subject class of equity securities in the United States or on any foreign exchange. As a result, some currently qualifying foreign private issuers, which do not maintain a foreign listing or whose principal foreign trading volume comprises less than 55% of their worldwide trading volume, will no longer qualify for the Rule 12g3-2(b) exemption. The SEC rejected any "grandfathering" of such companies. Since the definition of primary trading market uses a trading volume standard for the issuer's last fiscal year, an issuer is required to reassess its volume compliance annually.

SEC Abandoned 20% Trading Volume Condition. The SEC abandoned its proposed (and controversial) amendment that would have made a foreign private issuer ineligible for the Rule 12g3-2(b) exemption if the average daily trading volume ("ADTV") in the issuer's subject class of equity securities in the United States was greater than 20% of the ADTV of that class of equity securities on a worldwide basis. Many commentators opposed this trading volume condition on the grounds, among others, that it would likely discourage foreign private issuers from establishing or maintaining sponsored American Depository Receipt ("ADR") facilities or engaging in exempted offerings in the United States, and that the proposed foreign listing condition and accompanying definition of primary trading market should suffice from an investor protection prospective.

2. Non-Exchange Act Reporting Condition

The amendments continue to require that a foreign private issuer must not have any reporting obligations under Section 13(a) or 15(d) of the Exchange Act. The amendments, however, relax the current non- Exchange Act reporting condition of the existing rule in two important respects. First, the SEC eliminated the 18-month "look back" rule that formerly disqualified a foreign private issuer from obtaining the Rule 12g3-2(b) exemption if it had a registered a class of securities under Section 12 or had an active or suspended Section 15(d) reporting obligation during the preceding 18 months. Second, the SEC abandoned the requirement that a foreign private issuer must seek to qualify under the exemption within the statutory 120-day period for filing a Section 12(g) registration statement. A foreign private issuer, therefore, is no longer required to wait until the end of its current fiscal year and the start of a new 120- day period before it may obtain the exemption. It should be noted that under the non-US Exchange Act reporting condition, a foreign private issuer must not have Exchange Act reporting requirements with respect to any of its classes of equity securities.

3. Electronic Publication Condition

Electronic Publishing Requirement to Claim Exemption. The amendments eliminate the current requirement for foreign private issuers to make an initial written application to the SEC to claim the Rule 12g3-2(b) exemption and replace the current paper-based process for submitting non-US disclosure documents with a mandated electronic publishing requirement. Under the amendments, unless in connection with or following a recent Exchange Act deregistration,9 a foreign private issuer must electronically publish in English information that is material to an investment decision10 regarding the subject class of equity securities which the foreign private issuer:

  • made public or was required to make public pursuant to the laws of the country of its incorporation, organization or domicile,
  • filed or was required to file with the principal stock exchange in its primary trading market on which its securities are traded and which has been made public by that exchange, or
  • distributed or was required to distribute to its security holders since the first day of its most recently completed fiscal year.11

These non-US disclosure documents must be published in English on the foreign private issuer's internet website or through an electronic information delivery system generally available to the public in its primary trading market. In the adopting release, the SEC stated that publication in English on the website of a non-US stock exchange or securities regulatory authority would satisfy this requirement.12 Non-US disclosure documents will not be available on the SEC's Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) or its successor, Interactive Data Electronic Applications (IDEA).13

Electronic Publishing Requirement to Maintain Exemption. To maintain the Rule 12g3-2(b) exemption, a foreign private issuer is obligated to publish its non-US disclosure documents, on an ongoing basis and for each subsequent fiscal year, on its website or through an electronic information delivery system in its primary trading market. Further, a foreign private issuer must satisfy a "prompt" publication requirement. What constitutes "prompt" depends on the type of document and the amount of time required to prepare an English translation. As to maintaining published materials, an issuer should consider maintaining electronic publication of non-US disclosure documents until they are reasonably no longer material to an investment decision.

English Translation Requirement. To claim and maintain the Rule 12g3-2(b) exemption, a foreign private issuer must publish electronically a full English translation of the following documents:

  1. its annual report, including or accompanied by annual financial statements;
  2. interim reports that include financial statements;
  3. press releases; and
  4. all other communications and documents distributed directly to security holders of each class of equity securities to which the exemption relates.14

In contrast, currently, only documents specified in categories (iii) and (iv) above must be translated into English. With respect to all other information, the SEC has previously permitted a foreign private issuer to submit an English summary instead of a complete translation, so long as the summary conveys to US shareholders the substance of the information contained in the original document. In this respect, historically, the SEC has taken the position that, although the text of an issuer's annual report may be summarized in English in this fashion, the financial statements do not lend themselves to anything other than a line-by-line translation into English. The amended exemption may therefore impose a burden on a foreign private issuer to provide a full English translation of its annual or interim reports without the option to summarize non-financial parts.

In the adopting release, the SEC stated that, with respect to information other than that falling into categories (i) to (iv) above, a foreign private issuer may provide an English summary, rather than a full English translation, if, as a registrant, an issuer could submit an English summary for such non-US disclosure document under cover of Form 6-K or pursuant to Rule 12b-12(d)(3). The impact of this view is likely to be limited, as in general summaries are permitted under those provisions only for certain attachments and exhibits (e.g., certain non-material contracts).

Elimination of the Written Application Requirement and the SEC's List of Rule 12g3-2(b) Issuers

Amended Rule 12g3-2(b) is self-executing. A foreign private issuer automatically qualifies for exemption from Section 12(g) of the Exchange Act without submitting a written application to, or otherwise notifying, the SEC.15 The SEC will therefore no longer publish an annual list of companies claiming the Rule 12g3- 2(b) exemption. Moreover, a foreign private issuer will not be required to disclose its reliance on the Rule 12g3-2(b) exemption or related information, though it may choose to do so voluntarily. If an issuer does not provide such voluntary disclosure, however, banks wishing to establish an unsponsored ADR program, broker-dealers seeking to meet their obligations under Exchange Act Rule 15c2-11, and entities wishing to make resales in reliance on Rule 144A will need to determine whether the issuer qualifies for the Rule 12g3-2(b) exemption.

Duration of the Rule 12g3-2(b) Exemption

A foreign private issuer will lose the Rule 12g3-2(b) exemption if it no longer meets the foreign listing condition, the non-reporting condition, or the electronic publishing condition. No specific period for curing a defect in an issuer's claimed exemption is provided. In the adopting release, the SEC stated that an issuer that ceases to comply with any required condition must either re-establish compliance with the rule in a reasonably prompt manner (e.g., by relisting its securities in its primary trading market) or register under Section 12 of the Exchange Act.

Transition Period

The SEC has adopted a three-year transition period during which currently qualified foreign private issuers will continue to be exempt. If an issuer has not complied with the new conditions by the expiration of the three-year transition period (October 10, 2011), it will need to register under Section 12(g) or qualify for another exemption.

Separately, to provide sufficient time for foreign private issuers to develop their capabilities to publish electronically their non-US disclosure documents and to translate such documents into English, the SEC has established a three-month transition period following the amendments' effectiveness during which it will continue to accept and process paper submissions and make the accompanying disclosure matters public in the SEC's Public Reference Room. Thereafter, and notwithstanding the above three-year transition period, any such foreign private issuer still may wish to publish electronically their non-US disclosure documents in English in order to permit US broker-dealers to fulfill their Exchange Act Rule 15c2-11 responsibilities and to facilitate Rule 144A transactions.

Footnotes

1.See Release No. 34-58465 (September 5, 2008).

2 Exchange Act Rule 3b-4(c) defines a "foreign private issuer" as any foreign issuer (other than a foreign government), except for an issuer meeting the following conditions: (1) more than 50% of the issuer's outstanding voting securities are directly or indirectly held of record by residents of the United States and (2) any of the following: (i) the majority of the executive officers or directors are United States citizens or residents; (ii) more than 50 percent of the assets of the issuer are located in the United States; or (iii) the business of the issuer is administered principally in the United States. Exchange Act Rule 3b-4(b) defines "foreign issuer" as any issuer which is a foreign government, a national of any foreign country or a corporation or other organization incorporated or organized under the laws of any foreign country.

3 Section 12(g) of the Exchange Act, when read in conjunction with Exchange Act Rules 12g-1 and 12g3-2(a), requires a foreign private issuer to file an Exchange Act registration statement regarding a class of equity securities within 120 days of the last day of its fiscal year if, on that date, the issuer has 500 or more shareholders on a worldwide basis, including 300 or more US resident shareholders, and total assets that exceed $10 million.

4 A foreign private issuer may affirmatively seek the Exchange Act Rule 12g3-2(b) exemption in order to have established an unlisted, sponsored or unsponsored depositary facility for its ADRs. A foreign private issuer may be subject to Section 12(g) even absent voluntary action on its part to create a public trading market for any class of its equity securities in the United States.

5 See Release No. 34-55540 (March 27, 2007), 72 FR 16934 (April 5, 2007).

6 The amendments also eliminate (1) the current provision that generally withholds the Exchange Act Rule 12g3-2(b) exemption from successor issuers, (2) the rarely used ability of a Canadian issuer filing under the Multijurisdictional Disclosure System ("MJDS") to obtain the Exchange Act Rule 12g3-2(b) exemption for a class of equity securities while having Exchange Act reporting obligations regarding a class of debt securities, (3) the current provision that prohibits an issuer from relying on the Exchange Act Rule 12g3-2(b) exemption if its class of equity securities are traded through an automated inter-dealer quotation system, and (4) the related provision grandfathering Nasdaq-traded companies meeting specified conditions from Exchange Act Rule 12g3-2(b)'s automated inter-dealer quotation system prohibition.

7 Exchange Act Rule 12g3-2(b) does not today expressly require a foreign private issuer to maintain a current listing of the subject securities on a foreign exchange. In the adopting release, however, the SEC noted that the foreign listing condition was consistent with the SEC staff's past and current practice of Exchange Act Rule 12g3-2(b) requiring any issuer, regardless of size, to obtain a foreign listing before it could receive the exemption. Accordingly, the SEC believed that this requirem ent should not impose any new burden.

8 The amendments provide that in order to determine an issuer's "primary trading market" for this purpose, the average daily trading volume in the United States and on a worldwide basis must be calculated as under Exchange Act Rule 12b-6. 9 In March 2007, the SEC adopted amendments to Exchange Act Rule 12g3-2, which enable a foreign private issuer to claim the Exchange Act Rule 12g3-2(b) exemption immediately upon the effectiveness of its termination of Exchange Act registration and reporting pursuant to contemporaneously adopted Exchange Act Rule 12h-6. See Release No. 34-55540 (March 27, 2007), 72 FR 16934 (April 5, 2007). Pursuant to those amendments, issuers wishing to rely on Exchange Act Rule 12g3-2(b) immediately after de-registration will be subject to the same electronic publication requirements now being imposed on all non-US companies seeking to rely on the Exchange Act Rule 12g3-2b exemption.

10 The amendments provide the following examples of material information: results of operations or financial condition; changes in business; acquisitions or dispositions of assets; the issuance, redemption or acquisition of securities; changes in management or control; the granting of options or the payment of other remuneration to directors or officers; and transactions with directors, officers or principal security holders.

11 These are the same categories of information that the SEC has historically required a non-reporting company to submit in paper when applying for the exemption under Exchange Act Rule 12g3-2(b).

12 In the adopting release, the SEC cited the System for Electronic Document Analysis and Retrieval ("SEDAR") maintained by the Canadian Securities Administrators as an example of such a system.

13 It should be noted that a foreign private issuer's obligation to electronically publish material inform ation is limited to non-US disclosure documents that were or were required to be publicized, filed or distributed in circumstances described above. A foreign private issuer would not be required, for example, to electronically publish material information that it filed only with a stock exchange in a foreign jurisdiction that was not its principal stock exchange in its primary trading market on which its securities were traded. The amendments do not define the term "principal stock exchange." If a foreign private issuer aggregates trading across two foreign exchanges to meet the trading volume condition, this term would presumably refer to the foreign stock exchange upon which the issuer's class of equity security was most actively traded.

14 These are the same documents for which an issuer that has deregistered under Exchange Act Rule 12h-6 must provide English translations.

15 Under current Exchange Act Rules 12g3-2(b)(1), (2) and (3), these written materials include a list of the issuer's non-US disclosure documents, the number of US holders of this subject securities and the percentage of outstanding shares held by them, the circumstances in which its US holders acquired those securities, and the date and circumstances of the most recent public distribution of the securities of the issuer or its affiliate.

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