What is a foreign private issuer?
Introduction
The U.S. stock market is by far the largest stock market in the world, so many international companies elect to have their stock trade on a U.S. stock exchange. There are several different ways that a foreign company can have their stock trade on a U.S. stock exchange. Here is a summary, using the securities in our database:
- American Depository Receipts, or ADRs
- Cross-listed shares
- Common stock
When a foreign company decides to list their stock on a U.S. stock exchange, they have to decide whether to elect to be treated as a "foreign private issuer" under U.S. securities laws. Foreign private issuers are subject to different reporting and regulatory requirements than a U.S. company, as will be explained below. A company doesn't have to be treated as a foreign private issuer - a foreign company can choose to be treated as a "regular" company and follow the same rules as a U.S. company.
Rules to qualify
A foreign corporation is considered to be a foreign private issuer unless:
a) more than 50% of the issuer’s outstanding voting securities are held directly or indirectly of record by residents of the United States; and
b) any of the following applies:
i) the majority of the issuer’s executive officers or directors are U.S. citizens or residents;
ii) more than 50% of the issuer’s assets are located in the United States; or
iii) the issuer’s business is administered principally in the United States.
After they initially elect to be a foreign private issuer, a company must review its status as an FPI every year. An FPI must determine its status on the last business day of its most recently completed second fiscal quarter. If an FPI no longer satisfies the FPI requirements, it will become subject to U.S. domestic reporting requirements on the first day of its fiscal year immediately succeeding such determination.
Different reporting requirements
A foreign private issuer must file an Annual Report on Form 20 F within four months after the fiscal year covered by the report. By contrast, a domestic issuer must file an Annual Report on Form 10-K between 60 and 90 days following the end of its fiscal year, depending on its capitalization and other factors.
A foreign private issuer is not required under U.S. federal securities laws to file or make public quarterly financial information, subject to certain exceptions. Companies with a class of securities listed on the NYSE must submit semiannual unaudited financial information under cover of a Form 6-K within six months following the end of the second fiscal quarter. By contrast, U.S. domestic issuers are required to file unaudited financial information on Quarterly Reports on Form 10–Q.
A foreign private issuer may prepare its financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) without reconciliation to U.S. GAAP.
Exemption from certain corporate governance requirements
The SEC and the U.S. national securities exchanges, separately, through statutes, rules and regulations, govern corporate governance practices in the United States. However, an FPI registered in the United States may continue to follow certain corporate governance practices in accordance with its home-country rules and regulations.
The primary differences between U.S. and foreign private issuer corporate governance practices primarily relate to the composition and function of the company's Board of Directors. The S.E.C. and the U.S. stock exchanges (NASDAQ and the NYSE) impose various requirements on U.S. companies about the makeup of the Board of Directors and specifically, the function of the company's compensation and audit committees of the Board of Directors. FPIs can follow their home country rules, which are often quite different in these areas.