SEC Considers Amendments to “Foreign Private Issuer” Definition

The U.S. Securities and Exchange Commission (“SEC”) recently published a concept release (the “Concept Release”) in which it solicits comments on potential revisions to the “foreign private issuer” (“FPI”) definition. The SEC notes that developments within the FPI population have prompted it to consider whether the current FPI definition should be revised to better represent the issuers that had been intended to benefit from FPI accommodations. Comments are due by September 8, 2025.

Background

“FPI” is currently defined as a foreign issuer other than a foreign government, except for an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter:

1. more than 50% of the issuer’s outstanding voting securities are directly or indirectly held of record by residents of the United States[1]; and
2. any of the following:
   1. the majority of the executive officers or directors of the issuer are citizens or residents of the United States;
   2. more than 50% of the assets of the issuer are located in the United States; or
   3. the business of the issuer is administered principally in the United States.

Paragraph (i) is referred to as the “shareholder test”, while paragraph (ii) is referred to as the “business contacts test”.

Issuers that qualify as a FPI are provided with relief from certain U.S. disclosure and other requirements on the basis that they should be subject to meaningful disclosure and other regulatory requirements in their home jurisdiction. For example, FPIs are subject to reduced annual and quarterly reporting obligations as compared to U.S. domestic issuers, FPIs may prepare their financial statements using International Financial Reporting Standards (IFRS) rather than U.S. generally accepted accounting principles (U.S. GAAP) and FPIs are exempt from various U.S. rules, including proxy requirements and insider reporting rules.

SEC staff (“Staff”) have reported significant changes in the composition of FPIs that file annual reports on Form 20-F (“20-F FPIs”) over the past two decades. In 2023, Staff reported that the most common jurisdiction of incorporation among 20-F FPIs was the Cayman Islands, and the most common jurisdiction of headquarters was mainland China. In 2003, the most common jurisdictions for both incorporation and headquarters for 20-F FPIs were Canada and the United Kingdom. Staff also reported that the majority of 20-F FPIs have their equity securities almost exclusively traded in U.S. capital markets. The SEC noted that an increasing number of FPIs appear to have disclosure requirements under the rules of their home jurisdiction that differ from the requirements imposed on U.S. domestic issuers, which could lead to less information about FPIs being available to U.S. investors than in the past. As a result, the SEC is soliciting comments on whether the accommodations afforded to FPIs should continue to apply to foreign issuers that are captured by the current FPI definition or whether the definition should be amended.

Potential Regulatory Responses

The SEC is exploring the following potential changes to the FPI regime:

• Update existing eligibility criteria: Amendments could be made to the existing bifurcated test, such as lowering the 50% threshold of U.S. holders in the shareholder test. The SEC has also proposed revising the business contacts test by adding new criteria or changing the threshold for assets located in the United States;
• Foreign trading volume requirement: FPIs could be required to have a certain percentage of the trading volume of their securities in a market outside the United States. Issuers that have a meaningful amount of their securities traded on a non-U.S. market could be more likely to be subject to home jurisdiction oversight, disclosure and other regulatory requirements that merit accommodation than issuers whose securities are primarily or exclusively traded in the United States;
• Major foreign exchange listing requirement: Adding a requirement that FPIs be listed on a “major foreign exchange” might also help to ensure that FPIs are subject to meaningful regulation and oversight in a foreign market. A foreign exchange could be considered “major” when it meets certain prescribed criteria, such as a threshold of total market size, corporate governance requirements, reporting and other public disclosure requirements and enforcement authority. Exchanges that meet the standards could be automatically deemed “major” or the SEC could require a formal application process for each exchange;
• SEC assessment of foreign regulation: Each FPI could be required to be incorporated or headquartered in a jurisdiction that the SEC has determined to have a robust regulatory and oversight framework and be subject to securities regulations;
• Mutual recognition systems: The SEC could also develop a system of mutual recognition for issuers from selected foreign jurisdictions, similar in concept to the Multijurisdictional Disclosure System (MJDS), which permits eligible U.S. and Canadian issuers to conduct cross-border securities offerings and fulfill their reporting requirements primarily by complying with home jurisdiction securities regulations. While participant jurisdictions would be expected to meet certain standards in their regulatory approaches, the requirements would not need to be exactly the same as the SEC’s requirements for domestic issuers as long as there are comparable protections for U.S. investors; and
• International cooperation arrangement requirement: FPIs could be required to certify that they are either incorporated or headquartered in, and subject to the oversight of the signatory authority of, a jurisdiction in which the foreign securities authority has signed the International Organization of Securities Commissions (“IOSCO”) Multilateral Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information (“MMoU”) or the Enhanced MMoU. IOSCO members that sign the MMoU express their intent to assist other members in enforcement matters, including the sharing of information.

What’s Next?

The purpose of the Concept Release is to obtain input on the issues and potential approaches noted above before the SEC makes decisions regarding possible rulemaking. The SEC has posed a number of questions, including whether: (i) the shift in the characteristics of the FPI population warrants a reassessment of the FPI definition; (ii) alternative approaches or a combination of approaches would best address concerns; and (iii) any potential changes should only apply to new FPIs in order to eliminate transition costs for current FPIs. Following its review and consideration of public feedback, the SEC may propose amendments to the existing rules, which would be subject to an additional comment period.

[1] To determine the percentage of outstanding voting securities held by U.S. residents, an issuer must count securities held by registered and beneficial holders.

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