SEC seeks feedback on defining foreign private issuers

The Securities and Exchange Commission (SEC) recently issued a concept release inviting public feedback on the definition of a foreign private issuer (FPI) and whether it should be revised in light of significant changes in the FPI landscape since 2003. The SEC is welcoming comments from the public for 90 days following the release of the concept document in the Federal Register. Any modifications to the existing rules will necessitate the proposal of new or revised rules by the SEC after considering public input.

The current definition of an FPI entails specific accommodations that distinguish FPIs from domestic issuers. At present, a foreign issuer, excluding a foreign governmental entity, can be classified as an FPI if less than 50% of its outstanding voting securities are held by U.S. residents, or if over 50% of its voting securities are held by U.S. residents, provided certain conditions are not met. These conditions include having most executive officers or directors who are U.S. citizens or residents, possessing more than half of the issuer’s assets in the U.S., or primarily operating the business in the U.S.

SEC Chair Paul Atkins acknowledged that it has been a while since the SEC assessed the characteristics of FPIs. Consequently, a comprehensive analysis was conducted by the SEC staff on the FPIs under the reporting purview of the Securities Exchange Act of 1934 from 2003 to 2023. This review scrutinized various aspects such as jurisdictions of incorporation and headquarters, global market capitalizations, trading volumes, and other factors. The examination uncovered notable shifts in the jurisdictions of incorporation and headquarters of FPIs over the years. While the United Kingdom and Canada were predominant in 2003, the Cayman Islands and China emerged as prominent locations in 2023.

Furthermore, the study indicated that although over 30% of FPIs were incorporated in the Cayman Islands, their aggregate market capitalization represented only around 11.6% of all FPIs. Additionally, the trading of equity securities of FPIs in U.S. capital markets heightened significantly between 2014 and 2023, with approximately 55% of FPIs heavily trading in U.S. markets by 2023.

The SEC expressed concern that the existing regulatory accommodations for FPIs were initially designed based on the assumption that these entities would be subject to stringent disclosure and regulatory standards in their home jurisdictions, which might not be the case for many FPIs currently. Therefore, the SEC is seeking input from the public on potential adjustments to the FPI definition to better align with the evolving landscape. These adjustments could involve modifying the ownership thresholds, implementing foreign trading volume tests, introducing major foreign exchange listing requirements, and demanding adherence to stringent foreign regulations by FPIs.

In conclusion, the SEC’s call for public comments on the definition of FPIs showcases a commitment to enhancing the regulatory framework to accommodate the changing dynamics of FPIs and ensure that the definition remains relevant and effective in today’s global financial environment.