SEC Adopts Rules re Termination of a Foreign Private Issuer’s Registration of a Class of Securities Under the Exchange Act

By Cydney Posner

At an open meeting this morning, the SEC adopted a new rule that will enable a foreign private issuer meeting specified conditions to terminate permanently its Exchange Act registration and reporting obligations under Section 12(g) regarding a class of equity securities and its Section 15(d) reporting obligations regarding a class of equity or debt securities. The SEC also adopted a rule amendment that will apply the exemption from Exchange Act registration under Rule 12g3-2(b) immediately upon the effective date of the issuer's termination of registration and reporting obligations under the new exit rule. The rules were adopted substantially as reproposed in December. Members of the staff commented that they did not expect significant numbers of foreign deregistrations.

Currently, foreign private issuers may deregister only if they have fewer than 300 U.S. shareholders. This rule has come under criticism because it can be difficult to determine the residency of shareholders and whether the threshold has been met. In addition, it has been widely reported that foreign companies have become more reluctant to raise public funds in the U.S. because of the uncertainty of exiting the system. (You may recall former Commissioner Glassman's description of the current system as a "roach motel"; Commissioner Atkins today introduced a new metaphor, a "venus flytrap.") The new rule will allow a foreign private issuer to terminate registration if its U.S. average daily trading volume over a one-year period falls below 5% of its average worldwide daily trading volume, reflecting a change from the December reproposal, which used the issuer's primary market as the benchmark. Issuers may include off-exchange transactions as long as the information is reasonably reliable and not duplicative of on-exchange transactions. The staff believes that this measure of a foreign private issuer's nexus to the U.S. will permit deregistration when interest in the security in the U.S. has waned. Companies that exceed the trading threshold but then delist or terminate a sponsored ADR facility or that conduct a public offering in the U.S. must wait 12 months before they may delist under the rule. In addition, companies seeking to deregister must have been Exchange Act reporting companies for at least one year, must be current in their filings and must have filed at least one annual report.

The SEC also adopted a rule amendment that will apply the Rule 12g3-2(b) exemption from Exchange Act registration immediately upon effectiveness of termination of registration under the new exit rule. Under that exemption, foreign private issuers that have deregistered must maintain a listing on their respective primary markets for the 12 months subsequent to U.S. deregistration and must post on the internet, in English, certain otherwise required disclosure documents to ensure that material information remains accessible.

The new rules will become effective 60 days after publication in the Federal Register, with effectiveness estimated to be some time in June. Foreign private issuers that have terminated listing prior to adoption of the new rule will receive the benefits of a transition rule.

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