What is a Foreign Private Issuer?
If a foreign company wants to sell in U.S. markets, they will usually have to become listed as a public company in the U.S. However, they do have another option: becoming a Foreign Private Issuer (FPI).
This status provides access to U.S. markets without having to become listed. It’s a special status that provides foreign companies with disclosure and reporting benefits.
Read the rest of this article to learn about FPIs and how the process of gaining FPI status works. We’ll look at:
- What criteria FPIs need to meet.
- SEC filing requirements for FPIs.
- Benefits of FPI status.
- Risks involved with FPI status.
- Differences between FPIs and domestic U.S. companies.
- How a lawyer can help you with FPI status.
What Criteria Need to Be Met by FPIs?
An FPI has to meet certain SEC-led criteria in two tests.
Step One: U.S. Shareholder Test
- Are more than 50 percent of the outstanding voting securities of the issuer owned by residents in the U.S.? If the answer is “no,” the company is an FPI. If “yes,” they will have to move onto the next step.
Step Two: U.S. Business Contacts Test
If the answer of the U.S. Shareholder Test is “yes,” the company remains an FPI unless any of the following points apply:
- Most of the issuer’s executive officers or directors are residents/citizens of the U.S.
- Most of the issuer’s assets are based in the U.S.
- The business of the issuer is primarily administered in the U.S.
What SEC Filing Requirements Do FPIs Have?
FPIs will have to file forms with the U.S. Securities and Exchange Commission (SEC) in three situations:
- They’ve registered the ability to sell securities with the SEC.
- They’ve listed securities on a U.S. exchange.
- Within 120 days of a fiscal year where the issuing company owns assets that are worth more than $10 million and equity shares are held by more than 2,000 people.
An exemption is Rule 12g3-2(b). This rule exempts FPIs from having to register securities, provided the securities are mainly traded outside of the U.S.
FPIs need to file certain SEC forms. Here’s a rundown of them and what information they contain.
- Form F-1. This needs to be completed and submitted for initial public offerings (IPOs) of foreign companies in the U.S. It includes information about the business, risk factors, and terms of the securities that are being offered.
- Form 20-F. If an FPI has shares listed on a US exchange, this form needs to be submitted every year. Information that needs to be filled out in the form includes financial statements and other disclosures.
- Form 40-F. This form applies to certain Canadian companies, and it includes financial disclosures and statements.
- Form 6K. This is for periodic or current reports. Whenever an FPI completes a SEC filing, they will have to include this form. It enables U.S. investors to access information about the FPI.
What are Some Benefits of FPI Status?
FPI status has many benefits, such as the following:
- Global market access without the lengthy process involved.
- Ability to maintain governance structures in the foreign country while making use of a pool of U.S. investors.
- GAAP (Generally Accepted Accounting Principle) flexibility. When submitting financial statements to the SEC, a FPI can select the U.S. GAAP, non-U.S. GAAP, or the International Financial Reporting Standards (IFRS).
- Less executive compensation disclosure. FPIs can provide less thorough executive compensation disclosure as compared to the U.S. companies. For example, they don’t have to file a Compensation Discussion and Analysis (CD&A), which outlines how executive pay is determined and matches company performance.
What are the Risks Involved with FPI Status?
Although FPI status has many advantages, there are potential drawbacks and risks. These include the following:
- If the person’s home country has weaker regulatory oversight, this could result in issues with investors. They might wonder about accountability or transparency, which could make them sceptical.
- FPIs are subject to disclosure duties, even if these are considered lighter than what domestic U.S. companies have to fulfil.
- FPI status must be managed actively, so that issuers remain compliant.
- There’s a risk of consequences from lost FPI status, such as more audit and disclosure requirements that could be costly.
What are Differences Between FPIs and Domestic U.S. Companies?
There are some important differences that distinguish FPIs from U.S. companies. These include the following:
- Reporting frequencies. FPIs don’t have to report as frequently as U.S. companies.
- Accounting requirements. FPIs don’t have to file as frequently and within shorter deadlines in the way that U.S. companies have to. They also don’t have to apply GAAP.
- Regulation FD (Fair disclosure). This is something of which FPIs are exempt. Regulation FD prohibits companies from disclosing material selectively, such as to analysts, before they share it with the public.
Do You Need a Lawyer for FPI status?
A lawyer can be highly beneficial when you want to gain FPI status, mainly because the SEC’s rules can be complex. You’ll have to file forms annually and meet specific requirements.
A lawyer can also help you with the following tasks:
- They’ll help you determine if your company qualifies as an FPI.
- They’ll monitor and ensure compliance with all disclosure and reporting rules.
- They’ll check that the board and shareholder structures meet all requirements.
- They’ll avoid costly mistakes, such as regarding SEC filings.
- They’ll draft or review offering documents for U.S. investors.
- They’ll provide ongoing legal guidance.
Where can you find a lawyer for help with FPI?
If you need to hire a lawyer for help with Foreign Private Issuer status, you should consult with a reputable lawyer from ContractsCounsel, an online legal marketplace where clients can find and hire vetted lawyers on the platform.
Select a lawyer for your requirements based on their credentials, years of experience, client ratings, and previous projects completed on the platform.
