The US Securities and Exchange Commission announced yesterday that it will shortly issue proposed new rules making it easier for non-US companies to terminate their securities registrations with the SEC, exit the SEC’s public company reporting regime and quit the US public markets. The proposals would update the SEC’s current, forty-year-old exit rules in order to better accommodate today’s more vibrant international securities markets.
Equity Exits
Under a proposed new Exchange Act Rule 12h-6, an eligible non-US issuer could deregister its equity securities and exit the SEC reporting regime if it can meet one of a set of alternative exit tests. The availability of particular tests would depend on whether or not the issuer was a well-known seasoned issuer (WKSI). A WKSI is, essentially, a large company with an established US public track record.
A WKSI would be able to deregister its equity securities if the US average daily trading volume for those securities has been no greater than 5% of the average daily trading volume for those securities in the WKSI’s primary, non-US trading market, and if US residents held no more than 10% of the worldwide public float for those securities. Alternatively, if US residents held no more than 5% of the worldwide public float for those securities, the WKSI could deregister those securities irrespective of US trading volumes.
Issuers that are not WKSIs could deregister their equity securities if US residents held no more than 5% of the worldwide public float for those securities, regardless of US trading volumes.
To qualify for any of the above tests, an issuer would have to meet three initial conditions. First, the issuer must have been a public reporting company in the US for at least the past two years and must have filed with the SEC at least two US-style annual reports. Second, the issuer must not have sold securities in the US in either a public, SEC-registered offering or in a private, unregistered sale (for example, under Rule 144A) during the past 12 months. Third, the issuer must have maintained for at least the past two years a listing on its home country exchange that constitutes the primary trading market for the equity securities.
Even where an issuer cannot meet one of the proposed new tests for exit, but can meet the initial conditions, it would be able to deregister its equity securities if they were held by fewer than 300 persons worldwide or fewer than 300 persons resident in the US – a test similar to the exit rule that has been in place for the last forty years.
Debt Departures
Rule 12h-6 would make little change to the exit standard for issuers of SEC-registered debt securities. The rule would essentially maintain the current benchmark of fewer than 300 securities holders resident in the US, since such holders are often institutions holding large positions. In addition, the debt issuer would have to have filed with the SEC at least one US-style annual report to qualify for the exit test.
A New Way to Count
The proposed rule would change the method of counting US-resident securities holders – for both equity and debt securities – to make it more workable. A non-US issuer would be able to limit its inquiry into the amount of securities held by US residents to brokers, dealers, banks and other nominees in three locations: the US; the issuer’s own jurisdiction of incorporation; and, if different, the jurisdiction of the issuer’s primary trading market. Currently, a non-US issuer must search worldwide for US resident securities holders.
Also, issuers would be able to rely in good faith on information concerning the number of US-resident holders provided by independent, third-party information vendors, so long as the information vendors ordinarily assist issuers in counting, and collecting other information regarding, their shareholders.
The new proposals would also apply an existing exemption, under Exchange Act Rule 12g3-2(b), to a non-US issuer immediately upon deregistration of its equity securities. Currently, there is a delay in such application, during which time the issuer is susceptible to becoming a US public company again if the number of its US-resident holders increases. Rule 12g3-2(b) allows a non-US issuer to avoid becoming a US public company even if the number of its US-resident holders later reaches or surpasses 300, if the issuer regularly provides the SEC with copies of the public disclosures it makes under its home regulatory regime. The SEC proposes to modify the rule by requiring each exempted non-US issuer to publish this information electronically, in English, on its website or by using an electronic information system that is available to the public in the issuer’s primary trading market.
Checking Out
The SEC calculates that, of the 1,240-odd non-US issuers that have securities registered with the SEC, approximately 50% are eligible to deregister under current exit standards. It expects that under the new proposals that proportion would rise to around two-thirds.
At the open Commission meeting at which the coming proposals were announced, the new SEC Chairman, Christopher Cox, noted that the current exit regime has been likened to the Hotel California in the song of the same name by The Eagles -- a place where “you can check out any time you like, but you can never leave”. The new proposals ought to help overcome some or all of that feeling on the part of non-US companies that look to exit the public securities markets in the US.
Once the proposals themselves are released by the SEC, there will be a 60-day period for public comment, after which the SEC will issue its final rule changes.