A Euromoney Publication IFLR international Financial Law Review
Alexander F Cohen Gay Bronson Securities offerings Bryant Edwards Mark Stegemoeller and listings in the US: an overview for non-US issuers SECURITIES OFFERINGS AND LISTINGS IN THE UNITED STATES: AN OVERVIEW FOR NON-US ISSUERS
Alexander F Cohen Gay Bronson Bryant Edwards Mark Stegemoeller
Latham & Watkins
Alexander F Cohen, Gay Bronson and Bryant Edwards are partners in the London office of Latham & Watkins, and Mark Stegemoeller is a partner in the Los Angeles office of Latham & Watkins LLP. The authors would like to thank the following partners and associates of the firm for their assistance in preparing this Overview and their comments on various drafts: Kirk A Davenport and Adam B Cohen of the New York office (co-authors of the chapter entitled “Required Financial Statement Disclosure”); Olof Clausson, Aino Bunge, Scott Colwell, Michael Dunn, Jonathan Nunes, Ulrik Pedersen, and Jamal Qaimmaqami of the London office; Christopher T Burt of the Los Angeles office; Laurie B Smilan of the Northern Virginia office; and William R Baker, III and Thomas J Kim of the Washington DC office. The authors would also like to thank Ravi Rao, a director in the London office of PricewaterhouseCoopers LLP, for his helpful comments on the chapter entitled “Required Financial Statement Disclosure.” Any errors or omissions are, of course, solely the responsibility of the authors.
Latham & Watkins operates as a limited liability partnership worldwide with affiliates in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership.
© Euromoney Institutional Investor and Latham & Watkins 2003. All rights reserved. All or part of this document has been or may be used in other materials published by the authors or their colleagues at Latham & Watkins and may be updated or changed in other materials. The information contained in this document is published by Latham & Watkins as a service and should not be construed as legal advice. Should further analysis or explanation of the subject matter of this document be required, please contact any of the authors or the Latham & Watkins attorney with whom you normally consult.
www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS About Latham & Watkins Association of Securities Dealers, exchange listings (such as Latham & Watkins is a global law firm with 21 offices New York, American and The Nasdaq Stock Market) and worldwide. The firm, with over 1,500 lawyers, is a leader blue sky work. in corporate finance, capital markets, M&A, project finance and complex business litigation. About the authors Alexander F Cohen is a US securities partner in Latham & Corporate finance practice Watkins’ London office. He has extensive experience in Latham & Watkins’ corporate finance lawyers represent a cross-border equity capital markets, debt capital markets broad range of clients, from emerging companies to major and M&A transactions. He has advised leading European multinational corporations in virtually every industry issuers and major investment banks in complex deals, niche, as well as nearly all major investment and typically involving multiple jurisdictions. He also has commercial banks as underwriters or initial purchasers. significant expertise in sovereign and structured finance. He is an expert on the US Sarbanes-Oxley Act of 2002 The securities and corporate finance practice at Latham & and its implications for non-US issuers. Watkins is one of the most active and highly regarded among international law firms. We have represented Gay Bronson is a US corporate partner in Latham & corporate and partnership issuers, underwriters, placement Watkins’ London office. Ms Bronson practices in the areas agents and initial purchasers in hundreds of offerings of of corporate finance, restructurings, mergers and equity, debt and asset-backed securities in both US and acquisitions and general corporate law. She has extensive international markets. Our lawyers have extensive experience representing underwriters and issuers in public experience in public offerings, Rule 144A and Regulation and private equity and high yield debt offerings, with S private placements, rights offerings, debt/equity swaps, specific expertise in offerings for non-US issuers. In exchange offers, underwritten calls of convertible debt addition, Ms Bronson represents debtors and creditors in securities, interest-rate and currency swaps, and other out-of-court and pre-arranged in-court restructurings. capital-raising and risk-hedging transactions. Bryant Edwards is a partner in Latham & Watkins’ International activities London office and the chair of its 50-lawyer London Our securities expertise includes Regulation S and listings corporate department. His practice includes representing on foreign exchanges. Representing both issuers and companies and investment banking firms in merger and underwriters, our corporate finance lawyers have partic- acquisition transactions and in public and private offerings ipated in numerous offerings on behalf of US and interna- of securities, with a particular emphasis on issuances and tional clients in Europe, Asia and Latin America (including restructurings of debt securities. transactions registered under the securities laws of Japan and Singapore), often in “dual tranche” deals in which Mark Stegemoeller is a partner in Latham & Watkins’ Los securities are sold in contemporaneous offerings in the US Angeles office. He practices corporate law with significant and abroad. Our international practice is supported expertise in corporate finance, mergers and acquisitions through our offices in Brussels, Hamburg, Frankfurt, and securities matters. He has handled a wide variety of London, Hong Kong, Moscow, Milan, Paris, Singapore public and private securities offerings for investment and Tokyo. banking and corporate clients (including registered, Rule 144A, Regulation S and dual currency high yield debt Regulatory expertise offerings, and initial public offerings), as well as restruc- We have significant knowledge in all aspects of regulatory turings, debt tender offers and consent solicitations. He compliance, including SEC registrations, Regulation D, also advises corporate clients concerning compliance with Rule 144A offerings, shelf registrations, trading rules (such registration and reporting provisions of the Securities Act as Regulation M), rules of and reviews by the National of 1933 and the Securities Exchange Act of 1934.
US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com US securities contacts in Latham’s international offices
Frankfurt John Watson [email protected]
Hong Kong John Otoshi [email protected] David Zhang [email protected]
London Gay Bronson [email protected] Olof Clausson [email protected] Alexander F Cohen [email protected] Bryant Edwards [email protected] Michael Immordino [email protected] Bernard Nelson [email protected] Richard Trobman [email protected]
Milan Michael Immordino [email protected]
Moscow Anya Goldin [email protected]
Paris Alexander F Cohen [email protected]
Singapore Mark Nelson [email protected] Michael Sturrock [email protected]
Tokyo David Shapiro [email protected] Mike Yoshii [email protected]
www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS Editor Nigel Savage Production editor Richard Oliver Associate publisher Simon Oliver Publisher Richard Forster Director Christopher Fordham
Image setting and printing by PW Reproprint Ltd, London. This report states the law as at the end of September 2003. It is not a substitute for detailed local advice. It is presented as a special supplement to the October issue of International Financial Law Review © Euromoney Institutional Investor and Latham & Watkins 2003. For additional copies of this supplement and more information on International Financial Law Review, including a sample copy, call Simon Oliver, on Tel: +44 20 7779 8496; Fax: +44 20 7779 8665 or e-mail: [email protected]
US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Table of contents
Chapter 1 – Key statutes and concepts 1 US Securities Act of 1933; US Securities Exchange Act of 1934 1
Registration under the Securities Act and the Exchange Act 1 (i) Securities Act registration 1 (ii) Exchange Act registration 2
Exchange Act reporting 2 (i) Annual report on Form 20-F 2 (ii) Current reports on Form 6-K 2 (iii) Other consequences of Exchange Act reporting 3
Other relevant statutes 3
What is a “foreign private issuer?” 3 (i) Definition 3 (ii) How is ownership determined? 4 (iii) Benefits for foreign private issuers 4
Chapter 2 – The registration process 6 General 6
Key issues to identify in advance of registration 7
Registration forms 9 (i) Form F-1 10 (ii) Forms F-2 and F-3 10 (iii) Form F-4 11 (iv) Form F-6 11
ADRs and ADSs 12
Filing electronically – EDGAR 12
NASD review 13
NYSE and Nasdaq listing requirements 13
Prospectus delivery 14
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Chapter 3 – Key exemptions from Securities Act registration 15 General 15
Regulation S – offshore offerings 15 (i) The issuer safe harbour 16 (ii) The resale safe harbour 18 (iii) Violation of safe harbour conditions 18
Section 4(2) private placements 18
Regulation D private placements 19 (i) Background 19 (ii) Regulation D general conditions 19 (iii) Rule 504 – offers and sales not exceeding $1,000,000 20 (iv) Rule 505 – offers and sales not exceeding $5,000,000 20 (v) Rule 506 – unlimited offering amounts 20 (vi) Rule 508 – deviations from Regulation D 21
Resales of privately-placed securities 21 (i) Rule 144A resales to QIBs 21 1 (ii) “Section 4 (1- /2 )” resales 22 (iii) Rule 144 22
Rule 802 – securities issuances in connection with cross-border exchange offers and business combinations 23 (i) General 23 (ii) Requirements of Rule 802 23
Rule 801 – rights offerings 24 (i) General 24 (ii) Requirements of Rule 801 24
Chapter 4 – Restrictions on publicity during securities offerings 26 Registered transactions 26 (i) The three stages of registration under the Securities Act 26 (ii) Restrictions on publicity during the quiet period 26 (iii) Restrictions on publicity during the waiting period 28 (iv) Restrictions on publicity after effectiveness of the registration statement 28
Restrictions on publicity in unregistered offerings 28 (i) Rule 135c 29 (ii) Rule 135e 29
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Chapter 5 – Required financial statement disclosure 30 General 30
Annual and interim financial statements 31 (i) Audited annual financial statements 31 (ii) Unaudited interim financial statements 33 (iii) Selected financial information; capitalization 34
Reconciliation to US Gaap 34 (i) Annual audited and interim unaudited financial statements 34 (ii) Selected financial information 35 (iii) MD&A 35
Audit reports; currency translation 36 (i) Audit reports 36 (ii) Currency translation 36
Financial statements of recent and probable acquisitions; pro forma financial information 36 (i) General 36 (ii) Financial statement requirements 37 (iii) Operating real estate 39 (iv) MD&A 39 (v) Pro forma financial information 39 (vi) Reconciliation to US Gaap 40
Guarantor financial statements 40
Investments accounted for under the equity method 43
Industry guides and other transaction-specific guidance 44 (i) Industry guides 44 (ii) Supplemental schedules for certain transactions 44
Special requirements for public offerings 45 (i) Item 17 and Item 18 45 (ii) Segment reporting 46 (iii) Coverage ratios 47 (iv) Financial statements for secured offerings 47 (v) Other customary information 47
Summary financial data 47
Recent results 48
Recent developments and proposed acquisitions 48 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS iii Table of contents
Special considerations in unregistered transactions 48
Chapter 6 – The US Sarbanes-Oxley Act of 2002 50 Background 50 (i) Who is subject to Sarbanes-Oxley? 50 (ii) When does Sarbanes-Oxley take effect? 51
Key provisions of Sarbanes-Oxley, and related SEC rulemaking 51 (i) Certification requirements 51 (ii) Management’s reports on internal control over financial reporting 53 (iii) Non-Gaap financial measures 55 (iv) Off-balance sheet and other MD&A disclosure 56 (v) Standards relating to listed company audit committees 57 (vi) Audit committee financial expert 58 (vii) Auditor independence 59 (viii) Improper influence on the conduct of audits 60 (ix) Auditor record retention 61 (x) Material correcting adjustments 61 (xi) Attorney conduct rules 61 (xii) Code of ethics 62 (xiii) Blackout trading restrictions 63 (xiv) Loans to executives 63 (xv) Forfeiture of bonuses 64 (xvi) Research analysts 64 (xvii)Liability issues 65
Chapter 7 – Liability under the US federal securities laws 66 Background 66
Registration – Section 5 of the Securities Act 66
Anti-fraud – what is material? 66
Rule 10b-5 – purchase or sale of securities 67 (i) Background 67 (ii) Elements of a claim under Rule 10b-5 68 (iii) Scope of Rule 10b-5 68 (iv) Insider trading 68 (v) Damages under Rule 10b-5 69
Section 11 of the Securities Act – registered offerings 69
Section 12(a)(2) of the Securities Act – registered offerings 70
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Controlling person liability 70
Liability issues relating to Sarbanes-Oxley 71
Enforcement 71 (i) Background 71 (ii) Enforcement against foreign private issuers and non-US nationals 72
Chapter 8 – Communications with research analysts, investors and the public 73 Background 73
Guidelines for dealing with research analysts and investors 73 (i) Nature of information 73 (ii) “Material” 73 (iii) “Misleading” 73 (iv) Limit access 74 (v) Disseminating materials to analysts and investors 74 (vi) Reviewing draft analysts’ reports; distributing analysts’ reports 74 (vii) Making or commenting on projections 75 (viii) Inadvertent disclosures 76
Special situations 76 (i) Market rumours 76 (ii) Pending acquisitions/corporate transactions 76 (iii) Roadshows 76 (iv) Disclosures to employees 77
US securities laws and the internet 77 (i) Background 77 (ii) Internet offerings 78
Regulation of research analysts 79 (i) Background 79 (ii) NYSE Rule 472 and NASD Rule 2711 79 (iii) Global settlement 83
Chapter 9 – Other relevant statutes 85 US Investment Company Act of 1940 85
US federal tax laws – passive foreign investment companies 85
US state “blue sky” laws 86
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Chapter 10 – Conclusion and contacts 87
Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F 88
Annex B – NYSE and Nasdaq quantitative listing criteria 129
NYSE quantitative listing standards 129 (i) Minimum numerical listing standards — domestic issuers 129 (ii) Minimum numerical listing standards — foreign private issuers 129
Nasdaq quantitative listing requirements 130 (i) Basic Nasdaq inclusion criteria 130 (ii) NNM 130 (iii) SCM quantitative criteria 131
Annex C – Effective dates for certain Sarbanes-Oxley sections and related SEC rulemaking 132
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This Overview summarizes the key provisions of the US federal securities laws that apply to foreign private issuers (a term that covers most non-US issuers, other than foreign governments) when they offer securities for sale in the United States or list their securities for trading or quotation on the US stock markets.1
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US Securities Act of 1933; US As we discuss in more detail below, registered Securities Exchange Act of 1934 transactions involve filing a registration statement with the SEC and meeting detailed and specific disclosure The two principal federal securities statutes in the United and financial statement requirements. In addition, States are the US Securities Act of 1933 (the Securities registered transactions trigger the wide-ranging Act) and the US Securities Exchange Act of 1934 (the provisions of the US Sarbanes-Oxley Act of 2002 (the Exchange Act). To simplify considerably, the Securities Sarbanes-Oxley Act or Sarbanes-Oxley) and a compre- Act governs the offer and sale of securities in the United hensive liability scheme. States, while the Exchange Act regulates the trading of securities on a US national securities exchange such as the By contrast, the requirements of unregistered New York Stock Exchange (the NYSE) or the Nasdaq transactions are generally less demanding. A foreign Stock Market (Nasdaq), ongoing periodic and annual private issuer will not typically become subject to reporting, and tender and exchange offers. Sarbanes-Oxley merely by issuing securities in an unregistered transaction, and the liability regime The US Securities and Exchange Commission (the governing unregistered transactions is more circum- SEC) has issued a comprehensive body of rules and scribed. Foreign private issuers contemplating an regulations under the Securities Act and the Exchange unregistered transaction look to exemptions such as: Act. These rules have the force of law. • Offshore transactions: offers and sales made outside Registration under the Securities of the United States pursuant to Regulation S under Act and the Exchange Act the Securities Act (Regulation S);
Registration is a core concept in the US federal • Private placements: offers and sales not involving a securities laws. The Securities Act requires issuers to public offering pursuant to Section 4(2) of the register transactions. By contrast, the Exchange Act Securities Act or Regulation D under the Securities requires issuers to register classes of securities. Act (Regulation D); and
(i) Securities Act registration • Rule 144A transactions: private placements involving The Securities Act requires registration with the SEC of resales to qualified institutional buyers (QIBs) any transaction involving the offer or sale of a security, pursuant to Securities Act Rule 144A. unless the security is of a type that is exempt from registration or the transaction is structured to take The decision whether to issue in a registered or advantage of an available exemption from registration. unregistered transaction involves balancing business and The terms “offer and sale” and “security” are very legal objectives. Broadly speaking, registered broadly defined. transactions are more complex and time-consuming. www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 1 Chapter 1 – Key statutes and concepts
But not all securities issuances can take the form of an the SEC. unregistered transaction. If a foreign private issuer wishes to list its securities in the United States, or to Exchange Act reporting make a public offering of securities to retail investors in the United States, the transaction will have to be Once a foreign private issuer has registered with the registered. SEC under the Securities Act or the Exchange Act, it must make certain filings and submissions to the SEC (ii) Exchange Act registration under the Exchange Act.7 Reporting foreign private A foreign private issuer must register a class of securities issuers also become subject to various other provisions under the Exchange Act if that class will be listed on a of the US federal securities laws. US national securities exchange (such as the NYSE or American Stock Exchange) or quoted on Nasdaq.2 In (i) Annual report on Form 20-F addition, if a foreign private issuer has assets in excess of A reporting foreign private issuer must file an annual $10 million3 and a class of equity securities held by at report on Form 20-F with the SEC within six months least 500 shareholders (of whom at least 300 are resident after the end of its fiscal year.8 Form 20-F contains in the United States) it must register those securities,4 detailed financial and non-financial disclosure unless it can claim the benefit of the exemption from requirements. We include a checklist for non-financial registration provided by Exchange Act Rule 12g3-2(b). disclosure items in Annex A.
In order to qualify for the Rule 12g3-2(b) exemption, a foreign private issuer must first submit an application to Practice point: the SEC. Then, on an ongoing basis, the foreign private Annual reports on Form 20-F must be certified by an issuer must furnish to the SEC certain material issuer’s chief executive officer (CEO) and chief finan- information (such as information regarding the issuer’s cial officer (CFO) under Sections 302 and 906 of financial condition, changes in business and Sarbanes-Oxley. management, acquisitions or disposition of assets, issuances of securities, and transactions with (ii) Current reports on Form 6-K management or principal security holders)5 that:6 A reporting foreign private issuer must submit current reports to the SEC on Form 6-K.9 Form 6-K reports • it has made or is required to make public pursuant to must contain all material information that the issuer: the law of the country of its domicile or in which it is incorporated or organized; • makes or is required to make public pursuant to the laws of its country of incorporation or organization; • it has filed or is required to file with a stock exchange on which its securities are traded and that was made • files or is required to file with a stock exchange on public by that exchange; or which its securities are traded and which was made public by that exchange; or • it has distributed or is required to distribute to its security holders. • distributes or is required to distribute to its security holders.10 The Rule 12g3-2(b) exemption is not available under certain circumstances. For example, an issuer may not claim the exemption if, during the prior 18 months, it had securities registered under the Exchange Act or otherwise had an obligation to file periodic reports with
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Other relevant statutes Practice point: Failure to submit Form 6-Ks when required will pre- In addition to the Securities Act and the Exchange Act, vent a foreign private issuer from using Form F-2 or a foreign private issuer may trigger a number of other Form F-3, the “short form” Securities Act registration statutes when it issues securities in the United States, statements. As a result, foreign private issuers should including: take care to submit Form 6-Ks on a timely basis. • the Sarbanes-Oxley Act, which represents the most comprehensive restructuring of the regulatory system Practice point: governing the US capital markets since the enactment Form 6-K submissions do not need to be certified by of the Exchange Act in 1934; an issuer’s CEO and CFO under Sections 302 and 906 of Sarbanes-Oxley.11 • the US Investment Company Act of 1940 (the Investment Company Act), which regulates offers and sales of securities by investment companies. (iii) Other consequences of Exchange Some foreign private issuers may be “investment Act reporting companies” within the meaning of the Investment A reporting foreign private issuer becomes subject to a Company Act even though their primary activities variety of other provisions of the US federal securities are not investment related; laws, including: • US federal tax laws, which impose particular tax • Books and records; internal accounting controls:12 A treatment on securities of passive foreign investment reporting issuer must maintain and keep books, companies (PFICs) within the meaning of the US records and accounts that accurately and fairly reflect Internal Revenue Code (the Code). Certain foreign the transactions and dispositions of assets of the issuer, private issuers may be PFICs despite their operational and design and maintain a system of adequate internal activities; and accounting controls. • the US Trust Indenture Act of 1939, which requires • Limitations on payments to foreign officials:13 A that indentures used for public offerings of debt reporting issuer may not make corrupt payments to securities in the United States meet various foreign officials, foreign political parties or their substantive and procedural requirements. intermediaries. What is a foreign private issuer? • Audit requirements:14 A reporting issuer’s audit must include procedures for the detection of illegal acts, (i) Definition and the issuer’s auditors are required to take certain A “foreign private issuer” means any issuer (other than steps if illegal acts are found. Those steps include a foreign government) incorporated or organized under informing the issuer’s management and audit the laws of a jurisdiction outside of the United States committee, and potentially include a requirement to unless:16 resign from the engagement or notify the SEC (if the issuer’s board fails to take certain steps). • more than 50% of its outstanding voting securities are directly or indirectly owned of record by US • Sarbanes-Oxley:15 A reporting issuer is subject to the residents; and provisions of the Sarbanes-Oxley Act.
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• any of the following applies: These include the following:
- the majority of its executive officers or directors • Quarterly reports: Unlike domestic US issuers, are US citizens or residents; foreign private issuers are not required to file quarterly reports (including quarterly financial information) - more than 50% of its assets are located in the with the SEC.22 Some foreign private issuers, United States; or however, choose (or are required by contract) to file the same forms with the SEC that domestic US issuers - its business is administered principally in the use. In that case, they must report quarterly as if they United States. were a domestic US issuer.23
(ii) How is ownership determined? • SEC staff policy on confidential submissions: Foreign Generally, an issuer may rely upon a review of the private issuers that are registering for the first time addresses of its security holders in its records in with the SEC may generally submit registration determining whether or not it is a foreign private statements on a confidential basis to the SEC staff. By issuer.17 However, securities held of record by a broker, contrast, domestic US companies must file their dealer, or bank (or nominee for any of them) for the registration statements publicly. Confidential accounts of customers resident in the United States will submissions can be a significant advantage because be counted as held in the United States by the number the procedure allows the complicated issues often of separate accounts for which the securities are held.18 encountered in an initial SEC review to be resolved The issuer may rely in good faith on information as to behind closed doors. A foreign private issuer will still the number of these separate accounts supplied by be required to file its registration statement publicly brokers, dealers, banks or nominees.19 prior to going on a road show or selling its securities (and will have to file any future registration An issuer’s inquiry as to ownership of its securities by US statements publicly). residents may be limited to those brokers, dealers and banks (and other nominees) that are record holders of the issuer’s securities and that are located in (i) the United Practice point: States, (ii) the issuer’s jurisdiction of incorporation, and Previously, the SEC staff was willing to review draft (iii) the jurisdiction of the issuer’s primary trading market registration statements of all foreign private issuers on for its voting securities.20 If, after reasonable inquiry, the a confidential basis. The SEC has changed its policy issuer is unable to obtain information about the amount on confidential review, and will now generally only of securities represented by accounts of customers accept confidential submissions of draft registration resident in the United States, it may assume that these statements by first-time foreign registrants. customers are residents of the jurisdiction in which it has its principal place of business.21 • Proxy rules: The US proxy rules – which specify the (iii) Benefits for foreign private issuers procedures and required documentation for soliciting Under the US federal securities laws and the SEC’s rules shareholder votes – are not applicable to foreign and practice, foreign private issuers are not regulated in private issuers.24 precisely the same way as domestic US issuers. In particular, foreign private issuers are allowed a number of key benefits not available to domestic US issuers.
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• Regulation FD: Regulation FD (fair disclosure) • Accelerated filing: Under the accelerated filing rules requires issuers to make public disclosure of any adopted by the SEC in 2002, seasoned domestic US material non-public information that has been filers will eventually be required to file annual reports selectively disclosed to securities industry profes- 60 days after the end of their fiscal year.29 Foreign sionals (for example, analysts) or shareholders.25 The private issuers are not subject to accelerated filing, Regulation provides that when a domestic US issuer, and accordingly may file annual reports report within or someone acting on its behalf, discloses material six months of the end of their fiscal year.30 A foreign non-public information to certain persons (including private issuer that chooses, however, to file the same analysts, other securities market professionals and forms with the SEC that are required for domestic holders of the issuer’s securities who could reasonably US issuers will be subject to accelerated filing.31 be expected to trade on the basis of the information), it must make simultaneous public disclosure of that • Sarbanes-Oxley Act exemptions: Although the information (in the case of intentional disclosure) or Sarbanes-Oxley Act generally does not distinguish prompt public disclosure (in the case of non- between domestic US issuers and foreign private intentional disclosure).26 issuers, the SEC has adopted a number of significant exemptions for the benefit of foreign private issuers Foreign private issuers are expressly exempt from in its rules under the Sarbanes-Oxley Act. These Regulation FD.27 But foreign private issuers that file exemptions cover areas such as: (i) audit committee reports with the SEC typically consider complying with independence; (ii) black-out trading restrictions Regulation FD (at least in part), particularly since the (Regulation BTR); (iii) use of non-Gaap financial restrictions in their home jurisdictions in many cases measures (Regulation G); and (iv) certification of overlap with Regulation FD’s requirements. interim reports.
Practice point: Regardless of the exemption from Regulation FD, foreign private issuers remain exposed to potential lia- bility from selective disclosure, for example from “tipping” securities analysts or selected shareholders.
• Beneficial ownership reporting; short-swing profit recapture rules: Under Section 16(a) of the Exchange Act, anyone who owns more than 10% of any class of equity security registered under the Exchange Act, or who is an officer or director of an issuer of such a security, must file a statement of beneficial ownership with, and report changes in beneficial ownership to, the SEC. Similarly, Section 16(b) requires any such shareholder, officer or director to disgorge to the issuer profits realized on purchases and sales within any period of less than six months. Securities of foreign private issuers are exempt from Section 16.28
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General When the issuer initially submits the registration statement to the SEC, the registration statement is A foreign private issuer commences the registration assigned to an examiner and a member of the SEC’s process by submitting a registration statement on the accounting staff for review. The examiner will be the applicable form to the SEC staff. The SEC staff may issuer’s primary contact at the SEC in connection with then elect to review the registration statement. They the comment process. will almost always review the registration statement of an issuer that does not already file reports with the SEC The examiner will provide comments regarding and they will review all initial public offerings (IPOs). compliance with prescribed disclosure requirements and will often: (i) make requests for additional, clearer or more concise disclosure; (ii) provide comments relating Practice point: to the SEC’s “Plain English” rules, which took effect in Registration statements are not considered “filed” until October 1998;32 and (iii) seek supplemental information they are publicly filed. In the case of registration to document and supports statistics and claims contained statements submitted for confidential review, public in the registration statement relating to market data and filing generally occurs after the SEC staff has given its the issuer’s competitive position. comments on the confidential filing and the issuer has substantially resolved the SEC’s comments. The SEC’s accounting staff will comment on the financial statements and other financial information required by or included in the registration statement. The SEC staff will typically provide its first comments The accounting staff generally provides wide-ranging within 30 days of submission or filing. The length of comments on many aspects of the issuer’s financial time of the registration process will depend on the disclosure, particularly with respect to: nature of the SEC’s comments, particularly on the financial statements, and on the staff’s workload. • the accounting treatment of acquisitions and internal restructurings;
Practice point: • inclusion of historical financial statements of acquired The time required to complete the registration companies, guarantors and entities in which the issuer process leads many issuers to structure transactions as has a minority investment; private offerings under Rule 144A (for securities sold in the United States) and Regulation S (for securities sold • reconciliation to US Gaap by issuers with audited outside the United States). This approach generally financial statements prepared under other accounting allows much faster access to the capital markets. standards;
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• accounting for contingencies and the establishment Key issues to identify in advance of of reserves; registration
• disclosures concerning market risk exposure (interest Any issuer considering a public offering in the United rates, currencies, commodities) and hedging States, a private offering with US registration rights or a transactions; listing in the United States is strongly advised to consult with its auditors’ SEC specialists well in advance of the • disclosure of off-balance sheet arrangements; first submission to the SEC to assure that the required financial statements are available and complete. The • the appropriateness of adjustments in pro forma availability of required financial statements is very financial information; frequently a critical path that can significantly affect the timing of an offering. • compliance with the newly adopted conditions for use (and prohibitions on the use) of non-Gaap An issuer will also need to develop appropriate financial measures; disclosure for a Management’s Discussion and Analysis (MD&A) section discussing its financial results in • revenue recognition; and detail.33 The SEC places great importance on MD&A and has taken steps to require issuers to make signifi- • accounting for stock options, particularly those cantly expanded MD&A disclosure. In particular, granted less than one year prior to an equity offering. pursuant to Section 401(a) of the Sarbanes-Oxley Act, the SEC has adopted new rules requiring disclosure of off-balance sheet arrangements and certain contractual Practice point: obligations.34 The rules build on an SEC interpretive The SEC’s review of accounting disclosures has release regarding three areas of MD&A: (i) liquidity and become more rigorous and time-consuming in the capital resources, including off-balance sheet wake of Sarbanes-Oxley. arrangements; (ii) certain trading activities involving non-exchange traded contracts accounted for at fair After the issuer has resolved all issues raised in the SEC’s value; and (iii) relationships and transactions with comment letters, the SEC will declare the registration persons that derive benefits from their non-independent statement effective at a time jointly determined by the relationship with issuers or parties related to the issuer.35 issuer and the underwriters. Immediately after In addition, the SEC has proposed rules requiring effectiveness, underwriters typically confirm orders significant additional disclosure of an issuer’s critical orally, with written confirmation mailed promptly accounting policies.36 thereafter along with the final prospectus. Note that orders cannot be confirmed until the registration A first-time issuer must also compile significant amounts statement has been declared effective. of non-accounting data about its business and markets, its strategy and the regulatory environment in which it operates, and must distill this information into a clear and understandable prospectus and thoroughly check the disclosure for accuracy before submitting the registration statement to the SEC. First-time issuers will also become subject to Sarbanes-Oxley’s wide-ranging requirements.
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Prospective underwriters and counsel can assist the • If the issuer is offering debt securities, will they be issuer in assembling this information and an assortment secured by a pledge of the capital stock or inter- of disclosure documents from comparable issuers, but company debt of any related company? A pledgor the process of preparing for a first-time registration often often must file separate financial statements for the takes several months. company that issued the pledged securities.
Additional important issues to address in advance of any • SEC registration requires many material contracts to be offering include the following: filed as exhibits (subject, under certain circumstances, to confidential treatment of designated portions). Does • A foreign private issuer can submit financial the issuer have any material contracts that contain statements prepared in accordance with home- commercially sensitive information, or that are subject country Gaap (local Gaap) or International to confidentiality agreements that would be violated if Accounting Standards (IAS), in either case with a they were filed publicly? Note that under the SEC reconciliation to US Gaap. What are the significant rules mandating electronic filing by all foreign private differences between local Gaap or IAS and US Gaap? issuers documents (including material contracts) How long will reconciliation take? generally have to be submitted in English. Does the issuer have any material contracts that must be • Have all required audits been conducted in translated into English? accordance with US generally-accepted auditing standards (US Gaas)? The SEC requires all financial • Does the issuer have a significant minority investment statements to be audited in accordance with US Gaas, in any other entity or any 50/50 joint venture? even in the case of an issuer using local Gaap or IAS. Separate financial statements may be required for such an entity and the issuer may not have access to these • Does the issuer have the corporate governance statements or to such entity’s auditors. procedures and mechanisms in place to comply with Sarbanes-Oxley’s requirements (for example, • Does the issuer manage its business in separate management certifications, disclosure controls and segments and, if so, are the issuer’s internal accounts procedures, and appropriate audit committee sufficient to prepare financial statements that meet functions)? Note that a first-time issuer that is not the SEC’s segment reporting requirements? already an SEC reporting company becomes subject to Sarbanes-Oxley upon the initial public filing of its • Are the auditors of every set of required financial registration statement, even before the SEC declares statements prepared and qualified to have their audits that registration statement effective. used in a US securities offering and filed with the SEC? If not, re-audits may be necessary. • Has the issuer completed any significant acquisitions or dispositions during the three full financial years or any • Has the issuer granted stock options within the year subsequent interim period preceding the date of the prior to an equity offering? If so, the difference offering? Separate subsidiary financial statements and between the exercise price and the offering price pro forma financial information may be required. could constitute compensation expense that could reduce net income under US Gaap. • Guarantees in respect of a security are considered to be separate securities under the US federal securities • The SEC requires issuers in certain types of industries laws that must be registered, sometimes with separate (such as banking and oil and gas) to provide detailed and audited guarantor financial statements. Will the specific disclosure on various matters. Will the issuer be issuer’s securities be guaranteed by any company? able to assemble and develop the required information?
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• Is there a possibility that the issuer will wish to pursue Registration forms an unregistered transaction instead of the public offering? Based on Securities Act Rule 155, an issuer The SEC has specific forms for the registration of securities is permitted to conduct a private placement 30 days under both the Securities Act and the Exchange Act. after withdrawing a public offering.37 Rule 155 gives Forms not only contain their own disclosure requirements, general guidance that 30 days is an appropriate quiet but also specify certain items that must be disclosed under period in advance of a private placement.38 Securities Act Regulation S-K (for textual disclosure requirements) (S-K) and under Securities Act Regulation S-X (S-X), which governs financial statements. The primary forms for foreign private issuers are:
SEC registration forms Description
Securities Act forms
Form F-1 The form for first-time issuers and all other issuers who are not eligible for Form F- 2 or F-3.
Form F-2 A “short form” available to seasoned issuers who do not necessarily meet the public float requirements of Form F-3. Issuers may incorporate by reference information contained in filings made under the Exchange Act, such as an annual report on Form 20-F, as long as copies of any information so incorporated are delivered with the prospectus.
Form F-3 A “short form” available for investment grade debt and to seasoned issuers with a public float (shares owned by non-affiliates) of at least $75 million. Issuers may incorporate by reference information contained in filings made under the Exchange Act, such as an annual report on Form 20-F.
Form F-4 The form for business combinations and exchange offers.
Form F-6 The form for American Depositary Shares (ADSs) evidenced by American Depositary Receipts (ADRs).
Form S-8 The form for registering securities issued to employees under an employment benefit plan, and interests in such plans.
Exchange Act forms
Form 20-F The form for registering outstanding securities that will be listed on the NYSE or quoted on Nasdaq, and for annual reports.
Form 8-A A “short-form” available for registering newly issued securities that will be listed on the NYSE or quoted on Nasdaq in connection with a concurrent public offering in the United States. Form 8-A is used in conjunction with the applicable Securities Act registration form. www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 9 Chapter 2– The registration process
The central form for foreign private issuers is Form 20- • been subject to the reporting requirements of the F. Form 20-F sets out the required disclosure for US Exchange Act and filed all required materials on a listings and annual reports by foreign private issuers. In timely basis for at least 12 months prior to the filing addition, the registration forms for public securities of the registration statement; and offerings refer extensively to Form 20-F. • had no material default on loans or long-term leases For both the Securities Act and the Exchange Act, the or failure to pay a sinking fund installment or relevant forms typically prescribe broad categories of dividend on preferred stock since the end of the last information, rather than specific disclosures. In the case financial year covered by audited financial statements of a Securities Act registration form, the registration in its Exchange Act reports, and no subsidiary of the statement includes a prospectus containing prescribed issuer has had such a default. categories of financial and non-financial disclosure, as well as additional information not included in the If an issuer is F-3 eligible, it may use Form F-3 for the prospectus, including exhibits (such as corporate following transactions:40 documents and material contracts). The registration statement, prospectus and annual report must contain a • offerings by the issuer of non-convertible investment basic package of financial statements and other financial grade securities; information to illustrate the financial condition and results of operations of the issuer. • offerings of securities by the issuer (other than non- convertible investment grade debt securities) for cash A checklist showing the non-financial information if the aggregate market value worldwide of the required by Forms F-1, F-2, F-3 and 20-F is attached as issuer’s common equity held by non-affiliates is at Annex A. Financial statement requirements are least $75 million; discussed in “Required Financial Statement Disclosure,” below. • secondary offerings of securities by holders of the issuer’s securities (often pursuant to a registration (i) Form F-1 rights agreement); and Form F-1 is the Securities Act form for any securities of a foreign private issuer that is a first-time SEC registrant • offerings of securities by the issuer upon exercise of or for which no other form is authorized or prescribed. certain outstanding transferable warrants, upon It requires the issuer to include all required information exercise of rights granted pro rata by the issuer to in the prospectus itself (rather than to incorporate that existing holders of the class offered, pursuant to a information by reference from Exchange Act filings), and dividend or interest reinvestment plan, or upon is therefore typically a lengthy document. conversion of outstanding convertible securities.
(ii) Forms F-2 and F-3 Form F-2 may be used by an issuer that has had (and Form F-3 has both issuer and transaction requirements. whose subsidiaries have had) no material defaults since It is available to a foreign private issuer that has:39 the end of the last financial year and either has a longer history (36 months of Exchange Act reporting) than an • securities registered under the Exchange Act or is F-3 issuer or meets the $75 million public float required to file reports with the SEC under Section requirement of Form F-3.41 Form F-2 (but not Form 15(d) of the Exchange Act (by virtue of having F-3) requires the issuer to deliver a copy of the issuer’s registered an offering under the Securities Act); incorporated Exchange Act filings with the prospectus. • filed at least one annual report on Form 20-F;
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(iii) Form F-4 Practice point: Form F-4 is available to register securities issued in An important advantage of Forms F-2 and F-3 over connection with business combinations and exchange Form F-1 is that a significant portion of the required offers. Form F-4 requires information concerning:43 information may be incorporated by reference into Forms F-2 and F-3 from the issuer’s most recent • the relevant transaction, including pro forma financial annual report on Form 20-F and its other Exchange information for an acquisition or, as applicable, the Act filings (although use of Form F-2 requires delivery terms of the exchange; of copies of any information that is so incorporated). Form F-3 also contemplates incorporation of subse- • the issuer, its business and the risks associated with the quent Exchange Act reports, which allows F-3 issuers relevant investment, consistent with the disclosure to file a shelf registration statement and offer securities required by Forms F-1, F-2 or F-3 (issuers eligible to on a delayed or continuous basis.42 Even though an use Forms F-2 and F-3 may incorporate by reference F-2 or F-3 issuer is permitted to incorporate by refer- in Form F-4 to the same extent as permitted by those ence, in most underwritten deals the underwriters forms); and will require the issuer to include in the prospectus some information regarding its business, strategy and • for acquisitions, the company being acquired, other matters they consider necessary to market the including most of the same business and financial offering effectively. information that is required for a similarly situated issuer (if the company to be acquired already files reports with the SEC, the necessary information may Practice point: be incorporated by reference in certain circumstances). Foreign private issuers considering use of Form F-2 or Form F-3 should pay particular attention to timely submissions of current reports on Exchange Act Form Practice point: 6-K. Form F-4 is the applicable form for foreign private issuers who are offering new securities for outstand- ing securities, including those who have sold debt or Practice point: certain preferred stock under Rule 144A and Form 20-F – from which much of the disclosure in Regulation S in a private placement that is being Form F-3 and Form F-2 derives – has alternative exchanged for identical, SEC-registered debt or pre- financial statement requirements for Exchange Act ferred securities. This technique, known as the A/B periodic reports and Securities Act registration state- exchange offer, is a commonly used financing struc- ments, with the latter more extensive. An issuer ture. It allows issuers and underwriters to access the seeking to incorporate by reference using Form F-3 fixed income markets quickly through a private place- or F-2 must generally meet the more stringent Item ment while achieving public market pricing (that is, 18 standard in its Exchange Act reports. without liquidity discounts) because of the A/B exchange offer.
(iv) Form F-6 Form F-6 is a separate, additional form filed by a depositary bank to register ADSs evidenced by ADRs, the form in which equity interests in foreign private issuers are frequently held and traded in the United States. Form F-6 may only be used if:44 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 11 Chapter 2– The registration process
• the deposited shares have been offered or sold in the United States, the issuer must either register the transactions registered under the Securities Act or underlying class of shares with the SEC under the exempt from registration; Exchange Act or claim the benefit of the Rule 12g3- 2(b) exemption. If, however, the issuer desires to have • the foreign private issuer files periodic reports with its ADRs listed on a US national securities exchange or the SEC or is exempt from those filing requirements quoted on Nasdaq, Rule 12g3-2(b) is not available and pursuant to Rule 12g3-2(b); and accordingly the issuer must register the shares under the Exchange Act. • the holder of ADRs is entitled to withdraw the deposited securities at any time, subject only to The depositary receives fees for transactions in the temporary delays for specified, limited reasons. underlying shares, such as withdrawals from or deposits into the ADR facility and currency exchanges in ADRs and ADSs connection with dividends.
Many foreign private issuers sell equity securities into the United States through the use of ADRs evidencing Practice point: ADSs. ADRs are issued by a depositary, usually a large Depositaries often compete intensively to manage a multinational bank, and represent a specified number of new issuer’s ADR programme, and multiple bids are the issuer’s underlying equity securities held by the usually considered, with fees often paid by the suc- depositary or its custodian. Although ADR holders cessful depositary to the issuer. have essentially the same ultimate rights as holders of the underlying securities and can always, with limited exceptions, exchange their ADRs for the underlying Filing electronically – EDGAR securities, ADR programmes have certain advantages for issuers and holders (such as denomination in US Since November 4 2002, the SEC has required foreign dollars). private issuers to use the SEC’s Electronic Data Gathering and Retrieval (EDGAR) system for nearly all The SEC considers ADRs to be separate securities from SEC filings.45 Previously, only domestic US issuers were the underlying shares they represent. The issuer must required to file documents through EDGAR. register the offering of the underlying shares on the applicable form. Issuances of ADRs in connection with As a result, documents such as registration statements for a US public offering of the underlying shares by the offerings of securities, annual reports on Form 20-F and issuer are known as Level III ADR programmes; most current reports on Form 6-K must be filed issuances of ADRs in connection with listing or quoting electronically.46 In addition, all exhibits and attachments existing shares in the United States are known as Level to SEC filings (such as material contracts) must be filed II ADR programmes; and issuances of ADRs electronically, except for exhibits and attachments representing existing shares that are traded only over- previously filed in paper form, which may generally be the-counter in the United States are known as Level I incorporated in an EDGAR filing by reference.47 ADR programmes. ADR depositaries may establish ADR programmes to facilitate secondary trading in a There are only limited exceptions to the requirement to foreign private issuer’s previously issued shares either file electronically. These include: with the issuer’s participation (a sponsored programme) or, less commonly, without the issuer’s participation (an • a foreign private issuer’s annual report to the holders unsponsored programme). In either case, assuming the of its securities submitted on Form 6-K;48 ADR programme results in more than 300 holders in
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• a report or other document submitted on Form 6-K review will primarily focus on any pre-existing that the issuer is required to furnish and make public relationships between the underwriters and the issuer under the laws of its home country or the issuer’s and whether the underwriters’ proposed compensation home country exchange, that (i) is not a press release, is fair and not excessive (from the issuer’s perspective). (ii) is not required to be and has not been distributed The NASD compensation review will look at the to the holders of the foreign private issuer’s securities, underwriting commission to be paid in connection with and (iii) if discussing a material event, has already the offering as well as any other compensation received been the subject of a Form 6-K filing or other SEC by the underwriters from the issuer and any of its filing via EDGAR;49 and affiliates in any capacity. The NASD will also review the terms of any securities transactions (including • material submitted under Rule 12g3-2(b).50 purchases of equity and warrants) between the underwriters and their affiliates and the issuer and its As a general matter, all filings in EDGAR must be made affiliates. The SEC will not declare a registration in the English language.51 Non-English documents statement effective until the NASD has formally cleared must be fairly and accurately translated into English for the underwriting arrangements. filing in accordance with the SEC’s rules on foreign- language documents,52 including most documents NYSE and Nasdaq listing submitted to the SEC under cover of Form 6-K.53 requirements Alternatively, a summary of certain documents filed with the SEC as exhibits may be provided,54 although In order to be eligible for listing on the NYSE or for the SEC’s rules require specified significant documents quotation on Nasdaq, a foreign private issuer must meet (for example, articles of incorporation, instruments certain quantitative listing requirements and corporate defining the rights of security holders and contracts on governance standards. Once listed, foreign private which an issuer’s business is substantially dependent) to issuers must meet certain requirements relating to be provided in full translation.55 Similarly, certain ongoing shareholder communication and disclosure. documents provided to the SEC on Form 6-K may be We summarize the quantitative NYSE and Nasdaq provided in English summary, including a report listing criteria in Annex B below. required to be furnished and made public under the laws of the issuer’s home country or the rules of the issuer’s NYSE and Nasdaq have proposed wide-ranging home country stock exchange, as long as it is not a press changes in corporate governance requirements for listed release and is not required to be and has not been companies (certain of which have been approved by the distributed to the issuer’s security holders.56 Any SEC) in response to recent corporate scandals and permitted summary must fairly and accurately Sarbanes-Oxley. The proposals include, among other summarize the terms of each material provision of the things, heightened requirements of independence for original text and fairly and accurately describe the terms board and audit committee members and enhanced that have been omitted or abridged.57 audit committee powers and functions. However, both the NYSE and Nasdaq have provided foreign private NASD review issuers with certain exemptions to the proposed requirements, to the extent consistent with Sarbanes- Underwritten public offerings in the United States are, Oxley’s requirements: in most cases, subject to the review and approval of the National Association of Securities Dealers, Inc. (the • Under the NYSE proposals, foreign private issuers NASD), a self-regulatory organization that, among may follow home-country practice in lieu of certain other things, monitors the terms of public offerings of the new corporate governance requirements, but underwritten by US investment banks. The NASD must publicly disclose any significant ways in which www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 13 Chapter 2– The registration process
their home-country practices differ from those followed by domestic US companies under NYSE listing standards.58
• Under Nasdaq’s current listing rules, foreign private issuers may obtain exemptions from corporate governance standards if those rules would require the issuer to act contrary to applicable laws, rules, regulations, or generally accepted business practices of the issuer’s home country.59 Nasdaq’s corporate governance proposals provide that a foreign private issuer must disclose these exemptions. Prospectus delivery
Following effectiveness of the registration statement, and generally for 40 days thereafter,60 dealers may sell the registered securities only if the confirmation of any sale is accompanied or preceded by the final prospectus included in the registration statement.61 However:
• the prospectus delivery period is 25 days if the issuer is a first-time registrant, and the securities offered are listed or quoted in the United States;62
• the prospectus delivery period is 90 days in all other initial public offerings;63 and
• there is no requirement to deliver a prospectus if the issuer was already a reporting company under the Exchange Act immediately before the registration statement was filed.64
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General resale exemption. Under Regulation S, unregistered offers and sales may generally be made if (i) the offer or As discussed above, the process of registering a securities sale is made in an offshore transaction; and (ii) there are transaction requires a foreign private issuer to meet no directed selling efforts in the United States.65 We specific disclosure and financial statement requirements refer to these as the “Regulation S General and to undergo the SEC review process. By contrast, Conditions.” unregistered transactions are typically less complex and time-consuming to execute. Many foreign private An offshore transaction is defined as an offer which is issuers accordingly choose to structure securities not made to a person in the United States, and either: offerings in the United States to take advantage of available exemptions from registration. • at the time the buy order is originated, the buyer is outside the United States or the seller (and any person acting on the seller’s behalf) reasonably Practice point: believes that the buyer is outside of the United States; Unregistered transactions do not require the filing of a registration statement and generally do not turn the • for purposes of the issuer safe harbour, the transaction issuer into a reporting company that is required to file is executed in, on or through the physical trading annual reports with the SEC. A key attraction of these floor of an established foreign securities exchange transactions for a foreign private issuer is that it can located outside of the United States; or include its financial statements under local Gaap (or international accounting standards) and need not pro- • for purposes of the resale safe harbour, the transaction vide a reconciliation to US Gaap. The time and is executed in, on or through the facilities of a expense involved in a US Gaap reconciliation can be designated offshore securities market and neither the a significant concern for a foreign private issuer that is seller (nor any person acting on the seller’s behalf) seeking to access the US capital markets. knows that the transaction has been prearranged with a buyer in the United States.66 We summarize the most common exemptions used by foreign private issuers below. “Directed selling efforts” is broadly defined to include any activities that have, or can reasonably be expected to Regulation S – offshore offerings have, the effect of conditioning the market in the United States for the securities being offered in reliance Regulation S sets out the conditions under which an on Regulation S.67 Prohibited efforts include mailing offering outside the United States may be made without offering materials into the United States; conducting registration under the Securities Act. It provides a safe promotional seminars in the United States; granting harbour exemption for offers and sales by issuers, and a interviews about the offering in the United States www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 15 Chapter 3 – Key exemptions from Securities Act registration
(including by telephone); or placing advertisements (a) Category 1 with radio or television stations broadcasting in the United States.68 Importantly, legitimate selling activities This category has no requirements other than the in the United States in connection with concurrent US Regulation S General Conditions, and is available for:75 offerings – whether registered or private – do not constitute directed selling efforts.69 • securities offered by foreign issuers76 who reasonably believe at the commencement of the offering that there is no “substantial US market interest”77 in the Practice point: securities offered; A foreign private issuer may be required to furnish a copy of an offering memorandum relating to a • securities offered and sold in an overseas directed Regulation S offering on Form 6-K (if, for example, it offering;78 files that offering memorandum with a stock exchange on which its securities are listed, and the exchange • securities backed by the full faith and credit of a makes the offering memorandum public). This will foreign government; or generally not constitute directed selling efforts.70 • securities offered and sold pursuant to certain employee benefit plans established and administered under the laws of a foreign country. Practice point: The safe harbours of Regulation S are not exclusive and parties may use any other applicable exemptions Practice point: provided by the Securities Act.71 Regulation S only Even if Category 1 is available, market practice for applies to the registration requirements of the debt offerings is often to follow Category 2 restric- Securities Act and does not limit the applicability of the tions where there is a concurrent Rule 144A offering. US federal anti-fraud laws or any state laws relating to securities offerings.72 As a consequence, a Regulation S transaction may be exempt from registration under the (b) Category 2 Securities Act but – at least in theory – could still trigger anti-fraud liability in the United States.73 The second category involves securities that are not eligible for Category 1 and that are either (i) equity securities79 of a foreign issuer that is a reporting company (i) The issuer safe harbour under the Exchange Act or (ii) debt securities80 of reporting issuers (domestic or foreign) and non- Securities Act Rule 903 provides a safe harbour for reporting foreign issuers.81 Issuers in this category may issuers, distributors (that is, any underwriter, dealer, or take advantage of the safe harbour if the following other person who participates pursuant to a contractual conditions are met along with the Regulation S General arrangement in the distribution of the securities offered Conditions: or sold in reliance on Regulation S),74 their respective affiliates, and persons acting on their behalf. The • Certain offering restrictions82 must be adopted,83 particular requirements for the safe harbour depends on including: the “category” applicable to the transaction. - each distributor must agree in writing that all offers and sales during a 40-day distribution compliance period may be made only in
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accordance with safe harbours under • Each of the offering restrictions described above for Regulation S, pursuant to registration under the Category 2 must be met,90 except that a one-year Securities Act or an exemption from distribution compliance period applies to offerings of registration; and equity securities91 and a 40-day distribution compliance period applies to offerings of debt - prospectuses, advertisements, and all other securities.92 offering materials and documents (other than press releases) used in connection with offers • During the applicable distribution compliance and sales during the distribution compliance period, offers or sales cannot be made to a US person period must disclose that the securities are not other than a distributor93 (although exempt sales, such registered under the Securities Act and cannot as to QIBs pursuant to Rule 144A, may be made) be sold in the United States or to US persons and, in the case of equity securities: (other than distributors) unless so registered or an exemption from registration is available.84 - the purchaser (other than a distributor) must certify that it is not a US person; • During the 40-day distribution compliance period, offers and sales of the security cannot be made to a - the purchaser must agree to resell the securities US person other than a distributor85 (although only in accordance with Regulation S, pursuant exempt sales, such as to QIBs pursuant to Rule 144A, to registration under the Securities Act or an may be made).86 exemption from registration; and
• Any distributor selling securities to another - certain other restrictions must be satisfied, distributor, dealer, or person receiving a selling including a prohibition against corporate commission must deliver, during the 40-day distri- registration of transfers not made in accordance bution compliance period, a confirmation or notice with Regulation S.94 to the purchaser stating that the purchaser is subject to the same resale restrictions as the distributor.87 • Debt securities generally must be represented upon issuance by a temporary global security not The 40-day distribution compliance period begins on exchangeable for definitive securities until the the later of the date of the closing or the date on which expiration of the 40-day distribution compliance securities were first offered to persons other than period and, for persons other than distributors, until distributors (generally, the pricing date).88 certification of beneficial ownership by a non-US person.95 (c) Category 3 • Any distributor selling the securities to another The third category is a catch-all and has the most distributor, dealer, or person receiving a selling restrictive conditions. It includes all securities that are commission must deliver, during the applicable not eligible for Category 1 or 2, such as any securities of distribution compliance period, a notice or confir- a non-reporting domestic US issuer, equity securities of mation to the purchaser stating that the purchaser is a reporting domestic US issuer and equity securities of a subject to the same resale restrictions as the non-reporting foreign issuer (with substantial US distributor.96 market interest in the equity securities of that issuer).89 In addition to the Regulation S General Conditions, an issuer must also meet the following conditions:
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(iii) Violation of safe harbour conditions Practice point: The consequences of a breach of the conditions for use Equity securities issued by a domestic US issuer of Regulation S could be dire, since this would (whether reporting or non-reporting) pursuant to potentially allow purchasers of the securities to rescind Regulation S are considered “restricted securities”97 their transaction.102 If an issuer, distributor, any of their subject to limitations on resale, and remain restricted respective affiliates, or any person acting on their behalf securities even after an exempt resale pursuant to fails to comply with the Regulation S General Regulation S.98 As a practical matter, the required cer- Conditions, then the issuer safe harbour will not be tifications and other restrictions have severely limited available to any person in connection with the offer or the use of Regulation S for exempt sales of equity sale of the securities. However, if any of these persons securities by domestic US issuers. fails to comply with any of the other issuer safe harbour requirements (in other words, other than the Regulation S General Conditions), then only the party (ii) The resale safe harbour who fails to comply (as well as its agents and affiliates) Securities Act Rule 904 provides a safe harbour for will be unable to rely on the issuer safe harbour offshore resales by persons other than issuers, exemption. In that case, the fact that there may have distributors, their affiliates, and persons acting on their been a breach on the part of the issuer, distributor, their behalf. Resales of securities by these persons are subject affiliates, or agents (other than certain officers or only to the Regulation S General Conditions.99 directors relying on the resale exemption) does not generally negate a resale safe harbour exemption for an The resale safe harbour may also be relied upon by unaffiliated person.103 dealers and persons receiving selling concessions, except that the following additional conditions apply if the Section 4(2) private placements securities being resold are of the type included within the Category 2 or Category 3 safe harbour and the resale Section 4(2) of the Securities Act exempts “transactions is within the distribution compliance period imposed by an issuer not involving any public offering.” The with respect to those securities: term “public offering” is not defined in the Securities Act and the scope of the Section 4(2) exemption has • the seller and any person acting on behalf of the seller largely evolved through case law, SEC pronouncements must not knowingly offer or sell the securities to a and market practice. It is hence not possible to map the US person; and borders of Section 4(2) precisely.
• if the purchaser of the securities is also a securities The core issue is whether the persons to whom professional, then the seller must deliver a confir- securities are offered need the protection of the mation or other notice stating that the securities may Securities Act – that is, whether they are sufficiently be offered and sold during the distribution sophisticated so as to be able to fend for themselves.104 compliance period only in accordance with In determining whether a transaction is a public Regulation S, pursuant to registration under the offering, relevant factors include the number of offerees Securities Act or an exemption from registration.100 and their relationship to each other and the issuer, the number of securities being offered, the size of the The resale safe harbour may also be relied upon by offering and the manner in which the offering is certain officers and directors who are affiliates of the conducted.105 All of the surrounding circumstances issuer or a distributor, provided that the Regulation S must be considered in this analysis.106 General Conditions are met and no remuneration is paid other than customary broker’s commissions.101
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• insurance companies, investment companies, small Practice point: business investment companies and certain employee Section 4(2) is only available for offers and sales by an benefit plans; issuer; resales of securities acquired from an issuer require a separate exemption (such as Rule 144A, • private business development companies; discussed below). • certain tax-exempt organizations; Private placements under Section 4(2) typically involve, among other things: • corporations with assets over $5 million;
• a non-public offering (that is, an offering without any • directors, executive officers, and persons holding form of general solicitation or advertising); similar positions with or in the issuer;
• to a limited number of offerees; • natural persons with a net worth (alone or with that person’s spouse) exceeding $1 million; • who are buying for investment and not with a view to distribution; and • natural persons with individual income in excess of $200,000 per year or, with that person’s spouse, in • who are sophisticated investors and have been excess of $300,000 per year; provided with or have access to information about the issuer.107 • certain trusts with assets in excess of $5 million; and
In addition, the securities issued in a private placement • any entity owned entirely by such persons. generally include restrictions on resales by the purchasers (such as through the use of stop-transfer (ii) Regulation D general conditions orders, restrictive legends and the like).108 Regulation D provides certain general conditions (the Regulation D General Conditions), including: Regulation D private placements • Integration:110 All sales that are part of the same (i) Background Regulation D offering must meet all of the terms and Largely in response to the difficulties experienced by conditions of Regulation D. However, offers and practitioners in interpreting the availability of Section sales made more than six months before or after the 4(2), the SEC adopted Regulation D to provide a completion of a Regulation D offering will generally clearly defined non-exclusive safe harbour from not be considered part of the same Regulation D registration for offers and sales of securities by issuers. offering.
Regulation D differentiates transactions based on the • Information requirements: Regulation D’s size of the offerings and the types of investors to whom information requirements depend on the type of securities are being offered. Regulation D draws a core transaction and the type of participants in the distinction between accredited investors and other, non- transaction. The issuer must provide any purchaser sophisticated investors. Accredited investors include:109 that is not an accredited investor with extensive information regarding the issuer. If the issuer is not • banks, savings and loan associations, and similar an Exchange Act reporting company, that institutions; information includes non-financial and financial information substantially equivalent to that which it www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 19 Chapter 3 – Key exemptions from Securities Act registration
would have been required to provide in a registration $1,000,000 in any 12-month period.117 Issuers subject to statement under the Securities Act (for example, the reporting requirements of the Exchange Act and Form F-1 in the case of a first-time foreign investment companies, among others, may not use this registrant).111 For a foreign private issuer that is a exemption.118 All of the Regulation D General reporting company, it may provide its most recent Conditions apply to Rule 504 transactions, other than annual report on Form 20-F.112 The issuer must also Regulation D’s information requirements.119 make available to each purchaser the opportunity to ask questions about the offering or the issuer.113 (iv) Rule 505 – offers and sales not exceeding $5,000,000 Rule 505 contains an exemption for limited offerings Practice point: and sales of securities not exceeding $5,000,000 in a 12- Regulation D’s information requirements effectively month period.120 An unlimited number of accredited mean that financial information provided by a foreign investors (subject to the limitations on general solici- private issuer to a non-accredited investor must either tation and general advertising mentioned above) and up be prepared in accordance with US Gaap or recon- to 35 non-accredited investors may purchase securities ciled to US Gaap. This has limited the usefulness of in a Rule 505 offering.121 All of the Regulation D Regulation D for those foreign private issuers that do General Conditions apply to Rule 505 transactions, not prepare US Gaap or US Gaap-reconciled financial except that Regulation D’s information requirements statements. do not apply to any purchasers that are accredited investors.122
• Limitation on offering:114 Neither the issuer nor (v) Rule 506 – unlimited offering anyone acting on its behalf may use any general amounts solicitation or general advertising to offer or sell the Rule 506 closely resembles Rule 505 except that the securities. offering amount is not limited. Like Rule 505, an unlimited number of accredited investors (subject to the • Limitation on resale:115 Securities acquired in a limitations on general solicitation and general Regulation D transaction are restricted securities that advertising) and up to 35 non-accredited investors may cannot freely be resold absent registration or an purchase securities123 and all of the Regulation D exemption from registration. The issuer must take General Conditions apply, except for Regulation D’s reasonable care to make sure that purchasers would information requirements in the case of accredited not be deemed to be statutory underwriters (that is, investors.124 In addition, each purchaser of the securities engaged in a distribution of the securities), which is other than an accredited investor must demonstrate to typically satisfied by requiring purchaser represen- the issuer’s reasonable belief that the purchaser, “either tations about investment intent, restrictive legends on alone or with his purchaser representative(s) has such certificates, and restrictions on transfer. knowledge and experience in financial and business matters that he is capable of evaluating the merits and • Form D:116 The issuer must file a notice to the SEC risks of the prospective investment.”125 Issuers and their on Form D no later than 15 days after the first sale of placement agents typically satisfy this requirement by securities. having potential investors complete investor question- naires demonstrating their accredited status or their (iii) Rule 504 – offers and sales not sophistication. exceeding $1,000,000 Rule 504 provides an exemption from registration for limited offerings and sales of securities not exceeding
20 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 3 – Key exemptions from Securities Act registration
(vi) Rule 508 – deviations from Regulation D Practice point: Under Rule 508, a person may establish the existence of Securities purchased under Rule 144A are deemed an exemption under Regulation D with respect to any “restricted securities” and can only be resold pursuant purchaser even if the person failed to meet one or more to Rule 144A or another exemption (including the of the requirements of Regulation D. In this case, the Regulation S resale safe harbour described above).127 person must show that: (a) Definition of QIB • the failure to comply did not pertain to a term, A QIB is defined to include:128 condition, or requirement directly intended to protect the purchaser; • any of the following entities acting for its own account or the account of other QIBs, that in the • the failure to comply was “insignificant to the aggregate owns and invests on a discretionary basis offering as a whole;” and at least $100 million in securities of issuers that are not affiliated with the QIB: • the person made a good faith and reasonable attempt to comply with the relevant requirements of - insurance companies; Regulation D. - investment companies; Resales of privately placed securities - small business investment companies;
Both Section 4(2) and Regulation D apply only to - certain employee benefit plans; transactions by issuers,126 and neither provides an exemption for resales. Purchasers who wish to resell - certain trusts; securities acquired in a private placement must look to certain resale exemptions – in particular, the exemptions - certain tax-exempt organizations corporations; 1 provided by Rule 144A, “Section 4(1- /2)” and Rule and 144 under the Securities Act. - certain registered investment advisers; and (i) Rule 144A resales to QIBs Although market participants often refer to Rule 144A • certain broker-dealers, banks, and savings and loan offerings, as a technical matter Rule 144A transactions associations. involve two steps: sales to underwriters (or directly to institutional initial purchasers) under Section 4(2) or (b) Rule 144A requirements Regulation S, followed by resales to QIBs under Rule The requirements for a valid Rule 144A transaction 144A. As a result, Rule 144A transactions follow include the following: various limitations not found directly in Rule 144A itself (such as restrictions on publicity) as well as the • Sales to QIBs:129 the securities must be offered and explicit requirements of Rule 144A. sold only to QIBs or to a person who the seller (and any person acting on its behalf) “reasonably believes” is a QIB;
• Notice to buyers:130 the seller (and any person acting on its behalf) must take reasonable steps to ensure www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 21 Chapter 3 – Key exemptions from Securities Act registration
that the buyer is aware that the seller is relying on conditions, but with the expectation that the issuer Rule 144A (generally by so noting in the offering will promptly register an exchange of identical memorandum, or in the trade confirmation in the securities. As a result, purchasers generally do not case of an undocumented offering); require the liquidity discount they would otherwise demand if the securities were to remain private. In • Fungibility:131 the securities must not be, when addition to promising public registration under the issued, of the same class as securities listed on a US Securities Act, the issuer also typically agrees to file national securities exchange or quoted on Nasdaq periodic reports with the SEC under the Exchange (or, in the case of convertible or exchangeable Act, thereby enhancing public information and securities, have an effective conversion premium of liquidity. 10% or more); and 1 (ii) “Section 4 (1- /2)” resales • Information delivery:132 If the issuer is a reporting Market practice has developed the so-called “Section 4 1 company under the Exchange Act or is exempt (1- /2)” exemption for resales of privately placed 134 1 from reporting under Rule 12g3-2(b), a seller securities. (Section 4 (1- /2) does not actually appear wishing to resell the securities is not obligated to in the Securities Act and is instead the name given to furnish the purchaser with information concerning the practice of certain resales of private securities.) the issuer. However, if the issuer is not a reporting Under this exemption, securities that are initially company and is not exempt under Rule 12g3-2(b), privately placed may be resold if the resales essentially a holder or the purchaser must have the right to comply with the requirements for the original Section obtain from seller or issuer, upon request, certain 4(2) private placement. minimal reasonably current information concerning 1 the business of the issuer and its financial statements. Typical restrictions in a Section 4 (1- /2) transaction include that resales may only be made: (c) A/B exchange offers Rule 144A has also become particularly popular for • on a non-public basis; global offerings of debt securities, in part because of a line of SEC “no-action” letters that permits issuers • to sophisticated investors who could have partic- who have sold debt securities to QIBs pursuant to ipated in the original private placement and who are Rule 144A to subsequently register an exchange offer buying for investment and not with a view to distri- of identical securities for the Rule 144A securities.133 bution; and This procedure allows QIBs, subject to limited exceptions, to obtain freely tradable registered • subject to limitations on onward resales (such as securities in exchange for the restricted, legended letters of representation from purchasers). securities they obtained in the Rule 144A offering. Because the exchange offer will go through the SEC (iii) Rule 144 registration process, most issuers and underwriters seek Rule 144 provides conditions under which privately to conform the original Rule 144A offering placed securities may be resold to the public without memorandum as closely as possible to the requirements complying with the registration requirements of the of a full registration statement (including US Gaap Securities Act.135 Rule 144 requires: reconciliation). • One-year minimum holding period:136 securities must The availability of this exchange procedure allows be held for a minimum of one year from the date of issuers and underwriters to complete transactions purchase before any Rule 144 resale; quickly under Rule 144A to take advantage of market
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• Sales after one-year minimum holding period: after 802 must either be registered or structured to take the one-year minimum holding period has expired, advantage of an available exemption from registration. limited resales of restricted securities may be made if: (ii) Requirements of Rule 802 The requirements of Rule 802 are as follows: - Information:137 either the issuer is an Exchange Act reporting company that has been subject to • Limitation on US ownership:145 US holders of reporting requirements for 90 days prior to the sale securities must hold 10% or less of the class of and has filed all required reports in the 12 months securities that is the subject of the exchange offer or prior to the sale, or certain other information business combination. However, if there are no US about the issuer must be publicly available; shareholders, Rule 802 is not available.146
- Volume limitations:138 only certain amounts of securities may be resold; • Calculation of 10% limit: A US holder is defined as a person resident in the United States.147 In - Manner of sale:139 securities must be resold in determining whether or not a holder is a US unsolicited brokers’ transactions; and resident, a bidder must look through the record ownership of securities held by brokers, dealers, - Notice of sale:140 if more than 500 shares or $10,000 banks and other nominees located in the United worth of securities are sold in any three-month States, the target company’s jurisdiction of incorpo- period, the seller must file a notice on Form 144 ration, and the jurisdiction that is the primary with the SEC. trading market of the target securities.148 This is not a determination of ultimate beneficial ownership; • Sales after two years:141 non-affiliates of the issuer instead, only the first line of ownership behind the may freely resell restricted securities once two years broker or nominee must be established. The have passed from the date the securities were calculation date is 30 days prior to the acquired from an issuer or an affiliate of an issuer.142 commencement of the exchange offer or the solici- tation for a business combination.149 However, the Rule 802 – securities issuances in calculation excludes securities held by persons connection with cross-border owning more than 10% of the class of securities exchange offers and business sought in the exchange offer or business combinations combination, as well as securities held by the bidder.150 (i) General Securities Act Rule 802 provides an exemption from registration for offers and sales in any exchange offer • Equal treatment of US holders:151 The bidder must or business combination involving the acquisition of permit US holders of securities to participate in the securities of a foreign private issuer. Rule 802 does exchange offer or business combination on terms at not impose a dollar limitation on the value of securities least as favourable as those offered to other holders, sold to US investors in an exempt transaction, and but is not required to extend the offering into any both domestic US and foreign private issuers may rely US state that would require registration or qualifi- on Rule 802.143 Rule 802 provides an exemption only cation of the transaction. for the issuer of securities and not for affiliates of the issuer or any person who seeks to resell the securities.144 Accordingly, resales of securities acquired under Rule www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 23 Chapter 3 – Key exemptions from Securities Act registration
• Informational documents in the United States: If the number of additional securities the holders may bidder publishes or otherwise disseminates an purchase is in proportion to the amount of securities informational document to security holders in they hold on the record date of the offering.157 connection with the exchange offering or business combination, it must furnish an English-language Like Rule 802, Rule 801 does not impose a dollar translation of that document to the SEC under limitation on the value of securities sold to US cover of Form CB by the first business day after investors in an exempt transaction, but unlike Rule publication or dissemination, and must also file a 802 only foreign private issuers may rely on Rule consent to service of process on Form F-X.152 It 801.158 Rule 801 provides an exemption only for the must disseminate any informational document to issuer of securities and not for affiliates of the issuer or US security holders, in English, on a comparable any person who seeks to resell the securities.159 basis to that provided to security holders in the Accordingly, resales of securities acquired pursuant to home jurisdiction.153 In addition, if the bidder Rule 801 must be registered or exempt from disseminates information by publication in its home registration. jurisdiction, it must publish the information in a manner reasonably calculated to inform US security (ii) Requirements of Rule 801 holders of the offer.154 The requirements of Rule 801 are as follows:
• Limitation on US ownership: US securities holders • Legends:155 Any US offering documentation must must hold 10% or less of the class of securities that contain a legend regarding the non-US nature of is the subject of the rights offering.160 The the transaction and the bidder’s disclosure practices, calculation is done in the same manner as the and must state that investors may have difficulty in calculation under Rule 802 exemption, except that enforcing rights against the bidder and its officers the date of calculation is the record date of the rights and directors. offering.161 As for Rule 802, if there are no US shareholders, Rule 801 is not available.162
• Restricted securities:156 The securities acquired in a Rule 802 transaction will be restricted securities to • Equal treatment of US security holders:163 The the same extent and proportion as the target bidder must permit US security holders to securities sought in the exchange offer and business participate in the rights offering on terms at least as combination (in other words, restricted securities favorable as those offered to other holders, but is will yield restricted securities, and unrestricted not required to extend the offering into any US securities will yield unrestricted securities). state that would require registration or qualification of the transaction. Rule 801 – rights offerings
(i) General • Informational documents in the United States: If the Securities Act Rule 801 provides an exemption from issuer publishes or otherwise disseminates an registration for certain rights offerings by foreign informational document to security holders in private issuers. A “rights offering” is defined for these connection with the rights offering, it must furnish purposes as the sale for cash of equity securities in an English-language translation of that document to which existing securities holders of a particular class the SEC under cover of Form CB by the first (including holders of ADRs) are granted the right to business day after publication or dissemination, and purchase additional securities of that class, and the must also file a consent to service of process on
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Form F-X.164 It must disseminate any informational document to US security holders, in English, on a comparable basis to that provided to security holders in the home jurisdiction.165 In addition, if the issuer disseminates by publication in its home jurisdiction, it must publish the information in a manner reasonably calculated to inform US security holders of the offer.166
• Eligibility of securities:167 The securities offered in the rights offering must be equity securities of the same class as the securities held by offerees in the United States (directly or through ADRs).
• Limitations on transfer:168 The terms of the rights must prohibit transfers by US security holders except in accordance with Regulation S.
• Legends:169 Any US offering documentation must contain a legend regarding the non-US nature of the transaction and the issuer’s disclosure practices, and must state that investors may have difficulty in enforcing rights against the issuer and its officers and directors.
www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 25 Chapter 4 – Restrictions on publicity during securities offerings Chapter 4 Restrictions on publicity during securities offerings
Registered transactions statement has been declared effective by the SEC.
(i) The three stages of registration During each of these stages, publicity about the issuer is under the Securities Act restricted in distinct ways. In a registered transaction, it is unlawful:
• to offer or sell a security unless a registration Practice point: statement with respect to that offering has been filed An issuer and its underwriters should pay close atten- with the SEC;170 tion to the contents of their websites (including hyper- linked information), which are routinely reviewed by • to sell a security unless a registration statement with the SEC staff during the registration process. respect to that offering is in effect;171 (ii) Restrictions on publicity during the • to use a prospectus to offer or sell a security unless quiet period that prospectus meets the requirements of the As noted above, the pre-filing or quiet period begins Securities Act and the SEC (a conforming when an issuer decides to make a public offering prospectus);172 and (usually by retaining an investment bank or banks to undertake the offering) and ends when the registration • to sell a security unless the security (or confirmation statement relating to the offering is first filed publicly of the sale) is accompanied or preceded by a with the SEC. conforming prospectus.173 During this period, the issuer may not make offers or As a result of these basic principles, the registration sales of the securities being registered. The SEC has process is generally divided into three stages: construed the concept of premature offers (frequently called “gun jumping”) broadly to include publicity that • the quiet period – from the time an issuer decides to does not refer to the proposed offering but which may make a public offering until it files its registration nevertheless stimulate investor or dealer interest in the statement; issuer or its securities. During this period, an issuer should not release publicly any forecasts, projections or • the waiting period – from the time the registration predictions relating to revenues, income or earnings per statement is filed until it is declared effective; and share or concerning expected valuations, and should put in place procedures for review of public statements and • the post-effective period – after the registration press releases.
26 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 4 – Restrictions on publicity during securities offerings
Notwithstanding the prohibitions imposed by the States at which the issuer discusses its intention to Securities Act during the quiet period, a foreign private undertake a public offering. The issuer must provide issuer may: access to both US and non-US journalists and ensure that any written press releases or other press-related • continue to advertise products and services and to materials it uses meet the following requirements:177 issue press releases regarding factual business and financial developments in accordance with past • the materials must be distributed to journalists practice (ordinary course advertising and press (including US journalists) outside the United States; activity);174 and
• release a limited notice regarding the offering within • the materials must contain a legend stating that: the United States under Securities Act Rule 135; and - they are not an offer of securities for sale in the • conduct certain press activities outside the United United States; States under Securities Act Rule 135e. - securities may not be offered or sold in the (a) Rule 135 United States absent registration or an Rule 135 provides a safe harbour for public exemption from registration; announcements of a planned registered offering during the quiet period if the announcement: - any public offering in the United States may be made only by means of a prospectus that may • contains a legend to the effect that it does not be obtained from the issuer and that will constitute an offer of any securities for sale;175 and contain detailed information about the issuer and management, as well as financial statements; • contains only limited information, including:176 and
- the name of the issuer; - whether the issuer intends to register the offering in the United States. - the title, amount and basic terms of the securities offered; These materials also must not include any purchase order or coupon that could be used to indicate interest - the anticipated timing of the offering; and in the proposed offering.
- a brief statement of the manner and purpose of the offering, without naming the prospective Practice point: underwriters for the offering. Although Rule 135e does not limit the content of off- shore press announcements, other restrictions of the (b) Rule 135e US federal securities laws – such as the anti-fraud Rule 135e provides a general safe harbour for offshore prohibitions of Exchange Act Rule 10b-5 – continue press activity. Under Rule 135e, a foreign private issuer to apply. Some caution is therefore warranted in that will not be conducting its offering solely in the relying on the rule. United States – that is, which has a bona fide intent to make an offering offshore in addition to the US offering – may hold press conferences or give interviews to journalists (including US journalists) outside the United www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 27 Chapter 4 – Restrictions on publicity during securities offerings
• the title and amount of securities being offered; Practice point: Note that even if Rule 135e is otherwise available, an • a brief indication of the general type of business of issuer may not rely on the rule to provide internet the issuer; access to its offshore press conferences or written press-related materials issued offshore, unless it • the price of the security; implements procedures to ensure that only persons physically located outside the United States will have • the names of the managing underwriters; and access to the press conferences or materials.178 • the approximate date on which it is anticipated the proposed sale to the public will begin. Practice point: Rule 135e applies only to press activities, and does (iv) Restrictions on publicity after not protect the transmission of press-related materi- effectiveness of the registration als, including press releases, to investors. statement During the period after effectiveness of the registration statement, once the distribution of the securities has (iii) Restrictions on publicity during the been completed (that is, when the securities have been waiting period sold to investors), the limitations on publicity by the The waiting period extends from the time that the issuer are largely eliminated. If, however, a portion of registration statement is filed publicly with the SEC the securities was sold offshore in reliance on until the time that it is declared effective by the SEC. Regulation S, the issuer’s post-closing publicity in the During this period, offers but not sales of the security United States will continue to be limited during the may be made. Accordingly, a foreign private issuer distribution compliance period, which generally extends may: for 40 days after the closing for foreign private issuers.
• continue ordinary course advertising and press Restrictions on publicity in activity;179 unregistered offerings
• distribute a preliminary prospectus that meets the As discussed above, directed selling efforts or general requirements of the Securities Act; solicitation or general advertising in the United States can destroy the availability of an exemption from • make a limited notice within the United States under registration. Accordingly, publicity about a planned or Securities Act Rule 134; and pending unregistered transaction is subject to certain limitations. In particular, a foreign private issuer may: • continue to conduct certain press activities outside the United States under Rule 135e. • continue ordinary course advertising and press activity;180 Rule 134 Rule 134 provides a safe harbour for a public • distribute a preliminary and final offering announcement that contains only limited information, memorandum to certain investors; including: • if available, make a limited notice within the United • the name of the issuer; States under Rule 135c under the Securities Act; and
28 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 4 – Restrictions on publicity during securities offerings
• conduct certain press activities outside the United offshore press activity. This safe harbour is available for States under Rule 135e. unregistered as well as registered transactions.
(i) Rule 135c Rule 135c provides a safe harbour that permits a company to deliver notice in the United States that it proposes to make, is making or has made an unregistered offering of securities. Rule 135c is available to issuers subject to the reporting requirements of the Exchange Act or exempt from reporting. It requires the following:
• the notice may not be used for purposes of conditioning the market in the United States;181
• the notice must state that the securities offered have not been or will not be registered under the Securities Act and may not be offered absent registration or an exemption from registration;182 and
• the notice must contain only limited information, including:183
- the name of the issuer;
- the title, amount and basic terms of the securities being offered;
- the amount of the offering, if any, being made by selling shareholders;
- the time of the offering; and
- a brief statement of the manner and purpose of the offering, without naming the underwriters.
Under Rule 135c, the notice may take the form of a news release or a written communication directed to security holders or employees, or other public statements.184 The notice itself must be sent to the SEC under cover of Form 8-K, Form 6-K, or in accordance with the provisions of Rule 12g3-2(b), as applicable.185
(ii) Rule 135e As noted above, Rule 135e provides a safe harbour for www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 29 Chapter 5 – Required financial statement disclosure Chapter 5 Required financial statement disclosure General
The most frequently asked questions at all-hands meetings is “What financial statements are needed?” That seemingly simple question can prove very complicated to answer. We summerize below the financial statement requirements that apply when a foreign private issuer offers securities to the public in the United States, list its securities for trading in the United States or files a US annual report. We also briefly discuss financial statements in connection with unregistered transactions. (For ease of illustration, we have assumed below that the issuer’s fiscal year is the calendar year.)
Practice point: This is usually the most difficult challenge for foreign private issuers seeking to access the US public mar- kets. The requirements are technical and SEC-expe- rienced members of the issuer’s audit team must be involved at the earliest possible stage.
30 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 5 – Required financial statement disclosure
Annual and interim financial statements
(i) Audited annual financial statements
What must be provided? Consolidated annual financial statements of the issuer, audited by an independent auditor and accompanied by an audit report, consisting of:186
• balance sheet;
• income statement;
• statement of changes in equity;
• cashflow statement;
• related notes and schedules required by the system of accounting standards under which the financial statements were prepared; and
• if not included in the primary financial statements, a note analyzing the changes in each caption of shareholders’ equity presented in the balance sheet.
Note that separate financial statements may need to be included for guarantors, and that both separate financial statements and certain pro forma financial information may be required for acquired entities.
How many years must be included? Audited financial statements must cover each of the latest three financial years,187 except that:
• if the issuer has been in existence less than the prescribed number of years, it is sufficient to provide information for the life of the issuer and its predecessors;188
• if a jurisdiction outside the United States does not require a balance sheet for the earliest year of the three-year period, that balance sheet may be omitted;189 and
• in an initial registration statement, if the financial statements are presented in accordance with US Gaap (rather than reconciled to US Gaap), the earliest of the three years of financial statements may be omitted if that information has not previously been included in a filing made under the Securities Act or the Exchange Act.190
In addition, whenever audited financial statements are required for a period of one, two or three years, under S-X Rule 3-06 a single audited period of nine to 12 months may count as a year if: www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 31 Chapter 5 – Required financial statement disclosure
How many years must be included? • the issuer has changed its fiscal year during the period; (continued) • the issuer has made a significant business acquisition for which financial statements are required under S-X Rule 3-05 (discussed below) and the financial statements covering the interim period pertain to the business being acquired; or
• the SEC grants permission to do so under S-X Rule 3-13, provided that financial statements are filed that cover the full fiscal year or years for all other years in the time period (note, however, that this permission is rarely granted).
How old can the financial statements The last year of audited financial statements cannot be more than 15 months old at be?191 the time of the offering or listing, except:
• in the case of a registration statement relating to an initial public offering, the audited financial statements must be as of a date not older than 12 months prior to the time the document is filed;192 and
• in the case of a registration statement relating to an offering of securities: (i) upon the exercise of outstanding rights granted pro rata to all existing security holders of the applicable class; (ii) pursuant to a dividend or interest reinvestment plan; or (iii) upon the conversion of outstanding convertible securities or upon the exercise of outstanding transferable warrants, the financial statements may be up to 18 months old.193
Practice point: As a result of marketing considerations, the last year of audited financial statements is rarely more than 12 months old.
32 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 5 – Required financial statement disclosure
(ii) Unaudited interim financial statements
What must be provided? If a registration statement becomes effective more than nine months after the end of the last audited financial year, the issuer must also provide consolidated interim financial statements. (Interim financial statements are not required for annual reports.) Those financial statements:194
• may be unaudited, but must either be reconciled to, or prepared in accordance with, US Gaap;
• must cover at least the first six months of the financial year, unless the issuer publishes more current interim information, in which case that information must be included;
• should include a balance sheet, income statement, cash flow statement, statement of changes to equity and selected note disclosures;
• may be in condensed form, as long as they contain the major line items from the latest audited financial statements and include the major components of assets, liabilities and equity (in the case of the balance sheet); income and expenses (in the case of the income statement); and the major subtotals of cash flows (in the case of the cashflow statement); and
• should include comparative interim statements for the same period in the prior financial year, except that the requirement for comparative balance sheet information may be met by presenting the year-end balance sheet.
Practice point: The SEC encourages (but does not require) issuers to have an independent auditor review the interim finan- cial statements. It is not typical to refer to such a review in the registration statement. If this is done, however, a copy of the interim review report must be included in the document.195
www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 33 Chapter 5 – Required financial statement disclosure
(iii) Selected financial information; capitalization
Selected financial information • The issuer must include selected historical financial income statement and balance sheet data for each of the last five fiscal years.196
• However, selected financial data for either or both of the two earliest years may be omitted if the issuer represents to the SEC in the review process that such information cannot be provided, or cannot be provided on a restated basis, without unreasonable effort or expense.197
• If interim financial statements are included, the selected financial data should be updated for that interim period (which may be unaudited, if that fact is stated) and comparative data from the same period in the prior financial year should be provided, except that the requirement for comparative balance sheet data may be met by presenting the year-end balance sheet information.198
Statement of capitalization and • The issuer must include a statement of capitalization and indebtedness as of a date indebtedness no earlier than 60 days prior to the date of the registration statement.199 (Annual reports need not include a statement of capitalization and indebtedness.)200
• The capitalization statement must show the issuer’s capitalization on an actual basis and, if applicable, adjusted to reflect the sale of the securities being issued and the intended use of proceeds of the issuance.
• The capitalization statement should distinguish between guaranteed and unguar- anteed, and secured and unsecured, indebtedness.
Reconciliation to US Gaap private issuer registering for the first time must reconcile only the two most recently completed fiscal years (and (i) Annual audited and interim any interim period).204 unaudited financial statements The annual audited and interim unaudited financial The following items frequently require discussion and statements of a foreign private issuer included in a quantification as a result of the reconciliation requirements: registration statement or an annual report may be business combinations; stock compensation; restructuring prepared using either US Gaap, IAS or local Gaap.201 If charges;205 impairments; deferred or capitalized costs; local Gaap or IAS is used in the preparation of the investments; foreign currency translations; deferred taxes; financial statements, the consolidated financial pensions; derivatives; research and development; and statements (both annual and interim) must include a revenue recognition.206 In particular: reconciliation to US Gaap.202 The reconciliation comprises both disclosure of the material variations between local Gaap or IAS and US Gaap, as well as a numerical quantification of those variations.203 A foreign
34 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 5 – Required financial statement disclosure
• Income statements: net income is required to be require at least two years of selected financial data under reconciled in either of three ways: a tabular format; US Gaap (and will require the full five years if the on the face of the income statement; or in a note to earliest three years are available under US Gaap).216 the income statement. In addition, each material variation must be described and quantified as a (iii) MD&A separate reconciling item, although several material A foreign private issuer’s MD&A disclosure should focus variations may be combined on the face of the on its primary financial statements, whether those income statement if shown separately in a note.207 statements are prepared in accordance with US Gaap, Earnings per share computed according to US Gaap local Gaap or IAS.217 To the extent those statements are must also be included if materially different from prepared under local Gaap or IAS, a discussion should earnings per share under local Gaap or IAS.208 be included of the reconciliation to US Gaap and any differences between local Gaap or IAS and US Gaap not • Balance sheets: a reconciliation must be prepared for otherwise discussed in the reconciliation and needed for any line item that would have been materially an understanding of the financial statements as a different had that item been prepared using US whole.218 Gaap.209 Nevertheless, some disclosures routinely made under • Cash flow statements: for each period for which an US Gaap may rise to a level of materiality requiring income statement is presented and reconciled, a cash disclosure in MD&A, including:219 flow statement prepared in accordance with US Gaap or International Accounting Standard No 7 must be • material undisclosed uncertainties (such as reasonably included or, alternatively, an explanatory note to the possible loss contingencies220), commitments (such as financial statements must be included that describes those arising from leases) and credit risk exposures the differences that would have resulted if the and concentrations; information had been prepared using US Gaap.210 • material unrecognized obligations (such as pension (ii) Selected financial information obligations); Like the annual and interim financial statements, the required selected financial information may also be • material changes in estimates and accounting prepared using US Gaap, local Gaap or IAS.211 A methods, and other factors or events affecting reconciliation to US Gaap of local Gaap or IAS selected comparability; financial information must generally be provided for all five years covered by the selected financial information • defaults on debt and material restrictions on (and any interim periods).212 First-time registrants, dividends or other legal constraints on the use of however, need only prepare reconciliations for the two assets; most recent years (and any interim periods).213 In that case, an additional year of reconciliation is required for • material changes in the relative amounts of each year following the initial offering in subsequent constituent elements comprising line items presented annual reports.214 on the face of the financial statements;
If a foreign private issuer prepares its primary financial • significant terms of financings which would reveal statements in accordance with US Gaap (rather than material cash requirements or constraints; reconciling to US Gaap), it may present the five years of selected financial information under local Gaap or IAS • material subsequent events, such as events that affect without reconciliation,215 although the SEC staff will the recoverability of recorded assets; www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 35 Chapter 5 – Required financial statement disclosure
• material related-party transactions that may affect the exchange restrictions or controls relating to the reporting terms under which material revenues or expenses are currency, the currency of the issuer’s domicile or the recorded; and currency in which dividends will be paid.230
• significant accounting policies and measurement If the reporting currency is not the US dollar, US assumptions not disclosed in the financial statements, dollar-equivalent financial statements or convenience including methods of costing inventory, recognizing translations must not be included, except that an issuer revenues and recording and amortizing assets, which may present a translation of the most recent fiscal year may bear upon an understanding of operating trends and any subsequent interim period.231 The exchange or financial condition. rate used for any convenience translations should be as of the most recent balance sheet date included in the Audit reports; currency translation registration statement, except where the exchange rate of the most recent practicable date would yield a (i) Audit reports materially different result.232 The SEC will allow an Audited financial statements must be accompanied by an issuer to recast its previously reported financial audit report, covering each of the audited periods.221 The statements for periods prior to January 1 1999 into audit report must include, among other things, the euros, using the exchange rate between the euro and the opinion of the responsible accountant as to (i) the financial prior reporting currency fixed on January 1 1999.233 statements covered by the report and the accounting practices and principles set forth in those financial Issuers that do not prepare their financial statements in statements, and (ii) the consistency of the application of US dollars must provide disclosure of the exchange rate the accounting principles used.222 Any matter which the between the reporting currency and the US dollar.234 responsible accountant takes exception to must be clearly That disclosure should show: identified.223 The SEC will generally not accept an audit report containing a disclaimer or qualification.224 • the exchange rate at the last practicable date;
Note that the audit report must state that the audit has • the high and low exchange rates for each month been conducted in compliance with US Gaas, even for during the previous six months; and non-US Gaap financials.225 The auditor must also meet US standards for independence.226 • for the five most recent financial years, and any subsequent interim period covered by the financial statements, the average rates for each period (based Practice point: on the average exchange rates on the last day of each Many auditing firms are not qualified or willing to file month during the period).235 their audit reports with the SEC, and may be even less willing to do so after Sarbanes-Oxley. Financial statements of recent and probable acquisitions; pro forma (ii) Currency translation financial information Foreign private issuers may state amounts in their financial statements in any currency they deem appropriate (the (i) General reporting currency).227 However, only one currency may In addition to financial statements of the issuer, S-X be used as reporting currency.228 The reporting currency Rule 3-05 generally requires the inclusion in must be prominently disclosed on the face of the financial registration statements for public offerings or US listings statements.229 The issuer must also disclose if dividends (but not annual reports)236 of audited financial statements will be paid in a different currency and any material for a significant acquisition of a business that has closed,
36 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 5 – Required financial statement disclosure
or as soon as the acquisition becomes probable in cases information that would be required for the issuer; where the transaction is at the highest level of signif- icance (as discussed below). Furthermore, where a • if it exceeds 40%, then two years of audited and material acquisition has occurred or is probable, S-X interim financial information is required; and Rule 11-01 generally requires pro forma financial information in the registration statement for the most • if it exceeds 50%, three years of audited and interim recent fiscal year and most recent interim period.237 financial information is required.
The term “business” is defined in S-X Rule 11-01(d) to include an operating entity or business unit, but excludes Practice point: machinery and other assets that do not generate a distinct These determinations are often difficult and should be profit or loss stream.238 Acquisitions of related businesses addressed by the issuer and its accounting firm before are treated as a single acquisition for purposes of the signif- commencing the offering process. icance tests. Businesses are considered “related” if they are owned by a common seller, under common management, or their acquisitions are conditional upon each other or a Practice point: single common event. The term “probable” is interpreted The rules require the amounts used to be determined to mean more likely than not. The SEC staff has taken on the basis of US Gaap rather than local Gaap or IAS the general view that an acquisition becomes probable (as used by the issuer or the acquired company).242 upon the signing of a letter of intent.239 However, foreign private issuers typically make the calculation in the first instance on the basis of the sys- Whether financial statements for recent and probable tem of accounting used in their primary financial state- acquisitions must be included in the filing also depends ments (that is, local Gaap or IAS). upon the significance of the acquisition. Significance of an acquired business is evaluated under S-X Rule 1- (ii) Financial statement requirements 02(w) based upon three criteria: The table on the following page summarizes the financial statement requirements in connection with acquisitions. • the amount of the issuer’s investment in the acquired business compared to the issuer’s total assets; Practice point: • the total assets of the acquired business compared to If financial statements for an acquired business are the issuer’s total assets; and required, the acquired company’s auditors may not be qualified (or willing) to have their audit report filed • the pre-tax income240 from continuing operations of with the SEC. The auditors may also be unfamiliar the acquired business compared to the issuer’s pre-tax with the procedures required under US Gaas. The income from continuing operations; additional work required to get those financial state- ments into compliant form can be a significant timing in each case, based on the issuer’s most recent audited issue. financial statements.241
Generally: One notable exception to these rules is that below the 50% significance level, no audited financial statements • if the acquired business exceeds 20% of any of the three are required in a registration statement for probable significance criteria, then one year of audited financial acquisitions or for completed acquisitions consummated information is required, as well as the interim financial up to 74 days before the date of the offering.243 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 37 Chapter 5 – Required financial statement disclosure
Acquisition scenario Reporting requirement 1. Individual acquisition at or below the 20% 1. No requirement to include audited financials. significance level.
2. Individual acquisition (or multiple acquisitions of 2. Audited financials for the most recent fiscal year and related businesses, as described above) in excess of the unaudited financials for any interim periods will be required, as 20% significance level, but not above the 40% level. specified in S-X Rules 3-01 and 3-02.
3. Multiple acquisitions of unrelated businesses below the 3. Audited financials for the most recent fiscal year and any 20% significance level individually, but aggregating in interim periods required for a substantial majority of the excess of the 50% level of significance. individually insignificant acquisitions required.
4. Individual acquisition (or multiple acquisitions of 4. Audited financials for the two most recent fiscal years related businesses, as described above) in excess of the (including one balance sheet) and any interim periods required. 40% significance level, but not above the 50% level.
5. Individual acquisition above the 50% significance level. 5. Three years of audited financial statements (including two balance sheets) and any interim periods required for all completed and probable acquisitions at this level of significance. However, financial statements for the earliest of the three fiscal years required may be omitted if net revenues reported by the acquired business in its most recent fiscal year are less than $25 million.
6. Securities being registered in an offering to 6. Three years of financial statements (including two balance stockholders of the acquired company (such as a stock- sheets) of the business to be acquired in the transaction are for-stock merger). generally required and in most cases the most recent fiscal year must be audited.244
Staff Accounting Bulletin 103 (SAB 103) provides a special Practice point: interpretation of S-X Rule 3-05 for initial public offerings Notwithstanding this exception, market practice is involving businesses that have been built by the typically to include financials for any acquisition above aggregation of discrete businesses that remain substantially the 20% threshold as soon as it has become proba- intact after acquisition (that is, industry roll-ups). (SAB 103 ble and to require at least a one-year audit, even if recodifies, with slight modifications, Staff Accounting the 74-day grace period has not yet expired. Bulletin 80.) SAB 103 allows first-time issuers to consider the significance of businesses recently acquired or to be Compliance with these rules is also facilitated by the S-X acquired based on the pro forma financial information for Rule 3-06 exception that allows a single audited period of the issuer’s most recently completed fiscal year. nine to 12 months to count as a year for an acquired business. While compliance with this interpretation requires an application of SAB 103’s guidance and examples on a case-by-case basis, the policy is to allow currently
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insignificant business acquisitions to be excluded from (iv) MD&A the financial statement requirements while still ensuring Whenever historical financial statements of an acquired that the registration statement will include not less than business (or probable acquisition) are included in a three, two and one year(s) of financial statements for not registration statement, the issuer should consider whether less than 60%, 80% and 90%, respectively, of the a separate MD&A section discussing those financial constituent businesses of the issuer.245 statements is appropriate.249 Although there is no specific line item requiring that a second MD&A be included, it is Note that the permitted age of financial statements of not uncommon for issuers to interpret Securities Act Rule acquired or soon-to-be acquired businesses is the same as 408250 as requiring a full discussion and analysis of the for the issuer itself.246 This means, for example, that the financial statements of an acquired business (or probable audited annual financial statements of the acquired business acquisition), particularly where it exceeds 50% on any of may not be more than 15 months old (with certain the three significance criteria discussed above. exceptions noted above). (v) Pro forma financial information Notwithstanding the requirements outlined above, As noted above, whenever audited financials of an under S-X Rule 3-05(b)(4)(iii), separate financial acquired business are required, S-X Article 11 requires: statements for the acquired business do not need to be presented once the operating results of the acquired • a condensed pro forma balance sheet as of the end of business have been reflected in the issuer’s audited the most recent period for which a consolidated consolidated financial statements for a complete fiscal balance sheet is required (unless the transaction is year (a full audit cycle) unless the financial statements already reflected in that balance sheet);251 and have not been previously filed by the issuer or unless the acquired business is of such significance to the issuer that • a condensed pro forma income statement for the omission of such financial statements “would materially most recent fiscal year and the most recent interim impair an investor’s ability to understand the historical period (unless the historical income statement reflects financial results of the registrant.”247 the transaction for the entire period).252
(iii) Operating real estate The SEC will permit the inclusion of additional pro The acquisition or probable acquisition of operating real forma information that does not comply with S-X estate is subject to an additional set of disclosure Article 11 if this information is required by a foreign requirements under S-X Rule 3-14. S-X Rule 3-14 regulator.253 In that case, the issuer must indicate clearly addresses income-producing real estate such as what the presentation represents, state that the apartment buildings and shopping malls. (In information does not comply with Article 11 and comparison, where real estate is incidental to the service explain why the information is being included.254 provided by a business, such as a hotel, S-X Rule 3-05 alone would apply.) Generally, S-X Rule 3-14 requires that audited income statements must be provided for the Practice point: three most recent fiscal years for any such acquisition or The SEC’s pro forma rules permit adjustments that probable acquisition that would account for 10% or are directly related to the acquisition and related more of the issuer’s total assets. S-X Rule 3-14 also financing transactions. Adjustments for expected syn- prescribes certain variations from the typical form of ergies and cost savings that are not expressly mandat- income statement and allows for only one year of ed by the acquisition documents will generally not be income statements to be provided if the property is not permitted. acquired from a related party and certain additional textual disclosure is made.248 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 39 Chapter 5 – Required financial statement disclosure
burdensome than providing separate audited financial Practice point: statements for every guarantor, which would of course The SEC’s pro forma financial information require- be prohibitively expensive in many cases. ments may conflict with local stock exchange or listing rules or accounting requirements, which need to be S-X Rules 3-10(e) and (f) go even further, dispensing considered carefully in any multi-jurisdictional offering. with any additional information requirement for guarantors in the case of a parent company issuer that does not have independent assets or operations if all of Practice point: the non-guarantor subsidiaries are “minor.”259 US Gaap Even if pro forma adjustments for an acquired business reconciliation is required in the footnote when the are not required because the financial statements of the parent’s financial information is prepared under a acquired businesses are not required to be included in different set of accounting principles.260 In the chart the prospectus, the underwriters will often request that below, we review the provisions of S-X Rule 3-10 as the adjustments resulting from such an acquisition nev- they apply to the following five common situations: ertheless be included in the pro forma financial infor- mation. This in turn will require accountants’ “com- • parent company issuer of securities guaranteed by fort” on the historical information for the acquired one or more subsidiaries; company included in the pro forma presentation. • operating subsidiary issuer of securities guaranteed by parent company; (vi) Reconciliation to US Gaap • finance subsidiary issuer of securities guaranteed by The financial statements provided for an acquired parent company; foreign business may be prepared using local Gaap or IAS, but must be reconciled to US Gaap when the • subsidiary issuer of securities guaranteed by parent acquired business is at or above the 30% level for any of company and one or more other subsidiaries of the significance tests.255 The pro forma financial parent company; and information should either be prepared on a US Gaap basis or on a local Gaap or IAS basis accompanied by a • recently acquired subsidiary issuer or subsidiary quantified reconciliation to US Gaap.256 guarantor. Guarantor financial statements Practice point: A guarantee of a security (such as a guarantee of a debt A standstill period after a default before investors can or preferred equity security) is itself a security that must pursue a guarantor (as is common in upstream guar- be registered under the Securities Act, absent an antee structures in Europe) will not satisfy the full and applicable exemption. As a result, under S-X Rule unconditional requirement, and will result in a 3-10(a), the general rule is that guarantors are required requirement for separate financial statements. to present the same financial statements as the issuer of the guaranteed securities.257 Fortunately, S-X Rules 3- 10(b) to (f) contain a number of important exceptions that permit issuers to disclose financial information about guarantors in a summary format using a footnote to their financial statements.258 Although the footnote approach can involve a fair amount of effort, it is far less
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Guarantee scenario Financial statement requirements 1. Parent company issuer of securities guaranteed by some 1. No separate financial statements for subsidiaries required or all of issuer’s subsidiaries, where: under S-X Rules 3-10(e) and (f) if the parent’s financial statements are filed for the periods required and they include an • the subsidiary guarantors are 100% owned261 by the audited footnote with condensed, consolidating financial parent company issuer; information264 for each such period, with separate columns for:
• the guarantee is full – the amount of the guarantee may • the parent company; not be less than the underlying obligation;262 • the subsidiary guarantor (or subsidiary guarantors on a • the guarantee is unconditional – holders must be able to combined basis); take immediate action against the guarantor after a default on the underlying obligation; and • any non-guarantor subsidiaries on a combined basis;265
• the guarantees are joint and several (if there are • consolidating adjustments; and multiple guarantors).263 • total consolidated amounts.
Note 2 to S-X Rule 3-10(e) and Note 1 to S-X Rule 3-10(f) allow a conditional exemption from providing the footnote if the parent company has no independent assets or operations, the non-guarantor subsidiaries are “minor,” and there is a footnote to this effect in the parent financial statements that also notes that the guarantees are full and unconditional and joint and several. Under S-X Rule 3-10(h)(5), a parent company has “no independent assets or operations” if each of its total assets, revenues, income from continuing operations before income taxes, and cash flows from operating activities (excluding amounts related to its investment in its consolidated subsidiaries) is less than 3% of the corresponding consolidated amount.
2. Operating subsidiary issuer of securities guaranteed by 2. No separate financial statements for operating subsidiary parent company, where:266 required under S-X Rule 3-10(c) if the parent’s financial statements are filed for the periods required and they include an • the operating subsidiary issuer is 100% owned by the audited footnote with condensed, consolidating financial parent company guarantor; information267 for each such period, with separate columns for:
• the guarantee is full and unconditional; and • the parent company;
• no other subsidiary of the parent is a guarantor. • the operating subsidiary issuer;
• any non-guarantor subsidiaries on a combined basis;268
• consolidating adjustments; and www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 41 Chapter 5 – Required financial statement disclosure
Guarantee scenario Financial statement requirements
• total consolidated amounts.
This exception is also available if an operating subsidiary issuer meets these requirements except that the parent is a co-issuer with the subsidiary, rather than a guarantor.
3. Finance subsidiary issuer of securities guaranteed by 3. No separate financial statements for finance subsidiary parent company, where:269 required under S-X Rule 3-10(b) if the parent’s financial statements are filed for the periods required and they include an • the finance subsidiary issuer is 100% owned by the audited footnote with: parent company guarantor; • a statement that the finance subsidiary issuer is a 100% owned • the guarantee is full and unconditional; and finance subsidiary of the parent and the parent has fully and unconditionally guaranteed the securities; and • no other subsidiary of the parent is a guarantor. • additional disclosure under S-X Rule 3-10(b)(4) relating to limitations on the ability of the issuer and guarantor to obtain dividends and loans from their subsidiaries.
This exception is also available if a finance subsidiary issuer meets these requirements except that the parent is a co-issuer with the subsidiary, rather than a guarantor.
4. Subsidiary issuer of securities guaranteed by parent 4. No separate financial statements for subsidiaries required company and one or more other subsidiaries of parent under S-X Rule 3-10(d) if the parent’s financial statements are company – applies to both operating and finance filed for the periods required and they include an audited subsidiaries, where: footnote with condensed, consolidating financial information271 for each such period, with separate columns for: • the issuer and all subsidiary guarantors are 100% owned by the parent company guarantor; • the parent company;
• the guarantees are full and unconditional, joint and • the subsidiary issuer; several;270 and • the guarantor subsidiaries on a combined basis;272 • no other subsidiary of the parent is a guarantor. • any non-guarantor subsidiaries on a combined basis;
• consolidating adjustments; and
• total consolidated amounts.
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Guarantee scenario Financial statement requirements
This exception is also available if a subsidiary issuer meets these requirements except that the parent is a joint and several co-issuer with the subsidiary, rather than a guarantor.
5. Recently acquired subsidiary issuer or subsidiary 5. Separate financial statements required under S-X Rule 3-10(g) guarantor, where: for each such subsidiary, including:
• the subsidiary has not been included in the audited • audited financial statements for the subsidiary’s most recent consolidated results of the parent company for at least fiscal year prior to the acquisition; and nine months of the most recent fiscal year; and • unaudited financial statements for any required interim • the purchase price or net book value (as of the most periods. 273 recent fiscal year end prior to the acquisition), whichever is greater, of the subsidiary (or group of subsidiaries that Requirements apply even if (i) the recently acquired subsidiary would were related prior to the acquisition) is 20% or more of otherwise be eligible for the use of condensed consolidating footnote the principal amount of the securities being registered. presentation or (ii) S-X Rule 3-05 would not require financial statements.
Investments accounted for under These tests are performed as of the end of each year the equity method presented in the issuer’s financial statements.
S-X Rule 3-09 generally requires that registration Full audited financial statements as of the same dates and statements and annual reports include audited financial for the same periods as the audited consolidated financial statements for significant investments in less-than- statements of the issuer are required where the equity majority-owned investees that are accounted for under investee meets either of the two criteria above at the 20% the equity method. S-X Rule 3-09 applies whether the or greater significance level.276 For equity investees or investee is held by an issuer, a subsidiary or another non-consolidated subsidiaries which meet any of the investee.274 three S-X Rule 1-02(w) criteria at the greater than 10% but not more than 20% significance level, S-X Rule 4- Significance for these purposes is evaluated under S-X 08(g) requires the presentation of summary financial Rule 1-02(w) based on the following two criteria: information as described by S-X 1-02(bb). Financial statements of equity investees that are prepared under • the amount of the issuer’s investment in and advances local Gaap or IAS do not have to be quantitatively to the investee compared to the total assets of the reconciled to US Gaap unless either of the two criteria is issuer and its subsidiaries on a consolidated basis; and greater than 30% (calculated on a US Gaap basis).277 A description of the differences in accounting methods is • the equity of the issuer and its other subsidiaries in required, however, regardless of the significance levels.278 the pre-tax income from continuing operations of the equity investee compared to that income of the issuer and its subsidiaries on a consolidated basis.275
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Industry guides and other • Guide 7 – Description of property by issuers engaged or transaction-specific guidance to be engaged in significant mining operations: requires disclosure of information relating to each of the (i) Industry guides mines, plants and other significant properties owned Pursuant to Item 801 of Regulation S-K, the SEC or operated (or intended to be owned or operated) publishes the following six industry guides which by the issuer, including location of the property, brief require enhanced disclosure of financial and operational description of the title, claim or lease to the property, metrics for issuers in certain industries:279 a history of previous operations, and a description of the present condition and operations on the property. • Guide 2 – Disclosure of oil and gas operations: requires disclosure of reserve estimates, sales and production costs per unit, numbers of productive wells, Practice point: developed and undeveloped acreage, drilling activity, Compiling the information required by these industry and delivery commitments; guides may be a significant undertaking, and the audi- tors should coordinate with the issuer’s financial and • Guide 3 – Statistical disclosure by bank holding operating management early in the process if an companies: requires disclosure of analyses of interest industry guide applies to an offering. earnings, investment and loan portfolios, loan loss experience, deposit types, returns on equity and (ii) Supplemental schedules for certain assets, and short-term deposits; transactions S-X Rule 5-04 requires a number of supplemental • Guide 4 – Prospectuses relating to interests in oil and schedules for particular industries and circumstances. gas programmes: requires enhanced disclosure relating Each schedule contains additional financial information to the offering terms and participation in costs and that must be audited and provided with the registration revenues among investors and others, as well as a ten- statement or annual report. The schedules include: year financial summary of any drilling programmes by the issuer and its associates, including recovery on • Schedule I — Condensed financial information of investment for investors in those programmes; registrant (known as “parent-only” financial statements): requires condensed balance sheets and • Guide 5 – Preparation of registration statements statements of income and cash flows on a non- relating to interests in real estate limited partnerships: consolidated basis if as of the end of the latest fiscal requires a summary of the financial performance of year the amount of restricted net assets of subsidiaries any other real estate investment programmes exceeds 25% of the issuer’s consolidated assets. sponsored by the general partner and its affiliates; Restricted net assets are the issuer’s proportionate share of net assets of consolidated subsidiaries (after • Guide 6 – Disclosure concerning unpaid claims and inter-company eliminations) which as of the end of claim adjustment expenses of property-casualty the most recent fiscal year may not be transferred to insurance underwriters: requires disclosure of details the parent company by subsidiaries in the form of of reserves and historical claim data, if reserves for loans, advances or cash dividends without the consent unpaid property casualty claims and claim adjustment of a third party (that is, lender, regulatory agency, expenses of the issuer, its consolidated and unconsol- foreign government etc);280 idated subsidiaries and equity investees exceed 50% of the common stockholders’ equity of the issuer and its consolidated subsidiaries; and
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• Schedule II — Valuation and qualifying accounts: (although they may need to be disclosed under requires an analysis of each valuation and qualifying MD&A). account (for example, allowance for doubtful accounts, allowance for obsolescence); Compliance with Item 17 is required for annual reports and for Exchange Act registration statements in connection • Schedule III — Real estate and accumulated with listings in the United States, while registration depreciation: requires real estate operating and statements under the Securities Act in connection with investment companies to disclose certain financial public securities offerings generally require compliance details regarding each of their properties; with Item 18.284 Foreign private issuers may voluntarily report under Item 18 for all of their filings with the SEC. • Schedule IV — Mortgage loans on real estate: requires real estate operating and investment companies to disclose details of each mortgage loan which accounts Practice point: for 3% or more of the carrying value of all of the Many foreign private issuers listing existing securities in issuer’s mortgages; and the United States comply with the more extensive requirements of Item 18, even if they have no plans • Schedule V — Supplemental information concerning to file a registration statement to sell new securities in property-casualty insurance operations: requires the United States in the future. The secondary mar- disclosure as to liabilities on property-casualty ket and securities analysts generally require the addi- insurance claims if the issuer, its subsidiaries or 50%- tional information for comparability to other issuers. or-less owned equity basis investees have such liabilities. However, the schedule may be omitted if reserves for unpaid property-casualty claims and The following is a list of disclosure items that are often claims adjustment expenses did not, in the aggregate, required by Item 18 and therefore necessary to be exceed 50% of common stockholders’ equity of the included in any financial statements contained in a issuer and its consolidated subsidiaries as of the public offering registration statement under the beginning of the fiscal year. Securities Act:
Special requirements for public • disclosure of unconditional purchase obligations or offerings other commitments and guarantees;
(i) Item 17 and Item 18 • a description of stock option plans including the Form 20-F provides two levels of financial statement number of shares under option and option price; disclosure: Item 17 and Item 18. Item 18 requires a more thorough adaptation of the financial statements to • description of property, plant and equipment under US Gaap and the requirements of Regulation S-X than capital leases; does Item 17.281 According to the SEC, the distinction between Items 17 and 18 is based on a classification of • components of pension expense and description of the requirements of US Gaap and S-X into those that the plans; specify the methods of measuring the amounts shown on the face of the financial statements, and those • disclosure of related-party transactions, including the prescribing disclosures that explain, modify or monetary value of such transactions; supplement the accounting measurements.282 Disclosures that are required by US Gaap but not local • a schedule of debt repayments over the next five Gaap or IAS need not be furnished for Item 17283 years; www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 45 Chapter 5 – Required financial statement disclosure
• disclosure of possible loss contingencies that have not The aim of segment reporting is to align public financial been recognized in the financial statements; reporting with a company’s internal reporting in order to permit financial analysts and the public to see the overall • disclosure of the fair value of financial instruments; enterprise the way management sees it. Whether an and issuer considers its enterprise as having more than one segment is highly fact specific and often depends on • information on income taxes. factors such as economic similarity, the similarity of the products or services sold, the nature of the production In addition, information on sales, assets and operating process, customer type, distribution methods, and the profit by business segment and geographic area must be regulatory environment for the business. The determi- provided. nation is very subjective and is often the subject of much discussion with the company’s accountants and, through (ii) Segment reporting the SEC comment process, with the SEC. The most Under Item 18, in addition to all the consolidated critical factor in determining whether an issuer has more financial information required to be included in a than one segment is how management runs its business.286 registration statement, companies in more than one line of business may also be required to include separate Once a segment has been identified, the issuer must revenues and operating data for each line of business. provide information about the segment if it meets any This requirement is a function of whether the of the following 10% thresholds: company’s business is comprised of more than one segment. S-X Rule 3-03(e) and Item 101(b) of • its reported revenue (including both sales to external Regulation S-K require certain financial reporting and customers and intersegment sales) is 10% or more of textual disclosure for each segment, as defined by US the combined revenue (internal and external) of all Gaap. reported operating segments;
The Financial Accounting Standards Board Statement of • the absolute amount of its reported profit or loss is Financial Accounting Standards No 131 (SFAS 131), 10% or more of the greater, in absolute amount, of “Disclosures About Segments of an Enterprise and (1) the combined profit of all operating segments that Related Information,” provides detailed guidance for did not report a loss or (2) the combined loss of all when a business constitutes an operating segment and operating segments that did report a loss; or how its discrete financial information must be reported. Generally, an operating segment is a component of a • its assets are 10% or more of the combined assets of larger enterprise: all operating segments;
• that engages in business activities from which it may A company with more than one segment in excess of earn revenues and incur expenses (including revenues these size requirements must disclose information for and expenses relating to transactions with other each such segment including the revenues from external components of the same enterprise); customers, a measure of profit or loss287 and the total assets attributable to that segment, as well as a reconcil- • whose operating results are regularly reviewed by the iation to the corresponding consolidated amounts. enterprise’s chief operating decision maker285 to make Additional information on items such as equity decisions about resources to be allocated to the investments and capital expenditures may be required segment and assess its performance; and under SFAS 131 if such amounts are reviewed by the company on a segment basis. For interim periods, • for which discrete financial information is available. disclosure must include revenues, a measure of profit or
46 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 5 – Required financial statement disclosure
loss for each segment, reconciliations and material interim financial statements for an issuer’s affiliate if the changes to total assets. Financial disclosure for segments securities of that affiliate are pledged as collateral for the will typically be included in the financial statements and offering and those securities constitute a substantial be cross-referenced as part of a discussion on operating portion of the collateral for the securities being segments in MD&A.288 The effect of these requirements registered. Securities of the affiliate are deemed to is to force disclosure of profitability by segment, which constitute a substantial portion of the collateral if the many issuers are reluctant to do for competitive reasons. aggregate principal amount, par value, or book value of the pledged securities (as carried by the issuer), or the market value of the pledged securities, whichever is the Practice point: greatest, equals 20% or more of the principal amount of The identification and reporting of financial informa- the securities that are being secured. tion for operating segments will be critical in the offer- ing process as the time to prepare such information, If this test is met, the affiliate must file the same financial the effect on textual disclosure and the impact on statements that it would be required to file if it were the enterprise valuation may all be significant. Although issuer. However, the affiliate’s financial statements do not the requirement for segment reporting is usually con- need to be filed if they are otherwise separately included sidered only when a company is issuing securities for (which may be through incorporation by reference, if the first time, the issue should be revisited if the com- incorporation is otherwise permitted) in the filing pany has entered into new business lines or if man- individually or consolidated with the affiliate’s subsidiaries. agement has begun to analyze its business in a new way that may impact the original segment analysis. (v) Other customary information Because the guidance of SFAS 131 is complex and its In addition to the formal requirements of Form 20-F application very fact-specific, it is important to begin and Regulation S-X, it is customary in a public offering an early dialogue with the accountants when there to include certain other information in the registration may be segment reporting issues. statement that may be material or convenient for investors in considering the financial condition of the issuer. (iii) Coverage ratios Under Item 503(d) of Regulation S-K, any registration Summary financial data statement covering debt securities must include the ratio of earnings to fixed charges and any registration A page of summary financial data is routinely included statement covering preferred stock must include the in the summary box of the registration statement. ratio of combined fixed charges and preference Although there are no specific line item requirements dividends to earnings. Coverage ratios must be included for this key marketing page, it usually contains income for each of the last five fiscal years and for any interim statement, balance sheet, and other financial data for the periods presented. If the proceeds from the sale of debt last three to five fiscal years and the most recent interim or preferred equity will be used to repay outstanding period (as well as the comparable interim period in the debt or to retire other securities and the change in the prior year) similar to that required on the “Selected ratio would be 10% or greater, a pro forma ratio must financial data” page appearing later in the disclosure be included for the most recent fiscal year and the latest document. Key operational metrics are also typically interim period presented. included in the summary under a heading such as “Other financial data.” These metrics will vary with the (iv) Financial statements for secured type of issuer (for example, comparable store sales for a offerings retailer, capital expenditures for a manufacturer, or S-X Rule 3-16 generally requires separate audited and subscriber numbers for a cable television company).289 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 47 Chapter 5 – Required financial statement disclosure
Recent results acquired or to-be-acquired business are required to be presented. This practice will often result in a discussion Item 8B of Form 20-F requires disclosure of whether or of the impact of pending or recent acquisitions on not any significant change has occurred since the date of margins, debt levels etc, in a section of the MD&A the annual financial statements, or since the date of the labeled “Overview” or “Impact of the acquisition” or a most recent interim financial statements included in the similar title. The textual disclosure may include a document.290 The registration statement must also be discussion of any special charges or anticipated synergies updated to include any audited or interim financials that expected to result from the acquisition or other pending become available before the anticipated effective date.291 event. That information need not be reconciled to US Gaap, although a narrative disclosure about differences in Special considerations in accounting principles is required and material unregistered transactions reconciling items that have not been previously addressed in the filing must be quantified.292 As noted above, unregistered transactions do not require Comparative prior periods are not required.293 the filing of a registration statement or a reconciliation to US Gaap. And unregistered transactions impose few Whether or not recent results are required in the (if any) specific financial information requirements. For registration statement, it may also be desirable from a example, Regulation S has no financial statement marketing perspective to include a summary of recent requirements at all, while Rule 144A has only very financial results in the summary box. If the recent modest financial information requirements. It is hence results are negative, it may be advisable to include recent not possible to provide a precise answer to the question results disclosure to avoid any negative surprises for of what financial statements must be included in an investors when the full quarterly (or semi-annual) unregistered transaction. numbers become available. For example, the issuer may be aware that its sales are trending down in the current Foreign private issuers tend to take a flexible approach quarter, or that significant charges will be taken in to financial statements in unregistered transactions connection with an acquisition after it closes. Even if depending on a variety of factors, including the type of analysts may be anticipating such an event, it is transaction, local market practice, deal size, underwriter preferable to disclose this information in the registration practice, investor expectations and other marketing statement itself to avoid a risk of future litigation. At the issues. For example, in the case of debt offerings which roadshow meetings, prospective investors will be asking are intended to be followed in a matter of weeks by a about the results for a quarter or six-month period just registered exchange offer, buyers of the offered or almost completed and presenting information in the securities will receive full Securities Act disclosure offering document will facilitate a discussion of these shortly after the closing. Most practitioners accordingly results.294 elect to provide substantially the same disclosure to prospective purchasers before the closing whenever Recent developments and proposed possible. In other instances, unregistered transactions acquisitions have excluded a good deal of the finer elements of the financial information requirements, such as some of the To the extent material, the likely consequences of details of the required guarantor footnotes described material recent developments may also be disclosed in above and some of the details of executive compen- the summary box or the MD&A. For example, it is sation. customary to discuss a material recent or proposed acquisition in the MD&A section of the offering The bedrock principle is that the financial information document, whether or not audited financials of the provided to investors in the United States must meet the
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requirements of Exchange Act Rule 10b-5. In other words, the financial information must not misstate material facts or an omit material facts needed to make the included information not misleading.
www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 49 Chapter 6 – The US Sarbanes-Oxley Act of 2002 Chapter 6 The US Sarbanes-Oxley Act of 2002
Background Sarbanes-Oxley Act. Accordingly, in this section of the Overview when we refer below to “issuers” and On July 30 2002, US President George W Bush signed “foreign private issuers” we mean those companies that into law the Sarbanes-Oxley Act, which he called the are subject to Sarbanes-Oxley. “most far-reaching reforms of American business practice since the time of Franklin Delano Roosevelt.” Although the Sarbanes-Oxley Act does not generally The Sarbanes-Oxley Act significantly modified the US distinguish between US domestic and foreign private federal securities laws and has led to an unprecedented issuers, the SEC has, in its implementing rules, made wave of rulemaking by the SEC. various exceptions for the benefit of foreign private issuers. We summarize below the key provisions of the Sarbanes-Oxley Act and the SEC’s rules under the Act that are relevant to foreign private issuers. Practice point: The Sarbanes-Oxley Act has caused some foreign pri- (i) Who is subject to Sarbanes-Oxley? vate issuers to reconsider their listings in the United The Sarbanes-Oxley Act applies to all issuers – States. De-listing, however, only serves to exempt including foreign private issuers – that: the issuer from the requirements of Section 301 of Sarbanes-Oxley (concerning standards relating to list- • have registered securities under the Exchange Act; ed company audit committees). In order to avoid the remainder of Sarbanes-Oxley’s provisions, the issuer • are required to file reports under Section 15(d) of the would also have to de-register under the Exchange Exchange Act; or Act. Doing this requires that the issuer certify to the SEC that it has less than 300 US shareholders, which, • have filed a registration statement under the unfortunately, is in many cases difficult for a foreign Securities Act that has not yet become effective.295 private issuer to establish and police.
This means, for example, that any foreign private issuer that has listed its securities in the United States, or issued securities to the public in the United States whether or not listed (such as in a registered exchange offer for high-yield bonds) is subject to the Sarbanes-Oxley Act. A foreign private issuer that has not sold securities to the public in the United States, or that is exempt from Exchange Act registration by virtue of Exchange Act Rule 12g3-2(b) is not subject to the requirements of the
50 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 6 – The US Sarbanes-Oxley Act of 2002
(ii) When does Sarbanes-Oxley take reports on Form 6-K)300 to include separate certifications effect? by the issuer’s CEO and CFO.301 The certifications The Sarbanes-Oxley Act’s provisions have taken effect must state that:302 at different times, ranging from immediately upon enactment to later dates specified in the Act or on which • the officer has reviewed the annual report; the required SEC implementing regulations come into force. Annex C lists the effective dates for certain key • based on the officer’s knowledge, the annual report provisions of Sarbanes-Oxley and the related SEC rules. does not contain any untrue statement of a material fact or omit to state a material fact necessary to make Key provisions of Sarbanes-Oxley, the statements made, in light of the circumstances and related SEC rulemaking under which such statements were made, not misleading; (i) Certification requirements Sarbanes-Oxley contains two overlapping certifications • based on the officer’s knowledge, the financial that must be provided by an issuer’s principal executive statements, and other financial information included officer and principal financial officer, or persons in the annual report, fairly present in all material performing similar functions (respectively, the CEO and respects the financial condition, results of operations the CFO): the Section 302 certification, and the and cash flows of the issuer; Section 906 certification. Section 302 amends the Exchange Act, whereas Section 906 amends the US • the CEO and CFO are responsible for establishing federal criminal code. and maintaining “disclosure controls and procedures”303 [and “internal control over financial (a) Section 302 reporting”304]305 for the issuer and have: Section 302(a) of the Sarbanes-Oxley Act directs the SEC to adopt rules requiring CEO and CFO certifi- – designed such disclosure controls and cation of each annual or quarterly report filed by issuers. procedures, or caused such disclosure controls In response, the SEC has adopted new Exchange Act and procedures to be designed under their Rules 13a-14, 15d-14, 13a-15 and 15d-15; new Item supervision, to ensure that material information 15 of Form 20-F; and the text of a certification for Form relating to the issuer, including its consolidated 20-F.296 The certification rules, Item 15 and the certifi- subsidiaries, is made known to them by others cation text took effect on August 29 2002.297 within those entities;
However, the certification rules, Item 15 and the certifi- – [designed such internal control over financial cation text have been further modified by the rules reporting, or caused such internal control over adopted under Section 404 of the Sarbanes-Oxley financial reporting to be designed under their Act.298 As a result, we have summarized below the supervision, to provide reasonable assurance revised versions of the certification rules, Item 15 and regarding the reliability of financial reporting the certification text. The revised versions generally and the preparation of financial statements for took effect August 14 2003 (with certain exceptions that external purposes in accordance with generally we note below).299 accepted accounting principles;]306
(1) Exchange Act Rules 13a-14, 15d-14; Form 20- – evaluated the effectiveness of the issuer’s F disclosure controls and presented in the annual Rules 13a-14 and 15d-14 require a foreign private report their conclusions about the effectiveness issuer’s annual report on Form 20-F (but not its current of the disclosure controls and procedures, as of www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 51 Chapter 6 – The US Sarbanes-Oxley Act of 2002
the end of the period covered by the report the effectiveness of the disclosure controls and based on such evaluation;307 and procedures based on their review as of the end of the period to which the report relates.312 – disclosed in the report any change in the issuer’s internal control over financial reporting that For the purposes of Rules 13a-15 and 15d-15, and Item occurred during the period covered by the 15 of Form 20-F (as well as the required certifications of report that has materially affected, or is Rules 13a-14 and 15d-14), “disclosure controls and reasonably likely to materially affect, the issuer’s procedures” means controls and other procedures of an internal control over financial reporting; and issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that • the CEO and CFO have disclosed, based on their it files or submits under the Exchange Act is (i) most recent evaluation of internal control over recorded, processed, summarized and reported in a financial reporting, to the issuer’s auditors and the timely fashion, and (ii) accumulated and communicated audit committee: to the issuer’s management, to allow for timely decisions about disclosure.313 – all significant deficiencies and material weaknesses in the design or operation of (3) Violations of Section 302 internal control over financial reporting which While Section 302 carries no specific criminal sanctions, are reasonably likely to adversely affect the false certifications are subject to SEC enforcement issuer’s ability to record, process, summarize action for violating the Exchange Act and also possibly and report financial information; and to both SEC and private litigation alleging violations of the anti-fraud provisions of the Exchange Act (for – any fraud, whether or not material, that example, Section 10(b) of the Exchange Act and involves management or other employees who Exchange Act Rule 10b-5). A false certification also have a significant role in the issuer’s internal may have liability consequences under Sections 11 and control over financial reporting. 12(a)(2) of the Securities Act if the accompanying report is incorporated by reference into a registration statement The certifications must be included as an exhibit to the (for example, on Form F-3) or into a prospectus. issuer’s annual report on Form 20-F.308 Except for the portions of the certifications appearing above in square (b) Section 906 brackets (which do not come into effect until April 15 Section 906, which added new Section 1350 to the US 2005), the wording of the certification may not be federal criminal code, took effect immediately upon changed in any respect, even if the changes would enactment of the Sarbanes-Oxley Act on July 30 2002. appear to be inconsequential.309 Section 906 requires that each periodic report containing financial statements filed by an issuer must be (2) Disclosure controls and procedures – Exchange accompanied by a certification by the issuer’s CEO and Act Rules 13a-15 and 15d-15; Item 15 of Form 20-F CFO that: Under Rules 13a-15 and 15d-15, a foreign private issuer must maintain disclosure controls and procedures.310 In • the periodic report fully complies with the addition, as of the end of each fiscal year, the issuer’s requirements of Section 13(a) or Section 15(d) of the management, with the participation of the CEO and Exchange Act; and CFO, must make an evaluation of the effectiveness of the issuer’s disclosure controls and procedures.311 • the information contained in the periodic report Finally, under Item 15 of Form 20-F, the issuer must fairly presents, in all material respects, the financial disclose the conclusions of its CEO and CFO regarding condition and results of operations of the issuer.
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Although Section 906 is self-implementing, the SEC has has taken note of Senator Biden’s comments, and adopted Exchange Act Rules 13a-14(b) and 15d-14(b) although it stated that it was “concerned that extending to require that the Section 906 certification (which may Section 906 certifications to Forms 6-K or 8-K could be a joint certification of the CEO and CFO) must be potentially chill the disclosure of information by provided, and must be furnished as an exhibit to the companies,” it went on to comment that it was relevant periodic report.314 Because the Section 906 “considering, in consultation with the US Department certification is not considered “filed” as a technical of Justice, the application of Section 906 to current matter, it would not attract liability under Section 18 of reports on Forms 6-K and 8-K and annual reports on the Exchange Act or be incorporated by reference into Form 11-K and the possibility of taking additional the issuer’s subsequent Securities Act registration action.”318 statements (unless specifically incorporated by the issuer).315 Second, in contrast to the Section 302 certification, the text of the Section 906 certification does not explicitly (1) Violations of Section 906 provide for the officer to certify as to his or her Under Section 906, an officer who certifies a statement knowledge. However, the US Department of Justice “knowing that the periodic report accompanying the has confirmed that an officer may qualify a Section 906 statement” does not meet the certification can be fined certification to his or her knowledge because not more than $1 million or imprisoned for not more knowledge would, in any event, be a necessary element than 10 years, or both. By contrast, an officer who of criminal prosecution.319 willfully certifies his or her written statement while knowing that the annual report does not “comport with Third, whereas the Section 302 certification is required all the requirements” of Section 906 can be fined not for any amendment to an annual report on Form 20-F, more than $5 million or imprisoned not more than 20 the SEC has stated that Form 20-F amendments do not years, or both. The distinction between “knowing” and require a new Section 906 certification.320 “willful” certification is not set out in the Sarbanes- Oxley Act, but in other contexts “willfully” normally (ii) Management’s reports on internal requires a showing that the person had specific control over financial reporting knowledge of the law he or she was violating, whereas Section 404 of Sarbanes-Oxley directs the SEC to issue “knowingly” does not.316 rules requiring an issuer’s annual report to contain (i) an internal control report from management and (ii) an (c) Differences between Section 906 and Section 302 attestation report of the issuer’s independent auditor. certifications The SEC has accordingly adopted new Rules 13a-15 Although the text of the two required certifications and 15d-15 under the Exchange Act, and new Item 15 overlap, there are some important differences between of Form 20-F. A foreign private issuer must comply them. First, unlike Section 302, the SEC has not issued with these rules in connection with its annual report on specific guidance on whether Section 906 applies to Form 20-F for the first fiscal year ending on or after current reports on Form 6-K. We believe the Section April 15 2005.321 906 certification is not required for Form 6-K current reports (in view, among other things, of the fact that the For the purposes of Rules 13a-15 and 15d-15, and Item SEC’s rules implementing Section 302 only apply to 15 of Form 20-F (as well as the required certifications of annual reports on Form 20-F). In April 2003, however, Rules 13a-14 and 15d-14), “internal control over US Senator Joseph R Biden inserted comments into the financial reporting” is defined as a process designed by, US Congressional Record to the effect that the Section or under the supervision of, the issuer’s CEO and CFO, 906 certification was intended to apply to Form 6-K and effected by the issuer’s board of directors, submissions containing financial statements.317 The SEC management and other personnel, to provide reasonable www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 53 Chapter 6 – The US Sarbanes-Oxley Act of 2002
assurance regarding the reliability of financial reporting (b) Item 15 of Form 20-F and the preparation of financial statements for external In an issuer’s annual report on Form 20-F, management purposes in accordance with generally accepted must provide a report on the issuer’s internal control accounting principles, and includes those policies and over financial reporting that contains, among other procedures that: things:327
• pertain to the maintenance of records that in • a statement of management’s responsibility for reasonable detail accurately and fairly reflect the establishing and maintaining adequate internal transactions and dispositions of the assets of the issuer; control over financial reporting;
• provide reasonable assurance that transactions are • a statement identifying the framework used by recorded as necessary to permit preparation of management to evaluate the effectiveness of the financial statements in accordance with generally issuer’s internal control over financial reporting; accepted accounting principles, and that receipts and expenditures of the issuer are being made only in • management’s assessment of the effectiveness of the accordance with authorizations of management and issuer’s internal control over financial reporting as of directors of the issuer; and the end of the most recent fiscal year, including a statement as to whether or not the issuer’s internal • provide reasonable assurance regarding prevention or control over financial reporting is effective (including timely detection of unauthorized acquisition, use or the disclosure of any material weakness in the issuer’s disposition of the issuer’s assets that could have a internal control over financial reporting discovered material effect on the financial statements.322 by management);328 and
(a) Exchange Act Rules 13a-15 and 15d-15 • a statement that the independent auditor that audited In addition to requiring the maintenance of disclosure the financial statements included in the annual report controls and procedures, Rules 13a-15 and 15d-15 has issued an attestation report on management’s require a foreign private issuer to maintain internal assessment of the issuer’s internal control over control over financial reporting.323 As with disclosure financial reporting (the independent auditor’s controls and procedures, management (with the partic- attestation report must also be provided in the annual ipation of the CEO and CFO) must evaluate the report).329 effectiveness of the issuer’s internal control over financial reporting as of the end of each fiscal year.324 An issuer must maintain “evidential matter, including The SEC has, however, specified that management’s documentation” to provide reasonable support for evaluation must be based on a recognized control management’s assessment of the issuer’s internal control framework established by a body or group that has over financial reporting.330 followed due-process procedures, including a broad distribution of the framework for public comment.325 In addition, the issuer must also disclose any change in Furthermore, the issuer’s management must also its internal control over financial reporting, identified in evaluate whether during the fiscal year any change in connection with the CEO and CFO’s evaluation as of the issuer’s internal control over financial reporting the end of the fiscal year, that occurred during the occurred which materially affected, or is reasonably period covered by the annual report that has materially likely to materially affect, the issuer’s internal control affected, or is reasonably likely to materially affect, the over financial reporting.326 issuer’s internal control over financial reporting.331 The SEC has cautioned that while there is no explicit requirement in the rules under Section 404 to disclose
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the reasons for any such change, an issuer must consider A foreign private issuer is exempt from Regulation G whether the anti-fraud provisions of the US federal if:341 securities laws would require that disclosure, together with other information about the circumstances • its securities are listed or quoted outside the United surrounding the change.332 States;
(iii) Non-Gaap financial measures • the non-Gaap financial measure being used is not Section 401(b) of the Sarbanes-Oxley Act requires the derived from or based on a measure calculated and SEC to issue rules limiting the use of pro forma financial presented in accordance with US Gaap; and information in various ways. In response, the SEC has adopted both a new disclosure regulation, Regulation • the disclosure is made outside the United States. G, and new rules applicable to disclosure in filings with the SEC under Item 10 of Regulation S-K.333 The SEC (b) Regulation S-K Item 10(e) has chosen to refer in the rules to “non-Gaap financial Distinct from Regulation G, the SEC has adopted measures” rather than pro forma financial information, limitations on the use of non-Gaap financial measures in to avoid confusion with existing SEC rules on pro filings (whether annual reports on Form 20-F, or forma financial information (such as Article 11 of registration statements in connection with offerings in Regulation S-X).334 the United States or US listings) as new Item 10(e) of Regulation S-K. Item 10(e) applies to any SEC filings (a) Regulation G made in respect of financial years ended after March 28 Regulation G applies whenever an issuer, or a person 2003.342 acting on its behalf, publicly discloses material information that includes a non-Gaap financial Item 10(e) requires that whenever an issuer includes a measure.335 A “non-Gaap financial measure” is broadly non-Gaap financial measure in an SEC filing it must also defined as a numerical measure of financial performance include:343 that excludes (or includes) amounts that are otherwise included (or excluded) in the comparable measure • a presentation, with equal or greater prominence, of calculated and presented in the financial statements the most directly comparable Gaap financial measure; under Gaap.336 For a foreign private issuer, “Gaap” means the local Gaap under which the financial • a reconciliation of the differences between the non- statements were prepared, unless the measure in Gaap financial measure and the most directly question is derived from US Gaap, in which case Gaap comparable Gaap financial measure; means US Gaap for purposes of applying the requirements of Regulation G to the disclosure of the • a statement why management believes the non-Gaap measure.337 financial measure provides useful information for investors; and Regulation G requires that disclosure of this sort be accompanied by the most directly comparable financial • to the extent material, a statement of the additional measure calculated in accordance with Gaap, and a purposes for which management uses the non-Gaap reconciliation of the differences between the two.338 In financial measure. addition, Regulation G prohibits an issuer from making any non-Gaap financial measure public if it contains a Furthermore, Item 10(e) prohibits in SEC filings, material misstatement or omits to include information among other things:344 needed to make the included measure not misleading.339 Regulation G took effect on March 28 2003.340 • non-Gaap measures of liquidity that exclude items www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 55 Chapter 6 – The US Sarbanes-Oxley Act of 2002
requiring cash settlement, other than EBIT and arrangements, the disclosure must include:349 EBITDA; • the nature and business purpose of the off-balance • the adjustment of non-Gaap measures of sheet arrangements; performance to eliminate or smooth items charac- terized as non-recurring, unusual or infrequent when • the importance to the issuer of the off-balance sheet the nature of the charge or gain is such that it is arrangements in respect of liquidity, capital resources, reasonably likely to recur within two years or there market risk support, credit support or other benefits; was a similar charge or gain within the prior two years; and • the amount of revenues, expenses and cash flows arising from these arrangements; • the use of titles or descriptions for non-Gaap financial measures that are the same as, or confusingly similar • the nature and amounts of any interests retained, to, titles or descriptions used for Gaap financial securities issued or amounts incurred by the issuer measures. under these arrangements;
Item 10(e) contains an exemption from these • the nature and amounts of any other obligations or prohibitions for a foreign private issuer if the non-Gaap liabilities (contingent or otherwise) arising from these financial measure relates to the local Gaap used in the arrangements that are reasonably likely to become issuer’s primary financial statements, is required or material and the triggering events that could cause expressly permitted by the standard-setter that them to arise; and establishes the local Gaap, and is included in the issuer’s annual report for its home jurisdiction.345 • any known events or trends that will, or are reasonably likely to, result in the termination or (iv) Off-balance sheet and other MD&A reduction in availability to the issuer of these disclosure arrangements and the course of action the issuer Section 401(a) of the Sarbanes-Oxley Act requires the proposes to take in response. SEC to implement rules requiring issuers to disclose material off-balance sheet transactions. The SEC’s rules An “off-balance sheet arrangement” is defined to go beyond off-balance sheet transactions, however, and include any transaction, agreement or contractual also address certain topics covered in its prior MD&A arrangement to which an entity unconsolidated with the initiatives.346 The rules take the form of amendments to issuer is a party under which the issuer has certain Item 5 of Form 20-F, and accordingly apply to all obligations or interests.350 Because the definition of registration statements filed by foreign private issuers “off-balance sheet arrangement” incorporates concepts (whether under the Securities Act or Exchange Act), as from US Gaap, foreign private issuers will need to refer well as annual reports. to US Gaap for some of the disclosure items.351 However, the MD&A disclosure should focus on the (a) Off-balance sheet arrangements primary financial statements in the document (while Effective for SEC filings for fiscal years ending on or taking reconciliation to US Gaap into account).352 after June 15 2003,347 an issuer must disclose, in a separately captioned section of MD&A, off-balance (b) Table of contractual obligations sheet arrangements that either have, or are reasonably For fiscal years ending on or after December 15 2003,353 likely to have, a current or future material effect on the an issuer must also include in its SEC filings a table of issuer’s financial condition, results of operations, or contractual obligations as of the end of the latest balance liquidity.348 To the extent necessary to understand these sheet date showing the following items:354
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Contractual obligations Payments due by period Total Less than 1-3 3-5 More than 1 year years years 5 years Long-term debt obligations – – – – – Capital (finance) lease obligations – – – – – Operating lease obligations – – – – – Purchase obligations – – – – – Other long-term liabilities reflected – – – – – on the issuer’s balance sheet under the Gaap of the primary financial statements Total – – – – –
The term “purchase obligations” means an enforceable Under Rule 10A-3, audit committee members each agreement to purchase goods or services that is binding have to be a member of the board of directors and on the issuer and that specifies key commercial terms otherwise independent.360 To be independent, an audit (such as quantity and price).355 With the exception of committee member is barred from accepting any purchase obligations, the classifications of categories compensatory fees other than in that member’s capacity shown in the table are defined by reference to US Gaap. as a member of the board361 and may not be an affiliated However, an issuer that prepares financial statements in person of the issuer.362 The definition of “affiliated accordance with non-US Gaap should include those person” includes a person that, directly, or indirectly items of contractual obligations in the table that are through one or more intermediaries, controls, or is consistent with the classifications used in the Gaap under controlled by, or is under common control with the which its primary financial statements are prepared.356 specified person.363 There is, however, a safe harbour for certain non-executive officers and other persons that are (c) Contingent liabilities and commitments 10% or less shareholders of the issuer.364 Although it has issued proposed rules with respect to disclosure requirements for contingent liabilities and Foreign private issuers are entitled to certain exemptions commitments, the SEC has declined to adopt final rules. from the independence prong of Rule 10A-3. For In the meantime, the SEC’s existing guidance on the example, the inclusion of a non-management employee subject – which suggests a tabular format of specified representative,365 a non-management affiliated person categories357 – is controlling.358 with only observer status,366 or a non-management governmental representative on the audit committee (v) Standards relating to listed company will not violate the affiliated person prong of the audit committees independence test.367 In addition, issuers involved in an Section 301 of the Sarbanes-Oxley Act adds new IPO are entitled to certain exemptions during a transi- Section 10A(m) of the Exchange Act. Section 10A(m) tional period following their public offering.368 charges the SEC with creating rules to prohibit the listing of any security in the United States of an issuer Rule 10A-3 also requires that: that is not in compliance with certain substantive standards for audit committees. The SEC has adopted • the audit committee must be “directly responsible” final rules under Section 301 as Exchange Act Rule for the appointment, compensation, oversight and 10A-3. Listed foreign private issuers must be in retention of the external auditors, who must report compliance with Rule 10A-3 by July 31 2005.359 directly to the audit committee;369 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 57 Chapter 6 – The US Sarbanes-Oxley Act of 2002
• the audit committee must establish procedures for the (vi) Audit committee financial expert receipt, retention and treatment of complaints Section 407(a) of the Sarbanes-Oxley Act directs the regarding accounting, internal controls or auditing SEC to issue rules requiring an issuer to disclose in its matters, and for the confidential, anonymous periodic reports whether its audit committee has at least submission by employees of concerns regarding one financial expert, or if not, why not. questionable accounting or auditing matters;370 The SEC’s final rules implementing Section 407(a) use • the audit committee must have the authority to the term “audit committee financial expert” instead of engage independent counsel and other advisers as it “financial expert.” The SEC has implemented these deems necessary to carry out its duties;371 and rules as new Item 16A of Form 20-F. Item 16A applies to annual reports of foreign private issuers for fiscal years • the issuer must provide the audit committee with ending on or after July 15 2003.378 appropriate funding for payment of external auditors, advisors employed by the audit committee and Under Item 16A, a foreign private issuer must disclose ordinary administrative expenses of the audit in its annual report that the issuer’s board of directors has committee.372 determined whether or not it has one audit committee financial expert serving on its audit committee, or if not, These requirements are not intended to conflict with why not.379 If the issuer has a two-tier board of directors, local legal or listing provisions (or requirements under the supervisory or non-management board would make the foreign private issuer’s organizational documents), this determination.380 The issuer must also disclose the and instead relate to the allocation of responsibility name of the audit committee financial expert (if any)381 between the audit committee and the issuer’s and whether that person is independent from management.373 Accordingly, the audit committee may management.382 recommend or nominate the appointment or compen- sation of the external auditor to shareholders if these In order to qualify as an audit committee financial matters are within shareholder competence under local expert, the audit committee member must have the law,374 and it must be granted those responsibilities that following attributes:383 the board of directors can legally delegate.375 • an understanding of Gaap; Rule 10A-3 contains a general exemption for foreign private issuers that have a statutory board of auditors or • the ability to assess the general application of Gaap in statutory auditors established pursuant to home country connection with the accounting for estimates, law or listing requirements, which in turn meet various accruals and reserves; requirements.376 • experience preparing, auditing or analyzing financial A foreign private issuer relying on Rule 10A-3’s statements similar to those of the issuer, or actively exemption from independence, or the general supervising others engaged in these activities; exemption noted above, will need to disclose in its annual report its reliance on the exemptions and an • an understanding of internal controls and procedures assessment of whether this reliance will materially for financial reporting; and adversely affect the audit committee’s ability to act independently and to satisfy any of the other • an understanding of audit committee functions. requirements of Rule 10A-3.377 In addition, an audit committee financial expert must have gained those attributes through:384
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• education and experience as a principal financial new Item 16C of Form 20-F. S-X Rules 2-01 and 2- officer, principal accounting officer, controller, 07, and Rule 10A-2, generally took effect on May 6 public accountant or auditor, or experience in similar 2003 (although many of the provisions of these rules positions; have varying transition periods), while Item 16C takes effect for annual reports in respect of fiscal years ending • experience actively supervising these functions; after December 15 2003.389
• experience overseeing or assessing the performance Rule 10A-2 provides generally that it is unlawful for an of companies or public accountants with respect to auditor not to be independent under certain provisions the preparation, auditing or evaluation of financial of S-X Rules 2-01 and 2-07. S-X Rules 2-01 and 2- statements; or 07, in turn, track – and in some cases expand upon – the requirements of Sections 10A(g)-(l), and provide • other relevant experience. (among other things):
The term “Gaap” as used in Item 16A refers to the body • certain restrictions on the ability of an issuer to of Gaap used by the issuer in its primary financial employ a former partner, principal, shareholder or statements.385 Accordingly, the audit committee financial professional employee of an accounting firm;390 expert of a foreign private issuer need only be versed in local Gaap, and not in US Gaap or in reconciliation to • limitations on the non-audit services that an US Gaap (although that experience would, of course, be independent auditor may provide;391 useful).386 • that an audit partner must not act as the lead audit Item 16A also contains a liability safe harbour for the partner or concurring partner for more than five audit committee financial expert, under which: consecutive years, and must not provide certain other services for more than seven consecutive years;392 • a person who is determined to be an audit committee financial expert is not deemed to be an expert for any • that the audit committee must pre-approve the purpose, such as Section 11 of the Securities Act; engagement of the auditor to provide audit and non- and387 audit services to the issuer or its subsidiaries, or for policies or procedures for pre-approval of audit and • the designation of a person as an audit committee non-audit services (subject to certain de minimis financial expert does not impose greater duties, exceptions);393 obligations or liabilities on the person than on other audit committee and board members, and does not • that no audit partner may earn compensation based affect the duties, obligations or liabilities of other on the partner’s procuring engagements with the audit committee and board members.388 issuer to provide any services other than audit, review or attest services;394 and (vii) Auditor independence Title II of the Sarbanes-Oxley Act creates a series of • that an auditor must report to the audit committee on requirements relating to the work of external auditors, (i) all critical accounting policies and practices to be grouped under the heading “auditor independence.” used; (ii) all alternative treatments of financial Title II establishes new Sections 10A(g) through (l) of information within Gaap that have been discussed the Exchange Act. The SEC has implemented Title II with the issuer’s management (as well as the by the adoption of amendments to S-X Rule 2-01, new implications of those alternatives and the auditor’s S-X Rule 2-07, new Exchange Act Rule 10A-2, and preferred treatment); and (iii) all other material www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 59 Chapter 6 – The US Sarbanes-Oxley Act of 2002
written communications between the auditors and officer or director of an issuer, or any other person management.395 acting under the direction of an officer or issuer, from taking any action to coerce, manipulate, mislead or Under new Item 16C of Form 20-F, a foreign private fraudulently influence an auditor engaged in the issuer must disclose in its annual report: performance of an audit or review of financial statements of the issuer that are required to be filed with • under the caption “audit fees,” aggregate fees billed the SEC if that person knew or should have known that by the auditor for each of the last two fiscal years for his or her actions, if successful, could result in rendering audit services (and services in connection with the issuer’s financial statements materially misleading.403 statutory and regulatory filings);396 The reach of the new rules is quite broad. The phrase • under the caption “audit-related fees,” aggregate fees “persons acting under the direction” of an officer or billed by the auditor for each of the last two fiscal director includes the issuer’s employees (even if they are years for certain services “reasonably related” to the not under the supervision or control of that officer or audit and review of financial statements, as well as a director), customers, vendors, and even lawyers or other description of these services;397 outside advisors who might be in a position to give out false or misleading information to the auditor. 404 • under the caption “tax fees,” aggregate fees billed by the auditor for each of the last two fiscal years for tax In addition, the period during which an auditor can be services, as well as a description of these services;398 said to be “engaged in the performance of an audit” has been given a wide interpretation by the SEC. It • under the caption “all other fees,” aggregate fees accordingly could encompass not only the professional billed by the auditor for each of the last two fiscal engagement period but any other time the auditor is years for all other products and services, as well as a called upon to make decisions or judgments regarding description of these services;399 the issuer’s financial statements, including, in certain situations, periods prior to and after the retention of the • the pre-approval policies and procedures of its audit auditor.405 committee for audit and non-audit services;400 and Rule 13b2-2 also identifies certain types of actions • if greater than 50%, the percentage of hours which could cause an issuer’s financial statements to be expended on the audit by persons other than full- materially misleading, including improperly influencing time permanent employees of the auditor.401 an auditor:
(viii) Improper influence on the conduct • to issue or reissue a report on an issuer’s financial of audits statements that is not warranted in the circumstances Section 303 of the Sarbanes-Oxley Act directs the SEC (due to material violations of Gaap, Gaas, or other to issue rules prohibiting any officer or director of an professional or regulatory standards); issuer from taking any action to improperly influence an auditor for the purpose of rendering the issuer’s financial • not to perform audit, review or other procedures statements materially misleading. required by Gaas or other professional standards;
The SEC has adopted Exchange Act Rules 13b2-2(a) • not to withdraw an issued report; or through (c), largely tracking the text of Section 303. Rules 13b2-2(a) through (c) took effect on June 27 • not to communicate matters to an issuer’s audit 2003.402 Among other things, the rules prohibit an committee.406
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(ix) Auditor record retention issuer’s auditors. This provision took effect on July 30 Section 802 of the Sarbanes-Oxley Act (which amends 2002, and does not require implementing regulations by the US federal criminal code) requires any accountant the SEC. who conducts an audit of an issuer to maintain all audit or review workpapers for a period of five years from the The SEC has not provided guidance on the question end of the fiscal period in which the audit or review was whether Section 13(i) applies to interim financial concluded. Section 802 also requires the SEC to issue statements submitted on Form 6-K. We believe the rules relating to the retention of relevant records such as better view of Section 13(i) is that it applies only to a workpapers and other documents that form the basis of foreign private issuer’s annual report on Form 20-F, and the review. In response, the SEC has added new Rule not to any interim financial statements furnished to the 2-06 to Regulation S-X. Rule 2-06 took effect on SEC under Form 6-K. Submissions on Form 6-K are March 3 2003.407 not considered “filed” as a technical matter with the SEC, and are not required to be reconciled to US Gaap. Rule 2-06 requires that, for a period of seven years after In addition, the SEC has interpreted the Section 302 an accountant concludes an audit or review of an issuer’s certification requirement – which also refers to reports financial statements, the accountant must retain records filed with the SEC – as not applying to Form 6-K relevant to the audit or review, including workpapers, submissions.411 As a practical matter, however, an issuer which:408 would likely face concerns under the anti-fraud provisions of the US federal securities laws if it failed to • are created, sent or received in connection with the reflect a material correcting adjustment in an interim audit or review; and financial statement furnished on Form 6-K.
• contain conclusions, opinions, analyses or financial (xi) Attorney conduct rules data related to the audit or review. Section 307 of the Sarbanes-Oxley Act requires the SEC to issue rules setting forth “minimum standards of “Workpapers” for these purposes means documentation professional conduct for attorneys appearing and of auditing or review procedures applied, evidence practicing before the SEC in any way in the represen- obtained, and conclusions reached by the accountant in tation of issuers.” Section 307 also directs the SEC to the audit or review engagement.409 implement rules requiring an attorney to report “evidence of a material violation of securities law or Rule 2-06 also provides that memoranda, breach of fiduciary duty or similar violation” by an correspondence, communications, and other documents issuer or its agent to the issuer’s CEO or chief legal and records (including electronic records) must be counsel, and to report the evidence to the audit retained whether they support the auditor’s final committee, another independent board committee, or conclusions about the audit or review, or contain the board of directors as a whole, if the CEO or chief information that is inconsistent with those legal counsel “does not appropriately respond to the conclusions.410 evidence.” The SEC adopted final rules under Section 307 as new Part 205 Standards of Professional Conduct (x) Material correcting adjustments for Attorneys Appearing and Practicing Before the Section 401(a) of the Sarbanes-Oxley Act adds new Commission in the Representation of an Issuer (the Section 13(i) to the Exchange Act. Under Section 13(i), Attorney Conduct Rules).412 The Attorney Conduct each financial report containing financial statements that Rules took effect on August 5 2003. is prepared in accordance with (or reconciled to) US Gaap and filed with the SEC must reflect all material The term “appearing and practicing” before the SEC is correcting adjustments that have been identified by an broader than it might first appear. It potentially covers www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 61 Chapter 6 – The US Sarbanes-Oxley Act of 2002
any lawyer who transacts business with the SEC, compliance committee (QLCC), if one has been set represents an issuer in SEC proceedings, provides advice up.420 A QLCC – which may also be the audit on the US securities laws regarding any document the committee – is any committee of the issuer that includes attorney “has notice” will be provided to the SEC at least one member of the audit committee and two or (including in the context of preparing documents to be more non-employee members of the board of directors, filed), or advises an issuer whether information must be and that has been duly established by the board of included in or filed with any SEC document.413 directors with certain requirements.421 If the lawyer However, the Attorney Conduct Rules contain an reports the matter to the QLCC, he or she has no exemption for “non-appearing foreign attorneys,”414 further obligations under the Attorney Conduct which is defined as a lawyer who (i) is himself or herself Rules.422 In addition, the CLO may refer a reported admitted to practice law in a jurisdiction outside of the matter to the QLCC in lieu of conducting the required United States and does not hold himself or herself out as investigation, in which case the QLCC will be practicing US federal or state securities or other laws, responsible for responding.423 and (ii) either: The SEC has also proposed, but not yet adopted, a noisy • conducts activities that would constitute appearing withdrawal provision, under which a covered lawyer and practicing before the SEC only incidentally to, would be required to withdraw from representing an and in the ordinary course of, the practice of law in issuer under certain circumstances if there is not an a jurisdiction outside the United States; or appropriate response to the up-the-ladder reporting.424 The 60-day comment period for the noisy withdrawal • is appearing and practicing before the SEC only in proposal has expired, and the proposal has been the consultation with counsel, other than a non- subject of extensive comment by US lawyers. appearing foreign attorney, admitted or licensed to practice in a state or other United States (xii) Code of ethics jurisdiction.415 Section 406 of the Sarbanes-Oxley Act directs the SEC to issue rules requiring issuers to disclose whether they If a covered lawyer becomes aware of evidence of a have adopted a code of ethics for senior financial “material violation” — which is defined to include a officers, or if not, why not. The SEC has accordingly material violation of US securities law or a breach of adopted new Item 16B of Form 20-F, which takes effect fiduciary duty or a similar material violation of any US for annual reports for fiscal years ending on or after July federal or state law416 – the Attorney Conduct Rules 15 2003.425 create a duty to report the matter to the issuer’s chief legal officer (CLO) or to both the CLO and the CEO.417 Item 16B requires the issuer to disclose whether it has The CLO must then open an inquiry into the matter adopted a code of ethics that applies to its principal and take all reasonable steps to cause the issuer to adopt executive officers, principal financial officers, and an appropriate response.418 Unless the lawyer reasonably principal accounting officer or controller (or persons believes that the CLO’s response was adequate, he or performing similar functions), and if not, it must explain she must report the matter up-the-ladder to the audit why it has not done so.426 The term “code of ethics” committee, to another independent board committee (if means written standards that are reasonably designed to the issuer does not have an audit committee), or to the deter wrongdoing and to promote a specified set of board of directors as a whole (if there is no independent principles, such as honest and ethical conduct and full, board committee).419 accurate and timely disclosure.427 The code must be filed as an exhibit to the issuer’s annual report on Form 20-F As an alternative to reporting to the CLO or CEO, the or posted on the issuer’s website, or the issuer must lawyer may refer the matter to the issuer’s qualified legal undertake to provide to any person upon request, free
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of charge, a copy of the code.428 An issuer must report a timely fashion each director or officer and the SEC of any amendment to the code relating to its covered the blackout period and provide certain additional executive officers, as well as the nature and date, and information (including the reasons for the blackout name of the person involved, of any waivers (whether period).434 The issuer must file any notice of this type as explicit or implicit) of the code for its covered executive an exhibit to its annual report on Form 20-F.435 officers.429 Subject to a two-year statute of limitations,436 profits (xiii) Blackout trading restrictions realized by an insider in violation of Section 306 Section 306 of the Sarbanes-Oxley Act prohibits (regardless of the insider’s intention upon entering into directors and executive officers from acquiring or the transaction) will be recoverable by the issuer.437 In transferring company equity securities during pension addition, if the issuer fails to institute an action to fund blackout periods. The SEC has adopted new recover such profits within 60 days after being requested Regulation Blackout Trading Restrictions (Regulation to do so by a shareholder, the shareholder can then BTR) to implement Section 306. Regulation BTR initiate the action to recover on behalf of the issuer.438 took effect on January 26 2003.430 (xiv) Loans to executives For a foreign private issuer, a blackout period generally Section 402(a) of the Sarbanes-Oxley Act adds new means any period of more than three consecutive Section 13(k) to the Exchange Act. Under Section business days during which the ability to purchase or sell 13(k), it is illegal for an issuer to “extend or maintain an interest in the issuer’s equity securities held in an credit, to arrange for the extension of credit, or to individual account plan (such as a 401(k) plan)431 is renew an extension of credit, in the form of a personal temporarily suspended with respect to not less than 50% loan to or for any director or executive officer (or of participants or beneficiaries located in the United equivalent thereof)” of that issuer.439 Section 13(k) States and: covers both direct extensions and indirect extensions of credit, including through subsidiaries.440 Section 13(k) • the number of participants and beneficiaries located took effect on July 30 2002, and does not require in the United States subject to the temporary implementing SEC regulations. suspension exceeds 15% of the total number of employees of the issuer and its consolidated Section 13(k) contains certain exemptions, including: subsidiaries; or • any loan existing on July 30 2003, unless its terms are • more than 50,000 participants or beneficiaries located materially modified or the loan is renewed;441 in the United States are subject to the temporary suspension.432 • consumer credit and extensions of credit under a charge card;442 and Regulation BTR prohibits, subject to certain exceptions, any director or executive officer of an issuer • certain bank loans.443 from purchasing, selling or otherwise transferring the issuer’s equity securities during any blackout period The broad sweep of Section 13(k), coupled with the applicable to the securities, if the officer acquires or absence of SEC guidance, has raised a number of thorny previously acquired the securities in connection with his questions for issuers. In response, a group of 25 law or her service or employment as a director or officer.433 firms (including Latham & Watkins) has issued a paper Under Regulation BTR, in any case where a director or attempting to interpret Section 13(k) (the Interpretive officer is subject to a blackout trading restriction under Paper).444 The Interpretive Paper contends that the Section 306 of Sarbanes-Oxley, the issuer must notify in following should generally be regarded as permissible www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 63 Chapter 6 – The US Sarbanes-Oxley Act of 2002
under Section 13(k): Section 304 took effect on July 30 2002 and does not require SEC implementing rules. It remains unclear • cash advances to reimburse travel and similar whether, among other things, the definition of expenses while performing executive duties;445 “misconduct” applies to mistakes as opposed to knowing or reckless conduct.452 In the case of foreign • personal usage of a company credit card and private issuers, it is also not certain how Section 304 will company car, and relocation expenses required to be work if the required repayment is in conflict with the reimbursed;446 CEO’s or CFO’s rights under local employment laws.453
• stay and retention bonuses subject to repayment if an (xvi) Research analysts employee terminates employment before a Section 501 of the Sarbanes-Oxley Act added new designated date;447 Section 15D to the Exchange Act. Section 15D directs the SEC to adopt rules “reasonably designed to address • indemnification advances for litigation;448 conflicts of interest” involving securities analysts. The SEC has implemented Section 15D by enacting • tax indemnity payments to overseas-based executive Regulation Analyst Certification (Regulation AC).454 In officers;449 addition, as discussed below, the NYSE and NASD have issued new rules regarding research analysts that are • loans by a parent or shareholder that is a foreign designed to meet the requirements of Section 15D. private issuer but not subject to Sarbanes-Oxley to Regulation AC took effect on April 14 2003. the executive officer of a wholly-owned subsidiary that is subject to Sarbanes-Oxley, if the subsidiary has Regulation AC requires that any broker or dealer, or not “arranged” the loan and the loan is made by certain persons associated with brokers or dealers, must reason of service to the parent, not the subsidiary;450 include in any research reports that they publish or and circulate to a US person in the United States, a clear and prominent statement from the research analyst:455 • most cashless option exercises.451 • attesting that all of the views expressed in the research (xv) Forfeiture of bonuses report accurately reflect the research analyst’s Section 304 of the Sarbanes-Oxley Act provides that if personal views about the securities or issuers covered an issuer is required to “prepare an accounting in the report; and restatement due to the material noncompliance of the issuer, as a result of misconduct” with any financial • either that no part of the analyst’s compensation is reporting requirements under the securities laws, the related to specific recommendations expressed in the CEO and CFO must reimburse the issuer for: report, or if it is related, details of the source, amount and purpose of the compensation and how the • all bonuses or other incentive-based or equity-based compensation could influence the recommendations compensation received from the issuer during the 12- expressed in the report. month period following the first public issuance or filing with the SEC (whichever is first) of the A research analyst is the person primarily responsible for financial document embodying the financial the preparation of the content of the research report.456 reporting requirement; and If more than one analyst is primarily responsible, all must certify.457 Certifications should either appear on the • any profits received from the sale of the issuer’s front page of the research report or the front page securities during that 12-month period. should disclose where the certification is to be found.458
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The first certification (as to accuracy) applies both to the (xvii) Liability issues rating as well as to the analysis in the research report, The Sarbanes-Oxley Act has a sweeping impact on and the SEC has warned that a rating that contradicts liability under the US federal securities laws. For a the analysis could both render the certification false, as discussion of this, see “Liability Under the US Federal well as potentially violate the anti-fraud provisions of Securities Laws – Sarbanes-Oxley Act,” below. the US federal securities laws.459
In addition, Regulation AC mandates that brokers or dealers that provide research reports to US persons in the United States prepared by an analyst employed by them must keep certain quarterly records of public appearances of the analyst containing:460
• a statement by the analyst attesting that the views expressed in the public appearances accurately reflected his or her personal views about the securities or issuers covered in the report; and
• a statement that no part of the analyst’s compensation is related to specific recommendations or views expressed in the public appearances.
However, the record-keeping requirement only applies to public appearances when the research analyst is physically present in the United States.461
Regulation AC contains an exclusion to cover foreign research. In particular, foreign persons located outside the United States who are not associated with a US registered broker-dealer are exempt from Regulation AC if they:462
• prepare a research report concerning a foreign security; and
• provide the research report to a US person in the United States in accordance with the exemption under Exchange Act Rule 15a-6(a)(2) for non-US broker-dealers providing research reports to major US institutional investors.
A “foreign person” for these purposes means any non- US person, and a “foreign security” means a security issued by a foreign issuer for which the US market is not the principal trading market.463 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 65 Chapter 7 – Liability under the US federal securities laws Chapter 7 Liability under the US federal securities laws
Background comply carefully with the requirements for any applicable exemptions from Section 5 registration. A foreign private issuer becomes exposed to liability under the US federal securities laws in a variety of ways Under Section 12(a)(1) of the Securities Act, an investor when it offers or lists its securities in the United States. who buys securities issued in transactions violating This liability can be civil or, in certain circumstances, Section 5 can rescind the sale and recover his or her criminal. Although litigation by private plaintiffs is purchase price (plus interest, less any amount received more common, the SEC (and, in the case of criminal on the securities). If the investor no longer owns the matters, the US Department of Justice) can initiate securities, he or she can recover damages equal to the lawsuits, administrative proceedings and investigations. difference between the purchase and the sale price of We here summarize the key areas of liability. the securities (again, plus interest, less any amount received on the securities).465 Registration – Section 5 of the Securities Act Section 12(a)(1) imposes strict liability, and an investor is not required to demonstrate any causal link between Section 5 of the Securities Act effectively requires every his or her damages and the violation of Section 5.466 US offer and sale of securities to be either registered However, in order to be liable a defendant must be a with the SEC or made pursuant to an available seller – that is, a person who successfully solicits the exemption from registration. The terms “offer” and purchase, motivated at least in part by financial interest “sale” in the Securities Act are broadly construed. For – and the plaintiff must actually have bought the example, an offer includes any attempt to dispose of a securities from that defendant.467 security for value.464 As a result, publicity in the United States about an impending offering, website disclosure Anti-fraud – what is material? of the offering or even an e-mail communication to “friends and family” announcing an offering can The various anti-fraud provisions of the Securities Act constitute an unregistered offer in violation of Section and the Exchange Act discussed below impose liability 5. for material misstatements or omissions in connection with an offer or sale of securities. The fundamental test Violations of Section 5 can give rise to liability, as for materiality is whether there is a substantial likelihood discussed below. They can also lead to the delay (or that a reasonable investor would consider the even abandonment) of a securities offering if the SEC misstatement or omission important in deciding imposes a cooling-off period. As a result of these whether or not to purchase or sell a security.468 As the onerous remedies, it is critical to control publicity and US Supreme Court has explained, “there must be a
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substantial likelihood that the disclosure of the omitted • whether the misstatement affects the issuer’s fact would have been viewed by the reasonable investor compliance with loan covenants or other contractual as having significantly altered the ‘total mix’ of requirements; information made available.”469 • whether the misstatement has the effect of increasing The determination of materiality is a mixed question of management’s compensation – for example, by law and fact,470 and the SEC has made clear that there is satisfying requirements for the award of bonuses or no bright-line quantitative test for materiality.471 In other forms of incentive compensation; or particular, the SEC has affirmatively rejected exclusive reliance on a commonplace rule of thumb that had • whether the misstatement involves concealment of an developed in the preparation of financial statements, unlawful transaction. under which matters causing a numerical impact of less than 5% were generally not considered material.472 In adopting Regulation FD, the SEC indicated that the Although the SEC addressed this point in the context of following subjects should be carefully reviewed to preparing of financial statements, its guidance should determine whether they are material:474 also be taken into account in the preparation of narrative disclosure. • earnings information;
The SEC has pointed to several qualitative factors that • mergers, acquisitions, tender offers, joint ventures, or should be considered in assessing materiality, and that changes in assets; could render a quantitatively minor misstatement material:473 • new products or discoveries, or developments regarding customers or suppliers (for example, the • whether the misstatement arises from an item capable acquisition or loss of a contract); of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent • changes in control or in management; in the estimate; • change in auditors or auditor notification that the • whether the misstatement masks a change in earnings issuer may no longer rely on an auditor’s audit report; or other trends; • events regarding the issuer’s securities – for example, • whether the misstatement hides a failure to meet defaults on senior securities, calls of securities for analysts’ consensus expectations; redemption, repurchase plans, stock splits, or changes in dividends, changes to the rights of security holders, • whether the misstatement changes a loss into income public or private sales of additional securities; and or vice versa; • bankruptcies or receiverships. • whether the misstatement concerns a segment or other portion of the issuer’s business that has been Rule 10b-5 – purchase or sale of identified as playing a significant role in the issuer’s securities operations or profitability; (i) Background • whether the misstatement affects the issuer’s Section 10(b) of the Exchange Act and Exchange Act compliance with regulatory requirements; Rule 10b-5 provide a broad (and heavily litigated) basis for liability in securities transactions. Rule 10b-5 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 67 Chapter 7 – Liability under the US federal securities laws
prohibits: securities, and applies to unregistered transactions and secondary market trading. In addition, Rule 10b-5 • employing “any device, scheme, or artifice to covers oral and written statements, whether or not defraud;” relating to a registration statement or prospectus.481 These would potentially include statements made: • making “any untrue statement of material fact” or omitting “to state a material fact necessary in order to • in an offering memorandum for a Rule 144A make the statements made, in the light of the circum- offering; stances under which they were made, not misleading;” or • during a press conference or an interview, or in a press release; • engaging in any “act, practice, or course of business which operates or would operate as a fraud or • in an annual report on Form 20-F; and deceit.” • in a document submitted on Form 6-K. (ii) Elements of a claim under Rule 10b-5 The elements of a claim under Rule 10b-5 are: In addition while an issuer is generally not liable for the statements of others, there may be exceptions if, for • a misrepresentation or omission;475 example, a corporate insider participates sufficiently in the preparation of an analyst’s report or circulates the • of a material fact; report to prospective investors.482
• made with scienter — that is, either intent to (iv) Insider trading deceive, manipulate or defraud,476 or recklessness Insider trading is also prosecuted under Rule 10b-5. (beyond mere negligence);477 Generally speaking, Rule 10b-5 prohibits a person from buying or selling securities on the basis of material non- • upon which the plaintiff relied; and public information in violation of a duty owed to the shareholders of the issuer or where the information has • which caused the injury. been otherwise misappropriated.483 Rule 10b-5 imposes an obligation to disclose (or abstain from trading) on: Rule 10b-5 requires that the alleged fraud must have been in connection with the purchase or sale of • corporate insiders, such as directors, officers and securities – in other words, that there was some nexus controlling shareholders, who owe a fiduciary duty to but not necessarily a close relationship.478 As a the issuer’s shareholders;484 consequence, a private plaintiff must show that he or she actually purchased or sold stock;479 a plaintiff cannot • temporary insiders, such as lawyers, accountants or succeed on a claim that he or she would have sold had investment bankers;485 and the truth been known. But Rule 10b-5 does not require privity between the defendant and the • outsiders who misappropriate confidential plaintiff,480 and accordingly a plaintiff need not show information for trading purposes in breach of a duty that he or she actually bought securities from the person owed to the source of the information.486 who made the misleading statements. Bear in mind that a person can be liable under Rule (iii) Scope of Rule 10b-5 10b-5 even if he or she did not actually trade on the Rule 10b-5 is not limited to public offerings of material non-public information, but instead passed it to
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a third party (a practice sometimes known as “tipping”). In addition to the “tipper” (the person who discloses the Practice point: information), a “tippee” (the person to whom the The trend in the case law is to allow secondary-mar- information is disclosed and who had reason to know ket purchasers who can “trace” their securities to the the information came from an insider who had violated offering to bring claims under Section 11, at least to a duty) may also be liable under Rule 10b-5 if he or she the extent that the only shares in the market are trades on the basis of the tipped information.487 those subject to the registration statement.494
(v) Damages under Rule 10b-5 Violations of Rule 10b-5 can lead to rescission or A Section 11 claim can be brought against: damages.488 Damages for violations of Rule 10b-5 in private actions comprise a purchaser’s out-of-pocket • each person who signed the registration statement, loss, essentially limited to the difference between the including the issuer and members of management;495 purchase or sale price the plaintiff paid or received and the mean trading price of the security during the 90-day • each member of the issuer’s board of directors, or period beginning on the date on which the information similar governing body, regardless of whether he or correcting the misstatement or omission that is the basis she signed the registration statement;496 for the action is disseminated to the market.489 Civil or criminal penalties (including imprisonment, fines or • any expert named as responsible for a portion of the disgorgement orders) and injunctions and administrative registration statement, such as an issuer’s auditors; and proceedings are also possible.490 Punitive damages are, however, not available under Rule 10b-5.491 • each underwriter.
Section 11 of the Securities Act – Issuers are strictly liable under Section 11. Potential registered offerings defendants other than the issuer497 have a statutory due diligence defence to Section 11 liability, by virtue of Section 11(a) of the Securities Act imposes liability if Section 11(b)(3): any part of a registration statement, at the time it became effective, “contained an untrue statement of a • in the case of a non-expert with respect to the non- material fact or omitted to state a material fact required expertized portions of the registration statement, or to be stated therein or necessary to make the statements in the case of an expert with respect to the expertized therein not misleading.” Section 11 liability only covers portions (for example, the financial statements that statements made in a registration statement, and does include the auditors’ opinion), a defendant must not reach other documents that are not considered part show that he or she had, after reasonable investi- of a registration statement (such as roadshow materials gation, reasonable grounds to believe and did believe or research reports).492 In addition, Section 11 does not that the included information was true and that no extend to unregistered transactions, since these do not material facts were omitted;498 and involve a “registration statement.”493 • in the case of a non-expert with respect to expertized portions of the registration statement, a defendant must show he or she had no reasonable ground to believe, and did not believe, that the registration statement contained a material misstatement or omission.499
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Damages for violation of Section 11 are generally and in the exercise of reasonable care could not have limited to:500 known, of the material misstatements or omissions. In addition, as with Section 12(a)(1), in order to be liable • the difference between the price paid for a security under Section 12(a)(2) a defendant must be a seller – and its value at the time a plaintiff brings a lawsuit; that is, a person who successfully solicits the purchase, motivated at least in part by financial interest – and the • if the security has already been sold at the time a plaintiff must actually have bought the securities from lawsuit is brought, the amount paid for the security, that defendant.503 less the price at which the security was sold in the market; or Under Section 12(a)(2), a person who buys securities on the basis of a prospectus that contains a material • if the security was sold after the lawsuit was brought misstatement or omission — like a person who buys but before judgment, the lesser of (i) the amount the securities issued in violation of Section 5 of the plaintiff paid for the security, less the price at which Securities Act — can rescind the sale and recover his or the security was sold in the market, or (ii) the amount her purchase price (plus interest, less any amount the plaintiff paid for the security, less the value of the received on the securities). And if the investor no security as of the time the suit was brought. longer owns the securities, he or she can recover damages equal to the difference between the purchase Punitive damages are not available under Section 11.501 and the sale price of the securities (again plus interest, less any amount received on the securities). Section 12(a)(2) of the Securities Act – registered offerings Controlling person liability
Section 12(a)(2) of the Securities Act imposes liability Liability under the US federal securities laws potentially on any person who offers or sells a security by means of extends beyond issuers, underwriters and other direct a prospectus, or any oral communication, which participants in securities offerings to the persons who contains “an untrue statement of a material fact or omits control those participants. In particular, Section 15 of to state a material fact necessary in order to make the the Securities Act and Section 20 of the Exchange Act statements, in the light of the circumstances under provide that controlling persons may be jointly and which they were made, not misleading.” Section severally liable with the persons they control. As a 12(a)(2) overlaps with Section 11, but covers oral result, an issuer’s significant shareholders, its board of statements as well as statements in a prospectus, rather directors (or similar governing body) and members of its than the registration statement alone (of which the management may be liable along with the issuer for prospectus is a part). violations of Section 11, Section 12 or Rule 10b-5.
The US Supreme Court has interpreted the reference to The term “control” generally means the possession, “prospectus” in Section 12(a)(2) as a term of art directly or indirectly, of the power to direct or cause the meaning a prospectus in connection with a public direction of the management and policies of a person, offering under the Securities Act. As a result, it has whether through the ownership of voting securities, by ruled that Section 12(a)(2) does not apply to private contract or otherwise.504 This is not a bright-line test, unregistered transactions, secondary offerings or and instead depends on the facts and circumstances of secondary market transactions.502 any particular case. A defendant generally will be found to have controlled an issuer if he or she actually partic- Section 12(a)(2) provides a statutory due diligence ipated in (that is, exercised control over) the operations defence if the seller can show he or she did not know, of the issuer and possessed the power to control the
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specific transaction or activity from which the issuer’s in connection with any security of an issuer or to primary liability derives.505 Some courts have held that obtain, by means of false or fraudulent represen- the defendant must be a “culpable participant” in the tations, any money in connection with the purchase issuer’s wrongful conduct in order to trigger liability.506 or sale of a security;512
The controlling person has a defence to liability under • increases the maximum individual penalty for Section 15 if he or she “had no knowledge of or violations of the Exchange Act from $1 million and reasonable ground to believe in the existence of the facts 10 years imprisonment to $5 million and 20 years by reason of which the liability of the controlled person imprisonment, and raises the maximum corporate is alleged to exist,” and a defence under Section 20 if he fine from $2.5 million to $25 million;513 or she “acted in good faith and did not directly or indirectly induce the act or acts constituting the • gives the SEC the ability, after notice and a hearing, violation or cause of action.” This analysis is obviously to force an issuer subject to an SEC investigation to quite fact-specific,507 and may depend on such factors as put extraordinary payments to directors, officers, whether the defendant is an inside or outside director. partners, controlling persons, agents or employees into temporary escrow;514 Liability issues relating to Sarbanes-Oxley • gives the SEC the administrative authority to impose a ban on a person from acting as a director or an The Sarbanes-Oxley Act has a wide-ranging impact on officer of an issuer (the so-called “officer and director liability under the US federal securities laws. It creates bar”);515 previously, the SEC could only impose the new US federal criminal offenses relating to securities, officer and director bar by means of a court order;516 substantially increases the penalties for existing offenses and increases the SEC’s enforcement powers in various • lowers the standard for judicial imposition of the ways.508 Among other things, the Sarbanes-Oxley Act: officer and director bar to “unfitness” to serve as an officer and director, from “substantial unfitness;”517 • adds a new section to the US federal criminal code outlawing the alteration, destruction or concealment • prohibits an issuer from retaliating against whistle- of records to impede a US federal investigation;509 blowing employees who provide information or assist an investigation regarding violations of US federal • amends existing law to provide for fines and impris- securities law, SEC regulations or US federal law on onment of up to 20 years for corruptly altering, shareholder fraud; and518 destroying or concealing documents with the intent of obstructing an official proceeding;510 • amends the US federal bankruptcy laws to prohibit the discharge in bankruptcy of debts resulting from • amends existing law to provide for fines and impris- judgments, settlements or court orders in cases onment of up to 10 years for anyone who knowingly involving securities fraud.519 takes any action to retaliate against a person for providing information to US federal law Enforcement enforcement officials relating to violations or potential violations of US federal law;511 (i) Background The SEC has wide-ranging powers to investigate any • creates a new securities fraud crime (with penalties of conduct that could constitute a violation of the US up to 25 years imprisonment plus fines) of knowingly federal securities laws.520 SEC investigations are executing a scheme or artifice to defraud any person conducted by the Division of Enforcement, which also www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 71 Chapter 7 – Liability under the US federal securities laws
has responsibility for prosecuting civil violations of the Particular difficulties may arise for foreign private issuers US federal securities laws.521 In addition to bringing and non-US nationals who have legal obligations in charges under the causes of action described elsewhere both the United States and in their home countries. in this Overview, the SEC can bring enforcement While every jurisdiction prohibits fraud, there is no actions against participants in the securities markets universally accepted definition of fraud and thus (such as broker-dealers, investment advisers, issuers and activities that comply with local laws may violate the US their officers, directors, lawyers and accountants) using federal securities laws under certain circumstances. For causes of action and remedies unavailable to private example, in E.On AG,526 the SEC brought an litigants. Charges may be brought administratively, or enforcement action against a German company whose in a US federal district court. shares were listed on the NYSE. The SEC charged that the company had denied falsely that it was involved in While the SEC has civil enforcement authority only, merger negotiations and that the denials (issued in both Section 24 of the Securities Act and Section 32(a) of the English and German) violated Rule 10b-5. While Exchange Act make it a felony for any person to acknowledging that disclosure practices regarding the willfully violate any provision of those acts or a rule existence of negotiations may differ in other promulgated under the acts. Consequently, the SEC jurisdictions, the SEC nevertheless asserted that it would also works closely with criminal law enforcement not apply a different standard to foreign private issuers agencies throughout the United States to develop and for commenting on pending merger negotiations than bring criminal cases when the misconduct warrants to US domestic issuers.527 more severe action.
(ii) Enforcement against foreign private issuers and non-US nationals The SEC actively enforces the US federal securities laws against foreign private issuers and non-US nationals. 522 The SEC takes a very expansive view of its jurisdiction under the US federal securities laws, and the US courts have generally supported that view.523
The SEC’s power to enforce the US federal securities laws against foreign private issuers and non-US nationals is limited by its ability to obtain evidence from outside the United States and to establish jurisdiction. In order to facilitate its ability to obtain information from outside the United States, the SEC has entered into over 30 information-sharing arrangements (often called Memoranda of Understanding, or MOUs) with foreign financial regulators.524 These MOUs establish procedures for sharing information and providing assistance in instances where key evidence lies outside of the United States. Another, more formal, negotiated mechanism used to obtain information is a Mutual Legal Assistance Treaty (MLAT) between the United States and another country. The SEC must make a MLAT request through the US Department of Justice.525
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Background generally recommend the following guidelines to issuers (in addition to any applicable home jurisdiction rules). As a general matter, there is no duty under the US federal securities laws to disclose material information (i) Nature of information unless an applicable rule or regulation specifically One person or a small group of company personnel with requires disclosure.528 A foreign private issuer’s duty to an understanding of internal and reported financial data disclose may arise in situations such as: and strategies should control the nature and scope of information given to analysts and investors. That person • purchasing or selling securities; or group should determine that such information, whether considered separately or together with other • filing a registration statement; information, has already been publicly disclosed in the issuer’s SEC filings or, if not so disclosed, is neither • filing an annual report on Form 20-F; material nor misleading.
• submitting information on Form 6-K; and (ii) “Material” It is not possible to give a precise, bright-line answer to • NYSE or Nasdaq requirements. the question of what constitutes material information. In general, it is any fact which a buyer or seller Once an issuer chooses to disclose information to (including a speculative buyer or seller) would want to investors or the public, it must do so completely and know, or any fact which would, if known, affect the accurately,529 and may not make selective disclosure, market value of the security. such as to favoured investors. In addition, if a prior statement was accurate when made, but an issuer (iii) “Misleading” subsequently learns that the statement was false, an issuer Information provided to analysts or released to the must correct the statement.530 This is one reason why public would be construed as misleading if it is untrue, projections of future results are problematic. or if it omits any material facts necessary to make the other information provided not misleading under the Guidelines for dealing with circumstances. Thus, information provided to investors research analysts and investors or analysts should not be one-sided in its positive tone if there are other material facts that would be necessary for In order to minimize potential liability in connection an accurate and balanced description. with statements to research analysts and investors, we www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 73 Chapter 8 – Communications with research analysts, investors and the public
(iv) Limit access may be interested to listen to the conference call or An issuer should limit the number and identity of webcast (or otherwise providing at least two business personnel who have contact with analysts and investors. days’ advance notice to the public of the time and date This will help ensure that disclosures are consistent with of the call, with instructions as to how to access the call each other and with the issuer’s internal and publicly and webcast). The release should provide dial-in reported information, and that no analyst or group of instructions for the conference call, or, if the issuer analysts, or investor or group of investors, is being given decides to make the presentation by webcast, a website more information than any other. address. Although an issuer should permit anyone who may be interested to listen to the conference call, the (v) Disseminating materials to analysts issuer may choose to permit only securities analysts or and investors other designated individuals to ask questions during the To minimize selective disclosure risks, the issuer should question-and-answer period. generally disseminate information to analysts and investors in conference calls or webcasts rather than (vi) Reviewing draft analysts’ reports; one-on-one discussions. We recognize that it is difficult distributing analysts’ reports as a practical matter not to respond to inquiries by Absent review or comment on the contents of analysts’ individual analysts and investors, and the SEC continues reports, issuers are not responsible for the contents of to permit individual communication under a mosaic those reports and no affirmative duty exists to correct theory. In other words, as the SEC stated it in its release erroneous statements in them.532 Many issuers adopting Regulation FD, “an issuer is not prohibited accordingly refrain from reviewing draft reports, and from disclosing a non-material piece of information to adoption of such a policy should be seriously an analyst, even if, unbeknownst to the issuer, that piece considered. As noted above, review of analysts’ reports helps the analyst complete a ‘mosaic’ of information by corporate insiders can potentially trigger liability that, taken together, is material.”531 under Rule 10b-5 for statements made by the research analyst.533 Any written materials provided (which, as discussed above, may not contain any material non-public If the issuer does find it necessary or appropriate to information or any material omissions) should be conduct any such review, the issuer is obligated to disseminated to all analysts equally, and any material correct any material misstatements of fact in the draft, information simultaneously released to the public. The including the addition of any material facts necessary to more varied an issuer’s analyst contacts, the greater the make statements in the draft report not misleading. risks of an inadvertent isolated disclosure or an analyst’s (Note that, under new rules governing analysts adopted misconception that could later develop into a materiality by the NYSE and NASD, analysts may only submit issue. portions of their research report to an issuer for factual review: we discuss these rules below.) However, if the If an issuer does have material news it is extremely analyst has done his or her job, it is unlikely that any important that any such announcement be made correcting information will be found in documents that publicly, rather than to an analyst or analysts or selected are already publicly available, so that the issuer would be investors. obligated to publicly disclose any new material facts before giving the correcting information to analysts to Absent unusual circumstances, conference calls and avoid potential liability for tipping (that is, favouring) webcasts should be open to securities analysts, investors, the analysts. In a review of this sort, we encourage an the media and other interested parties. An issuer should issuer not to receive or review the analyst’s projections announce the date and time of the conference call in a or valuations, and to limit the review to factual content press release and on its website inviting anyone who and so advise the analyst in writing.
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Furthermore, there are liability risks for an issuer if it (b) PSLRA safe harbour534 distributes analysts’ reports to security holders or The Private Securities Litigation Reform Act of 1995 otherwise includes reports in public mailings or on its (the PSLRA) provides a safe harbour for SEC-reporting website (including by hyperlink). Analysts’ reports issuers, including SEC-reporting foreign private issuers, therefore should generally not be distributed to security for certain types of written or oral forward-looking holders or otherwise included in any of an issuer’s statements,535 including:536 mailings or on its website, unless previously approved by counsel and unless strong disclaimers are included that • projections of revenues, income, losses, earnings and the views and projections expressed in the report are other financial items; solely those of the analyst. If an issuer decides to make analysts’ reports available with disclaimers, it should • statements of the plans and objectives of management make all reports available, not just favourable ones. for future operations; and
(vii) Making or commenting on • statements of future economic performance. projections The PSLRA does not, however, protect forward- (a) General looking statements made in connection with initial Issuers have varying practices on whether they state public offerings or tender offers, or those statements that publicly their specific financial performance plans or are included in financial statements prepared in projections. Since the adoption of Regulation FD, it accordance with Gaap.537 has become more common for companies to provide that information to the markets. Other companies In order to take advantage of the PSLRA safe harbour, remain steadfast against releasing such information among other things, the forward-looking statement (whether in speeches, press releases, trade publications, must be identified as such, and must be accompanied by statements to analysts, or otherwise). If an issuer decides meaningful cautionary statements identifying important to make such an announcement, any projection should factors that could cause actual results to differ materially be made in a public announcement (and not selectively) from those in the forward-looking statement.538 As a and should be accompanied by the key market variables practical matter, issuers try to bring themselves within that could cause actual results to vary from such the safe harbour with respect to written forward- projections and other relevant assumptions. It is also looking statements by inserting cautionary language preferable to consult with counsel before making any noting that the relevant document contains forward- projections. As noted above, projections may give rise looking statements and by keeping current, in a widely to a duty to update if they become false or misleading in available public document such as a periodic SEC filing, light of subsequent events. the key market variables and risk factors affecting the issuer’s business. (This is the reason many earnings It is inherently difficult to determine the extent to announcements and other press releases routinely which an issuer’s actual performance (or revisions to its include long disclaimers.) As for forward-looking oral internal projections) must vary from previously statements, a spokesperson will often make a formal announced or endorsed projections before an update or statement to the following (rather stilted) effect: correction must be published. In addition, even if an update or correction is published, the issuer could still “The statements I am about to make include statements face litigation over whether the update or correction about our plans and future prospects for the company was published soon enough. and our industry that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual performance may www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 75 Chapter 8 – Communications with research analysts, investors and the public
differ materially from performance suggested by those pose particularly difficult disclosure questions. A statements. I encourage you to review the “Cautionary foreign private issuer that is holding merger negotiations Statement” section of [our annual report on Form 20- need not disclose the existence of those negotiations, F] filed with the SEC for additional information absent some other duty to disclose, or may respond to concerning factors that could cause those differences.” press inquiries by stating “no comment.” Once an issuer’s duty to disclose is triggered, however, it must We suggest that this statement be made at the beginning disclose information about pending merger and of each conference call with investors or analysts. Some acquisition transactions that are material and probable.539 issuers have the statement made by the moderator of the Materiality is judged on the basic materiality standard call, rather than an officer. under the US federal securities laws – that is, whether a reasonable investor would consider disclosure about the (viii) Inadvertent disclosures transaction important in deciding whether or not to Inadvertent disclosure of material non-public purchase or sell a security. There is no bright-line test information, such as in an informal meeting with a for when a transaction becomes probable. This may shareholder or analyst, can sometimes occur. In occur prior to the date a definitive agreement is signed addition to complying with local law requirements, a and, therefore, prior to the date on which the parties foreign private issuer should promptly disclose through would otherwise be prepared to announce the a press release any material non-public information transaction.540 inadvertently disclosed (notwithstanding the exemption of foreign private issuers from the specific requirements There is also an interaction between materiality and of Regulation FD). probability, so that high probability can compensate for a lower level of significance and vice versa.541 The US Special situations Supreme Court has explained that “materiality ‘will depend at any given time upon a balancing of both the (i) Market rumours indicated probability that the event will occur and the If analysts or journalists contact an issuer regarding anticipated magnitude of the event in light of the market rumours, an issuer must either disclose publicly totality of the company activity.’”542 In short, the more all material information regarding the subject matter of substantial an acquisition or disposal is likely to be, the the rumours or respond “no comment.” It is less probable it needs to be before it must be disclosed.543 impermissible to deny the subject matter of the rumours (for example, that acquisition negotiations are pending) More generally, if asked by investors or the press, a if the denial is false. Many issuers institute a policy of foreign private issuer may not deny that merger responding “no comment” to all rumours. discussions are taking place if this is not, in fact, true.544
However, if an issuer’s securities are listed on a national (iii) Roadshows exchange or quoted on Nasdaq and the rumours relate Most public offerings (and Rule 144A/Regulation S to impending developments, the exchange will offerings) for foreign private issuers include roadshows generally require the issuer to respond to the rumours. in the United States and outside the United States. In addition, if an issuer determines that the rumours These are group and one-on-one meetings with originated from within the issuer, public disclosure potential investors attended by key managers of the should be made. issuer and representatives of the underwriters. (In Rule 144A offerings, only QIBs are permitted to attend (ii) Pending acquisitions/corporate roadshows in the United States.) Many issuers choose transactions to allow access to their roadshows over the internet; this Merger negotiations or major corporate acquisitions can may be done if the procedures and restrictions specified
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by the SEC in certain no-action letters are followed.545 apply with equal force to statements made on an issuer’s website, or hyperlinked into an issuer’s website.548 The underwriters and the issuer typically prepare a slide Accordingly, statements in (or hyperlinked into) an show of key points on the issuer’s business and strategy. issuer’s website may constitute illegal gun-jumping if Copies of the slides would be considered a non- made before a registration statement is filed or a non- conforming prospectus in a registered offering, as they compliant prospectus if made after a registration would not contain the level of detail that is included in statement has been filed but before it has been declared the prospectus or offering memorandum. Hard copies effective by the SEC.549 In addition, in the case of an of the slides therefore should not be distributed at unregistered offering, these statements can constitute roadshow presentations (or, if they are distributed, they directed selling efforts or general solicitation and general should be retrieved at the end of the presentation). The advertising of a sort that can destroy the availability of preliminary prospectus or offering memorandum is the exemption from registration on which the issuer is typically distributed or made available to all attendees. seeking to rely.550 As with other public statements, The contents of the slide show and discussion points at ordinary course business, product and financial roadshow meetings should be consistent with, and no communications are permissible, as is posting an issuer’s broader than, the contents of the offering document. latest Exchange Act reports.551
(iv) Disclosures to employees Second, issuers are exposed to liability under the US Issuers should not disclose material non-public federal securities laws for communications via the information to employees (by newsletter or otherwise) internet, in the same way as for their other communi- and should make sure that employees involved in cations.552 Misleading website postings can, for, example, potentially material developments (for example, new lead to liability under Rule 10b-5.553 Similarly, issuers are products, acquisitions) are restricted from trading. Most potentially liable for statements made in websites to public companies have policies that define when and which their website is hyperlinked.554 under what circumstances certain employees are permitted to trade in the issuer’s securities. Practice point: US securities laws and the internet Issuers that are considering a securities offering should carefully review the contents of their websites with (i) Background counsel to make sure that the contents do not violate The rapid growth of the internet has significantly altered limitations on communications during the registration the means by which issuers and broker-dealers process, or violate prohibitions against general solicita- communicate with investors and the public at large. tion and directed selling efforts for a Rule The SEC has issued several interpretive releases and 144A/Regulation S offering. First-time issuers who no-action letters addressing the application of have not established a regular pattern of communica- US securities laws to internet communications.546 tion with the investment community should be partic- ularly careful. As a general matter, the US federal securities laws apply to the content of an issuer’s website in precisely the same manner as an issuer’s other communications.547 This has two key implications. First, as discussed above, issuers of securities in the United States are subject to various restrictions on publicity about a pending or proposed offering stemming from the registration requirements of the Securities Act. These restrictions www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 77 Chapter 8 – Communications with research analysts, investors and the public
offering under Regulation S with no concurrent US Practice point: offering (registered or unregistered) must: 555 Issuers should not post press releases on their web- site while an offering is pending unless those press • include a prominent disclaimer on its website making releases comply with Rule 134 or 135 (in the case of clear that the offer is directed only to countries other a registered offering) or Rule 135c (in the case of a than the United States. For example, the website can private offering). These rules allow for less informa- state that the securities are not being offered in the tion than would be permitted under Rule 135e, United States or to non-US persons; and which applies exclusively to offshore press activity. • implement procedures on its website that are reasonably designed to guard against sales to US persons. Before allowing a prospective investor to (ii) Internet offerings view materials online, for example, the investor If a foreign private issuer wants to conduct an offering should be required to certify non-US status and to of securities over the internet, or to make available via provide an addresses or telephone number outside the internet offering documentation that goes beyond the United States. The website should automatically the limited category of information that is permissible reject any person who refuses to provide the certifi- under US publicity restrictions, it should implement the cation (and preferably should be set up to reject any following procedures: person who provides a US address).
(a) General (c) Offshore offering with concurrent US unregistered For all types of offerings, a foreign private issuer should: offering A foreign private issuer that is planning a Regulation S • Consider establishing a separate website relating offering in combination with an unregistered offering in solely to the offering: some of the restrictions outlined the United States (such as a Rule 144A offering) must: 556 below (such as certification requirements) may be impractical for an issuer’s main website. • implement the restrictions for an offshore offering discussed above; • Consider including only materials that are not in English: this helps to reinforce the argument that the • either exclude US persons from the website or take materials are directed only to the local market and steps to ensure that only QIBs (in the case of a Rule not to the United States. 144A offering) or accredited investors (in the case of a private placement) have access to the website, for • Review hyperlinks: as noted above, hyperlinked example, by limiting access in the United States to material may give rise to liability. those investors who have been provided with a password; and • Ensure that information on the website is consistent in all respects with the printed offering documen- • to the extent practicable, limit information posted on tation: for example, the material on the website the website to information about the offshore should not be more detailed than that contained in offering, and only include information on the private the issuer’s prospectus filed with the SEC or in its US offering that is required by foreign law. (This offering memorandum. may, however, be difficult to accomplish if a single offering memorandum is used for the global offering, (b) Offshore offering with no concurrent US offering as is commonly the case.) A foreign private issuer that is planning an offshore
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(d) Registered offering The NYSE and NASD versions of the rules are substan- A foreign private issuer that is planning a Regulation S tially identical and are intended to operate in the same offering in combination with a registered public offering way.561 The Conflict of Interest Rules generally apply in the United States must:557 only to research reports on equity securities. In addition, they apply only to the members and member • implement the restrictions for an offshore offering organizations of the NASD and NYSE. discussed above; and (a) Gatekeeper provisions • either exclude US persons from the website or only Under the Conflict of Interest Rules, non-research allow US persons to participate in accordance with personnel, including investment banking personnel, certain specified SEC procedures. may review a research report prior to its publication only to “verify the factual accuracy of information in the Regulation of research analysts research report or to identify any potential conflict of interest” provided that:562 (i) Background As noted above, the Sarbanes-Oxley Act imposes • any written communication concerning the content various requirements on research analysts and the of research reports between non-research personnel research reports they publish. The NYSE and NASD and research personnel must be made either through have also adopted several sets of rules to address research authorized legal or compliance personnel or in a analyst conflicts of interest. In addition, under a global transmission copied to those personnel; and settlement of certain litigation, leading investment banks have agreed to further restrictions. We summarize the • any oral communication concerning the content of NYSE and NASD rules, and the global settlement, research reports between non-research personnel and below. research personnel must be documented and made either through authorized legal or compliance (ii) NYSE Rule 472 and NASD Rule 2711 personnel acting as intermediary or in a conversation In May 2002, the SEC approved rule amendments by conducted in the presence of those personnel. the NYSE and the NASD governing how member organizations of both groups, their research analysts and Similarly, firms may not submit research reports prior to investment banking departments manage and disclose their publication to the company that is the subject of conflicts of interest between their research and the report, except for sections of the research report to investment banking activities.558 On July 29 2003 the be reviewed by the company solely to verify the factual SEC approved further amendments to the rules accuracy of information in those sections.563 Under no proposed by the NYSE and the NASD (as so amended, circumstances may the research firm provide the the Conflict of Interest Rules).559 The primary purpose sections of the research report that include the research of the amendments is to conform the Conflict of summary, the research rating or the price target.564 Any Interest Rules to the requirements of the research report that is to be provided to the subject Sarbanes–Oxley Act.560 company must first be provided to the firm’s legal or compliance personnel and any rating change after the report is provided to the company must receive prior written authorization from legal or compliance personnel.565 The research firm may not notify the company of a proposed rating change until after the close of trading one business day prior to the announcement of the change.566 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 79 Chapter 8 – Communications with research analysts, investors and the public
(b) Restrictions on research analyst compensation research personnel for the sole purpose of due The Conflict of Interest Rules prohibit any member diligence.576 firms of the NASD or NYSE from paying “any bonus, salary or other form of compensation to a research (d) Restrictions on publishing research reports and public analyst that is based upon a specific investment banking appearances services transaction.”567 If an analyst received compen- The Conflict of Interest Rules require quiet periods sation that was based on the firm’s general investment during which a firm acting as an underwriter or dealer banking revenues, the fact must be disclosed in the of a securities offering may not issue a research report on firm’s research reports.568 a company and a research analyst with such firm may not recommend or offer an opinion on such company’s The Conflict of Interest Rules further separate research securities in a public appearance.577 analysts’ compensation from investment banking influence by requiring procedures for annual review and Specifically, a member organization acting as a manager approval of research analysts’ compensation by a or co-manager in a securities offering may not publish committee that reports to the board of directors or a or otherwise distribute research reports regarding the senior executive if the member organization has no issuer and any research analyst of such member organi- board of directors.569 The committee may not include zation may not recommend or offer an opinion on the representatives from the firm’s investment banking issuer’s securities in a public appearance:578 department.570 The Conflict of Interest Rules also prohibit the committee from considering the research • for 40 calendar days following an IPO; analyst’s contribution to the firm’s investment banking business and set forth criteria that the committee must • for 10 calendar days following a secondary offering; consider.571 and
(c) Prohibition of promise of favourable research • within 15 days prior to or after the expiration, waiver No member firm may “directly or indirectly offer or termination of a lock-up or similar agreement favorable research, a specific rating or a specific price between the member organization and the issuer or target, or threaten to change research, a rating or a price its shareholders that restricts or prohibits the sale of target, to a company as consideration or inducement for issuer securities after the completion of a securities the receipt of business or compensation.”572 The offering.579 Conflict of Interest Rules also prohibit member firms from retaliating against a research analyst as a result of an There are exceptions to these requirements for research adverse, negative or otherwise unfavourable research reports that are published or otherwise distributed, or report by the analyst that may harm the member firm’s research analyst recommendations made in a public investment banking relationship with the company that appearance, due to significant news or events, provided is the subject of the report.573 that the firm’s legal or compliance personnel authorize the publication of the research report before it is issued Research analysts are also prohibited from participating or authorize the public appearance before it is made.580 in efforts to solicit investment banking business.574 This would include participation in pitch meetings with In addition, no member firm that has agreed to prospective investment banking clients or having other participate or is participating as an underwriter or dealer communications with companies for the purpose of (other than as a manager or co-manager, in which case soliciting investment banking business.575 The rules the 40-day period described above would apply) of an provide an exception for communications between the issuer’s initial public offering may publish or otherwise research analyst and the subject company or non- distribute a research report regarding that issuer and a
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research analyst of such member firm may not or (ii) has direct influence or control over the recommend or offer an opinion on that issuer’s preparation of the substance of research reports or securities in a public appearance for 25 calendar days decisions regarding ratings in research reports, in each following the offering date.581 case to the extent such transactions involve equity securities of companies covered by the research analysts The Conflict of Interest Rules also require that if a or research reports such person oversees.587 member firm intends to terminate its research coverage of a subject company, member firms must provide (f) Disclosure requirements notice of this termination.582 Firms terminating coverage The Conflict of Interest Rules impose several disclosure must make a final research report available comparable requirements on research reports and public appearances in scope and detail to prior research reports on the issuer by research analysts.588 For example, research reports and must include a final recommendation or rating, must disclose if the member firm distributing the unless it is impracticable to provide a comparable research report or its affiliates:589 report.583 • has managed or co-managed a public offering of (e) Analyst trading restrictions securities for the subject company in the past 12 The Conflict of Interest Rules also impose various months; restrictions on an analyst’s personal trading, including restrictions on trading by members of the research • has received compensation for investment banking analyst’s household.584 No research analyst or member of services from the subject company in the past 12 the analyst’s household may:585 months; or
• purchase or receive an issuer’s securities prior to its • expects to receive or intends to seek compensation initial public offering if the issuer is principally for investment banking services from the subject engaged in the same types of businesses as companies company in the next three months. which the research analyst usually covers in research reports; Research reports must also disclose if, as of the last day of the month immediately preceding the publication of • purchase or sell any security issued by a company that a research report:590 the research analyst follows, or any option on or derivative of such security, for a period beginning 30 • the member firm issuing the research report or its calendar days before and ending five calendar days affiliates beneficially owns more than 1% of any class after the publication of a research report concerning of common equity securities of the subject company; the company or a change in rating or price target of the company’s securities;586 or • the subject company is a current client, or within the 12 months prior to the distribution of the research • purchase or sell any security or any option on or report was a client, of the member firm issuing the derivative of such security in a manner inconsistent research report and the types of services provided by with the research analyst’s recommendation as the member firm to the subject company; or reflected in the most recent published research report. • the member firm received any compensation for products or services other than investment banking The Conflict of Interest Rules also require that legal or services from the subject company in the last 12 compliance personnel give prior approval to transactions months. effected by a person who (i) supervises research analysts www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 81 Chapter 8 – Communications with research analysts, investors and the public
Research reports must also disclose client relationships • if the research analyst or a member of the research with and non-investment banking compensation from analyst’s household is an officer, director or advisory subject companies, to the extent known by the research board member of the subject company; and analysts involved in preparing the report or by any employee of the member firm with the ability to • any other actual, material conflict of interest of the influence the substance of the research report (an research analyst or member firm which the research influential employee). In particular, the Conflict of analyst knows or has reason to know at the time of Interest Rules require that research reports disclose:591 the publication or other distribution of the research report. • if the research analyst or an influential employee knows that the subject company is a current client, or The Conflict of Interest Rules also require detailed within the 12 months prior to the distribution of the qualitative and quantitative disclosures relating to the research report was a client, of the member firm firm’s research reports that must accompany each report issuing the research report and the types of services published, such as:595 provided by the member firm to the subject company;592 • the valuation methods used to determine a price target; • if the research analyst or an influential employee knows that the member firm or an affiliate of the • the meanings of each of the ratings the firm uses; member firm received any compensation for products or services other than investment banking • the percentage of all securities rated by the firm that services from the subject company in the last 12 are assigned each particular rating category and the months; and percentage of companies within each rating category that are clients of the firm; and • if the research analyst or the member firm has reason to know that an affiliate of the member firm received • a chart depicting the stock price of the subject any compensation for products or services other than company and the history of ratings by the firm on the investment banking services from the subject subject company’s securities. company in the past 12 months.593 In addition to the disclosures required in research Further, the Conflict of Interest Rules require that reports described above, research analysts must also certain potential conflicts of interest involving the disclose certain compensation and potential conflicts of research analyst preparing a report are disclosed. interest in any public appearance by the research Specifically, a member must disclose in research analyst.596 A research analyst must disclose in public reports:594 appearances:
• if a research analyst received any compensation from • if, as of the last day of the month immediately the subject company in the past 12 months or any preceding the publication of a research report, the compensation based upon (among other factors) the member firm issuing the research report or its member’s overall investment banking revenues; affiliates beneficially owns more than 1% of any class of common equity securities of the subject company; • if the research analyst or a member of the research analyst’s household has a financial interest in the • if the research analyst knows or has reason to know securities of the subject company and the nature of that the subject company is a current client, or within that financial interest; the 12 months preceding the public appearance was a
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client, of the member firm of the research analyst and • research and investment banking will be separate the types of services provided by the member firm to units with entirely separate reporting lines within the the subject company; firm and cannot report directly or indirectly to the other department;599 • if the research analyst knows or has reason to know that the member firm of the research analyst or any affiliate • research will have its own dedicated legal and of the member firm received any compensation from compliance staff, although it may be part of the firm’s the subject company in the past 12 months;597 overall compliance/legal infrastructure;600
• if the research analyst or a member of the research • the firm’s senior management will determine the analyst’s household has a financial interest the research department’s budget without influence from securities of the subject company and the nature of the investment banking department and without that financial interest; regard to specific revenues or results derived from investment banking;601 • any other actual, material conflict of interest of the research analyst of member firm which the research • the research and investment banking departments analyst knows or has reason to know at the time the will be physically separated;602 public appearance is made; • research analysts’ compensation may not be based, • if the research analyst or a member of the research directly or indirectly, on investment banking analyst’s household is an officer, director or advisory revenues or input from investment banking board member of the subject company; and personnel, and investment bankers will have no role in evaluating analyst’s job performance;603 • if a research analyst received any compensation from the subject company in the past 12 months. • the investment banking department will have no input into company-specific coverage decisions, (iii) Global settlement including decisions to terminate coverage;604 On April 28 2003 the SEC, in conjunction with the NYSE, NASD, New York State Attorney General, the • if a firm decides to terminate coverage, the firm will North American Securities Administrators Association make a final research available report on the company and state securities regulators announced the finalizing using the means of dissemination equivalent to those it of a global settlement (the Global Settlement) against a ordinarily uses (no such report is required if the prior number of leading investment banking firms.598 As part coverage was limited to purely quantitative analysis);605 of the Global Settlement, the defendant firms agreed to abide by new restrictions designed to insulate research • research analysts are prohibited from participating in analysts from pressures by the investment banking efforts to solicit investment banking business, such as departments at these firms. These new rules are set forth “pitch” meetings, and are prohibited from partici- in Addendum A to the Global Settlement, entitled pating in company- or investment banking- “Undertakings” (the Addendum). sponsored road shows related to a public offering or other investment banking transaction;606 and (a) Separation of research and investment banking Among the reforms contained in the Addendum aimed • the firms will create and enforce firewalls restricting at separating the research and investment banking communication between investment banking and functions within each firm are: research except in specifically designated circum- stances.607 www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 83 Chapter 8 – Communications with research analysts, investors and the public
Some of these provisions take effect 60 days after the • “Investors should consider this report as only a single entry of final judgment; the remainder take effect 120 factor in making their investment decision.”610 days after the entry of final judgment. Each firm must also make publicly available on its “Firm” for these purposes is defined to include affiliates website, in a downloadable format, certain information of the defendants, other than exempt investment advisor contained in its published research reports, including the affiliates. However, “the restrictions and requirements rating and explanation thereof, price targets (if any) and only apply in respect of a research report that is both (i) earnings per share forecasts.611 prepared by the firm and (ii) that relates to either (A) a US company or (B) a non-US company for which a US These disclosure requirements become effective 120 market is the principal equity trading market” (a days after the entry of the final judgment, other than the covered company).608 “Research report” is defined as requirement to disclose the availability of independent “any written (including electronic) communication that research, which becomes effective 270 days after the is furnished by the firm to investors in the United States entry of a final judgment.612 Like the requirements and that includes an analysis of the common stock, or regarding separation of research and investment any derivative thereof, including American Depositary banking, the disclosure requirements apply only to Receipts, of an issuer or issuers and provides research reports both prepared by the firm and relating information reasonably sufficient upon which to base an to a covered company.613 investment decision,” subject to certain technical exceptions.609 The separation and other provisions of the Addendum do not, therefore, apply to debt research or to research provided solely to non-US customers.
(b) Disclosures in research reports Each defendant firm must disclose prominently on the first page of any research report and any summary listing of recommendations or ratings contained in previously- issued research reports, that:
• “[Firm] does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.”
• With respect to companies as to which the firm is required to make available independent research (as described below): “Customers of [firm] can receive independent, third-party research on the company covered in this report, at no cost to them, where such research is available. Customers can access this independent research at [website address/hyperlink] or can call [toll-free number] to request a copy of this research.”
84 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Chapter 9 – Other relevant statutes Chapter 9 Other relevant statutes
US Investment Company Act of 1940 Practice point: A foreign private issuer should consult with US coun- The Investment Company Act and the SEC’s rules and sel at an early stage of a proposed securities offering regulations thereunder establish a comprehensive set of to determine if the Investment Company Act applies, registration and reporting requirements for investment and if so what steps need to be taken. This determi- companies. The Investment Company Act’s definition nation may require a detailed analysis of the issuer’s of “investment company” is broad. As a result, foreign assets and income sources. private issuers that view themselves as operating companies rather than investment companies can nevertheless trigger the Investment Company Act. US federal tax laws – passive foreign investment companies The Investment Company Act prohibits unregistered non-US investment companies from issuing securities to Depending on the sources of its income and the the public in the United States. Foreign private issuers composition of its assets, a foreign private issuer may be are generally unable to comply with the registration and considered a passive foreign investment company (a reporting requirements of the Investment Company PFIC) under the US federal tax laws. In particular, the Act. This means that a foreign private issuer that intends US Internal Revenue Code (the Code) defines a PFIC to offer its securities in the United States must: as any foreign corporation if, for any taxable year:
• fall outside of the definition of “investment • passive income of the corporation equals or exceeds company” under the Investment Company Act; 75% of gross income of the corporation for that taxable year; or • structure the offering to fit within an exception to or exemption from the Investment Company Act; or • the average percentage of assets (by value) held by that corporation during the taxable year that produce • obtain special exemptive relief from the SEC. passive income or are held for the production of passive income equals or exceeds 50% of its total Violations of the Investment Company Act can assets during that taxable year. potentially lead to civil and criminal liability. In addition, contracts in violation of the Investment Passive income for these purposes generally includes Company Act may be unenforceable. interest, dividends, rents, royalties, certain property transactions, commodities transactions, foreign- www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 85 Chapter 9 – Other relevant statutes
currency gains and income equivalent to interest. The SEC has proposed a definition for “qualified purchaser” that would essentially include almost all If a foreign private issuer is deemed to be a PFIC under private placement transactions involving sophisticated the Code, holders of the issuer’s equity securities who investors.614 Most state blue sky laws also allow issuers to are subject to US federal income taxation face various offer and sell securities to certain classes of sophisticated unattractive tax consequences, which in turn can hinder institutional investors without registration. the issuer’s ability to market its equity securities in the United States. A PFIC can assist holders to mitigate An issuer offering a security that is not a covered these consequences to a certain degree by agreeing to security or pursuant to an offering that is not exempt take various steps (including providing information on from registration under state law must register the offer an ongoing basis to its securities holders). and sale. Typically this will require completion of a simple form, payment of a filing fee and filing with the state the same registration statement filed with the SEC. Practice point: The level of state review of these offerings varies widely As with the Investment Company Act, a foreign pri- and, in some states, an offering may not be registered if vate issuer should consult with US tax counsel at an it is unfair, unjust or inequitable in the judgment of the early stage of a proposed securities offering to deter- state securities authorities. mine if the issuer may be considered a PFIC, and if so what steps need to be taken. Practice point: A guarantee of a covered security is often not itself a covered security, requiring many debt offerings to rely US state “blue sky” laws on state-by-state compliance with institutional investor exemptions. Nearly every state of the United States requires that an issuer of securities must register certain offers and sales of securities within that state. In addition to US federal liabilities, most states also have separate liability provisions that give investors claims against issuers and underwriters for material misstatements or omissions. These state securities laws are known as “blue sky” laws.
Under the National Securities Markets Improvement Act of 1996 (NSMIA), offers and sales of covered securities need not be registered under state blue sky laws. Covered securities include any securities that are:
• listed, or authorized for listing, on the NYSE or Nasdaq, or are securities that rank equal to or senior to a security of the same issuer that is so listed;
• sold to qualified purchasers; or
• sold in Rule 144A transactions where the issuer is a reporting company under the Exchange Act.
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The US federal securities laws are a continuously evolving area. We regularly issue client alerts summarizing important recent developments. These can be found on our website, www.lw.com.
If you have any questions about this Overview, please contact:
Alexander F Cohen — +44-20-7710-1014;
Gay Bronson — +44-20-7710-1006;
Bryant Edwards — +44-20-7710-1163;
John Huber — +1 (202) 637-2242; or
Mark Stegemoeller — +1 (213) 891-8948.
Also, of course, please feel free to call your usual Latham & Watkins lawyer.
www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 87 Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F
Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F This checklist summarizes the non-financial disclosures annual report on Form 20-F. Note that, whether or not required by Forms F-1, F-2, F-3 and Form 20-F (when prescribed by any form, all material information must be used either as a registration statement or an annual presented. In addition, the checklist is only a summary report). Issuers eligible to use Form F-2 and Form F-3 of certain key provisions. Please refer to the relevant are generally permitted to incorporate much of this form for the full text of the disclosure requirements. non-financial information by reference to the issuer’s
Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Forepart of registration statement and ✔ ✔ ✔ outside front cover of the prospectus (Regulation S-K 501).
The prospectus cover must include, among other things:
• Name of issuer, including an English translation of a foreign name.
• Title and amount of securities being offered.
• Offering price of the securities.
• US stock market on which the securities are traded or will be listed or quoted.
• Cross-reference to the risk factors section.
• Required SEC, state and other legends.
• Names of the lead or managing underwriters.
• The date of the prospectus.
88 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F
Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Inside cover and outside back cover of the ✔ ✔ ✔ prospectus (Regulation S-K 502).
• Table of contents for the prospectus.
• A legend describing the prospectus delivery requirements for dealers.
Prospectus summary (Regulation S-K 503(a)). ✔ ✔ ✔
• A summary of the prospectus written in “plain English.”
Address and telephone number (Regulation ✔ ✔ ✔ S-K 503(b)).
• The address and telephone number of the issuer’s principal executive offices should be provid- ed on the prospectus cover or in the prospectus summary.
Directors and senior management (Form 20- ✔ ✔ ✔ ✔ F, Item 1.A).
• Provide the names, business addresses and func- tions of the issuer’s directors and senior manage- ment.
www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 89 Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F
Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Advisers (20-F, Item 1.B). ✔ ✔ ✔ ✔
• If required by a jurisdiction outside the United States, provide the names and addresses of the issuer’s principal bankers and legal advisers to the extent the issuer has a continuing relationship with such entities, the sponsor for listing (where required by US regulations), and the legal advisers to the issuer.
Auditors (Form 20-F, Item 1.C). ✔ ✔ ✔ ✔
• Provide the names and addresses of the issuer’s auditors for the preceding three years (together with their membership in a professional body).
Offer statistics (Form 20-F, Item 2.A). ✔ ✔ ✔
• For each method of offering (e.g., rights offering, general offering, etc.), state the total expected amount of the issue, including the expected issue price or the method of determining the price and the number of securities expected to be issued.
90 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F
Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Method and expected timetable (Form 20-F, ✔ ✔ ✔ Item 2.B).
• The time period during which the offer will be open, information regarding shortening or lengthening of such time period, and where and to whom pur- chase or subscription applications shall be addressed.
• Method and time limits for paying up securities; where payment is partial, the manner and dates on which amounts due are to be paid.
• Method and time limits for delivery of equity securi- ties to subscribers or purchasers.
• In the case of pre-emptive purchase rights, specify the procedure for the exercise of any right of pre- emption, the negotiability of subscription rights and the treatment of subscription rights not exercised.
• Provide a full description of the manner in which results of the distribution of securities are to be made public, and when appropriate, the manner for refund- ing excess amounts paid by applicants (including whether interest will be paid).
Capitalization and indebtedness (Form 20-F, ✔ ✔ ✔ ✔ Item 3.B).
Include the following:
• A statement of capitalization and indebtedness (distinguishing between guaranteed and un-guaran- teed, and secured and unsecured, indebtedness) as of a date no earlier than 60 days prior to the date of the document.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Capitalization and indebtedness (Form 20-F, ✔ ✔ ✔ ✔ Item 3.B), continued.
• The statement should show the issuer’s capital- ization on an actual basis and, if applicable, as adjusted to reflect the sale of new securities being issued and the intended application of the net pro- ceeds therefrom.
Reasons for the offer and use of proceeds ✔ ✔ ✔ (Form 20-F, Item 3.C).
• The estimated net amount of the proceeds bro- ken down into each principal intended use thereof. If the issuer has no specific plans for the proceeds, it should discuss the principal reasons for the offer- ing.
• If the proceeds are being used directly or indi- rectly to acquire assets, other than in the ordinary course of business, briefly describe the assets and their cost.
• If the proceeds may or will be used to finance acquisitions of other businesses, give a brief description of such businesses and information on the status of the acquisitions.
• If any material part of the proceeds is to be used to discharge, reduce or retire indebtedness, describe the interest rate and maturity of such indebtedness and, for indebtedness incurred within the past year, the uses to which the proceeds of such indebtedness were put.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Risk factors (Form 20-F, Item 3.D). ✔ ✔ ✔
• Prominently disclose risk factors that are specific to the issuer or its industry and make an offering speculative or one of high risk.
• Companies are encouraged, but not required, to list the risk factors in the order of their priority to the issuer.
• The risk factors section is intended to be a sum- mary of more detailed discussion contained else- where in the document.
Risk factors (Regulation S-K 503(c)). ✔ ✔ ✔
• A discussion of the most significant factors that make the offering speculative or risky. This discus- sion should follow the prospectus summary.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
History and development of the issuer ✔ ✔ ✔ (Form 20-F, Item 4.A).
• The legal and commercial name of the issuer.
• The date of incorporation and the length of life of the issuer, except where indefinite.
• The domicile and legal form of the issuer, its country of incorporation and the address and tele- phone number of its registered office (or principal place of business if different from its registered office). Provide the name and address of the issuer's agent in the United States, if any.
• The important events in the development of the issuer’s business, such as any material reclassifica- tion, merger or consolidation of the issuer; acquisi- tions or dispositions of material assets; material changes in conduct of the business; material changes in the types of products produced or ser- vices rendered; name changes; or any bankruptcy, receivership or similar proceedings. (Note: Since beginning of last financial year for annual reports on 20-F.)
• A description of the issuer’s principal capital expenditures and divestitures for the last three financial years.
• Principal capital expenditures and divestitures currently in progress.
• Any public takeover offers by third parties in respect of the issuer’s shares or by the issuer in respect of other companies’ shares which have occurred during the last and current financial year and the price and outcome of such offers.
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Business overview (Form 20-F, Item 4.B). ✔ ✔ ✔
• The nature of the issuer’s operations and its principal activities, including the main categories of products sold and/or services performed for each of the last three financial years and any significant new products.
• The principal markets in which the issuer com- petes, including a breakdown of total revenues by category of activity and geographic market for each of the last three financial years.
• The seasonality of the issuer’s main business.
• The sources and availability of raw materials including a description of whether prices are volatile.
• The marketing channels and any special sales methods used by the issuer.
• Summary information regarding the extent to which the issuer is dependent, if at all, on patents or licenses, industrial, commercial or financial con- tracts (including contracts with customers or suppli- ers) or new manufacturing processes.
• The basis for any statements made by the issuer regarding its competitive position.
• The material effects of government regulations on the issuer’s business.
• Issuers that have not received operating rev- enues for three years prior to filing Form F-1 must disclose their plan of operations.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Organizational structure (Form 20-F, Item ✔ ✔ ✔ 4.C).
• If the issuer is part of a group, include a brief description of the group and the issuer’s position within the group.
• A listing of the issuer’s significant subsidiaries, including name, country of incorporation or resi- dence, proportion of ownership interest and, if dif- ferent, proportion of voting power held.
Property, plants and equipment (Form 20-F, ✔ ✔ ✔ Item 4.D).
•Material tangible fixed assets, including leased properties, and any major encumbrances thereon, including a description of the size and uses of the property; productive capacity and extent of utiliza- tion of the issuer’s facilities; how the assets are held; the products produced; and the location.
•Any environmental issues that may affect the issuer’s utilization of the assets.
•Any material plans to construct, expand or improve facilities, including the nature of and rea- son for the plan, an estimate of the amount of expenditures including amounts already paid, the method of financing the activity, the estimated dates of start and completion of the activity, and the increase of production capacity anticipated after completion.
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Operating results (Form 20-F, Item 5.A). ✔ ✔ ✔
• Significant factors, including unusual or infrequent events or new developments, materially affecting the issuer’s income from operations, indicating the extent to which income was so affected, as well as any other significant component of revenue or expenses necessary to understand the issuer’s results of operations.
• If the financial statements disclose material changes in net sales or revenues, discuss the extent to which such changes are attributable to changes in prices or to changes in the volume or amount of products or services being sold or to the introduc- tion of new products or services.
• The impact of inflation, if material. If the currency in which financial statements are presented is of a country that has experienced hyperinflation, pro- vide a five-year history of annual rates of inflation together with a discussion of the impact on the issuer.
• The impact of foreign currency fluctuations on the issuer, if material, and the extent to which for- eign currency net investments are hedged by cur- rency borrowings and other hedging instruments.
• Any governmental economic, fiscal, monetary or political policies or factors that have materially affected, or could materially affect, the issuer’s operations or investments by US shareholders.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Liquidity and capital resources (Form 20-F, ✔ ✔ ✔ Item 5.B).
• The issuer’s liquidity (both short and long term), including:
- internal and external sources of liquidity and a brief discussion of any material unused sources of liquidity;
- a statement by the issuer that the working capital is sufficient or a description of how it proposes to provide additional capital;
- the sources and amounts of the issuer’s cash flows, including the nature and extent of any legal or economic restrictions on the ability of subsidiaries to transfer funds to the issuer; and
- the level of borrowings, the seasonality of borrowing requirements and the maturity profile of borrowings and committed bor- rowing facilities.
• The type of financial instruments used, the matu- rity profile of debt, currency and interest rate struc- ture. Treasury policies, currency in which cash is held, extent to which borrowings are at fixed rates, use of financial instruments for hedging.
• The issuer’s material commitments for capital expenditures as of the end of the latest financial year and any subsequent interim period.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Research and development, patents and ✔ ✔ ✔ licenses, etc. (Form 20-F, Item 5.C).
• A description of the issuer’s research and devel- opment policies for the last three years, where it is significant, including the amount spent during each of the last three financial years on issuer-sponsored research and development activities.
Trend information (Form 20-F, Item 5.D). ✔ ✔ ✔
• The most significant recent trends in production, sales and inventory, the state of the order book and costs and selling prices since the latest financial year.
• For the current financial year, any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the issuer’s net sales or revenues, income from continuing operations, profitability, liquidity or capi- tal resources, or that would cause reported infor- mation not to be indicative of future operating results or financial condition.
Off-balance sheet arrangements (Form 20-F ✔ ✔ ✔ Item 5.E; effective for reports including financial statements for fiscal years ending on or after June 15 2003).
• Discussion in a separately-captioned section of the issuer’s off-balance sheet arrangements that have or are likely to have a material effect on the issuer’s financial condition, changes in financial con- dition, revenues and expenses, results of opera- tions, liquidity, and capital resources.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
• To the extent necessary for an understanding of ✔ ✔ ✔ the off-balance sheet arrangements and their effects:
- the nature and business purpose of the arrangements;
- the importance of the arrangements to the issuer for liquidity, capital resources, market risk or credit risk support or other benefits;
- the financial impact of the arrangements on the issuer (for example, revenues, expenses, cash flows or securities issued) and the com- pany's exposure to risk as a result of the arrangements (for example, retained interests or contingent liabilities); and
- known events, demands, commitments, trends or uncertainties that affect the availabil- ity or benefits to the issuer of material off-bal- ance sheet arrangements.
Tabular disclosure of contractual ✔ ✔ ✔ obligations (Form 20-F Item 5.F; effective for reports including financial statements for fiscal years ending on or after December 15 2003).
• The issuer must provide in a table an overview of its aggregate contractual obligations as of the lat- est balance sheet date.
• Disclosure is required of the amounts, aggregat- ed by type of contractual obligation, for at least the periods specified by the SEC (less than 1 year, 1-3 years, 3-5 years and more than 5 years).
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• The required categories of contractual obliga- ✔ ✔ ✔ tions are long-term debt obligations, capital (finance) lease obligations, operating leases, pur- chase obligations and other long-term liabilities reflected on the balance sheet under the Gaap of the primary financial statements. If the primary financial statements do not distinguish between capital and operating leases these can be presented under one category.
• The issuer may disaggregate the specified cate- gories and use the categories most suitable to its business (provided that the table includes all obliga- tions that fall under the specified categories).
Directors and senior management (Form 20- ✔ ✔ ✔ F, Item 6.A).
With respect to the issuer’s directors and senior management, and any employees such as scientists or designers upon whose work the issuer is dependent, disclose:
• Name, business experience, functions and areas of experience in the issuer.
• Principal business activities performed outside the issuer, including in the case of directors director- ships.
• Date of birth or age (if required to be reported in the home country).
• The nature of any family relationship between any of the persons named above.
• Any arrangement or understanding with major shareholders, customers, suppliers or others pur- suant to which any such person was selected. www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 101 Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F
Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Compensation (Form 20-F, Item 6.B). ✔ ✔ ✔ For the last full financial year for the issuer’s direc- tors and members of its administrative, supervisory or management bodies, disclose:
• The amount of compensation paid, and benefits in kind granted, to such persons by the issuer and its subsidiaries for services in all capacities to the issuer and its subsidiaries by any person.
• Disclosure of compensation is required on an individual basis unless individual disclosure is not required in the issuer’s home country.
• If any portion of the compensation was paid (i) pursuant to a bonus or profit-sharing plan, provide a brief description of the plan and the basis upon which such persons participate in the plan; or (ii) in the form of stock options, provide the title and amount of securities covered by the options, the exercise price, the purchase price (if any), and the expiration date of the options.
• The total amounts set aside or accrued by the issuer or its subsidiaries to provide pension, retire- ment or similar benefits.
Board practices (Form 20-F, Item 6.C). ✔ ✔ ✔ For the issuer’s last completed financial year, dis- close the following information with respect to the issuer’s directors, and members of its administra- tive, supervisory or management bodies:
• Date of expiration of the current term of office and the period during which the person has served in that office.
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• Directors’ service contracts providing for benefits ✔ ✔ ✔ upon termination of employment or an appropriate negative statement.
• Issuer’s audit committee and remuneration com- mittee, including the names of committee mem- bers and a summary of the terms of reference under which the committee operates.
Employees (Form 20-F, Item 6.D). ✔ ✔ ✔
• The number of employees at the end of the period or the average for the period for each of the past three financial years (and changes in such numbers, if material).
• If possible, a breakdown of persons employed by main category of activity and geographic location.
• Any significant change in the number of employ- ees, and information regarding the relationship between management and labor unions.
• If the issuer employs a significant number of tem- porary employees, disclose the number of tempo- rary employees on average during the most recent financial year.
Share ownership (Form 20-F, Item 6.E). ✔ ✔ ✔
• With respect to the persons listed in “Compensation” above, disclose their ownership of issuer shares and stock options as of the most recent practicable date.
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• For options, disclose the title and amount of ✔ ✔ ✔ securities called for by the options, the exercise price, the purchase price, if any; and the expiration date of the options.
• Any arrangements for involving the employees in the capital of the issuer, including any arrangement that involves the issue or grant of options or shares or securities of the issuer.
Major shareholders (Form 20-F, Item 7.A). ✔ ✔ ✔
• With regard to the beneficial owners of 5% or more (or a lower percentage if required by the home country) of each class of the issuer’s voting securities, disclose: - Their names, the number of shares and the percentage of outstanding shares of each class owned by each of them.
- Any significant change in the percentage own- ership during the past three years.
- Whether the major shareholders have differ- ent voting rights.
• Note: Beneficial ownership is defined to include the power to direct voting or disposition of shares or to receive the economic benefit of ownership.
• Disclose the portion of each class of securities held in the United States and the number of record holders in the United States.
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• Disclose whether the issuer is directly or indi- ✔ ✔ ✔ rectly owned or controlled by another corpora- tion(s), by any foreign government or by any other natural or legal person(s) severally or jointly.
• Discuss any arrangements the operation of which may at a subsequent date result in a change in control of the issuer.
Related party transactions (Form 20-F, Item ✔ ✔ ✔ 7.B).
Describe transactions and loans during the preced- ing three financial years (and any interim period), or, for an annual report on Form 20-F, since the beginning of the last financial year and to the latest practicable date, between the issuer and:
• enterprises that directly or indirectly control or are controlled by, or are under common control with, the issuer;
• associates;
• significant shareholders (beneficial ownership of a 10% voting interest is presumed to be significant) and close members of such person’s family;
• key management personnel and close members of such person’s family; and
• enterprises in which a substantial voting interest is owned by significant shareholders or key man- agement or over which any such person is able to exercise significant influence (beneficial ownership of a 10% voting interest is presumed to be signifi- cant).
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Interests of experts and counsel (Form 20-F, ✔ ✔ ✔ Item 7.C).
• If any of the named experts or counselors was employed on a contingent basis, owns issuer shares in an amount material to that person, has a material direct or indirect economic interest in the issuer or depends on the success of the offering, disclose the nature and terms of such contingency or interest.
Legal or arbitration proceedings (Form 20-F, ✔ ✔ ✔ Item 8.A-7).
• Provide information with respect to legal or arbi- tration proceedings that may have, or have had in the recent past, significant effects on the issuer’s financial position or profitability, including govern- mental proceedings pending or known to be con- templated.
• Include any material proceeding in which any director, any member of senior management, or any affiliate is adverse to the issuer or its sub- sidiaries or has a material interest adverse to the issuer or its subsidiaries.
• For annual reports on Form 20-F, discuss disposi- tions of previously reported litigation.
Dividend policy (Form 20-F, ✔ ✔ ✔ Item 8.A-8).
• Describe the issuer’s policy on dividend distribu- tions.
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Significant changes (Form 20-F, Item 8.B). ✔ ✔ ✔
• Disclose whether or not any significant change has occurred since the date of the annual financial statements, and/or since the date of the most recent interim financial statements, if any, included in the document.
Offering and listing details (Form 20-F, Item ✔ ✔ ✔ ✔ ✔ 9.A).
• The expected offering price or the method of determining the price and the amount of expenses specifically charged to the purchaser.
• If there is no established market for the securi- ties, the manner of determining the offering price.
• Description of any pre-emptive purchase rights.
• The price history of the offered or listed securi- ties.
• The market price in the US market and the prin- cipal trading market outside the United States and significant trading suspensions and lack of liquidity.
• Whether the securities are registered or bearer, the number of offered securities to be issued and the minimum offer price.
• Arrangements for transfer and any restrictions on the free transferability of the offered securities.
• Any limitation or qualifications of the rights of holders of the offered securities. • Description of terms of any warrants or rights being offered.
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• If securities are redeemable, a description of ✔ ✔ ✔ ✔ ✔ redemption provisions.
Plan of distribution (Form 20-F, Item 9.B). ✔ ✔ ✔
• Names and addresses of the underwriters.
• Subscription by major shareholders, directors or management to the offering and whether any per- son intends to subscribe for more than 5% of the offering.
• Whether the offering is being made in two or more countries using different tranches.
• Any preferential allocation arrangements.
• Any over-allotment option or “greenshoe.”
• Any distribution otherwise than through under- writers, including arrangements with brokers or dealers.
• Whether the securities are to be offered in con- nection with the writing of exchange-traded call options.
• Any simultaneous private or public offering.
• Description of underwriting arrangements.
• Any material relationship between an under- writer and the issuer and in certain cases informa- tion regarding the managing underwriter’s experi- ence.
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Markets (Form 20-F, Item 9.C). ✔ ✔ ✔ ✔ ✔
• All stock exchanges and other regulated markets on which the securities to be offered or listed are traded and any applications for future listing.
• The dates on which the shares will be listed.
Selling shareholders (Form 20-F, Item 9.D). ✔ ✔ ✔
• Names and addresses of selling shareholders and the nature of any position, office or other material relationship within the past three years with the issuer or any of its predecessors or affiliates.
• The number and class of securities being offered by each selling shareholder.
• The number and percentage of the securities beneficially held by the selling shareholder before and immediately after the offering.
Dilution (Form 20-F, Item 9.E). ✔ ✔ ✔
• Where there is a substantial disparity between the public offering price and the effective cash cost to directors or senior management, or affiliated persons, of equity securities acquired by them in transactions during the past five years, include a comparison of the public contribution in the pro- posed public offering and the effective cash contri- butions of such persons.
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• Disclose the amount and percentage of immedi- ✔ ✔ ✔ ate dilution resulting from the offering, computed as the difference between the offering price per share and the net book value per share for the equivalent class of security, as of the latest balance sheet date.
• In the case of a subscription offering to existing shareholders, disclose the amount and percentage of immediate dilution if they do not subscribe to the new offering.
Expenses of the issue (Form 20-F, Item 9.F). ✔ ✔ ✔
• Underwriting discounts or commissions, stated on a percentage and per share basis.
• A reasonably itemized statement of the major categories of offering expenses and by whom the expenses are payable, if other than the issuer.
• The portion of such expenses to be borne by any selling shareholder.
Share capital (Form 20-F, Item 10.A). ✔ ✔ ✔
• Note: Not applicable for offerings of securities other than common equity.
• The amount of issued capital and, for each class of share capital: (i) the number of shares autho- rized; (ii) the number of shares issued and fully paid and issued but not fully paid; (iii) the par value per share, or that the shares have no par value; and (iv) a reconciliation of the number of shares out- standing at the beginning and end of the year.
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• If more than 10% of capital has been paid for ✔ ✔ ✔ with assets other than cash within the past five years, that fact should be stated.
• If there are shares not representing capital, the number and main characteristics of such shares shall be stated.
• Indicate the number, book value and face value of shares in the issuer held by or on behalf of the issuer itself or by subsidiaries of the issuer.
• Description of authorized but unissued capital and rights to subscribe for such capital.
• Description of outstanding options to purchase share capital.
• A three-year history of share capital, including changes in the amount of the issued capital and/or the number and classes of shares of which it is composed.
• An indication of the resolutions, authorizations and approvals by virtue of which the shares have been or will be created and/or issued.
Memorandum and articles of association ✔ ✔ ✔ (Form 20-F, Item 10.B).
• Note: If unchanged, this information may be incor- porated by reference to a previous 20-F or registra- tion statement.
• The issuer’s objects and purposes.
• The registor and the entry number therein.
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• Provisions of the articles of association or charter ✔ ✔ ✔ and bylaws with respect to powers and rights of directors.
• The rights, preferences and restrictions attaching to each class of the shares.
• Action necessary to change the rights of holders of the stock.
• Conditions for convoking annual general meetings and extraordinary general meetings of shareholders.
• Any limitations on the rights to own securities.
• Any provision that could delay, defer or prevent a change in control of the issuer.
• Any bylaw provision governing the ownership threshold above which shareholder ownership must be disclosed.
• Description of material differences between certain provisions of home country law and US law.
• Any condition imposed by the memorandum and articles of association on changing the capital, where such condition is more stringent than is required by law.
Material contracts (Form 20-F, Item 10.C). ✔ ✔ ✔
• A summary of each material contract (other than generally contracts entered into in the ordinary course of business), including dates, parties, general nature of the contracts, terms and conditions, and amount of any consideration passing to or from the issuer. Such contracts must also be filed as an exhibit to the report.
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Exchange controls (Form 20-F, Item 10.D). ✔ ✔ ✔
Describe any governmental laws, decrees, regula- tions or other legislation of the home country of the issuer which may affect:
• the import or export of capital, including the availability of cash and cash equivalents for use by the issuer’s group; or
• the remittance of dividends, interest or other payments to nonresident holders of the issuer’s securities.
Taxation (Form 20-F, Item 10.E). ✔ ✔ ✔
• Information regarding taxes (including withhold- ing provisions) to which shareholders in the United States may be subject.
• Whether the issuer assumes responsibility for the withholding of tax at the source and applicable pro- visions of any reciprocal tax treaties between the home and host countries, or a statement, if applic- able, that there are no such treaties.
Dividends and paying agents (Form 20-F, Item ✔ ✔ ✔ ✔ 10.F).
• Note: Not applicable for offerings of securities other than common equity.
• Any dividend restrictions, date on which entitle- ment to dividends arises, and any procedures for nonresident holders to claim dividends.
• Paying agents in countries where admission has taken place or is expected to take place. www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 113 Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F
Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Statement by experts (Form 20-F, Item 10.G). ✔ ✔ ✔ ✔
• Where a statement or report is attributed to a person as an expert, provide such person’s name, address and qualifications and a statement to the effect that such statement or report is included, in the form and context in which it is included, with the consent of that person. The consents should also be filed as an exhibit.
Documents on display (Form 20-F, Item 10.H). ✔ ✔ ✔
• Where the documents concerning the issuer which are referred to in the document may be inspected.
• Exhibits and documents on display generally should be translated into English, or a summary in English should be provided.
Quantitative analysis of market risk (Form ✔ ✔ ✔ 20-F, Item 11(a)).
• Provide quantitative information, as of the end of the latest financial year, about market risk, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant mar- ket rate or price risks (for example, equity price risk).
• Categorize market risk sensitive instruments into instruments entered into for trading purposes and instruments entered into for purposes other than trading purposes.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
• Within both the trading and other than trading ✔ ✔ ✔ portfolios, present separate quantitative informa- tion, to the extent material, for each market risk exposure category (namely, interest rate risk, for- eign currency exchange rate risk, commodity price risk, and other relevant market risks, such as equity price risk).
• Use one of the three disclosure alternatives set forth in Item 11(a) of Form 20-F for all of the required quantitative disclosures about market risk. Examples of the mandatory quantitative disclosure are set forth in the Appendix to Item 11 of Form 20-F.
Qualitative information about market risk ✔ ✔ ✔ (Form 20-F, Item 11(b)).
To the extent material, describe:
• The issuer’s primary market risk exposures, including: interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks (for example, equity price risk).
• How those exposures are managed, including, but not be limited to, a discussion of the objectives, general strategies and instruments, if any, used to manage those exposures.
• Changes in either the primary market risk expo- sures or how those exposures are managed, when compared to what was in effect during the most recently completed financial year and what is known or expected to be in effect in future report- ing periods.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
• Qualitative information about market risk should ✔ ✔ ✔ be presented separately for market risk sensitive instruments entered into for trading purposes and those entered into for purposes other than trading.
Description of debt securities being ✔ ✔ ✔ ✔ registered (Form 20-F, Item 12.A).
• Interest, conversions, maturity, redemption, amortization, sinking funds or retirement.
• The kind and priority of any lien securing the issue, as well as a brief identification of the principal properties subject to each lien.
• Subordination of the rights of holders of the securities to other security holders or creditors.
• If the securities are subordinated, give the aggre- gate amount of outstanding indebtedness that is senior to the subordinated debt.
• Restrictive covenants.
• Events of default and consequences thereof. Consequences of failure to make payments.
• Modification of the terms of the security or the rights of security holders.
• If rights may be materially limited or qualified by any other authorized class of securities, describe such limitations or qualifications.
• The tax effects of any original issue discount.
• The name and address of the trustee and paying agents. Relationships between trustee and issuer.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
• The currency or currencies in which the debt is ✔ ✔ ✔ ✔ payable.
• Any law or decree determining the extent to which the securities may be serviced.
• If the securities are guaranteed, the name of the guarantor and a brief outline of the contract of guarantee.
Ratio of earnings to fixed charges (Regulation ✔ ✔ ✔ S-K 503(d)).
• If debt securities are being offered, the ratio of earnings to fixed charges must be shown for the last five financial years and for the latest interim period for which financial statements is required.
• If preferred stock is being offered, the ratio of earnings to fixed charges and preferred stock divi- dends must be shown for the same periods.
• If proceeds from sale of debt securities or pre- ferred stock will be used to repay outstanding debt or to retire other securities and the change to the ratio would be greater than 10% a pro forma ratio must be included.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Description of warrants or rights to ✔ ✔ ✔ ✔ purchase the securities being registered (Form 20-F, Item 12.B).
• The amount of securities for which the warrants or rights are exercisable.
• The period during and the price at which the warrants or rights are exercisable.
• The amount of warrants or rights outstanding.
• Provisions for changes or adjustments in the exercise price.
• Any other material terms of the warrants or rights.
Description of American Depositary Shares ✔ ✔ ✔ ✔ being registered (Form 20-F, Item 12.D).
• The name of the depositary and the address of its principal executive office.
• The title of the American Depositary Receipts and the deposited security. Briefly describe the American Depositary Shares, including:
- the amount of deposited securities represented by one unit of American Depositary Receipts;
- any procedure for voting;
- the procedure for collecting and distributing dividends;
- the procedures for transmitting notices, reports and proxy soliciting material;
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
- the sale or exercise of rights; ✔ ✔ ✔ ✔
- the deposit or sale of securities resulting from dividends, splits or plans of reorganization;
- amendment, extension or termination of the deposit arrangements;
- inspection rights;
- any transfer restrictions applicable to the underlying securities; and
- any limitation on the depositary’s liability.
• All fees and charges that a holder of American depositary receipts may have to pay.
Defaults, dividend arrearages and ✔ delinquencies (Form 20-F, Item 13).
• If there has been a material payment default, or any other material default not cured within 30 days, in respect of indebtedness of the issuer or any of its significant subsidiaries that exceeds 5% of the issuer’s consolidated assets, identify the indebt- edness and the nature of the default, including the amount of the default and total arrearages on the date of filing.
• Describe dividend arrearages and any other material default not cured within 30 days on any series of preferred stock of the issuer or its signifi- cant subsidiaries.
• Note: These items may be incorporated by ref- erence from any previously submitted Form 6-K.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Material modifications to the rights of ✔ security holders (Form 20-F, Items 14.A-D).
• Describe material modifications to the instru- ments governing any class of registered securities, including by means of issuing or modifying any other class of securities.
• Describe any withdrawal or substitution of a material amount of collateral securing a registered security, including a reference to the provisions of the underlying indenture authorizing the withdraw- al or substitution (unless the withdrawal or substitu- tion has been made in compliance with the requirements of the Trust Indenture Act).
• Identify any changes to trustees or paying agents.
• Note: This information can be incorporated from a previously submitted report on Form 6-K.
Use of proceeds (Form 20-F, Item 14.E). ✔
• Describe the actual use of proceeds from securi- ties sold under any previously filed registration statement under the Securities Act, unless all pro- ceeds have been accounted for in previous Form 20-F filings.
• Unless unchanged from a previous Form 20-F, provide details relating to any previous registration statement under the Securities Act, including:
- registration statement file number;
- offering date (or an explanation of why the offering has not commenced or has been termi- nated);
120 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F
Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
- managing underwriters, if any; ✔
- title of securities registered and, if applicable, class of securities into which a registered con- vertible security may be converted;
- amount registered, aggregate offering price, amount sold to date (for the account of the issuer and any selling shareholders);
- expenses and underwriting discounts incurred from the effective date of the registration statement to the end of the most recent financial period (indicating which of such amounts are estimates and which payments have been made to directors, officers, gener- al partners, 10% shareholders or affiliates);
- net proceeds to the issuer after expenses and underwriting discounts;
- itemization of uses of proceeds by specific categories specified in Item 14E.4(g) of Form 20-F, including payments made to directors, officers, general partners, 10% shareholders or affiliates; and
- description of any material difference between the actual use of proceeds and the use of proceeds described in the prospectus.
Note: This information can be incorporated from a previously submitted report on Form 6-K. The reporting of use of proceeds may cease on the later of the date of disclosure of the application of all the offering proceeds, or the date of the termi- nation of the offering.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Controls and procedures (Form 20-F, Item 15). ✔
• Disclose the conclusions of the issuer's principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, about the effectiveness of the issuer's dis- closure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) based on their evaluation the controls and proce- dures as of a date within 90 days prior to the filing date of the report.
• Disclose whether or not there were significant changes in the issuer's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, includ- ing any corrective actions with regard to significant deficiencies and material weaknesses.
Audit committee financial expert (Form 20-F, ✔ Item 16A; effective for annual reports for fiscal years ending on or after July 15 2003).
• The company must disclose (i) whether it has at least one “audit committee financial expert” serving on the audit committee and, if so, (ii) such person’s name. (It is sufficient to name one financial expert, even if more than one expert serves on the com- mittee.)
• If the company does not have an audit commit- tee financial expert, the company must disclose that fact and the reasons why.
122 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F
Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Code of ethics (Form 20-F, Item 16B; effective ✔ for annual reports for fiscal years ending on or after July 15 2003).
• The issuer must disclose whether it has adopted a written code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons serving similar functions. If the company has not adopted such a code of ethics, it must explain why it has not done so.
• Disclosure is also required of the nature of any amendment to or waiver of the code of ethics affecting the above officers (and, in the case of a waiver, to whom the waiver was granted).
• The code of ethics must be filed as an exhibit to Form 20-F, be available for free upon request or be posted on the issuer’s website.
Principal accountant fees and services (Form ✔ 20-F, Item 16C; effective for annual reports for fiscal years ending on or after December 15 2003).
• The issuer must disclose, under the caption audit fees, the aggregate amount audit fees, audit-related fees, tax fees and all other fees billed for each of the two most recent fiscal years. The company must also describe in subcategories the nature of the services provided that are categorized as audit- related fees and all other fees.
• The issuer must disclose the audit committee’s policies and procedures concerning pre-approval of audit and non-audit services to be performed by the auditor.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
• The issuer must disclose the percentage of audit- ✔ related fees, tax fees and all other fees described above that were approved by the audit committee.
• If greater than 50%, disclosure is required of the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by per- sons other than the principal accountant's full-time, permanent employees.
Certifications required by Section 302 of ✔ the Sarbanes-Oxley Act (filed as an exhibit to Form 20-F).
Provide a separate certification for each principal execu- tive officer and principal financial officer of the registrant.
See Rules 13a-14 and 15d-14.
Certifications required by Section 906 of ✔ the Sarbanes-Oxley Act (filed as an exhibit to Form 20-F).
Provide a separate certification for each principal executive officer and principal financial officer of the registrant.
SEC position on indemnification for Securities ✔ ✔ ✔ Act liabilities (Regulation S-K, Rule 510).
• Issuers are required to include a statement to the effect that insofar as indemnification for liabilities arising out of the Securities Act may be permitted to directors, officers or persons controlling the issuer, the issuer has been informed that in the opinion of the SEC, such indemnification is against public policy and is unenforceable.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Material changes (Item 5 in Forms F-2 and F-3). ✔ ✔
• Describe material changes in issuer’s affairs which have occurred since the end of the latest financial year for which certified financial statements were included in the latest filing under the Exchange Act.
• If not included in the Exchange Act documents incorporated by reference:
- financial statements of acquired companies in accordance with Rule 3-05 of Regulation S-X;
- pro forma financial information in accordance with Article 11 of Regulation S-X;
- restated financial statements if there is a change in accounting principles or a correc- tion of an error that requires material retroactive restatements;
- restated financial statements where there has been one or more business combinations with significant businesses accounted for by the pooling of interests method subsequent to the most recent financial year end; and
- any financial information required because of a material disposition of assets outside the normal course of business.
• If financial statements incorporated by reference in the registration statement are not sufficiently cur- rent to comply with Item 8.A of Form 20-F, updat- ed financial statements must be presented in the prospectus or in a subsequent filing under the Exchange Act that is incorporated by reference in the prospectus.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Incorporation of documents by reference: ✔ Form F-2 (Form F-2, Item 6). The issuer must state that it will:
• provide at no cost to each person to whom a prospectus is delivered, and who submits an oral or written request, a copy of any of all or the infor- mation that has been incorporated by reference in the prospectus but not delivered with the prospec- tus; and
• provide the name, address and telephone num- ber to which the request for this information must be made.
Incorporation of documents by reference: ✔ Form F-3 (Form F-3, Item 6).
• The issuer’s latest Form 20-F, Form 40-F, Form 10-K or Form 10 filed pursuant to the Exchange Act shall be incorporated by reference.
• Any report on Form 10-Q or Form 8-K filed since the date of filing of the annual report will also be incorporated by reference.
• All subsequent reports on Form 20-F, Form 40-F or Form 10-K, and all subsequent filings on Form 10-Q and 8-K, in each case prior to the termina- tion of the offering, must be incorporated by refer- ence.
• The issuer may incorporate by reference Form 6-K submissions.
• If the issuer is registering capital stock, the issuer must incorporate by reference the Exchange Act fil- ing that describes such capital stock.
126 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F
Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
In addition, the issuer must state that it will: ✔
• provide at no cost to each person to whom a prospectus is delivered, and who submits an oral or written request, a copy of any of all or the infor- mation that has been incorporated by reference in the prospectus but not delivered with the prospec- tus; and
• provide the name, address and telephone num- ber to which the request for this information must be made.
Information not required in the prospectus
Indemnification of directors and officers ✔ ✔ ✔ (Regulation S-K, Rule 702).
• State the general effect of any statute, charter provisions, by-laws, contract or other arrange- ments under which any controlling persons, direc- tor or officer of the issuer is insured or indemnified in any manner against liability which he may incur in his capacity as such.
Recent sales of unregistered securities ✔ (Regulation S-K, Rule 701).
• Provide the information specified in Item 701 of Regulation S-K regarding all securities of the issuer sold by the issuer during the past three years which were not registered under the Securities Act.
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Registration Annual statement report on Form Form Form on Form Form 20-F Disclosure F-1 F-2 F-3 20-F
Exhibits and financial statement schedules ✔ ✔ ✔ ✔ ✔ (Regulation S-K, Rule 601, Form 20-F, Item 19).
• For Securities Act registration statements, refer to Item 601 of Regulation S-K for a chart specifying all exhibits required to be filed as part of the regis- tration statement.
• For annual reports and registration statements under the Exchange Act, refer to the instructions to Item 19 of Form 20-F.
Undertakings (Regulation S-K, Rule 512). ✔ ✔ ✔
• Refer to Item 512 of Regulation S-K for various undertakings and commitment required to be made by the issuer in connection with different forms of registration statement and different types of offerings.
128 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Annex B –NYSE and Nasdaq quantitative listing criteria
Annex B – NYSE and Nasdaq quantitative listing criteria
NYSE quantitative listing standards and equity in the earnings or losses of investees, subject to certain adjustments) must total at least: Under the NYSE’s listing standards, a foreign private issuer may use either the NYSE’s domestic listing - $2.5 million in the latest fiscal year together criteria or its alternative listing standards (which are with $2 million in each of the preceding two specifically designed for foreign private issuers with a years; or liquid market for their securities outside the United States).615 The NYSE’s listing standards include the - $6.5 million in the aggregate for the last three following. fiscal years together with a minimum of $4.5 million in the most recent fiscal year, and positive (i) Minimum numerical listing standards amounts for each of the preceding two years; — domestic issuers Under the general domestic listing standards for US • Market capitalization (1):619 market capitalization of companies, an issuer must meet the following minimum not less than $500 million, revenues of not less than distribution and size requirements: $100 million during the most recent 12-month period and operating cash flow of at least $25 million • Size/volume criteria:616 in the aggregate for the last three fiscal years (and - 2,000 holders of 100 shares or more (or of a each year is reported as a positive amount); or unit of trading if less than 100 shares); • Market capitalization (2):620 market capitalization of - 2,200 total stockholders, together with average not less than $1 billion and $100 million in revenues monthly trading volume (for the most recent in the most recent fiscal year. six months) of 100,000 shares; or (ii) Minimum numerical listing standards - 500 total stockholders, together with average — foreign private issuers monthly trading volume (for the most recent 12 The alternative listing standards for foreign private months) of one million shares and 1.1 million issuers provide the following minimum distribution and publicly-held shares (excluding shares held by size requirements. directors, officers or their immediate families, and other concentrated holdings of 10% or • Size/volume criteria:621 5,000 worldwide holders of more); and 100 shares or more;
• Market value of publicly-held shares:617 Aggregate • Number of publicly-held shares:622 2.5 million market value of publicly held shares of $60 million, worldwide, excluding shares held by directors, in the case of IPOs or spin-offs, and $100 million for officers or their immediate families, and other all other companies. concentrated holdings of 10% or more; and
In addition, an issuer must meet one of the following • Market value of publicly-held shares:623 Aggregate financial standards: worldwide market value of publicly held shares of $100 million. • Pre-tax earnings:618 pre-tax earnings (from continuing operations and after minority interest, amortization www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 129 Annex B –NYSE and Nasdaq quantitative listing criteria
In addition, an issuer must meet one of the following In addition, a foreign private issuer must have: financial standards: • Foreign shares – round lot holders:628 in the case of • Pre-tax earnings:624 pre-tax earnings (from continuing foreign shares, there must be at least 300 “round lot operations and after minority interest, amortization holders” (that is, a holder of a normal unit of and equity in the earnings or losses of investees, trading629); subject to certain adjustments) of $100 million in the aggregate for the last three fiscal years, together with • Foreign shares – publicly-held shares:630 in the case of a minimum of $25 million in each of the most recent foreign shares, there must be at least one million two fiscal years; or publicly held shares; and
• Market capitalization (1):625 market capitalization of • ADRs:631 in the case of ADRs, at least 100,000 must not less than $500 million, revenues of not less than be issued. $100 million during the most recent 12-month period and operating cash flow of at least $100 (ii) NNM million in the aggregate for the last three fiscal years A foreign private issuer must generally meet the (and each of the two most fiscal years of at least $25 following entry standards to be designated for inclusion million); or in the NNM. These standards are in addition to the basic criteria set out above (except that an issuer meeting • Market capitalization (2):626 market capitalization of entry standard 3 need not meet the basic criteria): not less than $1 billion and $100 million in revenues in the most recent fiscal year. • Entry standard 1:632 - annual pre-tax income of at least $1 million Nasdaq quantitative listing (excluding extraordinary or non-recurring requirements items) in the most recently completed fiscal year or in two of the last three most recently There are two tiers of Nasdaq: the Nasdaq National completed fiscal years; Market (NNM) and the Nasdaq SmallCap Market (SCM). The NNM has more stringent requirements for - at least 1.1 million publicly held shares; inclusion than the SCM. - market value of publicly held shares is at least $8 (i) Basic Nasdaq inclusion criteria million; For initial inclusion on Nasdaq (whether the NNM or the SCM), a non-Canadian foreign private issuer must - bid price per share is $5 or more; have:627 - stockholders’ equity of at least $15 million; • Stockholders’ equity: $5 million; - at least 400 round lot shareholders; and • Market capitalization: $50 million; or - at least three registered active and active market • Net income: $750,000 (excluding extraordinary or makers with respect to the security. non-recurring items) in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.
130 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Annex B –NYSE and Nasdaq quantitative listing criteria
• Entry standard 2: 633 • for equity securities, there is a minimum public - stockholders’ equity of at least $30 million; distribution of one million trading units; and
- at least 1.1 million publicly held shares; • the aggregate market value of the security is at least $4 million. - market value of publicly held shares is at least $18 million; (iii) SCM quantitative criteria A foreign private issuer meeting the basic Nasdaq - bid price per share is $5 or more; inclusion criteria will be included in the SCM unless it is designated for inclusion in the NNM. - at least three registered active and active market makers with respect to the security;
- a two-year operating history; and
- at least 400 round lot shareholders.
• Entry standard 3:634 - at least 1.1 million publicly held shares;
- market value of publicly held shares is at least $20 million;
- bid price per share is $5 or more;
- at least four registered active and active market makers with respect to the security;
- at least 400 round lot shareholders; and
- either a market capitalization of $75 million or total assets and total revenue of $75 million each for the most recently completed fiscal year or two of the last three most recently completed fiscal years.
As an alternative to the entry standards, Nasdaq may consider including the securities of an issuer in the NNM if:635
• the issuer has assets in excess of $100 million and stockholders’ equity of at least $10 million;
• there are a minimum of 400 holders of the security;
www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 131 Annex C – Effective dates for certain Sarbanes-Oxley Sections and related SEC rulemaking
Annex C – Effective dates for certain Sarbanes-Oxley sections and related SEC rulemaking
Provision (Sarbanes-Oxley Section and SEC Rule(s)) Effective as of
Material correcting adjustments (Sarbanes-Oxley §401(a); Exchange Act Section 13(i)) July 30 2002
July 30 2002, for the requirement to certify; however, the require- ment to provide the Section 906 Section 906 certification requirement certification as an exhibit took effect (Sarbanes-Oxley §906; Exchange Act Rules 13a-14(b) and 15d-14(b)) August 14 2003
Loans to executives (Sarbanes-Oxley §402(a); Exchange Act Section 13(k)) July 30 2002
Forfeiture of bonuses (Sarbanes-Oxley §304) July 30 2002
August 29 2002; however, the text of the Section 302 certification as modified by the rules adopted under Section 404 generally took effect August 14 2003 (except with respect to the portions of the certi- Section 302 certification requirements; disclosure controls and procedures fication dealing with internal control (Sarbanes-Oxley §302; Exchange Act Rules 13a-14, 15d-14, 13a-15, 15d- over financial reporting, which take 15; Form 20-F, Item 15) effect on April 15 2005)
Blackout trading restrictions (Sarbanes-Oxley §306; Regulation BTR) January 26 2003
Auditor record retention (Sarbanes-Oxley §802; Regulation S-X, Rule 2-06) March 3 2003
132 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Annex C – Effective dates for certain Sarbanes-Oxley Sections and related SEC rulemaking
Provision (Sarbanes-Oxley Section and SEC Rule(s)) Effective as of
Non-Gaap financial measures (Sarbanes-Oxley §401(b); Regulation G; Regulation S-K, Item 10(e)) March 28 2003
Research analysts (Sarbanes-Oxley §501; Regulation AC) April 14 2003
Auditor independence (Sarbanes-Oxley Title II; Regulation S-X, Rules 2-01 and 2-07; Exchange Act Rule 10A-2; Form 20-F, Item 16C) May 6 2003
June 15 2003, except with respect to inclusion of a table of contractual Off-balance sheet and other MD&A disclosure obligations in MD&A, which takes (Sarbanes-Oxley §401(a); Form 20-F, Item 5) effect on December 15 2003
Improper influence on the conduct of audits (Sarbanes-Oxley §303; Exchange Act Rule 13b2-2(a)-(c)) June 27 2003
Audit committee financial expert (Sarbanes-Oxley §407(a); Form 20-F, Item 16A) July 15 2003
Code of ethics (Sarbanes-Oxley §406; Form 20-F, Item 16B) July 15 2003
Attorney conduct rules (Sarbanes-Oxley §307; Part 205) August 5 2003
Management assessment of internal controls (Sarbanes-Oxley §404; Exchange Act Rules 13a-15, 15d-15; Form 20-F, Item 15) April 15 2005
Standards relating to listed company audit committees (Sarbanes-Oxley §301; Exchange Act Rule 10A-3) July 31 2005
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Endnotes
1 We do not discuss the Multijurisdictional Disclosure System applicable 19 Id. to Canadian foreign private issuers in this Overview, or the special requirements applicable to registered “investment companies.” 20 Instruction A to Securities Act Rule 405. 2 Exchange Act Section 12(a) prohibits transactions on US national 21 Instruction B to Securities Act Rule 405. securities exchanges with respect to unregistered securities, while 22 Exchange Act Rule 13a-13(b)(2). Section 12(b) sets out the requirement for that registration. Technically, Nasdaq is not a “national securities exchange” and the 23 Exchange Act Rule 13a-16(a)(3). requirements of Sections 12(a) and 12(b) accordingly do not apply to 24 Exchange Act Rule 3a12-3(b). securities quoted on Nasdaq. Nasdaq rules, however, require a foreign private issuer to register securities under Exchange Act Section 12(g) 25 Regulation FD, Rule 100. prior to quotation. National Association of Securities Dealers, Inc., NASD Manual, Rules 4320(a), (b) [hereinafter NASD Manual]. 26 Id. Section 12(g)(1) permits voluntary registration of equity securities. 27 Id. Rule 101(b)(ii). 3 In the case of a foreign private issuer whose securities are quoted on 28 Exchange Act Rule 3a12-3(b). Note that these securities remain Nasdaq, this threshold is $1 million, not $10 million. See Exchange subject to the beneficial ownership reporting requirements of Sections Act Rule 12g-1. 13(d) and 13(g). 4 Exchange Act Section 12(g)(1); Exchange Act Rules 12g-1, 12g3-2(a). 29 Acceleration of Periodic Report Filing Dates and Disclosure 5 Exchange Act Rule 12g3-2(b)(3). Concerning Website Access to Reports, Securities Act Release No 8128, Exchange Act Release No 46464, Financial Reporting Release 6 Exchange Act Rule 12g3-2(b)(1)(i). No 63 [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,724, at 86,188 (September 5 2002). 7 Exchange Act Sections 13(a), 15(d). 30 Id. at 86,199. 8 Form 20-F, General Instructions A(b). See also Exchange Act Rule 13a-1 (each issuer with Section 12 registered securities must file an 31 Exchange Act Rule 13a-13(b)(2). annual report within the time period specified in the relevant form). 32 Plain English Disclosure, Securities Act Release No 7497, Exchange 9 Exchange Act Rule 13a-16(a); Form 6-K, General Instruction A. Act Release No 39593, International Series Release No 1113 (January 28 1998). 10 Form 6-K, General Instruction B. 33 Form 20-F refers to MD&A as “Operating and Financial Review and 11 Note that in April 2003, US Senator Joseph R. Biden inserted Prospects.” See Form 20-F, Item 5. comments into the US Congressional Record to the effect that the Section 906 certification was intended to apply to Form 6-K 34 Disclosure in Management’s Discussion and Analysis about Off- submissions containing financial statements. Legislative History of Balance Sheet Arrangements and Aggregate Contractual Obligations, Title IX of the Sarbanes-Oxley Act of 2002, 149 Cong. Rec. S5325, Securities Act Release No 8182, Exchange Act Release No 47264, S5331 (April 11 2003). The SEC has taken note of Senator Biden’s International Series Release No 1266 (January 27 2003). comments, and although it stated that it was “concerned that extending Section 906 certifications to Forms 6-K or 8-K could potentially chill 35 Commission Statements about Management’s Discussion and Analysis the disclosure of information by companies,” it went on to comment of Financial Condition and Results of Operations, Securities Act that it was “considering, in consultation with the US Department of Release No 8056, Exchange Act Release No 45321, Financial Justice, the application of Section 906 to current reports on Forms 6- Reporting Release No 61 [2001-2002 Transfer Binder] Fed. Sec. L. K and 8-K and annual reports on Form 11-K and the possibility of Rep. (CCH) ¶ 86,617, at 85,152 (January 22 2002). taking additional action.” Management’s Reports on Internal Control 36 Disclosure in Management’s Discussion and Analysis about the Over Financial Reporting and Certification of Disclosure in Exchange Application of Critical Accounting Policies, Securities Act Release No Act Periodic Reports, Securities Act Release No 8238, Exchange Act 8098, Exchange Act Release No 45907, International Series Release Release No 47986, Investment Company Act Release No 26068 (June No 1258 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 5 2003). 86,638, at 85,409 (May 10 2002). See also Cautionary Advice 12 Exchange Act Section 13(b)(2)-(7); Exchange Act Regulation 13B-2. Regarding Disclosure About Critical Accounting Policies, Securities Act Release No 8040, Exchange Act Release No 45149, Financial 13 Exchange Act Section 30A. Reporting Release No 60 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,609, at 85,097 (December 12 2001). 14 Exchange Act Section 10A. 37 Securities Act Rule 155(c)(3). 15 Sarbanes-Oxley Act, Section 2(a)(7) (definition of “issuer” subject to Sarbanes-Oxley). 38 Id. 16 Securities Act Rule 405; Exchange Act Rule 3b-4. 39 Form F-3, General Instruction I.A. 17 Instruction A to Securities Act Rule 405; Exchange Act Rules 12g3- 40 Id. General Instruction I.B. 2(a)(1), 12g5-1(a). 41 Form F-2, General Instruction I. 18 Exchange Act Rule 12g3-2(a)(1).
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42 See Securities Act Rule 415. 72 Id. Preliminary Note 1. 43 Form F-4, General Instructions B, C. 73 In addition, Regulation S is not available with respect to any transaction or series of transactions that, although in technical 44 Form F-6, General Instruction I.A. compliance with Regulation S, is part of a plan or scheme to avoid the 45 Mandated EDGAR Filing for Foreign Issuers, Securities Act Release registration requirements of the Securities Act. Id. Preliminary Note No 8099, Exchange Act Release No 45922, International Series 2. Release No 1259 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. 74 Securities Act Rule 902(d). (CCH) ¶ 86,640, at 85,471 (May 14 2002) [hereinafter EDGAR Filing Release]. See also Securities Act Regulation S-T, Rule 100(a) 75 Securities Act Rule 903(b)(1). (Regulation S-T applies to all registrants whose filings are subject to review by the SEC’s Division of Corporation Finance). 76 A “foreign issuer” is any foreign government or foreign private issuer. Securities Act Rule 902(e). 46 Regulation S-T, Rule 101(a). 77 “Substantial US market interest” is defined in Securities Act Rule 47 Id. Rule 102(a). 902(j). 48 Id. Rule 101(b)(1). 78 “Overseas directed offering” is defined in Securities Act Rule 903(b)(ii). 49 Id. Rule 101(b)(7). 79 The term “equity securities” is defined in Securities Act Rule 405, and 50 EDGAR Filing Release, ¶ 86,640, at 85,476. includes debt securities convertible into equity securities. 51 Regulation S-T, Rule 306(a). 80 The term “debt securities” is defined as all securities that are not equity 52 Id. securities, and includes non-participating preferred stock and asset- backed securities. Securities Act Rule 902(a). 53 Form 6-K, General Instruction D(1). 81 Securities Act Rule 903(b)(2). 54 Regulation S-T, Rule 306(a). 82 The term “offering restrictions” is defined in Securities Act Rule 55 Securities Act Rule 403(c)(2); Exchange Act Rule 12b-12(d)(2). 902(g). 56 Form 6-K, General Instruction D(2). 83 Securities Act Rule 903 (b)(2)(i) 57 Securities Act Rule 403(c)(3)(ii); Exchange Act Rule 12b-12(d)(3)(ii); 84 Securities Act Rule 902(g). Form 6-K, General Instruction D(4). 85 Securities Act Rule 903(b)(2)(ii). 58 Corporate Governance Rule Proposals, Exchange Act Release No 47672, Rule 303A(11) (April 11 2003). 86 Regulation S Adopting Release, ¶ 84,524 at 80,681-82. 59 NASD Manual, Rule 4350(a). 87 Securities Act Rule 903(b)(2)(iii). 60 Securities Act Section 4(3). 88 Securities Act Rule 902(f). 61 Securities Act Section 5(d)(2). 89 Securities Act Rule 903(b)(3). 62 Securities Act Rule 174(d). 90 Securities Act Rule 903(b)(3)(i). 63 Securities Act Section 4(3). 91 Securities Act Rule 903(b)(3)(iii). 64 Securities Act Rule 174(b). 92 Securities Act Rule 903(b)(3)(ii). 65 Securities Act Rule 903 (offers and sales by an issuer or distributor); 93 Securities Act Rule 903(b)(3)(ii)(A) and (iii)(A). Securities Act Rule 904 (offshore resales). 94 Securities Act Rule 903(b)(3)(iii)(B). 66 Securities Act Rule 902(h). 95 Securities Act Rule 903(b)(3)(ii)(B). 67 Securities Act Rule 902(c)(1). 96 Securities Act Rule 903(b)(3)(iv). 68 Securities Act Rule 902(c) 97 The term “restricted securities” is defined in Securities Act Rule 69 Offshore Offers and Sales, Securities Act Release No 6863, Exchange 144(a)(3). Act Release No 27942, Investment Company Act Release No 17458 98 Securities Act Rule 905. [1989-1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 84,524, at 80,661 (April 24 1990) [hereinafter Regulation S Adopting Release]. 99 Securities Act Rule 904(a). More generally, the Regulation S Adopting Release makes clear that offshore transactions in compliance with Regulation S will not be 100 Securities Act Rule 904(b)(1). integrated with concurrent registered or private offerings in the United 101 Securities Act Rule 904(b)(2). States. Id. ¶ 84,524, at 80,681-82. 102 Securities Act Section 12(a). 70 See Coral Gold Corporation (available February 19 1991) [1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,707, at 78,229. 103 Regulation S Adopting Release, ¶ 84,524 at 80,681. 71 Regulation S, Preliminary Note 5. 104 SEC v. Ralston Purina Co., 346 US 119, 125 (1953) (the applicability of the private placement exemption “should turn on whether the www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 135 Endnotes
particular class of persons affected needs the protection” of the ¶ 76,704, at 78,039; Morgan Stanley & Co. Inc. (publication available Securities Act; an offering to those “who are shown to be able to fend June 5 1991) Fed. Sec. L. Rep. (CCH) [1991-1992 Transfer Binder] ¶ for themselves” is a private placement). 76,018, at 78,884.
1 105 See, for example, Securities Act Release No 285, 1935 SEC LEXIS 134 See generally “The Section ‘4(1- /2)’ Phenomenon: Private Resales of 485 (January 24 1935) (SEC General Counsel specifies four criteria to ‘Restricted’ Securities”, 34 The Business Lawyer 1961 (July 1979). determine when a transaction qualifies as public offering: (i) the number of offerees and their relationship to each other and to the 135 Rule 144(b). issuer; (ii) the number of units offered; (iii) the size of the offering; and 136 Rule 144(d). (iv) the manner of the offering). 137 Rule 144(c). 106 Securities Act Release No 4552 (November 6 1962), 1962 Lexis 166 (all the surrounding circumstances must be considered “including such 138 Rule 144(e). factors as the relationship between the offerees and the issuer, the 139 Rule 144(f). nature, scope, size, type and manner of the offering”). 140 Rule 144(h). 107 Certain courts have held that this information must be comparable to the information investors would have received in a public offering. 141 Rule 144(k). See, for example, Doran v. Petroleum Mgmt. Corp., 545 F.2d 893, 903 (5th Cir. 1977). 142 Id. “Affiliate” is broadly defined to include any person that, directly or indirectly, controls an issuer. Securities Act Rule 405. 108 Securities sold under Section 4(2) are “restricted securities” that may not be freely resold to the public. Securities Act Rule 144(a)(3). 143 Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings, Securities Act Release No 7759, Exchange Act 109 Securities Act Rule 501(a). Release No 42,054, Trust Indenture Act Release No 2378, International Series Release No 1208 [1999-2000 Transfer Binder] 110 Securities Act Rule 502(a). Fed. Sec. L. Rep. (CCH) ¶ 86,214, at 82,536, 82,550 (October 22 111 Securities Act Rule 502(b)(2)(i). 1999) [hereinafter Cross-Border Release]. 112 Securities Act Rule 502(b)(2)(ii)(D). 144 General Notes to Securities Act Rules 800, 801 and 802, Note 6. 113 Securities Act Rule 502(b)(2)(v). 145 Securities Act Rule 802(a)(1). The 10% limitation does not apply in the case of an exchange offer or business combination commenced 114 Securities Act Rule 502(c). during the pendency of a prior exchange offer. Securities Act Rule 115 Securities Act Rule 502(d). 802(a)(1). Certain presumptions about the level of US ownership are available in the case of a hostile exchange offer. See Securities Act 116 Securities Act Rule 503. Rule 802(c). 117 Securities Act Rule 504(b)(2). 146 SEC Division of Corporation Finance, Manual of Publicly Available Telephone Interpretations, 3rd Supplement (July 2001), Section II.C, 118 Securities Act Rule 504(a). Question 1 (http://www.sec.gov/interps/telephone/phonesup- 119 Securities Act Rules 504(b)(1); 502(b)(1). plement3.htm) [hereinafter Telephone Interpretations]. 120 Securities Act Rule 505(b)(2)(i). 147 Securities Act Rule 800(h). 121 Securities Act Rules 505(b)(2)(ii); 501(e)(1)(iv). 148 Securities Act Rule 800(h)(3). 122 Securities Act Rules 505(b)(1); 502(b)(1). 149 Securities Act Rule 800(h)(1). 123 Securities Act Rule 506(b)(2)(i). 150 Securities Act Rule 802(h)(2) 124 Securities Act Rules 506(b)(1); 502(b)(1). 151 Securities Act Rule 802(a)(2). 125 Securities Act Rule 506(b)(2)(ii). “Purchaser representative” is defined 152 Securities Act Rule 802(a)(3)(i). in Rule 501(h). 153 Securities Act Rule 802(a)(3)(ii). 126 Securities Act Section 4(2); Regulation D, Preliminary Note 4. 154 Securities Act Rule 802(a)(3)(iii). 127 Rule 144A, Preliminary Note 6. 155 Securities Act Rule 802(b). 128 Rule 144A(a)(1). 156 General Notes to Securities Act Rules 800, 801 and 802, Note 8. 129 Rule 144A(d)(1). 157 Securities Act Rule 800(g). 130 Rule 144A(d)(2). 158 Cross-Border Release, ¶ 86,214, at 82,550. 131 Rule 144A(d)(3). 159 General Notes to Securities Act Rules 800, 801 and 802, Note 6. 132 Rule 144A(d)(4). 160 Securities Act Rule 801(a)(2). 133 Exxon Capital Holdings Corp. (publication available May 13 1988) 161 Securities Act Rule 800(h). 1988 SEC No-Act. LEXIS 682; Shearman & Sterling (publication available July 2 1993) Fed. Sec. L. Rep. (CCH) [1993 Transfer Binder] 162 Telephone Interpretations, Section II.C, Question 1.
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163 Securities Act Rule 801(a)(3). Reporting and Disclosure Issues]. 164 Securities Act Rule 801(a)(4)(i). 193 Form 20-F, Instruction 2 to Item 8. 165 Securities Act Rule 801(a)(4)(ii). 194 Id. Item 8.A.5. 166 Securities Act Rule 801(a)(4)(iii). 195 Id. 167 Securities Act Rule 801(a)(5). 196 Id. Item 3.A.1. The selected financials must include at least each of the following line items: net sales or operating revenues, income (loss) 168 Securities Act Rule 801(a)(6). from operations, income (loss) from continuing operations, net income 169 Securities Act Rule 801(b). (loss), net income (loss) from operations per share, income (loss) from continuing operations per share, total assets, net assets, capital stock 170 Securities Act Section 5(c). (excluding long-term debt and redeemable preferred stock), number of shares adjusted to reflect changes in capital, dividends declared per 171 Securities Act Section 5(a)(1). share in both the currency of the financial statements and US dollars, 172 Securities Act Section 5(b)(1). including the formula used for any adjustments to dividends declared, and diluted net income per share. The selected financials may also 173 Securities Act Section 5(b)(2). include any additional items that would enhance an understanding of 174 Guidelines for the Release of Information by Issuers Whose Securities the issuer’s financial condition and results of operations. Id. are in Registration, Securities Act Release No 5180 (August 16 1971) 197 Id. [hereinafter Information Guidelines]. 198 Id. 175 Securities Act Rule 135(a)(1). 199 Id. Item 3.B. 176 Securities Act Rule 135(a)(2). 200 Id. Instruction 1 to Item 3. 177 Securities Act Rule 135e(b)(1), (2). 201 Id. Item 17(c). 178 Use of Electronic Media, Securities Act Release No 7856, Exchange Act Release No 42728, Investment Company Act Release No 24426 202 Id. However, reconciliation is not required for interim financial [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304, at 83,384 statements included in an annual report. Simplification of Registration n.68 (April 28 2000) [hereinafter Use of Electronic Media Release]. and Reporting Requirements for Foreign Companies; Safe Harbours for Public Announcements of Unregistered Offerings and Broker- 179 Information Guidelines. Dealer Research Reports, Securities Act Release No 7053, Exchange 180 Electronic Media Release, ¶ 86,304, at 83,384 Act Release No 33918, International Series Release No 653 [1993- 1994 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 85,331, at 85,206, 181 Securities Act Rule 135c(a)(1). n.36 (April 19 1994) [hereinafter Simplification Release]. 182 Securities Act Rule 135c(a)(2). 203 Form 20-F, Item 17(c). 183 Securities Act Rule 135c(a)(3). 204 International Financial Reporting and Disclosure Issues, Section III.A.2. See also Simplification Release, ¶ 85,331, at 85,206 (adoption 184 Securities Act Rule 135c(b). of requirement that reconciliation for earliest of the three years may be 185 Securities Act Rule 135c(d). omitted); Form 20-F, Item 17(c)(2)(i) (reconciliation of net income of the earliest of the required three years may be omitted if that 186 Form 20-F, Item 8.A.1. information has not previously been included in a registration statement under the Securities Act). 187 Id. Item 8.A.2. 205 Note that it is not permissible to present restructuring charges in the 188 S-X Rule 3-02(a). income statement as a separate caption after income from continuing 189 Form 20-F, Instruction 1 to Item 8.A.2. operations before income taxes (that is, preceding income taxes and/or discontinued operations). Codification of Staff Accounting Bulletins, 190 Id. Instruction 3 to Item 8.A.2. Staff Accounting Bulletin No 103, Topic 5.P.3 (May 9 2003) [hereinafter SAB 103]. When a restructuring charge is classified as an 191 The rules regarding the age or “staleness” of the required financial operating expense, it is generally inappropriate in the Staff’s view to statements for foreign private issuers vary a great deal from those present a preceding subtotal captioned or representing operating applicable to domestic issuers. Generally speaking, the financial income before restructuring charges, since this is not a measurement of statements for domestic issuers go “stale” at a much faster rate. operating results under Gaap. However, it is permissible to discuss the 192 Form 20-F, Item 8.A.4. The SEC will, however, waive this effect on net income and earnings per share of restructuring charges requirement, and apply the 15-month rule, in an initial public offering within MD&A, since in the Staff’s view discussions in MD&A (and where the issuer is able to represent that it is not required to comply elsewhere) that quantify unusual or infrequent items are beneficial. Id. with this requirement in any other jurisdiction outside the United 206 For a discussion of revenue recognition issues, see id., Topic 13. States and that complying with the requirement is impracticable and would involve undue hardship. As a result, the SEC expects that the 207 Form 20-F, Item 17(c)(2)(i). majority of initial public offerings will be subject only to the 15-month rule. Id. Instruction 2 to Item 8.A.4; SEC Division of Corporation 208 Id. Instruction 2 to Item 17. Finance, International Financial Reporting and Disclosure Issues, May 209 Id. Item 17(c)(2)(ii). 1 2001, Section II.A.1(c) [hereinafter International Financial www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 137 Endnotes
210 Id. Item 17(c)(2)(iii). 235 Id. 211 Id. Instruction 2 to Item 3.A. 236 See id. Item 17(a) (financial statements must be included if they would be required for a registration statement on Form 10 or an annual report 212 Id. on Form 10-K); Form 10-K, Item 8 and Instruction 1 to Item 8 213 Simplification Release, ¶ 85,331, at 85,206. (financial statements must comply with Regulation S-X, other than S- X Rule 3-05 and S-X Article 11). See also Form F-1, Item 4(b) 214 Id. (requiring issuers to provide the financial statements called for by Rule 3-05). 215 Id. n.37; International Financial Reporting and Disclosure Issues, Section III.A.3. 237 S-X Rule 11-01 also requires pro forma financial information where disposition of a “significant portion of a business” by an issuer has 216 SEC Division of Corporation Finance, Accounting Disclosure Rules occurred or is probable, and that disposition is not “fully reflected” in and Practices: An Overview, Topic 6.III.A.2.b (March 31 2000) the issuer’s filed financial statements. [hereinafter SEC Accounting Overview]. 238 Whether an acquisition is of a “business” should be evaluated in light 217 Form 20-F, Instruction 2 to Item 5. of the facts and circumstances involved and whether there is sufficient 218 Id. continuity of the acquired entity's operations prior to and after the transactions so that disclosure of prior financial information is material 219 SAB 103, Topic 1.D.1 to an understanding of future operations. A presumption exists that a 220 For a discussion of the disclosure of loss contingencies, see id. Topic separate entity, a subsidiary, or a division is a business. However, a 5.Y. lesser component of an entity may also constitute a business. Among the facts and circumstances which should be considered in evaluating 221 Form 20-F, Item 8.A.1, Item 8.A.3. whether an acquisition of a lesser component of an entity constitutes a business are: 222 S-X Rule 2-02. • whether the nature of the revenue-producing activity of the 223 Form 20-F, Item 8.A.3. component will remain generally the same as before the 224 Id. Instruction to Item 8.A.3. See also SAB 103, Topic 1.E.2 (financial transaction; or statements on which the auditors’ opinions are qualified because of a • whether any of the following attributes remain with the limitation on the scope of the audit do not meet the requirements of component after the transaction: (i) physical facilities; (ii) employee S-X Rule 2-02(b); financial statements for which the auditors’ opinions base; (iii) market distribution system; (iv) sales force; (v) customer contain qualifications relating to the acceptability of accounting base; (vi) operating rights; (vii) production techniques; or (viii) principles used or the completeness of disclosures made are also trade names. unacceptable). As an example, the SEC recently released a statement regarding certain advice rendered by The Institute of Chartered 239 However, a different conclusion may be reached depending upon the Accountants of England and Wales. The advice concerned the customary practice for an industry or a particular issuer. For example, inclusion of certain language in audit opinions limiting the right of an issuer may be submitting a letter of intent as one of many parties in reliance by third parties on those opinions. The SEC made clear that a bidding process, or a roll-up entity may routinely sign letters of intent such language would not be acceptable in audit reports accompanying to further its due diligence investigations of multiple potential targets, SEC filings. See Letter from SEC Acting Chief Accountant and but with the acquisition of only a minority of those companies Director of Corporation Finance to The Institute of Chartered becoming probable. Accountants of England and Wales re: the Use of Clarifying Language in UK Audit Opinions (February 28 2003) 240 If the acquired business had a net loss, then the absolute value of the (www.sec.gov/info/accountants/staffletters/icaew022803.htm). negative amount is generally used for the test. 225 Form 20-F, General Instruction E.(c), second paragraph. 241 S-X Rule 3-05(b)(3). Note that, under Rule 3-05(b)(3), the calculation of the significance of an acquired business for purposes of determining 226 Id. whether separate audited financials need to be included in a registration statement (and if so, how many years) is generally made on the basis of 227 S-X Rule 3-20(a). the issuer's most recent annual financial statement. However, if the 228 International Financial Reporting and Disclosure Issues, Section issuer has made a significant acquisition subsequent to the latest fiscal VII.C.1. year end and filed a report on Form 8-K that included audited financial statements for that business for the periods required by Rule 3-05 and 229 S-X Rule 3-20(b). the pro forma information required by S-X Rule 11-01, the test is based upon the pro forma amounts for the latest fiscal year in the Form 8-K 230 Id. rather than the historical amounts for the latest fiscal year. 231 Id. 242 SEC Accounting Overview, Topic 2.I.D.1.e.2. 232 Id. See also International Financial Reporting and Disclosure Issues, 243 The date of an offering will be deemed to be the date of the final Section VII.E (discussing issues arising from material currency devalu- prospectus or prospectus supplement filed pursuant to Rule 424(b). By ations after the date of the balance sheet). analogy, the pricing date would be the date of an offering in a Rule 233 International Financial Reporting and Disclosure Issues, Section 144A transaction. VII.D.1. Note that disclosure may be required about the impact of the 244 Item 17(b) of Form F-4 provides some accommodations with respect euro conversion on items such as the business description, MD&A and to acquirees that are not reporting companies under the Exchange Act market risk disclosure. Id. Section VII.D.2. and in certain other cases where financial statements have previously 234 Form 20-F, Item 3.A.3. been provided to security holders.
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245 In order for the pre-acquisition statements of an acquiree to be omitted 255 Form 20-F, Item 17(c)(v). As discussed below under “Special from the registration statement, each of the following conditions must Requirements for Public Offerings,” while registrants in most public be met: offerings must comply with Item 18 with respect to their consolidated financial statements, they need only comply with Item 17 with respect • the combined significance of businesses acquired or to be acquired to any separate financial statements provided for significant acquired for which audited financial statements cover a period of less than 9 businesses. S-X Rule 3-05(c). months may not exceed 10%; 256 SEC Accounting Overview, Topic 6.IV.A.7. • the combined significance of businesses acquired or to be acquired for which audited financial statements cover a period of less than 21 257 In the case of a foreign private issuer, these will be the financial months may not exceed 20%; and statements required by Item 8.A of Form 20-F. S-X Rule 3-10(a)(3). Note that S-X Rule 3-10 does not apply to credit enhancements that • the combined significance of businesses acquired or to be acquired are not guarantees. However, in certain cases the financial condition for which audited financial statements cover a period of less than 33 of the party providing the credit enhancement could be material to months may not exceed 40%. investors and subject to disclosure. See Financial Statements and Combined significance is the total, for all included companies, of each Periodic Reports for Related Issuers and Guarantors, Securities Act individual company’s highest level of significance under the three tests Release No 7878, Exchange Act Release No 43124 [2000 Transfer of significance (investment, assets and pre-tax income). For a serial Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,320, at 83,711, n.50 (August 4 acquirer going public, the application of SAB 103 is likely to allow for 2000) [hereinafter Guarantors Release]. the exclusion of financial statements for an increasing number of 258 The modified financial information permitted by S-X Rules 3-10(b)- acquired companies for each period prior to the IPO. (f) is available only for “debt and debt-like securities” for which the 246 See S-X Rule 3-05 (financial statements of acquired businesses must be issuer has a contractual obligation to pay a fixed sum at a fixed time, prepared and audited in accordance with Regulation S-X). and, where the obligation is cumulative, a set amount of interest (which may be determined using an adjustable rate) must be paid. 247 For example, if, at the date of acquisition, the acquired business met at Guarantors Release ¶ 83,711, at 83,724. least one of the conditions in the S-X Rule 1-02 definition of significant subsidiary at the 80% level, the deal team might likely 259 Under S-X Rule 3-10(h)(6), a subsidiary is “minor” if each of its total conclude that the income statements of the acquired business should assets, stockholders' equity, revenues, income from continuing normally continue to be furnished for such periods prior to the operations before income taxes, and cash flows from operating acquisition as would, along with the issuer’s audited financials post- activities is less than 3% of the parent company's corresponding consol- acquisition, cover the equivalent of the three-year period specified in idated amount. S-X Rule 3-02. 260 S-X Rule 3-10(i)(12). The reconciliation may be based on Item 17 of 248 The additional disclosure includes (i) material factors considered by the Form 20-F. Id. issuer in assessing the property, including sources of revenue 261 Under S-X Rule 3-10(h)(1), a subsidiary is 100% owned if all of its (including, but not limited to, competition in the rental market, outstanding voting shares are owned by its parent company, either comparative rents, occupancy rates) and expense (including, but not directly or indirectly, including convertible securities and options to limited to, utility rates, ad valorem tax rates, maintenance expenses and buy voting shares. A subsidiary not in corporate form is 100% owned capital improvements anticipated) and (ii) an indication that, after if the sum of all interests are owned, either directly or indirectly, by its reasonable inquiry, the issuer is not aware of any material factors parent company, other than securities that are guaranteed by its parent relating to the property other than those discussed in (i) that would and, if applicable, other 100% owned subsidiaries of its parent, and cause the reported financial information not to be necessarily indicative securities that guarantee securities issued by its parent and, if applicable, of future operating results. other 100% owned subsidiaries of its parent. Note that this standard is 249 Form 20-F refers to MD&A as “Operating and Financial Review and different from the definition of “wholly-owned subsidiary” under S-X Prospects.” See Form 20-F, Item 5. Rule 1-02(aa), which is “a subsidiary substantially all of whose outstanding voting shares are owned by its parent and/or the parent's 250 Rule 408 states that “In addition to the information expressly required other wholly owned subsidiaries.” to be included in a registration statement, there shall be added such further material information, if any, as may be necessary to make the 262 The Latham & Watkins standard form indenture includes a “savings required statements, in the light of the circumstances under which they clause” to limit the guarantee to the extent necessary for the guarantee are made, not misleading.” See also Form 20-F, General Instruction not to constitute a fraudulent conveyance under insolvency laws. This C.(c) (referring to Exchange Act Rule 12b-20, which contains substan- exception does not vitiate the guarantee in the view of the SEC. tially identical language to Securities Act Rule 408). Guarantees may also have different subordination terms than the guaranteed security. 251 S-X Rule 11-02(c)(1). The pro forma condensed balance sheet should be prepared as if the transaction had occurred on the date of the latest 263 However, pursuant to Note 3 of S-X Rule 3-10(f), if any of the historical balance sheet. S-X Rule 11-02(b)(6). subsidiary guarantees is not joint and several with the guarantees of the other subsidiaries, then each subsidiary guarantor whose guarantee is 252 S-X Rule 11-02(c)(2). The pro forma condensed income statements not joint and several need not include separate financial statements, but should be prepared as if the transaction had taken place at the the condensed consolidating financial information must include a beginning of the latest financial year included in the filing. Id. Rule separate column for each subsidiary guarantor whose guarantee is not 11-02(b)(6). joint and several. 253 International Financial Reporting and Disclosure Issues, Section 264 S-X Rule 3-10(i) provides guidance for the preparation of the VIII.C. condensed consolidating financial information in the footnote. 254 Id. 265 The column for non-guarantor subsidiaries may be omitted if the www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 139 Endnotes
parent has independent assets or operations and the non-guarantor 283 Id. subsidiaries are minor. 284 Form 20-F, General Instruction E.(c). Offerings of non-convertible, 266 A subsidiary is an operating subsidiary if it is not a finance subsidiary (as investment grade securities and certain rights offerings need only defined below). comply with Item 17. Form F-1, Item 4(c); Form F-3, General Instructions I.B.2 and I.B.4. Note that, in the case of acquisitions of a 267 Note 1 to S-X Rule 3-10(c) allows a conditional exemption from foreign business, the financial statements of the acquired business need providing the footnote if the parent company has no independent assets only be presented under Item 17. S-X Rule 3-05(c). Similarly, or operations, the non-guarantor subsidiaries are minor, and there is a audited financial statements for a less than majority owned equity footnote to this effect in the parent financial statements that also notes investor that is a foreign business need only comply with Item 17. Id. that the guarantee is full and unconditional. S-X Rule 3-09(d). 268 The column for non-guarantor subsidiaries may be omitted if the 285 SFAS 131 uses the term “chief operating decision maker” to identify a parent has independent assets or operations and the non-guarantor function rather than a specific person; the “chief operating decision subsidiaries are minor. maker” could be the CEO, CFO, or a group of senior managers, 269 A subsidiary is a finance subsidiary if it has no assets, operations, depending upon the circumstances. revenues or cash flows other than those related to the issuance, 286 In practice there is a great variety of ways in which management may administration and repayment of the security being registered and any view its business and there is no one right answer within a given other securities guaranteed by its parent company. industry. For example, Dell Computer considers that its enterprise is 270 However, pursuant to Note 4 of S-X Rule 3-10(d), if any of the primarily operating on a geographic basis, but with two operating subsidiary guarantees is not joint and several with the guarantees of the segments in the United States (business and consumer); in comparison, parent company or the guarantees of the parent company and the other IBM reports its results under seven operating segments based upon subsidiaries, each subsidiary guarantor whose guarantee is not joint and customers, products, technology and delivery channels. several need not include separate financial statements, but the 287 Under SFAS 131, the details provided in reporting a “measure of profit condensed consolidating financial information must include a separate or loss” depend upon the information that is actually reviewed by the column for each subsidiary guarantor whose guarantee is not joint and chief operating decision maker and may include revenues from external several. vs. internal customers, interest revenue and expense, depreciation and 271 For a finance subsidiary only, instead of providing this condensed amortization, and extraordinary items, among others. consolidating financial information, the parent company’s financial 288 Note that a foreign private issuer need not reconcile segment statements may included an audited footnote (if true) that parent information to US Gaap in its MD&A discussion. International company has no independent assets or operations, the issuer is a 100% Financial Reporting and Disclosure Issues, Section V.A.3. owned finance subsidiary, the parent company and all of the parent company’s subsidiaries other than the issuer have guaranteed the 289 In January 2003, the SEC adopted new rules limiting the use of non- securities, and the guarantees are full and unconditional and joint and Gaap financial measures that have customarily appeared in the several. Note 5 to S-X Rule 3-10(d). summary financial data. See Latham & Watkins Client Alert No 257, SEC Adopts Rules for Disclosure of EBITDA and Other “Non-Gaap 272 The column for non-guarantor subsidiaries may be omitted if the non- Financial Measures,” for more information on this important topic guarantor subsidiaries are minor. (http://www.lw.com/resource/publications/_pdf/pub578.pdf). 273 The audited and unaudited financial statements must comply with all 290 This requirement applies to annual reports as well as registration aspects of Regulation S-X except for the filing of supporting schedules. statements. See also Form F-2, Item 5.a and Form F-3, Item 5.a 274 SAB 103, Topic 6.K.4. (requiring disclosure of any material change in the issuer’s affairs since the end of the last fiscal year for which certified financial statements are 275 S-X Rule 3-09(a). included in the registration statement or are incorporated by reference from the last filing on Form 20-F, to the extent those changes have not 276 Id. been described in a current report, such as on Form 6-K, that is 277 Form 20-F, Item 17(c)(vi). incorporated in the registration statement). 278 Simplification Release, ¶ 85,331, at 85,206. 291 Form 20-F, Item 8.A.5. This requirement does not apply to annual reports. Id. Instruction 1 to Item 8.A.5. Although Item 8.A.5 refers 279 Guide 1 has been removed and reserved. Regulation S-K, Item only to interim financial statements, the SEC takes the position that this 801(a). requirement applies to annual financial statements as well. 280 Where restrictions on the amount of funds that may be loaned or International Financial Reporting and Disclosure Issues, Section advanced differ from the amount restricted as to transfer in the form of VIII.A. cash dividends, the amount least restrictive to the subsidiary may be 292 International Financial Reporting and Disclosure Issues, Section used. Redeemable preferred stocks and minority interests are deducted VIII.A. in computing net assets for purposes of this test. 293 Id. 281 Compare Form 20-F, Item 17(b) (financial statement must disclose information “substantially similar” to financial statements complying 294 Regulation FD prohibits discussing material information with with US Gaap and Regulation S-X) with id. Item 18 (must provide all prospective investors unless it has been made public. Foreign private Item 17 information plus all other information required by US Gaap issuers are exempt from Regulation FD, but many companies attempt and Regulation S-X unless those requirements do not apply to foreign to comply because of liability concerns. Some companies will issue a private issuers, subject to certain exceptions). “recent results” press release ahead of schedule in order to allow for the inclusion of these results in the offering document and a “road show” 282 SAB 103, Topic 1.D.1. discussion of these results with prospective investors.
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295 Sarbanes-Oxley Act Section 2(a)(7). criminal proceedings rather than civil litigation. John Huber, Thomas Kim and Catherine Groves, The Sarbanes-Oxley Act of 2002 and SEC 296 Certification of Disclosure in Companies’ Quarterly and Annual Rulemaking, ¶ II.B.1.d, at 12 (March 28 2003) Reports, Securities Act Release No 8124, Exchange Act Release No (http://www.lw.com/upload/docs/doc33.pdf) [hereinafter Huber 46427, Investment Company Act Release No 25722 [2002 Transfer Outline]. Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,720, at 86,132, 86,152 (August 28 2002) [hereinafter Certification Adopting Release]. 316 Huber Outline, ¶ II.B.3.b(1), at 17. 297 Id. ¶ 86,720, at 86,126. 317 Legislative History of Title IX of the Sarbanes-Oxley Act of 2002, 149 Cong. Rec. S5325, S5331 (April 11 2003). 298 Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, 318 Management’s Reports on Internal Control Adopting Release, Section Securities Act Release No 8238, Exchange Act Release No 47986, III.A. Investment Company Act Release No 26068 (June 5 2003) [hereinafter Management’s Reports on Internal Control Adopting 319 Huber Outline, ¶ II.B.2.b(3), at 15. Release]. 320 Management’s Reports on Internal Control Adopting Release, Section 299 Id. III.B. 300 The SEC has stated that current reports such as those on Forms 6-K 321 Management’s Reports on Internal Control Adopting Release, Section and 8-K, as opposed to periodic reports (that is, quarterly and annual II.J. reports), are not covered by Section 302’s certification requirements. 322 Exchange Act Rules 13a-15(f); 15d-15(f). Certification Adopting Release, ¶ 86,720, at 86,130. Foreign private issuers are nevertheless required to design and maintain disclosure 323 Exchange Act Rules 13a-15(a), 15d-15(a). controls and procedures to ensure full and timely disclosure in current 324 Exchange Act Rules 13a-15(c), 15d-15(c). reports. Id. 325 Id. Although Rules 13a-15 and 15d-15 do not require the use of a 301 Exchange Act Rules 13a-14(a), 15d-14(a). particular framework, the Committee of Sponsoring Organizations of 302 Form 20-F, Instructions as to Exhibits, Instruction 12. the Treadway Commission’s “Internal Control – Integrated Framework”, the Canadian Institute of Chartered Accountant’s “The 303 The term “disclosure controls and procedures” is defined in Exchange Guidance on Assessing Control”, and the Institute of Chartered Act Rule 13a-15(e) and 15d-15(e). Accountants in England and Wales’ “Turnbull Report” are all 304 The term “internal control over financial reporting” is defined in approved frameworks. Management’s Reports on Internal Control Exchange Act Rule 13a-15(f) and 15d-15(f). Adopting Release, at n.67. 305 This portion of the Section 302 certification does not take effect until 326 Exchange Act Rules 13a-15(d), 15d-15(d). the annual report on Form 20-F for the first fiscal year ending on or 327 Form 20-F, Item 15(b). after April 15 2005. Management’s Reports on Internal Control Adopting Release, Sections II.J, III.E. 328 Even if the evaluation framework used by a foreign private issuer does not require a statement as to the effectiveness of the issuer’s system of 306 Similarly, this portion of the Section 302 certification does not take internal control over financial reporting, the issuer must nevertheless effect until April 15 2005. Id. state affirmatively whether such controls are effective. Management’s 307 Note, however, that no specific date for the evaluation is specified. Reports on Internal Control Adopting Release, n.68. Management’s Reports on Internal Control Adopting Release, Section 329 Form 20-F, Item 15(c). III.E. 330 Id. Instruction 1 to Item 15. The SEC has stated that it believes it is 308 Exchange Act Rules 13a-14(a), 15d-14(a). important for the internal control report to be located near the 309 Certification Adopting Release, ¶ 86,720, at 86,132. However, “a auditor’s attestation report, and that it expects issuers will place the company’s certifying officers may temporarily modify the content of report and attestation near MD&A disclosure or immediately preceding their Section 302 certification to eliminate certain references to internal the financial statements. Management’s Reports on Internal Control control over financial reporting until the compliance date.” Adopting Release, Section II.B.3.e. Management’s Reports on Internal Control Adopting Release. 331 Form 20-F, Item 15(d). 310 Exchange Act Rules 13a-15(a), 15d-15(a). 332 Management’s Reports on Internal Control Adopting Release, Section 311 Exchange Act Rules 13a-15(b), 15d-15(b). II.F.3. 312 Form 20-F, Item 15(a). 333 Conditions for Use of Non-Gaap Financial Measures, Securities Act Release No 8176, Exchange Act Release No 47226, Financial 313 Exchange Act Rules 13a-15(e), 15d-15(e). Reporting Release No 65 (January 22 2003) [hereinafter Non-Gaap Financial Measures Adopting Release]; see also Latham & Watkins 314 Pending effectiveness of Rules 13a-14(b) and 15d-14(b), the SEC has Client Alert No 257, SEC Adopts Rules for Disclosure of EBITDA reiterated its prior guidance that an issuer should provide the Section and Other “Non-Gaap Financial Measures” 906 certification as an exhibit to the annual report to which it relates. (http://www.lw.com/resource/publications/_pdf/pub578.pdf). Management’s Reports on Internal Control Adopting Release, Section III.C. 334 Conditions for Use of Non-Gaap Financial Measures, Securities Act Release No 8145, Exchange Act Release No 46788 [2002 Transfer 315 Management’s Reports on Internal Control Adopting Release, Section Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,737, at 86,444-86,446 III.B. Not “filing” will also limit enforcement of the certificate to (November 4 2002). www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 141 Endnotes
335 Regulation G, Rule 100(a). 367 Exchange Act Rule 10A-3(b)(1)(iv)(E). 336 Id. Rule 101(a)(1). The term does not cover operating measures. Id. 368 Exchange Act Rule 10A-3(b)(1)(iv)(A). Rule 101(a)(2). 369 Exchange Act Rule 10A-3(b)(2). 337 Id. Rule 101(b). In addition, if the foreign private issuer prepares its primary financial statements under US Gaap, “Gaap” would mean US 370 Exchange Act Rule 10A-3(b)(3). Gaap. Id. 371 Exchange Act Rule 10A-3(b)(4). 338 Id. Rule 100(a). 372 Exchange Act Rule 10A-3(b)(5). 339 Id. Rule 100(b). 373 Instruction 1 to Exchange Act Rule 10A-3. 340 Non-Gaap Financial Measures Adopting Release. 374 Id. 341 Regulation G, Rule 100(c). 375 Instruction 2 to Exchange Act Rule 10A-3. 342 Non-Gaap Financial Measures Adopting Release. 376 Exchange Act Rule 10A-3(c)(3). 343 Regulation S-K, Item 10(e)(1)(i). 377 Exchange Act Rule 10A-3(d) and Form 20-F, Item 16.D. 344 Id. Item 10(e)(1)(ii). 378 Id. 345 Id. Item 10, Note to Paragraph (e). 379 Form 20-F, Items 16A(a)(1) and (3). 346 See Disclosure in Management’s Discussion and Analysis about Off- 380 Id. Instruction 3 to Item 16A. Balance Sheet Arrangements and Aggregate Contractual Obligations, Securities Act Release No 8182, Exchange Act Release No 47264, 381 Id. Item 16A(a)(2). Financial Reporting Release No 67, International Series Release No 382 Id. Note that for listed issuers the audit committee financial expert will 1266 (January 27 2003) [hereinafter Off-Balance Sheet Adopting need to satisfy the definition of “independence” as set forth under Release]. Exchange Act Rule 10A-3. Id 347 Id. 383 Id. Item 16A(b). 348 Form 20-F, Item 5.E.1. 384 Id. Item 16A(c). 349 Id. Items 5.E.1.(a)-(d). 385 Id. Instruction 3 to Item 16A. 350 Id. Item 5.E.2. 386 Sections 406 and 407 Adopting Release, Section II.A.4.d.i. 351 Off-Balance Sheet Adopting Release, Sections II.B.1 and III.A.1. 387 Form 20-F, Item 16A(d)(1). 352 Id. Section III.G. 388 Id. Items 16A(d)(2)-(3). 353 Id. 389 Strengthening the Commission’s Requirements Regarding Auditor 354 Form 20-F, Item 5.F.1. Independence, Securities Act Release No 8183, Exchange Act Release No 47265, Investment Company Act Release No 25915, Investment 355 Id. Item 5.F.2. Advisers Act Release No 2103 (January 28 2003). 356 Off-Balance Sheet Adopting Release, Section III.D and n.73. 390 S-X Rule 2-01(c)(2)(iii); see also Exchange Act Section 10A(l) (auditor 357 Commission Statement about Management’s Discussion and Analysis may not audit an issuer whose CEO, controller, CFO or chief of Financial Condition and Results of Operations, Securities Act accounting officer was employed by the auditor and participated in the Release No 8056, Exchange Act Release No 45321, Financial audit during the one-year period preceding the date of the initiation of Reporting Release No 61 (January 22 2002). the audit in question). 358 Off-Balance Sheet Adopting Release, Section II.B.4. 391 S-X Rule 2-01(c)(4); see also Exchange Act Section 10A(g) (substan- tially identical limitations). 359 Exchange Act Rule 10A-3(a)(5)(i)(A); see also Standards Relating to Listed Company Audit Committees, Securities Act Release No 8220, 392 S-X Rule 2-01(c)(6); see also Exchange Act Section 10A(j) (unlawful Exchange Act Release No 47654, Investment Company Act Release to act as auditor if lead (or coordinating) audit partner (having primary No 26001 (April 9 2003). responsibility for the audit) or audit partner responsible for reviewing the audit has performed audit services for the issuer in the each of the 360 Exchange Act Rule 10A-3(b)(1)(i). prior five fiscal years of the issuer). 361 Exchange Act Rule 10A-3(b)(1)(ii)(A). 393 S-X Rule 2-01(c)(7); see also Exchange Act Sections 10A(h)-(i) (all audit and permitted non-audit services must be pre-approved by the 362 Exchange Act Rule 10A-3(b)(1)(ii)(B). audit committee (subject to certain de minimis exceptions)). 363 Exchange Act Rule 10A-3(e)(1)(i). 394 S-X Rule 2-01(c)(8). 364 Exchange Act Rule 10A-3(e)(1)(ii)(A). 395 S-X Rule 2-07(a); see also Exchange Act Section 10A(k) (substantially 365 Exchange Act Rule 10A-3(b)(1)(iv)(C). identical requirements). 366 Exchange Act Rule 10A-3(b)(1)(iv)(D). 396 Form 20-F, Item 16C(a).
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397 Id. Item 16C(b). 429 Id. Items 16B(d) and (e). 398 Id. Item 16C(c). 430 Insider Trades During Pension Fund Blackout Periods, Exchange Act Release No 47225, Investment Company Act Release No 25909 399 Id. Item 16C(d). (January 22 2003). 400 Id. Item 16C(e). 431 The term “individual account plan” is defined in Regulation BTR, 401 Id. Item 16C(f). Rule 100(j). 402 Improper Influence on Conduct of Audits, Exchange Act Release No 432 Id. Rule 100(b)(2). 47890, Investment Company Act Release No 26050, Financial 433 Id. Rule 101(a). Reporting Release No 71 (May 20 2003) [hereinafter Improper Influence Adopting Release]. 434 Id. Rule 104. 403 Exchange Act Rule 13b2-2(b)(1). 435 Form 20-F, Instructions as to Exhibits, Instruction 10. Although the issuer need not submit the notice under Form 6-K, if it does so it is not 404 Improper Influence Adopting Release, Section II.B. separately required to include the notice as an exhibit to its annual 405 Id. report on Form 20-F. Id. 406 Exchange Act Rule 13b2-2(b)(2). 436 Regulation BTR, Rule 103(b). 407 Retention of Records Relevant to Audits and Reviews, Securities Act 437 Id. Rule 103(a). Release No 8180, Exchange Act Release No 47241, Investment 438 Id. Rule 103(b). Company Act Release No 25911, Financial Reporting Release No 66 (January 24 2003) [hereinafter Retention Release]. 439 Exchange Act Section 13(k)(1). 408 S-X Rule 2-06(a). The SEC required a seven-year period rather than 440 Id. the five-year period mandated in Section 802, because, among other things, Section 103 of the Sarbanes-Oxley Act directs the Public 441 Id. Company Accounting Oversight Board to require auditors to retain 442 Exchange Act Section 13(k)(2). audit workpapers and other materials that support the audit for seven years. Retention Release, Section II. 443 Exchange Act Section 13(k)(3). 409 S-X Rule 2-06(b). 444 Sarbanes-Oxley Act: Interpretive Issues under Section 402 – Prohibition of Certain Insider Loans (October 15 2002) 410 S-X Rule 2-06(c). (http://www.lw.com/upload/docs/doc29.pdf). 411 See Certification Adopting Release, ¶ 86,720, at 86,130. 445 Id. at 3-4. 412 Implementation of Standards of Professional Conduct for Attorneys, 446 Id. at 4. Securities Act Release No 8185, Exchange Act Release No 47276, Investment Company Act Release No 25919 (January 29 2003) 447 Id. [hereinafter Attorney Conduct Adopting Release]. 448 Id. at 4-5. 413 Part 205.2(a)(1). 449 Id. at 6. 414 Part 205.2(a)(2)(ii). 450 Id. 415 Part 205.2(j). 451 Id. at 8-11. 416 Part 205.2(i). 452 See Huber Outline, ¶ V.C.1, at 77-79. 417 Part 205.3(b)(1). 453 Id. ¶ V.C.2, at 79. 418 Part 205.3(b)(2). 454 Regulation Analyst Certification, Securities Act Release No 8193, 419 Part 205.3(b)(3). Exchange Act Release No 47384 (February 20 2003) [hereinafter Regulation AC Release]. 420 Part 205.3(c)(1). 455 Regulation AC, Rule 501(a). 421 Part 205.2(k). 456 Id. Rule 500. 422 Part 205.3(c)(1). 457 Id. Certification is not, however, required from “junior analysts.” 423 Part 205.3(c)(2). Regulation AC Release, Section III.A.1. 424 Attorney Conduct Adopting Release. 458 Regulation AC Release, at n.11. 425 Sections 406 and 407 Adopting Release. 459 Id. Section I.A. 426 Form 20-F, Item 16B(a). 460 Regulation AC, Rule 502(a). 427 Id. Item 16B(b). 461 Id. Rule 502(c). 428 Id. Item 16B(c). 462 Id. Rule 503. www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 143 Endnotes
463 Id. Rule 500. A “foreign issuer” is any foreign government or foreign owes a duty of trust or confidence to the issuer,” such as an attorney, private issuer. Securities Act Rule 902(e). investment banker or accountant). 464 Securities Act Section 2(a)(3). 484 Federal Securities Litigation, at 6-32 to 6-33. 465 David M. Brodsky & Daniel J. Kramer, Federal Securities Litigation, 485 Id. at 6-34. 4-16 to 4-17 (1st ed. 1997) [hereinafter Federal Securities Litigation]. 486 Id. at 6-34 to 6-35 (citing United States v. O’Hagan, 521 US 642 466 Id. at 4-2 to 4-3. (1997)). The SEC has recently added two rules to clarify issues that have arisen in insider trading cases. First, Rule 10b5-1 provides that 467 Id. at 5-20 (citing Pinter v. Dahl, 486 US 622, 641-54 (1988)). trading “on the basis of” material non-public information includes all 468 See TSC Indus., Inc. v. Northway, Inc., 426 US 438, 449 (1976); see also trading while in possession of that information, except certain trades Securities Act Rule 405 (“material” information is “matters to which previously contracted for in good faith and not as part of a plan or there is a substantial likelihood that a reasonable investor would attach scheme to evade the prohibitions of Rule 10b5-1. Second, Rule importance in determining whether to purchase the security 10b5-2 fleshes out the meaning of a “duty of trust or confidence” for registered”). TSC involved the interpretation of Section 14(a) of the purposes of the misappropriation theory. Exchange Act and Rule 14a-9. The Supreme Court has, however, 487 Federal Securities Litigation, at 6-34. explicitly extended TSC’s definition of materiality to Rule 10b-5, Basic Inc. v. Levinson, 485 US 224, 231-32 (1988), and the lower US federal 488 Id. at 6-42. courts have generally used the TSC standard in all contexts involving the anti-fraud provisions of the US federal securities laws. Louis Loss 489 Exchange Act Section 21D(e)(1); see also Federal Securities Litigation, & Joel Seligman, Securities Regulation 2074-75 (3rd ed. 1992) at 6-43 to 6-45 (discussing damages under Exchange Act Section [hereinafter Loss & Seligman]. 10(b)). 469 TSC, 426 US at 449. 490 See, for example, Exchange Act Sections 21(d)(3) (providing for money penalties in SEC civil actions), 32(a) (providing for criminal 470 Id. at 450. penalties for willful violations of the Exchange Act). 471 SAB 103, Topic 1.M.1 (SAB 103 recodifies Staff Accounting Bulletin 491 Federal Securities Litigation, at 6-42; see also Exchange Act Section 99). 28(a) (limiting recovery for damages in actions under the Exchange Act to “actual damages”). 472 Id. 492 Federal Securities Litigation, at 3-1. 473 Id. 493 See Loss & Seligman, at 4217-18. 474 Selective Disclosure and Insider Trading, Securities Act Release No 7881, Exchange Act Release No 43154, Investment Company Act 494 See Federal Securities Litigation, at 3-8 to 3-10. Release No 24599 [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,319, at 83,676, 83,684 (August 15 2000) [hereinafter Regulation 495 Id. at 3-11 (citing Securities Act Section 6(a)). FD Release]. 496 Id. at 3-12. 475 In the case of an omission, a plaintiff must show that there was a duty 497 Id. at 3-14. to disclose the material facts; merely being in possession of material non-public information does not, of itself, create a duty to disclose. 498 Securities Act Sections 11(b)(3)(A) and (B). Federal Securities Litigation, at 6-4. 499 Securities Act Section 11(b)(3)(C). 476 Ernst & Ernst v. Hochfelder, 425 US 185, 193 (1976). 500 Securities Act Section 11(e). 477 Federal Securities Litigation, at 6-13 to 6-14. 501 Federal Securities Litigation, at 3-19 to 3-20. 478 Id. at 6-26 to 6-27. 502 Gustafson v. Alloyd Co., 513 US 561, 564, 584 (1995). There is some 479 Blue Chip Stamps v. Manor Drug Stores, 421 US 723, 754-55 (1975). question whether Section 12(a)(2) liability extends to offshore public offerings under Regulation S. One lower US federal court has held 480 Loss & Seligman, at 3679 n.553. that, despite Gustafson, “an offering issued pursuant to Regulation S is 481 See Loss & Seligman, at 3688 (explaining that “[t]he Rule may be subject to” Section 12(a)(2) liability “if it is a public offering.” Sloane violated by feeding misinformation into the marketplace, or even Overseas Fund Ltd. v. Sapiens Int’l Corp, 941 F. Supp. 1369, 1376 withholding information too long,” regardless of whether the (S.D.N.Y. 1996). defendants themselves bought or sold securities) (citation omitted). 503 Id. at 5-20 (citing Pinter v. Dahl, 486 US 622, 641-54 (1988)). 482 Federal Securities Litigation, at 6-30 to 6-31. The SEC has stated that 504 Securities Act Rule 405; see also Exchange Act Rule 12b-2. an issuer may be “fully liable” if it disseminates and adopts false third- party reports “even if it had no role whatsoever in the preparation of 505 Federal Securities Litigation, at 11-5. the report.” Use of Electronic Media, Securities Act Release No 7856, 506 Id. at 11-5 to 11-7. Exchange Act Release No 42728, Investment Company Act Release No 24426 [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304, 507 See generally id. at 11-7 to 11-10 (discussing the defence). at 83,374, 83,381, n.54 (April 28 2000) (citing In the Matter of Presstek, Inc., Exchange Act Release No 39472 (December 22 1997)). 508 Huber Outline, ¶ X.A, at 134. 483 Federal Securities Litigation, at 6-32; see also Regulation FD Release, 509 Sarbanes-Oxley Act Section 802(a) (adding new Section 1519 of 18 ¶ 86,319, at 83,682 (defining a temporary insider as “a person who USC); Huber Outline, ¶ X.A.1.a.1, at 135.
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510 Sarbanes-Oxley Act Section 1102 (amending 18 USC Section 1512); 527 Id. Huber Outline, ¶ X.A.1.b, at 137. 528 Federal Securities Litigation, at 6-4. 511 Sarbanes-Oxley Act Section 1107 (amending 18 USC Section 1513); Huber Outline, ¶ X.A.2.a, at 137. 529 Id. at 6-4 to 6-5. 512 Sarbanes-Oxley Act Section 807 (adding new Section 1348 to 18 530 Id. at 6-5. USC); Huber Outline, ¶ X.A.3, at 137. 531 Regulation FD Release, ¶ 86,319, at 83,684. 513 Sarbanes-Oxley Act Section 1106 (amending Exchange Act Section 532 Note that, in the SEC’s view, a research report contains an “inherent 32(a)); Huber Outline, ¶ X.A.4.a.7, at 138. representation” that the views expressed in the report are not 514 Sarbanes-Oxley Act Section 1103 (amending Exchange Act Section knowingly false and do not omit material facts necessary in order to 21C(c)); Huber Outline, ¶ X.B.1, at 139. make statements not misleading. Regulation AC Release, Section II.I. Accordingly, “analysts may be found to have violated the anti-fraud 515 Sarbanes-Oxley Act Section 1105 (amending Exchange Act Section provisions of the federal securities laws if they make baseless 21C and Securities Act Section 8A); Huber Outline, ¶ X.B.2.a, at 139. recommendations or recommendations that they disbelieve.” Id. 516 Huber Outline, ¶ X.B.2.a, at 139. 533 Federal Securities Litigation, at 6-31. 517 Sarbanes-Oxley Act Section 305 (amending Exchange Act Section 534 See generally Federal Securities Litigation, at 2-1 to 2-31 (discussing 21(d)(2) and Securities Act Section 20(e)); Huber Outline, ¶ X.B.2.c, the PSLRA). at 140. 535 Securities Act Section 27A(c)(1). 518 Sarbanes-Oxley Act Section 806 (adding new Section 1514A to 18 USC); Huber Outline, ¶ X.C.2.a, at 141. 536 Securities Act Section 27A(i)(1). 519 Sarbanes-Oxley Act Section 803 (adding new Section 523(a) to 11 537 Securities Act Section 27A(b)(2). USC); Huber Outline, ¶ X.C.3.a, at 141. 538 Securities Act Section 27A(c)(1)(A)(i). 520 See SEC v. Murphy, [1983-84 Transfer Binder] Fed. Sec. L. Rep. 539 Basic Inc. v. Levinson, 485 US 224, 230-232 (1998). (CCH) ¶ 99,688 (C.D. Ca. 1983). 540 Id. at 236 (quoting TSC Indus., Inc. v. Northway, Inc., 426 US 438, 450 521 For a comprehensive discussion of SEC Enforcement practice, see, for (1976)). example, The Securities Enforcement Manual: Tactics and Strategies (Richard M. Phillips, ed. 1997); William R. McLucas, J. Lynn Taylor 541 Id. at 238-41 (1998). & Susan A. Mathews, A Practitioner’s Guide to the SEC’s Investigative 542 Id. at 238 (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 and Enforcement Process, 70 Temp. L. Rev. 53 (1997). (2d. Cir. 1968)). 522 See, for example, SEC v. Lernout & Hauspie Speech Products, N.V., 543 See, for example, SEC v. Geon Industries, Inc., 531 F.2d 39, 47-48 (2d. Litigation Release No 17782 (October 10 2002) (charging Belgian Cir. 1976) (“Since a merger in which it is bought out is the most corporation quoted on Nasdaq National Market System with financial important event that can occur in a small corporation’s life, to wit, its fraud), available at death, we think that inside information, as regards a merger of this sort, http://www.sec.gov/litigation/litreleases/lr17782.htm; SEC v. can become material at an earlier stage than would be the case as A.C.L.N., Ltd., Litigation Release No 17776 (October 8 2002) regards lesser transactions—and this even though the mortality rate of (charging NYSE-listed Cypriot corporation and its Cypriot auditor mergers in such formative stages is doubtless high.”). with financial fraud), available at http://www.sec.gov/litigation/litreleases/lr17776.htm; SEC v. 544 E.On AG. Millennium Financial, Ltd., Litigation Release No 17528 (May 22 2002) (charging Uruguayan securities firm with securities fraud), available at 545 See, for example, Charles Schwab & Co., Inc. (publ. avail. November http://www.sec.gov/litigation/litreleases/lr17528.htm. 15 1999) [1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 77,650, at 76,310. 523 See, for example, SEC v. Unifund SAL, 910 F.2d 1028, 1033 (2d Cir. 1990) (upholding preliminary injunction barring insider trading against 546 For an overview, see Use of Electronic Media Release; see also Use of Lebanese investment company which purchased stock in a New York Internet Web Sites to Offer Securities, Solicit Securities Transactions, Stock Exchange-listed company through Beirut office of US broker- or Advertise Investment Services Offshore, Securities Act Release No dealer). See also Federal Securities Litigation, at 1-5 to 1-8 (discussing 7516, Exchange Act Release No 39779, Investment Advisers Act the extra-territorial reach of the US federal securities laws). Release No 1710, Investment Company Act Release No 23071 (March 23 1998) (www.sec.gov/rules/interp/33-7516.htm) 524 2002 SEC Annual Report at 13, available at [hereinafter Offshore Internet Offerings Release]. http://www.sec.gov/pdf/annrep02/ar02full.pdf. 547 Use of Electronic Media, Securities Act Release No 7856, Exchange 525 For a discussion of MLATs, see Symposium, Mann, Mari & Lavdas, Act Release No 42728, Investment Co. Act Release No 24426 [2000 International Agreements and Understandings for the Production of Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304, at 83,381 (April Information and Other Mutual Assistance, 29 Int’l Law. 780, 781 28 2000). n.248 and accompanying text (1995). 548 Id. at 83,383. 526 In the Matter of E.On AG, Exchange Act Release No 43372, Administrative Proceeding File No 3-10318 (September 28 2000), 549 Id. at 83,383-85. available at http://www.sec.gov/litigation/admin/34-43372.htm 550 See Offshore Internet Offerings Release, Section IV.A.2. [hereinafter E.On AG]. 551 Use of Electronic Media Release, ¶ 86,304, at 83,384. www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 145 Endnotes
552 Id. at 86,381. 570 Id. 553 Id. 571 Id. 554 Id. at 83,381-83,383. 572 NASD Rule 2711(e); see NYSE Rule 472(g)(1). 555 Offshore Internet Offerings Release, Section IV.A.1. 573 NASD Rule 2711(j); NYSE Rule 472(g)(2). 556 Id. Section IV.A.2. 574 NASD Rule 2711(c)(4); NYSE Rule 472(b)(5). 557 Use of Electronic Media Release, ¶ 86,304, at 83,386. 575 Id. 558 Order Approving Proposed Rule Changes by the National Association 576 NYSE Rule 472(b)(5). The NASD Rules do not contain a of Securities Dealers, Inc. and the New York Stock Exchange, Inc. and comparable exception. Notice of Filing and Order Granting Accelerated Approval of Amendment No 2 to the Proposed Rule Change by the National 577 NASD Rule 2711(f); NYSE Rule 472(f). Association of Securities Dealers, Inc. and Amendment No 1 to the 578 NASD Rules 2711(f)(1)(A), (f)(1)(B), (f)(4); NYSE Rules 472(f)(1), (2) Proposed Rule Change by the New York Stock Exchange, Inc. and (4). “Public appearance” is defined to include “without limitation, Relating to Research Analyst Conflicts of Interest, Exchange Act participation by a research analyst in a seminar, forum (including an Release No 45908 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. interactive electronic forum), radio, television or print media (CCH) ¶ 86,639, at 85,457 (May 10 2002). The Conflict of Interest interview, or public speaking activity, or the writing of a print media Rules are NYSE Rule 472, Communications with the Public, and article in which such research analyst makes a recommendation or NASD Rule 2711, Research Analysts and Research Reports. offers an opinion concerning any equity securities.” NYSE Rule 559 Order Approving Proposed Rule Changes by the New York Stock 472.50; see NASD Rule 2711(a)(4). Exchange, Inc. Relating to Exchange Rules 344 (“Supervisory Analysts”), 579 The prohibitions contained in the second two bullets do not apply to 345A (“Continuing Education for Registered Persons”), 351 (“Reporting public appearances or research reports published or otherwise Requirements”) and 472 (“Communications with the Public”) and by the distributed under Securities Act Rule 139 regarding an issuer with National Association of Securities Dealers, Inc. Relating to Research “actively-traded securities,” as defined in Rule 101(c)(1) of Regulation Analyst Conflicts of Interest and Notice of Filing and Order Granting M under the Exchange Act. NASD Rule 2711(f)(1)(B)(ii), (f)(4); Accelerated Approval of Amendment No 3 to the Proposed Rule Change NYSE Rule 472(f)(2), (4). by the New York Stock Exchange, Inc. and Amendment No 3 to the Proposed Rule Change by the National Association of Securities Dealers, 580 NASD Rule 2711(f)(1)(B)(i), (f)(4); NYSE Rule 472(f)(5). Inc. Relating to Research Analyst Conflicts of Interest, Exchange Act 581 NASD Rule 2711(f)(2); NYSE Rule 472(f)(3). Release No 48252 (July 29 2003), 68 Fed. Reg. 45,875 (August 4 2003). These amendments to the Conflict of Interest Rules generally become 582 NASD Rule 2711(f)(5); NYSE Rule 472(f)(6). effective 60 days after the approval of the rule amendments by the SEC, or September 27 2003, although certain provisions of the amendments 583 Id. Examples given for impracticability are if the research analyst take effect at later dates. Id. at Section III.M. covering the issuer has left the employ of the member firm or the member firm has terminated coverage of the industry or sector of the 560 Id. at Section II.B. issuer. Id. If it is impracticable to provide a final recommendation or rating, the member firm must provide the rationale for the decision to 561 Id. at Section II.B. terminate coverage. Id. 562 NASD Rule 2711(b)(3); NYSE Rule 472(b)(3). These rules do not 584 NASD Rule 2711(g); NYSE Rule 472(e). apply to certain small firms, which are defined as “member organi- zations that over the three previous years, on average per year, have 585 NASD Rule 2711(g)(1-3); NYSE Rule 472(e)(1-3). participated in ten or fewer investment banking services transactions as manager or co-manager and generated $5 million or less in gross 586 There are exceptions to this blackout period for research analysts that investment banking services revenues from those transactions.” NYSE recently began covering a company or for purchases and sales that are Rule 472(m); see NASD Rule 2711(k). due to a significant news or a significant event, as well as other exceptions. See NASD Rules 2711(g)(2)(A), (B); NYSE Rule 472(e)(4). 563 NASD Rule 2711(c)(2); see NYSE Rule 472(b)(4). There are further exemptions to the trading restriction rules for transactions such as sales of shares of registered diversified investment 564 NASD Rule 2711(c)(2)(A); NYSE Rule 472(b)(4). companies and sales pre-approved by the legal or compliance department 565 NASD Rule 2711(c)(2)(B), (C); NYSE Rule 472(b)(4)(i), (ii). based on unanticipated significant changes in personal financial circum- stances. See NASD Rules 2711(g)(4) and (5); NYSE Rule 472(e)(4). 566 NASD Rule 2711(c)(3); NYSE Rule 472(b)(4)(iii). 587 NASD Rule 2711(g)(6); NYSE Rule 472(e)(5). 567 NASD Rule 2711(d)(1); see NYSE Rule 472(h)(1). Here and for all other purposes under the Conflict of Interest Rules, “research analyst” 588 NASD Rule 2711(h); NYSE Rule 472(k). is defined to include a member, allied member, or employee of a 589 NASD Rule 2711(h)(2)(A)(ii); NYSE Rule 472(k)(1)(i)(a). The member or member organization “primarily responsible for, and any Conflict of Interest Rules provide for an exception to the disclosure person who reports directly or indirectly to such research analyst in required by the second and third bullets “to the extent such disclosure connection with, the preparation of the substance of a research report, would reveal material non-public information regarding specific whether or not such person has the job title of ‘research analyst.’” potential future investment banking services transactions of the subject NYSE Rule 472.40; NASD Rule 2711(a)(5). company.” NASD Rule 2711(h)(2)(C); NYSE Rule 472(k)(3). 568 NASD Rule 2711(h)(2)(A)(i)(a); NYSE Rule 472(k)(1)(ii)(a)(2) 590 NASD Rules 2711(h)(1)(B), (h)(2)(A)(iii); NYSE Rules 569 NASD Rule 2711(d)(2); NYSE Rule 472(h)(2). 472(k)(1)(i)(c), (d). If the research report is published less than 30
146 US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com Endnotes
calendar days after the end of the most recent month, such information 611 Addendum, Section II.2. need only be provided as of the end of the second preceding month prior to the publication of the research report. 612 Addendum, Section II.5. 591 NYSE Rules 472(k)(1)(ii)(b), (k)(1)(iii)(a); see NASD Rules 613 Addendum, Section II.3. 2711(h)(2)(A)(iii-v). 614 Defining the Term “Qualified Purchaser” Under the Securities Act of 592 The Conflict of Interest Rules provide for an exception “to the extent 1933, Securities Act Release No 8041 [2001-2002 Transfer Binder] such disclosure would reveal material non-public information Fed. Sec. L. Rep. (CCH) ¶ 86,610, at 85,098, 85,103-85,104 regarding specific potential future investment banking transactions of (December 19 2001). the subject company.” NASD Rule 2711(h)(2)(C); NYSE Rule 615 New York Stock Exchange Listed Companies Manual, ¶ 103.00.A 472(k)(3). 616 Id. ¶ 102.01A. 593 The rules provide that this disclosure requirement will be deemed satisfied if any such compensation is disclosed in research reports within 617 Id. ¶ 102.01.B. For IPOs, the NYSE will rely on a written commitment 30 days after the completion of the most recent calendar quarter, from the underwriter regarding the anticipated value of the offering. Id. provided that the member has taken steps reasonably designed to 618 Id. ¶ 102.01.C.I. identify such compensation during that calendar quarter. NASD Rule 2711(h)(2)(A)(v)(a); NYSE Rule 472(k)(1)(iii)(a)(1). The rules further 619 Id. ¶ 102.01.C.II. provide that an analyst and member would be presumed not to have reason to know of affiliate non-investment banking compensation 620 Id. ¶ 102.01.C.III. from the subject company if the member maintains and enforces 621 Id. ¶ 103.01.A. policies and procedures reasonably designed to prevent all research analysts and influential employees (those with the ability to influence 622 Id. the substance of research reports) for directly or indirectly receiving information from the affiliate concerning such compensation. NASD 623 Id. For IPOs, the NYSE will rely on a written commitment from the Rule 2711(h)(2)(A)(v)(b); NYSE Rule 472(k)(1)(iii)(a)(2). underwriter regarding the anticipated value of the offering. Id. 594 NASD Rules 2711(h)(1)(A), (C), (h)(2)(A)(i) and (h)(3); NYSE Rules 624 Id. ¶ 103.01.B.I. 472(k)(1)(ii)(a), 472(k)(1)(iii)(b-d). 625 Id. ¶ 103.01.B.II. 595 NASD Rule 2711(h)(4-7); NYSE Rule 472(k)(1)(i)(e-h). 626 Id. ¶ 103.01.B.III. 596 See note 578 for the definition of “public appearance” for purposes of 627 National Association of Securities Dealers, Inc., NASD Manual, Rule the Conflict of Interest Rules. 4320(e)(2)(A). 597 The Conflict of Interest Rules provide for an exception to this 628 Id. Rule 4320(e)(4). requirement and the requirement in the preceding bullet “to the extent such disclosure would reveal material non-public information 629 Id. Rule 4200(a)(30). regarding specific potential future investment banking services 630 Id. Rule 4320(e)(5). transactions of the subject company.” NASD Rule 2711(h)(2)(C). NYSE Rule 472(k)(3). 631 Id. Rule 4320(e)(6). 598 Global Settlement, Litigation Release Nos. 18109-18118 (April 28 632 Id. Rule 4420(a). 2003). 633 Id. Rule 4420(b). 599 Addendum, Section I.1. 634 Id. Rule 4420(c). 600 Addendum, Section I.2. 635 Id. Rule 4420(f). 601 Addendum, Section I.3. 602 Addendum, Section I.4. 603 Addendum, Section I.5. 604 Addendum, Section I.7. 605 Addendum, Section I.8. Compare to the similar requirements in the NASD and NYSE rule amendments. NASD Rule 2711(f)(5); NYSE Rule 472(f)(5). 606 Addendum, Section I.9, I.11. Compare to NASD Rule 2711(c)(4) and NYSE Rule 472(b)(4), each of which as proposed applies only to pitches for IPO business. 607 Addendum, Section I.10. 608 Addendum, Section II.3. 609 Addendum, Section I.1.e. 610 Addendum, Section II.1.c. www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS 147 Securities Practice
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