by Cydney Posner
Earlier this month, Corp Fin recently released a slew of new CDIs relating to qualified institutional buyers under Rule 144A as well as all things international. Dedicated to those who like to Below are summaries.
Rule 144A – Private Resales of Securities to Institutions
New 138.05 through 138.08 address the question of what securities an entity may include when calculating whether it meets the $100 million threshold under Rule 144A(a)(1)(i) for purposes of determining its status as a QIB under Rule 144A. In that circumstance, an entity may include the following as “owned” by the entity:
- securities that it purchased and continues to hold on margin, so long as they are not subject to a repurchase agreement (see Rule 144A(a)(2)); and
- securities that it owns but has loaned out to borrowers of securities.
However, in determining its status as a QIB, an entity may not include the following as “owned”:
- securities that it has borrowed; or
- short positions in securities (because short positions do not represent ownership of securities but rather sales of securities).
New 138.09 addresses the same question but in the context of an investment company that is not registered under the Investment Company Act of 1940 (although it is part of a family of funds, some of which may be registered investment companies). In that case, when determining its status as a QIB, the non-registered investment company is not permitted to aggregate investments by the other funds that are part of the family in the manner described under Rule 144A(a)(1)(iv); only registered investment companies may use that aggregation method.
New 138.10 looks at the issue of QIB status of a limited partnership under Rule 144A(a)(1)(v), which provides that an entity will be deemed a QIB if all of its equity owners are QIBs. For that purpose, the limited partners are the equity owners of the limited partnership, but the general partner need not be considered, unless that person is also a limited partner. (See also 255.18.)
Definitions: Rules 3a11-1 to 3b-19 and Rule 405 – Definition of Terms
A number of the new CDIs relate to the definition of “foreign private issuer” in Rule 405 and Rule 3b-4(c).
New 110.02 and 203.17 provide that, in applying the foreign private issuer definition, a company that has multiple classes of voting stock with different voting rights can determine whether more than 50% of its outstanding voting securities are directly or indirectly owned of record by residents in the U.S. by either one of two methods: (i) on a combined basis, that is, whether more than 50% of the voting power of those classes on a combined basis is directly or indirectly owned of record by residents of the U.S., or (ii) based on the number of voting securities. In any case, companies must apply a determination methodology on a consistent basis.
New 110.03 and 203.18 identify the factors to be applied in determining the status of an individual as a “U.S. resident” for purposes of determining whether the 50% threshold has been exceeded. According to the CDIs, a “permanent resident” in the U.S. — a so-called Green Card holder — is presumed to be a U.S. resident. Persons who are not “permanent residents” may still be U.S. residents for purposes of the provisions depending on whether they satisfy the company’s consistently applied criteria: “In these circumstances, an issuer must decide what criteria it will use to determine residency and apply them consistently without changing them to achieve a desired result. Examples of factors an issuer may apply include tax residency, nationality, mailing address, physical presence, the location of a significant portion of their financial and legal relationships, or immigration status.”
New 110.04 and 203.19 state that, in determining whether a majority of the executive officers or directors are U.S. citizens or residents under the definition of “foreign private issuer,” the calculation should be made separately for each group: “In effect, there are four determinations: the citizenship status of executive officers, the residency status of executive officers, the citizenship status of directors, and the residency status of directors.”
New 110.05 and 203.20 provide that, where the company has two boards of directors, in determining whether a majority of the executive officers or directors are U.S. citizens or residents, the company must “make the determination with respect to the board that performs the functions most closely to those undertaken by a U.S.-style board of directors. If those functions are divided between both boards, the issuer may aggregate the members of both boards for purposes of calculating the majority.”
New 110.06 and 203.21 state that, in determining whether more than 50% of the company’s assets are located outside the U.S., the company can use the geographic segment information determined in the preparation of its financial statements or, alternatively, any other reasonable methodology, so long as the methodology is consistently applied.
New 110.07 and 203.22 advise that there is no single factor or group of factors that are determinative for purposes of deciding whether the company’s business is administered principally in the U.S. The company “must assess on a consolidated basis the location from which its officers, partners, or managers primarily direct, control and coordinate the issuer’s activities.”
New 110.08 and 203.23 indicate that holding an annual or special meeting of shareholders or occasional board meetings in the U.S. would not, by itself, result in a determination that the company’s business is administered principally in the U.S. In the absence of “other factors indicating the location from which an issuer’s officers, partners, or managers primarily direct, control and coordinate the issuer’s activities on a consolidated basis, as described in new 110.07 and 203.22, there is no single factor or group of factors that is determinative of whether an issuer’s business is principally administered in the United States.”
Definitions: Rules 12g-1 to 12h-6
New 150.02 provides guidance on the filings that a non-reporting foreign private issuer should make when it succeeds to the reporting obligation of an issuer under Exchange Act Rule 12g-3, e.g., through an acquisition exempt from registration. The CDI advises that the “foreign private issuer’s initial filing to evidence the succession should be a Form 6-K announcing the succession, filed on EDGAR using the 8-K submission type that is appropriate to the specific transaction. Thereafter, the issuer should make all other Exchange Act filings as appropriate.”
New 155.01 provides that, for purposes of applying the primary trading market definition under Rule 12h-6(f)(5), because the capital markets within the European Union have become more integrated as a result of the application of EU-wide laws and regulations, a company may consider all securities trading markets in the EU as a single foreign jurisdiction.
Reg S (unregistered offers and sales outside the U.S.)
Rule 902 – Definitions
New 276.01 discusses the factors to be applied in determining the status of an individual as a “natural person resident in the United States” for purposes of the definition of “U.S. person” under Rule 902(k)(1)(i). Consistent with new 110.03 and 203.18, a “permanent resident” in the U.S. — a so-called Green Card holder — is presumed to be a U.S. resident. Persons who are not “permanent residents” may still be U.S. residents for purposes of these provisions, depending on whether the person satisfies the company’s consistently applied criteria: “In these circumstances, an issuer must decide what criteria it will use to determine residency and apply them consistently without changing them to achieve a desired result. Examples of factors an issuer may apply include tax residency, nationality, mailing address, physical presence, the location of a significant portion of their financial and legal relationships, or immigration status.”
Rule 903 – Offers or Sales of Securities by the Issuer, a Distributor, Any of their Respective Affiliates, or Any Person Acting on Behalf of Any of the Foregoing; Conditions Relating to Specific Securities
New 277.02 indicates that an issuer may rely on Rule 903(b)(1)(ii) (securities offered and sold in an offering directed into a single country other than the U.S.) for an offering of securities in more than one country that is part of the European Union, but only to the extent the local laws and customary practices and documentation are those of the EU rather than of a single country within the EU. The CDI observes that this position reflects the level of integration of the capital markets within the EU that now exists as a result of application of EU-wide laws and regulations relating to prospectuses, transparency, trading and other matters.
New 277.03 Similarly, for the reasons discussed in 277.02, an issuer may rely on Rule 903(b)(1)(iv) for an offering of securities to employees under a benefit plan established under the laws of a country other than the U.S. if the laws, customary practices and documentation are those of the EU.
New 277.04 observes that the SEC has stated that persons relying on the Category 2 safe harbor must “ensure (by whatever means they choose) that any non-distributor to whom they sell securities is a non-U.S. person and is not purchasing for the account or benefit of a U.S. person.” The SEC also noted that the “safe harbor protection would not be available where offers and sales were made nominally to non-U.S. persons to evade the restrictions.” (See Securities Act Release No. 6863 (April 24, 1990). This same guidance may also be applied under the Category 3 safe harbor in establishing that offers and sales are not made to a U.S. person or for the account or benefit of a U.S. person.
New 277.05 provides that, because there are no specific requirements under Reg S relating to the manner in which certifications and agreements are made, the certifications and agreements required under Reg S (such as those required under Category 3 and those required with respect to warrants) may be provided electronically. These processes may be implemented by third parties, and issuers and distributors may rely on those procedures to the same extent and in the same manner as when certifications and agreements are obtained in paper.
New 277.06 provides that Rule 903(b)(4) relating to guaranteed debt securities would apply to offerings of debt securities in situations where the parent company is the issuer (or a co-issuer) of the debt securities and one or more subsidiaries is a guarantor, and when the parent company is a guarantor and there are one or more subsidiaries that are also guarantors of the securities, in each case as long as the payment obligation of the parent company is full and unconditional.
Form 20-F and F-Series Forms Generally
New 110.03 and 102.03 provide that, when a foreign private issuer guarantees securities of a subsidiary that is not a foreign private issuer, the parent company-guarantor and subsidiary-issuer of guaranteed securities may use an F-series registration statement to register an offering of the securities and Form 20-F with respect to any reporting obligations, so long as certain requirements are satisfied: “Rule 3-10 of Reg S-X permits modified reporting by subsidiary issuers of guaranteed securities and subsidiary guarantors. Separate financial statements need not be filed for subsidiaries if any of Rules 3-10(b) through 3-10(d) apply and all applicable conditions of the rule relied upon are met in the parent company’s filings. If the parent and issuer are eligible to present condensed consolidated financial information in the parent company’s filings and the parent qualifies as a foreign private issuer, the parent company and its subsidiaries may use an F-series registration statement to register an offering of guarantees and guaranteed securities that are issued by a domestic or foreign subsidiary that does not qualify as a foreign private issuer and use Form 20-F with respect to any reporting obligations associated with such registration statement. The same would apply if the parent and subsidiaries are eligible to present narrative disclosure in lieu of condensed consolidating financial information under Rule 3-10.”
New 110.04 and 102.04, similarly, provide that when a parent foreign private issuer issues securities that are guaranteed or co-issued by one or more subsidiaries that do not themselves qualify as foreign private issuers, the parent company-issuer and subsidiary-guarantor(s) or co-issuers may use an F-series registration statement to register an offering of the securities and Form 20-F with respect to any reporting obligations, so long as certain requirements are satisfied: “In this situation, separate financial statements need not be filed for subsidiaries if either Rule 3-10(e) or 3-10(f) applies and all applicable conditions of the rule relied upon are met in the parent company’s filings. As described in the last two sentences of 102.03 and 110.03, when a parent foreign private issuer issues securities guaranteed or co-issued by one or more subsidiaries that do not themselves qualify as foreign private issuers, the parent and subsidiary may use an F-series registration statement when they are eligible to present condensed consolidating financial information or narrative disclosure.”
New 110.05 states that the deadline for a Form 20-F annual report when the issuer’s fiscal year ends on the last day of a month is four complete months after that day. For example, a February 28 fiscal year end results in a due date of June 30. When the last day of the issuer’s fiscal year is other than the end of a month, the annual report on Form 20-F is due on the same day four months ahead. For example, a February 20 fiscal year end results in a due date of June 20.
New 110.06 confirms that a wholly owned subsidiary of a foreign private issuer may omit certain information from its Form 20-F annual report in the same manner as a subsidiary under Form 10-K, General Instruction I. The issuer must include “a prominent statement on the cover page of the Form 20-F that it meets the conditions set forth in General Instruction I(1)(a) and (b) to Form 10-K and is therefore filing the form with the reduced disclosure format.” In that event, the issuer may omit information comparable to the items enumerated in General Instruction I(2). The CDI specifies the particular items that may be omitted.
New 110.07 confirms that a foreign private issuer may incorporate by reference into a Form 20-F information that has previously been filed with the SEC. Rule 12b-23 permits information to be incorporated by reference in answer or partial answer to any item required to be disclosed by Form 20-F, subject to the limitations set forth in that rule. Issuers using incorporation by reference must identify with specificity the information that is being incorporated by reference.