securities offerings and listings in the us: an overview ... · securities offerings and listings...

Securities offerings and listings in the US:an overview for non-US issuers2009 UPDATE

Alexander F Cohen

Kirk A Davenport

Bryant B Edwards

Antti V Ihamuotila

Jeffrey H Lawlis

Mark A Stegemoeller

Michael W Sturrock

Joel H Trotter

John D Watson, Jr

IFLRInternational Financial Law Review

Securities offerings and listings in the US: an overview for non-US issuers i

2009 Update

Securities offerings and listings in the US: an overview for non-US issuers

Alexander F CohenKirk A DavenportBryant B EdwardsAntti V IhamuotilaJeffrey H LawlisMark A StegemoellerMichael W SturrockJoel H TrotterJohn D Watson, Jr

Latham & Watkins

September 2009

Alexander F Cohen is a partner in the Washington, DC office of Latham & Watkins LLP; Kirk A Davenport is a partner in the New York office of Latham & Watkins LLP; Bryant B Edwards is a partner in the Dubai office of Latham & Watkins LLP; Antti V Ihamuotila is a partner in the London office of Latham & Watkins LLP; Jeffrey H Lawlis is a partner in the London and Milan offices of Latham & Watkins LLP; Mark A Stegemoeller is a partner in the Los Angeles office of Latham & Watkins LLP; Michael W Sturrock is a partner in the Singapore office of Latham & Watkins LLP; Joel H Trotter is a partner in the Washington, DC office of Latham & Watkins LLP; and John D Watson, Jr is a partner in the Paris office of Latham & Watkins LLP. The authors would like to thank Christina Del Vecchio from the London office for her assistance in preparing this overview. 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 Institutions Investor and Latham & Watkins 2009.

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 to its clients 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.

ii Securities offerings and listings in the US: an overview for non-US issuers

About Latham & Watkins Latham & Watkins is an international full-service law firm with 27 offices and over 2,000 lawyers worldwide. The firm has leading practices in a wide spectrum of corporate, finance, transactional litigation and regulatory areas.

Corporate finance practiceLatham & Watkins’ corporate finance lawyers represent a broad range of clients, from emerging companies to major multinational corporations in virtually every industry niche, as well as nearly all major investment and commercial banks as underwriters or initial purchasers.

The securities and corporate finance practice at Latham & Watkins is one of the most active and highly regarded among international law firms. We have represented corporate and partnership issuers, underwriters, placement agents and initial purchasers in hundreds of offerings of equity, debt and asset-backed securities in both US and international markets. Our lawyers have extensive experience in public offerings, Rule 144A and Regulation S private placements, rights offerings, debt/equity swaps, exchange offers, underwritten calls of convertible debt securities, interest-rate and currency swaps, and other capital-raising and risk-hedging transactions.

International activitiesOur securities expertise includes offerings and listings on foreign exchanges. Representing both issuers and underwriters, our corporate finance lawyers have participated in numerous offerings on behalf of US and international clients in Europe, Asia and Latin America (including transactions registered under the securities laws of Japan and Singapore), often in “dual tranche” deals in which securities are sold in contemporaneous offerings in the US and abroad. Our international practice is supported through our offices in Abu Dhabi, Barcelona, Brussels, Doha, Dubai, Frankfurt, Hamburg, Hong Kong, London, Madrid, Milan, Moscow, Munich, Paris, Rome, Shanghai, Singapore and Tokyo.

Abu Dhabi

Bryant B Edwards+971 2 672 5002

Hamburg

Henning C SchneiderJoachim von Falkenhausen +49 40 4140 30

Munich

Jörg Kirchner+49 89 2080 3 8000

Barcelona

José Luis Blanco+34 93 545 5000

Hong Kong

John A OtoshiDavid Zhang+852 2522 7886

Paris

Thomas ForschbachJohn D Watson, Jr+33 1 40 62 20 00

Brussels

Howard Rosenblatt+32 2 788 60 00

London

Richard M TrobmanOlof ClaussonMichael S ImmordinoAntti V IhamuotilaJeffrey H Lawlis+44 20 7710 1000

Rome

Michael S ImmordinoJeffrey H Lawlis+39 06 9895 6700

Doha

Bryant B Edwards+974 452 8322

Madrid

José Luis BlancoJuan Manuel de Remedios+34 91 791 5000

Shanghai

David ZhangRowland Cheng+86 21 6101 6000

Dubai

Bryant B Edwards+971 4 704 6300

Milan

Michael S ImmordinoJeffrey H LawlisMaria Cristina Storchi+39 02 3046 2000

Singapore

Michael W SturrockRajiv Gupta +65 6536 1161

Frankfurt

Rudolf HaasRoland Maass+49 69 6062 6000

Moscow

Mark M Banovich+7 495 785 1234

Tokyo

Michael J Yoshii+81 3 6212 7800

US SECURITIES CONTACTS IN LATHAM & WATKINS INTERNATIONAL OFFICES

Securities offerings and listings in the US: an overview for non-US issuers iii

Regulatory expertiseWe have significant knowledge in all aspects of regulatory compliance, including SEC registrations, Regulation D, Rule 144A, Regulation S, shelf registrations, trading rules (such as Regulation M), rules of and reviews by the Financial Industry Regulatory Authority, exchange listings (such as the New York Stock Exchange and the Nasdaq Stock Market) and blue sky work.

About the authorsAlexander F Cohen is Co-Chair of the firm’s global Corporate Finance Practice Group and a former senior official of the US Securities and Exchange Commission. He joined the SEC staff in 2006 as Deputy General Counsel for Legal Policy and Administrative Practice and later served as Deputy Chief of Staff. As Deputy Chief of Staff and senior legal counsel in the Chairman’s Office, Cohen advised the SEC Chairman on all aspects of the agency’s work. In his role as Deputy General Counsel, Cohen participated in the development and review of all facets of the SEC’s regulatory function and provided advice to the Chairman, Commissioners and senior agency staff on novel legal matters. Cohen’s experience covers complex financial transactions, SEC registration and reporting, corporate governance, accounting restatements, investigations by the SEC and related issues. From 2001 to 2006, Cohen was resident in Latham & Watkins’ London and Hong Kong offices.

Kirk A Davenport is Co-Chair of the firm’s global Corporate Finance Practice Group. He has practised law since 1984 and joined the firm in 1985. His practice centres around corporate finance, mergers and acquisitions and general securities and corporate matters. His clients include US and non-US investment banks, New York Stock Exchange-listed companies, foreign corporations, leveraged buy-out funds and mezzanine investment funds.

Bryant B Edwards is Office Managing Partner of Latham & Watkins’ Middle East offices. Edwards has practised law with the firm since 1981 and recently relocated to Dubai from the firm’s London office, where he served as Chair of the Corporate Department. He also previously served as Chair of the Los Angeles Office Corporate Department. His practice includes representation of companies and investment banking firms in merger and acquisition transactions and in public and private offerings of securities, with a particular emphasis on issuances and restructurings of debt securities.

Antti V Ihamuotila is a partner in the London office of Latham & Watkins. He practises corporate law with an emphasis on capital markets, mergers and acquisitions and public company representation. Ihamuotila has advised on public and private offerings of equity and debt securities and public and private mergers and acquisitions. He also advises clients in venture capital investments and on general corporate matters, including compliance with US federal securities laws.

Jeffrey H Lawlis is a partner in the Corporate Department of Latham & Watkins’ London and Milan offices. Lawlis’ practice focuses on corporate finance, company representation and general securities matters as well as mergers and acquisitions. Lawlis has extensive international experience representing companies, sponsors and investment banks in a variety of industries on a wide range of both public and private cross-border transactions, with a particular focus on the Italian and Spanish markets.

Mark A Stegemoeller is a partner in the Los Angeles office of Latham & Watkins. He has practised law with the firm since 1982 and has previously worked in the firm’s London and Chicago offices. He practises corporate law with significant expertise in corporate finance, mergers and acquisitions and securities matters. He has handled a wide variety of public and private securities offerings for investment banking and corporate clients (including initial public offerings and registered, Rule 144A, Regulation S and dual currency high yield debt offerings), as well as restructurings, debt tender offers and consent solicitations. He also advises corporate clients concerning compliance with registration and reporting provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.

Michael W Sturrock is a partner in the Singapore office of Latham & Watkins and has led the firm’s Corporate Department in Singapore since 1999. Sturrock’s practice focuses on corporate finance and mergers and acquisitions and represents both issuers and underwriters in corporate financings and both buyers and sellers in public and private M&A transactions.

Joel H Trotter is the Deputy Chair of the Corporate Department in the Washington, DC office of Latham & Watkins. His practice focuses on corporate finance, mergers and acquisitions, securities regulation and general corporate matters. Trotter represents major New York Stock Exchange listed

iv Securities offerings and listings in the US: an overview for non-US issuers

companies and counsels both issuers and underwriters in the public offering process and in corporate compliance matters involving SEC reporting and disclosure requirements. He also serves as special counsel for boards of directors, audit committees and special committees on governance issues, corporate crises and business combination proposals.

John D Watson, Jr, a partner in the Paris office and the Vice-Chair of the firm’s Global Corporate Department. In this role, Watson is responsible for coordination, resource allocation and strategic development of the firm’s transactional practice in Europe. Watson’s practice focuses on capital markets transactions, representing issuers and underwriters in private placements, Rule 144A financings and registered public offerings of common stock, preferred stock and high yield debt. Since moving to Europe in 2001, he has focused on the representation of issuers and underwriters in leveraged finance transactions. From 2001 to 2004, Watson was resident in the firm’s Frankfurt Office where he was involved in the development of the firm’s German practice. In 2004, his primary focus shifted to Paris, where he works with the firm’s French capital markets team.

Editor Simon Crompton

Sub-editor Maria McGrady

Production editor andy alcock

Publisher denny Squibb

Divisional director danny Williams

Image setting and printing by William Clowes, Beccles UK.

This report states the law as at the beginning of [September] 2009. It is not a substitute for detailed local advice.

© Euromoney Institutional Investor and Latham & Watkins 2009.

For additional copies of this publication and more information on International Financial Law Review, including a sample copy, call Denny Squibb, on Tel: +852 2842 6945; Fax: +852 2521 8900 or e-mail: [email protected]

Contents v

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; Rule 12g3-2(b) exemption 1

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 2

Other relevant statutes 3

What is a foreign private issuer? 3(i) definition 3(ii) How is ownership of record determined? 3(iii) When is foreign private issuer status determined? 3(iv) Losing foreign private issuer status 3(v) Benefits for foreign private issuers 3

CHAPTER 2 Registered transactions – the registration process 5

US public offering reforms 5

General 5

Issues to identify before registration 6

available registration forms 7(i) Form F-1 7(ii) Form F-3 7(iii) Form F-4 8(iv) Form F-6 8

automatic shelf registration for WKSIs 8

adRs and adSs 8

Filing electronically 9

Interactive data 9

Confidentiality 10

FInRa review 10

nYSe and nasdaq listing requirements 10

Foreign private issuer deregistration and termination of exchange act reporting 10(i) deregistering equity securities; terminating exchange act reporting 10(ii) terminating exchange act reporting for debt securities 11(iii) Implications for M&a transations 11(iv) Rule 12g3-2(b) exemption 11(v) Rule 13e-3 disclosure 11

vi Securities offerings and listings in the US: an overview for non-US issuers

CHAPTER 3 Restrictions on publicity in connection with registered transactions 12

the regime governing communications during public securities offerings in the US 12

Restrictions on publicity during the quiet period 12(i) Rule 135 12(ii) Rule 135e 12(iii) Rule 163 – pre-filing offers by WKSIs 13(iv) Rule 163a – the 30-day bright line safe harbour 13(v) Rules 168 and 169 – safe harbours for factual business information and forward-looking information during an offering 13

Restrictions on publicity during the waiting period 14(i) Background 14(ii) Rule 134 15

Restrictions on publicity after effectiveness of the registration statement 15

Research reports 15(i) definition of research report 15(ii) Rule 137 – publication of research by non-participating broker-dealers 15(iii) Rule 138 – publication of research by an underwriter on other securities of an issuer 15(iv) Rule 139 – publication of research about the securities being offered by an underwriter 16

prospectus delivery 16(i) prospectus-delivery requirements 16(ii) Rule 172 16(iii) Rule 173 16(iv) Rule 174 16

CHAPTER 4 Free writing prospectuses and road shows 17

WKSIs and other issuers 17(i) WKSIs 17(ii) three other categories of issuers 17

Free writing prospectuses 17(i) Overview 17(ii) definition of free writing prospectus 17

Rule 164 17

Rule 433 18(i) prospectus-delivery requirements 18(ii) Information and legend requirements 18(iii) Filing requirements 18(iv) Information on an issuer’s website 18(v) Media free writing prospectuses – the Google provision 19(vi) Record retention 19(vii) Minor deviations – Rule 164 19

Road shows 19

CHAPTER 5 Key exemptions from Securities Act registration 20

General 20

Contents vii

Regulation S – offshore offerings 20(i) the issuer safe harbour 20(ii) the resale safe harbour 21(iii) Violation of safe harbour conditions 22

Section 4(2) private placements 22

Regulation d private placements 22(i) Background 22(ii) Regulation d general conditions 22(iii) Rule 504 – offers and sales not exceeding $1 million 23(iv) Rule 505 – offers and sales not exceeding $5 million 23(v) Rule 506 – unlimited offering amounts 23(vi) Rule 508 – deviations from Regulation d 23(vii) Certain blue sky issues 23

Resales of privately placed securities 23(i) Rule 144a resales to QIBs 23(ii) “Section 4 (1-1/2)” resales 24(iii) Rule 144 24

Rule 802 – securities issuances in connection with cross-border exchange offers and business combinations 25(i) General 25(ii) Requirements of Rule 802 25

Rule 801 – rights offerings 25(i) General 25(ii) Requirements of Rule 801 26

Rule 701 – compensatory benefit plans 26(i) eligible issuers 26(ii) eligible transactions 26(iii) eligible plans and participants 26(iv) amounts that may be offered and sold 26(v) disclosure requirements 26(vi) no integration 27(vii) Resale limitations 27(viii) Certain blue sky issues 27

Restrictions on publicity in connection with unregistered transactions 27(i) Factual business and financial developments 27(ii) Rule 135c 28(iii) Rule 135e 28(iv) Research reports 28

CHAPTER 6 Required financial statement disclosure 29

What must be provided? 29(i) Basic financial statement requirements for public offerings 29(ii) Md&a 31(iii) Using IFRS without reconciliation 32(iv) When does financial information go stale? 32(v) Reconciliation to US Gaap 34(vi) audit reports 34(vii) Currency translation; exchange rates 34(viii) additional financial information typically included 35

additional financial information for certain situations 35(i) Recent and probable acquisitions 35(ii) Guarantor financial statements 38

viii Securities offerings and listings in the US: an overview for non-US issuers

(iii) Secured offerings 41(iv) Investments accounted for under the equity method 41(v) Segment reporting 41(vi) Supplemental schedules for certain transactions 42(vii) Industry guides 42

Quantitative and qualitative disclosure about market risk 43

Item 18 versus Item 17 43

Special considerations in Rule 144a transactions 43

CHAPTER 7 The US Sarbanes-Oxley Act of 2002 45

Who is subject to Sarbanes-Oxley? 45

When does Sarbanes-Oxley take effect? 45

Section 404 – internal control over financial reporting 45(i) Internal control requirements 45(ii) definition of internal control over financial reporting 46(iii) evaluation of internal control 46(iv) Certain internal control issues 47(v) Internal control audits – auditing Standard no. 5 49

disclosure controls and procedures 50(i) Interaction between disclosure controls and procedures and internal control 50(ii) Requirements 50

Certification requirements 50(i) Section 302 50(ii) Section 906 51(iii) differences between Section 302 and Section 906 certifications 51

non-Gaap financial measures 51(i) Regulation G 51(ii) S-K Item 10(e) 52

Off-balance-sheet and other Md&a disclosure 52(i) Off-balance sheet arrangements 52(ii) table of contractual obligations 53(iii) Contingent liabilities and commitments 53

Standards relating to listed company audit committees 53

audit committee financial expert 54

auditor independence 54

Improper influence on the conduct of audits 55

auditor record retention 55

Material correcting adjustments 55

attorney conduct rules 56

Code of ethics 56

Blackout trading restrictions 56

Contents ix

Loans to executives 57

Forfeiture of bonuses 57

Research analysts 57

Liability issues 58

CHAPTER 8 Reporting by shareholders – obligations of major shareholders to file Schedule 13D or 13G reports 59

Schedule 13d 59

Schedule 13G 59

amendments to Schedule 13d or 13G reports 59

CHAPTER 9 Cross-border tender and exchange offers – the Tier I and Tier II exemptions 61

the regulatory scheme 61

the tier I exemption 61(i) Relief granted 61(ii) Requirements 61

the tier II exemption 62(i) Relief granted 62(ii) Requirements 63

Rule 14e-5 63(i) tier I and tier II offers 63(ii) all tender offers 64

CHAPTER 10 Liability under the US federal securities laws 65

Registration – Section 5 of the Securities act 65

anti-fraud 65(i) What is material? 65(ii) Rule 10b-5 – purchase or sale of securities 66(iii) Section 11 of the Securities act – registered offerings 66(iv) Section 12(a)(2) of the Securities act – registered offerings 67(v) Liability for free writing prospectuses 68

Controlling person liability 68

Liability issues relating to Sarbanes-Oxley 68

enforcement 69(i) enforcement against foreign private issuers and non-US nationals 69

CHAPTER 11 Communications with research analysts, investors and the public 70

Guidelines for dealing with research analysts and investors 70(i) nature of information 70(ii) “Material” 70(iii) “Misleading” 70

x Securities offerings and listings in the US: an overview for non-US issuers

(iv) Limit access 70(v) disseminating materials to analysts and investors 70(vi) Reviewing draft analysts’ reports; distributing analysts’ reports 70(vii) Making or commenting on projections 71(viii) Inadvertent disclosures 71

Special situations 71(i) Market rumours 71(ii) pending acquisitions/corporate transactions 72(iii) Road shows 72(iv) disclosures to employees 72

US securities laws and the internet 72(i) Background 72(ii) Internet offerings 72

Regulation of research analysts 73(i) Background 73(ii) nYSe Rule 472, Incorporated nYSe Rule 472 and naSd Rule 2711 73(iii) Global settlement 75

CHAPTER 12 Other relevant statutes 77

US Investment Company act of 1940 77

US federal tax laws – passive foreign investment companies 77

US state “blue sky” laws 77

CHAPTER 13 Conclusion and contacts 78

ANNEX A Non-financial disclosure requirements of Forms F-1, F-3 and Form 20-F 79

ANNEX B Automatic shelf registration for WKSIs 97

definition of automatic shelf registration statement 97

Rules 462 and 401 – immediate effectiveness of automatic shelf registration statement 97

Rule 430B – omitted information from an automatic shelf registration statement 97

Rule 413 – adding new classes of securities to an automatic shelf registration statement 97

Rules 456 and 457 – pay-as-you-go registration fees for an automatic shelf registration statement 97

ANNEX C NYSE quantitative listing criteria and corporate governance standards 98

nYSe quantitative listing and maintenance standards 98(i) Quantitative initial listing standards 98(ii) alternate Listing Standards for foreign private issuers 98(iii) Quantitative maintenance requirements 98(iv) Other maintenance requirements 98

Contents xi

nYSe corporate governance requirements 99(i) Majority of independent directors 99(ii) executive session 100(iii) nominating/corporate governance committee 100(iv) Compensation committee 100(v) audit committee 100(vi) Internal audit 101(vii) Shareholder approval of certain transactions 101(viii) Corporate governance guidelines 101(ix) Code of business conduct and ethics 101(x) Certification requirements 101(xi) Written affirmation 101

nYSe communication and notification requirements 101

Corporate governance requirements for foreign private issuers 102

ANNEX D Nasdaq quantitative listing criteria and corporate governance standards 103

nGM quantitative listing and maintenance standards 103(i) Quantitative initial listing standards 103(ii) Quantitative maintenance requirements 103

nGSM quantitative listing and maintenance standards 103(i) Quantitative initial listing standards 103(ii) Quantitative maintenance requirements 104

nCM quantitative listing and maintenance standards 104(i) Quantitative initial listing standards 104(ii) Maintenance requirements 104

nasdaq corporate governance requirements 104(i) Majority of independent directors 104(ii) Meetings of independent directors 105(iii) director nominees 105(iv) executive compensation 105(v) audit committees 105

Cure periods 106

nasdaq communication and notification requirements 107

Corporate governance requirements for foreign private issuers 107

Endnotes 108

xii Securities offerings and listings in the US: an overview for non-US issuers

Securities offerings and listings in the US: an overview for non-US issuers xiii

2009 Update

Securities offerings and listings in the US: an overview for non-US issuers

This overview summarises 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 US or list their securities for trading or quotation on the US stock markets.1

xiv Securities offerings and listings in the US: an overview for non-US issuers

Key statutes and concepts 1

US Securities Act of 1933; US Securities Exchange Act of 1934As far as most foreign private issuers are concerned, the two principal federal securities statutes in the US are the US Securities Act of 1933, as amended (the Securities Act) and the US Securities Exchange Act of 1934, as amended (the Exchange Act). To simplify considerably, the Securities Act governs the offer and sale of securities in the US, while the Exchange Act regulates the trading of securities on US national securities exchanges such as the New York Stock Exchange (the NYSE) or the Nasdaq Stock Market (Nasdaq), ongoing periodic and annual reporting, and tender and exchange offers.

The US Securities and Exchange Commission (the SEC) has issued a comprehensive body of rules and regulations under the Securities Act and the Exchange Act. These rules have the force of law. The SEC and its staff have also provided interpretive guidance on a wide range of questions under the securities laws.

Registration under the Securities Act and the Exchange ActRegistration is a core concept in the US federal securities laws. The Securities Act requires issuers to register transactions. By contrast, the Exchange Act requires issuers to register classes of securities.

(i) Securities Act registrationThe Securities Act requires registration with the SEC of any transaction involving the offer or sale of a security, unless the security is of a type that is exempt from registration or the transaction is structured to take advantage of an available exemption from registration. The terms offer and sale and security are very broadly defined.

As we discuss in more detail below, registered transactions involve filing a registration statement with the SEC and meeting detailed and specific disclosure and financial statement requirements. In addition, registered transactions trigger the wide-ranging provisions of the US Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act or Sarbanes-Oxley) and a comprehensive liability scheme.

By contrast, the requirements of unregistered transactions are generally – but not invariably – less demanding. A foreign private issuer will not typically become subject to Sarbanes-Oxley merely by issuing securities in an unregistered transaction, and the liability regime governing unregistered transactions is more circumscribed. Foreign private issuers contemplating an unregistered transaction look to exemptions from registration such as:• Offshore transactions: offers and sales made outside of the

US pursuant to Regulation S under the Securities Act (Regulation S);

• Private placements: offers and sales not involving a public offering pursuant to Section 4(2) of the Securities Act or Regulation D under the Securities Act (Regulation D); and

• Rule 144A transactions: private placements involving resales to qualified institutional buyers (QIBs) pursuant to Rule 144A under the Securities Act.The decision whether to issue in a registered or unregistered

transaction involves balancing business and legal objectives. Broadly speaking, registered transactions are more complex, time-consuming and carry greater liability risks (although the SEC’s reforms to the US public offering process that took effect in late 2005 have changed the landscape, above all for certain large-scale, seasoned issuers). In addition, not all securities issuances can take the form of an unregistered transaction. For example, if a foreign private issuer wishes to list its securities in the US, or to make a public offering of securities to retail investors in the US, the transaction will have to be registered.

(ii) Exchange Act registration; Rule 12g3-2(b) exemptionA foreign private issuer must register a class of securities under the Exchange Act if that class will be listed on a US national securities exchange (such as the NYSE or Nasdaq).2 In addition, if a foreign private issuer has assets in excess of $10 million and a class of equity securities held by at least 500 shareholders (of whom at least 300 are residents in the US) it must also register those securities under the Exchange Act,3 unless it can claim the exemption from registration provided by Exchange Act Rule 12g3-2(b).

Under the amendments to Rule 12g3-2(b) that took effect on October 10 2008,4 foreign private issuers are no longer required to submit initial written applications or submit their material “non-US disclosure documents”5 to the SEC in order to qualify for the Rule 12g3-2(b) exemption. Foreign private issuers are now automatically eligible to claim the exemption if they satisfy the following conditions:• Electronic publication of non-US disclosure documents.6

The foreign private issuer must publish in English, either via its website or through an electronic information delivery system,7 all material non-US disclosure documents that it has released since the first day of its most recently completed fiscal year.8 Non-US disclosure documents only need to be published in English if they are material to an investment decision in the issuer’s securities. The rule includes a non-exhaustive list of disclosures that can be considered material for these purposes9 and, at a minimum, English translations of the following documents must be published electronically:- the foreign private issuer’s annual report and annual financial

statements; - its interim reports that include financial statements;- press releases; and- all other communications and documents distributed

directly to holders of the subject class of securities to which the exemption relates.10

• Foreign listing. The foreign private issuer must maintain a listing on one or more markets constituting the primary trading

CHapteR 1

Key statutes and concepts

2 Securities offerings and listings in the US: an overview for non-US issuers

market outside of the US of the subject class of securities. For these purposes, primary trading market means:- a foreign market that, either alone or together with another

foreign market, accounted for at least 55% of the trading in the relevant securities on a worldwide basis in the foreign private issuer’s last fiscal year; and

- if trading in the relevant securities in two foreign markets is combined to meet the 55% threshold, the trading on at least one of them was greater than the trading in the US.11

• No existing SEC reporting. The foreign private issuer must not be required to file or furnish reports under Sections 13(a) or 15(d) of the Exchange Act (this generally means that the foreign private issuer does not have securities publicly offered or listed in the US and it has not otherwise voluntarily registered its securities under the Exchange Act). Once established, a foreign private issuer can maintain the Rule

12g3-2(b) exemption by continuing to publish electronically its disclosure documents in English promptly after the information has been made public in the foreign private issuer’s primary trading market.12 Whether disclosure has been made “promptly” depends on the type of document and the amount of time required to prepare the English translation. Material press releases generally should be published electronically in English on or around the same business day as their original publication.13

If a foreign private issuer no longer complies with the provisions of Rule 12g3-2(b), the foreign private issuer will have to either register the subject class of securities under the Exchange Act within 120 days after the foreign private issuer’s fiscal year end, qualify for the exemption under Rule 12g3-2(a) by concluding that it has fewer than 300 shareholders resident in the US or, if possible, re-establish compliance with the rule’s conditions within a “reasonably prompt manner.”14

The SEC established a three-year transitional period to provide foreign private issuers who were exempt under Rule 12g3-2(b) as in effect prior to October 10 2008, but who do not satisfy the requirements of the amended rule, an opportunity to either register under the Exchange Act or establish compliance with amended Rule 12g3-2(b). The SEC ceased accepting and processing paper submissions for Rule 12g3-2(b) ongoing compliance at the end of a three-month transitional period that expired on January 10 2009.

Exchange Act reportingOnce a foreign private issuer has registered a transaction with the SEC under the Securities Act or a class of securities under the Exchange Act (a reporting foreign private issuer), it must make certain ongoing filings with the SEC under the Exchange Act.15 Reporting foreign private issuers also become subject to various other provisions of the US federal securities laws.

(i) Annual report on Form 20-FA reporting foreign private issuer must file an annual report on Form 20-F with the SEC. For fiscal years ending before December 15 2011, a reporting foreign private issuer must file its annual report on Form 20-F within six months after its fiscal year-end. Beginning with fiscal years ending on or after December 15 2011, the due date for filing annual reports on Form 20-F will be four months after the foreign private issuer’s fiscal year-end.16 While the new accelerated filing due date may approximate the annual report filing due date required by the home securities regulators of foreign private issuers in many jurisdictions,17 the revised deadline

will still provide a substantial accommodation to foreign private issuers as compared to domestic US issuers.18

Form 20-F contains detailed financial and non-financial disclosure requirements. We include a checklist for non-financial disclosure items in Annex A at the end of this book.

PRACTICE POINTannual reports on Form 20-F must be certified by a foreign private issuer’s chief executive officer (CEO) and chief financial officer (CFO) under Sections 302 and 906 of Sarbanes-Oxley. For a more detailed discussion on the Sarbanes-Oxley act and its requirements, see Chapter 7.

(ii) Current reports on Form 6-KA reporting foreign private issuer must submit current reports to the SEC on Form 6-K.19 Form 6-K reports must contain all material information that the issuer:20

• makes or is required to make public pursuant to the laws of its country of incorporation or organisation;

• files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange; or

• distributes or is required to distribute to its security holders.

PRACTICE POINTFailure to submit Form 6-Ks when required might prevent a foreign private issuer from using Form F-3, the “short form” Securities act registration statement for any future securities offerings. as a result, foreign private issuers should take care to submit Form 6-Ks on a timely basis.

PRACTICE POINTForm 6-K submissions do not need to be certified by a foreign private issuer’s CeO and CFO under Sections 302 and 906 of Sarbanes-Oxley.21

(iii) Other consequences of Exchange Act reportingA reporting foreign private issuer becomes subject to a variety of other provisions of the US federal securities laws, including:• Books and records; internal accounting controls:22 A

reporting foreign private issuer must maintain and keep books, records and accounts that “accurately and fairly reflect” the transactions and dispositions of assets of the foreign private issuer, and design and maintain a system of adequate “internal accounting controls.”

• Limitations on payments to foreign officials:23 A reporting foreign private issuer may not make corrupt payments to foreign officials, foreign political parties or their intermediaries.

• Audit requirements:24 A reporting foreign private issuer’s audit must include procedures for the detection of illegal acts, and the issuer’s auditors are required to take certain steps if illegal acts are found. Those steps include informing the issuer’s management and audit committee, and potentially include a requirement to resign from the engagement or notify the SEC (if the issuer’s board fails to take appropriate remedial action).

Key statutes and concepts 3

• Sarbanes-Oxley:25 A reporting foreign private issuer is subject to the provisions of the Sarbanes-Oxley Act.

Other relevant statutesIn addition to the Securities Act and the Exchange Act, a foreign private issuer may trigger a number of other statutes when it issues securities in the US, including:• the Sarbanes-Oxley Act, which is the most comprehensive

restructuring of the regulatory system governing the US capital markets since the enactment of the Exchange Act in 1934;

• the US Investment Company Act of 1940 (the Investment Company Act), which regulates offers and sales of securities by investment companies. Some foreign private issuers may inadvertently fall within the definition of investment company under the Investment Company Act even though their primary activities are not investment related;

• US federal tax laws, which impose particular tax treatment on securities of “passive foreign investment companies” (PFICs) within the meaning of the US Internal Revenue Code (the Code). Certain foreign private issuers may be PFICs despite their operational activities; and

• the US Trust Indenture Act of 1939, which requires that indentures used for public offerings of debt securities in the US meet various substantive and procedural requirements.

What is a foreign private issuer?(i) DefinitionA foreign private issuer means any issuer (other than a foreign government) incorporated or organised under the laws of a jurisdiction outside of the US unless:26

• more than 50% of its outstanding voting securities are directly or indirectly owned of record by US residents; and

• any of the following applies:- the majority of its executive officers or directors are US

citizens or residents;- more than 50% of its assets are located in the US; or- its business is administered principally in the US.

• Issuers that qualify as foreign private issuers are allowed a number of key benefits not available to domestic US issuers, as discussed below.

PRACTICE POINTan issuer that has more than 50% US ownership can still be a foreign private issuer. to fail to qualify as a foreign private issuer, an issuer needs to be both majority owned by US residents and meet any one of the three additional tests noted above.

(ii) How is ownership of record determined?In order to determine the percentage of outstanding voting securities held “of record” by US residents, an issuer should start with a review of the addresses of its security holders in its records.27 But the inquiry does not end there. Instead, an issuer must perform a “look-through” analysis in respect of securities held of record by a broker, dealer, bank or other nominee located in:28

• the US;• the issuer’s jurisdiction of incorporation; and • the jurisdiction that is the issuer’s primary trading market

for its voting securities (if different than the jurisdiction of incorporation).

In the case of these securities, the number of separate accounts for which the securities are held should be counted.29 The issuer may rely in good faith on information as to the number of these separate accounts supplied by the broker, dealer, bank or nominee.30 If, after reasonable inquiry, the issuer is unable to obtain information about the amount of securities represented by accounts of customers resident in the US, it may assume that these customers are residents of the jurisdiction in which the nominee has its principal place of business.31

(iii) When is foreign private issuer status determined?For new registrants, the determination of whether an issuer qualifies as a foreign private issuer is made as of a date within 30 days prior to the filing of the initial registration statement.32

Once an issuer qualifies as a foreign private issuer, it is immediately able to use the forms and rules designated for foreign private issuers.33 Thereafter, it must test its status annually, at the end of its most recently completed second fiscal quarter.34

For example, an issuer that reports as a domestic US issuer but subsequently determines that it qualifies as a foreign private issuer as of the end of its second fiscal quarter would no longer need to continue reporting on Form 8-K and Form 10-Q for the remainder of that fiscal year. Instead, it could immediately begin furnishing reports on Form 6-K and would file an annual report on Form 20-F (rather than Form 10-K).

(iv) Losing foreign private issuer statusIf an issuer does not qualify as a foreign private issuer at the end of its second fiscal quarter, it nonetheless remains eligible to use the forms and rules for foreign private issuers until the end of that fiscal year (in other words, it does not lose its status as a foreign private issuer until the first day of the next fiscal year).35 Once an issuer fails to qualify as a foreign private issuer, it will be treated as a domestic US issuer unless and until it requalifies as a foreign private issuer as of the last business day of its second fiscal quarter.36

By way of example, a calendar year issuer that does not qualify as a foreign private issuer as of the end of its second fiscal quarter in 2009 would still be able to file an annual report on Form 20-F in 2009 in respect of its 2008 fiscal year. It would also not become subject to quarterly reporting on Form 10-Q during 2009. However, it would be required to file its annual report on Form 10-K in 2010 in respect of its 2009 fiscal year on the same timetable as a domestic US issuer. It would also become subject to the proxy rules, reporting of beneficial ownership of securities by the officers, directors and beneficial owners of more than 10% of a class of equity securities of the issuer, and reporting on Form 8-K and Form 10-Q as of the first day of 2010.

There is no requirement for a foreign issuer to notify the market if it has switched its status from domestic US issuer to foreign private issuer, or vice versa. However, such an issuer, by changing its applicable reporting forms, will effectively be providing notice that it has switched status.

(v) Benefits for foreign private issuersUnder the US federal securities laws and the SEC’s rules and practice, foreign private issuers are not regulated in entirely the same manner as domestic US issuers. In particular, foreign private issuers are allowed a number of key benefits not available to domestic US issuers.


These include the following:• Quarterly reporting not required: Unlike domestic US

issuers, foreign private issuers are not required to file quarterly reports (including quarterly financial information) on Form 10-Q or current reports on Form 8-K with the SEC.37 Some foreign private issuers, however, choose (or are required by contract) to file the same forms with the SEC that domestic US issuers use. In that case, they must report quarterly as if they were a domestic US issuer.38

• Ability to make confidential submission of first-time registration statements: Foreign private issuers that are registering for the first time with the SEC may generally submit registration statements on a confidential basis to the SEC staff. By contrast, domestic US issuers must file their registration statements publicly. Confidential submissions can be a significant advantage because the procedure allows the complicated issues often encountered in an initial SEC review to be resolved behind closed doors. A foreign private issuer will still be required to file its registration statement publicly prior to going on a road show or selling its securities. Absent unusual circumstances, once an issuer becomes a reporting foreign private issuer, the staff will not review its registration statements confidentially and so it will have to file these registration statements publicly.39

• Ability to use US Gaap, IFRS or local Gaap: Domestic US issuers must prepare financial statements in accordance with US Generally Accepted Accounting Principles (US Gaap). The financial statements of foreign private issuers, however, may be prepared using US Gaap, International Financial Reporting Standards (IFRS), or local home-country Gaap (local Gaap). In the case of foreign private issuers that use the English-language version of IFRS as issued by the International Accounting Standards Board (IASB IFRS), no reconciliation to US Gaap is needed.40 By contrast, if local Gaap or non-IASB IFRS is used, the consolidated financial statements (both annual and interim) must include a footnote reconciliation to US Gaap.41

• Exemption from the proxy rules: The US proxy rules – which specify the procedures and required documentation for soliciting shareholder votes – are not applicable to foreign private issuers.42

• Exemption from Regulation FD: Regulation FD requires issuers to make public disclosure of any “material non-public information” that has been selectively disclosed to securities industry professionals (for example, analysts) or shareholders.43 Foreign private issuers are expressly exempt from Regulation FD.44 The Regulation provides that when a domestic US issuer, or someone acting on its behalf, discloses material non-public information to certain persons (including analysts, other securities market professionals and holders of the issuer’s securities who could reasonably be expected to trade on the basis of the information), it must make simultaneous public disclosure of that information (in the case of intentional disclosure) or prompt public disclosure (in the case of non-intentional disclosure).45

PRACTICE POINTForeign private issuers that file reports with the SeC typically comply with Regulation Fd (at least in part), particularly since the restrictions in their home jurisdictions in many cases overlap with Regulation Fd’s requirements.

PRACTICE POINTRegardless of the exemption from Regulation Fd, foreign private issuers remain exposed to potential liability from selective disclosure, for example from “tipping” securities analysts or selected shareholders.

• Exemption from beneficial ownership reporting and 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 realised on purchases and sales within any period of less than six months. Securities of foreign private issuers are exempt from Section 16.46

• Not subject to accelerated filing: Under the accelerated filing rules47 adopted by the SEC in 2002, seasoned domestic US issuers are required to file annual reports 60 days after the end of their fiscal year.48 Foreign private issuers are not subject to accelerated filing, and may currently file annual reports within six months after the end of their fiscal year.49 However, this deadline will shorten to four months after a foreign private issuer’s fiscal year end (instead of six months), starting with fiscal years ending on or after December 15 2011.50 A foreign private issuer that chooses to file the same forms with the SEC that are required for domestic US issuers will be subject to accelerated filing in the same manner as domestic US issuers.51

• Exemptions from Sarbanes-Oxley Act: Although the Sarbanes-Oxley Act generally does not distinguish between domestic US issuers and foreign private issuers, the SEC has adopted a number of significant exemptions for the benefit of foreign private issuers in the application of its rules adopted under the Sarbanes-Oxley Act. These exemptions cover areas such as: (1) audit committee independence; (2) black-out trading restrictions (Regulation BTR); and (3) use of non-Gaap financial measures (Regulation G). In addition, foreign private issuers that become public in the US for the first time, whether through an IPO, a registered exchange offer or a secondary listing on a US securities exchange, or that are non-accelerated filers are not required to immediately comply with Section 404(b) of the Sarbanes-Oxley Act (requiring auditor attestation of management’s internal control assessment).52 For a more detailed discussion on the Sarbanes-Oxley Act and its requirements, see Chapter 7.

• More limited executive compensation disclosure: foreign private issuers are subject to more limited executive compensation disclosure requirements than domestic US issuers.53

Registered transactions – the registration process 5

US public offering reformsIn 2005, the SEC reformed the registration, communication and offering processes in the US.54

Among other things, the 2005 reforms:• Created a new breed of issuers called well-known

seasoned issuers, or WKSIs. WKSIs are large cap, seasoned issuers. They benefit from special treatment in securities offerings – in particular, they are able to make offers to sell securities before a registration statement has been filed and without regard to previously applicable restrictions on pre-offering publicity (often referred to as gun jumping). In addition, WKSIs are entitled to automatic shelf registration on demand without SEC review.

• Encouraged communications with the market both before and during public securities offerings. Even non-WKSI issuers are provided greater freedom under the reforms to communicate without fear of the prohibitions on gun-jumping so long as those communications occur more than 30 days before a registration statement is filed and do not refer to a securities offering. In addition, two safe harbours allow the continued regular release of certain factual and forward-looking information by certain issuers during the offering process.

• Allowed use of free writing prospectuses. The reforms permit issuers to use a type of written document in connection with offerings, called a free writing prospectus. Free writing prospectuses are not subject to the strict form and content requirements of current statutory prospectuses. In most but not all cases, free writing prospectuses need to be filed with the SEC concurrently with first use.

• Changed the liability regime. In an authoritative interpretation of Section 12(a)(2) of the Securities Act, the rules clarified that information delivered after an investor makes his or her investment decision—which the rules define as the point at which the investor enters into a contract for sale—will not be taken into account in determining whether the investor previously received materially inaccurate information.

GeneralA foreign private issuer begins the registration process by submitting a registration statement on the applicable form to the SEC staff. The SEC staff may then elect to review the registration statement. They will almost always review the registration statement of an issuer that does not already file reports with the SEC and they will review all initial public offerings (IPOs). (As noted above, WKSIs, including WKSIs that are foreign private issuers, may file immediately effective registration statements without SEC review.)

PRACTICE POINTRegistration statements are not considered filed until they are publicly filed. In the case of registration statements submitted for confidential review, public filing generally occurs after the SeC has given its comments on the confidential filing and the issuer has substantially resolved the comments.

If the SEC elects to review the registration statement, the SEC will provide comments to the issuer. The SEC will typically provide its first comments within 30 days of submission or filing. The length of time of the registration process will depend on the nature of the SEC’s comments, particularly on the financial statements, and on the SEC’s workload.

PRACTICE POINTthe time required to complete the registration process leads many issuers to structure transactions as private offerings under Rule 144a (for securities sold in the US) and Regulation S (for securities sold outside the US). this approach generally allows much faster access to the capital markets.

In certain Rule 144a/Regulation S offerings involving debt securities, the registration process takes place months after the initial sale through a registered a/B exchange offer.

When the issuer initially submits the registration statement to the SEC, the registration statement is assigned to an examiner and a member of the SEC’s accounting staff for review. The examiner will be the issuer’s primary contact at the SEC in connection with the comment process.

The examiner will provide comments regarding compliance with prescribed disclosure requirements and will often:• make requests for additional, clearer or more concise

disclosure;• provide comments relating to the SEC’s Plain English rules;55

and• seek supplemental information to document and support

statistics and claims contained in the registration statement relating to market data and the issuer’s competitive position.The SEC’s accounting staff will comment on the financial

statements and other financial information required by or included in the registration statement. They generally provide wide-ranging comments on many aspects of the issuer’s financial disclosure, particularly with respect to:• the accounting treatment of acquisitions and internal

restructurings;• inclusion of historical financial statements of acquired

companies, guarantors and entities in which the issuer has a minority investment;

CHapteR 2

Registered transactions – the registration process


• reconciliation to US Gaap by issuers with audited financial statements prepared under other accounting standards if the foreign private issuer prepares its financial statements in accordance with accounting standards other than IASB IFRS or US Gaap (see What is a foreign private issuer? – Benefits for foreign private issuers above in Chapter 1);

• accounting for contingencies and the establishment of reserves;

• disclosures concerning market risk exposure (interest rates, currencies, commodities) and hedging transactions;

• disclosure of off-balance-sheet arrangements;• the appropriateness of adjustments in pro forma financial

information;• compliance with the newly adopted conditions for use (and

prohibitions on the use) of non-Gaap financial measures;• revenue recognition; and• accounting for stock options, particularly those granted less

than one year before an equity offering.After the issuer has resolved all issues raised in the SEC’s

comment letters, the SEC will declare the registration statement effective at a time jointly determined by the issuer and the underwriters. Immediately after effectiveness, underwriters typically confirm orders orally, with written confirmation provided promptly thereafter along with the final prospectus.

Issues to identify before registrationAny issuer considering a public offering in the US, a private offering with US registration rights or a listing in the US is strongly advised to consult with its auditors’ SEC specialists well in advance of the first submission to the SEC to assure that required financial statements are available and complete. The availability of required financial statements often affects significantly the timing of an offering.

A first-time issuer must also compile significant amounts 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.

Prospective underwriters and counsel can assist the issuer in assembling this information and an assortment of disclosure documents from “comparable” issuers, but the process of preparing for a first-time registration often takes several months.

Issues to address in advance of any offering include the following:• If the foreign private issuer prepares its financial statements

based on an accounting standard other than US Gaap or IASB IFRS, what are the significant differences between local Gaap/non-IASB IFRS and US Gaap? How long will reconciliation take?

• Have all required audits been conducted in accordance with the standards of the US Public Company Accounting Oversight Board (PCAOB)? The SEC requires all financial statements to be audited in accordance with the PCAOB’s standards, even in the case of an issuer using local Gaap or IFRS (whether IASB IFRS or non-IASB IFRS).56

• Does the issuer have the corporate governance procedures and mechanisms in place to comply with Sarbanes-Oxley’s requirements (for example, management certifications, internal control over financial reporting, disclosure controls and

procedures, the appropriate audit committee functions)? Note that a first-time issuer that is not already an SEC reporting company becomes subject to Sarbanes-Oxley upon the initial public filing of its registration statement, even before the SEC declares that registration statement effective.

• Has the issuer completed any significant acquisitions or dispositions during the three full financial years or any subsequent interim period preceding the date of the offering? Separate subsidiary financial statements and pro forma financial information may be required.

• Guarantees in respect of a security are considered to be separate securities under the US federal securities laws that must be registered, sometimes with separate audited guarantor financial statements. Will the issuer’s securities be guaranteed by any company?

• If the issuer is offering debt securities, will they be secured by a pledge of the capital stock or inter-company debt of any related company? A pledgor often must file separate financial statements for the company that issued the pledged securities.

• SEC registration requires many material contracts to be filed as exhibits (subject, under certain circumstances, to confidential treatment of designated portions). Does the issuer have any material contracts that contain commercially sensitive information, or that are subject to confidentiality agreements that would be violated if they were filed publicly? Note that under the SEC rules mandating electronic filing by all foreign private issuers documents (including material contracts) generally have to be submitted in English. Does the issuer have any material contracts that must be translated into English?

• Does the issuer have a significant minority investment in any other entity or any 50/50 joint venture? Separate financial statements may be required for such an entity and the issuer may not have access to these statements or to such entity’s auditors.

• Does the issuer manage its business in separate segments and, if so, are the issuer’s internal accounts enough to prepare financial statements that meet the SEC’s “segment reporting” requirements?

• Are the auditors of every set of required financial statements prepared and qualified to have their audits used in a US securities offering and filed with the SEC? If not, re-audits may be necessary.

• Has the issuer granted stock options within the year prior to an equity offering? If so, the difference between the exercise price and the offering price could constitute compensation expense that could reduce net income under US Gaap, if applicable.

• The SEC requires issuers in certain types of industries (such as banking and oil and gas) to provide detailed and specific disclosure on various matters. Will the issuer be able to assemble and develop the required information?

• Is there a possibility that the issuer will wish to pursue an unregistered transaction instead of the public offering? Based on Securities Act Rule 155, an issuer is permitted to conduct a private placement 30 days after withdrawing a public offering.57 Rule 155 gives general guidance that 30 days is an appropriate “quiet period” in advance of a private placement.58

• Is there a possibility that the issuer will wish to pursue a concurrent unregistered private placement and public offering? If so, care must be taken to avoid taking steps (such as soliciting investors for the private placement by means of the public offering document) that could potentially threaten the private placement.


Available registration formsThe SEC has specific forms for the registration of securities under both the Securities Act and the Exchange Act. Forms not only contain their own disclosure requirements, but also specify certain items that must be disclosed under 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 central form for foreign private issuers is Form 20-F. Form 20-F sets out the required disclosure for US listings and annual reports by foreign private issuers. In addition, the registration forms for public securities offerings refer extensively to Form 20-F.

For both the Securities Act and the Exchange Act, the relevant forms typically prescribe broad categories of information, rather than specific disclosures. In the case of a Securities Act registration form, the registration statement includes a prospectus containing prescribed categories of financial and non-financial disclosure, as well as additional information not included in the prospectus, including exhibits (such as corporate documents and material contracts). The registration statement, prospectus and annual report must contain a basic package of financial statements and other financial information to illustrate the financial condition and results of operations of the issuer.

For a foreign private issuer, the primary registration forms are:

SEC registration forms DescriptionSecurities Act forms

Form F-1 the form for first-time issuers and all other issuers who are not eligible for Form F-3.

Form F-3 a short form available for certain offerings by seasoned issuers. 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 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 nasdaq in connection with a concurrent public offering in the US. Form 8-a is used in conjunction with the applicable Securities act registration form.

A checklist showing the non-financial information required by Forms F-1, F-3 and 20-F is attached as Annex A. Financial statement requirements are discussed in Required Financial Statement Disclosure (chapter 6).

(i) Form F-1Form F-1 is the Securities Act form for any securities of a foreign private issuer that is a first-time SEC registrant or for which no other form is authorised or prescribed. Although certain non-IPO issuers are allowed to incorporate information by reference from previous Exchange Act filings, a Form F-1 is typically a lengthy document.

(ii) Form F-3Form F-3 is available to a foreign private issuer that has:59

• securities registered under the Exchange Act or is required to file reports with the SEC under Section 15(d) of the Exchange Act forms Act (by virtue of having registered an offering under the Securities Act);

• filed at least one annual report on Form 20-F;• been subject to the reporting requirements of the Exchange Act

and filed all required materials on a timely basis for at least 12 months before the filing of the registration statement; and

• had no material default on loans or long-term leases or failure to pay a sinking fund installment or dividend on preferred stock since the end of the last financial year covered by audited financial statements in its Exchange Act reports, and no subsidiary of the foreign private issuer has had such a default.Form F-3 is available for the following transactions:60

• offerings by the foreign private issuer of non-convertible investment grade securities;

• offerings of securities by the foreign private issuer (other than non-convertible investment-grade debt securities) for cash if the aggregate market value worldwide of the issuer’s common equity held by non-affiliates is at least $75 million;

• secondary offerings of securities by holders of the foreign private issuer’s securities (often pursuant to a registration rights agreement); and

• offerings of securities by the issuer upon exercise of certain outstanding transferable warrants, upon exercise of rights granted pro rata by the issuer to existing holders of the class


offered, pursuant to a dividend or interest reinvestment plan, or upon conversion of outstanding convertible securities.

PRACTICE POINTForm 20-F – from which much of the disclosure in Form F-3 derives – has alternative financial statement requirements for exchange act periodic reports and Securities act registration statements, with the latter being more extensive. an issuer seeking to incorporate by reference using Form F-3 must generally meet the more stringent Item 18 standard in its exchange act reports. For a more detailed discussion on Form 20-F, see Exchange Act reporting–Annual report on Form 20-F in Chapter 1.

PRACTICE POINTUnlike Form F-1 – which only allows backward incorporation by reference from previously filed exchange act reports – Form F-3 also contemplates forward incorporation of subsequent exchange act reports. this allows F-3 issuers to file a shelf registration statement and offer securities on a delayed or continuous basis.61

(iii) Form F-4Form F-4 is the applicable form for foreign private issuers who are offering new securities for outstanding securities, including securities issued in connection with business combinations and exchange offers.

Form F-4 requires information concerning:62

• the relevant transaction, including pro forma financial information for an acquisition or, as applicable, the terms of the exchange;

• the issuer, its business and the risks associated with the relevant investment, consistent with the disclosure required by Forms F-1 or F-3 (issuers eligible to use Form F-3 may incorporate by reference in Form F-4 to the same extent as permitted by those forms); and

• for acquisitions, the company being acquired, including most of the same business and financial 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 be incorporated by reference in certain circumstances).

(iv) Form F-6Form 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 US. Form F-6 may only be used if:63

• the deposited shares have been offered or sold in transactions registered under the Securities Act or exempt from registration;

• the foreign private issuer files periodic reports with the SEC or is exempt from those filing requirements pursuant to Rule 12g3-2(b), discussed above, or, in the case of an unsponsored ADR programme as described below, where a depositary, after exercising reasonable diligence, has a reasonable, good faith belief that the issuer is exempt from registration pursuant to Rule 12g3-2(b); and

• the holder of ADRs is entitled to withdraw the deposited securities at any time, subject only to temporary delays for specified, limited reasons.

Automatic shelf registration for WKSIsModifications to Form F-3, coupled with Securities Act Rule 430B, allow a foreign private issuer that is a WKSI (and in certain cases, its majority-owned subsidiaries) to register (without paying a filing fee) an unspecified amount of securities on a shelf registration statement. The shelf registration statement becomes automatically effective, so that sales can take place immediately after filing, without risk of SEC review. We discuss automatic shelf registration in Annex B, below.

ADRs and ADSsMany foreign private issuers that sell equity securities into the US do so through the use of ADRs. ADRs are issued by a depositary, usually a large multinational bank, and represent a specified number of the issuer’s underlying equity securities held by the depositary or its custodian. Although ADR holders have essentially the same ultimate rights as holders of the underlying securities and can, with limited exceptions, exchange their ADRs for the underlying securities at any time, ADRs are denominated in US dollars and their terms are negotiated between the issuer and the depositary bank. The depositary typically receives fees for transactions in the underlying shares, such as withdrawals from or deposits into the ADR facility and currency exchanges in connection with the payment of dividends, as well as ongoing annual depositary service fees.

The SEC considers ADRs to be separate securities from the underlying shares. This means that depositary banks, as the issuer of the ADRs, must separately register the issuance of ADRs with the SEC on Form F-6. In addition, an issuer wishing to conclude a public offering or seeking a listing in the US must always register the underlying shares on the applicable SEC form as discussed above.

Issuances of ADRs in connection with a US public offering by the issuer are known as Level III ADR programmes; issuances of ADRs in connection with listing or quoting existing shares in the US are known as Level II ADR programmes; and issuances of ADRs representing existing shares that are traded only over-the-counter in the US are known as Level I ADR programmes. ADR depositaries may establish a Level I ADR programme to facilitate secondary trading in a foreign private issuer’s previously issued shares either with the issuer’s participation (a sponsored programme) or without the issuer’s participation (an unsponsored programme). In either case, the issuer must either register the underlying class of shares with the SEC under the Exchange Act or claim the benefit of the Rule 12g3-2(b) exemption. If, however, the issuer desires to have its ADRs listed on a US national securities exchange (for example the NYSE or Nasdaq), Rule 12g3-2(b) is not available and accordingly the issuer must register the shares under the Exchange Act.

The SEC’s amendments to Rule 12g3-2(b) and Form F-6 that took effect in October 2008 have changed market practice for unsponsored Level I ADR programmes. Form F-6 now permits the establishment of an unsponsored ADR facility by a depositary in respect of a foreign private issuer’s equity securities in the event that, after exercising reasonable diligence, the depositary has a reasonable, good faith belief that the foreign private issuer benefits from the Rule 12g3-2(b) exemption.64


This change has had far reaching consequences. Previously, foreign private issuers that did not wish to have their securities traded in the form of ADRs could avoid doing so by not claiming the Rule 12g3-2(b) exemption. Following the amendments, however, Rule 12g3-2(b) has become self-executing and is now automatic for most foreign private issuers that electronically publish material disclosure documents in English. The combination of Rule 12g3-2(b) becoming self-executing and the ability of depositary banks to reasonably believe that foreign private issuers are in compliance with the Rule 12g3-2(b) exemption has resulted in a considerable increase in the number of unsponsored Level I ADR programmes since the adoption of the amendments.65 For a more detailed discussion on Rule 12g3-2(b), see Registration under the Securities Act and the Exchange Act, Exchange Act registration; Rule 12g3-2(b) exemption in Chapter 1.

PRACTICE POINTdepositaries often compete intensively to manage a foreign private issuer’s new adR programme, and multiple bids are usually considered, with fees often paid by the successful depositary to the foreign private issuer.

Filing electronicallySince November 2002, the SEC has required foreign private issuers to use the SEC’s Electronic Data Gathering and Retrieval (EDGAR) system for nearly all SEC filings.66 Previously, only domestic US issuers were required to file documents through EDGAR.

Documents such as registration statements for offerings of securities, annual reports on Form 20-F and most current reports on Form 6-K must be filed electronically.67 In addition, all exhibits and attachments to SEC filings (such as material contracts) must be filed electronically, except for exhibits and attachments previously filed in paper form, which may generally be incorporated in an EDGAR filing by reference.68

There are only limited exceptions to the requirement to file electronically. These include:• a foreign private issuer’s annual report to the holders of its

securities submitted on Form 6-K;69 and• a report or other document submitted on Form 6-K that the

issuer is required to furnish and make public under the laws of its home country or the issuer’s home country exchange, that (1)is not a press release, (2) is not required to be and has not

been distributed to the holders of the foreign private issuer’s securities, and (3) if discussing a material event, has already been the subject of a Form 6-K filing or other SEC filing via EDGAR.70 As a general matter, all filings in EDGAR must be made in

the English language.71 Non-English documents must be fairly and accurately translated into English for filing in accordance with the SEC’s rules on foreign-language documents,72 including most documents submitted to the SEC under cover of Form 6-K.73 Alternatively, a summary of certain documents filed with the SEC as exhibits may be provided,74 although the SEC’s rules require specified significant documents (for example, articles of incorporation, articles of association, instruments defining the rights of security holders and contracts on which an issuer’s business is substantially dependent) to be provided in full translation.75 Similarly, certain documents provided to the SEC on Form 6-K may be provided in English summary, including a report required to be furnished and made public under the laws of the issuer’s home country or the rules of the issuer’s home country stock exchange, as long as it is not a press release and is not required to be and has not been distributed to the issuer’s security holders.76 Any permitted summary must fairly and accurately summarise the terms of each material provision of the original text and fairly and accurately describe the terms that have been omitted or abridged.77

Interactive dataOn January 30 2009, the SEC adopted rules that require public companies and foreign private issuers that prepare their financial statements in accordance with US Gaap and IASB IFRS to begin providing their financial statements in eXtensible Business Reporting Language (XBRL).78 Currently, the new rules do not apply to foreign private issuers who do not prepare their financial statements in accordance with US Gaap or IASB IFRS.79 XBRL is a form of electronic communication whose main feature includes interactive electronic tagging of both financial and non-financial data.

The SEC has adopted a three-year phase-in programme beginning with 2008 annual reports. Year one includes filers using US Gaap with a worldwide public float of over $5 billion; year two includes all other large accelerated filers (defined below) using US Gaap; and year three includes all remaining filers. Below is a chart outlining the three-year phase-in programme and the reports for which a filer would be required to include interactive data for the company’s financial statements.80

Type of filer Reports requiring XBRL-formatted data domestic US and foreign large accelerated filers using US Gaap with worldwide public common equity float above $5 billion as of the end of the second fiscal quarter of their most recently completed fiscal year

Quarterly reports on Form 10-Q or annual reports on Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15 2009

all other large accelerated filers using US Gaap Quarterly reports on Form 10-Q or annual reports on Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15 2010

all remaining filers using US Gaap Quarterly reports on Form 10-Q or annual reports on Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15 2011

Foreign private issuers with financial statements prepared in accordance with IaSB IFRS

annual reports on Form 20-F or Form 40-F for fiscal periods ending on or after June 15 2011


A large accelerated filer is an issuer that, as of the end of its fiscal year:81

• has an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates of $700 million or more (measured as of the last business day of its most recently completed second fiscal quarter);

• has been subject to SEC reporting under the 1934 Act for a period of at least 12 calendar months;

• has filed at least one annual report under the 1934 Act with the SEC; and

• is not eligible to use the requirements for smaller reporting companies in Regulation S-K.82

ConfidentialityAs discussed above, foreign private issuers that are registering with the SEC for the first time may submit registration statements for review on a confidential basis. Those registration statements remain confidential until the point of public filing (which is done at the time of printing a preliminary prospectus).

In almost all other circumstances, issuers are required to file registration statements and Exchange Act reports publicly. These documents – including any exhibits, such as material contracts – become available shortly after filing through the SEC’s EDGAR database (or the SEC’s public reference facilities in Washington, DC). In addition, the SEC makes public both its comment letters on issuer’s registration statements and required Exchange Act reports, as well as issuers’ responses to those comments, within 45 days of the end of the SEC’s review process.83

Issuers often wish to preserve the confidentiality of certain portions of their response to SEC comments, as well as key terms of material contracts. The Securities Act and the Exchange Act include rules detailing how confidential treatment may be obtained for information contained in documents that are required to be filed with the SEC.84 The SEC has historically been unwilling to grant broad-brush requests for confidential treatment, particularly of contractual terms.

FINRA reviewUnderwritten public offerings in the US are, in most cases, also subject to review and approval by the Financial Industry Regulatory Authority (FINRA). FINRA is a self-regulatory organisation that was created in July 2007 through the consolidation of the National Association of Securities Dealers and the member regulation, enforcement and arbitration functions of the NYSE Regulation (NYSER).

Among other things, FINRA monitors the terms of public offerings underwritten by US investment banks. FINRA reviews will primarily focus on any pre-existing relationships between the underwriters and the issuer and whether the underwriters’ proposed compensation is fair and not excessive. FINRA compensation reviews will look at the underwriting commission to be paid in connection with the offering as well as any other compensation received by the underwriters from the issuer and any of its affiliates in any capacity. FINRA will also review the terms of any securities transactions (including purchases of equity and warrants) between the underwriters and their affiliates and the issuer and its affiliates.

PRACTICE POINTthe SeC will not declare a registration statement effective until FInRa has formally cleared the underwriting arrangements.

NYSE and Nasdaq listing requirementsTo be eligible for listing on the NYSE or on Nasdaq, a foreign private issuer must meet certain quantitative listing requirements and corporate governance standards. Once listed, foreign private issuers must meet certain requirements relating to ongoing shareholder communication and disclosure. The quantitative NYSE and Nasdaq listing criteria and corporate governance standards are summarised in Annex C.

NYSE and Nasdaq adopted wide-ranging changes in corporate governance requirements for listed companies in the wake of Sarbanes-Oxley. Foreign private issuers may follow home-country practice in lieu of certain of the corporate governance requirements, although they must also disclose any significant ways in which their home-country practices differ from those followed by domestic US companies.85

Foreign private issuer deregistration and termination of Exchange Act reportingIn 2007, the SEC adopted Rule 12h-6 and amendments to the rules that govern when a foreign private issuer may deregister a class of equity securities under Section 12(g) of the Exchange Act and terminate its Exchange Act reporting obligations, and when a foreign private issuer may terminate its Exchange Act reporting obligations regarding a class of debt securities. These rules make it considerably easier for foreign private issuers to deregister their securities and terminate Exchange Act reporting obligations than previously.86 In addition, foreign private issuers are now able to terminate their reporting obligations under Section 15(d) of the Exchange Act permanently.87 (Under the previous rules, these reporting obligations were suspended but could be reinstated depending on the number of US holders of the issuer’s securities over time.)

(i) Deregistering equity securities; terminating Exchange Act reportingThe rules set out two alternative ways for foreign private issuers to deregister their equity securities and terminate Exchange Act reporting obligations, and they impose three additional conditions that must be met (regardless of which alternative is chosen).(a) Alternative 1: 5% average daily trading volume testEquity securities of foreign private issuers are eligible for deregistration and termination of the related Exchange Act reporting requirements if the average daily trading volume (ADTV)88 of that class of securities during a recent 12-month period89 in the US has been 5% or less of the ADTV of the same class of securities on a worldwide basis.90

The deregistration rules contain two limits to using the ADTV standard to ensure that an issuer seeking to deregister under this standard does not artificially reduce the US ADTV of a certain class of equity securities.91 An issuer will not be eligible to deregister a class of equity securities and terminate its Exchange Act reporting obligations under the ADTV standard if, within the previous 12 months, the issuer:• terminated an ADR facility in the same class of securities and

the US ADTV of that class of securities exceeded 5% of the


issuer’s worldwide ADTV at the time of the termination, or • delisted the same class of equity securities from a US-based

securities exchange or inter-dealer quotation system and the US ADTV of that class of securities exceeded 5% of the issuer’s worldwide ADTV at the time of such delisting.92

(b) Alternative 2: 300-holder testAs an alternative to the ADTV benchmark provision, the rules permit a foreign private issuer to terminate its reporting obligations under the Exchange Act regarding a class of equity securities if, on any date within 120 days before filing for deregistration, the foreign private issuer has less than 300 record holders worldwide or who are US residents.93 The rules employ a “look-through” counting method under which an issuer has to analyse the accounts of brokers, banks and other nominees located in the US, the jurisdiction in which the issuer is organised and, if different, the jurisdiction of its primary trading market to make this calculation.94 For a more detailed discussion on how share ownership is evaluated, see What is a foreign private issuer? – How is ownership determined? in Chapter 1.(c) Additional conditionsRegardless of whether it uses the ADTV or 300-holder alternative, a foreign private issuer wishing to deregister a class of equity securities must meet three additional conditions outlined below to deregister the class of equity securities and to terminate its Exchange Act reporting obligations. • First, the foreign private issuer must have at least a 12-month

Exchange Act reporting history, including having filed at least one Exchange Act annual report, and be current in its reports.95

• Second, the equity securities of the foreign private issuer must not have been sold, subject to limited exceptions, through a registered public offering under the Securities Act in the 12 months leading up to the attempted deregistration.96 Securities sold via an exemption to the Securities Act are not subject to this limitation. Consequently, Rule 144A offerings and issuances of securities under Rule 802, among other exemptions from registration under the Securities Act that occur within the previous year, will not delay or prevent the deregistration of a foreign private issuer. 97

• Finally, the foreign private issuer must have had that class of securities listed on an exchange in the issuer’s primary trading market98 for at least twelve months preceding the deregistration filing in the US.99

(ii) Terminating Exchange Act reporting for debt securitiesA foreign private issuer may terminate its reporting requirements under the Exchange Act with regard to a class of debt securities if two principal criteria are satisfied. First, the issuer is required to have submitted all required Exchange Act filings, including at least one Exchange Act annual report, since the debt securities were registered and came under the Exchange Act reporting system. Second, as with “Alternative 2” discussed above, the foreign private issuer must have less than 300 record holders on a worldwide basis or that are residents of the US, in either case on a date within 120 days before filing for deregistration.100 The method for counting these record holders is the same as for equity securities as described above.101

(iii) Implications for M&A transactionsThe deregistration rules provide that a foreign private issuer

that succeeds to the reporting obligations of another company following a merger, consolidation, exchange of securities, acquisition of assets or similar transaction (a successor registrant) can take into account the reporting history of the predecessor registrant in determining whether the successor registrant is eligible to deregister under Rule 12h-6.102

The successor may terminate its inherited reporting obligations with respect to a class of equity securities if it meets the prior reporting, foreign listing, and quantitative benchmark conditions described above. A successor may terminate its inherited reporting obligation with respect to a class of debt securities if it meets all of the debt security deregistration requirements otherwise applicable to foreign private issuers, as described earlier. For both equity and debt securities, the one-year prior reporting condition is deemed satisfied for a successor if it has been satisfied by the predecessor issuer during the relevant period. If a registered offering or merger is involved in the business combination transaction, then the foreign private issuer registrant would be ineligible to deregister for at least 12 months following the consummation of the transaction.

PRACTICE POINT It is not necessary to take into account a predecessor issuer’s adtV when determining whether the adtV condition is met by a successor issuer to a business combination transaction.103

(iv) Rule 12g3-2(b) exemptionForeign private issuers that deregister are immediately eligible to take advantage of the exemption from registration under Rule 12g3-2(b).104 In addition, as part of the amendments to Rule 12g3-2(b) adopted in October 2008, the SEC removed the prohibition on foreign private issuers claiming the Rule 12g3-2(b) exemption if, following a merger, consolidation, exchange of securities or asset acquisition, a foreign private issuer succeeds to the SEC reporting obligations of another issuer. The amendment flows logically from the SEC’s amendments adopted in March 2007, which permit successor issuers to terminate Exchange Act reporting obligations under the deregistration provisions of Rule 12h-6 and to simultaneously avail themselves to the Rule 12g3-2(b) exemption.105 For a more detailed discussion of this exemption, see Exchange Act registration; Rule 12g3-2(b) exemption in Chapter 1.

(v) Rule 13e-3 disclosureUnder Rule 13e-3 of the Exchange Act, a foreign private issuer or any affiliate that engages in certain specified transactions (including transactions which have either a reasonable likelihood or a purpose of causing that issuer to become eligible under Rule 12h-6 to deregister a class of equity securities or terminate a reporting obligation) must file a Schedule 13E-3 with the SEC.106 Rule 13e-3 requires the issuer to provide certain information about such transactions and is intended to provide the issuer’s security holders with one last opportunity to obtain information about the issuer and consider their alternatives prior to the consummation of a going private transaction.107


The regime governing communications during public securities offerings in the USSection 5(c) of the Securities Act prohibits all offers, in whatever form, prior to the filing of a registration statement. The term offer is interpreted broadly.

In addition, between the public filing of a registration statement and its effective date, Section 5(b)(1) of the Securities Act requires that any prospectus – an expansive term that captures nearly all forms of written or broadcast communication – used in connection with a securities offering be limited to a statutory prospectus that meets information and form requirements (a conforming prospectus).

Section 5(a) of the Securities Act prohibits the sale of any securities until the registration statement has been declared effective by the SEC. And Section 5(b)(2) of the Securities Act requires that a security being sold must be accompanied or preceded by a conforming prospectus.

Offers in violation of these restrictions are often referred to as gun jumping.

For purposes of regulating publicity about an issuer and an offering, the registration process is accordingly divided into three stages:• the quiet period – from the time an issuer decides to make a

public offering until it files its registration statement;• the waiting period – from the time the registration statement is

filed until it is declared effective; and• the post-effective period – after the registration statement has

been declared effective by the SEC.During each of these stages, publicity about the issuer is

restricted in distinct ways.

PRACTICE POINTan issuer and its underwriters should pay close attention to the contents of their websites (including hyperlinked information), which are routinely reviewed by the SeC staff during the registration process.

PRACTICE POINTpublication of research about an issuer in the US by an investment bank participating in an offering during any stage of the registration process raises significant issues that can affect the offering and constitute an unlawful offer of securities or a non-conforming prospectus. Guidelines are often provided by counsel to all investment banks participating in the offering that restrict content and distribution of research. For a more detailed discussion on research reports, see Research Reports below.

Restrictions on publicity during the quiet periodAs noted above, the pre-filing or quiet period begins when an issuer decides to make a public offering (usually by retaining an investment bank or banks to undertake the offering) and ends when the registration statement relating to the offering is first filed publicly with the SEC.

During this period, the issuer may not make offers or sales of the securities being registered. The SEC has construed the concept of premature offers broadly to include publicity that does not refer to the proposed offering but which may nevertheless stimulate investor or dealer interest in the issuer or its securities. An issuer should generally not release publicly any forecasts, projections or predictions relating to revenues, income or earnings a share or concerning expected valuations, and should put in place procedures for review of public statements and press releases.

The SEC has provided certain safe harbours from the prohibition on pre-filing offers. In particular, a foreign private issuer may:• release a limited notice regarding the offering within the US

under Securities Act Rule 135;• conduct certain press activities outside the US under Securities

Act Rule 135e;• if the foreign private issuer is a WKSI, make certain offers of

securities under Securities Act Rule 163;• take advantage of the 30-day safe harbour for certain pre-filing

statements under Securities Act Rule 163A; and• release certain factual and forward-looking information.

(i) Rule 135Rule 135 provides that an issuer will not be deemed to make an offer of securities under Section 5(c) as a result of certain public announcements of a planned registered offering during the quiet period. Under Rule 135, the announcement must:• contain a legend to the effect that it does not constitute an offer

of any securities for sale;108 and• contain only limited information, including:109

- the name of the issuer;- the title, amount and basic terms of the securities offered;- the anticipated timing of the offering; and- a brief statement of the manner and purpose of the offering,

without naming the prospective underwriters for the offering.

(ii) Rule 135eRule 135e provides that a foreign private issuer will not be deemed to make a Section 5(c) offer by providing journalists with access to: (1) its press conferences held outside the US; (2) meetings with issuer (or selling security holder) representatives conducted outside the US; or (3) written press-related materials released outside the US in which the issuer discusses its intention to undertake an offering. To take advantage of Rule 135e, the offering must not be conducted solely in the US – that is, the

CHapteR 3

Restrictions on publicity in connection with registered transactions

Restrictions on publicity in connection with registered transactions 13

issuer must have a bona fide intent to make an offering offshore in addition to the US offering. The issuer must also provide access to both US and non-US journalists, and ensure that any written press releases or other press-related materials it uses meet the following requirements:110

• the materials must be distributed to journalists (including US journalists) outside the US; and

• the materials must contain a legend stating:- that they are not an offer of securities for sale in the US;- that securities may not be offered or sold in the US absent

registration or an exemption from registration;- that any public offering in the US may be made only by

means of a prospectus that may be obtained from the issuer and that will contain detailed information about the issuer and management, as well as financial statements; and

- whether the issuer intends to register the offering in the US.These materials also must not include any purchase order or

coupon that could be used to indicate interest in the proposed offering.

PRACTICE POINTalthough Rule 135e does not limit the content of offshore press announcements, other restrictions of the US federal securities laws (such as the anti-fraud prohibitions of exchange act Rule 10b-5) continue to apply. Some caution is therefore warranted in relying on the Rule. Foreign private issuers should avoid making detailed discussions of a pending offering, particularly in the english-language press outside the US.

PRACTICE POINTnote that even if Rule 135e is otherwise available, an issuer may not rely on the Rule to provide internet access to its offshore press conferences or written press-related materials issued offshore, unless it implements procedures to ensure that only persons physically located outside the US will have access to the press conferences or materials.111

PRACTICE POINTRule 135e applies only to press activities, and does not protect the transmission of press-related materials, including press releases, to investors.

(iii) Rule 163 – pre-filing offers by WKSIsRule 163 creates a non-exclusive exemption for WKSIs from Section 5(c)’s prohibition on pre-filing offers. Under the rule, which is not available to underwriters,112 offers by or on behalf of a WKSI before the filing of a registration statement are free from the restraints of Section 5(c), provided that certain conditions are met.113 These include that:• the written communication must contain a prescribed

legend;114

• it must be filed with the SEC promptly upon filing of the registration statement for the offering (unless the communication has previously been filed with the SEC or is

exempt from filing under the terms of Securities Act Rule 433, dealing with free writing prospectuses);115 and

• it must not relate to “ineligible offerings,” including certain business combination transactions.116

Written offers under Rule 163 are deemed to be both a statutory prospectus, subject to Section 12(a)(2) liability, and a free writing prospectus subject to filing in accordance with Rule 433 (discussed in more detail below).117 If no registration statement is filed, however, a Rule 163 communication will not need to be filed.118

Although Rule 163 offers are subject to Regulation FD,119 Regulation FD does not apply to foreign private issuers (even though many foreign private issuers choose to comply with the terms of Regulation FD). In addition, Rule 163 communications will potentially trigger liability under various anti-fraud provisions of the securities laws, including Section 12(a)(2) and Rule 10b-5 under the Exchange Act.120

(iv) Rule 163A – the 30-day bright line safe harbourRule 163A provides all issuers (whether or not WKSIs) with a non-exclusive safe harbour for certain communications made more than 30 days before the filing of a registration statement.121 Communications more than 30 days before filing are not considered pre-filing offers prohibited by Section 5(c), and so will be free from traditional restrictions on gun jumping.122 They are likewise not deemed to be free writing prospectuses.123

Use of the safe harbour is subject to the following requirements:• Rule 163A communications must not refer to the securities

offering that is the subject of the registration statement;124

• the communications must be made by or on behalf of an issuer – in other words, the issuer will need to authorise or approve Rule 163A communication and communications authorised or approved by underwriters or dealers will not come within the safe harbour;125

• the issuer must take “reasonable steps within its control” to prevent further distribution of the information during the 30-day period before filing the registration statement (although the SEC has suggested that the issuer may maintain this information on its website, if the information is appropriately dated, identified as historical material, and not referred to as part of the offering activities);126 and

• the safe harbour may not be used in connection with certain business combination transactions, offerings to employees registered on Form S-8, and offerings by blank check companies, shell companies or penny stock issuers.127

(v) Rules 168 and 169 – safe harbours for factual business information and forward-looking information during an offeringSince at least 1971, the SEC has permitted issuers to continue to advertise products and services and to issue press releases regarding factual business and financial developments in accordance with past practice, despite the limitations on gun jumping.128 In addition, Securities Act Rules 168 and 169 codified (and expanded) this exclusion in the form of two safe harbours.

In particular, Rules 168 and 169 exempt from the definition of offer under Section 5(c) (and Section 2(a)(10) of the Securities Act) certain information regularly released by or on behalf of an issuer in the ordinary course of its business.129 Communications that fall within the safe harbours will not be prohibited pre-


filing offers pursuant to Section 5(c) (and are not free writing prospectuses).130

(a) Rule 168Rule 168 is a non-exclusive safe harbour for reporting issuers. It allows a reporting issuer and certain non-reporting foreign private issuers to make continued regular release or dissemination of “factual business information” and “forward-looking information,” subject to certain conditions.131 Disclosure of Rule 168 information will be permitted at any time, including before and after the filing of a registration statement.132

Non-reporting foreign private issuers that may use Rule 168 include those that:133

• meet the registrant eligibility requirements for Form F-3, other than the reporting history requirements of the Form;

• either satisfy certain public float thresholds or are issuing certain non-convertible investment grade securities; and

• either:- have equity securities that have traded on certain markets

outside the US for at least 12 months; or- have a worldwide market value of outstanding common

equity held by non-affiliates of $700 million or more.Under Rule 168, factual business information means:134

• factual information about the issuer, its business or financial developments, or other aspects of its business;

• advertisements of, or other information about, the issuer’s products or services; and

• dividend notices.Forward-looking information means:135

• projections of an issuer’s revenues, income or loss, earnings or loss per share, capital expenditures, dividends, capital structure, or other financial items;

• statements about management’s plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer;

• statements about the issuer’s future economic performance, including statements generally contemplated by the issuer’s MD&A; and

• assumptions underlying or relating to the foregoing.However, neither term includes information about an offering

or information released or disseminated as part of offering activities.

As is the case under Rules 163 and 163A, factual business information and forward-looking information under Rule 168 will be considered released “by or on behalf ” of an issuer if the issuer, its agent or its representative, other than an underwriter or a dealer, authorised or approved its use before its release.136 The SEC has not defined who may be considered an agent or a representative for these purposes (other than to exclude underwriters or dealers that are offering participants), although it has pointed to advertising agencies and public relations firms as possible examples.137

There are a number of additional conditions for using the Rule 168 safe harbour. These include that:138

• the issuer has previously released or disseminated Rule 168 information in the ordinary course of its business; and

• the timing, manner and form in which the information is released is materially consistent with similar past disclosures.For the information to be considered regularly released

in the ordinary course of business, the method of releasing or disseminating the information, and not just the content, will be

required to be consistent with prior practice.139 Therefore, under Rule 168 the issuer will need to be able to show a record of releasing the particular type of information in the same particular manner, although the SEC has acknowledged that one prior release could establish a record. Information can also be regularly released for these purposes if it is made on an unscheduled or episodic basis (such as product advertising, product release information or earnings guidance). Furthermore, merely using new or different technologies will not necessarily disqualify a communication.

(b) Rule 169Rule 169 is a non-exclusive safe harbour for non-reporting issuers. It is similar to, but more limited than, Rule 168. Under Rule 169, non-reporting issuers are permitted to continue to release factual business information, but not forward-looking information subject to certain conditions.140 In addition, the definition of factual business information is narrower under Rule 169 than under Rule 168. Rule 169 information may be released at any time, including before or after the filing of a registration statement.141

Under Rule 169, factual business information means:142

• factual information about the issuer, its business or financial developments, or other aspects of its business; and

• advertisements of, or other information about, the issuer’s products or services.Unlike Rule 168 for reporting issuers, Rule 169 does not

include dividend notices or factual information set forth in the issuer’s Exchange Act reports within the definition of factual business information. The SEC has explained that it had not included dividend notices within the definition because the communications covered by Rule 169 are those intended for use by persons other than in their capacity as investors.143 But the two Rules are similar in that under both, factual business information does not include information about an offering or information released or disseminated as part of offering activities.144

As is the case for Rule 168, information will be considered to be released “by or on behalf ” of an issuer under Rule 169 if the issuer, its agent or its representative, other than an offering participant that is an underwriter or a dealer, authorised or approved its use before its release.

In addition, to use the Rule 169 safe harbour:• the issuer must have previously released or disseminated

information of the type described in Rule 169 in the ordinary course of its business;

• the timing, manner and form in which the information is released must be materially consistent with similar past disclosures; and

• the information must be released or disseminated to persons, such as customers or suppliers, other than in their capacity as investors or potential investors, by the issuer’s employees or agents who historically have provided this information.The SEC has explained that Rule 169 is aimed at protecting

communications intended for non-investors.145 But the safe harbour will continue to be available even if a widely disseminated communication that otherwise meets the requirements of the Rule is available to or is received by investors.

Restrictions on publicity during the waiting period(i) BackgroundThe waiting period extends from the time that the registration

Restrictions on publicity in connection with registered transactions 15

statement is filed publicly with the SEC until the time that it is declared effective by the SEC. During this period, offers but not sales of the security may be made. Under Section 5(b)(1), a non-conforming prospectus may not be used, and because the term prospectus picks up nearly all forms of written communication (and many electronic communications as well), all written offers must take the form of a conforming prospectus.

Accordingly, a foreign private issuer may:• continue to advertise products and services and to issue press

releases regarding factual business and financial developments in accordance with past practice;146

• continue to release factual and forward-looking information in accordance with the Rule 168 and Rule 169 safe harbours;

• continue to conduct certain press activities outside the US under Rule 135e; and

• make a limited notice within the US under Securities Act Rule 134.In addition, a foreign private issuer may use a preliminary

prospectus, a free writing prospectus and hold road shows during this period. We discuss free writing prospectuses and road shows in more detail below.

PRACTICE POINTduring the waiting period, an issuer should exercise particular caution in interviews with journalists in which information is furnished orally but with the expectation that it may be published. disclosures of this sort may be considered a written offer and hence a non-conforming prospectus. In particular, an issuer should not make any oral statements that go beyond or are inconsistent with the information contained in the preliminary prospectus.

(ii) Rule 134Rule 134 provides that certain limited written communications related to a securities offering as to which a registration statement has been filed will not be considered to be an offer under Section 5. Rule 134 is available once a statutory prospectus has been filed, although in the case of an IPO, most of the information permitted by Rule 134 may be disclosed before the inclusion of a bona fide price range in the registration statement.147

The information permitted by Rule 134 includes:148

• certain basic factual information about the legal identity and business location of the issuer, including contact details of the issuer;

• information about the business segments through which the issuer operates;

• information about the securities being offered;• the names of all underwriters participating in the offering and

their additional role in the underwriting syndicate;• the anticipated schedule for the offering, and a description of

marketing events;• a description of the procedures by which the underwriters will

conduct the offering and information about procedures for opening accounts and submitting indications of interest;

• expanded disclosure regarding credit ratings (although a bona fide price range, in the case of a non-reporting issuer, must be included in the registration statement before including ratings information in a Rule 134 communication);

• certain additional information, including the names of selling

securities holders, certain email addresses, the exchanges on which the securities will be listed and the ticker symbols; and

• a required legend.

Restrictions on publicity after effectiveness of the registration statementAfter effectiveness of the registration statement, underwriters and other distribution participants may only sell the securities by means of a final prospectus.149 In addition, underwriters will have an obligation to deliver a statutory prospectus during a period of time following effectiveness, even in connection with secondary market resales. We discuss prospectus delivery in more detail later.

Accordingly until the later of (1) completion of “distribution” of the securities (that is, when the securities have been sold to investors), and (2) expiration of the relevant prospectus-delivery period, limitations on publicity by the issuer will remain in place. Once these periods have passed, offering-related limitations on publicity can generally be eliminated.

Research reportsSecurities Act Rules 137, 138 and 139 set out the circumstances under which a broker or dealer may publish research contemporaneously with a registered offering without violating the Section 5(c) prohibitions on pre-filing offers or the form of prospectus requirements of Section 5(b)(1).150

(i) Definition of research reportA research report is a written communication that includes information, opinions or recommendations with respect to securities or an issuer, or an analysis of securities or an issuer, whether or not it provides information reasonably sufficient for an investment decision.151 The term written communication includes a wide variety of electronic communication, such as emails and websites. According to the SEC, the definition of research report is intended to encompass all types of research reports, whether issuer-specific or industry compendiums separately identifying the issuer.152 In addition, the definition does not (and the related safe harbours do not) cover oral communications, which accordingly may be offers subject to Section 12(a)(2) liability.153

(ii) Rule 137 – publication of research by non-participating broker-dealersRule 137 provides that a broker or dealer that is not a participant in a registered offering but publishes or distributes research will not be deemed to make offers of a security or to participate in a distribution of those securities as an underwriter.

Rule 137 applies to securities of any issuer, including non-reporting issuers (but excluding blank check companies, shell companies and penny stock issuers). Rule 137 is available only to brokers and dealers who are not participating in the registered offering of the issuer’s securities and have not received compensation from the issuer, its affiliates or participants in the securities distribution. Rule 137 also requires that the broker-dealer must publish or distribute the research report in the regular course of business.

(iii) Rule 138 – publication of research by an underwriter on other securities of an issuerRule 138 provides that a broker or dealer participating in a distribution of securities by an issuer that is Form F-3 eligible


(or, in the case of a foreign private issuer only, meets certain conditions of Form F-3) is not deemed to make an offer of those securities if it publishes or distributes research that is confined to a different type of security of that issuer.154 For example, Rule 138 allows publication of research with respect to debt securities by an underwriter when participating in a distribution of the issuer’s common stock, and vice versa.

Rule 138:155

• covers research reports on all reporting issuers that are current in their Exchange Act reporting (with the exception of blank check companies, shell companies and penny stock issuers); and

• includes a requirement that the broker or dealer publish research reports on the types of securities in question in the regular course of its business.The SEC has explained that the regular course requirement

under revised Rule 138 does not mean that the broker or dealer must have a history of publishing research reports about the particular issuer or its securities. Instead, the research report must cover the “same types of securities”.156

(iv) Rule 139 – publication of research about the securities being offered by an underwriterRule 139 provides that a broker or dealer participating in a registered offering by certain seasoned issuers can publish ongoing research about the issuer and its securities without being deemed to offer those securities by way of its research reports.157 Rule 139 research can take the form of issuer-specific reports, or more general reports covering an industry sector. Rule 139 covers Form F-3 eligible issuers that are current in their Exchange Act reporting for issuer-specific research reports; Exchange Act reporting companies for industry research reports; and certain foreign private issuers for both types of reports. However, the Rule also excludes research reports about blank check companies, shell companies and penny stock issuers from the scope of the safe harbour.• Issuer-specific reports:158 To qualify for the Rule 139 safe

harbour, the broker-dealer must publish issuer-specific research reports in the regular course of its business. That publication may not represent the initiation of publication of research about the issuer or its securities (or re-initiation of publication following discontinuation). The SEC has explained that this requirement means that the broker-dealer must have previously published at least one research report on the issuer or its securities, or have published one such report following discontinuation of coverage.159

• Industry reports:160 Rule 139 requires that the broker or dealer must publish research in the regular course of its business and, at the time of the publication of the research report, must include similar information about the issuer or its securities in similar reports.

PRACTICE POINTRule 139 no longer contains the prior requirement that the broker-dealer not make a recommendation in the report more favourable than that contained in previous reports, and in fact the broker-dealer need not have included any recommendation in its prior reports.161

Prospectus delivery(i) Prospectus-delivery requirementsOnce the registration statement becomes effective, and generally for 40 days thereafter,162 dealers may sell the registered securities (including in secondary market transactions) only if the confirmation of any sale is accompanied or preceded by the final prospectus included in the registration statement.163 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 US;164

• the prospectus-delivery period is 90 days in all other initial public offerings;165 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.166

(ii) Rule 172Under Rule 172, after the effective date of a registration statement:• written trade confirmations and notices of allocation of

securities are exempt from Section 5(b)(1)’s prohibition on non-conforming prospectuses; and

• any obligation to deliver a final prospectus is deemed to be met provided the issuer makes a good faith and reasonable effort to file a final prospectus by the required prospectus filing date under Rule 424 (and if it fails timely to file, it files the prospectus as soon as possible thereafter).To satisfy Rule 172, the registration statement cannot be the

subject of any stop orders and the issuer cannot be subject to any cease and desist proceedings. Furthermore, Rule 172 does not apply to employee benefit offerings registered on Form S-8.

(iii) Rule 173Under Rule 173, each underwriter or broker-dealer participating in an offering in which the final prospectus-delivery requirements apply may deliver, in lieu of a final prospectus, a notice to the effect that the sale was made pursuant to a registration statement or in a transaction in which a final prospectus would have been required to have been delivered in the absence of Rule 172. The notice—which is exempt from Section 5(b)(1)’s prohibition on non-conforming prospectuses—must be delivered not later than two business days following completion of the sale. Compliance with Rule 173 is not a condition for the Rule 172 exemption from prospectus delivery, and hence failure to send the required notice does not result in a violation of Section 5.167

(iv) Rule 174Under Rule 174, any obligation to deliver a prospectus under the Rule will be satisfied by complying with Rule 172. In other words, during the 25, 40 or 90-day period following effectiveness (depending on the type of transaction and whether the issuer was an Exchange Act reporting company prior to filing the registration statement), no physical prospectus needs to be delivered.

Free writing prospectuses and road shows 17

WKSIs and other issuersThe rules relating to free writing prospectuses draw a key distinction between four different types of issuers – WKSIs; seasoned issuers; unseasoned reporting issuers; and non-reporting issuers.

(i) WKSIsA WKSI168 is any issuer (including its majority-owned subsidiaries under certain circumstances) that:169

• meets the registrant requirements of General Instruction IA of Form S-3 or Form F-3, which include that the issuer:- has securities registered with the SEC under Section 12(b) of

the Exchange Act, a class of equity securities registered under Section 12(g) or is required to file reports under Section 15(d);

- has filed at least one annual report on Form 20-F;- has filed on time all material required to be filed with the

SEC during the 12 calendar months and any portion of a month immediately preceding the filing of the registration statement; and

- has not had any material defaults since the end of the last fiscal year;

• as of a date within 60 days of the determination date, has either:- a worldwide market value of outstanding voting and

nonvoting common equity170 held by non-affiliates of $700 million or more; or

- both (1) registered and issued at least $1 billion in aggregate principal amount of non-convertible debt or preferred stock for cash, not exchange, during the past three years, and (2) will only offer non-convertible debt or preferred stock (unless the issuer is also eligible to register a primary offering of its securities on Form S-3 or Form F-3); and

• is not an ineligible issuer or asset-backed issuer.171

(ii) Three other categories of issuersIn addition to WKSIs, there are three other categories of issuers: seasoned issuers; unseasoned issuers; and non-reporting issuers.172

• Seasoned issuers. Seasoned issuers are distinguished from WKSIs primarily by the size of their public float. However, a WKSI that is S-3 or F-3 eligible but is otherwise an ineligible issuer (for example, a WKSI that has engaged in certain Exchange Act violations) is considered a seasoned issuer.

• Unseasoned reporting issuers. An unseasoned reporting issuer is an issuer that is required to file Exchange Act reports, but does not satisfy the requirements of Form S-3 or Form F3 for a primary offering of its securities. A WKSI that is not current and timely in its Exchange Act filings and hence loses S-3 or F-3 eligibility is considered an unseasoned reporting issuer.

• Non-reporting issuers. A non-reporting issuer is an issuer that is not required to file Exchange Act reports.

Free writing prospectuses(i) OverviewSecurities Act Rules 164 and 433 allow issuers and underwriters to make written offers by way of a free writing prospectus after a registration statement has been filed. As noted above, WKSIs can use a free writing prospectus even before filing a registration statement under Rule 163. Free writing prospectuses will not have to meet the extensive form and content requirements of statutory prospectuses.

(ii) Definition of free writing prospectusA free writing prospectus is any “written communication” that constitutes an offer to sell or a solicitation of an offer to buy securities relating to a registered offering, that is used after a registration statement has been filed, other than:173

• a permitted preliminary or final statutory prospectus;• a communication delivered after effectiveness of a registration

statement that is accompanied or proceeded by a statutory prospectus.The term written communication for these purposes includes

any written or printed communication, any radio or TV broadcast (regardless of how transmitted), or any graphic communication.174 The term graphic communication covers all forms of electronic media, except for a communication that, at the time of the communication, originates live, in real-time to a live audience and does not originate in recorded form or otherwise as a graphic communication, although it is transmitted electronically.175

Examples of graphic communications that will be treated as free writing prospectuses include:• emails;• websites;• blast voicemail messages; and• CD-ROMs.

Communications that are not considered offers or prospectuses, such as Rule 134 or Rule 135 communications, communications benefiting from the Rule 168 or 169 safe harbours, and research reports exempted from the definition of offers, will not be deemed to be free writing prospectuses.176

Rule 164Under Rule 164, once a registration statement has been filed, a free writing prospectus of the issuer or any other offering participant will be deemed not to violate Section 5(b)(1)’s prohibition on the use of a non-conforming prospectus prior to effectiveness if:177

• the issuer is an eligible issuer (or, in the case of any offering participant other than the issuer, that participant has a “reasonable belief “ that the issuer is eligible);

• the offering is an eligible registered offering; and• the additional conditions of Rule 433 are met.

Ineligible issuers for these purposes include the same group that are ineligible to qualify as WKSIs, with one exception.178 An ineligible issuer (other than blank check companies, shell

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Free writing prospectuses and road shows


companies and penny stock companies) may nevertheless use a free writing prospectus consisting only of a description of the terms of the offering, such as a term sheet.179 Ineligible transactions include certain business combinations, as well as offerings on Form S-8 other than by a WKSI.180

Rule 433Rule 433 lays out the additional conditions for use of a free writing prospectus. These include the following.

(i) Prospectus-delivery requirementsIn connection with offerings of any Rule 164 eligible securities by WKSIs, and most primary offerings by seasoned issuers, the issuer and other offering participants may use a free writing prospectus at any time during the offering process once a registration statement has been filed.181 There is no requirement to deliver a statutory prospectus in connection with a WKSI or seasoned issuer free writing prospectus; a legend containing information regarding how to obtain a statutory prospectus suffices.

Non-reporting and unseasoned issuers, and other offering participants, may use a free writing prospectus if a statutory prospectus – including a price range in the case of an IPO – is on file with the SEC.182 In addition, the statutory prospectus must accompany or precede the free writing prospectus, with two exceptions:• once a statutory prospectus has been provided, if there is no

material change between that prospectus and the most recent statutory prospectus, then no additional statutory prospectus will need to be delivered; and

• in the limited situation where a free writing prospectus is not prepared by or on behalf of or used or referred to by the issuer or its underwriters – for example, an article by an unaffiliated journalist – and no consideration by the issuer or other offering participant is given for publication, no statutory prospectus will need to be provided (although one will need to be on file with the SEC prior to the communication).For electronic free writing prospectuses, this prospectus delivery

requirement can be met by including an active hyperlink to the statutory prospectus in the free writing prospectus.183 In other words, a physical prospectus will not need to be delivered if the free writing prospectus is delivered by email. As for WKSI and seasoned issuer free writing prospectuses, once the registration statement has become effective a final prospectus must precede or accompany any free writing prospectus used by a non-reporting or unseasoned issuer.

(ii) Information and legend requirementsUnder Rule 433, a free writing prospectus may include information “the substance of which is not included in the registration statement.”184 But this information must not “conflict with”:• information contained in the registration statement; or• information in the issuer’s Exchange Act reports that are

incorporated by reference into the registration statement.Free writing prospectuses must also contain a prescribed

legend.185

The SEC has explained that disclaimers of responsibility or liability that are impermissible in a statutory prospectus are also impermissible in free writing prospectuses.186 These would include disclaimers regarding accuracy, completeness or reliance by investors; statements requiring investors to read the registration statement; language indicating that the free writing prospectus is

not an offer; and, for filed free writing prospectuses, statements that the information is confidential.

(iii) Filing requirementsWith certain exceptions noted below, an issuer or offering participant must file a free writing prospectus with the SEC no later than the day the free writing prospectus is first used.

An issuer must file:187

• any issuer free writing prospectus, which is defined as:188

- a free writing prospectus prepared by or on behalf of the issuer; or

- a free writing prospectus used or referred to by the issuer;• any issuer information (that is, material information about the

issuer or its securities provided by or on behalf of the issuer) contained in a free writing prospectus prepared by or on behalf of or used by any other offering participant (“but not information prepared by or on behalf of a person other than the issuer on the basis of or derived from issuer information”);189 and

• a description of the final terms of the issuer’s securities contained in a free writing prospectus prepared by or on behalf of the issuer or any offering participant.Information is considered prepared or provided by or on behalf

of an issuer if the issuer or an agent or representative of the issuer authorises the communication or information or approves the communication or information before it is used.190 The SEC has stated that a selling security holder unaffiliated with the issuer is treated like any other offering participant, but a selling security holder that is an affiliate of the issuer and prepares, uses or refers to a free writing prospectus needs to consider whether it is acting by or on behalf of the issuer.191

Any other offering participant, such as an underwriter, must file a free writing prospectus it uses or refers to, and is distributed by it in a manner reasonably designed to lead to its “broad unrestricted dissemination.”192 The SEC has explained that a website restricted to an investment bank’s customers or a subset of its customers will not require filing, regardless of the number of recipients to which it is distributed.193 Similarly, an email sent by an underwriter only to its customers will not require filing, regardless of the number of customers receiving the email distribution.

There are certain exceptions to the requirement to file a free writing prospectus. These include:• issuers and other offering participants do not need to file

a free writing prospectus that does not contain substantive “changes from or additions” to a previously filed free writing prospectus;194

• issuers do not need to file issuer information contained in a free writing prospectus prepared by or on behalf or used by any other offering participant if that information is already included in a previously filed statutory or free writing prospectus relating to the offering;195 and

• issuers and other offering participants do not need to file a free writing prospectus that is a preliminary term sheet, although a free writing prospectus that is a final term sheet must be filed by the issuer within two days of the later of establishing the terms and the date of first use.196

(iv) Information on an issuer’s website197Under Rule 433, offers of securities contained on an issuer’s website or hyperlinked from the issuer’s website to a third party website will be free writing prospectuses that must be filed

Free writing prospectuses and road shows 19

(unless a filing exemption applies). Historical information about an issuer, however, that is identified as such and is located in a separate section of an issuer’s website will not be considered a free writing prospectus if that information has not been incorporated by reference into or otherwise included in a prospectus for the offering, or otherwise used or referred to in connection with the offering. Information on the issuer’s website, such as past earnings releases, may also be protected under Rule 168 or 169 without segregation, if the requirements of those rules are satisfied.

(v) Media free writing prospectuses – the Google provisionRule 433 provides that any written offer that includes information provided, authorised or approved by the issuer or any other offering participant that is prepared and disseminated by an unaffiliated media third party will be deemed to be an issuer free writing prospectus.198 Nevertheless, the requirements for prior or current prospectus delivery, legending and filing that would otherwise apply to these free writing prospectuses will be deemed satisfied if:199

• no payment is made or consideration given for the publication by the issuer or other offering participants; and

• the issuer or other offering participant files the media free writing prospectus with the required legend within four business days after the issuer or other offering participant becomes aware of publication or dissemination (provided that the free writing prospectus need not be filed if the substance of the written communication has previously been filed).Any filing of a media free writing prospectus in these

circumstances may include information that the issuer or offering participant believes is needed to correct information included in the free writing prospectus.200 In addition, in lieu of filing the media free writing communication as actually published, the issuer or offering participant may file a copy of the materials provided to the media, including transcripts of interviews.

(vi) Record retentionRule 433 requires issuers and other offering participants to retain all free writing prospectuses they have used and that have not been filed for three years from the initial bona fide offering of the securities.201

(vii) Minor deviations – Rule 164The failure to comply with the conditions of Rule 433 will result in a violation of Section 5(b)(1). Rule 164 provides some relief from the harsh consequences of such an event in the case of certain “immaterial or unintentional” deviations from the requirements of Rule 433. In particular:202

• a failure to file or delay in filing a free writing prospectus will not be a violation so long as a good faith and reasonable effort was made to comply with the filing requirement and the free writing prospectus is filed as soon as practicable after the discovery of the failure to file;

• a failure to include the required legend will not be a violation, so long as (1) a good faith and reasonable effort was made to comply with the legending requirement, (2) the free writing prospectus is amended to include the required legend as soon as practicable after the discovery of the omitted or incorrect legend and (3) if the free writing prospectus has been transmitted without the required legend, it must be retransmitted with the legend by substantially the same means as, and directed to

substantially the same purchasers to whom, the original free writing prospectus was sent; and

• a failure to comply with the record retention requirements of Rule 433 will not be a violation so long as a good faith and reasonable effort is made to comply with the record retention requirements.

Road showsRule 433 defines a road show as an offer (other than a statutory prospectus) that contains a presentation regarding an offering by one or more members of an issuer’s management, and includes discussion of the issuer, management or the securities being offered.203

Under Rule 433, a road show that is deemed to be a written communication is a free writing prospectus, but with one exception need not be filed.204 Bear in mind that the term written communication includes most electronic communications, but not communications (other than TV broadcasts) in real-time to a live audience that do not originate in recorded form.205 Accordingly, a live road show is not a free writing prospectus, even if it is simultaneously retransmitted to other locations (such as overflow rooms). In addition, slides or other visual aids transmitted simultaneously with communications of this sort would also not be considered written communications.206

The one exception where filing is required is for road shows that are written communications and hence free writing prospectuses (such as pre-recorded electronic road shows) in connection with an IPO.207 But even these road shows need not be filed if the issuer makes at least one version of a bona fide electronic road show208 available without restriction electronically to any person (for example on its unrestricted website).209 Prerecorded road shows outside the context of an IPO are considered to be free writing prospectuses but need not be filed.

PRACTICE POINTIn view of Rule 433, the SeC has withdrawn a series of no action letters that governed the use of electronic road shows in connection with registered offerings.210 embedded in these no-action letters were many restrictions and conditions that no longer apply to electronic road shows under Rule 433. there is no longer any reason, for example, to limit the audience of an electronic road show in any way, to permit the re-transmission only of a live presentation in front of an audience, to limit viewers to seeing it only within a 24-hour period or a limited number of times, or to prohibit the printing or copying of the road show.

PRACTICE POINTCertain road shows (such as pre-recorded road shows) may be considered free writing prospectuses. Bear in mind that Rule 433 limits the content of legends on free writing prospectuses, and prohibits disclaimers that are commonly inserted in many road show slides today. Failure to comply with Rule 433’s legending requirements would potentially turn a written road show into a non-conforming prospectus violating Section 5(b)(1).


GeneralAs discussed above, the process of registering a securities transaction generally requires a foreign private issuer to meet specific disclosure and financial statement requirements and to undergo the SEC review process. By contrast, unregistered transactions are not subject to SEC review and are typically less complex and time-consuming to execute. Many foreign private issuers accordingly choose to structure securities offerings in the US to take advantage of available exemptions from registration.

PRACTICE POINTUnregistered transactions do not require the filing of a registration statement with the SeC and generally do not turn the issuer into a reporting company that is required to file annual reports with the SeC and comply with Sarbanes-Oxley. a key attraction of these transactions for foreign private issuers that do not prepare their financial statements under US Gaap or IaSB IFRS is that they can include their financial statements prepared under local Gaap/non-IaSB IFRS and need not provide a reconciliation to US Gaap. the time and expense involved in a US Gaap reconciliation for foreign private issuers not utilising US Gaap or IaSB IFRS can be a significant concern when seeking to access the US capital markets. For further discussion on this, see What must be provided? Reconciliation to US Gaap in chapter 6.

Regulation S – offshore offeringsRegulation S sets out the conditions under which an offering outside the US may be made without registration under the Securities Act. It provides a safe harbour exemption for offers and sales by issuers, and a resale exemption. Under Regulation S, unregistered offers and sales may generally be made if:• the offer or sale is made in an offshore transaction; and• there are no directed selling efforts in the US.211

We refer to these as the Regulation S General Conditions.An offshore transaction is defined as an offer which is not made to a person in the US, and either:• at the time the buy order is originated, the buyer is outside the

US or the seller (and any person acting on the seller’s behalf ) reasonably believes that the buyer is outside of the US;

• for purposes of the issuer safe harbour, the transaction is executed in, on or through the physical trading floor of an established foreign securities exchange located outside of the US; or

• for purposes of the resale safe harbour, the transaction is executed in, on or through the facilities of a designated offshore securities market and neither the seller (nor any person acting on the seller’s behalf ) knows that the transaction has been prearranged with a buyer in the US.212

Directed selling efforts is broadly defined to include any activities

that have, or can reasonably be expected to have, the effect of conditioning the market in the US for the securities being offered in reliance on Regulation S.213 Prohibited efforts include mailing offering materials into the US; conducting promotional seminars in the US; granting interviews about the offering in the US (including by telephone); or placing advertisements with radio or television stations broadcasting in the US.214 Importantly, legitimate selling activities in the US in connection with concurrent US offerings—whether registered or private—do not constitute directed selling efforts.215

PRACTICE POINTa foreign private issuer that is a reporting issuer with the SeC may be required to furnish a copy of an offering memorandum relating to a Regulation S offering on Form 6-K (if, for example, it files that offering memorandum with a stock exchange on which its securities are listed, and the exchange makes the offering memorandum public). this will generally not constitute directed selling efforts.216

PRACTICE POINTthe safe harbours of Regulation S are not exclusive and parties may use any other applicable exemptions provided by the Securities act.217 Regulation S only applies to the registration requirements of the Securities act and does not limit the applicability of the US federal anti-fraud laws or any state laws relating to securities offerings.218 as a consequence, a Regulation S transaction may be exempt from registration under the Securities act but—at least in theory—could still trigger anti-fraud liability in the US.219

(i) The issuer safe harbourSecurities Act Rule 903 provides a safe harbour for issuers, distributors (that is, any underwriter, dealer, or other person who participates pursuant to a contractual arrangement in the distribution of the securities offered or sold in reliance on Regulation S),220 their respective affiliates, and persons acting on their behalf. The particular requirements for the safe harbour depend on the “category” applicable to the transaction.

(a) Category 1This category has no requirements other than the Regulation S General Conditions, and is available for:221

• securities offered by foreign issuers222 who reasonably believe at the commencement of the offering that there is no substantial US market interest 223 in the securities offered;

• securities offered and sold in an overseas directed offering;224

• securities backed by the full faith and credit of a foreign government; or

CHapteR 5

Key exemptions from Securities Act registration

Key exemptions from Securities Act registration 21

• securities offered and sold pursuant to certain employee benefit plans established and administered under the laws of a foreign country.

PRACTICE POINTeven if Category 1 is available, market practice for debt offerings is often to follow Category 2 restrictions where there is a concurrent Rule 144a offering.

(b) Category 2The second category involves securities that are not eligible for Category 1 and that are either (1) equity securities225 of a foreign issuer that is a reporting company under the Exchange Act or (2) debt securities226 of reporting issuers (domestic or foreign) and non-reporting foreign issuers.227 Issuers in this category may take advantage of the safe harbour if the following conditions are met along with the Regulation S General Conditions:• Certain offering restrictions228 must be adopted,229 including:

- each distributor must agree in writing that all offers and sales during a 40-day distribution compliance period may be made only in accordance with safe harbours under Regulation S, pursuant to registration under the Securities Act or an exemption from registration; and

- prospectuses, advertisements, and all other offering materials and documents (other than press releases) used in connection with offers and sales during the distribution compliance period must disclose that the securities are not registered under the Securities Act and cannot be sold in the US or to US persons (other than distributors) unless so registered or an exemption from registration is available.230

- During the 40-day distribution compliance period, offers and sales of the security cannot be made to a US person other than a distributor231 (although exempt sales, such as to QIBs pursuant to Rule 144A, may be made).232

- Any distributor selling securities to another distributor, dealer, or person receiving a selling commission must deliver, during the 40-day distribution compliance period, a confirmation or notice to the purchaser stating that the purchaser is subject to the same resale restrictions as the distributor.233

• The 40-day distribution compliance period begins on the later of the date of the closing or the date on which securities were first offered to persons other than distributors (generally, the pricing date).234

(c) Category 3The third category is a catch-all and has the most restrictive conditions. It includes all securities that are not eligible for Category 1 or 2, such as any securities of a non-reporting domestic US issuer, equity securities of a reporting domestic US issuer and equity securities of a non-reporting foreign issuer (with substantial US market interest in the equity securities of that issuer).235 In addition to the Regulation S General Conditions, an issuer must also meet the following conditions:• Each of the offering restrictions described above for Category 2

must be met,236 except that a one-year distribution compliance period (or six-month distribution compliance period for reporting issuers) applies to offerings of equity securities237 and a 40-day distribution compliance period applies to offerings of debt securities.238

• During the applicable distribution compliance period, offers or sales cannot be made to a US person other than a distributor239 (although exempt sales, such as to QIBs pursuant to Rule 144A, may be made) and, in the case of equity securities:- the purchaser (other than a distributor) must certify that it is

not a US person;- the purchaser must agree to resell the securities only in

accordance with Regulation S, pursuant to registration under the Securities Act or an exemption from registration; and

- certain other restrictions must be satisfied, including a prohibition against corporate registration of transfers not made in accordance with Regulation S.240

• Debt securities generally must be represented upon issuance by a temporary global security not exchangeable for definitive securities until the expiration of the 40-day distribution compliance period and, for persons other than distributors, until certification of beneficial ownership by a non-US person.241

• Any distributor selling the securities to another distributor, dealer, or person receiving a selling commission must deliver, during the applicable distribution compliance period, a notice or confirmation to the purchaser stating that the purchaser is subject to the same resale restrictions as the distributor.242

PRACTICE POINTequity securities issued by a domestic US issuer (whether reporting or non-reporting) pursuant to Regulation S are considered restricted securities243 subject to limitations on resale, and remain restricted securities even after an exempt resale pursuant to Regulation S.244 as a practical matter, the required certifications and other restrictions have limited the use of Regulation S for exempt sales of equity securities by domestic US issuers.

(ii) The resale safe harbourSecurities Act Rule 904 provides a safe harbour for offshore resales by persons other than issuers, distributors, their affiliates, and persons acting on their behalf. Resales of securities by these persons are subject only to the Regulation S General Conditions.245

The resale safe harbour may also be relied upon by dealers and persons receiving selling concessions, except that the following additional conditions apply if the securities being resold are of the type included within the Category 2 or Category 3 safe harbour and the resale is within the distribution compliance period imposed with respect to those securities:• the seller and any person acting on behalf of the seller must not

knowingly offer or sell the securities to a US person; and• if the purchaser of the securities is also a securities professional,

then the seller must deliver a confirmation or other notice stating that the securities may be offered and sold during the distribution compliance period only in accordance with Regulation S, pursuant to registration under the Securities Act or an exemption from registration.246

The resale safe harbour may also be relied upon by certain officers and directors who are affiliates of the issuer or a distributor, provided that the Regulation S General Conditions are met and no remuneration is paid other than customary broker’s commissions.247


(iii) Violation of safe harbour conditionsThe consequences of a breach of the conditions for use of Regulation S could be significant, since this would potentially allow buyers of the securities to rescind their purchases.248 If an issuer, distributor, any of their respective affiliates, or any person acting on their behalf fails to comply with the Regulation S General Conditions, then the issuer safe harbour will not be available to any person in connection with the offer or sale of the securities. However, if any of these persons 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 who fails to comply (as well as its agents and affiliates) will be unable to rely on the issuer safe harbour exemption. In that case, the fact that there may have been a breach on the part of the issuer, distributor, their affiliates, or agents (other than certain officers or directors relying on the resale exemption) does not generally negate a resale safe harbour exemption for an unaffiliated person.249

Section 4(2) private placementsSection 4(2) of the Securities Act exempts “transactions by an issuer not involving any public offering”. The term public offering is not defined in the Securities Act and the scope of the Section 4(2) exemption has largely evolved through case law, SEC pronouncements and market practice. It is hence not possible to map the borders of Section 4(2) precisely.

The core issue is whether the persons to whom securities are offered need the protection of the Securities Act – that is, whether they are sufficiently sophisticated so as to be able to fend for themselves.250 In determining whether a transaction is a public offering, relevant factors include the number of offerees and their relationship to each other and the issuer, the number of securities being offered, the size of the offering and the manner in which the offering is conducted.251 All of the surrounding circumstances must be considered in this analysis.252

PRACTICE POINTSection 4(2) is only available for offers and sales by an issuer; resales of securities acquired from an issuer require a separate exemption (such as Rule 144a, discussed below).

Private placements under Section 4(2) typically involve, among other things:• a non-public offering (that is, an offering without any form of

general solicitation or advertising);• to a limited number of offerees;• who are buying for investment and not with a view to

distribution; and• who are sophisticated investors and have been provided with or

have access to information about the issuer.253

In addition, the securities issued in a private placement generally include restrictions on resales by the purchasers (such as through the use of stop-transfer orders, restrictive legends and the like).254

Regulation D private placements(i) BackgroundLargely in response to the difficulties experienced by practitioners in interpreting the availability of Section 4(2), the SEC adopted Regulation D to provide a clearly defined non-exclusive safe harbour from registration for offers and sales of securities by issuers.

Regulation D differentiates transactions based on the size of the offerings and the types of investors to whom securities are being offered. Regulation D draws a core distinction between accredited investors and other, non-sophisticated investors.

Accredited investors include:255

• banks, savings and loan associations, and similar institutions;• insurance companies, investment companies, small business

investment companies and certain employee benefit plans;• private business development companies;• certain tax-exempt organisations;• corporations with assets over $5 million;• directors, executive officers, and persons holding similar

positions with or in the issuer;• natural persons with a net worth (alone or with that person’s

spouse) exceeding $1 million;• natural persons with individual income in excess of $200,000

per year or, with that person’s spouse, in excess of $300,000 per year;

• certain trusts with assets in excess of $5 million; and• any entity owned entirely by such persons.

(ii) Regulation D general conditionsRegulation D provides certain general conditions (the Regulation D General Conditions), including:• Integration:256 All sales that are part of the same Regulation D

offering must meet all of the terms and conditions of Regulation D. However, offers and sales made more than six months before or after the completion of a Regulation D offering will generally not be considered part of the same Regulation D offering.

• Information requirements: Regulation D’s information requirements depend on the type of transaction and the type of participants in the transaction. The issuer must provide any purchaser that is not an accredited investor with extensive information regarding the issuer. If the issuer is not an Exchange Act reporting company, that information includes non-financial and financial information substantially equivalent to that which it would have been required to provide in a registration statement under the Securities Act (for example, Form F-1 in the case of a first-time foreign registrant).257 For a foreign private issuer that is a reporting company, it may provide its most recent annual report on Form 20-F.258 The issuer must also make available to each purchaser the opportunity to ask questions about the offering or the issuer.259

PRACTICE POINTRegulation d’s information requirements effectively mean that financial information provided by a foreign private issuer to a non-accredited investor must be prepared in accordance with US Gaap or IaSB IFRS, or if prepared in local Gaap/non-IaSB IFRS, be reconciled to US Gaap.260

• Limitation on offering:261 Neither the issuer nor anyone acting on its behalf may use any “general solicitation” or “general advertising” to offer or sell the securities.

• Limitation on resale:262 Securities acquired in a Regulation D transaction are restricted securities that cannot freely be resold absent registration or an exemption from registration. The issuer must take reasonable care to make sure that purchasers would not be deemed to be statutory underwriters (that is, engaged in


a distribution of the securities), which is typically satisfied by requiring purchaser representations about investment intent, restrictive legends on certificates and restrictions on transfer.

• Form D:263 The issuer must file a notice to the SEC on Form D no later than 15 days after the first sale of securities. In February 2008, the SEC adopted rules updating the requirements of Form D,264 permitting electronic filing of Form D as of September 15 2008, and requiring electronic filing of Form D beginning March 16 2009.265

(iii) Rule 504 – offers and sales not exceeding $1 millionRule 504 provides an exemption from registration for limited offerings and sales of securities not exceeding $1 million in any 12-month period.266 Issuers subject to the reporting requirements of the Exchange Act and investment companies, among others, may not use this exemption.267 All of the Regulation D General Conditions apply to Rule 504 transactions, other than Regulation D’s information requirements.268

(iv) Rule 505 – offers and sales not exceeding $5 millionRule 505 contains an exemption for limited offerings and sales of securities not exceeding $5 million in a 12-month period.269 An unlimited number of accredited investors (subject to the limitations on general solicitation and general advertising mentioned above) and up to 35 non-accredited investors may purchase securities in a Rule 505 offering.270 All of the Regulation D General Conditions apply to Rule 505 transactions, except that Regulation D’s information requirements do not apply to any purchasers that are accredited investors.271

(v) Rule 506 – unlimited offering amountsRule 506 closely resembles Rule 505 except that the offering amount is not limited. Like Rule 505, an unlimited number of accredited investors (subject to the limitations on general solicitation and general advertising) and up to 35 non-accredited investors may purchase securities272 and all of the Regulation D General Conditions apply, except for Regulation D’s information requirements in the case of accredited investors.273 In addition, each purchaser of the securities other than an accredited investor must demonstrate to the issuer’s reasonable belief that the purchaser, “either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.”274 Issuers and their placement agents typically satisfy this requirement by having potential investors complete “investor questionnaires” demonstrating their accredited status or their sophistication.

(vi) Rule 508 – deviations from Regulation DUnder Rule 508, a person may establish the existence of an exemption under Regulation D with respect to any purchaser even if the person failed to meet one or more of the requirements of Regulation D. In this case, the person must show that:• the failure to comply did not pertain to a term, condition, or

requirement directly intended to protect the purchaser;• the failure to comply was “insignificant to the offering as a

whole;” and• the person made a good faith and reasonable attempt to comply

with the relevant requirements of Regulation D.

(vii) Certain blue sky issuesSecurities issued under Rule 506 are exempt from most state securities regulation because they are deemed to be “covered securities” under the Securities Act.275

Resales of privately placed securitiesBoth Section 4(2) and Regulation D apply only to transactions by issuers,276 and neither provides an exemption for resales. Purchasers who wish to resell securities acquired in a private placement must look to certain resale exemptions—in particular, the exemptions provided by Rule 144A, “Section 4(1-1/2)” or Rule 144 under the Securities Act.

(i) Rule 144A resales to QIBsAlthough market participants often refer to Rule 144A offerings, as a technical matter Rule 144A transactions involve two steps: sales to underwriters (or directly to institutional initial purchasers) under Section 4(2) or Regulation S, followed by resales to QIBs under Rule 144A. As a result, Rule 144A transactions follow various limitations not found directly in Rule 144A itself (such as restrictions on publicity) as well as the explicit requirements of Rule 144A.

PRACTICE POINTSecurities purchased under Rule 144a are deemed restricted securities and can only be resold pursuant to Rule 144a or another exemption (including the Regulation S resale safe harbour described above).277 For discussion on Rule 144 and recent changes affecting the status of restricted securities, see Rule 144 below.

(a) Definition of QIBA QIB is defined to include any of the following entities acting for its own account or the account of other QIBs, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the QIB:278

• US-regulated insurance companies;• investment companies registered under the Investment

Company Act;• small business investment companies licensed by the US Small

Business Administration;• certain employee benefit plans;• certain trusts;• certain tax-exempt organisations and corporations;• certain registered investment advisers;• certain registered broker-dealers; and• US banks and savings and loan associations, and non-US banks,

savings and loan associations, and equivalent institutions.

(b) Rule 144A requirementsThe requirements for a valid Rule 144A transaction include the following:• Sales to QIBs:279 the securities must be offered and 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:280 the seller (and any person acting on its behalf ) must take “reasonable steps” to ensure that the buyer is aware that the seller is relying on Rule 144A (generally


by so noting in the offering memorandum, or in the trade confirmation in the case of an undocumented offering);

• Fungibility:281 the securities must not be, when issued, of the same class as securities listed on a US national securities exchange (or, in the case of convertible or exchangeable securities, have an effective conversion premium of 10% or more); and

• Information delivery:282 if the issuer is a reporting company under the Exchange Act or is exempt from reporting under Rule 12g3-2(b), a seller wishing to resell the securities is not obligated to furnish the purchaser with information concerning the issuer. However, if the issuer is not a reporting company and is not exempt under Rule 12g3-2(b), a holder or the purchaser must have the right to obtain from seller or issuer, upon request, certain minimal “reasonably current” information concerning the business of the issuer and its financial statements.

(c) A/B exchange offersRule 144A is particularly popular for global offerings of debt securities, in part because of a line of SEC “no-action” letters that permits issuers who have sold debt securities to QIBs pursuant to Rule 144A subsequently to register an exchange offer of identical securities for the Rule 144A securities.283 This procedure allows QIBs, subject to limited exceptions, to obtain freely tradable registered securities in exchange for the restricted, legended securities they obtained in the Rule 144A offering. Because the exchange offer will go through the SEC registration process, most issuers and underwriters seek to conform the original Rule 144A offering memorandum as closely as possible to the requirements of a full registration statement.

The availability of this exchange procedure allows issuers and underwriters to complete transactions quickly under Rule 144A to take advantage of market conditions, but with the expectation that the issuer will promptly register an exchange of identical securities. As a result, purchasers generally do not require the “liquidity discount” they would otherwise demand if the securities were to remain private. In addition to promising public registration under the Securities Act, the issuer also typically agrees to file periodic reports with the SEC under the Exchange Act, thereby enhancing public information and liquidity.

Recent amendments to Rule 144, specifically the shortening of the holding period applicable to the sale of restricted securities, may reduce the significance of registration rights in private offerings. US and non-US issuers assessing whether to become reporting companies under the Exchange Act should carefully study market practice with respect to registration rights as it evolves in response to the recent amendments.284 For a more detailed discussion on the recent amendments to Rule 144, see Rule 144 below.

(ii) “Section 4 (1-1/2)” resalesMarket practice has developed the so-called “Section 4 (1-1/2)” exemption for resales of privately placed securities.285 (Section 4 (1-1/2) does not actually appear in the Securities Act and is instead the name given to the practice of certain resales of private securities.) Under this exemption, securities that are initially privately placed may be resold if the resales essentially comply with the requirements for the original Section 4(2) private placement.

Typical restrictions in a Section 4 (1-1/2) transaction include that resales may only be made:• on a non-public basis;• to sophisticated investors who could have participated in the

original private placement and who are buying for investment

and not with a view to distribution; and• subject to limitations on onward resales (such as letters of

representation from purchasers or appropriate “no registration” opinions of counsel).

(iii) Rule 144Rule 144 provides conditions under which non-affiliates of an issuer may resell restricted securities to the public without registration under the Securities Act, and affiliates of the issuer may resell restricted or unrestricted securities without registration.286

Restricted securities include:287

• securities acquired directly or indirectly from an issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving a public offering;

• securities acquired from the issuer that are subject to the resale limitations of Regulation D;

• securities acquired in a Rule 144A transaction; and• equity securities of domestic US issuers acquired in Regulation

S transactions.An affiliate of an issuer for these purposes is a person that,

directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer.288

It is important to note that Rule 144 treats resales by affiliates and non-affiliates differently. An affiliate’s resales of any securities of an issuer, whether restricted or not, are subject to Rule 144, while only resales of restricted securities by non-affiliates are brought within the Rule.

Rule 144 requires:• Holding period applicable to sales of restricted

securities by a non-affiliate: non-affiliate holders of restricted securities of a reporting company that is current in its SEC filings may resell these securities without any restriction after satisfying a six-month holding period. Non-affiliate holders of restricted securities of a reporting company, even if it is not current in its SEC filings, may resell those securities without restriction after satisfying a one-year holding period. A holding period of one-year will also apply to a non-affiliate’s sale of restricted securities of a non-reporting company;

• Holding period applicable to sales of restricted securities by an affiliate: affiliates of reporting companies that comply with the current public information, manner of sale (for equity securities), volume limitation and filing requirements may resell the securities after satisfying a minimum six-month holding period. An affiliate of a non-reporting company must satisfy a one-year holding period, and thereafter must still comply with the current public information, manner of sale (for equity securities), volume limitations of the rule and filing requirements;

• Sales of restricted securities by affiliates after the holding period: after the six-month or one-year minimum holding period has expired (whichever is applicable), limited resales of restricted securities by affiliates may be made if:- Information:289 either the issuer is an Exchange Act reporting

company that has been subject to reporting requirements for 90 days prior to the sale and has filed all required reports in the 12 months prior to the sale, or certain other information about the issuer must be publicly available;

- Volume limitations:290 the amount of securities sold, together with all sales of restricted or other securities of the same class for the account of such person within the preceding three


months, must not exceed the greater of (1) 1% of the shares or other units of the class outstanding; or (2) the average weekly reported trading volume on US national securities exchanges or on Nasdaq during the prior four weeks; or (3) if the securities sold are debt securities, then 10% of the principal amount of the tranche attributable to the securities sold;

- Manner of sale:291 if the securities to be sold are equity securities, they must be resold in (1) unsolicited brokers’ transactions; (2) transactions with a market maker; or (3) riskless principal transactions; and

- Notice of sale:292 if more than 5,000 shares or $50,000 worth of securities are resold in any three-month period, the seller must file a notice on Form 144 with the SEC.

Rule 802 – securities issuances in connection with cross-border exchange offers and business combinations(i) GeneralSecurities Act Rule 802 provides an exemption from registration for offers and sales in any exchange offer or business combination involving the acquisition of securities of a foreign private issuer. Rule 802 does not impose a dollar limitation on the value of securities sold to US investors in an exempt transaction, and both domestic US issuers and foreign private issuers may rely on Rule 802, and it is available for exchanges in respect of equity or debt securities.293 Rule 802 provides an exemption only for the issuer of securities and not for affiliates of the issuer or any person who seeks to resell the securities.294 Securities issued pursuant to the Rule 802 exemption will take on the restricted or unrestricted status (for purposes of Rule 144) to the same extent and proportion of the securities for which they were exchanged.295 Accordingly, resales of securities acquired pursuant to Rule 802 may be restricted depending on their restricted or unrestricted status. For a more detailed discussion on this, see Resales of privately placed securities, in Chapter 5.

(ii) Requirements of Rule 802The requirements of Rule 802, which were recently amended in 2008, are as follows:• Limitation on US ownership:296 US holders of securities

must hold 10% or less of the class of securities that is the subject of the exchange offer or business combination. However, if there are no US shareholders, Rule 802 is not available.297

• Calculation of 10% limit: A US holder is defined as a person resident in the US.298 In determining whether or not a holder is a US resident, a bidder must look through the record ownership of securities held by brokers, dealers, banks and other nominees located in the US, the target company’s jurisdiction of incorporation, and the jurisdiction that is the primary trading market of the target securities.299 If, after “reasonable inquiry,” a bidder is unable to obtain information about the amount of securities held by US residents, it may assume that the customers are residents of the jurisdiction in which the nominee has its principal place of business.300 The calculation date is a date no more than 60 days before or 30 days after the public announcement of the business combination.301 (If the bidder is unable to make the calculation within these time frames, the calculation may be made as of the most recent practicable date before the public announcement, but in no event earlier than 120 days before the public announcement.) 302 However, the

calculation excludes securities held by the bidder.303

• Equal treatment of US holders; “Blue Sky”:304 The bidder must permit US holders of securities to participate in the exchange offer or business combination on terms at least as favourable as those offered to other holders, but is not required to extend the offering into any US state that would require registration or qualification of the transaction.

• Informational documents in the US: If the bidder publishes or otherwise disseminates an informational document to security holders in connection with the exchange offering or business combination, it must furnish an English language translation of that document to the SEC under cover of Form CB by the first business day after publication or dissemination, and must also file a consent to service of process on Form F-X.305 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.306 In addition, if the bidder disseminates information by publication in its home jurisdiction, it must publish the information in a manner reasonably calculated to inform US security holders of the offer.307

• Legends:308 Any US offering documentation must contain a legend regarding the non-US nature of the transaction and the bidder’s disclosure practices, and must state that investors may have difficulty in enforcing rights against the bidder and its officers and directors.

• Restricted securities:309 The securities acquired in a Rule 802 transaction will be restricted securities to the same extent and proportion as the target securities sought in the exchange offer and business combination (in other words, restricted securities will yield restricted securities, and unrestricted securities will yield unrestricted securities).

• Not an Investment Company:310 Rule 802 does not apply to an exchange offer or a business combination by an investment company within the meaning of the Investment Company Act that is registered or required to be registered under that Act (other than a registered closed-end investment company).

Rule 801 – rights offerings(i) GeneralSecurities Act Rule 801 provides an exemption from registration for certain rights offerings by foreign private issuers. A rights offering is defined for these purposes as the sale for cash of equity securities in which existing securities holders of a particular class (including holders of ADRs) are granted the right to purchase additional securities of that class, and the number of additional securities the holders may purchase is in proportion to the amount of securities they hold on the record date of the offering.311

Like Rule 802, Rule 801 does not impose a dollar limitation on the value of securities sold to US investors in an exempt transaction, but unlike Rule 802 only foreign private issuers may rely on Rule 801.312 Rule 801 provides an exemption only for the issuer of securities and not for affiliates of the issuer or any person who seeks to resell the securities.313 Securities issued pursuant to the Rule 801 exemption will take on the restricted or unrestricted status (for purposes of Rule 144) to the same extent and proportion of the securities held by the security holder of the class with respect to which the rights offering was made, as of the record date for the rights offering. Accordingly, resales of securities acquired pursuant to Rule 801 may be restricted depending on their restricted or unrestricted status. For a more


detailed discussion on this, see Resales of privately placed securities, in Chapter 5.

(ii) Requirements of Rule 801The requirements of Rule 801 are as follows:• Limitation on US ownership: US securities holders must

hold 10% or less of the class of securities that is the subject of the rights offering.314 The calculation is done in the same manner as the calculation under Rule 802 exemption, except that the calculation keys off the record date of the rights offering.315 As for Rule 802, if there are no US shareholders, Rule 801 is not available.316

• Equal treatment of US security holders:317 The bidder must permit US security holders to participate in the rights offering on terms at least as favourable as those offered to other holders, but is not required to extend the offering into any US state that would require registration or qualification of the transaction.

• Informational documents in the US: If the issuer publishes or otherwise disseminates an informational document to security holders in connection with the rights offering, it must furnish an English-language translation of that document to the SEC under cover of Form CB by the first business day after publication or dissemination, and must also file a consent to service of process on Form F-X.318 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.319 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.320

• Eligibility of securities:321 The securities offered in the rights offering must be equity securities of the same class as the securities held by offerees in the US (directly or through ADRs).

• Limitations on transfer:322 The terms of the rights must prohibit transfers by US security holders except in accordance with Regulation S.

• Legends:323 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.

Rule 701 – compensatory benefit plansRule 701 under the Securities Act provides an exemption from registration for offers and sales of securities pursuant to certain compensatory benefit plans.324

(i) Eligible issuersRule 701 is available to any issuer that is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, and that is not an investment company registered or required to be registered under the Investment Company Act.325 This includes foreign private issuers that have never listed their securities in the US or offered them to the public in the US, or that benefit from the exemption from Exchange Act registration provided by Rule 12g3-2(b). If an issuer becomes subject to Exchange Act reporting after it has made offers in compliance with Rule 701 (for example, by conducting a public offering) it may nevertheless rely on Rule 701 to sell securities previously offered to the persons to whom

the offers were made.326 In addition, a reporting issuer may rely on Rule 701 to the extent it guarantees the payment of a subsidiary’s securities that are sold under Rule 701.327

Rule 701 is only available to the issuer of securities, and not to any of its affiliates.328 It may also not be used for capital-raising transactions.329

(ii) Eligible transactionsRule 701 exempts offers and sales of securities issued under a written compensatory benefit plan (or written compensation contract) established by the issuer, parent of the issuer, majority-owned subsidiary, or majority-owned subsidiary of the issuer’s parent.330 A compensatory benefit plan for these purposes means any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan.331

(iii) Eligible plans and participantsThe plan must be limited to employees, directors, general partners, trustees (where the issuer is a business trust), officers, consultants and advisers, and family members332 of those persons who acquire the securities by gift or a domestic relations order.333 Offers and sales may be made to former employees, directors, general partners, trustees, officers, consultants and advisers only if those persons were employed by or provided services to the issuer at the time the securities were offered.334

Certain additional requirements apply to consultants and advisers. In particular, Rule 701 is only available to consultants and advisers if:335

• they are natural persons;• they provide bona fide services to the issuer, its parents, its

majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parent; and

• the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer’s securities.

(iv) Amounts that may be offered and soldAny amount of securities may be offered under Rule 701.336 Sales, however, are limited. In particular, under Rule 701, the aggregate sales price or amount of securities sold in reliance on Rule 701 during any consecutive 12-month period must not exceed the greatest of the following:337

• $1 million;• 15% of the total assets of the issuer, measured at the issuer’s

most recent balance sheet date (or of the issuer’s parent if the issuer is a wholly-owned subsidiary and the securities represent obligations that the parent fully and unconditionally guarantees); or

• 15% of the outstanding amount of the class of securities being offered and sold in reliance on Rule 701, measured at the issuer’s most recent balance sheet date.The term aggregate sales price means the sum of all cash,

property, notes, cancellation of debt or any other consideration (including the value of the employee’s services) received by the issuer for the sale of its securities.338 The aggregate sales price is calculated on the date of sale.339

(v) Disclosure requirementsAn issuer must deliver a copy of the plan to investors.340 In


addition, if the aggregate sales price or amount of securities issued under Rule 701 exceeds $5 million within any 12-month period, Rule 701 requires the issuer to provide each purchaser with certain information within a reasonable period of time before the date of sale, including:341

• if the plan is subject to the US Employee Retirement Income Security Act of 1974 (ERISA), a copy of the ERISA summary plan description;

• if the plan is not subject to ERISA, a summary of the plan’s material terms;

• risk factors related to the securities being offered and the issuer; and

• financial statements required to be furnished by Part F/S of Form 1-A under Regulation A (as of a date no more than 180 days before the sale of securities), which must either be prepared in accordance with US Gaap or IASB IFRS, or if prepared in local Gaap/non-IASB IFRS must be reconciled to US Gaap.342

Historically, financial statements were required to either be prepared in accordance with US Gaap, or be reconciled to US Gaap, which posed significant challenges for certain non-US issuers seeking to rely on Rule 701. To facilitate stock ownership and compensatory plans for employees of foreign private issuers, the SEC has removed the US Gaap reconciliation requirement for foreign private issuers that prepare financial statements in accordance with IASB IFRS.343 However, as the financial statements must be no more than 180-days old, foreign private issuers that report financial results on a semi-annual basis are subject to a “blackout” period each year from the last day of the first half of the financial year (June 30, for calendar-year reporting companies) until the half-year results are released and provided to plan participants, during which time Rule 701 is not available.

Note that issuances under Rule 701 remain subject to the antifraud provisions of the US federal securities laws. An issuer should consider whether disclosure in addition to that specified above is appropriate (such as MD&A or a developed business description).

(vi) No integrationSecurities offerings under Rule 701 are not subject to integration with any other offers or sales by the issuer (including other unregistered offerings).344

(vii) Resale limitationsSecurities issued under Rule 701 are deemed to be restricted securities within the meaning of Rule 144 under the Securities Act.345 The Rule 701 exemption is only available to the issuer and does not cover the resale of the securities by any other person.

Resales must accordingly either be registered under the Securities Act or be structured to take advantage of an exemption from registration.346 However, if the issuer becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, securities issued under Rule 701 may be resold 90 days thereafter:347

• by non-affiliates without any restrictions other than the requirement imposed by Rule 144 for sale in brokers’ transactions; and

• by affiliates pursuant to Rule 144 without observing the normal holding-period requirement for restricted securities.Any certificated securities issued under Rule 701 should contain

a legend stating that the securities have not been registered under the Securities Act and may not be sold or transferred in the absence of registration or an exemption from registration.

(viii) Certain blue sky issuesIssuances of securities under Rule 701 are not exempt from the securities laws of the various US states (known as the “blue sky” laws). Accordingly, issuers need to determine the blue sky requirements in the states where US offerees under the plan are resident.

PRACTICE POINTa foreign private issuer with assets in excess of $10 million that has 500 or more record holders of its equity securities (including shares issued under a compensatory benefit plan), of whom 300 or more are US residents, will be required to register that class of securities under the exchange act348 unless an exemption, such as Rule 12g3-2(b), is available (for further discussion on the Rule 12g3-2(b) exemption, see Registration under the Securities Act and the Exchange Act–Exchange Act registration; Rule 12g3-2(b) exemption in Chapter 1). note that stock options are considered a separate class of equity securities, and so a foreign private issuer which exceeded the thresholds above would be required to register the options under the exchange act (unless Rule 12g3-2(b) were available).349 In december 2007, the SeC amended Rule 12h-1 to add an additional exemption from exchange act registration for stock options issued under compensatory benefit plans:350

• Rule 12h-1 is available to private, non-reporting issuers and includes limitations concerning permitted optionholders351 and transferability352 and requires issuers to periodically provide certain information to optionholders.353

• Rule 12h-1(g) is available to certain exchange act reporting issuers and also includes limitations concerning permitted optionholders.354

Restrictions on publicity in connection with unregistered transactionsAs discussed above, directed selling efforts or “general solicitation or general advertising” in the US can destroy the availability of the relevant exemption from registration. In addition, publicity about an unregistered transaction can amount to an illegal offer of securities. Accordingly, publicity about a planned or pending unregistered transaction is subject to certain limitations.

In particular, a foreign private issuer may:• continue to advertise products and services and to issue press

releases regarding factual business and financial developments in accordance with past practice;355

• distribute a preliminary and final offering memorandum to certain investors;

• if available, make a limited notice within the US under Rule 135c under the Securities Act; and

• conduct certain press activities outside the US under Rule 135e.

(i) Factual business and financial developmentsAs noted above, in registered transactions the SEC permits issuers to continue to advertise products and services and to issue press releases regarding factual business and financial developments in accordance with past practice, despite the limitations on gun jumping. These activities are also permissible in connection with unregistered transactions.


(ii) Rule 135cRule 135c provides a safe harbour that permits a company to deliver notice in the US that it proposes to make, is making or has made an unregistered offering of securities. As discussed above, all offers and sales of securities in the US must be registered or exempt from registration, and the terms offer and sale are construed broadly. Rule 135c clarifies that a notice distributed in the US by an issuer subject to the reporting requirements of the Exchange Act or exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act will not be deemed to be an offer for sale of a security if the following conditions are met:• the notice is not used for purposes of conditioning the market

in the US;356

• the notice states 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;357 and

• the notice contains only limited information, including:358

- 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.Rule 135c notices do not constitute “general solicitation” or

“directed selling efforts.”359

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.360 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.361

(iii) Rule 135eAs noted above, Rule 135e provides a safe harbour for offshore press activity. This safe harbour is available for unregistered as well as registered transactions. Like notices under Rule 135c, offshore press activity meeting Rule 135e does not constitute general solicitation or directed selling efforts.362

(iv) Research reports Research reports potentially raise concerns about directed selling efforts and general solicitation. For this reason (and because of liability concerns), many underwriters refuse to allow research to be distributed in the US in connection with Rule 144A or Regulation S offerings.

Rule 138 is, however, available for unregistered transactions. In particular, if the conditions of the rule are otherwise met, publication of research by a broker-dealer will not be considered to be an offer or a general solicitation in connection with a Rule 144A transaction. Likewise such publication will not be seen as prohibited directed selling efforts in connection with a Regulation S transaction.

Similarly, if the other conditions of Rule 139 are met, research may be published during Rule 144A or Regulation S offerings without fear of being treated as a general solicitation or directed selling effort. For a more detailed discussion on research reports, see Research reports in Chapter 3.

Required financial statement disclosure 29

The financial statement requirements for registration statements and annual reports of foreign private issuers are found in Items 3, 8, 17 and 18 of Form 20-F, and in Regulation S-X.

PRACTICE POINTthis is usually the most difficult challenge for foreign private issuers seeking to access the US public markets. the requirements are technical and SeC-experienced members of the issuer’s audit team must be involved at the earliest possible stage.

What must be provided? (i) Basic financial statement requirements for public offeringsThe following tables summarise the basic financial statement requirements for public offerings.363 Much of this information

can be incorporated by reference for issuers eligible to use Form F-3,364 and for certain issuers filing a registration statement on Form F-1.365

PRACTICE POINTIssuers who are eligible for incorporation by reference will want to consult their underwriters before electing to incorporate all required financial information. For marketing purposes, it is often desirable to provide the financial information directly in the printed offering document.

PRACTICE POINTdespite these rules, as a result of marketing considerations, the last year of audited financial statements is rarely more than 12 months old.

CHapteR 6

Required financial statement disclosure

Annual audited financial statements

Consolidated annual financial statements of the issuer, audited by an independent accountant and accompanied by an audit report, consisting of:366

• balance sheet;• income statements;• statement of changes in equity;• statement of cash flows;• related notes and schedules required by the system of accounting under which the financial statements were prepared; and• if not included in the primary financial statements, a note analysing the changes in each caption of shareholders’ equity

presented in the balance sheet.

audited financial statements included in a registration statement (or annual report) must be prepared in accordance with:• US Gaap;• IaSB IFRS; or • local Gaap/non-IaSB IFRS reconciled to US Gaap, as described below.367

audited financial statements must cover each of the latest three fiscal years,368 with certain exceptions:• if the issuer has been in existence less than the required three years, financial information covering the issuer’s predecessor

entities may need to be provided;369

• if a jurisdiction outside the US does not require a balance sheet for the earliest year of the three-year period, that balance sheet may be omitted;370 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 1933 act or the 1934 act.371

Under certain circumstances, audited financial information may cover nine to 12 months rather than a full fiscal year for one of the required years.372


Interim unaudited financial statements

If a registration statement becomes effective more than nine months after the end of the last audited fiscal year, the issuer must provide consolidated interim financial statements.373

those financial statements:• may be unaudited but must be prepared in accordance with US Gaap, IaSB IFRS374 or local Gaap/non-IaSB IFRS

reconciled to US Gaap;375

• must cover at least the first six months of the fiscal year;• should include a balance sheet, income statement, statement of cash flows, statement of changes in 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 statement of cash flows); and

• should include comparative interim statements for the same period in the prior fiscal year, except that the requirement for comparative balance sheet information may be met by presenting the year-end balance sheet.376

Selected financial information

a registration statement must include selected historical financial income statements and balance sheet data for each of the last five fiscal years (or such shorter period as the issuer has been in operation), with the following exception:377

• 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.378

Financial information may be prepared based on US Gaap or IaSB IFRS, or on the same basis used in the primary financial statements (that is, local Gaap/non-IaSB IFRS) with a reconciliation to US Gaap.379

If interim unaudited financial statements are included, the selected financial data should be updated for that interim period and comparative data from the same period in the prior fiscal year should be provided.380

Selected financial data should be presented in the same currency as the financial statements.381

Acquired company financial information and pro forma financial information

Under S-X Rule 3-05, depending on the size of the acquisition and its significance to the issuer (which is measured in various ways – not all of them intuitive), audited annual financial statements for the most recent one, two or three fiscal years, plus appropriate unaudited interim financial statements, must be included. We discuss S-X Rule 3-05 in more detail below in Section IV.a.

Under S-X article 11, when acquired company financial statements are included in a registration statement (and in certain other instances) pro forma financial information must also be included. We discuss S-X article 11 in more detail in Section IV.a.

Statement of capitalisation and indebtedness

a registration statement must include a statement of capitalisation and indebtedness.382 although the rules require the capitalisation statement to be as of a date no earlier than 60 days prior to the date of the registration statement,383 the SeC staff will not object if a foreign private issuer presents the statement as of the same date as the most recent balance sheet required in the registration statement.384 If, however, there have been significant subsequent changes in capitalisation (for example, securities issuances), those changes should be reflected in “as adjusted” columns or footnotes to the table.385


PRACTICE POINTIf the underwriters of an offering require negative assurance on interim periods in the comfort letter, the auditing firm providing the comfort letter must usually perform a SaS 100 or similar review of interim financial information if more than 135 days have passed since the most recent audit or review of interim financial information performed by the auditing firm, even if less current information is required by the SeC or included in the offering document.

PRACTICE POINTthe SeC encourages (but does not require) issuers to have an independent auditor review the interim financial 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.389

PRACTICE POINTCompanies planning to go public for the first time should bear one additional point in mind. an IpO will involve close scrutiny of a company’s internal control over financial reporting. Once a company is public, Section 404(a) of Sarbanes-Oxley will subsequently require an assessment by management of the issuer’s internal control over financial reporting, while Section 404(b) requires an attestation report of the issuer’s independent auditors on management’s assessment. Compliance with Section 404 can be a major undertaking for a newly public company, although the SeC has adopted a transition period permitting an IpO issuer to wait until its second annual report to provide a management’s Section 404(a) assessment and an auditor’s Section 404(b) attestation.390 For a more detailed discussion on the Sarbanes-Oxley act and its requirements, see Chapter 7 – “Section 404-internal control over financial reporting.”

(ii) MD&ARegistration statements for foreign private issuers must contain or incorporate by reference an “Operating and Financial Review and Prospects,” which contains essentially the same information as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of a US registration statement (MD&A).391 The MD&A requirements for US issuers are set out in S-K Item 303. For purposes of this Overview, we refer to

the “Operating and Financial Review and Prospects” section of a foreign private issuer’s registration statement as the MD&A.

PRACTICE POINTthe purpose of the Md&a is to provide investors with the information necessary to an understanding of an issuer’s financial condition, changes in financial condition and results of operations.392 It is the place where management interprets the financial statements for investors. a well-written Md&a will focus on trends and uncertainties in the marketplace and will identify the key “drivers” of the issuer’s results of operations. It will explain the issuer’s business as management sees it, separately discussing each segment’s performance if material to an understanding of the business as a whole, and will identify and discuss the key metrics that management uses to evaluate the business’ performance and financial health. Many Md&a sections include a general discussion of the issuer’s future prospects under a subheading such as “Outlook,” and some issuers even go so far as to give specific guidance for the following quarter or the current or following fiscal year.

In recent years, the SEC has expanded the line item disclosure requirements for the MD&A, adding specific requirements for off-balance sheet arrangements and long-term contractual obligations,393 certain derivatives contracts and related-party transactions394 as well as critical accounting policies.395

(a) The 2003 MD&A ReleaseIn December 2003, the SEC published interpretive guidance on MD&A requirements (the 2003 MD&A Release).396 The 2003 MD&A Release addressed:• the overall presentation of MD&A;• the focus and content of MD&A;• disclosure regarding liquidity and capital resources; and• disclosure regarding critical accounting estimates.

As a general matter, the SEC stated that the most important information should be most prominently disclosed, and encouraged issuers to include an executive-level overview of MD&A.397 In addition, under the 2003 MD&A Release, issuers were instructed to:• focus on material information and eliminate information that

does not promote understanding of their financial condition, liquidity and capital resources, changes in financial condition and results of operations;

• identify and discuss key performance indicators, including non-financial performance indicators, that management uses

Ratio of earnings to fixed charges for debt

If debt securities are being registered, a ratio of earnings to fixed charges for each of the last five fiscal years and for the latest interim period presented must be included.386

For preferred securities, a ratio of combined fixed charges and preference dividends to earnings must be shown.387

If the proceeds from the sale of debt or preferred equity will be used to repay outstanding debt or to retire other securities and the change in the ratio would be 10% or greater, a pro forma ratio must be included for the most recent fiscal year and the latest interim period presented.388


to manage the business and that are material to investors; and• identify and disclose known trends, events, demands,

commitments and uncertainties that are reasonably likely to have a material effect on financial condition or operating performance.398

(b) Overall presentationThe SEC commented in the 2003 MD&A Release that the presentation of MD&A was frequently lengthy, complex and confusing. Issuers were encouraged to prepare MD&A with a strong focus on the most important information. In particular, issuers should:• consider including a tabular presentation of financial or other

information;• assess the usefulness of headings they include, and consider

adding additional headings as needed; and• include an introductory section with an executive-level

discussion identifying the most important matters with which management is concerned in evaluating an issuer’s financial results.399

(c) Content and focusThe 2003 MD&A Release emphasised that disclosure should focus on material information necessary to understand the issuer’s financial condition and operating performance, and its prospects for the future. Issuers were urged to: • identify key variables, which may be non-financial;• evaluate whether material information disclosed in other

documents (such as earnings releases or analysts’ calls) should be included in MD&A;

• provide a balanced view of the underlying dynamics of the business, including a description of an issuer’s successes as well as failures;

• focus on known material events and uncertainties that would cause reported financial information not to be necessarily indicative of future financial performance; and

• focus on (and analyse) known trends, demands, commitments, events and uncertainties to assess whether these trends or uncertainties are reasonably likely to have a material impact on the issuer’s liquidity, capital resources or results of operations.400

(d) Liquidity and capital resourcesAn issuer must include in the MD&A material information regarding:• historical sources of cash and capital expenditures;• an evaluation of the amounts and certainties of cash flows;• the existence and timing of commitments for capital

expenditures and other known and reasonably likely cash requirements;

• expected changes in the mix and relative cost of capital resources;

• which balance sheet or income or cash flow items should be considered in assessing liquidity; and

• sources and needs for capital going forward.The SEC stated that an issuer should identify:• known material cash requirements;• sources and uses of cash, discussing the primary drivers of cash

flows, and the indicative value of historical cash flows;• historical financing arrangements and their importance to cash

flows, including debt financings, off-balance sheet financing arrangements, issuances of derivatives and the impact of known or reasonably likely changes in credit ratings;

• prospective financings that are reasonably likely to occur, including potential amounts, terms and impact on the issuer;

• material debt covenants, to the extent an issuer is likely to be in breach of those covenants or those covenants have an impact on the issuer’s ability to take on additional debt or equity financing; and

• known material trends relating to cash management.401

(e) Critical accounting estimatesUnder the 2003 MD&A Release, issuers should provide disclosure about critical accounting estimates or assumptions where:• the nature of the estimates or assumptions is material due to

the levels of subjectivity and judgment needed to account for highly uncertain matters or the susceptibility of those matters to change; and

• the impact of the estimates and assumptions on financial condition or operating performance is material.The SEC stated that this disclosure should supplement, not

duplicate, the description of accounting policies included in the notes to the financial statements. In particular, an issuer should present its analysis of the uncertainties involved in applying a principle at a given time or the variability that is likely to result from its application over time. An issuer should also discuss specifically why its accounting estimates or assumptions might change, and how the estimate has changed in the past or may change in the future.402

(iii) Using IFRS without reconciliationThe SEC has adopted rules that allow certain foreign private issuers to file financial statements prepared in accordance with IASB IFRS without reconciliation to US Gaap. The rules apply to annual and interim financial statements for the respective fiscal years and periods ending after November 15 2007 that are filed with the SEC after March 4 2008, if the following conditions are satisfied:• the issuer meets the definition of foreign private issuer under

Rule 3b-4 of the Exchange Act;403

• the foreign private issuer files its annual reports on Form 20-F;404

• the issuer’s financial statements do not include any deviations from IASB IFRS;405

• the issuer’s financial statements state unreservedly and explicitly in an appropriate note to the financial statements that its financial statements are in compliance with IASB IFRS;406

• the auditor opines on compliance with IASB IFRS; • the auditor’s report contains no qualification relating to

compliance with IASB IFRS; and• any interim periods fully comply with International Accounting

Standard (IAS) 34.407

If a foreign private issuer meets these requirements, it may report in IFRS and omit a US Gaap reconciliation from its annual audited, interim unaudited an selected financial statements.

(iv) When does financial information go stale?Understanding the timing requirements for the provision of financial statements is almost as critical as understanding the scope of the financial information required. The determination of when


financial statements go “stale” is sure to come up at the all-hands meeting and planning to have the necessary financial information prepared on time is an essential part of the offering process.

The staleness of financial statements is measured by the number of days between the effective date of the registration statement (or, by analogy, the pricing date of a Rule 144A offering if the underwriter desires to mirror SEC requirements) and the date of the financial statements in the filing, as summarised in the following tables.408 For any of the time frames noted below, if the

last day before the financials go stale is a Saturday, Sunday or US federal holiday, Rule 417 under the 1933 Act allows the filing to be made on the next business day, thereby effectively postponing the staleness date.

The staleness of financial statements also dictates the information required in an initial filing of a registration statement. The SEC Staff has a policy against commencing review of a filing unless the financial statements in the filing comply with the staleness rules on the filing date.409

Staleness of annual audited financial statements

the last year of audited financial statements cannot be more than 15 months old at the time of the offering or listing, subject to the two exceptions listed below.410 this means that an issuer with a december 31 fiscal year end must have its registration statement “go effective” before March 31, or else annual audited financial statements for the year just ended must be included.

In the case of a registration statement relating to an IpO, the audited financial statements must be as of a date not older than 12 months prior to the time the document is filed.411 In other words, an IpO issuer with a december 31 fiscal year end cannot file a registration statement after January 1 without including audited financial statements for the year just ended (or audited financial statements as of an interim date less than 12 months prior to the filing). the SeC will, however, waive this requirement, and apply the 15-month rule, in an IpO where the issuer is able to represent that it is not required to comply with this requirement in any other jurisdiction outside the US and that complying with the requirement is impracticable and would involve undue hardship.412

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 at the time of offering.413 this means that an issuer with a december 31 fiscal year end must have its registration statement for these types of transactions go effective before June 30, or else annual audited financial statements for the year just ended must be included.

Staleness of interim unaudited financial statements

Interim unaudited financial statements of foreign private issuers do not generally go stale after a specific period.

If a registration statement becomes effective more than nine months after the end of the last audited fiscal year (September 30, in the case of an issuer with a december 31 fiscal year end) the issuer must provide unaudited interim financial statements in accordance with, or reconciled to, US Gaap covering at least the first six months of the year.

However, if an issuer publishes interim financial statements that are more current than those required, it must include the more current information in its registration statement.414 For example, if an issuer with a fiscal year ending december 31 publishes first quarter information and does a securities offering in July, it must include the first quarter information in its registration statement.

although the more current interim financial information (the first quarter information in the example above) generally need not be reconciled to or prepared in accordance with US Gaap, to the extent there are new reconciling items or the issuer has made a change in its accounting principles with respect to the interim period, it must quantify material reconciling items that have not previously been addressed in the audited financial statements, and must provide narrative disclosures about the differences in accounting principles used.415 Furthermore, except as noted below, if an issuer discloses interim financial information prepared using different accounting standards than used in its SeC filings, it must (1) reconcile that interim information to US Gaap or (2) provide a reconciliation from local Gaap/non-IaSB IFRS to US Gaap (that is, a “reverse reconciliation”) for at least the most recent year required in the registration statement.416

Staleness of financial statements


(v) Reconciliation to US Gaap

Reconciliation requirements – annual and interim financial statements

annual audited and interim unaudited financial statements in a registration statement may be prepared using either US Gaap, IFRS or local Gaap.417 If local Gaap or non-IaSB IFRS is used in the preparation of the financial statements, the consolidated financial statements (both annual and interim) must include a reconciliation to US Gaap.418

Reconciliation comprises both disclosure of the material variations between local Gaap/non-IaSB IFRS, on the one hand, and US Gaap, on the other hand, as well as a numerical quantification of those variations.419 In the case of registered offerings, the reconciliation must meet Item 18 of Form 20-F (discussed in more detail below).

a foreign private issuer registering for the first time must reconcile only the two most recently completed fiscal years (and any interim period).420

Items that frequently require discussion and quantification as a result of the reconciliation requirements include the different methods of accounting for business combinations, stock compensation, restructuring charges, impairments, deferred or capitalised costs, investments, foreign currency translation, deferred taxes, pensions, derivatives, consolidation, asset retirement obligations, research and development and revenue recognition.

Reconciliation requirements – selected financial information

Required selected financial information may be prepared using US Gaap, local Gaap or IFRS (depending on the Gaap used for the primary financial statements).421 a reconciliation to US Gaap of local Gaap or non-IaSB IFRS selected financial information must generally be provided for all five years covered by the selected financial information (and any interim periods).422

First-time registrants need only prepare reconciliations for the two most recent years (and any interim periods).423

If a foreign private issuer prepares its primary financial statements in accordance with US Gaap or IaSB IFRS (rather than reconciling to US Gaap), it may present the five years of selected financial information under local Gaap or non-IaSB IFRS without reconciliation.424 the SeC staff will require selected financial data based on US Gaap reconciliation if the issuer only prepares its primary financial statements using a basis of accounting other than US Gaap or IaSB IFRS.425

MD&AA foreign private issuer’s MD&A disclosure should focus on its primary financial statements, whether those statements are prepared in accordance with US Gaap, local Gaap or IFRS.426 To the extent those statements are prepared under local Gaap or non-IASB IFRS, a discussion should be included of the reconciliation to US Gaap and any differences between local Gaap/non-IASB IFRS and US Gaap not otherwise discussed in the reconciliation and needed for an understanding of the financial statements as a whole.427

(vi) Audit reportsAudited financial statements must be accompanied by an audit report, covering each of the audited periods.428 If the auditors refuse to provide a report or if the report contains qualifications or disclaimers, full disclosure of the refusal, qualifications or disclaimers must be made.429 The SEC will generally not accept an audit report containing a disclaimer or qualification.430

Note that audit reports must state that the audit has been conducted in compliance with the standards of the PCAOB, even for non-US Gaap financials.431 The auditor must also meet US standards for independence.432 In addition, a non-US public accounting firm that prepares or issues any audit report with respect to any issuer, or plays a substantial role in the preparation

or furnishing of an audit report with respect to any issuer, must be registered with the PCAOB.433

(vii) Currency translation; exchange ratesForeign private issuers may state amounts in their financial statements in any currency they deem appropriate (the reporting currency).434 However, only one currency may be used as the reporting currency.435 The reporting currency must be prominently disclosed on the face of the financial statements.436 The issuer must also disclose if dividends will be paid in a different currency and any material exchange restrictions or controls relating to the reporting currency, the currency of the issuer’s domicile or the currency in which dividends will be paid.437

If the reporting currency is not the US dollar, US dollar-equivalent financial statements or convenience translations are not permitted to be included, except that an issuer may present a translation of the most recent fiscal year and any subsequent interim period.438 The exchange rate used for any convenience translations should be as of the most recent balance sheet date included in the registration statement, except where the exchange rate of the most recent practicable date would yield a materially different result.439

In addition, issuers that do not prepare their financial statements in US dollars must provide disclosure of the exchange

Reconciliation – annual audited and interim unaudited financial statements

Selected financial information


rate between the reporting currency and the US dollar.440 That disclosure should show:• the exchange rate at the last practicable date;• the high and low exchange rates for each month during the

previous six months; and• for the five most recent fiscal years, and any subsequent interim

period covered by the financial statements, the average rates for each period (based on the average exchange rates on the last day of each month during the period).441

As of December 31 2008 the Federal Reserve Bank of New York discontinued its publication of exchange rates. In light of this, the SEC has stated that “[a]ny reliable source may be used for rates of exchange as long as the source is identified.” 442

(viii) Additional financial information typically includedIn addition to the formal requirements of Form 20-F and Regulation S-X, it is customary to include certain other information in the offering document that may be material or convenient for investors in considering the financial condition of the issuer. The three most common examples are described below.

(a) Other financial data and non-Gaap financial measuresA page of summary financial data is routinely included in the “summary box” in the offering document. Although there are no specific line item requirements for this key marketing page, it usually contains income statement, balance sheet and other financial data for the last three to five fiscal years and the most recent interim period (as well as the comparable interim period in the prior year) comparable to that required on the “Selected Financial Data” page that appears later in the disclosure document. Where appropriate from either a disclosure or marketing perspective, additional operational metrics are also included in the summary under a heading such as “Other Financial Data.” These metrics will vary with the type of issuer and will be selected based on the criteria that management and the investment community monitor to evaluate performance or liquidity. Typical examples include comparable store sales data for a retailer, capital expenditures for a manufacturer and subscriber numbers for a cable television company. If non-Gaap financial measures are included in the summary (such as “Ebitda” or “Adjusted Ebitda”) this is where they usually appear.443

(b) Recent financial resultsIf a significant amount of time has passed since the most recent financial statements included in the offering document, it may be appropriate to include a summary of recent financial results in the “summary box.” Examples of “recent results” disclosures are most common after a quarter is completed but before financial statements for that quarter have become available. The issuer and the underwriters will want to tell the market as soon as possible about any positive improvement in operating trends at the conclusion of a good quarter. If the recent results are negative, on the other hand, recent results disclosure may be advisable to avoid any negative surprises for investors when the full quarterly numbers become available. For example, the issuer may be aware that its sales are trending down in the current quarter, or that significant charges will be taken in connection with an acquisition after it closes. Even if Wall Street analysts may be anticipating such an event, it is preferable to disclose this information in the offering document itself. At the “road show” meetings, prospective

investors will be asking about the results for a quarter just or almost completed and presenting information in the offering document will facilitate a discussion of these results.444

(c) Recent developmentsTo the extent material, the likely consequences of material recent developments may be disclosed in the “summary box” or the MD&A. For example, it is customary to discuss a material recent or proposed acquisition in the MD&A section of the offering document, whether or not audited financials of the acquired or to-be-acquired business are required to be presented. This practice will often result in a discussion of the impact of pending or recent acquisitions on, among other things, margins and debt levels in a section of the MD&A labelled “Overview,” “Impact of the Acquisition” or a similar title. The textual disclosure may include a discussion of any special charges or anticipated synergies expected to result from the acquisition or other pending event.

Additional financial information for certain situations(i) Recent and probable acquisitionsIn addition to financial statements of the issuer, registration statements generally require inclusion of audited financial statements for a significant acquisition of a “business” that has taken place 75 days or more before the offering, or, in the case of the most material acquisitions, as soon as the acquisition becomes “probable.”445 These requirements can be found in S-X Rule 3-05. In addition, where a material acquisition has occurred or is probable, pro forma financial information complying with S-X Article 11 for the most recent fiscal year and the most recent interim period may also be required in the registration statement.

The SEC defines the term “business” to include an operating entity or business unit, but excludes machinery and other assets that do not generate a distinct profit or loss stream.446 Acquisitions of related businesses are treated as a single acquisition for purposes of the significance tests. Businesses are considered “related” if they are owned by a common seller, under common management, or the acquisition of one business is conditioned upon the acquisition of each other business or a single common event.447 The term “probable” is interpreted to mean “more likely than not.” The SEC staff has taken the general view that an acquisition becomes probable upon the signing of a letter of intent.448

Whether financial statements for recent and probable acquisitions must be included in the filing also depends upon the “significance” of the acquisition. Significance of an acquired business is evaluated under S-X Rule 3-05 based upon three criteria (which in turn are derived from S-X Rule 1-02(w)):• the amount of the issuer’s investment in the acquired business

compared to the issuer’s total assets;• the total assets of the acquired business compared to the issuer’s

total assets; and• the “pre-tax income”449 from continuing operations of the

acquired business compared to the issuer’s pre-tax income from continuing operations;in each case, based on a comparison between the issuer’s and

the target’s most recent audited financial statements.Generally:

• if the acquired business exceeds 20% of any of the three significance criteria, then one year of audited financial information is required, as well as the interim financial


information that would be required under S-X Rules 3-01 and 3-02;450

• if it exceeds 40%, then two years of audits and the appropriate interim financial information are required;451 and

• if it exceeds 50% of any of the three criteria (or if securities are being registered to be offered to the security holders of the acquired business), three years of audited and the appropriate interim financial information are required.452

Note that the amounts used for these calculations must be determined on the basis of US Gaap (for issuers that file their financial statements in accordance with or provide a reconciliation to US Gaap) or IASB IFRS (for foreign private issuers that file their financial statements in accordance with IASB IFRS) rather than local Gaap or non-IASB IFRS.453 In addition, when a “foreign business”454 is acquired, S-X Rule 3-05(c) effectively allows for the inclusion of local Gaap/non-IASB IFRS financials without reconciliation to US Gaap when the acquired business is below the 30% level for all of the significance tests; at or above 30%, footnote reconciliation to US Gaap must be included (although this reconciliation need only meet the requirements of Item 17,

not Item 18, of Form 20-F).455 No US Gaap reconciliation is required for the inclusion of financial statements of an acquired foreign business where the issuer uses IASB IFRS.456

PRACTICE POINTthese determinations are often difficult and should be addressed by the issuer and its accounting firm before commencing the offering process.

PRACTICE POINTIf financial statements for an acquired business are required, the acquired company’s auditors may not be qualified (or willing) to have their audit report filed with the SeC. the auditors may also be unfamiliar with the audit procedures required by the pCaOB. the additional work required to get those financial statements into compliant form can be a significant timing issue.

Acquisition scenario Reporting requirement

1. Individual acquisition at or below the 20% significance level.

1. no requirement to include audited or interim financials.

2. Individual acquisition (or multiple acquisitions of “related businesses,” as described above) in excess of the 20% significance level, but not above the 40% level.

2. audited financials for the most recent fiscal year of the acquired business must be included. Unaudited interim financials may need to be included, depending on the time of year that the offering takes place.

3. Multiple acquisitions of unrelated businesses below the 20% significance level individually, but aggregating in excess of the 50% level of significance.

3. audited financials for the most recent fiscal year will be required for a substantial majority of the individually insignificant acquisitions. Unaudited interim financials may need to be included, depending on the time of year that the offering takes place.

4. Individual acquisition (or multiple acquisitions of “related businesses,” as described above) in excess of the 40% significance level, but not above the 50% level.

4. audited financials for the two most recent fiscal years of the acquired business (including one balance sheet) must be included. Unaudited interim financials may need to be included, depending on the time of year that the offering takes place.

5. Individual acquisition above the 50% significance level. 5. audited financials for the three most recent fiscal years of the acquired business (including two balance sheets) must be included. this requirement also applies to acquisitions of this size that have closed within the 75-day period prior to the offering or are “probable” at the time of the offering. However, audited financials 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 $50 million. Unaudited interim financials may need to be included, depending on the time of year that the offering takes place.

(a) Financial statements required in connection with acquisitionsThe following table summarises the general rules for an acquisition that occurred more than 75 days before the offering.


Note that the permitted age of financial statements of an acquired or soon-to-be acquired business is determined as if the acquired business was itself a public issuer.457 In other words, “staleness” dates for the financials of an acquired company are governed by the staleness rules applying to public company financial statements (as summarised earlier in the chapter).458

Also note that, below the 50% significance level, no audited financial statements are required in the offering document for probable acquisitions or for completed acquisitions consummated up to 74 days before the date of the offering.459 The commitment committees of some financing sources may, however, require at least a one-year audit of the acquired company in this situation together with historical pro forma financial information, even if the 74-day grace period has not yet expired.

PRACTICE POINTWhen a “foreign business“460 is acquired, financial statements of the business may be required under S-X Rule 3-05 depending on the significance of the acquisition. although financial statements of foreign private issuers must normally be reconciled to US Gaap (or presented in US Gaap or IaSB IFRS), S-X Rule 3-05(c) effectively allows for the inclusion of local Gaap/non-IaSB IFRS financials without reconciliation to US Gaap when the acquired business is below the 30% level for all of the significance tests (at or above 30%, footnote reconciliation to US Gaap must be included).461

Foreign private issuers are currently only required to provide the aforementioned financial statements of significant acquired businesses and pro forma financial information in registration statements and not in their annual reports on Form 20-F or their reports on Form 6-K.462 Domestic US issuers, on the other hand, must present the financial statements of significant acquired businesses complying with S-X Rule 3-05 and pro forma financial information complying with S-X Article 11 in a current report on form 8-K as well as in their registration statement.463

(b) Exceptions to the financial statement requirements for acquired businessesThere are a number of exceptions to the requirement to provide separate financial statements of acquired businesses.

(c) Industry roll-ups and operating real estateStaff Accounting Bulletin No 80 (SAB 80) provides a special interpretation of S-X Rule 3-05 for initial public offerings of businesses that have been built by the aggregation of discrete businesses that remain substantially intact after acquisition (industry roll-ups). SAB 80 (which was recodified, with slight modifications, in Staff Accounting Bulletin No 103) allows first-time issuers to consider the significance of businesses recently acquired or to be acquired based on the pro forma financial information for the issuer’s most recently completed fiscal year. While compliance with this interpretation requires an application of SAB 80’s guidance and examples on a case-by-case basis, the policy is to allow currently insignificant business acquisitions to be excluded from the financial statement requirements while still ensuring that the registration statement will include not less than three, two and one year(s) of financial statements for not less than 60%, 80% and 90%, respectively, of the constituent businesses of the issuer.467

The acquisition or probable acquisition of operating real estate property is subject to an additional set of disclosure requirements under S-X Rule 3-14, which addresses income-producing real estate such as apartment houses and shopping malls. In comparison, where real estate is merely incidental to the service provided by a business, as for example in the case of a hotel, the regular S-X Rule 3-05 requirements would apply. S-X Rule 3-14(a) requires that audited income statements must be provided for the three most recent fiscal years for any such acquisition or probable acquisition that would be “significant“ (generally, that would account for 10% or more of the issuer’s total assets as of the last fiscal year end prior to the acquisition). S-X Rule 3-14(a) also requires certain variations from the typical form of income statement and allows for only one year of income statements to be provided if the property is not acquired from a related party and certain additional textual disclosure is made.468

(d) MD&AWhenever historical financial statements of an acquired business (or probable acquisition) are included in the offering document, the registrant will need to consider whether a separate MD&A section discussing those financial statements is appropriate. Although there is no specific line item requiring that a second MD&A be included, it is not uncommon for registrants to interpret 1933 Act Rule 408469 as requiring a full discussion and

Exceptions to the requirement to provide financial statements of acquired businesses

Separate financial statements for an acquired business do not need to be presented once the operating results of the acquired business have been included in the issuer’s audited consolidated financial statements for at least nine months unless the financial statements have not been previously filed by the issuer or unless the acquired business is of such significance to the issuer that omission of such financial statements “would materially impair an investor’s ability to understand the historical financial results of the registrant.“464 Where the acquired business met at least one of the significance tests at the 80% level, the income statements of the acquired business should normally continue to be furnished.465 this rule means that financial statements for major acquisitions at the highest level of materiality may be required for subsequent registration statements, even those unrelated to the original acquisition.

a single audited period of 9, 10 or 11 months may count as a year for an acquired business in certain circumstances.466


analysis of the financial statements of an acquired business (or probable acquisition), particularly where it exceeds 50% on any of the three significance criteria discussed above.

(e) Pro forma financial informationAs noted above, where a material acquisition has occurred or is probable that would trigger the need for acquired company financial statements under S-X Rule 3-05, pro forma financial information complying with S-X Article 11 must also be included. Pro forma financial information is intended to illustrate the continuing impact of a transaction, by showing how the specific transaction might have affected historical financial statements had it occurred at the beginning of the issuer’s most recently completed fiscal year.

In particular, S-X Article 11 requires:470

• a condensed pro forma balance sheet471 as of the end of the most recent period for which a consolidated balance sheet of the issuer is required, unless the transaction is already reflected in that balance sheet;472 and

• a condensed pro forma income statement473 for the issuer’s most recently completed fiscal year and the most recent interim period of the issuer, unless the historical income statement reflects the transaction for the entire period.474

S-X Article 11 also requires pro forma financial information in a number of other situations, such as:• certain significant dispositions that are not fully reflected in the

financial statements of the issuer included in the prospectus;475 and

• other events or transactions for which disclosure of pro forma financial information would be material to investors.476

S-X Article 11 provides extensive specific requirements for the content of pro forma financial information, including those set out in the following table.477

PRACTICE POINTeven if pro forma financial information for an acquired business is not required to be included in the prospectus, the underwriters may nevertheless request that pro forma financial information be included in the disclosure document. this situation arises where the underwriters want to show the expected higher “run rate” operating results of the combined companies for marketing reasons even though there is no specific requirement to do so.

(ii) Guarantor financial statementsA guarantee of a security (such as a guarantee of a debt or preferred equity security) is itself a security that must be registered under the 1933 Act, absent an applicable exemption. As a result, under S-X Rule 3-10(a), the general rule is that guarantors are required to present the same financial statements as the issuer of the guaranteed securities.484 Fortunately, S-X Rules 3-10(b)-(f ) contain a number of important exceptions that permit issuers to disclose financial information about guarantors in a condensed format using a footnote to their own financial statements.485 Although the footnote approach can involve a fair amount of effort, it is far less burdensome than providing separate audited financial statements for every guarantor, which would be prohibitively expensive in many cases. S-X Rules 3-10(c), (e) and (f ) go even further, dispensing with any additional information requirement for guarantors in the case of a parent company or subsidiary issuer where the parent company does not have independent assets or operations of its own and all of the non-guarantor subsidiaries are “minor”486 (generally, less than 3% of the consolidated parent) and each guarantee is full and unconditional. US Gaap reconciliation is required in the footnote when the parent’s financial information is prepared in accordance with accounting principles other than US Gaap or IASB IFRS.487

Content requirements

pro forma adjustments related to the pro forma condensed income statement must include adjustments which give effect to events that are:• directly attributable to the transaction;• expected to have a continuing impact on the issuer; and• factually supportable.478

as a result, adjustments for expected future synergies and cost savings that are not expressly mandated by the acquisition documents will generally not be permitted.

pro forma condensed income statements should be presented using the issuer’s fiscal year end.479 If the most recent fiscal year end of the acquired company differs from that of the issuer by more than 93 days, the acquired company’s fiscal year end should be brought up to within 93 days of the issuer’s fiscal year end (if practicable).480

additional pro forma information that does not comply with S-X article 11 is permissible if this information is required by a non-US regulator.481 In that case, the issuer must indicate clearly what the presentation represents, state that the information does not comply with article 11 and explain why the information is being included.482

pro forma financial information should either be prepared on a US Gaap or IaSB IFRS basis, or on a local Gaap/non-IaSB IFRS basis accompanied by a quantified reconciliation to US Gaap.483


S-X Rules 3-10(e) and (f ) go even further, dispensing 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 the non-guarantor subsidiaries are “minor.”488

In the table below, we review the provisions of S-X Rule 3-10 as they apply to the following five common situations:• parent company issuer of securities guaranteed by one or more

subsidiaries;• operating subsidiary issuer of securities guaranteed by parent

company;

• finance subsidiary issuer of securities guaranteed by parent company;

• subsidiary issuer of securities guaranteed by parent company and one or more other subsidiaries of parent company; and

• recently acquired subsidiary issuer or subsidiary guarantor. Note that the amounts used for these calculations must be

determined on the basis of US Gaap or IASB IFRS rather than local Gaap/non-IASB IFRS.

Guarantee scenario Financial statement requirements

1. no separate financial statements for subsidiaries required under S-X Rule 3-10(e) and (f) if the parent’s annual audited and interim unaudited financial statements are filed for the periods required, and those financial statements include a footnote (audited for the periods for which audited financial statements are required) with condensed, consolidating financial information492 for each such period, with separate columns for:

• the parent company;• the subsidiary guarantor (or subsidiary guarantors on a

combined basis);• any non-guarantor subsidiaries on a combined basis;493

• consolidating adjustments; and• 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 this footnote if the parent company has no independent assets or operations, the non-guarantor subsidiaries are “minor“ (generally, less than 3% of the consolidated parent) and there is a footnote to that 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.”494

2. no separate financial statements for the operating

subsidiary required under S-X Rule 3-10(c) if the parent’s audited annual and unaudited interim financial statements are filed for the periods required and they include a footnote (audited for the periods for which audited financial statements are required) with condensed, consolidating financial information496 for each such period, with separate columns for:

• the parent company;• the operating subsidiary issuer;• any non-guarantor subsidiaries on a combined basis;497


note 3 to S-X Rule 3-10(c) provides that this exception is also available if an operating subsidiary issuer meets these

1. parent company issuer of securities guaranteed by some or all of issuer’s subsidiaries, where:

• the subsidiary guarantors are 100% owned489 by the parent company issuer;

• each guarantee is full – the amount of the guarantee may not be less than the underlying obligation;490

• each guarantee is unconditional – holders must be able to take immediate action against the guarantor after a default on the underlying obligation; and

• the guarantees are joint and several (if there are multiple guarantors).491

2. Operating subsidiary495 issuer of securities guaranteed by parent company, where:

• the operating subsidiary issuer is 100% owned by the parent company guarantor;

• the guarantee is full and unconditional; and• no other subsidiary of the parent is a guarantor.


Guarantee scenario Financial statement requirements

requirements except that the parent is a co-issuer with the subsidiary, rather than a guarantor.

3. no separate financial statements for finance subsidiary required under S-X Rule 3-10(b) if the parent’s audited annual and unaudited interim financial statements are filed for the periods required and they include a footnote (audited for the periods for which audited financial statements are required) with:

• a statement that the finance subsidiary issuer is a 100%-owned finance subsidiary of the parent; and

• the parent has fully and unconditionally guaranteed the securities.

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.499

4. no separate financial statements for subsidiaries required under S-X Rule 3-10(d) if the parent’s audited annual and unaudited interim financial statements are filed for the periods required and they include a footnote (audited for the periods for which audited financial statements are required) with condensed, consolidating financial information501 for each such period, with separate columns for:

• the parent company;• the subsidiary issuer;• the guarantor subsidiaries on a combined basis;• any non-guarantor subsidiaries on a combined basis;502


this exception is also available if a subsidiary issuer meets these requirements except that subsidiary is not a joint and several guarantor. In that case, the condensed consolidating financial information should include a separate column for the subsidiary.503

5. Separate financial statements are required under S-X Rule 3-10(g) for each such subsidiary, including:

• audited financial statements for the subsidiary’s most recent fiscal year prior to the acquisition; and

• unaudited financial statements for any required interim periods.507

these requirements apply even if (i) the recently acquired

subsidiary would otherwise be eligible for the use of condensed consolidating footnote presentation508 or (ii) S-X Rule 3-05 would not require financial statements.

3. Finance subsidiary issuer of securities guaranteed by parent company, where:498

• the finance subsidiary issuer is 100% owned by the parent company guarantor;

• the guarantee is full and unconditional; and• no other subsidiary of the parent is a guarantor.

4. Operating or finance subsidiary issuer of securities guaranteed by parent company and one or more other subsidiaries of parent company, where:

• the issuer and all subsidiary guarantors are 100% owned by the parent company guarantor;

• the guarantees are full and unconditional; and• the guarantees are joint and several.500

5. Recently acquired subsidiary issuer or subsidiary guarantor, where:

• the subsidiary has not been included in the audited consolidated results of the parent company for at least nine months of the most recent fiscal year;504 and

• the purchase price or net book value (as of the most recent fiscal year end prior to the acquisition),505 whichever is greater, of the subsidiary (or group of subsidiaries that were related prior to the acquisition)506 is 20% or more of the principal amount of the securities being registered.


PRACTICE POINTa standstill period after a default before investors can pursue a guarantor (as is common in upstream guarantee structures in europe) will not satisfy the “full and unconditional” requirement, and will result in a requirement for separate financial statements.

(iii) Secured offeringsS-X Rule 3-16 generally requires separate audited and interim financial statements for an issuer’s affiliate if the securities of that affiliate are pledged as collateral for the offering and those securities constitute a “substantial portion” of the collateral for the securities being registered. Securities of the affiliate are deemed to constitute a “substantial portion” of the collateral if the 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 greatest, equals 20% or more of the principal amount of the securities that are being secured.509

If this test is met, the affiliate must file the same financial statements that it would be required to file if it were the issuer. However, the affiliate’s financial statements do not need to be filed if they are otherwise separately included (which may be through incorporation by reference, if incorporation is otherwise permitted). This very burdensome requirement to produce separate audited financials for large subsidiaries if their stock is pledged to secure a bond deal often makes it uneconomical to secure publicly offered bonds with stock pledges.

(iv) Investments accounted for under the equity methodS-X Rule 3-09 generally requires the inclusion of separate audited financial statements for significant investments that are accounted for under the equity method.510 S-X Rule 3-09 applies whether the investee is held by an issuer, a subsidiary or another investee.511

For investees, significance is evaluated under S-X Rule 1-02(w) based on the following two criteria:512

• does the amount of the issuer’s (and its other subsidiaries’) investment in and advances to the investee exceed 20% of the total assets of the issuer and its subsidiaries on a consolidated basis as of the end of the most recently completed fiscal year (“Test 1”);513 and

• does the equity of the issuer and its other subsidiaries in the pre-tax income from continuing operations of the equity investee exceed 20% of the income of the issuer and its subsidiaries on a consolidated basis for the most recently completed fiscal year (“Test 2”).514

If either of these tests is met, separate financial statements of the subsidiary must be filed.515 Insofar as practicable, those financial statements must be as of the same dates and for the same periods as the required audited annual financial statements of the issuer, but need only be audited for those fiscal years in which either Test 1 or Test 2 is met at or above the 20% level.516 Note that the amounts used for these calculations must be determined on the basis of US Gaap or IASB IFRS rather than local Gaap/non-IASB IFRS.517

For equity investees that meet any of the three S-X Rule 1-02(w) criteria at the greater than 10% but not more than the 20% significance level, S-X Rule 4-08(g) requires the presentation

of summary financial information as described by S-X Rule 1-02(bb).518 Requirements for financial statements of equity investees that are prepared under local Gaap or non-IASB IFRS do not have to be reconciled to US Gaap unless either of the Test 1 or Test 2 criteria is greater than 30% (calculated on a US Gaap basis).519 A description of the differences in accounting methods is required, however, regardless of the significance levels.520 Equity investees using IASB IFRS do not need to include a reconciliation.521

(v) Segment reportingIn addition to all the consolidated financial information required to be included in an offering document, companies that are engaged in more than one line of business or operate in more than one geographic area may also be required to include separate revenues and operating data for each of their business lines or geographic areas. This requirement is a function of whether the company’s business is comprised of more than one operating segment as defined by generally accepted accounting principles. S-X Rule 3-03(e) and S-K Item 101(b) require certain financial reporting and textual disclosure for each operating segment.522 Statement of Financial Accounting Standards 131 (SFAS 131), “Disclosures About Segments of an Enterprise and Related Information,” provides detailed guidance for when a component of a larger enterprise constitutes an operating segment and how its discrete financial information must be reported.

Generally, an operating segment is a component of a larger enterprise:• that engages in business activities from which it may earn

revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise);

• whose operating results are regularly reviewed by the enterprise’s chief operating decision-maker523 to make decisions about resources to be allocated to the segment and assess its performance; and

• for which discrete financial information is available. The aim of segment reporting is to align public financial

reporting with a company’s internal reporting in order to permit financial analysts and the public to see the overall enterprise the same way management sees it. The most critical factor in determining whether an issuer has more than one operating segment is how management runs its business.524 Whether an issuer can aggregate operating segments is highly fact-specific and depends on factors such as economic similarity, the similarity of the products or services sold, the nature of the production process, customer type, distribution methods, and the regulatory environment for the business. The determination is very subjective and is often the subject of much discussion with the company’s accountants and, through the SEC comment process, with the SEC.

Once a segment has been identified, the issuer must provide information about the segment if it meets any of the following 10% thresholds:• its reported revenue (including both sales to external customers

and intersegment sales) is 10% or more of the combined revenue (internal and external) of all reported operating segments;

• the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of (i) the combined profit of all operating segments that did not report a loss or


(ii) the combined loss of all operating segments that did report a loss; or the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of (i) the combined profit of all operating segments that did not report a loss or (ii) the combined loss of all operating segments that did report a loss; or

• its assets are 10% or more of the combined assets of all operating segments.525

Note that, for purposes of applying the 10% significance criteria, an issuer whose primary financial statements are prepared under local Gaap or non-IASB IFRS should use the basis of accounting used for internal management reporting in determining whether segments are reportable.

A company with more than one segment (or aggregated segments) in excess of any of these thresholds must disclose for each such segment the revenues from external customers, a measure of profit or loss526 and the total assets attributable to that segment, as well as a reconciliation to the corresponding consolidated amounts. Additional information on items such as equity investments and capital expenditures may be required under SFAS 131 if such amounts are reviewed by the chief operating decision maker of the company on a segment basis. For interim periods, disclosure must include a measure of profit or loss for each segment, reconciliations and material changes to total assets. Financial disclosure for segments will typically be included in the financial statements and be cross-referenced as part of a discussion on operating segments in MD&A. The effect of these requirements is to force disclosure of profitability by segment, which many issuers are reluctant to do for competitive reasons.

PRACTICE POINTthe identification and reporting of financial information for operating segments will be critical in the offering process, as the time to prepare such information, the effect on textual disclosure and the impact on enterprise valuation may all be significant. the need for segment reporting is always considered carefully when a company is issuing securities for the first time. However, the issue should be revisited whenever the company has entered into new business lines or if management has begun to analyse its business in a new way that may affect the original segment analysis. Because the guidance of SFaS 131 is complex and its application very fact-specific, it is important to begin an early dialogue with the accountants when there may be segment reporting issues.

(vi) Supplemental schedules for certain transactionsS-X Rule 5-04 requires a number of supplemental schedules for particular industries and circumstances527 Each schedule contains additional financial information that must be audited and provided, typically including:• Schedule I – Condensed financial information of reg-

istrant (known as “parent-only financial statements”): requires condensed balance sheets and statements of income and cash flows on a non-consolidated basis as of the end of the latest fiscal year if the amount of restricted net assets of subsidiaries exceeds 25% of the issuer’s consolidated assets. “Restricted net assets” are the issuer’s proportionate share of net assets of consolidated subsidiaries (after intercompany elimina-

tions) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (for example, the lender, regulatory agency or foreign government).528

• Schedule II – Valuation and qualifying accounts: requires an analysis of each valuation and qualifying account (such as allowance for doubtful accounts, allowance for obsolescence).

• Schedule III – Real estate and accumulated deprecia-tion: requires real estate operating and investment companies to disclose certain financial details regarding each of their proper-ties.

• Schedule IV – Mortgage loans on real estate: requires real estate operating and investment companies to disclose details of each mortgage loan which accounts for 3% or more of the carrying value of all of the issuer’s mortgages.

• Schedule V – Supplemental information concerning property-casualty insurance operations: requires disclo-sure as to liabilities on property-casualty insurance claims if the issuer, its subsidiaries or 50%-or-less owned equity basis inves-tees have such liabilities. However, the schedule may be omit-ted if reserves for unpaid property-casualty claims and claims adjustment expenses did not, in the aggregate, exceed 50% of common stockholders’ equity of the issuer and its consolidated subsidiaries as of the beginning of the fiscal year.Issuers in specific industries might have schedule requirements

that vary from those listed above.

(vii) Industry guidesS-K Item 801 sets out six industry guides requiring enhanced disclosure of financial and operational metrics for issuers in certain industries:529

• Guide 2 – Disclosure of oil and gas operations: amend-ments adopted at the end of 2008 require enhanced disclosure of oil and gas reserves (including from non-traditional sources), the company’s progress in converting proved undeveloped re-serves into proved developed reserves, technologies used estab-lishing reserves, the company’s internal controls over reserves estimates, disclosure based on geographic area (as defined), as well as the optional disclosure of probable and possible reserves and oil and gas reserves’ sensitivity to price. Required disclo-sure also includes information regarding proved undeveloped reserves; oil and gas production; drilling and other exploratory and development activities; present activities; delivery commit-ments; and oil and gas properties, wells, operations and acre-age.530

• Guide 3 – Statistical disclosure by bank holding com-panies: requires disclosure of analyses of interest earnings, investment and loan portfolios, loan loss experience, deposit types, returns on equity and assets, and short-term deposits.

• Guide 4 – Prospectuses relating to interests in oil and gas programmes: requires enhanced disclosure relating to the offering terms and participation in costs and revenues among investors and others, as well as a 10-year financial summary of any drilling programmes by the issuer and its associates, includ-ing recovery on investment for investors in those programmes.

• Guide 5 – Preparation of registration statements relating to interests in real estate limited partnerships: requires a summary of the financial performance of any other real estate investment programmes sponsored by the general partner and its affiliates.


• Guide 6 – Disclosure concerning unpaid claims and claim adjustment expenses of property-casualty insurance underwriters: requires disclosure of details of reserves and historical claim data if reserves for unpaid property casualty claims and claim adjustment expenses of the issuer, its consolidated and unconsolidated subsidiaries and equity investees exceed 50% of the common stockholders’ equity of the issuer and its consolidated subsidiaries.

• Guide 7 – Description of property by issuers engaged or to be engaged in significant mining operations: requires disclosure of information relating to each of the mines, plants and other significant properties owned or operated (or intended to be owned or operated) by the issuer, including location of the property, brief description of the title, claim or lease to the property, a history of previous operations, and a description of the present condition and operations on the property.Compiling the information required by these industry guides

can be a big undertaking, and the issuer’s financial and operating management should consult with its professional advisers early in the process if an industry guide applies.

Quantitative and qualitative disclosure about market riskItem 11 of Form 20-F sets out various specific requirements for quantitative and qualitative disclosure about market risk sensitive instruments (such as derivatives). This disclosure can be significant for companies with substantial trading portfolios or that engage in extensive hedging.

Item 18 versus Item 17Form 20-F provides two levels of financial statement disclosure: Item 17 and Item 18. Item 18 requires a more thorough adaptation of the issuer’s financial statements to US Gaap and the requirements of Regulation S-X than does Item 17.531 The distinction between Items 17 and 18 is based on a classification of the requirements of US Gaap and S-X into those that specify the methods of measuring the amounts shown on the face of the financial statements, and those prescribing disclosures which explain, modify or supplement the accounting measurements.532 Disclosures that are required by US Gaap but not local Gaap or IFRS need not be furnished for Item 17533 (although they might need to be disclosed under MD&A).

For example, if a foreign private issuer prepares its financial statements on a basis other than US Gaap or IFRS, Item 17 requires only a limited reconciliation to US Gaap.534 In contrast, Item 18 requires such financial statements to include all information required by US Gaap and Regulation S-X, in addition to the reconciling information required under Item 17.

For fiscal years ending before December 15 2009, Item 17 permits segment data to be omitted from financial statements prepared in accordance with US Gaap. Beginning with fiscal years ending on or after December 15 2009, the option to omit segment data from US Gaap financial statements will be eliminated from Item 17. Foreign private issuers that present US Gaap financial statements will therefore be required to comply fully with US Gaap, including presentation of segment data.

Registration statements for securities offerings generally must comply with Item 18. For fiscal years ending before December 15 2011, annual reports on Form 20-F (and 1934 Act registration statements for secondary listings) need only meet Item 17.535 In

respect of such fiscal years, foreign private issuers may, however, voluntarily report under Item 18 for all of their filings with the SEC, and many foreign private issuers choose to do so to facilitate further securities offerings or for market-driven reasons. Reporting under Item 18 allows, for example, an issuer to incorporate its filed financial statements into shelf registration statements. In addition, securities analysts may require the additional information for comparability to other issuers.

Some of the more significant disclosure items that are often required by Item 18 include segment information, derivative instruments and hedging activities, fair value of financial instruments, details about investment securities, guarantees and other commitments, asset retirement obligations, contingencies, stock compensation, related-party transactions, components of pension expense and description of the plans, income taxes, leases, concentration of credit risks, discounted operations and earnings per share.

Beginning with fiscal years ending on or after December 15 2011, annual reports on Form 20-F (and the Exchange Act registration statements forms available to foreign private issuers (Forms 20-F, F-1, F-3 and F-4) for secondary listings) must comply with Item 18. Accordingly, foreign private issuers that do not provide financial statements in accordance with US Gaap or IFRS, will have to provide a reconciliation that includes the footnote disclosures required by US Gaap and Regulation S-X. Item 17 will continue to be available for financial statements of non-registrants, such as significant acquired businesses, significant equity method investees, entities whose securities are pledged as collateral and guarantors, that are required to be included in a foreign private issuer’s registration statement, and annual report or other Exchange Act report. These include financial statements of significant acquired businesses,536 significant equity method investees,537 entities whose securities are pledged as collateral538 and guarantors.539

Special considerations in Rule 144A transactionsThe disclosure document in a Rule 144A offering is typically modelled after its first cousin, the public prospectus. This holds true for financial statements as well – although the line item disclosure rules of the 1933 Act do not strictly apply to private offerings under Rule 144A, it has become standard practice to follow these rules as if they applied to Rule 144A offerings, with only limited exceptions. In many situations, the commitment committees of the major financing sources will insist on including financial disclosure in the Rule 144A offering circular that is in all material respects consistent with the financial statement requirements that would apply to a registration statement filed with the SEC. Rule 144A offerings are typically sold off the desk to buyers who expect substantially equivalent level of disclosure that they would receive in a public deal. Additionally, since the Rule 144A offering circular is often followed in a matter of weeks by a registered exchange offer prospectus (at least in Rule 144A offerings with registration rights) and the buyers of the offered securities will thereby receive full 1933 Act disclosure shortly after the closing, most practitioners elect whenever possible to provide substantially the same disclosure to prospective purchasers before the closing as well. Therefore, Rule 144A offering circulars typically follow the public offering rules described above in all material respects.

Foreign private issuers tend to take a flexible approach to


financial statements in unregistered transactions depending on a variety of factors, including the type of transaction, local market practice, deal size, underwriter practice, investor expectations and other marketing issues. It is not uncommon for a working group on a Rule 144A deal to decide to dispense with a particular financial statement requirement if the group determines that that particular item will not materially alter the total mix of information provided, or if there is another way to disclose the issue that the S-X requirement is targeting. After all, Rule 144A(d)(4)’s information requirement is very modest and calls only for “the issuer’s most recent balance sheet and profit and loss and retained earnings statements, and similar financial statements for such part of the two preceding fiscal years as the issuer has been in operation (the financial statements should be audited to the extent reasonably available).” A more flexible approach can also be justified by the fact that the liability standards of Sections 11 and 12 of the 1933 Act do not apply to Rule 144A deals. Although Rule 10b-5 does apply to Rule 144A offerings, it is more difficult for disgruntled purchasers to demonstrate the requisite “scienter” required to establish a valid 10b-5 claim.540 As a result, it is not uncommon to provide only two years of audited financial statements in a Rule 144A transaction where a registration statement would require three years. This is true both for the issuer and for material acquired businesses. We have seen this decision taken in a number of deals, particularly where the issuer is already in its third or fourth fiscal quarter, since the third year of audits will likely be completed in the natural course before the exchange offer registration statement is required to be filed. Other working groups have elected to exclude some of the finer elements of the financial information requirements where they have determined that such additional information would

not materially alter the total mix of information presented. Examples include some of the details of the required guarantor footnotes described above, the separate financial statements of subsidiaries in secured deals and some of the details of executive compensation. Although the industry custom is to follow the public offering rules as if they applied to the 144A deal, there is no requirement in Rule 144A to do so and some working groups will conclude that not every detail of the information called for in a registration statement is required to present 144A investors with full and fair disclosure.

PRACTICE POINTas the full impact of Sarbanes-Oxley has made itself felt upon the private equity community and smaller public companies (for whom a few extra million dollars of administrative expenses are material), we have seen a rise in “144a-for-life” debt financings. these transactions are identical to regular Rule 144a offerings, except that they do not offer bond investors any registration rights and they do not require the bond issuers to become or remain voluntary filers of 1934 act reports. Because these offerings will not be followed in a few weeks with a registered exchange offer prospectus that is fully compliant with S-X, some deal teams are concluding that 144a-for-life disclosure documents can more freely dispense with non-core S-X requirements than would be the case in a Rule 144a offering with registration rights. there is no clear consensus among practitioners at this time as to whether, or to what extent, such additional flexibility is appropriate.

The US Sarbanes-Oxley Act of 2002 45

Who is subject to Sarbanes-Oxley?The Sarbanes-Oxley Act applies to all issuers (including foreign private issuers) that:• have registered securities under the Exchange Act;• are required to file reports under Section 15(d) of the Exchange

Act; or• have filed a registration statement under the Securities Act, that

has not yet become effective.541

This means, for example, that any foreign private issuer that has listed its securities in the US, or issued securities to the public in the US 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, however, that has not sold securities to the public in the US, 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 Sarbanes-Oxley Act. Accordingly, when we refer below to issuers and foreign private issuers we mean those companies that are subject to Sarbanes-Oxley.

Although the Sarbanes-Oxley Act does not generally distinguish between domestic US issuers and foreign private issuers, the SEC has, in its implementing rules, made various exceptions for the benefit of foreign private issuers.

PRACTICE POINTthe Sarbanes-Oxley act has caused some foreign private issuers to reconsider their listings in the US. de-listing, however, only serves to exempt the issuer from the requirements of Section 301 of Sarbanes-Oxley (concerning standards relating to listed company audit committees). to avoid the remainder of Sarbanes-Oxley’s provisions, the issuer would also have to de-register under the exchange act. doing this had previously been impractical, because it required an issuer to certify to the SeC that it has fewer than 300 US shareholders. effective June 4 2007, however, the SeC adopted exchange act Rule 12h-6, making it considerably easier for foreign private issuers to deregister their securities. For further discussion on deregistration and Rule 12h-6, see Foreign Private Issuer Deregistration under the Exchange Act in Chapter 2.

When does Sarbanes-Oxley take effect?The Sarbanes-Oxley Act’s provisions have taken effect at different times, ranging from immediately upon enactment to later dates specified in the Act or on which the required SEC implementing regulations came into force. Currently, all of the Act’s provisions have taken effect with the exception, as discussed in detail below, of certain auditor attestation requirements for issuers that qualify as non-accelerated filers (as defined below).

Section 404 – internal control over financial reporting (i) Internal control requirementsSection 404 of Sarbanes-Oxley contains two related requirements. First, under Section 404(a), the SEC must adopt rules requiring an issuer’s annual report filed with the SEC to contain an internal control report (1) stating management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting and (2) containing an assessment, as of the end of the issuer’s most recent fiscal year, of the effectiveness of the issuer’s internal control structure and procedures for financial reporting.

In addition, Section 404(b) requires an issuer’s independent auditor to attest to, and report on, management’s Section 404(a) assessment, in accordance with standards adopted by the US Public Company Accounting Oversight Board (the PCAOB). (Section 404(b) provides, however, that the attestation cannot be a separate engagement of the auditor.) The PCAOB has adopted Auditing Standard No 5 as the current standard for Section 404(b) attestation engagements.542

(a) Section 404(a) – management’s assessmentAs required by Section 404(a), the SEC has adopted Rules 13a-15 and 15d-15 under the Exchange Act, and the related Item 15 of Form 20-F.

Under Rules 13a-15 and 15d-15, a foreign private issuer must:• maintain internal control over financial reporting;543

• evaluate (with the participation of the CEO and CFO) the effectiveness of internal control as of the end of each fiscal year;544 and

• evaluate (with the participation of the CEO and CFO) any change in its internal control that occurred during the fiscal year that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting.545

Under Item 15, in a foreign private issuer’s annual report on Form 20-F, management must provide a report on the issuer’s internal control over financial reporting that contains, among other things:546

• a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting;

• a statement identifying the framework used by management to evaluate the effectiveness of the issuer’s internal control over financial reporting;

• management’s assessment of the effectiveness of the issuer’s internal control over financial reporting as of the end of the most recent fiscal year, including a statement as to whether or not the issuer’s internal control over financial reporting is effective. The statement must also include disclosure of any material weakness in the issuer’s internal control over financial reporting identified by management. Management is not permitted to conclude that the issuer’s internal control over

CHapteR 7

The US Sarbanes-Oxley Act of 2002


financial reporting is effective if there are one or more material weaknesses in internal control; and

• a statement that the independent auditor that audited the financial statements included in the annual report has issued an attestation report on management’s assessment of the issuer’s internal control over financial reporting (the independent auditor’s attestation report must also be provided in the annual report).

(b) Section 404(b) – auditor’s attestationUnder Item 15, a foreign private issuer’s annual report on Form 20-F must include:• an attestation report of the independent auditor on

management’s assessment of the issuer’s internal control over financial reporting; and

• disclosure of any change in its internal control that occurred during the fiscal year that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting.547

However, Item 15T delays implementation of Section 404(b) for foreign private issuers that are not a large accelerated filer or an accelerated filer until fiscal years ending on or after December 15 2009.548

For these purposes:• A large accelerated filer is an issuer that, as of the end of its fiscal

year:549

- has an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates (market capitalisation) of $700 million or more (measured as of the last business day of its most recently completed second fiscal quarter);

- has been subject to SEC reporting under the 1934 Act for a period of at least 12 calendar months;

- has filed at least one annual report under the 1934 Act with the SEC; and

- is not eligible to use the requirements for smaller reporting companies in Regulation S-K.550

• An accelerated filer is an issuer meeting the same conditions, except that it has a market capitalisation of $75 million or more but less than $700 million (measured as of the last business day of its most recently completed second fiscal quarter).551

• Although the term non-accelerated filer is not defined in the SEC’s rules, the SEC uses it to mean an issuer that, as of the end of its fiscal year:- has a market capitalisation of under $75 million, or - does not otherwise meet the requirements of the accelerated

filer or large accelerated filer definitions above.

(c) Transition relief for new reporting companies (such as IPO issuers)A foreign private issuer need not comply with Section 404(a) or 404(b) requirements until it either (1) has been required to file an annual report for the prior fiscal year or (2) has filed an annual report for the prior fiscal year.552 This means, for example, that IPO issuers do not need to include a Section 404(a) management assessment or Section 404(b) auditor’s attestation in the first Form 20-F they file after their IPO. These issuers are required, however, to include a statement in their first annual report that the annual report does not include either management’s assessment on the company’s internal control over financial reporting or the auditor’s attestation report.553

(ii) Definition of internal control over financial reportingFor purposes of Rules 13a-15 and 15d-15, and Items 15 and 15T of Form 20-F (as well as the Section 302 certification discussed below), internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer’s CEO and CFO, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:• pertain to the maintenance of records that in reasonable detail

accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and

• that receipts and expenditures of the issuer are being made only in accordance with authorisations of management and directors of the issuer; and

• provide reasonable assurance regarding the prevention or timely detection of unauthorised acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.554

(iii) Evaluation of internal control(a) Framework for evaluation and the interpretive guidanceThe SEC does not require that an issuer use a particular framework in undertaking an evaluation of internal control over financial reporting. In fact, the SEC has affirmed that the framework for evaluating internal controls over financial reporting will vary from company to company.555 The SEC has, however, published an interpretative release to provide guidance for management in evaluating and assessing internal controls over financial reporting (the Interpretive Guidance).556 Although not the only permissible framework, the SEC has stated that an evaluation of internal controls over financial reporting that complies with the Interpretive Guidance will satisfy the evaluation requirements of 34 Act Rules 13a-15c and 15d-15c.557

For issuers who choose not to follow the Interpretive Guidance (including those issuers who have previously established frameworks), the SEC requires that management’s evaluation be based on a recognised control framework established by a body or group that has followed due-process procedures, including a broad distribution of the framework for public comment.558 The Committee of Sponsoring Organisations of the Treadway Commissions’ Internal Control – Integrated Framework, the Canadian Institute of Chartered Accountants’ Guidance on Assessing Control, and the Institute of Chartered Accountants in England and Wales’ Turnbull Report are all approved frameworks.559

The framework must:560

• be free from bias;• permit reasonably consistent qualitative and quantitative

measures of an issuer’s internal control;• be sufficiently complete so that those relevant factors that

would alter a conclusion about the effectiveness of an issuer’s internal controls are not omitted; and

• be relevant to an evaluation of internal control over financial reporting.


In the Interpretive Guidance, the SEC follows the principles indicated above and provides a framework for evaluation with two main objectives.561 First, the framework provides that management should evaluate whether it has implemented “controls”562 that adequately address the risk that a material misstatement of the financial statements would not be prevented or detected in a timely manner.563 If management determines that risks of a material misstatement can be addressed by entity-level controls, it is unnecessary to implement more specific, lower-level controls.564 Second, management’s evaluation of evidence about the operation of its controls should be based on its assessment of risk: low risk areas should receive less testing and control than high-risk areas.565 Thus, the Interpretive Guidance seeks to establish a framework that is as efficient as possible, allowing issuers to rely on entity-level controls when possible and to focus their resources on examining those areas of their operations most likely to pose risks to reliable financial reporting.

(b) Auditor independenceAlthough management may coordinate its evaluation of internal controls with that of its auditors, it cannot compromise the auditors’ independence. Auditors may assist management in documenting internal controls, but management must be actively involved in the documentation process. In addition, management cannot delegate its responsibilities to assess internal control to the auditor.566

The SEC has emphasised that management and auditors have different roles and responsibilities with respect to evaluating and auditing internal controls, but the auditors’ independence is a crucial element to the integrity and efficiency of the process.567 Management must design and maintain the internal controls and perform an annual evaluation that provides a reasonable basis for management’s assessment of the internal controls’ effectiveness. However, management’s continuous involvement with the company’s internal controls and overall business may influence its judgment concerning how best to evaluate internal controls and the sufficiency of evidence necessary to assess the effectiveness of such controls. The SEC has therefore emphasised the auditors’ responsibility to conduct an independent audit that “includes appropriate professional scepticism” to ensure that a company’s internal controls can be assessed and evaluated effectively and impartially.568

(c) Material weaknessesManagement may not determine that an issuer’s internal control over financial reporting is effective if it identifies one or more material weaknesses in the issuer’s internal control.569 The SEC has adopted an official definition of the term material weaknesses in Exchange Act Rule 12b-2 and Rule 1-02 of Regulation S-X. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.570 The definition adopted by the SEC is the same as that adopted by the auditing standards of the PCAOB.571

(d) Method of evaluationAs with the framework for evaluation of internal controls, the SEC does not require that a specific method or procedure be followed in undertaking the evaluation in accordance with an

issuer’s chosen framework. The SEC has, however, published the Interpretive Guidance to assist management in developing a method for evaluating and assessing internal controls over financial reporting that will comply with Exchange Act Rules 13a-15(c) and 15d-15(c).572 Whatever method is used, Form 20-F requires that issuers maintain “evidential matter, including documentation,” to provide reasonable support for management’s assessment of internal control over financial reporting.573

In general, management’s assessment of internal controls must be based on procedures sufficient both to evaluate the design of such controls and to test their operating effectiveness.574 Controls that are subject to assessment include:575 • controls over initiating, recording, processing, and reconciling

account balances, classes of transactions and disclosure, and related assertions included in the financial statements;

• controls related to the initiation and processing of non-routine and non-systematic transactions;

• controls related to the selection and application of appropriate accounting policies; and

• controls related to the prevention, identification, and detection of fraud.The SEC has cautioned that inquiry alone generally will not

provide an adequate basis for management’s assessment.576

(e) Changes in internal controlThere is no explicit requirement in the rules under Section 404 to disclose the reasons for any changes in internal control (as opposed to the existence of those changes).577 The SEC has cautioned, however, that an issuer must consider whether the anti-fraud provisions of the US federal securities laws would require that disclosure, together with other information about the circumstances surrounding the change.578

(iv) Certain internal control issues(a) September 2007 FAQThe SEC has issued and subsequently revised (most recently in September 2007) answers to certain frequently asked questions regarding management’s report over internal control (the September 2007 FAQ).579

Under the September 2007 FAQ:• Equity investees: an issuer must have controls over the re-

cording of amounts related to its investment that are recorded in its consolidated financial statements, although it need not evaluate the recording of transactions into the investee’s ac-counts.580

• Material business combinations: if an issuer consummates a material business combination during a fiscal year and is unable to conduct an assessment of the acquired business’s internal control during the period between the consummation date and the date of management’s assessment, it may omit an assessment of the acquired business’s internal control for not more than one year from the date of acquisition (and must make certain disclosures about the acquired business and the effect of the acquisition on the issuer’s internal control).581

• Initial internal control report: management need not disclose changes or improvements made in preparation for the first internal control report, although the SEC cautioned that if the issuer were to identify a material weakness it should carefully consider whether that fact should be disclosed, as well as any changes made in response to the material weakness.582

• Subsequent internal control reports: after an issuer’s first


management report on internal control, it is required to identify and disclose material changes in internal control in its annual report on Form 20-F. This would include discussing a material change (including an improvement) even if that change was not in response to an identified significant deficiency or material weakness.583

• Internal control of supplementary information in finan-cial statements: management is required to perform and regularly assess adequate internal controls over the preparation of its financial statements, including the supplementary infor-mation thereto (for example, the financial statement schedules required by Regulation S-X as well as any supplementary dis-closures required by the relevant accounting standards board). However, the SEC is currently evaluating whether an issuer’s internal control over such supplementary information in its financial statement should form part of management’s report on their assessment of internal control over financial reporting. Until such time as the SEC has completed its evaluation of this area, internal control over the preparation of this supplemen-tary information need not be encompassed in management’s assessment of internal control over financial reporting.584

• Reference to “interim financial statements” in defi-nition of “material weakness”: the reference to interim financial statements in the definition of material weakness is not applicable to foreign private issuers because home coun-try requirements regarding the preparation of interim financial information vary significantly and there are no uniform re-quirements under the Exchange Act. However, foreign private issuers filing on domestic US forms are subject to the same requirements with respect to interim information as domestic US issuers.585

• Consolidated entities on a proportionate basis: typi-cally, management’s report on internal control over financial reporting should include all consolidated entities, even if those entities are consolidated on a proportionate basis. However, there may be circumstances where the issuer does not have the right or authority to evaluate the internal controls of the entity consolidated on a proportionate basis and also lacks the access necessary to make the evaluation. In such cases, management should evaluate its controls over the recording of the amounts related to the proportionately consolidated entity recorded in the consolidated financial statements.586

(b) May 2005 SEC Staff StatementIn 2005, the SEC issued a Staff Statement on Management’s Report on Internal Control Over Financial Reporting.587 The SEC Staff Statement focuses on the management’s report on internal control as required by Section 404.

The SEC Staff Statement (which reflects the views of the staff of the SEC’s Division of Corporation Finance) provides that:• Overall focus of reporting: while identifying control

deficiencies and significant deficiencies represents an important component of management’s internal control assessment, the “overall focus” of internal control reporting should be on those items that could result in material errors in a company’s financial statements.588

• Reasonable assurance: management is required to assess whether internal control is effective to provide “reasonable assurance” about the reliability of financial reporting. This is a high standard, but does not mean absolute assurance. Exchange

Act Section 13(b)(7) defines reasonable assurance as a level of assurance that “would satisfy prudent officials in the conduct of their own affairs.”589

• Preferred approaches: in place of a check-the-box approach, management should focus on controls related to those processes and classes of transactions for financial statement accounts and disclosures that are most likely to have a material impact on an issuer’s financial statements. In addition, management should use a top-down, risk-based approach in determining the controls to be tested. The use of a percentage as a minimum threshold can be a reasonable starting place, but management must also exercise judgment (including qualitative factors) to determine if amounts above or below the threshold should be evaluated.590

• Annual and company measures versus interim meas-ures: companies should generally focus on annual and com-pany measures rather than interim or segment measures.591 In addition, although management’s assessment is stated as of year-end, this does not mean that controls must only be tested during the period leading up to the year-end close. It is instead preferable to test over a longer period of time.592

• Restatements: Section 404 does not require that a material weakness be found in every case of restatement resulting from an error. Instead, management and the auditors should use their judgment in assessing the reasons why a restatement was necessary and whether the need for restatement resulted from a material weakness in controls.593

• Disclosure: companies should consider including in material weakness disclosure a discussion of:- the nature of the material weakness;- its impact on financial reporting and the control environment;

and- management’s current plans, if any, for rectifying the

weakness.594

• Impact of material weaknesses: issuers are strongly en-couraged to provide disclosure that allows investors to assess the potential impact of each material weakness, and that also distinguishes those material weaknesses that have a pervasive impact on internal control from those that do not.595

• IT issues: the SEC staff does not expect testing of general information technology controls that do not pertain to financial reporting.596 New IT systems and upgrades may not, however, be excluded by management from the scope of its assessment of internal control.597

• Auditor independence: with respect to auditor independ-ence:- discussing internal control issues with a company’s auditors

and exchanging views with them does not compromise auditor independence.

- so long as management, and not the auditor, makes the final determination as to the accounting used, and the auditor does not design or implement accounting policies, involving auditors in a consideration of the proper application of accounting standards is appropriate and does not indicate an internal control deficiency.

Management should not be discouraged from providing draft financial statements to auditors, even those that may be incomplete or contain errors. Errors in draft financial statements by themselves should not be the basis for determining that a deficiency in internal control exists.598


(v) Internal control audits – Auditing Standard No 5 599

As part of its enhanced regulation of the accounting profession, the Sarbanes-Oxley Act established the PCAOB (in Section 101 of the Act) and charged the PCAOB with, among other things, supervising public accounting firms that prepare the attestation reports issuers must file with their annual reports600 and establishing the standards governing the preparation of such reports.

Auditing Standard No 5 sets out the PCAOB’s rules for internal control audits (the PCAOB chose to refer to an “audit” rather than an “attestation”)601. As an update and replacement of the prior Auditing Standard No 2, Auditing Standard No 5 is effective for audits of fiscal years ending on or after November 15 2007.602 The PCAOB stated that Auditing Standard No 5 reflects a refinement of the prior standard, rather than a significant shift in approach.603 In particular, the main goals of the PCAOB in creating Auditing Standard No 5 were (1) to align the PCAOB’s standard with the SEC’s Interpretive Guidance and focus the internal control audit on the most important matters, (2) to scale the 404 audit to account for the particular facts and circumstances of individual companies, particularly smaller companies, (3) to allow auditors to use their professional judgment, particularly with regard to risk assessment, and (4) to follow a principled approach at determining when and to what extent auditors can rely on the work of others.604 The new standard is meant to eliminate unnecessary procedures and generally simplify the internal control audit process. 605

The PCAOB stated that the objective of the internal control audit is to enable auditors of an issuer to express an opinion on the effectiveness of the issuer’s internal control over financial reporting.606 In practice, therefore, the auditor must plan and perform the audit to compile competent evidence supporting a reasonable assurance that no material weakness exists.607 Using the same framework that management uses for its evaluation of internal controls, the auditor must bring to bear technical training, proficiency as an auditor, independence, due professional care and due professional scepticism to the audit of internal controls.608

(a) Significant deficiencies and material weaknessesAuditing Standard No 5 defines the concepts of “deficiency609,” “significant deficiency610,” and, as noted above, “material weakness.” Each of these terms describes faults in internal controls of varying levels of severity, with “deficiency” being the least severe and “material weakness” being the most severe: internal controls cannot be considered effective if one or more material weakness exists.611 Auditors must evaluate the severity of each control deficiency and determine whether such deficiencies, individually or in the aggregate, rise to the level of material weaknesses in an issuer’s internal controls.612 This will depend on whether there is a reasonable possibility that the controls could fail (even if they have not actually failed) to detect or prevent a misstatement or disclosure and the magnitude of such potential failure. 613

Auditing Standard No 5 requires auditors to communicate in writing to the management and the audit committee all material weaknesses identified during the audit. Further, if the auditor concludes that the audit committee’s oversight of the issuer’s financial reporting and internal controls is ineffective, the auditor must communicate this conclusion in writing the issuer’s board of directors.614 The auditor must also communicate in writing to the audit committee all significant deficiencies identified during the audit and should communicate in writing to the management (and notify the audit committee when such communication has

been made) all deficiencies identified during the audit that have not previously been communicated in writing to management. 615

(b) Identifying significant deficiencies and material weaknessesAuditing Standard No 5 identifies a number of risk factors that “affect whether there is a reasonable possibility that a deficiency, or a combination of deficiencies, will result in a misstatement of an account balance or disclosure.”616 These include:• the nature of the financial statement accounts, disclosures, and

assertions involved;• the susceptibility of the related asset or liability to loss or

fraud;• the subjectivity, complexity, or extent of judgment required to

determine the amount involved;• the interaction or relationship of the control with other controls,

including whether they are interdependent or redundant;• the interaction of the deficiencies; and• the possible future consequences of the deficiency.

The PCAOB notes that multiple deficiencies affecting the same account balance or disclosure increase the probability of misstatement and could, in combination, constitute a material weakness, even though such deficiencies may be less severe alone.617

In addition, Auditing Standard No 5 identifies a number of indicators of material weaknesses in internal control over financial reporting.618 These include:• identification of fraud, whether or not material, on the part of

senior management;• restatement of previously issued financial statements to reflect

the correction of a material misstatement;• identification by the auditor of a material misstatement of

financial statements in the current period in circumstances that indicate that the misstatement would not have been detected by the company’s internal control over financial reporting; and

• ineffective oversight of the company’s external financial reporting and internal control over financial reporting by the company’s audit committee.

(c) Auditor’s reportUnder Auditing Standard No 5, the auditor’s report includes the auditor’s opinion on whether the company maintained, in all material respects, effective internal control over financial reporting as of the specified date, based on the control criteria. 619

An auditor may not conclude that an issuer’s internal control over financial reporting is effective if it has identified one or more material weaknesses.620 If the auditor cannot perform all of the necessary procedures, the auditor may either withdraw from the engagement or disclaim an opinion.621 If an overall opinion cannot be expressed, Auditing Standard No 5 requires the auditor to explain why.622

Auditing Standard No 5 provides that if there are deficiencies that, individually or together, result in one or more material weaknesses, the auditor must express an adverse opinion on the issuer’s internal control over financial reporting, unless there is a restriction on the scope of the engagement.623 When expressing an adverse opinion on internal control over financial reporting, the auditor’s report must include a statement that a material weakness has been identified and identify the material weakness described in management’s assessment.624 If the material weakness has not been included in management’s assessment, the report should be


modified to state that a material weakness has been identified but not included in management’s assessment.625

Disclosure controls and proceduresIn addition to internal control, the SEC’s rules under the Act define the concept of “disclosure controls and procedures.”626 For these purposes (as well as for the Section 302 certification discussion below), disclosure controls and procedures mean controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is (1) timely recorded, processed, summarised, and reported; and (2) accumulated and communicated to the issuer’s management to allow for timely decisions about disclosure.627

(i) Interaction between disclosure controls and procedures and internal controlThere is substantial overlap between the concepts of disclosure controls and procedures and internal control over financial reporting, although there are some elements of each term that are not subsumed within the other. In particular, “disclosure controls and procedures will include those components of internal control over financial reporting that provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles.”628 By contrast, disclosure controls and procedures would not necessarily include accurate recording of transactions and disposition or safeguarding of assets, which would remain components of internal control.629

Accordingly, the effectiveness of an issuer’s disclosure controls and procedures is directly linked to the effectiveness of its internal control over financial reporting. Recall that management may not determine that an issuer’s internal control over financial reporting is effective if it identifies one or more material weaknesses in the issuer’s internal control over financial reporting. While the SEC has not established that existence of a material weakness prevents management from concluding that an issuer’s disclosure controls and procedures are effective, statements by senior SEC officials make clear that an issuer with a material weakness in internal control must overcome a high hurdle in order to conclude that its disclosure controls and procedures are nevertheless effective. The SEC has noted specifically that when an issuer restates previously issued financial statements to correct a material misstatement, management should consider whether its original disclosures concerning the effectiveness of its internal control over financial reporting are still appropriate and “[s]imilarly, while there is no requirement that management reassess or revise its conclusion related to the effectiveness of its disclosure controls and procedures, management should consider whether its original disclosures regarding effectiveness of disclosure controls and procedures need to be modified or supplemented to include any other material information that is necessary for such disclosures not to be misleading.”630

(ii) RequirementsThe regime governing disclosure controls and procedures is similar to that for internal control. Accordingly:• as of the end of each fiscal year, the issuer’s management,

with the participation of the CEO and CFO, must make an evaluation of the effectiveness of the issuer’s disclosure controls and procedures;631 and

• the issuer must disclose the conclusions of its CEO and CFO regarding the effectiveness of the disclosure controls and procedures based on their review as of the end of the period to which the report relates.632

There is, however, no required auditor’s attestation with respect to disclosure controls and procedures.

Certification requirementsSarbanes-Oxley contains two overlapping certifications that must be provided by an issuer’s CEO and CFO (or persons performing similar functions): the Section 302 certification and the Section 906 certification. Section 302 amends the Exchange Act, whereas Section 906 amends the US federal criminal code.

(i) Section 302Section 302(a) of the Sarbanes-Oxley Act directed the SEC to adopt rules requiring CEO and CFO certification of each “annual or quarterly report” filed by issuers. In response, the SEC has adopted Exchange Act Rules 13a-14 and 15d-14 and the text of a certification for Form 20-F.633

(a) Section 302 Certification TextRules 13a-14 and 15d-14 require a foreign private issuer’s annual

report on Form 20-F (but not its current reports on Form 6-K)634 to include separate certifications by the issuer’s CEO and CFO. The certifications must state that:635

1. the officer has reviewed the annual report;2. based on the officer’s knowledge, the annual report does not

contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report;

3. based on the officer’s knowledge, the financial statements, and other financial information included in the annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the issuer;

4. the CEO and CFO are responsible for establishing and maintaining “disclosure controls and procedures” [and “internal control over financial reporting”] for the issuer and have:• designed such disclosure controls and procedures, or caused

such disclosure controls and procedures to be designed under their supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the annual report is being prepared;

• [designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;]

• evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in the annual report their conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation;636 and

• disclosed in the report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the report that has materially affected, or


is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

5. the CEO and CFO have disclosed, based on their most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee:• all significant deficiencies and material weaknesses in

the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarise and report financial information; and

• any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

The certifications must be included as an exhibit to the issuer’s annual report on Form 20-F.637 As part of the SEC’s regulatory relief for foreign private issuers, the portions of the certifications appearing above in square brackets did not come into effect until fiscal years ending on or after July 15 2006, in the case of foreign private issuers that are large accelerated filers, July 15 2007, in the case of accelerated filers, and December 15 2007 in the case of non-accelerated filers.638 Except for these changes, the wording of the certification attached to the issuer’s annual report639 may not be changed in any respect, even if the changes would appear to be inconsequential.640

(b) Violations of Section 302While Section 302 carries no criminal sanctions, false certifications are subject to SEC enforcement action for violating the Exchange Act and also possibly to both SEC and private litigation alleging violations of the anti-fraud provisions of the Exchange Act (such as Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5). A false certification also may have liability consequences under Sections 11 and 12(a)(2) of the Securities Act if the accompanying report is incorporated by reference into a registration statement (for example, on Form F-3) or into a prospectus.

(ii) Section 906(a) Section 906 Certification textSection 906 added Section 1350 to the US federal criminal code. Section 906 requires that each “periodic report containing financial statements” filed by an issuer must “be accompanied by” a certification by the issuer’s CEO and CFO that:• the periodic report fully complies with the requirements of

Section 13(a) or Section 15(d) of the Exchange Act; and• the information contained in the periodic report fairly presents,

in all material respects, the financial condition and results of operations of the issuer.Although Section 906 is self-implementing, the SEC has

adopted Exchange Act Rules 13a-14(b) and 15d-14(b) to require that the Section 906 certification (which may be a joint certification of the CEO and CFO) must be provided, and must be furnished as an exhibit to the relevant periodic report. Because the Section 906 certification is not considered “filed” as a technical matter, it would not attract liability under Section 18 of the Exchange Act or be incorporated by reference into the issuer’s subsequent Securities Act registration statements (unless specifically incorporated by the issuer).641 As with the Section 302 certification, Section 906 certification is not required for current reports on Form 6-K.642

(b) Violations of Section 906Under Section 906, an officer who certifies a statement “knowing

that the periodic report accompanying the statement” does not meet the certification can be fined not more than $1 million or imprisoned for not more than 10 years, or both. By contrast, an officer who “wilfully” certifies his or her written statement while “knowing” that the annual report does not “comport with all the requirements” of Section 906 can be fined not more than $5 million or imprisoned not more than 20 years, or both. The distinction between “knowing” and “wilful” certification is not set out in the Sarbanes-Oxley Act, but in other contexts “wilfully” normally requires a showing that the person had specific knowledge of the law he or she was violating, whereas “knowingly” does not.643

(iii) Differences between Section 302 and Section 906 certificationsAlthough the texts of the two required certifications overlap, there are some important differences between them. In contrast to the Section 302 certification, the text of the Section 906 certification does not explicitly provide for the officer to certify as to his or her knowledge. However, the US Department of Justice has confirmed that an officer may qualify a Section 906 certification to his or her knowledge because knowledge would, in any event, be a necessary element of criminal prosecution.644 Furthermore, whereas the Section 302 certification is required for any amendment to an annual report on Form 20-F, Form 20-F amendments that do not contain financial statements do not require a Section 906 certification.645

Non-Gaap financial measuresSection 401(b) of the Sarbanes-Oxley Act requires the SEC to issue rules limiting the use of “pro forma” financial information in various ways. In response, the SEC adopted both a disclosure regulation, Regulation G, and rules applicable to disclosure in filings with the SEC under Item 10 of Regulation S-K.646 The SEC has chosen to refer in the rules to “non-Gaap financial measures” rather than pro forma financial information, to avoid confusion with existing SEC rules on pro forma financial information (such as Article 11 of Regulation S-X).647

(i) Regulation GRegulation G applies whenever an issuer, or a person acting on its behalf, “publicly discloses material information” that includes a non-Gaap financial measure.648 Non-Gaap financial measure is broadly defined as a numerical measure of financial performance that excludes (or includes) amounts that are otherwise included (or excluded) in the comparable measure calculated and presented in the financial statements under Gaap.649 For purposes of Regulation G, “Gaap” generally means US Gaap. However, in the case of a foreign private issuer whose primary financial statements are prepared in IFRS or local Gaap, “Gaap” means the accounting principles under which the financial statements were prepared, unless the measure in question is derived from US Gaap (in which case Gaap means US Gaap).650

The term non-Gaap financial measure does not include:• operating or other financial measures and ratios or statistical

measures calculated using exclusively one or both of (1) financial measures calculated in accordance with Gaap and (2) operating measures or other measures that are not non-Gaap financial measures;651 or

• financial measures required to be disclosed by Gaap, SEC rules or an applicable system of regulation of a government, governmental authority, or a self-regulatory organisation.652


Regulation G requires that public disclosure of non-Gaap financial measures be accompanied by:653

• a presentation of the most directly comparable financial measure calculated in accordance with Gaap; and

• a quantitative reconciliation of the differences between the non-Gaap financial measure and the most directly comparable Gaap financial measure.654

In addition, Regulation G prohibits an issuer from making any non-Gaap financial measure public if it contains a material misstatement or omits to include information needed to make the included measure not misleading.655

A foreign private issuer is exempt from Regulation G if:656

• its securities are listed or quoted outside the US;• the non-Gaap financial measure being used is not derived from

or based on a measure calculated and presented in accordance with US Gaap; and

• the disclosure is made outside the US. (ii) S-K Item 10(e)Distinct from Regulation G, the SEC has adopted limitations on the use of non-Gaap financial measures in filings (whether annual reports on Form 20-F, or registration statements in connection with offerings in the US or US listings) in Item 10(e) of Regulation S-K. For purposes of Item 10(e), the term “non-Gaap financial measures” has the same meaning as under Regulation G.657

Item 10(e) requires that whenever an issuer includes a non-Gaap financial measure in an SEC filing it must also include:658

• a presentation, with equal or greater prominence, of the most directly comparable Gaap financial measure;

• a quantitative reconciliation of the differences between the non-Gaap financial measure and the most directly comparable Gaap financial measure;659

• a statement why management believes the non-Gaap financial measure provides useful information for investors; and

• to the extent material, a statement of the additional purposes for which management uses the non-Gaap financial measure.660

Furthermore, Item 10(e) prohibits in SEC filings, among other things:661

• non-Gaap measures of liquidity that exclude items requiring cash settlement, other than EBIT and EBITDA;

• the adjustment of non-Gaap measures of performance to eliminate or smooth items characterised as non-recurring, unusual, or infrequent when the nature of the charge or gain is such that it is reasonably likely to recur within two years, or there was a similar charge or gain within the prior two years;

• the presentation of non-Gaap financial measures on the face of the financial statements, in the accompanying notes, or on the face of any pro forma financial information required to be disclosed by Article 11 of Regulation S-X; and

• the use of titles or descriptions for non-Gaap financial measures that are the same as, or confusingly similar to, titles or descriptions used for Gaap financial measures.Item 10(e) contains an exemption from these prohibitions for

a foreign private issuer if the non-Gaap financial measure relates to the local Gaap used in the issuer’s primary financial statements, is required or expressly permitted by the standard-setter that establishes the local Gaap, and is included in the issuer’s annual report for its home jurisdiction.662

The SEC has cautioned that inclusion of a non-Gaap financial measure may be misleading unless accompanied by disclosure as to:663

• the manner in which management use the non-Gaap measure to conduct or evaluate its business;

• the economic substance behind management’s decision to use such a measure;

• the material limitations associated with the use of the non-Gaap financial measure as compared to the use of the most directly comparable Gaap financial measure;

• the manner in which management compensates for these limitations when using the non-Gaap financial measure; and

• the substantive reasons why management believes the non-Gaap financial measure provides useful information to investors.The SEC has also stated that “earnings” as used in EBIT and

EBITDA is intended to mean net income as presented in the statement of operations under Gaap, and that measures that are calculated differently should not be characterised as EBIT or EBITDA.664 To the extent EBIT or EBITDA are presented as a performance measure, the term should be reconciled to net income and not operating income.665

Off-balance-sheet and other MD&A disclosureSection 401(a) of the Sarbanes-Oxley Act requires the SEC to implement rules requiring issuers to disclose material off-balance sheet transactions. The SEC’s rules go beyond off-balance sheet transactions, however, and also address certain topics covered in its prior MD&A initiatives.666 The rules take the form of amendments to Item 5 of Form 20-F and, accordingly, apply to all registration statements filed by foreign private issuers (whether under the Securities Act or Exchange Act), as well as annual reports.

(i) Off-balance sheet arrangementsAn issuer must disclose, in a separately captioned section of MD&A, off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future material effect on the issuer’s financial condition, results of operations, capital expenditures or capital resources, or liquidity.667 To the extent necessary to understand these arrangements, the disclosure must include:668

• the nature and business purpose of the off-balance sheet arrangements;

• the importance to the issuer of the off-balance sheet arrangements in respect of liquidity, capital resources, market-risk support, credit-risk support, or other benefits;

• the amount of revenues, expenses, and cash flows arising from these arrangements;

• the nature and amounts of any interests retained, securities issued, or amounts incurred by the issuer under these arrangements;

• the nature and amounts of any other obligations or liabilities (contingent or otherwise) arising from these arrangements that are reasonably likely to become material and the triggering events that could cause them to arise; and

• any known events or trends that will, or are reasonably likely to, result in the termination or reduction in availability to the issuer of these arrangements, and the course of action the issuer proposes to take in response.An “off-balance sheet arrangement” is defined to include any

transaction, agreement or contractual arrangement to which an entity unconsolidated with the issuer is a party under which the issuer has certain obligations or interests.669 Because the definition of “off-balance sheet arrangement” incorporates concepts from US Gaap, foreign private issuers will need to refer to US Gaap for some of the disclosure items.670 Form 20-F provides that issuers that file IFRS financials should, in response to items referring to


US Gaap, provide additional disclosure than would normally be required under IFRS if necessary to satisfy the objective of the disclosure requirements.671

(ii) Table of contractual obligationsAn issuer must also include in its SEC filings a table of contractual obligations as of the end of the latest balance sheet date showing the items listed in the table above.672

The term “purchase obligations” means an enforceable agreement to purchase goods or services that is binding on the issuer and that specifies all significant commercial terms (such as quantity and price).673 With the exception of “purchase obligations,” the classifications of categories shown in the table are defined by reference to US Gaap. However, as noted above, issuers that file IFRS financials should, in response to items referring to US Gaap, provide disclosure that satisfies the objective of the disclosure requirements.674

(iii) Contingent liabilities and commitmentsAlthough it issued proposed rules with respect to disclosure requirements for contingent liabilities and commitments, the SEC declined to adopt final rules. In the meantime, the SEC’s existing guidance on the subject – which suggests a tabular format of specified categories675 – is controlling.676

Standards relating to listed company audit committeesSection 301 of the Sarbanes-Oxley Act added Section 10A(m) to the Exchange Act. Section 10A(m) charges the SEC with creating rules to prohibit the listing of any security in the US of an issuer that is not in compliance with certain substantive standards for audit committees. The SEC has adopted final rules under Section 301 as Exchange Act Rule 10A-3.

Under Rule 10A-3, audit committee members each have to be a member of the board of directors and be otherwise independent.677 To be “independent,” an audit committee member is barred from accepting any compensatory fees other than in that member’s capacity as a member of the board678 and may not be an “affiliated person” of the issuer.679 The definition of “affiliated person” includes a person who, directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the specified person.680 There

is, however, a safe harbour for certain non-executive officers and other persons that are 10% or less shareholders of the issuer.681

Foreign private issuers are entitled to certain exemptions from the independence requirement of Rule 10A-3. For example, the inclusion of a non-management employee representative,682 a non-management affiliated person with only observer status,683 or a non-management governmental representative on the audit committee will not violate the affiliated person prong of the independence test.684 In addition, issuers involved in an IPO are entitled to certain exemptions during a transitional period following their public offering.685

Rule 10A-3 also requires that:• the audit committee must be “directly responsible” for the

appointment, compensation, oversight and retention of the external auditors, who must report directly to the audit committee;686

• the audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls or auditing matters, and for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters;687

• the audit committee must have the authority to engage independent counsel and other advisers as it deems necessary to carry out its duties;688 and

• the issuer must provide the audit committee with appropriate funding for payment of external auditors, advisers employed by the audit committee and ordinary administrative expenses of the audit committee.689

These requirements are not intended to conflict with local legal or listing provisions (or requirements under the foreign private issuer’s organisational documents), and instead relate to the allocation of responsibility between the audit committee and the issuer’s management.690 Accordingly, the audit committee may recommend or nominate the appointment or compensation of the external auditor to shareholders if these matters are within shareholder competence under local law,691 and it must be granted those responsibilities that the board of directors can legally delegate.692

Rule 10A-3 contains a general exemption for foreign private issuers that have a statutory board of auditors or statutory auditors established pursuant to home country law or listing requirements, which in turn meet various requirements.693

Payments due by period

Contractual obligations Total Less than 1 year

1-3 years 3-5 years More than 5 years

1 year – – – – –

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 – – – – –


A foreign private issuer relying on Rule 10A-3’s exemption from independence, or the general exemption noted above, will need to disclose in its annual report its reliance on the exemptions and an assessment of whether this reliance will materially adversely affect the audit committee’s ability to act independently and to satisfy any of the other requirements of Rule 10A-3.694

Audit committee financial expertSection 407(a) of the Sarbanes-Oxley Act directs the SEC to

issue rules requiring an issuer to disclose in its periodic reports whether its audit committee has at least one “financial expert” or if not, to state why not.

The SEC’s final rules implementing Section 407(a) use the term “audit committee financial expert” instead of “financial expert.” The SEC implemented these rules as Item 16A of Form 20-F.

Under Item 16A, a foreign private issuer must disclose in its annual report that the issuer’s board of directors has determined whether or not it has one audit committee financial expert serving on its audit committee, or if not, to state why not.695 If the issuer has a two-tier board of directors, the supervisory or non-management board would make this determination.696 The issuer must also disclose the name of the audit committee financial expert (if any)697 and whether that person is “independent” from management.698 An issuer’s board of directors must make an affirmative determination whether or not it has at least one audit committee financial expert, and may not simply fail to reach a conclusion.699

To qualify as an audit committee financial expert, the audit committee member must have the following “attributes:”700

• an understanding of Gaap and financial statements;• the ability to assess the general application of Gaap in connection

with the accounting for estimates, accruals and reserves;• experience preparing, auditing or analysing financial statements

similar to those of the issuer, or actively supervising others engaged in these activities;

• an understanding of internal controls over financial reporting; and

• an understanding of audit committee functions.701

In addition, an audit committee financial expert must have gained those attributes through:• education and experience as a principal financial officer,

principal accounting officer, controller, public accountant or auditor, or through experience in similar positions;

• experience actively supervising these functions;• experience overseeing or assessing the performance of companies

or public accountants with respect to the preparation, auditing or evaluation of financial statements; or

• other relevant experience.702

The term Gaap as used in Item 16A refers to the body of Gaap used by the issuer in its primary financial statements.703 Accordingly, the audit committee financial expert of a foreign private issuer need only be versed in the generally accepted accounting principles used by the foreign private issuer in preparing the financial statements filed with the SEC.704

Item 16A also contains a liability safe harbour for the audit committee financial expert, under which:• a person who is determined to be an audit committee financial

expert is not deemed to be an expert for any purpose, such as Section 11 of the Securities Act;705 and

• the designation of a person as an audit committee financial

expert does not impose greater duties, obligations or liabilities on the person than on other audit committee and board members, and does not affect the duties, obligations or liabilities of other audit committee and board members.706

Auditor independenceTitle II of the Sarbanes-Oxley Act creates a series of requirements relating to the work of external auditors, grouped under the heading “auditor independence”. Title II establishes Sections 10A(g) through (l) of the Exchange Act. The SEC implemented Title II by the adoption of amendments to Regulation S-X (S-X) Rule 2-01, and by adopting S-X Rule 2-07, Exchange Act Rule 10A-2, and Item 16C of Form 20-F.

Rule 10A-2 provides generally that it is unlawful for an auditor not to be independent under certain provisions of S-X Rules 2-01 and 2-07. S-X Rules 2-01 and 2-07, in turn, track – and in some cases expand upon – the requirements of Sections 10A(g) to (l), and provide (among other things):• an issuer may not employ a former partner, principal,

shareholder, or professional employee of an accounting firm in a financial reporting oversight role at the issuer if the individual was a member of the audit engagement team during the one-year period preceding the date audit procedures commenced for the fiscal period that included the date of initial employment of the audit engagement team member by the issuer;707

• limitations on the non-audit services that an independent auditor may provide;708

• that an audit partner must not act as the lead audit partner or concurring partner for more than five consecutive years and must not provide certain other services for more than seven consecutive years;709

• that the audit committee must pre-approve the engagement of the auditor to provide audit and non-audit services to the issuer or its subsidiaries, or for policies or procedures for pre-approval of audit and non-audit services (subject to certain de minimis exceptions);710

• that no audit partner may earn compensation based on the partner’s procuring engagements with the issuer to provide any services other than audit, review, or attest services;711 and

• that an auditor must report to the audit committee on (1) all critical accounting policies and practices to be used, (2) all alternative treatments of financial information within Gaap that have been discussed with the issuer’s management (as well as the implications of those alternatives and the auditor’s preferred treatment), and (3) all other material written communications between the auditors and management.712

Under Item 16C of Form 20-F, a foreign private issuer must disclose in its annual report:• under the caption “audit fees,” aggregate fees billed by the

auditor for each of the last two fiscal years for audit services (and services in connection with statutory and regulatory filings);713

• under the caption “audit-related fees,” aggregate fees billed by the auditor for each of the last two fiscal years for certain services “reasonably related” to the audit and review of financial statements, as well as a description of these services;714

• under the caption “tax fees,” aggregate fees billed by the auditor for each of the last two fiscal years for tax services, as well as a description of these services;715

• under the caption “all other fees,” aggregate fees billed by the


auditor for each of the last two fiscal years for all other products and services, as well as a description of these services; and716

• the pre-approval policies and procedures of its audit committee for audit and non-audit services;717 and, if greater than 50%, the percentage of hours expended on the audit by persons other than full-time permanent employees of the auditor.718

In addition, the PCAOB has adopted Rule 3526 (approved by the SEC on August 22 2008) requiring an issuer’s independent auditor to make certain communications to the issuer’s audit committee.719 The rule provides that, prior to accepting an initial engagement with an issuer, and at least annually once the auditor has been engaged by the issuer, the auditor must:• describe in writing to the audit committee of the issuer, all

relationships between the auditor (or any affiliates thereof ) and the issuer (or persons in financial reporting oversight roles at the issuer) that, as of the date of the communication, may reasonably be thought to bear on independence;

• discuss with the audit committee of the issuer the potential effects of the relationships described above on the independence of the auditor; and

• document the substance of its discussion with the audit committee of the issuer.720

The rule further provides that, once the auditor has been engaged by the issuer, the auditor must affirm to the audit committee of the issuer, at least annually in writing, that as of the date of the communication the auditor is “independent” as required by PCAOB rules.721

Improper influence on the conduct of auditsSection 303 of the Sarbanes-Oxley Act directs the SEC to issue rules prohibiting any officer or director of an issuer from taking any action to improperly influence an auditor for the purpose of rendering the issuer’s financial statements materially misleading.

The SEC has adopted Exchange Act Rules 13b2-2(a) to (c), largely tracking the text of Section 303. Among other things, the rules prohibit an officer or director of an issuer, or any other person acting under the direction of an officer or issuer, from taking any action to “coerce, manipulate, mislead or fraudulently influence” an auditor engaged in the performance of an audit or review of financial statements of the issuer that are required to be filed with the SEC if that person knew or should have known that his or her actions, if successful, could result in rendering the issuer’s financial statements materially misleading.722 The rule is enforceable exclusively by the SEC in civil proceedings.

The reach of the rules is quite broad. The phrase “persons acting under the direction” of an officer or director includes the issuer’s employees (even if they are not under the supervision or control of that officer or director), customers, vendors, and even attorneys or other outside advisers who might be in a position to give out false or misleading information to the auditor.723 In addition, the period during which an auditor can be said to be “engaged in the performance of an audit” has been given a wide interpretation by the SEC. It accordingly could encompass not only the professional engagement period but any other time the auditor is called upon to make decisions or judgments regarding the issuer’s financial statements, including, in certain situations, periods prior to and after the retention of the auditor.724

Rule 13b2-2 also identifies certain types of actions which could cause an issuer’s financial statements to be materially misleading, including improperly influencing an auditor:

• to issue or reissue a report on an issuer’s financial statements that is not warranted in the circumstances (due to material violations of generally accepted accounting principles, generally accepted auditing standards, or other professional or regulatory standards);

• not to perform audit, review, or other procedures required by generally accepted auditing standards or other professional standards;

• not to withdraw an issued report; or • not to communicate matters to an issuer’s audit committee.725

Auditor record retentionSection 802 of the Sarbanes-Oxley Act (which amends the US federal criminal code) requires any accountant who conducts an audit of an issuer to maintain all audit or review work papers for a period of five years from the end of the fiscal period in which the audit or review was concluded. Section 802 also requires the SEC to issue rules relating to the retention of relevant records such as work papers and other documents that form the basis of the review. In response, the SEC adopted Rule 2-06 to Regulation S-X.

Rule 2-06 requires that, for a period of seven years after an accountant concludes an audit or review of an issuer’s financial statements, the accountant must retain records relevant to the audit or review, including work papers, which:726

• are created, sent, or received in connection with the audit or review; and

• contain conclusions, opinions, analyses, or financial data related to the audit or review.“Work papers” for these purposes means documentation of

auditing or review procedures applied, evidence obtained, and conclusions reached by the accountant in the audit or review engagement.727

Rule 2-06 also provides that memoranda, correspondence, communications, and other documents and records (including electronic records) must be retained whether they support the auditor’s final conclusions about the audit or review, or contain information that is inconsistent with those conclusions.728

Material correcting adjustmentsSection 401(a) of the Sarbanes-Oxley Act added Section 13(i) to the Exchange Act. Under Section 13(i), each financial report containing financial statements prepared in accordance with (or reconciled to) generally accepted accounting principles729 and filed with the SEC must reflect all “material correcting adjustments” that have been identified by an issuer’s auditors. (This provision does not require implementing regulations by the SEC.)

The SEC has not provided guidance on the question whether Section 13(i) applies to interim financial statements submitted on Form 6-K. We believe the better view of Section 13(i) is that it applies only to a foreign private issuer’s annual report on Form 20-F and not to any interim financial statements furnished to the SEC under Form 6-K. Submissions on Form 6-K are not considered “filed” as a technical matter with the SEC. In addition, the SEC has interpreted the Section 302 certification requirement – which also refers to reports filed with the SEC – as not applying to Form 6-K submissions.730 As a practical matter, however, an issuer would likely face concerns under the anti-fraud provisions of the US federal securities laws if it failed to reflect a material correcting adjustment in an interim financial statement furnished on Form 6-K.


Attorney conduct rulesSection 307 of the Sarbanes-Oxley Act requires the SEC to issue rules setting forth “minimum standards of professional conduct for attorneys appearing and practising before the SEC in any way in the representation of issuers.” Section 307 also directs the SEC to implement rules requiring an attorney to report “evidence of a material violation of securities law or breach of fiduciary duty or similar violation” by an issuer or its agent to the issuer’s CEO or chief legal counsel and to report the evidence to the audit committee, another independent board committee, or the board of directors as a whole, if the CEO or chief legal counsel “does not appropriately respond to the evidence.” The SEC adopted final rules under Section 307 as Part 205 Standards of Professional Conduct for Attorneys Appearing and Practising Before the Commission in the Representation of an Issuer (the Attorney Conduct Rules).731

The term “appearing and practising” before the SEC is broader than it might first appear. It potentially covers any lawyer who transacts business with the SEC, represents an issuer in SEC proceedings, provides advice on the US securities laws regarding any document the attorney “has notice” will be submitted to the SEC (including in the context of preparing documents to be filed), or advises an issuer whether information must be included in or filed with any SEC document.732 However, the Attorney Conduct Rules contain an exemption for “non-appearing foreign attorneys,”733 which is defined as an attorney who (1) is himself or herself admitted to practise law in a jurisdiction outside of the US and does not hold himself or herself out as practising US federal or state securities or other laws, and (2) either:• conducts activities that would constitute appearing and

practising before the SEC only incidentally to, and in the ordinary course of, the practice of law in a jurisdiction outside the US; or

• is appearing and practising before the SEC only in consultation with counsel, other than a non-appearing foreign attorney, admitted or licensed to practise in a state or other US jurisdiction.734

If a covered attorney becomes aware of evidence of a “material violation” – which is defined to include a material violation of US securities law or a breach of fiduciary duty or a similar material violation of any US federal or state law – 735the Attorney Conduct Rules create a duty to report the matter to the issuer’s chief legal officer (CLO) or to both the CLO and the CEO.736 The CLO must then open an inquiry into the matter and take all reasonable steps to cause the issuer to adopt an appropriate response.737 Unless the attorney reasonably believes that the CLO’s response was adequate, he or she must report the matter “up the ladder” to the audit committee, to another independent board committee (if the issuer does not have an audit committee), or the board of directors as a whole (if there is no independent board committee).738

As an alternative to reporting to the CLO or CEO, the attorney may refer the matter to the issuer’s qualified legal compliance committee (QLCC), if one has been set up.739 A QLCC – which may also be the audit committee – is any committee of the issuer that includes at least one member of the audit committee and two or more non-employee members of the board of directors and that has been duly established by the board of directors with certain requirements.740 If the attorney reports the matter to the QLCC, he or she has no further obligations under the Attorney Conduct

Rules.741 In addition, the CLO may refer a reported matter to the QLCC in lieu of conducting the required investigation, in which case the QLCC will be responsible for responding.742

The SEC has also proposed, but not yet adopted, a “noisy withdrawal” provision under which a covered attorney would be required to withdraw from representing an issuer under certain circumstances if there is not an appropriate response to the up-the-ladder reporting.743

Code of ethicsSection 406 of the Sarbanes-Oxley Act directs the SEC to issue rules requiring issuers to disclose whether they have adopted a code of ethics for senior financial officers, or if not, why not. The SEC has accordingly adopted Item 16B of Form 20-F.

Item 16B requires the issuer to disclose whether it has adopted a code of ethics that applies to its principal executive officers, principal financial officers, and principal accounting officer or controller (or persons performing similar functions), and if not, it must explain why it has not done so.744 The term “code of ethics” means written standards that are reasonably designed to deter wrongdoing and to promote a specified set of principles, such as honest and ethical conduct and full, accurate, and timely disclosure.745 The code must be filed as an exhibit to the issuer’s annual report on Form 20-F or posted on the issuer’s website, or the issuer must undertake to provide to any person upon request, free of charge, a copy of the code.746 An issuer must report any amendment to the code relating to its covered executive officers, as well as the nature and date, and name of the person involved, of any waivers (whether explicit or implicit) of the code for its covered executive officers.747

Blackout trading restrictionsSection 306 of the Sarbanes-Oxley Act prohibits directors and executive officers from acquiring or transferring company equity securities during pension fund “blackout periods” imposed by the company itself or by a fiduciary of the company’s pension fund. The SEC adopted Regulation Blackout Trading Restrictions (Regulation BTR) to implement Section 306.

For a foreign private issuer, a blackout period generally means any period of more than three consecutive business days during which the ability to purchase or sell an interest in the issuer’s equity securities held in an “individual account plan” (such as a 401(k) plan)748 is temporarily suspended by the issuer or by a fiduciary of the plan with respect to not less than 50% of participants or beneficiaries located in the US and either:• the number of participants and beneficiaries located in the

US subject to the temporary suspension exceeds 15% of the total number of employees of the issuer and its consolidated subsidiaries; or

• more than 50,000 participants or beneficiaries located in the US are subject to the temporary suspension.749

Regulation BTR prohibits, subject to certain exceptions, any director or executive officer of an issuer from purchasing, selling, or otherwise transferring the issuer’s equity securities during any blackout period applicable to the securities, if the officer acquires or previously acquired the securities in connection with his or her service or employment as a director or officer.750 Under Regulation BTR, in any case where a director or officer is subject to a blackout trading restriction under Section 306 of Sarbanes-Oxley, the issuer must timely notify each director or officer and


the SEC of the blackout period and provide certain additional information (including the reasons for the blackout period).751 The issuer must file any notice of this type as an exhibit to its annual report on Form 20-F.752

Subject to a two-year statute of limitations,753 profits realised by an insider in violation of Section 306 (regardless of the insider’s intention upon entering into the transaction) will be recoverable by the issuer.754 In addition, if the issuer fails to institute an action to recover such profits within 60 days after being requested to do so by a shareholder, the shareholder can then initiate the action to recover on behalf of the issuer.755

Loans to executivesSection 402(a) of the Sarbanes-Oxley Act added Section 13(k) to the Exchange Act. Under Section 13(k), it is illegal for an issuer to “extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof )” of that issuer.756 Section 13(k) covers both direct extensions and indirect extensions of credit, including through subsidiaries.757

Section 13(k) contains certain exemptions, including:• any loan existing on July 30 2002, unless its terms are materially

modified or the loan is renewed;758

• consumer credit and extensions of credit under a charge card;759 and

• certain bank loans.760

The broad sweep of Section 13(k), coupled with the absence of SEC guidance, has raised a number of thorny questions for issuers. In response, a group of 25 law firms (including Latham & Watkins) issued a paper attempting to interpret Section 13(k) (the Interpretive Paper).761 The Interpretive Paper contends that the following should generally be regarded as permissible under Section 13(k):• cash advances to reimburse travel and similar expenses while

performing executive duties;762

• personal usage of a company credit card and company car, and relocation expenses required to be reimbursed;763

• “stay” and “retention” bonuses subject to repayment if an employee terminates employment before a designated date;764

• indemnification advances for litigation;765

• tax indemnity payments to overseas-based executive officers;766

• loans by a parent or shareholder that is a foreign private issuer but not subject to Sarbanes-Oxley, to the executive officer of a wholly-owned subsidiary that is subject to Sarbanes-Oxley, if the subsidiary has not “arranged” the loan and the loan is made by reason of service to the parent, not the subsidiary767; and

• most “cashless” option exercises.768

Forfeiture of bonusesSection 304 of the Sarbanes-Oxley Act provides that if an issuer is required to “prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct” with any financial reporting requirements under the securities laws, the CEO and CFO must reimburse the issuer for:• all bonuses or other incentive-based or equity-based

compensation received from the issuer during the 12-month period following the first public issuance or filing with the SEC (whichever is first) of the financial document embodying the financial reporting requirement; and

• any profits received from the sale of the issuer’s securities during that 12-month period.Section 304 does not require SEC implementing rules. It

remains unclear whether, among other things, the definition of “misconduct” applies to mistakes as opposed to knowing or reckless conduct.769 In the case of foreign private issuers, it is also not certain how Section 304 works if the required repayment is in conflict with the CEO’s or CFO’s rights under local employment laws.770

Research analystsSection 501 of the Sarbanes-Oxley Act added Section 15D to the Exchange Act. Section 15D directs the SEC to adopt rules “reasonably designed to address conflicts of interest” involving securities analysts. The SEC has adopted Regulation Analyst Certification to implement Section 15D (Regulation AC).771 (In addition, the NYSE and FINRA (formerly NASD) have issued rules regarding research analysts that are designed to meet the requirements of Section 15D.772)

Regulation AC requires that any broker or dealer, or certain persons associated with brokers or dealers, must include in any research reports that they publish or circulate to a US person in the US, a “clear and prominent” certification from the research analyst:773

• attesting that all of the views expressed in the research report accurately reflect the research analyst’s personal views about the securities or issuers covered in the report; and

• either that no part of the analyst’s compensation is related to specific recommendations expressed in the report, or if it is related, details of the source, amount and purpose of the compensation and how the compensation could influence the recommendations expressed in the report.A research analyst is the person “primarily responsible” for the

preparation of the content of the research report.774 If more than one analyst is primarily responsible, all must certify.775

Certifications should either appear on the front page of the research report or the front page should disclose where the certification is to be found.776 The first certification (as to accuracy) applies both to the rating as well as to the analysis in the research report, and the SEC has warned that a rating that contradicts the analysis could both render the certification false, as well as potentially violate the anti-fraud provisions of the US federal securities laws.777

In addition, Regulation AC mandates that brokers or dealers that provide research reports to US persons in the US prepared by an analyst employed by them must keep certain quarterly records of public appearances of the analyst containing:778

• 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 US.779

Regulation AC contains an exclusion to cover foreign research. In particular, “foreign persons” located outside the US who are not associated with a US registered broker-dealer are exempt from Regulation AC if they:780


• prepare a research report concerning a foreign security; and• provide the research report to a US person in the US 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.781

Liability issuesThe Sarbanes-Oxley Act has a sweeping impact on liability under the US federal securities laws. For a discussion of this, see Liability under the US federal securities laws – Sarbanes-Oxley Act Chapter 10.

Reporting by shareholders – obligations of major shareholders to file Schedule 13D or 13G reports 59

Shareholders who acquire beneficial ownership of more than 5% of a class of equity securities registered under the Exchange Act (a registered equity class) become subject to certain filing obligations with the SEC.782 In particular, the shareholder must file with the SEC (and send to the issuer of the securities by registered or certified mail) a statement on Schedule 13D or (if they are eligible) a short-form statement on Schedule 13G.783

A person is deemed to be the beneficial owner of shares if he or she, directly or indirectly, has:784

• voting power including the power to vote (or direct the voting of ) the shares; or

• investment power including the power to dispose of (or direct the disposition of ) those shares.In addition, when two or more persons agree to act together

for the purposes of acquiring, holding, voting or disposing of the equity securities of an issue, they are generally considered a “group” and their holdings of the registered equity class are aggregated for purposes of determining their filing obligations.785

We discuss the requirements of Schedules 13D and 13G below.

Schedule 13DA Schedule 13D must be filed within 10 days of the acquisition of more than 5% of a registered equity class.786 Schedule 13D must be filed by all shareholders who are not otherwise eligible to use Schedule 13G. Schedule 13D requires disclosure of a variety of information, including:• the identity, residence, citizenship and nature of the beneficial

ownership of the person making the report and of all persons on whose behalf the purchases have been made;

• the source and amount of funds used in making the purchases;• the purpose of the purchases; and• a description of any contracts, arrangements, understandings

or relationships with respect to the securities.

Schedule 13GCertain persons who would otherwise be required to file a Schedule 13D may instead file the short-form Schedule 13G.787

These include:• 13G institutional investors:788 certain institutional investors

which have acquired the securities in the ordinary course of business and not with the purpose or effect of changing or influencing control of the issuer. Such institutional investors include, among others: (1) US-registered broker-dealers, (2) US-regulated banks, (3) US-regulated insurance companies, (4) US-registered investment companies and (5) foreign institutions that are the functional equivalent of any of the US-regulated institutions that qualify to report on a Schedule 13G, provided that the foreign institution certifies that it is subject to a regulatory scheme that is substantially comparable to the

regulatory scheme applicable to the equivalent US institution and will undertake to furnish to the SEC, upon request, information that it otherwise would be required to provide on a Schedule 13D;

• 13G passive investors:789 other investors who have not acquired the securities with the purpose or effect of changing or influencing control of the issuer, are not 13G institutional investors and do not beneficially own (directly or indirectly) more than 20% of the registered equity class; and

• Other 13G investors:790 certain other investors who own more than 5% of a registered equity class as of the end of any calendar year, including investors who acquire the securities pursuant to a registration statement under the Securities Act, or those who owned their positions before the issuer registered its equity securities under the Exchange Act.Notwithstanding this, a 13G institutional investor and 13G

passive investor must file a Schedule 13D within 10 days if it changes its intention to hold the securities for passive purposes only.791 In addition, a 13G passive investor must file a Schedule 13D within 10 days of acquiring more than 20% of a registered equity class.792

The filing deadline for Schedule 13G varies depending on the type of investor. In particular:• 13G institutional investors must file within 45 days of the end

of the calendar year (to the extent they still own more than 5% of the registered equity class as of the end of the calendar year), or within 10 days after the end of the first month in which they own more than 10% of the registered equity class;793

• 13G passive investors must file within 10 days of the acquisition of more than 5% of a registered equity class;794 and

• other 13G investors must file within 45 days of the end of the calendar year in which they acquired the securities.795

Amendments to Schedule 13D or 13G reportsIf any material change occurs in the facts reported in a Schedule 13D, including any material increase or decrease in the percentage of the registered equity class beneficially owned, then an amendment disclosing that change must be filed promptly with the SEC.796 An acquisition or disposition of 1% or more of a registered equity class is deemed to be material for these purposes.797

Any person who has filed a Schedule 13G (and remains eligible to use that Schedule) must amend the Schedule 13G within 45 days after the end of any calendar year in which there are any changes to the information reported in its Schedule 13G, other than a change in percentage ownership resulting from a change in the aggregate number of outstanding securities of the registered equity class.798 In addition:• a 13G institutional investor who has reported owning more

than 10% of a registered equity class must file an amendment

CHapteR 8

Reporting by shareholders – obligations of major shareholders to file Schedule 13D or 13G reports


reporting any increase or decrease in its holdings of more than 5% of the registered equity class within 10 days of the end of the calendar month in which the change occurs;799 and

• any other 13G passive investor must promptly file an

amendment reporting an acquisition of greater than 10% of a registered equity class, and must thereafter report promptly any increase or decrease in its holdings of more than 5% of the registered equity class.800

Cross-border tender and exchange offers – the Tier I and Tier II exemptions 61

Tender offers, exchange offers and business combinations involving a non-US target with US securities holders potentially trigger a variety of provisions of the US federal securities laws.801 Depending principally on the level of US ownership of the target, certain exemptions from this regulatory scheme (known as the Tier I and Tier II exemptions) may be available.802 We summarise below the requirements and scope of the Tier I and Tier II exemptions, as well as the related exemption from Rule 14e-5. On September 19 2008, the SEC adopted amendments to the rules governing cross-border tender offers, exchange offers and business combinations.803 The amendments are intended to refine the cross-border rules in order to reduce regulatory conflict between US and non-US regulatory regimes and thereby encourage bidders to include US holders of the securities of foreign private issuers in cross-border business combination transactions. The amendments essentially codify no-action letter relief and interpretive guidance that the staff has provided on a case-by-case basis since the adoption of the cross-border rules in 1999.

The regulatory schemeCross-border M&A transactions are regulated by certain provisions of the Exchange Act and the SEC rules and regulations thereunder. These include Exchange Act Sections 13(d), 13(e), 14(d), 14(e) and 14(f ), and Regulation 13D-G, Rule 13e-3, Rule 13e-4, Regulation 14D and Regulation 14E under the Exchange Act. In addition, to the extent securities will be issued as consideration in the transaction, the registration requirements of the Securities Act will apply.

The Tier I exemption(i) Relief grantedTier I relief is sweeping. A tender offer for the equity securities of a foreign private issuer that meets the requirements of the Tier I exemption is exempt from most of the disclosure, filing and procedural requirements of the Exchange Act and the rules promulgated thereunder governing tender offers. Specifically, a Tier I-eligible tender offer is exempt from:• Sections 14(d)(1) through 14(d)(7) of the Exchange Act;804

• Regulation 14D (Rules 14d-1 through 14d-10) under the Exchange Act;805

• Schedules TO and 14D-9 under Regulation 14D;806

• Rules 14e-1 and 14e-2 of Regulation 14E;807 and• Rules 13e-3808 and 13e-4809 (in the case of a “going-private”

transaction or an issuer tender offer).A Tier I tender offer that meets certain additional requirements

is also exempt from Rule 14e-5, which generally prohibits a bidder in a tender or exchange offer from purchasing the targeted security outside the offer.810

The 2008 cross-border amendments further expand the scope of the Tier I exemption to include certain previously non-exempt business combination transaction structures commonly used

outside the US, such as compulsory acquisitions for cash and court-approved schemes of arrangements.811

Tier I transactions remain subject to the applicable rules of the target’s home jurisdiction,812 which is defined to include both the target’s jurisdiction of incorporation as well as the primary trading market for its securities.813 They also remain subject to the various antifraud provisions of the US federal securities laws, including Section 14(e) of the Exchange Act (applicable to tender and exchange offers).814 Both US and non-US bidders may rely on the Tier I exemption.815

(ii) RequirementsThe Tier I exemption is available if the following conditions are met:816

(a) Foreign private issuerThe target must be a foreign private issuer. See What is a foreign private issuer? in Chapter 1 above.817

(b) Limited US ownership• Ten percent limit:818 US securities holders must hold 10%

or less of the class of securities sought in the tender offer. However, the 10% limitation does not apply in the case of a tender offer commenced during the pendency of a prior Tier I tender offer.

• Calculation of 10% limit: A US securities holder is a person resident in the US.819 In determining whether or not a holder is a US resident, a bidder must look through the record ownership of securities held by brokers, dealers, banks and other nominees located in the US, the target company’s jurisdiction of incorporation and the jurisdiction that is the primary trading market of the target securities.820 Under the 2008 cross-border amendments, the Tier I eligibility calculation may be made any time within the period commencing 60 days prior to and ending 30 days after the date of announcement of the transaction.821 Also, pursuant to the 2008 cross-border amendments, securities held by persons (whether US or foreign) owning more than 10% of the class of securities sought in the tender offer are no longer excluded from the Tier I eligibility calculation (whereas securities held by the bidder and securities convertible into or exchangeable for the subject securities are still excluded).822 The previous requirement to exclude such holders often had the effect of disproportionately increasing the percentage of US ownership levels, as holders of large percentages of securities of foreign private issuers are frequently non-US persons. Accordingly, this change to the cross-border rules is expected to expand the number of transactions eligible for Tier I relief.

• Alternative average daily trading volume test available for certain negotiated and non-negotiated transactions: The 2008 cross-border amendments provide for an alternative Tier I eligibility test based on trading volume to determine US ownership in limited situations where an issuer or bidder

CHapteR 9

Cross-border tender and exchange offers – the Tier I and Tier II exemptions


is unable to complete the “look-through” analysis of the percentage of holders of the subject securities who are resident in the US.823 To qualify, the average daily trading volume for the subject securities in the US over a twelve-month period ending no more than 60 days before the announcement of the transaction must not be more than 10% of the average daily trading volume on a worldwide basis: information indicating otherwise must not be in annual information published by the target, and the acquiror must not have a reason to know that target’s US ownership levels do not qualify.824

(c) Equal treatment of US securities holdersThe bidder must permit US securities holders to participate in the offer on terms at least as favourable as those offered to other holders.825 Notwithstanding this requirement, certain exceptions are available in the case of exchange offers:• Blue Sky exemption: If the bidder offers securities registered

under the Securities Act, the bidder need not extend the offer to holders in those US states that prohibit the offer (after the bidder has a made a “good faith effort” to register or qualify the offer in that state), except that the bidder must offer the same cash alternative to holders in that state that it has offered to holders in any other state.826 In addition, if the bidder offers securities exempt from registration under Securities Act Rule 802 (discussed in Chapter 5), it need not extend the offer to holders in those US states that require registration, except that the bidder must offer the same cash alternative to holders in that state that it has offered to holders in any other state.827

• Cash only consideration:828 US securities holders may be offered only cash as consideration for the tender offer, even if non-US securities holders are offered consideration consisting in whole or in part of securities of the bidder. The bidder must have a reasonable basis to believe that the cash is “substantially equivalent” to the value of the consideration offered to non-US securities holders, and must meet certain additional conditions.

• Disparate tax treatment; loan notes:829 If a bidder offers loan notes solely to give sellers tax advantages not available in the US, and these notes are neither listed on an organised securities market nor registered under the Securities Act, the loan notes need not be offered to US securities holders.

(d) Informational documents in the USThree requirements apply to offering documents used in connection with a tender offer.• Comparable basis:830 Bidders must disseminate “any

informational document” to US securities holders, in English, on a “comparable basis” to that provided to security holders in the home jurisdiction.

• Publication:831 If the bidder disseminates by publication in its home jurisdiction, it must publish the information in a manner “reasonably calculated” to inform US securities holders of the offer.

• Form CB:832 In the case of a tender offer that otherwise would be subject to Regulation 14D (generally, an offer for equity securities registered under the Exchange Act), or an issuer self tender offer subject to Rule 13e-4, the bidder must furnish an English-language translation of the offering materials to the SEC under cover of Form CB by the first business day after publication or dissemination. A non-US offeror also must file a consent to service of process on Form F-X.

(e) Limitation on investment companiesThe issuer of the securities that is the subject of a Tier I tender offer may not be an investment company within the meaning of the Investment Company Act that is registered or required to be registered under that Act (other than a registered closed-end investment company).833

The Tier II exemption(i) Relief grantedTier II relief is considerably more limited than that available under Tier I and entitles bidders making issuer and third-party tender offers to limited relief from US securities law in areas of frequent conflict between US and foreign regulatory requirements, thus reducing the burdens of compliance. In particular:• All-holders rule – loan notes and separate US and

non-US offers: Tier II tender offers are exempt from the all-holders rule of Exchange Act Rule 14d-10 (and the related Exchange Act Rule 13e-4(f )(8) for issuer self-tender offers) in two ways. First, if a bidder offers loan notes solely to give sellers tax advantages not available in the US, and these notes are neither listed on an organised securities market nor registered under the Securities Act, the loan notes need not be offered to US securities holders.834 Second, under the 2008 cross-border amendments, a bidder may split its offer into multiple separate offers, one made to US securities holders (including ADR holders) and one or more separate offers made to non-US securities holders.835 In addition, the 2008 cross-border amendments provide that the separate US offer can include non-US securities holders thereby accommodating the inclusion of all the target’s ADRs in the US offer.836 The offer to US securities holders must be on terms at least as favourable as those offered to any other holders of the target securities.837

• Notice of extensions:838 Notice of extensions of the length of a tender offer made in accordance with home jurisdiction law or practice will be deemed to satisfy the requirements of Rule 14e-1(d) (which specifies the manner in which notice of extensions must be given).

• Prompt payment:839 Payments made in accordance with home jurisdiction law or practice will be deemed to satisfy the prompt payment requirements of Rule 14e-1(c) (which specifies the manner in which notice of extensions must be given).

• Subsequent offering period; withdrawal rights: A bidder is required to provide target security holders with withdrawal rights after a set date, measured from the commencement of a tender offer until shares have been accepted for payment.840 Under the regulatory framework prior to the 2008 cross-border amendments, a bidder providing for a subsequent offering period was permitted to suspend back-end withdrawal rights from the close of the initial offering period to the commencement of the subsequent offering period provided certain conditions are met.841 The 2008 cross-border amendments extend this relief, subject to certain conditions being satisfied, by allowing withdrawal rights to be terminated at the end of the initial offering period, so that such withdrawal rights are not available during the counting process, even if bidders do not provide a subsequent offering period.842

• Expanded Tier II exemptive relief for subsequent offering periods: The 2008 cross-border amendments revise the subsequent offering period for Tier II cross-border tender offers by: (1) allowing subsequent offering periods to last for

Cross-border tender and exchange offers – the Tier I and Tier II exemptions 63

more than 20 business days (and not imposing any maximum time limit), which is regularly required by applicable non-US law (under the 2008 cross-border amendments, this change also applies to offers for domestic US issuers in addition to offers for foreign private issuers);843 (2) allowing bidders to pay interest on securities tendered during a subsequent offering period where required under foreign law;844 and (3) providing additional flexibility to accommodate the commonly used non-US “mix and match” offer structure which regularly conflicts with the proration and prompt payment rules applicable during subsequent offering periods.845

• Early termination of an initial offering period:846 The 2008 cross-border amendments permit a bidder to terminate an initial offering period, including a voluntary extension of that period, if at the time the initial offering period and withdrawal rights end the following conditions are satisfied: (1) the initial offering period has been open for at least 20 US business days; (2) the bidder has adequately discussed the possibility and the impact of the early termination in the original offer materials; (3) the bidder provides a subsequent offering period after the termination of the initial offering period; (4) all offer conditions are satisfied as of the time when the initial offering period ends; and (5) the bidder does not terminate the initial offering period or any extension of that period during any mandatory extension required under US tender offer rules.

• Early commencement of an exchange offer: In order to reduce the regulatory disparity between cash and stock tender offers, certain exchange offers are permitted to commence on the date of the filing of a registration statement for the securities to be offered in the transaction, rather than the date on which the registration statement is declared effective by the SEC.847 The 2008 cross-border amendments allow all exchange offers eligible for the Tier II cross-border exemptions to take advantage of the early commencement procedure – including those for domestic US issuer targets – subject to the condition that the offeror voluntarily provide certain protections (such as withdrawal rights) that are required in an offer subject to Rule 13e-4 or Regulation 14D.848

The 2008 cross-border amendments also clarify that the Tier II exemption is available regardless of whether the target securities are subject to Rule 13e-4 (securities subject to issuer self-tender offers) or Regulation 14D (securities registered under Section 12 of the Exchange Act) as long as the other conditions to Tier II exemptive relief are satisfied.849

In addition, the SEC provides in the adopting release to the 2008 cross-border amendments additional interpretive guidance with respect to the Tier II minimum acceptance condition exemption. The cross-border tender offer rules generally require that a bidder keep an offer open and provide withdrawal rights for a certain period of time after a material change in the offer’s terms is communicated to target security holders.850 The SEC considers a reduction or waiver of a minimum acceptance condition to constitute a material change.851 With the adoption of the 2008 cross-border amendments, the SEC has re-affirmed that previous interpretive guidance on when bidders meeting the conditions of the Tier II exemption could waive or reduce the minimum acceptance condition without providing withdrawal rights during the remainder of the offer was and continues to be limited to instances where home country law and practice make it impossible or unnecessarily burdensome to comply with the extension

requirements of US law.852 In addition, the SEC refines its prior guidance by introducing the additional requirement (although this is not codified within the 2008 cross-border amendments themselves) that the bidder must undertake not to waive or reduce the minimum acceptance condition below a majority of the outstanding target securities that are the subject of the tender offer or the percentage threshold required to control the target company under applicable foreign law, if it is greater, in order to rely on this guidance.853 Furthermore, a bidder seeking to rely on this guidance will be required to fully disclose all of the possible implications of the potential waiver or reduction, including at the specific levels contemplated – disclosure that may be challenging to provide in an exchange offer.854

Tier II transactions remain subject to the applicable rules of the target’s home jurisdiction and all other provisions of the US rules and regulations applicable to business combination transactions not specifically exempted by Tier II.855

The SEC has indicated that it will continue to entertain requests for additional no action relief for Tier II tender offers on a case-by-case basis.856

The adopting release to the 2008 cross-border amendments provides further guidance also on US exclusionary tender offers and so-called “vendor placements” (offers that are not extended to the target’s US security holders).857

(ii) RequirementsThe Tier II exemption is available if the following conditions are met:• Forty percent limit:858 US securities holders must hold 40%

or less of the class of securities sought in the tender offer, calculated in the same manner as the 10% limit of Tier I. The 40% limitation does not apply in the case of a tender offer commenced during the pendency of a prior Tier II tender offer.

• Alternative average daily trading volume test available for certain negotiated and non-negotiated transactions:859 similar to Tier I, the 2008 cross-border amendments provide for an alternate Tier II eligibility test based on average daily trading volume to determine US ownership for the Tier II exemption, calculated in the same manner – and subject to the same conditions and limitations – as the 10% limit of Tier I, except that the relevant threshold is 40% instead of 10%.

• Foreign private issuer; not an investment company:860 The target must be a foreign private issuer but must not be an investment company within the meaning of the Investment Company Act that is registered or required to be registered under that Act (other than a registered closed-end investment company).

Rule 14e-5(i) Tier I and Tier II offersRule 14e-5 generally prohibits a bidder, its affiliates and certain persons acting on their behalf in a tender or exchange offer from purchasing target equity securities outside the offer.861 Tier I tender offers are generally exempt from Rule 14e-5,862 if, in addition to meeting the Tier I requirements (and the requirements of its home jurisdiction):863

• the offering documentation provided to US securities holders prominently discloses the possibility of purchases outside the


tender offer and the manner in which any information about such purchases will be disclosed;864 and

• the bidder discloses in the US information regarding these purchases in a manner comparable to the disclosure it makes in its home jurisdiction.865

The 2008 cross-border amendments expand the exemption from Rule 14e-5 to also cover Tier II transactions, subject to certain conditions designed to promote the fair treatment of tendering security holders, for (1) purchases or arrangements to purchase pursuant to a foreign tender offer; and (2) purchases or arrangements to purchase by an affiliate of the financial adviser and an offeror and its affiliates that are permissible under and

will be conducted in accordance with the applicable laws of the subject company’s home jurisdiction.866

(ii) All tender offersIn a tender offer for the securities of a non-US issuer (whether Tier I, Tier II or otherwise) purchases by “connected exempt market-makers” and “connected exempt principal traders” in accordance with the UK City Code on Takeovers and Mergers are generally exempt from Rule 14e-5 (subject to certain additional requirements).867 More generally, the SEC has stated that it will continue to entertain requests for no action relief from Rule 14e5 on a case-by-case basis.868

Liability under the US federal securities laws 65

A foreign private issuer becomes exposed to liability under the US federal securities laws in a variety of ways when it offers or lists its securities in the US. This liability can be civil or, in certain circumstances, criminal. Although litigation by private plaintiffs is more common, the SEC (and, in the case of criminal matters, the US Department of Justice) can initiate lawsuits, administrative proceedings and investigations. We summarise below the key areas of liability.

Registration – Section 5 of the Securities ActSection 5 of the Securities Act effectively requires every US offer and sale of securities to be either registered with the SEC or made pursuant to an available exemption from registration. The terms offer and sale in the Securities Act are broadly construed. For example, an offer includes any attempt to dispose of a security for value.869 As a result, publicity in the US about an impending offering, website disclosure of the offering or even an e-mail communication to “friends and family” announcing an offering can constitute an unregistered offer in violation of Section 5.

Violations of Section 5 can give rise to liability, as discussed below. They can also lead to the delay (or even abandonment) of a securities offering if the SEC imposes a cooling-off period. As a result of these onerous remedies, it is critical to control publicity and comply carefully with the requirements for any applicable exemptions from Section 5 registration.

Under Section 12(a)(1) of the Securities Act, an investor who buys securities issued in transactions violating Section 5 can rescind the sale and recover his or her purchase price (plus interest, less any amount received on the securities). If the investor no longer owns the securities, he or she can recover damages equal to the difference between the purchase and the sale price of the securities (again, plus interest, less any amount received on the securities).870

Section 12(a)(1) imposes strict liability, and an investor is not required to demonstrate any causal link between his or her damages and the violation of Section 5.871 However, in order to be liable, a defendant must be a seller – that is, a person who successfully solicits the purchase, motivated at least in part by financial interest – and the plaintiff must actually have bought the securities from that defendant.872

Anti-fraud(i) What is material?The various anti-fraud provisions of the Securities Act and the Exchange Act discussed below impose liability for material misstatements or omissions in connection with an offer or sale of securities. The fundamental test for “materiality” is whether there is a substantial likelihood that a reasonable investor would consider the misstatement or omission important in deciding whether or not to purchase or sell a security.873 As the US Supreme Court has explained, “there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the

reasonable investor as having significantly altered the ‘total mix’ of information made available.”874

The determination of materiality is a mixed question of law and fact,875 and the SEC has made clear that there is no bright-line quantitative test for materiality.876 In particular, the SEC has affirmatively rejected exclusive reliance on a commonplace rule of thumb that had developed in the preparation of financial statements, under which matters causing a numerical impact of less than 5% were generally not considered material.877 Although the SEC addressed this point in the context of preparing of financial statements, its guidance should also be taken into account in the preparation of narrative disclosure.

The SEC has pointed to several qualitative factors that should be considered in assessing materiality, and that could render a quantitatively minor misstatement material:878

• whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate;

• whether the misstatement masks a change in earnings or other trends;

• whether the misstatement hides a failure to meet analysts’ consensus expectations;

• whether the misstatement changes a loss into income or vice versa;

• whether the misstatement concerns a segment or other portion of the issuer’s business that has been identified as playing a significant role in the issuer’s operations or profitability;

• whether the misstatement affects the issuer’s compliance with regulatory requirements;

• whether the misstatement affects the issuer’s compliance with loan covenants or other contractual requirements;

• whether the misstatement has the effect of increasing management’s compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation; or

• whether the misstatement involves concealment of an unlawful transaction.In adopting Regulation FD, the SEC indicated that the

following subjects should be carefully reviewed to determine whether they are material:879

• earnings information;• mergers, acquisitions, tender offers, joint ventures, or changes

in assets;• new products or discoveries, or developments regarding

customers or suppliers (for example, the acquisition or loss of a contract);

• changes in control or in management;• change in auditors or auditor notification that the issuer may

no longer rely on an auditor’s audit report;• events regarding the issuer’s securities – for example, defaults on

senior securities, calls of securities for redemption, repurchase plans, stock splits, or changes in dividends, changes to the

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Liability under the US federal securities laws


rights of security holders, public or private sales of additional securities; and

• bankruptcies or receiverships.

(ii) Rule 10b-5 – Purchase or sale of securitiesSection 10(b) of the Exchange Act and Exchange Act Rule 10b-5 provide a broad (and heavily litigated) basis for liability in securities transactions. Rule 10b-5 prohibits:• employing “any device, scheme, or artifice to defraud;”• making “any untrue statement of material fact” or omitting “to

state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading;” or

• engaging in any “act, practice, or course of business which operates or would operate as a fraud or deceit.”

(a) Elements of a claim under Rule 10b-5The elements of a claim under Rule 10b-5 are:• a misrepresentation or omission;880

• of a material fact;• made with scienter – that is, either intent to deceive, manipulate

or defraud,881 or recklessness (beyond mere negligence);882

• upon which the plaintiff relied; and• which caused the injury.

Rule 10b-5 requires that the alleged fraud must have been in connection with the purchase or sale of securities – in other words, that there was some nexus but not necessarily a close relationship.883 As a consequence, a private plaintiff must show that he or she actually purchased or sold stock;884 a plaintiff cannot succeed on a claim that he or she would have sold had the truth been known. But Rule 10b-5 does not require privity between the defendant and the plaintiff,885 and accordingly a plaintiff need not show that he or she actually bought securities from the person who made the misleading statements.

(b) Scope of Rule 10b-5Rule 10b-5 is not limited to public offerings of securities, and applies to unregistered transactions and secondary market trading. In addition, Rule 10b-5 covers oral and written statements, whether or not relating to a registration statement or prospectus.886 These would potentially include statements made:• in an offering memorandum for a Rule 144A offering;• during a press conference or an interview, or in a press release;• in an annual report on Form 20-F; and• in a document submitted on Form 6-K.

In addition while an issuer is generally not liable for the statements of others, there may be exceptions if, for example, a corporate insider participates sufficiently in the preparation of an analyst’s report or circulates the report to prospective investors.887

(c) Insider tradingInsider trading is also prosecuted under Rule 10b-5. Generally speaking, Rule 10b-5 prohibits a person from buying or selling securities on the basis of material non-public information in violation of a duty owed to the shareholders of the issuer or where the information has been otherwise misappropriated.888 Rule 10b-5 imposes an obligation to disclose (or abstain from trading) on:• corporate insiders, such as directors, officers and controlling

shareholders, who owe a fiduciary duty to the issuer’s shareholders;889

• temporary insiders, such as lawyers, accountants or investment bankers;890 and

• outsiders who “misappropriate” confidential information for trading purposes in breach of a duty owed to the source of the information.891

Bear in mind that a person can be liable under Rule 10b-5 even if he or she did not actually trade on the material non-public information, but instead passed it to a third party (a practice sometimes known as “tipping”). In addition to the “tipper” (the person who discloses the information), a “tippee” (the person to whom the information is disclosed and who had reason to know the information came from an insider who had violated a duty) may also be liable under Rule 10b-5 if he or she trades on the basis of the tipped information.892

(d) Damages under Rule 10b-5Violations of Rule 10b-5 can lead to rescission or damages.893 Damages for violations of Rule 10b-5 in private actions comprise a purchaser’s out-of-pocket loss, essentially limited to the difference between the purchase or sale price the plaintiff paid or received and the mean trading price of the security during the 90-day period beginning on the date on which the information correcting the misstatement or omission that is the basis for the action is disseminated to the market.894 Civil or criminal penalties (including imprisonment, fines or disgorgement orders) and injunctions and administrative proceedings are also possible.895 Punitive damages are, however, not available under Rule 10b-5.896

(iii) Section 11 of the Securities Act – registered offeringsSection 11(a) of the Securities Act imposes liability if any part of a registration statement, at the time it became effective, “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading”. Section 11 liability only covers statements made in a registration statement, and does not reach other documents that are not considered part of a registration statement (such as road show materials, free writing prospectuses or research reports).897 In addition, Section 11 does not extend to unregistered transactions, since these do not involve a “registration statement”.898

PRACTICE POINTthe trend in the case law is to allow secondary-market purchasers who can trace their securities to the offering to bring claims under Section 11, at least to the extent that the only shares in the market are those subject to the registration statement.899

A Section 11 claim can be brought against:

• each person who signed the registration statement, including the issuer and members of management;900

• each member of the issuer’s board of directors, or similar governing body, regardless of whether he or she signed the registration statement;901

• any expert named as responsible for a portion of the registration statement, such as an issuer’s auditors; and

• each underwriter.


Issuers are strictly liable under Section 11. Potential defendants other than the issuer902 have statutory defences to Section 11 liability, by virtue of Section 11(b)(3):• Due diligence defence: in the case of a non-expert with

respect to the non-expertised portions of the registration statement, or in the case of an expert with respect to the expertised portions (for example, the financial statements that include the auditors’ opinion), a defendant must show that he or she had, after reasonable investigation, reasonable grounds to believe and did believe that the included information was true and that no material facts were omitted;903 and

• Reliance defence: in the case of a non-expert with respect to expertised 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.904 Damages for violation of Section 11 are generally limited

to:905

• the difference between the price paid for a security and its value at the time a plaintiff brings a lawsuit;

• if the security has already been sold at the time a lawsuit is brought, the amount paid for the security, less the price at which the security was sold in the market; or

• if the security was sold after the lawsuit was brought but before judgment, the lesser of (1) the amount the plaintiff paid for the security, less the price at which the security was sold in the market, or (2) the amount the plaintiff paid for the security, less the value of the security as of the time the suit was brought.Punitive damages are not available under Section 11.906

(iv) Section 12(a)(2) of the Securities Act – registered offeringsSection 12(a)(2) of the Securities Act imposes liability on any person who offers or sells a security by means of a prospectus, or any oral communication, which contains “an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading”. Section 12(a)(2) overlaps with Section 11, but covers oral statements, free writing prospectuses and statements in a prospectus, rather than the registration statement alone (of which the prospectus is a part).

The US Supreme Court has interpreted the reference to “prospectus” in Section 12(a)(2) as a term of art meaning a prospectus in connection with a public offering under the Securities Act. As a result, it has ruled that Section 12(a)(2) does not apply to private unregistered transactions, secondary offerings or secondary market transactions.907

Section 12(a)(2) provides a statutory due diligence defence if the seller can show he or she “did not know, and in the exercise of reasonable care could not have known”, of the material misstatements or omissions.

Under Section 12(a)(2), a person who buys securities on the basis of a prospectus that contains a material misstatement or omission – like a person who buys securities issued in violation of Section 5 of the Securities Act – can rescind the sale and recover his or her purchase price (plus interest, less any amount received on the securities). And if the investor no longer owns the securities, he or she can recover damages equal to the difference between the purchase and the sale price of the securities (again plus interest, less any amount received on the securities).

(a) Rule 159A – issuer as seller under Section 12(a)(2)As with Section 12(a)(1), to be liable under Section 12(a)(2) a defendant must be a seller – that is, a person who successfully solicits the purchase, motivated at least in part by financial interest.908 Securities Act Rule 159A provides that for purposes of Section 12(a)(2), regardless of the underwriting method used to sell securities, the term seller will include the issuer of the securities sold to a person as part of the initial distribution of those securities.909 Under Rule 159A, the issuer will be deemed to offer or sell securities by means of: • any preliminary prospectus or prospectus required to be filed

under Rule 424;• any free writing prospectus relating to the offering prepared by

or on behalf of the issuer or used or referred to by the issuer;• the portion of any other free writing prospectus relating to the

offering containing material information about the issuer or its securities provided by or on behalf of the issuer; and

• any other communication that is an offer made by or on behalf of the issuer.For purposes of Rule 159A, information and communications

are provided “by or on behalf ” of an issuer if an issuer or an agent or a representative of the issuer authorises or approves the information or communication before use.910 However, underwriters and dealers will not be treated as agents or representatives of the issuer (and hence will not be deemed to be acting by or on behalf of the issuer) solely by virtue of acting as offering participants. As a result, they will not be deemed to be a seller for Section 12(a)(2) purposes under these circumstances.

Rule 159A does not cover purchasers of the issuer’s securities who buy in the aftermarket.911

(b) Rule 159 – timing of the investment decision under Section 12(a)(2)According to the SEC, an investor makes an investment decision at the time of the contract of sale for securities (that is, at the time the offering is priced in most underwritten deals).912 In turn, Rule 159 provides that, for purposes of determining whether a prospectus or oral statement included a material misstatement or omission at the time of the contract of sale under Section 12(a)(2) (and Section 17(a)(2)), “any information conveyed to the purchaser only after such time of sale” will not be taken into account.

The key implication of Rule 159 is that Section 12(a)(2) (and Section 17(a)(2)) liability will be determined by reference to the total package of information conveyed to the purchaser at or before the time of sale. Accordingly, a preliminary prospectus, a free writing prospectus or an oral communication at a road show may give rise to liability under Section 12(a)(2) (in suits by private plaintiffs) (and Section 17(a)(2) (in suits by the SEC)), even if later corrected or supplemented in a final prospectus that is filed or delivered after pricing. In other words, changes made to the disclosure after pricing and included in the final prospectus will not provide a liability shield for the issuer or its underwriters. The critical inquiry will be whether the preliminary prospectus, as supplemented at the time of pricing (including by way of one or more free writing prospectuses), included an untrue statement of material fact, or omitted to state a material fact necessary to make the statements, in light of the circumstances under which they were made, not misleading.


(v) Liability for free writing prospectuses(a) Free writing prospectuses are not part of the regis-tration statement but are subject to 12(a)(2) liabilityA free writing prospectus is not considered to be part of a registration statement.913 As a result, it will not be subject to liability under Section 11. But every free writing prospectus, regardless of whether it is filed, is subject to liability under Section 12(a)(2) (and other anti-fraud provisions of the federal securities laws, such as Section 17(a)(2) in the case of actions by the SEC). In addition, the SEC has explained that statements at road shows are subject to Section 12(a)(2) liability (to the extent the statements are an offer of securities), regardless of whether the road show constitutes a free writing prospectus.914 In other words, statements at live road shows will be subject to Section 12(a)(2). (b) Cross-liability issues – Rule 159AA key question for underwriters is which free writing prospectuses subject them to liability. To address this issue, Securities Act Rule 159A provides that an offering participant will not be considered to offer or sell securities to a particular person “by means of” a free writing prospectus for Section 12(a)(2) purposes unless:915 • the offering participant used or referred to the free writing

prospectus in offering or selling securities to that person;• the offering participant sold securities to that person and

participated in the planning for the use of the free writing prospectus that was used by another offering participant to sell securities to that person; or

• the offering participant was otherwise required to file the free writing prospectus under Rule 433 (as in the case of a free writing prospectus that it distributes by broad unrestricted dissemination).In addition, under Rule 159A an offering participant will not

be considered to offer or sell securities by means of a free writing prospectus solely because another person has used or referred to the free writing prospectus or filed it with the SEC.916

Controlling person liabilityLiability under the US federal securities laws potentially extends beyond issuers, underwriters and other direct participants in securities offerings to the persons who control those participants. In particular, Section 15 of the Securities Act and Section 20 of the Exchange Act provide that controlling persons may be jointly and severally liable with the persons they control. As a result, an issuer’s significant shareholders, its board of directors (or similar governing body) and members of its management may be liable along with the issuer for violations of Section 11, Section 12 or Rule 10b-5.

The term control generally means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise.917 This is not a bright-line test, and instead depends on the facts and circumstances of any particular case. A defendant generally will be found to have controlled an issuer if he or she actually participated in (that is, exercised control over) the operations of the issuer and possessed the power to control the specific transaction or activity from which the issuer’s primary liability derives.918 Some courts have held that the defendant must be a “culpable participant” in the issuer’s wrongful conduct in order to trigger liability.919

The controlling person has a defence to liability under Section

15 if he or she “had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist,” and a defence under Section 20 if he or she “acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.” This analysis is obviously quite fact-specific,920 and may depend on such factors as whether the defendant is an inside or outside director.

PRACTICE POINTpotential controlling persons such as members of an issuer’s board of directors should familiarise themselves generally with the disclosure used in connection with an offering, and should pay particular attention to any high-level statements about an issuer’s strategy, business or financial performance. they should also review carefully any statements about themselves (for example, disclosure about a controlling shareholder).

Liability issues relating to Sarbanes-OxleyThe Sarbanes-Oxley Act has a wide-ranging impact on liability under the US federal securities laws. It created US federal criminal offences relating to securities, substantially increased the penalties for existing offences and increased the SEC’s enforcement powers in various ways.921 Among other things, the Sarbanes-Oxley Act:• added a new section to the US federal criminal code outlawing

the alteration, destruction or concealment of records to impede a US federal investigation;922

• amended existing law to provide for fines and imprisonment of up to 20 years for corruptly altering, destroying or concealing documents with the intent of obstructing an official proceeding;923

• amended existing law to provide for fines and imprisonment of up to 10 years for anyone who knowingly takes any action to retaliate against a person for providing information to US federal law enforcement officials relating to violations or potential violations of US federal law;924

• created a new securities fraud crime (with penalties of up to 25 years imprisonment plus fines) of knowingly executing a scheme or artifice to defraud any person in connection with any security of an issuer or to obtain, by means of false or fraudulent representations, any money in connection with the purchase or sale of a security;925

• increased the maximum individual penalty for violations of the Exchange Act from $1 million and 10 years imprisonment to $5 million and 20 years imprisonment, and raises the maximum corporate fine from $2.5 million to $25 million;926

• gave the SEC the ability, after notice and a hearing, to force an issuer subject to an SEC investigation to put extraordinary payments to directors, officers, partners, controlling persons, agents or employees into temporary escrow;927

• gave the SEC the administrative authority to impose a ban on a person from acting as a director or an officer of an issuer (the so-called officer and director bar);928 previously, the SEC could only impose the officer and director bar by means of a court order;929

• lowered the standard for judicial imposition of the officer and director bar to “unfitness” to serve as an officer and director, from the previous “substantial unfitness” threshold;930


• prohibited an issuer from retaliating against whistle blowing employees who provide information or assist an investigation regarding violations of US federal securities law, SEC regulations or US federal law on shareholder fraud;931 and

• amended the US federal bankruptcy laws to prohibit the discharge in bankruptcy of debts resulting from judgments, settlements or court orders in cases involving securities fraud.932

EnforcementThe SEC has wide-ranging powers to investigate any conduct that could constitute a violation of the US federal securities laws.933 SEC investigations are conducted by the Division of Enforcement, which also has responsibility for prosecuting civil violations of the US federal securities laws.934 In addition to bringing charges under the causes of action described elsewhere in this Overview, the SEC can bring enforcement actions against participants in the securities markets (such as broker-dealers, investment advisers, issuers and their officers, directors, lawyers and accountants) using causes of action and remedies unavailable to private litigants. Charges may be brought administratively, or in a US federal district court.

While the SEC has civil enforcement authority only, Section 24 of the Securities Act and Section 32(a) of the Exchange Act make it a felony for any person to wilfully violate any provision of those acts or a rule promulgated under the acts. Consequently, the SEC also works closely with criminal law enforcement agencies throughout the US to develop and bring criminal cases when the misconduct warrants more severe action.

(i) Enforcement against foreign private issuers and non-US nationalsThe SEC actively enforces the US federal securities laws against

foreign private issuers and non-US nationals.935 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.936

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 US and to establish jurisdiction. In order to facilitate its ability to obtain information from outside the US, the SEC has entered into over 30 information-sharing arrangements (often called Memoranda of Understanding, or MOUs) with foreign financial regulators.937 These MOUs establish procedures for sharing information and providing assistance in instances where key evidence lies outside of the US. Another, more formal, negotiated mechanism used to obtain information is a Mutual Legal Assistance Treaty (MLAT) between the US and another country. The SEC must make a MLAT request through the US Department of Justice.938

Particular difficulties may arise for foreign private issuers and non-US nationals who have legal obligations in both the US and in their home countries. While every jurisdiction prohibits fraud, there is no universally accepted definition of fraud and thus activities that comply with local laws may violate the US federal securities laws under certain circumstances. For example, in E.On AG,939 the SEC brought and settled an enforcement action against a German company whose shares were listed on the NYSE. The SEC charged that the company had denied falsely that it was involved in merger negotiations and that the denials (issued in both English and German) violated Rule 10b-5. While acknowledging that disclosure practices regarding the existence of negotiations may differ in other jurisdictions, the SEC nevertheless asserted that it would not apply a different standard to foreign private issuers for commenting on pending merger negotiations than to domestic US issuers.940


As a general matter, there is no duty under the US federal securities laws to disclose material information unless an applicable rule or regulation specifically requires disclosure.941 A foreign private issuer’s duty to disclose may arise in situations such as: • purchasing or selling securities;• filing a registration statement;• filing an annual report on Form 20-F;• submitting information on Form 6-K; and• NYSE or Nasdaq requirements.

Once an issuer chooses to disclose information to investors or the public, it must do so completely and accurately,942 and may not make selective disclosure, such as to favoured investors. In addition, if a prior statement was accurate when made, but an issuer subsequently learns that the statement was false, an issuer must correct the statement.943 This is one reason why projections of future results are problematic.

Guidelines for dealing with research analysts and investorsTo minimise potential liability in connection with statements to research analysts and investors, we generally recommend the following guidelines to issuers (in addition to any applicable home jurisdiction rules).

(i) Nature of informationOne person or a small group of company personnel with an understanding of internal and reported financial data and strategies should control the nature and scope of information given to analysts and investors. That person or group should determine that such information, whether considered separately or together with other information, has already been publicly disclosed in the issuer’s SEC filings or, if not so disclosed, is neither material nor misleading.

(ii) “Material”It is not possible to give a precise, bright-line answer to the question of what constitutes material information. In general, it is any fact which a buyer or seller (including a speculative buyer or seller) would want to know, or any fact which would, if known, affect the market value of the security.

(iii) “Misleading”Information provided to analysts or released to the public would be construed as misleading if it is untrue, or if it omits any material facts necessary to make the other information provided not misleading under the circumstances. Thus, information provided to investors or analysts should not be one-sided in its positive tone if there are other material facts that would be necessary for an accurate and balanced description.

(iv) Limit accessAn issuer should limit the number and identity of personnel who have contact with analysts and investors. This will help ensure

that disclosures are consistent with each other and with the issuer’s internal and publicly reported information, and that no analyst or group of analysts, or investor or group of investors, is being given more information than any other.

(v) Disseminating materials to analysts and investorsTo minimise selective disclosure risks, the issuer should generally disseminate information to analysts and investors in conference calls or webcasts rather than one-on-one discussions. We recognise that it is difficult as a practical matter not to respond to inquiries by individual analysts and investors, and the SEC continues to permit individual communication under a mosaic theory. In other words, as the SEC stated it in its release adopting Regulation FD, “an issuer is not prohibited from disclosing a non-material piece of information to an analyst, even if, unbeknownst to the issuer, that piece helps the analyst complete a ‘mosaic’ of information that, taken together, is material”.944

Any written materials provided (which, as discussed above, may not contain any material non-public information or any material omissions) should be disseminated to all analysts equally, and any material information simultaneously released to the public. The more varied an issuer’s analyst contacts, the greater the risks of an inadvertent isolated disclosure or an analyst’s misconception that could later develop into a materiality issue.

If an issuer does have material news it is extremely important that any such announcement be made publicly, rather than to an analyst or analysts or selected investors.

Absent unusual circumstances, conference calls and webcasts should be open to securities analysts, investors, the media and other interested parties. An issuer should announce the date and time of the conference call in a press release and on its website inviting anyone who may be interested to listen to the conference call or webcast (or otherwise providing at least two business days’ advance notice to the public of the time and date of the call, with instructions as to how to access the call and webcast). The release should provide dial-in instructions for the conference call, or, if the issuer decides to make the presentation by webcast, a website address. Although an issuer should permit anyone who may be interested to listen to the conference call, the issuer may choose to permit only securities analysts or other designated individuals to ask questions during the question-and-answer period.

(vi) Reviewing draft analysts’ reports; distributing analysts’ reportsAbsent review or comment on the contents of analysts’ reports, issuers are not responsible for the contents of those reports and no affirmative duty exists to correct erroneous statements in them.945 Many issuers accordingly refrain from reviewing draft reports, and adoption of such a policy should be seriously considered. As noted above, review of analysts’ reports by corporate insiders can potentially trigger liability under Rule 10b-5 for statements made by the research analyst.946

CHapteR 11

Communications with research analysts, investors and the public

Communications with research analysts, investors and the public 71

If the issuer does find it necessary or appropriate to conduct any such review, the issuer is obligated to correct any material misstatements of fact in the draft, including the addition of any material facts necessary to make statements in the draft report not misleading. (Under rules governing analysts adopted by the NYSE and FINRA, analysts may only submit portions of their research report to an issuer for factual review; we discuss these rules below.) However, if the analyst has done his or her job, it is unlikely that any correcting information will be found in documents that are already publicly available, so that the issuer would be obligated to publicly disclose any new material facts before giving the correcting information to analysts to avoid potential liability for tipping (that is, favouring) the analysts. In a review of this sort, we encourage an issuer not to receive or review the analyst’s projections or valuations, and to limit the review to factual content and so advise the analyst in writing.

Furthermore, there are liability risks for an issuer if it distributes analysts’ reports to security holders or otherwise includes reports in public mailings or on its website (including by hyperlink). Analysts’ reports therefore should generally not be distributed to security holders or otherwise included in any of an issuer’s mailings or on its website, unless previously approved by counsel and unless strong disclaimers are included that the views and projections expressed in the report are solely those of the analyst. If an issuer decides to make analysts’ reports available with disclaimers, it should make all reports available, not just favourable ones.

(vii) Making or commenting on projections(a) GeneralIssuers have varying practices on whether they state publicly their specific financial performance plans or projections. Since the adoption of Regulation FD, it has become more common for companies to provide that information to the markets. Other companies remain steadfast against releasing such information (whether in speeches, press releases, trade publications, statements to analysts, or otherwise). If an issuer decides to make such an announcement, any projection should be made in a public announcement (and not selectively) and should be accompanied by the key market variables that could cause actual results to vary from such projections and other relevant assumptions. It is also preferable to consult with counsel before making any projections. As noted above, projections may give rise to a duty to update if they become false or misleading in light of subsequent events.

It is inherently difficult to determine the extent to which an issuer’s actual performance (or revisions to its internal projections) must vary from previously announced or endorsed projections before an update or correction must be published. In addition, even if an update or correction is published, the issuer could still face litigation over whether the update or correction was published soon enough.

(b) PSLRA safe harbour947

The Private Securities Litigation Reform Act of 1995 (the PSLRA) provides a safe harbour for SEC-reporting issuers, including SEC-reporting foreign private issuers, for certain types of written or oral forward-looking statements,948 including:949 • projections of revenues, income, losses, earnings and other

financial items;• statements of the plans and objectives of management for

future operations; and• statements of future economic performance.

The PSLRA does not, however, protect forward-looking statements made in connection with initial public offerings or tender offers, or those statements that are included in financial statements prepared in accordance with Gaap.950

In order to take advantage of the PSLRA safe harbour, among other things, the forward-looking statement must be identified as such, and must be accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.951 As a practical matter, issuers try to bring themselves within the safe harbour with respect to written forward-looking statements by inserting cautionary language noting that the relevant document contains forward-looking statements and by keeping current, in a widely available public document such as a periodic SEC filing, the key market variables and risk factors affecting the issuer’s business. (This is the reason many earnings announcements and other press releases routinely include long disclaimers.) As for forward-looking oral statements, a spokesperson will often make a formal statement to the following (rather stilted) effect:

“The statements I am about to make include statements about our plans and future prospects for the company and our industry that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual performance may differ materially from performance suggested by those statements. I encourage you to review the ‘Cautionary Statement’ section of [our annual report on Form 20-F] filed with the SEC for additional information concerning factors that could cause those differences.”

We suggest that this statement be made at the beginning of each conference call with investors or analysts. Some issuers have the statement made by the moderator of the call, rather than an officer.

(viii) Inadvertent disclosuresInadvertent disclosure of material non-public information, such as in an informal meeting with a shareholder or analyst, can sometimes occur. In addition to complying with local law requirements, a foreign private issuer should consider promptly disclosing through a press release any material non-public information inadvertently disclosed (notwithstanding the exemption of foreign private issuers from the specific requirements of Regulation FD).

Special situations(i) Market rumoursIf analysts or journalists contact an issuer regarding market rumours, an issuer must either disclose publicly all material information regarding the subject matter of the rumours or respond “no comment”. It is impermissible to deny the subject matter of the rumours (for example, that acquisition negotiations are pending) if the denial is false. Many issuers institute a policy of responding “no comment” to all rumours.

However, if an issuer’s securities are listed on a national exchange and the rumours relate to impending developments, the exchange will generally require the issuer to respond to the rumours. In addition, if an issuer determines that the rumours originated from within the issuer, public disclosure should be made.


(ii) Pending acquisitions/corporate transactionsMerger negotiations or major corporate acquisitions can pose particularly difficult disclosure questions. A foreign private issuer that is holding merger negotiations need not disclose the existence of those negotiations, absent some other duty to disclose, or may respond to press inquiries by stating “no comment”. Once an issuer’s duty to disclose is triggered, however, it must disclose information about pending merger and acquisition transactions that are material and probable.952 Materiality is judged on the basic materiality standard under the US federal securities laws – that is, whether a reasonable investor would consider disclosure about the transaction important in deciding whether or not to purchase or sell a security. There is no bright-line test for when a transaction becomes probable. This may occur prior to the date a definitive agreement is signed and, therefore, prior to the date on which the parties would otherwise be prepared to announce the transaction.953

There is also an interaction between materiality and probability, so that high probability can compensate for a lower level of significance and vice versa.954 The US Supreme Court has explained that “materiality ‘will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.’”955 In short, the more substantial an acquisition or disposal is likely to be, the less probable it needs to be before it must be disclosed.956

More generally, if asked by investors or the press, a foreign private issuer may not deny that merger discussions are taking place if this is not, in fact, true.957

(iii) Road showsMost public offerings (and Rule 144A/Regulation S offerings) for foreign private issuers include road shows in the US and outside the US. These are group and one-on-one meetings with potential investors attended by key managers of the issuer and representatives of the underwriters. (In Rule 144A offerings, only QIBs are permitted to attend road shows in the US.)

The underwriters and the issuer typically prepare a slide show of key points on the issuer’s business and strategy. Hard copies of the slides should generally not be distributed at road show presentations. The preliminary prospectus or offering memorandum is typically distributed or made available to all attendees. The contents of the slide show and discussion points at road show meetings should be consistent with, and no broader than, the contents of the offering document.

(iv) Disclosures to employeesIssuers should not disclose material non-public information to employees (by newsletter or otherwise) and should make sure that employees involved in potentially material developments (for example, new products, acquisitions) are restricted from trading. Most public companies have policies that define when and under what circumstances certain employees are permitted to trade in the issuer’s securities.

US securities laws and the internet(i) BackgroundThe rapid growth of the internet has significantly altered the means by which issuers and broker-dealers communicate with investors and the public at large. The SEC has issued several interpretive releases and no-action letters addressing the application of US securities laws to internet communications.958

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.959 This has two key implications. First, as discussed above, issuers of securities in the US are subject to various restrictions on publicity about a pending or proposed offering stemming from the registration requirements of the Securities Act. These restrictions apply with equal force to statements made on an issuer’s website, or hyperlinked into an issuer’s website.960 Accordingly, statements in (or hyperlinked into) an issuer’s website may constitute illegal gun-jumping if made before a registration statement is filed or a non-compliant prospectus if made after a registration statement has been filed but before it has been declared effective by the SEC.961 In addition, in the case of an unregistered offering, these statements can constitute “directed selling efforts” or “general solicitation and general advertising” of a sort that can destroy the availability of the exemption from registration on which the issuer is seeking to rely.962 As with other public statements, “ordinary course” business, product and financial communications are permissible, as is posting an issuer’s latest Exchange Act reports.963

Second, issuers are exposed to liability under the US federal securities laws for communications via the internet, in the same way as for their other communications.964 Misleading website postings or statements made by the company (or by a person acting on behalf of the company) on a blog can, for, example, lead to liability under Rule 10b5.965 Similarly, issuers are potentially liable for statements made in websites to which their website is hyperlinked.966 Companies cannot require investors to waive protections under the federal securities laws as a condition to entering or participating in, as applicable, a website, blog or shareholder forum.967

PRACTICE POINTIssuers that are considering a securities offering should carefully review the contents of their websites with counsel to make sure that the contents do not violate limitations on communications during the registration process, or violate prohibitions against general solicitation and directed selling efforts for a Rule 144a/Regulation S offering. First-time issuers who have not established a regular pattern of communication with the investment community should be particularly careful.

PRACTICE POINTIssuers should not post press releases on their website while an offering is pending unless those press releases comply with Rule 134 or 135 (in the case of a registered offering) or Rule 135c (in the case of a private offering). these rules allow for less information than would be permitted under Rule 135e, which applies exclusively to offshore press activity.

(ii) Internet offeringsIf a foreign private issuer wants to conduct an offering of securities over the internet, or to make available via the internet offering documentation that goes beyond the limited category of information that is permissible under US publicity restrictions, it should implement the following procedures:


(a) GeneralFor all types of offerings, a foreign private issuer should:• Consider establishing a separate website relating

solely to the offering: some of the restrictions outlined be-low (such as certification requirements) may be impractical for an issuer’s main website;

• Consider including only materials that are not in Eng-lish: this helps to reinforce the argument that the materials are directed only to the local market and not to the US;

• Review hyperlinks: as noted above, hyperlinked material may give rise to liability; and

• Ensure that information on the website is consistent with the printed offering documentation: for example, the material on the website should not be more detailed than that contained in the issuer’s prospectus filed with the SEC or in its offering memorandum.

(b) Offshore offering with no concurrent US offeringA foreign private issuer that is planning an offshore offering under Regulation S with no concurrent US offering (registered or unregistered) must:968 • include a prominent disclaimer on its website making clear that

the offer is directed only to countries other than the US. For example, the website can state that the securities are not being offered in the US or to non-US persons; and

• implement procedures on its website that are reasonably designed to guard against sales to US persons. Before allowing a prospective investor to view materials online, for example, the investor should be required to certify non-US status and to provide an addresses or telephone number outside the US. The website should automatically reject any person who refuses to provide the certification (and preferably should be set up to reject any person who provides a US address).

(c) Offshore offering with concurrent US unregistered offeringA foreign private issuer that is planning a Regulation S offering in combination with an unregistered offering in the US (such as a Rule 144A offering) must:969 • implement the restrictions for an offshore offering discussed

above;• either exclude US persons from the website or take steps to

ensure that only QIBs (in the case of a Rule 144A offering) or accredited investors (in the case of a Regulation D private placement) have access to the website, for example, by limiting access in the US to those investors who have been provided with a password; and

• to the extent practicable, limit information posted on the website to information about the offshore offering, and only include information on the private US offering that is required by foreign law. (This may, however, be difficult to accomplish if a single offering memorandum is used for the global offering, as is commonly the case.)

(d) Registered offeringA foreign private issuer that is planning a Regulation S offering in combination with a registered public offering in the US must:970 • implement the restrictions for an offshore offering discussed

above; and

• either exclude US persons from the website or only allow US persons to participate in accordance with certain specified SEC procedures.

Regulation of research analysts(i) BackgroundAs noted above, the Sarbanes-Oxley Act imposes various require-ments on research analysts and the research reports they publish. The NYSE and FINRA have also adopted several sets of rules to ad-dress research analyst conflicts of interest and have conformed their rules to the requirements of the Sarbanes Oxley Act.971 In addition, under a global settlement of certain litigation, leading investment banks have agreed to further restrictions. We summarise the NYSE and FINRA rules, and the global settlement, below.

(ii) NYSE Rule 472, Incorporated NYSE Rule 472 and NASD Rule 2711NYSE Rule 472,972 FINRA’s Incorporated NYSE Rule 472 and NASD Rule 2711 (together, the Conflict of Interest Rules) govern how the NYSE’s and FINRA’s respective member organisations manage and disclose conflicts of interest between their research analyst and investment banking operations. The NYSE and FINRA versions of the Conflict of Interest Rules are substantially identical and are intended to operate in the same way.973 The Conflict of Interest Rules generally apply only to research reports on equity securities. In addition, they apply only to the members and member organisations of FINRA and NYSE.

(a) Gatekeeper provisionsUnder the Conflict of Interest Rules, non-research personnel, including investment banking personnel, may review a research report prior to its publication only to “verify the factual accuracy of information in the research report or to identify any potential conflict of interest” provided that:974 • any written communication concerning the content of research

reports between non-research personnel and research personnel must be made either through authorised legal or compliance personnel or in a transmission copied to those personnel; and

• any oral communication concerning the content of research reports between non-research personnel and research personnel must be documented and made either through authorised legal or compliance personnel acting as intermediary or in a conversation conducted in the presence of those personnel.Similarly, firms may not submit research reports prior to their

publication to the subject company of the research report, except for sections of the research report to be reviewed by the subject company solely to verify the factual accuracy of information in those sections.975 Under no circumstances may the firm provide the sections of the research report that include the research summary, the research rating or the price target.976 Any research report that is to be provided to the subject company must first be provided to the firm’s legal or compliance personnel and any rating change after the report is provided to the subject company must receive prior written authorisation from legal or compliance personnel.977 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.978

(b) Restrictions on research analyst compensationThe Conflict of Interest Rules prohibit any member firms of


FINRA or NYSE from paying “any bonus, salary or other form of compensation to a research analyst that is based upon a specific investment banking services transaction.”979 If an analyst received compensation that was based on the firm’s general investment banking revenues, the fact must be disclosed in the firm’s research reports.980

The Conflict of Interest Rules further separate research analysts’ compensation from investment banking influence by requiring procedures for annual review and approval of research analysts’ compensation by a committee that reports to the board of directors or a senior executive if the member organisation has no board of directors.981 The committee may not include representatives from the firm’s investment banking department.982 The Conflict of Interest Rules also prohibit the committee from considering the research analyst’s contribution to the firm’s investment banking business and set forth criteria that the committee must consider.983

(c) Prohibition of promise of favourable researchUnder the Conflict of Interest Rules, no member firm may “directly or indirectly offer favourable research, a specific rating or a specific price target, or threaten to change research, a rating or a price target, to a company as consideration or inducement for the receipt of business or compensation.”984 The Conflict of Interest Rules also prohibit member firms from retaliating against a research analyst as a result of an adverse, negative or otherwise unfavourable research report by the analyst that may harm the member firm’s investment banking relationship with the company that is the subject of the report.985

In addition, research analysts are prohibited from participating in efforts to solicit investment banking business.986 This would include participation in pitch meetings with prospective investment banking clients or having other communications with companies for the purpose of soliciting investment banking business.987 The rules provide an exception for communications between the research analyst and the subject company or non-research personnel for the sole purpose of due diligence.988 The Conflict of Interest Rules further prohibit research analysts from participating in road shows related to an investment banking transaction or otherwise communicating with customers in the presence of investment banking personnel or company management about an investment banking transaction.989 Investment banking personnel are correspondingly prohibited from directing a research analyst to engage in sales and marketing efforts or other communications with a current or prospective customer related to an investment banking transaction.990 Any communication relating to an investment banking transaction by a research analyst with a current or prospective customer, or internal personnel, must also be fair, balanced and not misleading, taking into consideration the overall context in which the communication is made.991

(d) Restrictions on publishing research reports and public appearancesThe Conflict of Interest Rules require quiet periods during which a firm acting as an underwriter or dealer of a securities offering may not issue a research report on a company and a research analyst with such firm may not recommend or offer an opinion on such company’s securities in a public appearance.992 For a more detailed discussion on research reports generally, see Research reports in Chapter 3.

Specifically, a member organisation acting as a manager or co-manager in a securities offering may not publish or otherwise distribute research reports regarding the issuer and any research analyst of such member organisation may not recommend or offer an opinion on the issuer’s securities in a public appearance:993 • for 40 calendar days following an IPO;• for 10 calendar days following a secondary offering; and• within 15 days prior to or after the expiration, waiver or

termination of a lock-up or similar agreement between the member organisation and the issuer or its shareholders that restricts or prohibits the sale of issuer securities after the completion of a securities offering.994

There are exceptions to these requirements for research reports that are published or otherwise distributed, or research analyst recommendations made in a public appearance, due to significant news or events, provided that the firm’s legal or compliance personnel authorise the publication of the research report before it is issued or authorise the public appearance before it is made.995

In addition, no member firm that has agreed to participate or is participating as an underwriter or dealer (other than as a manager or co-manager, in which case the 40-day period described above would apply) of an issuer’s initial public offering may publish or otherwise distribute a research report regarding that issuer and a research analyst of such member firm may not recommend or offer an opinion on that issuer’s securities in a public appearance for 25 calendar days following the offering date.996

The Conflict of Interest Rules also require that if a member firm intends to terminate its research coverage of a subject company, member firms must provide notice of this termination.997 Firms terminating coverage must make a final research report available comparable in scope and detail to prior research reports on the issuer and must include a final recommendation or rating, unless it is impracticable to provide a comparable report.998

(e) Analyst trading restrictionsThe Conflict of Interest Rules also impose various restrictions on an analyst’s personal trading, including restrictions on trading by members of the research analyst’s household.999 No research analyst or member of the analyst’s household may:1000 • purchase or receive an issuer’s securities prior to its initial public

offering if the issuer is principally engaged in the same types of businesses as companies which the research analyst usually covers in research reports;

• purchase or sell any security issued by a company that the research analyst follows, or any option on or derivative of such security, for a period beginning 30 calendar days before and ending five calendar days after the publication of a research report concerning the company or a change in rating or price target of the company’s securities;1001 or

• purchase or sell any security or any option on or derivative of such security in a manner inconsistent with the research analyst’s recommendation as reflected in the most recent published research report.The Conflict of Interest Rules also require that legal or

compliance personnel give prior approval to transactions effected by a person who (1) supervises research analysts or (2) has direct influence or control over the preparation of the substance of research reports or decisions regarding ratings in research reports, in each case to the extent such transactions involve equity securities of companies covered by the research analysts or research reports such person oversees.1002


(f) Disclosure requirementsThe Conflict of Interest Rules impose several disclosure requirements on research reports and public appearances by research analysts.1003 For example, research reports must disclose if the member firm distributing the research report or its affiliates:1004

• has managed or co-managed a public offering of securities for the subject company in the past 12 months;

• has received compensation for investment banking services from the subject company in the past 12 months;

• expects to receive or intends to seek compensation for investment banking services from the subject company in the next three months; or

• was making a market in the subject company’s securities at the time the research report was published.1005 Research reports must also disclose if, as of the last day of

the month immediately preceding the publication of a research report:1006 • the member firm issuing the research report or its affiliates

beneficially owns more than 1% of any class of common equity securities of the subject company;

• the subject company is a current client, or within the 12 months prior to the distribution of the research report was a client, of the member firm issuing the research report and the types of services provided by the member firm to the subject company; or

• the member firm received any compensation for products or services other than investment banking services from the subject company in the last 12 months.Research reports must also disclose client relationships with and

non-investment banking compensation from subject companies, to the extent known by the research analysts involved in preparing the report or by any employee of the member firm with the ability to influence the substance of the research report (an influential employee). In particular, the Conflict of Interest Rules require that research reports disclose:1007 • if the research analyst or an influential employee knows that

the subject company is a current client, or within the 12 months prior to the distribution of the research report was a client, of the member firm issuing the research report and the types of services provided by the member firm to the subject company;1008

• if the research analyst or an influential employee knows that the member firm or an affiliate of the member firm received any compensation for products or services other than investment banking services from the subject company in the last 12 months; and

• if the research analyst or the member firm has reason to know that an affiliate of the member firm received any compensation for products or services other than investment banking services from the subject company in the past 12 months.1009

Further, the Conflict of Interest Rules require that certain potential conflicts of interest involving the research analyst preparing a report are disclosed. Specifically, a member must disclose in research reports:1010 • if a research analyst received any compensation from the subject

company in the past 12 months or any compensation based upon (among other factors) the member’s overall investment banking revenues;

• if the research analyst or a member of the research analyst’s household has a financial interest in the securities of the subject company and the nature of that financial interest;

• if the research analyst or a member of the research analyst’s household is an officer, director or advisery board member of the subject company; and

• any other actual, material conflict of interest of the research analyst or member firm which the research analyst knows or has reason to know at the time of the publication or other distribution of the research report.The Conflict of Interest Rules also require detailed qualitative

and quantitative disclosures relating to the firm’s research reports that must accompany each report published, such as:1011 • the valuation methods used to determine a price target;• the meanings of each of the ratings the firm uses;• the percentage of all securities rated by the firm that are assigned

each particular rating category and the percentage of companies within each rating category that are clients of the firm; and

• a chart depicting the stock price of the subject company and the history of ratings by the firm on the subject company’s securities.In addition to the disclosures required in research reports

described above, research analysts must also disclose certain compensation and potential conflicts of interest in any public appearance by the research analyst. A research analyst must disclose in public appearances:• if, as of the last day of the month immediately preceding the

publication of a research report, the member firm issuing the research report or its affiliates beneficially owns more than 1% of any class of common equity securities of the subject company;

• if the research analyst knows or has reason to know that the subject company is a current client, or within the 12 months preceding the public appearance was a client, of the member firm of the research analyst and the types of services provided by the member firm to the subject company;

• if the research analyst knows or has reason to know that the member firm of the research analyst or any affiliate of the member firm received any compensation from the subject company in the past 12 months;1012

• if the research analyst or a member of the research analyst’s household has a financial interest in the securities of the subject company and the nature of that financial interest;

• any other actual, material conflict of interest of the research analyst of member firm which the research analyst knows or has reason to know at the time the public appearance is made;

• if the research analyst or a member of the research analyst’s household is an officer, director or advisery board member of the subject company; and

• if a research analyst received any compensation from the subject company in the past 12 months.

(iii) Global settlementOn April 28 2003 the SEC, in conjunction with the NYSE, National Association of Securities Dealers (formerly NASD, renamed FINRA), New York State Attorney General, North American Securities Administrators Association and state securities regulators announced the finalising of a global settlement (the Global Settlement) against a number of leading investment banking firms.1013 As part of the Global Settlement, the defendant firms agreed to abide by restrictions designed to insulate research analysts from pressures by the investment banking departments at these firms. These rules are set forth in Addendum A to the Global Settlement, entitled “Undertakings” (the Addendum).


The Addendum includes requirements on the separation of research and investment banking functions and required disclosures in research reports. Both categories of requirements apply only “in respect of a research report that is both (1) prepared by the firm and (2) that relates to either (a) a US company or (b) a non-US company for which a US market is the principal equity trading market.”1014 The requirements in the Addendum do not apply to debt research or research provided solely to non-US investors.1015 Firm for these purposes is defined to include affiliates of the defendants, other than exempt investment adviser affiliates.

(a) Separation of research and investment bankingAmong the reforms contained in the Addendum aimed at separating the research and investment banking functions within each firm are:• research and investment banking will be separate units with

entirely separate reporting lines within the firm and cannot report directly or indirectly to the other department;1016

• research will have its own dedicated legal and compliance staff, although it may be part of the firm’s overall compliance/legal infrastructure;1017

• the firm’s senior management will determine the research department’s budget without influence from the investment banking department and without regard to specific revenues or results derived from investment banking;1018

• the research and investment banking departments will be physically separated;1019

• research analysts’ compensation may not be based, directly or indirectly, on investment banking revenues or input from investment banking personnel, and investment bankers will have no role in evaluating analysts’ job performance;1020

• the investment banking department will have no input into company-specific coverage decisions, including decisions to terminate coverage;1021

• if a firm decides to terminate coverage, the firm will make a final research report available on the company using the means of dissemination equivalent to those it ordinarily uses (no such report is required if the prior coverage was limited to purely quantitative analysis);1022

• research analysts are prohibited from participating in efforts to solicit investment banking business, such as “pitch” meetings, and are prohibited from participating in company or investment banking-sponsored road shows related to a public offering or other investment banking transaction;1023 and

• the firms will create and enforce firewalls restricting communication between investment banking and research except in specifically designated circumstances.1024

(b) Disclosures in research reportsEach 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:• “[The 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 [the 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.”

• “Investors should consider this report as only a single factor in making their investment decision.”1025 Each firm must also make publicly available on its website,

in a downloadable format, certain information contained in its published research reports, including the rating and explanation thereof, price targets (if any) and earnings per share forecasts.1026

Other relevant statutes 77

US Investment Company Act of 1940The Investment Company Act and the SEC’s rules and regulations thereunder establish a comprehensive set of registration and reporting requirements for investment companies. The Investment Company Act’s definition of “investment company” is broad. As a result, foreign private issuers that view themselves as operating companies rather than investment companies can nevertheless trigger the Investment Company Act.

The Investment Company Act prohibits unregistered non-US investment companies from issuing securities to the public in the US. Foreign private issuers are generally unable to comply with the registration and reporting requirements of the Investment Company Act. This means that a foreign private issuer that intends to offer its securities in the US must:• fall outside of the definition of investment company under the

Investment Company Act;• structure the offering to fit within an exception to or exemption

from the Investment Company Act; or• obtain special exemptive relief from the SEC.

Violations of the Investment Company Act can potentially lead to civil and criminal liability. In addition, contracts in violation of the Investment Company Act may be unenforceable.

PRACTICE POINTa foreign private issuer should consult with US counsel at an early stage of a proposed securities offering to determine if the Investment Company act applies, and if so what steps need to be taken. this determination may require a detailed analysis of the issuer’s assets and income sources.

US federal tax laws – passive foreign investment companiesDepending on the sources of its income and the composition of its assets, a foreign private issuer may be considered a passive foreign investment company (a PFIC) under the US federal tax laws. In particular, the US Internal Revenue Code (the Code) defines a PFIC as any foreign corporation if, for any taxable year:• passive income of the corporation equals or exceeds 75% of

gross income of the corporation; or• the average percentage of assets (by value) held by that

corporation during the taxable year that produce passive income or are held for the production of passive income equals or exceeds 50% of its total assets.Passive income for these purposes generally includes interest,

dividends, rents, royalties, income from certain property transactions, commodities transactions and notional principal contracts, foreign-currency gains and income equivalent to interest.

If a foreign private issuer is deemed to be a PFIC under the Code, holders of the issuer’s equity securities who are subject

to US federal income taxation face various unattractive tax consequences, which in turn can hinder the issuer’s ability to market its equity securities in the US. A PFIC can assist holders to mitigate these consequences to a certain degree by agreeing to take various steps (including providing information on an ongoing basis to its securities holders).

PRACTICE POINTas with the Investment Company act, a foreign private issuer should consult with US tax counsel at an early stage of a proposed securities offering to determine if the issuer may be considered a pFIC, and if so what steps need to be taken.

US state “blue sky” lawsNearly every state of the US 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, offers and sales of covered securities need not be registered under state blue sky laws. Covered securities include any securities that are:• listed, or authorised 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.The SEC has proposed a definition for qualified purchaser that

would essentially include almost all private placement transactions involving sophisticated investors.1027 Most state blue sky laws also allow issuers to offer and sell securities to certain classes of sophisticated institutional investors without registration.

An issuer offering a security that is not a covered security or pursuant to an offering that is not exempt from registration under state law must register the offer 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. The level of state review of these offerings varies widely and, in some states, an offering may not be registered if it is unfair, unjust or inequitable in the judgment of the state securities authorities.

PRACTICE POINTa guarantee of a covered security is often not itself a covered security, requiring many debt offerings to rely on state-by-state compliance with institutional investor exemptions.

CHapteR 12

Other relevant statutes


The US federal securities laws are a continuously evolving area. We regularly issue client alerts summarising 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 +1 202 637 2284

Kirk A Davenport +1 212 906 1284;

Bryant Edwards +971 4704 6323;

John Huber +1 202 637 2242;

Antti V Ihamuotila +44 20 7710 3013

Jeffrey H Lawlis +44 20 7710 1151

Mark A Stegemoeller +1 213 891 8948;

Michael W Sturrock +65 6437 5412;

Joel H Trotter +1 202 637 2165; or

John D Watson, Jr. +33 1 40 62 21 88.

Also, of course, please feel free to call your usual Latham & Watkins lawyer.

CHapteR 13

Conclusion and contacts

Annex A 79

This checklist summarises the non-financial disclosures required by Form F-1, Form F-3 and Form 20-F (when used either as a registration statement or an annual report). Issuers eligible to use Form F-3 are generally permitted to incorporate much of this non-financial information by reference to the issuer’s annual report on Form 20-F. In addition, certain non-IPO issuers may incorporate this information into Form F-1.

Note that, whether or not prescribed by any form, Exchange Act Rule 12b-20 requires inclusion of “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made” not misleading. In addition, the checklist is only a summary of certain key provisions. Please refer to the relevant form for the full text of the disclosure requirements.

anneX a

Non-financial disclosure requirements of Form F-1, Form F-3 and Form 20-F

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Forepart of registration statement and outside front cover page of the prospectus (S-K Item 501).

the outside front cover of the prospectus 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 (that is, “subject to completion”) legends;• names of the lead or managing underwriters;• the date of the prospectus.

Inside front and outside back cover pages of the prospectus (S-K Item 502).• table of contents for the prospectus.• a legend describing the prospectus-delivery requirements for dealers.

Prospectus summary (S-K Item 503(a)).• a summary of the prospectus written in plain english.

Address and telephone number (S-K Item 503(b); Form 20-F, Item 4.a-3).• the address and telephone number of the issuer’s principal executive offices should be

provided on the prospectus cover or in the prospectus summary.

Risk factors (S-K Item 503(c)).• a discussion of the most significant factors that make the offering speculative or risky. this

discussion should follow the prospectus summary.

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.

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• 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 summary of more detailed discussion contained elsewhere in the document.

Ratio of earnings to fixed charges (S-K Item 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 dividends must be shown for the same periods.

• If proceeds from sale of debt securities or preferred 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.

Directors and senior management (Form 20-F, Item 1.a).• provide the names, business addresses and functions of the issuer’s directors and senior

management.

Advisers (20-F, Item 1.B).• 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 (for example, rights offering and general offering), 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.

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 purchase 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 securities to subscribers or purchasers.• In the case of pre-emptive purchase rights, specify the procedure for the exercise of any right

of preemption, 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 refunding excess amounts paid by applicants (including whether interest will be paid).

Annex A 81

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Capitalisation and indebtedness (Form 20-F, Item 3.B).Include the following:• a statement of capitalisation and indebtedness (distinguishing between guaranteed and non-

guaranteed, and secured and unsecured, indebtedness) as of a date no earlier than 60 days before the date of the document;

• the statement should show the issuer’s capitalisation 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 proceeds therefrom.

Reasons for the offer and use of proceeds (Form 20-F, Item 3.C).• the estimated net amount of the proceeds broken 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 offering.

• If the proceeds are being used directly or indirectly 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.

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

telephone 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 US, if any.

• the important events in the development of the issuer’s business. For example, any material reclassification, merger or consolidation of the issuer; acquisitions or dispositions of material assets; material changes in conduct of the business; material changes in the types of products produced or services rendered; name changes; or any bankruptcy, receivership or similar proceedings. (note: Since the beginning of the last financial year for annual reports on Form 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 that have occurred during the last and current financial year and the price and outcome of such offers.

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 competes, 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.


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• 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 licences, industrial, commercial or financial contracts (including contracts with customers or suppliers) 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 revenues for three years prior to filing Form F-1 must

disclose their plan of operations similar to that required by Regulation S-K 101(a)(2).

Organisational 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

residence, proportion of ownership interest and, if different, 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 utilisation 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 utilisation of the assets.• any material plans to construct, expand or improve facilities, including the nature of and

reason 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.

Unresolved staff comments (Form 20-F, Item 4a).• If the registrant is an accelerated filer as defined in Rule 12b-2 of the exchange act or

is a well-known seasoned issuer and has received written comments from the SeC staff regarding its periodic reports under the exchange act not less than 180 days before the end of its fiscal year to which the annual report relates, disclose the substance of any such unresolved comments the registrant believes are material.

• the disclosure may provide other information, including the position of the registrant with respect to any such comment.

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 introduction 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, provide 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 foreign currency net investments are hedged by currency borrowings and other hedging instruments.

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• 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.

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 borrowing facilities.

• the type of financial instruments used, the maturity profile of debt, currency and interest rate structure. treasury policies, currency in which cash is held, extent to which borrowings are at fixed rates, of use as 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.

Research and development, patents and licences (Form 20-F, Item 5.C).• a description of the issuer’s research and development 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 at least 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 capital resources, or that would cause reported information not to be indicative of future operating results or financial condition.

Off-balance-sheet arrangements (Form 20-F Item 5.e.)• 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 condition, revenues and expenses, results of operations, liquidity, and capital resources.

• 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 company’s exposure to risk as a result of the arrangements (for example, retained interests or contingent liabilities); and


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- known events, demands, commitments, trends or uncertainties that affect the availability or benefits to the issuer of material off-balance-sheet arrangements.

Tabular disclosure of contractual obligations (Form 20-F Item 5.F.)• the issuer must provide in a table an overview of its aggregate contractual obligations as of

the latest balance sheet date.• disclosure is required of the amounts, aggregated by type of contractual obligation, for at

least the periods specified by the SeC (less than one year, one to three years, three to five years and more than five years).

• the required categories of contractual obligations are long-term debt obligations, capital (finance) lease obligations, operating leases, purchase 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 categories and use the categories most suitable to its business (provided that the table includes all obligations 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,

directorships;• 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

pursuant to which any such person was selected.

Compensation (Form 20-F, Item 6.B).For the last full financial year for the issuer’s directors 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: (1) 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 (2) 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, retirement or similar benefits.

Board practices (Form 20-F, Item 6.C).For the issuer’s last completed financial year, disclose the following information with respect to the issuer’s directors, and members of its administrative, supervisory or management bodies:

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• date of expiration of the current term of office and the period during which the person has served in that office;

• directors’ service contracts providing for benefits upon termination of employment or an appropriate negative statement;

• the issuer’s audit committee and remuneration committee, including the names of committee members 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 employees, and information regarding the

relationship between management and labour unions.• If the issuer employs a significant number of temporary employees, disclose the number of

temporary 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.• 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 ownership during the past three years;- whether the major shareholders have different 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 US and the number of record

holders in the US.• disclose whether the issuer is directly or indirectly owned or controlled by any other

corporation(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 preceding 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;


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• 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 management personnel or over which any such person is able to exercise significant influence (beneficial ownership of a 10% voting interest is presumed to be significant).

Interests of experts and counsel (Form 20-F, Item 7.C).• If any of the named experts or counsellors 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 arbitration proceedings that may have, or have

had in the recent past, significant effects on the issuer’s financial position or profitability, including governmental proceedings pending or known to be contemplated.

• Include any material proceeding in which any director, any member of senior management, or any affiliate is adverse to the issuer or its subsidiaries or has a material interest adverse to the issuer or its subsidiaries.

• For annual reports on Form 20-F, report dispositions of previously reported litigation.

Dividend policy (Form 20-F, Item 8.a-8)• describe the issuer’s policy on dividend distributions

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 9a. note: when using Form 20-F as a registration statement, include only items four through seven below; when using Form 20-F as an annual report, include only item four below).1) the expected offering price or the method of determining the price and the amount of

expenses specifically charged to the purchaser.2) If there is no established market for the securities, the manner of determining the offering

price.3) description of any pre-emptive purchase rights.4) the price history of the offered or listed securities, and the market price in the US market and

the principal trading market outside the US and significant trading suspensions and lack of liquidity.

5) 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.

6) any limitation or qualifications of the rights of holders of the offered securities.7) a description of terms of any warrants or rights being offered, and if securities are

redeemable, a description of redemption provisions.

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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 person 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 underwriters, including arrangements with brokers or

dealers.• Whether the securities are to be offered in connection with the writing of exchange-traded

call options.• any simultaneous private or public offering.• description of underwriting arrangements.• any material relationship between an underwriter and the issuer and in certain cases

information regarding the managing underwriter’s experience.

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 proposed public offering and the effective cash contributions of such persons.

• disclose the amount and percentage of immediate 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 itemised 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.


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• the amount of issued capital and, for each class of share capital: (1) the number of shares authorised; (2) the number of shares issued and fully paid and issued but not fully paid; (3) the par value per share, or that the shares have no par value; and (4) a reconciliation of the number of shares outstanding at the beginning and end of the year.

• 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 authorised 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, authorisations 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 incorporated by reference to a previous Form 20-F or registration statement.• the issuer’s objects and purposes.• the register and the entry number therein.• 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.

Exchange controls (Form 20-F, Item 10.d).describe any government laws, decrees, regulations or other legislation of the home country of the issuer that might 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 non-resident holders of the issuer’s

securities.

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Taxation (Form 20-F, Item 10.e).• Information regarding taxes (including withholding provisions) to which shareholders in the

US may be subject.• Whether the issuer assumes responsibility for the withholding of tax at the source and

applicable provisions of any reciprocal tax treaties between the home and host countries, or a statement, if applicable, 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 entitlement to dividends arises, and any procedures

for non-resident holders to claim dividends.• paying agents in countries where admission has taken place or is expected to take place.

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 market rate or price risks (for example, equity price risk).

• Categorise market risk sensitive instruments into instruments entered into for trading purposes and instruments entered into for purposes other than trading purposes.

• Within both the trading and other than trading portfolios, present separate quantitative information, to the extent material, for each market risk exposure category (that is, interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market risks, such as equity price risk).

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 exposures 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 reporting periods;

• 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.


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Description of debt securities being registered (Form 20-F, Item 12.a).• Interest, conversions, maturity, redemption, amortisation, 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 aggregate 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 authorised 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. note any material relationship

between trustee and issuer.• 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.

Description of warrants or rights to purchase the securities being registered (Form 20F, 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.

Other securities (Form 20-F, Item 12.C).If securities other than equity, debt, warrants or rights are being offered, a brief description of the rights evidenced by the securities.

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;- the sale or exercise of rights;- the deposit or sale of securities resulting from dividends, splits or plans of reorganisation;- 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, including the annual fee for general depositary services. (note: the requirement to disclose, in

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particular, the annual fee for general depositary services is effective beginning with the fiscal years ending on or after december 15 2009 and must be disclosed in the annual report as well as the registration statement).

• all payments made by the depositary to the issuer in connection with its american depositary receipt facilities which are disclosed on a per payment basis rather than on an aggregate basis. (note: this disclosure is effective beginning with fiscal years ending on or after december 15 2009 and applies to both registration statements and when used as an annual report).

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 indebtedness 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 significant subsidiaries.

note: these items may be incorporated by reference from any previously filed Form 6-K.

Material modifications to the rights of security holders (Form 20-F, Item a-d 14).• describe material modifications to the instruments 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 authorising the withdrawal or substitution (unless the withdrawal or substitution has been made in compliance with the requirements of the tIa).

• Identify any changes to trustees or paying agents.note: this information can be incorporated from a previously filed report on Form 6-K.

Use of proceeds (Form 20-F, Item 14.e).• describe the actual use of proceeds from securities sold under any previously filed

registration statement under the Securities act, unless all proceeds 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

terminated);- managing underwriters, if any;- title of securities registered and, if applicable, class of securities into which a registered

convertible 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, general partners, 10% shareholders or affiliates);

- net proceeds to the issuer after expenses and underwriting discounts;- itemisation of uses of proceeds by specific categories specified in Item 14.e.4(g) of Form

20-F, including payments made to directors, officers, general partners, 10% shareholders or affiliates;


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- 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 filed 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 termination of the offering.

Controls and procedures (Form 20-F, Items 15, 15t).• 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 disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)), based on their evaluation the controls and procedures as of a date within 90 days before the filing date of the report.

• provide an internal control report from management, covering certain required topics.• For large accelerated filers and accelerated filers, provide the registered public accounting

firm’s attestation report on management’s assessment of the issuer’s internal control.• For non-accelerated filers (in respect of fiscal years ending on or after december 15

2009), provide the registered public accounting firm’s attestation report on management’s assessment of the issuer’s internal control.

• disclose any change in internal control reporting identified in connection with management’s evaluation that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting.

Audit committee financial expert (Form 20-F, Item 16a).• the company must disclose (1) whether it has at least one audit committee financial expert

serving on the audit committee and, if so, (2) that person’s name. If there is more than one financial expert, the issuer may, but is not required to, disclose the names of the other experts.

• If the company does not have an audit committee financial expert, the company must disclose that fact and the reasons why such an expert is not available.

Code of ethics (Form 20-F, Item 16B).• 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).• the issuer must disclose, under the caption audit fees, the aggregate amount audit fees,

audit-related fees, tax fees and all other fees that were 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 categorised 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.

Annex A 93

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• 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 persons other than the principal accountant’s full-time, permanent employees.

Exemptions from the listing standards for audit committees (Form 20-F, Item 16d).• the issuer must provide the disclosure required by exchange act Rule 10a-3(d) if it

has taken advantage of certain exemptions from the independence standards for audit committees provided by exchange act Rule 10a-3.

Purchases of equity securities by the issuer and affiliated purchasers (Form 20-F, Item 16e).• the issuer must disclose, in a prescribed tabular format, certain information on a monthly

basis with respect to any purchase made by the registrant or any affiliated purchaser (as defined in Rule 10b-18(a)(3)) of shares of the issuer’s equity securities that are registered pursuant to Section 12 of the exchange act.

Change in and Disagreements with Issuer’s Certifying Accountant (Form 20-F, Item 16F. note: this item applies beginning with fiscal years ending on or after december 15 2009; Form F-3 will require Item 16F disclosure to be provided in the registration statement at effectiveness, as well as in a prospectus used in connection with a shelf offering).• For fiscal years ending on or after december 15 2009, the issuer must disclose the following

information relating to any changes in and disagreements with its certifying accountant:1028

- whether an independent accountant that was previously engaged as the principal accountant to audit the issuer’s financial statements, or a significant subsidiary on which the accountant expressed reliance in its report, has resigned, declined to stand for re-election or was dismissed;

- whether the decision to change accountants was recommended or approved by the board of directors, or by any audit or similar committee of the board of directors

- whether any disagreements or reportable events that occurred within the last two fiscal years and any interim period preceding the change of accountant; and

- whether during the fiscal year in which the change of accountants took place or during the subsequent year, the issuer had similar, material transactions to those which led to the disagreements with the former accountants, and whether such transactions were accounted for or disclosed in a manner different from that which the former accountants would have concluded was required. If so, the issuer would be required to disclose the existence and nature of the disagreement or reportable event, and the effect on the financial statements according to the method required by the former accountants.

• If there has been a change in certifying accountant, the issuer must provide its former accountant a copy of the disclosures that it intends to make in response to Item 16F and request the former accountant to furnish the issuer with a letter stating whether it agrees with the disclosures made by the issuer and, if not, stating the respects in which it does not agree. the issuer must also file the former accountant’s letter as an exhibit to the annual report or registration statement containing the Item 16F disclosure. If, however, the change in accountants occurs less than 30 days prior to the filing of the annual report or registration statement and the former accountant’s letter is unavailable at the time of filing, the letter may be filed within 10 business days after the filing of the annual report or registration statement.


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Corporate Governance Practices (Form 20-F, Item 16G. note: this item applies beginning with fiscal years ending on or after december 15 2008).• If the issuer’s securities are listed on a US national securities exchange, it must provide a

concise summary of any significant ways in which its corporate governance practices differ from those followed by domestic US issuers under the listing standards of the relevant exchange.1029

Certifications required by Section 302 of the Sarbanes-Oxley Act (Form 20-F, following signatures).provide a separate certification for each principal executive officer and principal financial officer of the registrant stating the following:1) I have reviewed this annual report on Form 20-F of [identify company];2) Based on my knowledge, this annual report does not contain any untrue statement of a

material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4) the company’s certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in exchange act Rules 13a-15(e) and 15d-15(e)) [and internal control over financial reporting (as defined in exchange act Rules 13a-15(f) and 15d-15(f))]* for the company and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles];*

c) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;

*note: Items marked with an asterisk are required for fiscal years ending on or after July 15 2006, in the case of accelerated filers, and July 15 2007, in the case of non-accelerated filers.5) the company’s other certifying officer(s) and I have disclosed, based on our most recent

evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal

control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarise and report financial information; and

Annex A 95

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b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

See Rules 13a-14 and 15d-14.

Certifications required by Section 906 of the Sarbanes-Oxley Act (to accompany Form 20-F)provide a separate certification for each principal executive officer and principal financial officer of the registrant stating the following:• the accompanying annual Report on Form 20-F of the Company for the year ended

[___________] (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the exchange act; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

SEC position on indemnification for Securities Act Liabilities (S-K Item 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.

Material changes: Form F-3 (Form F-3, Item 5).• describe material changes in issuer’s affairs that 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.

• Include changes in and disagreements with issuer’s certifying accountant (effective for registration statements and annual reports in respect of fiscal years ending on or after december 15 2009).

• If not included in the exchange act documents incorporated by reference:- financial statements of acquired companies in accordance with S-X Rule 3-05;- pro forma financial information in accordance with S-X article 11;- restated financial statements if there is a change in accounting principles or a correction 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 current to comply with Item 8a of Form 20-F, updated 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.

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 should 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 Form 8-K, in each case before the termination of the offering, must be incorporated by reference.


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• the issuer may incorporate by reference any Form 6-K meeting the requirements of Form F-3.• If the issuer is registering capital stock, the issuer must incorporate by reference the

exchange act filing that describes such capital stock.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 information that has been incorporated by reference in the prospectus but not delivered with the prospectus; and

• provide the name, address and telephone number to which the request for this information must be made.

Indemnification of directors and officers (S-K Item 702).• State the general effect of any statute, charter provisions, bylaws, contract or other

arrangements under which any controlling persons, director or officer of the issuer is insured or indemnified in any manner against liability that they might incur in their capacity as such.

Recent sales of unregistered securities (S-K Item 701).• provide the information specified in S-K Item 701 regarding all securities of the issuer sold

by the issuer during the past three years that were not registered under the Securities act.

Exhibits and financial statement schedules (S-K Item 601, Form 20-F, Item 19).• For Securities act registration statements refer to S-K Item 601 for a chart specifying all

exhibits required to be filed as part of the registration statement.• For annual reports and registration statements under the exchange act refer to the

instructions to Item 19 of Form 20-F.

Undertakings (S-K Item 512).• Refer to S-K Item 512 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.

Annex B 97

Definition of automatic shelf registration statementAn automatic shelf registration statement is a registration statement on Form F-3 filed by a WKSI that meets certain requirements, outlined below.1030

Any registrant that is an eligible WKSI as of the relevant determination date may use Form F-3 to file an immediately effective registration statement1031 for offerings of most types of securities, as well as certain securities of its majority-owned subsidiaries (including unconditional guarantees of the parent’s securities). The determination date for these purposes is the later of: (1) the time of filing of the issuer’s most recent shelf registration statement; (2) the time of the most recent amendment to its shelf registration statement for purposes of satisfying Section 10(a)(3); and (3) the date of filing the issuer’s most recent annual report on Form 20-F (if it has not filed a shelf registration statement for the prior 16 months). 1032 This means that an issuer must test its eligibility for automatic shelf registration both on the initial filing date and at the time of each annual Section 10(a)(3) update (which is typically accomplished by means of the filing of an incorporated Form 10-K or Form 20-F annual report).1033

Rules 462 and 401 – immediate effectiveness of automatic shelf registration statementUnder revised Securities Act Rule 462, an automatic shelf registration statement, and any post-effective amendment to an automatic shelf registration statement (including an amendment to add additional classes of securities under Securities Act Rule 413) becomes effective immediately upon filing with the SEC.1034 Under a related amendment to Securities Act Rule 401(g), an automatic shelf registration statement will be deemed to be on the proper form unless the SEC notifies the issuer of its objection to use of the form.1035 (If the SEC does so, an issuer cannot proceed with subsequent offerings without amendment to the automatic shelf registration statement and for ongoing offerings will have to file a post-effective amendment to reflect that the registration statement is no longer an automatic shelf registration statement.)1036

Rule 430B – omitted information from an automatic shelf registration statementUnder Securities Act Rule 430B, a prospectus filed as part of an automatic shelf registration statement may omit:1037 • information that is unknown or not reasonably available to the

issuer (pursuant to Securities Act Rule 409);• whether the offering is a primary or secondary offering;

• the plan of distribution for the securities;• a description of the securities registered other than an

identification of the name or class of the securities;• the identity of other issuers; and• the names of any selling security holders and amounts of

securities to be registered on their behalf.Rule 430B provides that virtually all of the omitted information

can be included in a post–effective amendment to the registration statement, a prospectus supplement filed under Securities Act Rule 424(b) or by incorporation by reference of Exchange Act reports.1038 In addition, under revised Securities Act Rule 462, a post-effective amendment to an automatic shelf registration statement will become effective immediately upon filing.1039 Note, however, that an issuer adding new types of securities or new registrants must do so by immediately effective post-effective amendment, which will require appropriate signature pages, Exhibit 5 opinions and consents.1040

Rule 413 – adding new classes of securities to an automatic shelf registration statementUnder revised Securities Act Rule 413, WKSIs will be allowed to add new classes of securities to an automatically effective shelf registration statement (and certain securities of its majority owned subsidiaries) at any time through a post-effective amendment.1041 That post-effective amendment will itself become effective automatically upon filing (by virtue of Rule 462).1042 Details about the new class of securities to be offered can be provided via a post-effective amendment, a prospectus supplement or an incorporated Exchange Act report.1043

Rules 456 and 457 – pay-as-you-go registration fees for an automatic shelf registration statementUnder Securities Act Rules 456 and 457, WKSIs registering securities under the automatic shelf registration process may defer paying filing fees until the time of the actual offering when a prospectus supplement under Rule 424(b) is due.1044 For each shelf takedown, a WKSI will include the amount of these pay-as-you-go registration fees (in the “Calculation of Registration Fee” table) either in a Rule 424(b) prospectus or in a post-effective amendment filed at the time of fee payment.1045

A registration statement relying on pay-as-you-go registration fee payment will be considered filed upon receipt by the SEC, and the securities will be considered registered if the fee has been paid and the post-effective amendment or Rule 424(b) prospectus including the revised calculation table has been filed.1046

anneX B

Automatic shelf registration for WKSIs


The NYSE’s requirements for initial listing and listing maintenance are set out below. Foreign private issuers may satisfy either the general NYSE listing standards applicable to domestic US issuers or the NYSE’s Alternate Listing Standards for foreign private issuers.1047 They apply only to foreign private issuers with a broad, liquid market for their securities in their country of origin.1048

NYSE quantitative listing and maintenance standards(i) Quantitative initial listing standards1049

Under the NYSE initial listing standards, an issuer typically must meet the following minimum distribution and market value criteria1050 and must also meet one of the two financial standards described below.1051

(a) Minimum distribution requirements:• IPOs: An IPO issuer must have 400 holders of 100 shares or

more1052 and 1.1 million publicly held shares.1053

• Transfer or quotation: An issuer seeking to transfer to the NYSE or list its existing securities must have either:- 400 holders of 100 shares or more;1054 or- 2,200 total stockholders, together with average monthly

trading volume of 100,000 shares for the most recent six months;1055 or

- 500 total stockholders, together with average monthly trading volume of 1 million shares for the most recent 12 months and 1.1 million publicly held shares.1056

(b) Market value of publicly held sharesThe aggregate market value of publicly held shares must be at least $60 million for IPO issuers1057 or $100 million for issuers seeking to transfer to the NYSE or list their existing securities.1058 In addition, a company must have a closing price or, if listing in connection with an IPO, an IPO price per share of at least $4 at the time of initial listing.

(c) Financial standards (must satisfy one of the following requirements)Earnings test: An issuer’s pre-tax earnings (from continuing operations and after minority interest, amortisation and equity in the earnings or losses of investees, subject to certain adjustments) must total at least $10 million in the aggregate for the last three fiscal years including a minimum of $2 million in each of the two most recent fiscal years and positive amounts in all three years; or at least $12 million in the aggregate for the last three fiscal years together with a minimum of $5 million in the most recent fiscal year and $2 million in the next most recent fiscal year;1059 or

(d) Valuation/revenue test: An issuer must have:• Valuation/revenue with cash flow test: At least $500 million in

global market capitalisation, at least $100 million in revenues during the most recent 12-month period, and at least $25

million aggregate cash flows for the last three fiscal years and with positive cash flows in all three fiscal years (subject to certain adjustments);1060 or

• Pure valuation/revenue test: At least $750 million in global market capitalisation, and at least $75 million in revenues during the most recent fiscal year; or1061

• Assets and Equity test: An issuer must have at least $100 million in global market capitalisation and at least $75 million in total assets together with at least $50 million in stockholders’ equity.1062

(ii) Alternate Listing Standards for foreign private issuersUnder the NYSE Alternate Listing Standards, a foreign private issuer typically must meet the following minimum distribution and market value criteria and must meet one of the two financial standards described below.1063

(a) Minimum distribution requirementsA foreign private issuer must have:• 5,000 worldwide holders of 100 shares or more; and• 2.5 million shares held publicly worldwide.1064

(b) Market value of publicly held sharesThe aggregate worldwide market value of publicly held shares of the foreign private issuer must be at least $100 million.1065 In addition, an issuer must have a closing price or, if listing in connection with an IPO, an IPO price per share of at least $4 at the time of listing. 1066

(c) Financial standards (must satisfy one of the following requirements)Earnings test: The pre-tax earnings (from continuing operations and after minority interest, amortisation and equity in the earnings or losses of investees, subject to certain adjustments) of the foreign private issuer must be at least $100 million in the aggregate for the last three fiscal years, including a minimum of $25 million in each of the most recent two fiscal years;1067 orValuation/revenue test: A foreign private issuer must have:• Valuation/revenue with cash flow test: At least $500 million in

global market capitalisation, at least $100 million in revenues during the most recent 12-month period, and $100 million in the aggregate cash flows for the last three fiscal years, including $25 million in each of the two most recent fiscal years (subject to certain adjustments);1068 or

• Pure valuation/revenue test: At least $750 million in global market capitalisation and $75 million in revenues during the most recent fiscal year.1069

(iii) Quantitative maintenance requirementsTo maintain its listing on the NYSE, a domestic US issuer or foreign private issuer must meet certain quantitative maintenance standards, which are summarised below.

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NYSE quantitative listing criteria and corporate governance standards

Annex C 99

(a) Minimum distribution requirementsThe NYSE may promptly initiate suspension and delisting procedures against an issuer if:• the total number of stockholders is less than 400; or• the total number of stockholders is less than 1,200 and the

average monthly trading volume for the most recent 12 months is less than 100,000 shares; or

• the number of publicly held shares is less than 600,000.1070

(b) Minimum financial standardsThe NYSE will consider an issuer to be below compliance (and so eligible for suspension and delisting) if:• an issuer qualified to list under the Earnings Test, and its average

global market capitalisation over a consecutive 30 trading-day period is less than $75 million and, at the same time, total stockholders’ equity is less than $75 million;1071 or

• an issuer qualified to list under the Valuation/Revenue with Cash Flow Test and:- average global market capitalisation over a consecutive 30

trading-day period is less than $250 million and, at the same time, total revenues are less than $20 million over the last 12 months (unless the issuer qualifies as an original listing under one of the other original listing standards); or

- average global market capitalisation over a consecutive 30 trading-day period is less than $75 million;1072 or

• an issuer qualified to list under the Pure Valuation/Revenue Test and:- its average global market capitalisation over a consecutive 30

trading-day period is less than $375 million and, at the same time, its total revenues are less than $15 million over the last 12 months (unless the issuer qualifies as an original listing under one of the other original listing standards); or

- its average global market capitalisation over a consecutive 30 trading-day period is less than $100 million.1073

When applying the market capitalisation test in any of the financial standard tests above, the NYSE will generally look to the total common stock outstanding (excluding treasury shares) as well as any common stock issuable upon conversion of another outstanding equity security. The NYSE deems these securities to be reflected in market value to such an extent that the security is the substantial equivalent of common stock. In this regard, the NYSE will only consider securities that are: (1) publicly traded (or quoted); or (2) convertible into a publicly traded (or quoted) security.

Despite the financial standard maintenance tests above, and regardless of the original financial standards under which an issuer listed, the NYSE will promptly initiate (rather than consider initiating) suspension and delisting procedures against an issuer if the issuer is determined to have an average global market capitalisation of less than $25 million over a consecutive 30 trading-day period.1074

(c) Price criteriaAn issuer will be considered to be below compliance standards and accordingly might be subject to suspension and delisting if the average closing price of its listed security is less than $1.00 over a consecutive 30 trading-day period. Once notified that the issuer is below compliance, the issuer has six months to bring its share price and average share price back above $1.00. The issuer must, however, notify the NYSE, within 10 business days of receipt of the notification, of its intent to cure this deficiency

or be subject to suspension and delisting procedures. A failure to satisfy the minimum price requirement will be deemed cured if the price promptly exceeds $1.00 a share, and the price remains above $1.00 a share for at least the following 30 trading days.1075

(iv) Other maintenance requirementsThe NYSE may in its sole discretion subject an issuer to suspension and delisting on a number of additional grounds, including:• a substantial reduction in operating assets and/or scope of

operations;• the failure of an issuer to make timely, adequate, and accurate

disclosures of information to its shareholders and the investing public; and

• the failure to observe good accounting practices in reporting of earnings and financial position.1076

NYSE corporate governance requirementsIn addition to the quantitative listing and maintenance standards detailed above, an issuer must meet certain corporate governance standards for initial listing and maintenance of a listing. As described below, foreign private issuers are permitted to follow home country practice in lieu of most of the NYSE corporate governance requirements.

(i) Majority of independent directorsA majority of the issuer’s board of directors must consist of independent directors.1077 A director will qualify as independent only if the board affirmatively determines that the director has no material relationship with the company (either directly or as a partner, shareholder or officer of an organisation that has a relationship with the company).1078 Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships. However, ownership of even a significant amount of stock (that is, 10%), by itself, is not a bar to an independence finding.1079

A company must disclose these determinations in its annual proxy statement or, if the company does not file an annual proxy statement, in its annual report filed with the SEC. A board may adopt and disclose categorical standards to assist it in making determinations of independence and may make only general disclosure if a director meets these standards.1080

In addition, a director cannot be independent unless at least three years (except as provided in the transition rule below) have passed since:• the director (or an immediate family member) was an employee

or executive officer of the company;1081

• the director (or an immediate family member) received more than $100,000 per year in direct compensation from the company, other than director and committee fees and pension or other forms of deferred compensation for prior service not contingent on continued service;1082

• the director was affiliated with or employed by (or any immediate family member was affiliated with or employed in a professional capacity by) a present or former external auditor;1083

• the director (or any immediate family member) was employed as an executive officer of another company whose compensation committee includes an executive of the company;1084 and

• any single fiscal year when a company of which the director is an executive officer or an employee (or of which the director’s immediate family member is an executive officer) made payments to, or received payments from, the listed company


for property or services in an amount exceeding the greater of $1 million or 2% of such other company’s consolidated gross revenues. 1085 An immediate family member is defined to include a person’s

spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than a domestic employee) who shares that person’s home. References to the company would include any parent or subsidiary in a consolidated group with the company. 1086

(ii) Executive sessionNon-management directors must meet at regularly scheduled executive sessions without management and, if any such directors are not independent under the standards described above, an executive session of solely independent directors must be scheduled at least once a year.1087

(iii) Nominating/corporate governance committeeCompanies must have a nominating/corporate governance committee composed entirely of independent directors.1088 That committee must have a written charter that:• addresses the committee’s purpose and responsibilities, which

must include identifying and selecting or recommending director nominees, developing and recommending corporate governance principles and overseeing the evaluation of the board and management;1089 and

• provides for an annual performance evaluation of the committee.1090 The nominating/corporate governance committee charter

should also address:• committee member qualifications;• committee member appointment and removal;• committee structure and operations (including the authority to

delegate to subcommittees); and• committee reporting to the board.1091

If a company is legally required by contract or otherwise to provide third parties with the ability to nominate directors, the selection and nomination of such directors need not be subject to the nominating committee process.

(iv) Compensation committeeCompanies must have a compensation committee composed entirely of independent directors.1092 That committee must have a written charter that:• addresses the committee’s purpose and responsibilities, which

at a minimum must include the direct responsibility to:- review and approve corporate goals and objectives relevant to

CEO compensation, evaluate the CEO’s performance, and to determine and approve (either as a committee or together with other independent directors) the CEO’s compensation level based on this evaluation;1093

- make recommendations to the board with respect to non-CEO compensation, incentive-compensation plans and equity-based plans that are subject to board approval;1094 and

- produce a compensation committee report on executive compensation as required by the SEC to be included in the company’s annual proxy statement or annual report filed with the SEC;1095 and

• provides for an annual performance evaluation of the compensation committee.1096

The compensation committee charter should also address committee member qualifications, committee member appointment and removal, committee structure and operations (including authority to delegate to subcommittees) and committee reporting to the board.1097

(v) Audit committee(a) Sarbanes-OxleyCompanies must have an audit committee that satisfies the independence and other requirements of Exchange Act Rule 10A-3 (implementing Section 301 of Sarbanes-Oxley).1098

(b) CharterThe audit committee must have a written charter that addresses:• the committee’s purpose, which at a minimum must be to:

- assist board with oversight of: (1) the integrity of the company’s financial statements; (2) the company’s compliance with legal and regulatory requirements; (3) the independent auditor’s qualifications and independence; and (4) the performance of the company’s internal audit function and independent auditors;1099 and

- prepare an audit committee report as required by the SEC to be included in the company’s annual proxy statement;1100

• an annual performance evaluation of the audit committee;1101 and

• the duties and responsibilities of the audit committee, which at a minimum must include those set out in Exchange Act Rule 10A-3(b)(2), (3), (4) and (5) (concerning responsibilities relating to: (1) registered public accounting firms; (2) complaints relating to accounting, internal accounting controls or auditing matters; (3) authority to engage advisers; and (4) funding as determined by the audit committee),1102 as well as to: - at least annually, obtain and review a report by the

independent auditor describing: (1) the firm’s internal quality-control procedures; (2) any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by government or professional bodies, within the preceding five years respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and (3) all relationships between the independent auditor and the company (to assess the auditor’s independence);1103

- discuss the company’s annual audited financial statement;1104 quarterly unaudited financial statements with management and the independent auditor, including the company’s MD&A disclosures;1105 earnings press releases;1106 financial information and earnings guidance provided to analysts and rating agencies;1107 and policies with respect to risk assessment and risk management;1108

- meet separately, periodically, with management, with internal auditors and with independent auditors;1109

- review with the independent auditors any audit problems or difficulties and management’s response;1110

- set clear hiring policies for employees or former employees of the independent auditors;1111 and

- report regularly to the board.1112

(c) CompositionThe audit committee must have a minimum of three members, each of whom is independent and financially literate and at least

Annex C 101

one of whom has accounting or financial management expertise. Such qualifications are left to the company’s board to determine based on its business judgment. If an audit committee member simultaneously serves on the audit committees of more than three public companies, and the company does not limit the number of audit committees on which its audit committee members serve, then in each case the board must determine that the simultaneous service would not impair the ability of such member to serve effectively on its audit committee. The company must also disclose that determination in the company’s annual proxy statement or, if the company does not file an annual proxy statement, in its annual report filed with the SEC.1113

Audit committee members must meet both the NYSE’s independence rules applicable to directors, and also the independence requirements of Exchange Act Rule 10A-3.1114

(vi) Internal auditCompanies must have an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. This function may be outsourced to a third-party service provider other than the company’s independent auditor.1115

(vii) Shareholder approval of certain transactionsShareholder approval is required for each of the following material transactions, with certain exceptions:• the implementation of equity-compensation plans and material

revisions thereto;1116

• an issuance of more than 1% of the outstanding common stock or 1% of the voting power outstanding of the issuer (measured either by amount of shares or voting power) to a related party (that is, directors, officers or substantial security holders of the issuer) or to a subsidiary, affiliate or company owned by the related party;1117

• an issuance of more than 20% of the outstanding common stock of the issuer (measured either by amount of shares or voting power);1118 and

• an issuance that will result in a change of control of the issuer.1119

(viii) Corporate governance guidelinesCompanies must adopt and disclose corporate governance guidelines. Areas that must be addressed include:• director qualification standards;• director responsibilities;• director access to management and, as necessary and

appropriate, independent advisers;• director compensation;• director orientation and continuing education;• management succession; and• annual performance evaluation of the board.

The company must state in its annual proxy statement or, if the company does not file an annual proxy statement, in its annual report filed with the SEC that this information is available on its website, and is available in print to any shareholder who requests it.1120

(ix) Code of business conduct and ethicsCompanies must adopt and disclose a code of business conduct and

ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers.

This code should address, among other things:• conflicts of interest;• corporate opportunities;• confidentiality;• fair dealing;• protection and use of company assets;• compliance with laws, rules and regulations (including insider

trading laws); and• encouraging the reporting of illegal or unethical behaviour.

The code must contain compliance standards and procedures to facilitate its effective operation and must require that any waiver of the code for executive officers or directors be made only by the board or a board committee and must be promptly disclosed to shareholders.

The company must state in its annual proxy statement or, if the company does not file an annual proxy statement, in its annual report filed with the SEC that this information is available on its website, and is available in print to any shareholder who requests it.1121

(x) Certification requirementsEach year the CEO must certify to the NYSE that they are not aware of any violation by the company of NYSE corporate governance listing standards. In addition, the CEO must promptly notify the NYSE in writing after any executive officer of the company becomes aware of any material non-compliance with any NYSE corporate governance listing standard.1122

(xi) Written affirmationIn addition to the CEO certification mentioned above, an officer of the company must provide to the NYSE, within about 30 days after the annual shareholders’ meeting, a wide-ranging written affirmation with exhibits that describes the company’s compliance or non-compliance with the NYSE’s corporate governance requirements.1123 Besides the annual written affirmation, an interim written affirmation will be required: • each time a director is added to or removed from the board;• if any change is made to the composition of the audit,

nominating or compensation committee; and• if the required responsibilities of the nominating/corporate

governance committee and/or the compensation committee have been reallocated to any other board committees, and any changes to the composition of those committees occurs.1124

NYSE communication and notification requirementsThe NYSE expects any listed company to release quickly any information that might reasonably be expected to materially affect the market for its securities. In addition, a listed company should act promptly to dispel any unfounded rumours that produce unusual market activity or price variations.1125

When announcement of a material event or a statement dealing with a rumour is made shortly before or during market hours (9:30 am to 5:00 pm, New York City time), the issuer’s NYSE representative should be notified by telephone at least 10 minutes before the announcement is released to the news media. This will allow the NYSE to determine if a trading halt should be imposed.1126


Corporate governance requirements for foreign private issuersForeign private issuers are permitted to follow home country practice in lieu of the NYSE’s corporate governance standards, other than the NYSE’s requirements that it must: (1) have an audit committee that meets the requirements of Exchange Act Rule 10A-3; and (2) provide prompt notification from its CEO of material non-compliance with the applicable provisions of the NYSE’s corporate governance rules.1127 A foreign private issuer must also provide an annual written affirmation to the NYSE.1128

Whether a listed foreign private issuer follows the NYSE

corporate governance standards or its home country practice, it must disclose any ways in which its corporate governance practices differ from those followed by domestic US issuers under NYSE listing standards.1129 A detailed and cumbersome analysis is not required, and instead a brief, general summary of differences is enough. An issuer may provide this disclosure either on its website (provided it is in English and accessible from the US) and/or in its annual report distributed to shareholders in the US. If the disclosure is only made available on the company’s website, its annual report must state this fact and must provide the web address at which the information can be obtained.1130

Annex D 103

There are three distinct markets within Nasdaq: the Nasdaq Global Market (NGM), the Nasdaq Global Select Market (NGSM)1131 and the Nasdaq Capital Market (NCM). The NGSM mandates the highest initial listing requirements of any market in the world, while its maintenance requirements are identical to those of the NGM. The NGM, in turn, has more stringent quantitative listing and maintenance requirements than the NCM. Except as noted below, the quantitative listing and maintenance criteria applicable to non-Canadian foreign private issuers for the NGM, NGSM and NCM are identical to those of domestic US issuers and Canadian issuers. Foreign private issuers (including Canadian issuers) may, however, elect to follow home country practice in lieu of compliance with the Nasdaq corporate governance requirements (other than as described below).

NGM quantitative listing and maintenance standards(i) Quantitative initial listing standardsAn issuer, whether a domestic US issuer or a foreign private issuer, generally must meet the following standards to be listed on the NGM.

(a) Entry standard 1An issuer must have:• annual pre-tax income of at least $1 million (excluding

extraordinary or non-recurring items) in the most recently completed fiscal year or in two of the last three most recently completed fiscal years;1132

• at least 1.1 million publicly held shares;1133

• market value of publicly held shares (that is, excluding shares held by directors, officers and 10% shareholders)1134 of at least $8 million;1135

• bid price a share of $4 or more;1136

• stockholders’ equity of at least $15 million;1137

• at least 400 round lot shareholders (that is, a holder of a normal unit of trading);1138 and

• at least three registered and active market-makers with respect to the security.1139

(b) Entry standard 2An issuer must have:• stockholders’ equity of at least $30 million;1140


• market value of publicly held shares of at least $18 million;1142 • bid price a share of $4 or more;1143

• at least three registered and active market-makers with respect to the security;1144

• a two-year operating history;1145 and• at least 400 round lot shareholders.1146

(c) Entry standard 3An issuer must have:


• market value of publicly held shares of at least $20 million;1148

• a bid price a share of $4 or more;1149

• at least four registered and active market-makers with respect to the security;1150

• at least 400 round lot shareholders;1151 and• either a market capitalisation of $75 million1152 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.1153

(ii) Quantitative maintenance requirementsOnce an issuer has been listed on the NGM, it must continue to satisfy one of the following maintenance standards.

(a) Maintenance standard 1An issuer must maintain:• at least 750,000 publicly held shares;1154


• stockholders’ equity of at least $10 million;1156

• at least 400 round lot shareholders;1157

• a bid price a share of $1 or more;1158 and• at least two registered and active market-makers with respect to

the security.1159

(b) Maintenance standard 2An issuer must maintain:• at least 1.1 million publicly held shares;1160


• a bid price a share of $1 or more;1162

• at least four registered and active market-makers with respect to the security;1163

• at least 400 round lot shareholders;1164 and• either a market capitalisation of $50 million1165 or total assets

and total revenue of $50 million each for the most recently completed fiscal year or two of the last three most recently completed fiscal years.1166

(c) Failure to meet maintenance requirementsA failure to meet the maintenance requirements will be determined to exist only if the deficiency continues for a period of either 10 or 30 consecutive business days (depending on the requirement with respect to which there is a deficiency). An issuer will have a period after notification by Nasdaq of the failure in which to achieve compliance with the applicable requirement.1167

NGSM quantitative listing and maintenance standards(i) Quantitative initial listing standardsAn issuer that satisfies all of the requirements for listing on the NGM will be eligible for listing on the NGSM if it meets the additional liquidity and financial requirements described below.

anneX d

Nasdaq quantitative listing criteria and corporate governance standards


Each October, Nasdaq will review the qualifications of all securities listed on the NGM to determine if any security meets the initial listing requirements of the NGSM. Securities meeting the requirements of the NGSM at such time will be transferred to the NGSM in January of the following year.1168 An issuer of a security listed on either the NGM or NCM may also, at any time, apply to transfer the respective security to the NGSM.1169

(a) Liquidity requirementsThe security must show either:• a minimum of 550 beneficial shareholders and an average

monthly trading volume over the prior 12 months of at least 1.1 million shares a month;1170 or

• a minimum of 2,200 beneficial shareholders;1171 or• a minimum of 450 beneficial shareholders.1172

In computing each of the above, Nasdaq will not consider shares held by an officer, director, or 10% shareholder of the company.1173

The security must have 1.25 million publicly held shares1174 and the publicly held shares must have either: • a market value of at least $110 million;1175 or• a market value of at least $100 million so long as the issuer has

stockholders’ equity of at least $110 million;1176 or• a market value of at least $70 million where the issuer is listing

in connection with an initial public offering or where the issuer is an affiliate of, or a spin-off from, another company listed on the NGSM, or where the issuer is a closed-end management investment company.1177 An issuer must have:

• where the issuer meets the requirements of the NGM Entry Standard 1 or NGM Entry Standard 2 (as detailed above), the issuer must have at least three registered and active market-makers.1178 Otherwise, the issuer must have at least four registered and active market-makers;1179 and

• other than an issuer listed on the NGM that transfers its listing to the NGSM, the issuer shall have a minimum bid price for the security of $4 a share.1180

(b) Financial requirementsThe issuer must meet one of the following financial standards:

Standard 1:• aggregate income from continuing operations before income taxes

of at least $11 million over the prior three fiscal years;1181 and• positive income from continuing operations before income

taxes in each of the prior three fiscal years;1182 and• at least $2.2 million in income from continuing operations

before income taxes in each of the two most recent fiscal years.1183

Standard 2:• aggregate cash flows of at least $27.5 million over the prior

three fiscal years;1184 and• positive cash flows in each of the prior three fiscal years;1185

and• both average market capitalisation of at least $550 million over

the prior 12 months and total revenue of at least $110 million in the previous fiscal year.1186

Standard 3:• average market capitalisation of at least $850 million over the

prior 12 months;1187 and• total revenue of at least $90 million in the previous fiscal

year.1188

(ii) Quantitative maintenance requirementsOnce an issuer has been listed on the NGSM, it is subject to the same maintenance standards as issuers listed on the NGM, as described above.

NCM quantitative listing and maintenance standards(i) Quantitative initial listing standardsFor initial listing on NCM, an issuer must have:• either: (1) a two year operating history,1189 stockholders’ equity

of at least $5 million1190 and a market value of publicly held shares of at least $15 million1191; (2) a market value of listed securities (that is, securities listed on a national securities exchange)1192 of at least $50 million,1193 stockholders’ equity of at least $4 million1194 and a market value of publicly held shares of at least $15 million1195; or (3) net income (excluding extraordinary or non-recurring items) of at least $750,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years1196, stockholders’ equity of at least $4 million1197 and a market value of publicly held shares of at least $5 million;1198


• at least 1 million publicly held shares;1200

• a minimum bid price of $4 a share;1201

• at least three registered and active market-makers;1202 and• in the case of ADRs, at least 400,000 must be issued.1203

(ii) Maintenance requirements For continued listing on NCM, an issuer must maintain:• either: (1) stockholders’ equity of at least $2.5 million; (2) a

market value of listed securities of at least $35 million; or (3) net income (excluding extraordinary or non-recurring items) of at least $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years;1204


• at least 500,000 publicly held shares;1206

• a market value of publicly held shares of at least $1 million;1207

• a minimum bid price of $1 a share;1208 and• at least two registered and active market-makers.1209

As is the case for securities listed on the NNM, a failure to meet the continued listing requirements will be determined to exist only if the deficiency continues for a period of either 10 or 30 consecutive business days (depending on the requirement with respect to which there is a deficiency) and in each case an issuer will have a period after notification by Nasdaq of the failure in which to achieve compliance with the applicable requirement.1210

Nasdaq corporate governance requirementsIn addition to the quantitative maintenance criteria set out above, issuers of Nasdaq-listed securities (whether on the NCM or NNM) must comply with the Nasdaq rules relating to corporate governance described below. As described below, a listed foreign private issuer is permitted to follow home country practice in lieu of most of Nasdaq’s corporate governance standards.

(i) Majority of independent directorsA majority of the issuer’s board of directors must consist of independent directors.1211 The board of directors must affirmatively determine that the director has no relationship with

Annex D 105

the issuer that would impair their independence,1212 and the issuer must disclose in its annual proxy (or, if it does not file a proxy, on its annual report on Form 10-K (or Form 20-F for foreign private issuers) filed with the SEC, those directors that the board of directors has determined to be independent.1213

Ownership of an issuer’s stock, by itself, is not a bar to an independence finding.1214 The Nasdaq rules define an independent director to mean a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.1215

A director cannot be independent who: • is, or at any time in the past three years was, employed by the

issuer or any parent or subsidiary (as defined below) of the issuer;1216

• has accepted, or who has a family member (as defined below) who has accepted, any payments from the issuer or any parent or subsidiary of the issuer in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence,1217 other than:- compensation for director or board committee service;1218

- compensation paid to a family member who is a nonexecutive employee of the issuer or a parent or subsidiary of the issuer;1219 or

- benefits under a tax-qualified retirement plan, or nondiscretionary compensation;1220

• is a family member of an individual who is, or at any time during the past three years was, employed by the issuer or any parent or subsidiary of the issuer as an executive;1221

• is, or has a family member who is, a partner in, or controlling shareholder or executive officer of, any organisation to which the issuer made, or from which the issuer received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more,1222 other than:- payments arising solely from investments in the issuer’s

securities;1223 or- payments under non-discretionary charitable contribution

matching programmes;1224 • is, or has a family member who is, employed as an executive

officer of another entity where at any time during the past three years any of the executive officers of the issuer serves on the compensation committee of such other entity;1225 or

• is, or has a family member who is, a current partner of the issuer’s outside auditor, or was a partner or employee of the issuer’s outside auditor who worked on the issuer’s audit at any time during any of the past three years.1226 For these purposes, a parent or subsidiary covers entities that the

issuer controls and consolidates with its financial statements as filed with the SEC (but not if the issuer reflects such entity solely as an investment in its financial statements).1227 A family member is defined to include a person’s spouse, parents, children, siblings, whether by blood, marriage or adoption, or anyone residing in such person’s home.1228

(ii) Meetings of independent directorsIndependent directors must have regularly scheduled meetings at which only independent directors are present.1229 Those meetings should occur not less than twice a year.1230

(iii) Director nomineesDirector nominees must be selected, or recommended for the board of director’s selection, either by a majority of the independent directors or by a nominations committee comprised solely of independent directors.1231 Each issuer must certify that it has adopted a formal written charter or board resolution addressing the nominations process (and such related matters as may be required under the federal securities laws).1232 In certain circumstances a single non-independent director, who is not a current officer or employee (or family member of an officer or employee), may serve for up to two years on an independent nominations committee comprised of at least three members.1233 Independent director oversight of director nominations does not apply in cases where the right to nominate a director belongs legally to a third party (although the requirement that the nominations committee be composed entirely of independent directors remains).1234 This rule also does not apply if the issuer is subject to a binding obligation inconsistent with the rule, and such obligation predates November 2003.1235

(iv) Executive compensationCompensation of the CEO and all other executive officers must be determined either by a majority of the independent directors or by a compensation committee comprised solely of independent directors. The CEO may not be present during voting or deliberations concerning their compensation.1236 In certain circumstances a single non-independent director, who is not a current officer or employee (or family member of an officer or employee), may serve for up to two years on an independent compensation committee comprised of at least three members.1237

(v) Audit committees(a) Sarbanes-OxleyAn issuer’s audit committee must satisfy the independence and other requirements of Exchange Act Rule 10A-3 (implementing Section 301 of Sarbanes-Oxley).1238

(b) CharterEach issuer must certify that it has a written audit committee charter and that the audit committee has reviewed and assessed the adequacy of the audit committee charter on an annual basis.1239 The charter must specify: • the scope of the audit committee’s responsibilities, and how it

carries out those responsibilities, including structure, processes, and membership requirements;1240

• the audit committee’s responsibility for ensuring its receipt from the outside auditors of a formal written statement delineating all relationships between the auditor and the issuer, and the audit committee’s responsibility for engaging in a dialogue with the auditor with respect to any disclosed relationships or services that might impact the objectivity and independence of the auditor and for taking, or recommending that the full board take, appropriate action to oversee the independence of the outside auditor;1241

• the committee’s purpose of overseeing the accounting and financial reporting processes of the issuer and the audits of the financial statements of the issuer;1242 and

• the specific audit committee responsibilities and authority necessary to comply with the audit committee requirements of Sarbanes-Oxley and Nasdaq Rule 4350(d)(3) concerning


responsibilities relating to: (1) registered public accounting firms; (2) complaints relating to accounting, internal accounting controls or auditing matters; (3) authority to engage advisers; and (4) funding as determined by the audit committee.1243

(c) CompositionThe issuer must have, and certify that it has and will continue to have, an audit committee of at least three members, each of whom must:• be independent, within the meaning of the Nasdaq director

independence rules discussed above;• meet the requirements for audit committee independence, set

out in Exchange Act Rule 10A-3(b)(1), that, subject to certain limited exceptions, (1) such member be a member of the board of directors of the issuer, (2) such member not (other than in his or her capacity as a member of the board of directors, the audit committee or another board committee) accept directly or indirectly any consulting, advisery, or other compensatory fee from the issuer or any subsidiary thereof and (3) such member not be an affiliated person1244 of the issuer or any subsidiary thereof;

• not have participated in the preparation of the financial statements of the issuer or any current subsidiary of the issuer at any time during the past three years; and

• be able to read and understand fundamental financial statements, including an issuer’s balance sheet, income statement and cash flow statement, at the time of appointment.1245

In addition, each issuer must certify that it has, and will continue to have, one member of the audit committee who has past employment experience in finance or accounting or other comparable experience or background which results in financial sophistication.1246 Note a director who qualifies as an audit committee financial expert under Item 407(d)(5) of Regulation S-K or Item 407(d)(5) of Regulation S-B will be deemed to meet this financial sophistication requirement.1247 Under certain circumstances a single director who meets the independence requirements of Exchange Act Rule 10A-3(b)(1) but not the independence requirements of the Nasdaq rules, who is not a current officer or employee (or family member of an officer or employee), may serve for up to two years on an audit committee. Such a person may not, however, chair the audit committee.1248

(d) Responsibility and authorityThe audit committee must have the specific responsibilities and authority needed to satisfy Exchange Act Rule 10A-3(b)(2), (3), (4) and (5) (concerning responsibilities relating to (1) registered public accounting firms, (2) complaints relating to accounting, internal accounting controls or auditing matters, (3) authority to engage advisers, and (4) funding as determined by the audit committee).1249

Cure periodsThe Nasdaq rules provide for certain cure periods if an audit committee member ceases to be independent for reasons outside the member’s reasonable control, or if there is a vacancy on the audit committee.1250

(a) Shareholder meetingsAn issuer must hold an annual meeting of shareholders and provide notice of that meeting to Nasdaq.1251

(b) QuorumAn issuer must provide for a quorum of at least 33% of the outstanding shares of the issuer’s common voting stock, as specified in its by-laws for any meeting of the holders of its common stock.1252

(c) Proxy solicitationAn issuer must solicit proxies and provide proxy statements for all meetings of shareholders and must provide copies of such proxy solicitation to Nasdaq.1253 Note, however, that foreign private issuers are not subject to the US proxy rules.

(d) Conflicts of interestAn issuer must conduct an appropriate review of all related party transactions for potential conflict of interest situations on an ongoing basis, and all such transactions must be approved by the audit committee or another independent committee of the board of directors. A “related-party transaction” for this purpose means those transactions required to be disclosed pursuant to Item 404 of Regulation S-K or Item 404 of Regulation S-B (and includes transactions and loans between management and the issuer for amounts over $120,000) or, in the case of foreign private issuers, pursuant to Item 7.B of Form 20-F (and includes transactions and loans between the issuer and enterprises under common control of the issuer, associates, individuals owning an interest in the voting power of the company that gives them significant influence or key management).1254

(e) Shareholder approval of certain transactionsAn issuer must obtain shareholder approval prior to the issuance of securities:• when a stock option or purchase plan is to be established or

materially amended,1255 subject to limited exceptions;1256

• when the issuance or potential issuance will result in a change of control of the issuer;1257

• in connection with the acquisition of the stock or assets of another company: (1) if any director, officer or substantial shareholder of the issuer has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction, and the issuance of securities could result in a 5% or greater increase in outstanding common shares or voting power;1258 or (2) where, other than in a public offering for cash: (a) the common stock to be issued has or will have upon issuance voting power equal to 20% or more of the voting power outstanding before the issuance of the stock or convertible securities, or (b) the number of shares of common stock to be issued is or will be 20% or more of the number of shares of common stock outstanding before the issuance of the stock or convertible securities;1259 and

• in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the issuer of common stock (or securities convertible into or exercisable for common stock) (1) at a price less than the greater of book or market value which together with sales by certain affiliates of the issuer equals 20% or more of the common stock or voting power outstanding before the issuance,1260 or (2) equal to 20% or more of the common stock or voting power outstanding before the issuance for less than the greater of book or market value of the stock.1261 An exception may be made upon application to Nasdaq when a

Annex D 107

delay in securing stockholder approval would seriously jeopardise the financial viability of the enterprise and the audit committee (or other comparable body) expressly approves reliance on this exception.1262

Only shares actually issued and outstanding (excluding treasury shares or shares held by a subsidiary) are to be used for any calculation under the shareholder approval requirement. Shareholder approval must be obtained prior to the issuance of certain private financing instruments generally in the form of convertible securities under which the number of shares that will be issued is uncertain until the conversion occurs, unless the instrument contains certain features (potentially a cap on the number of shares that can be issued upon conversion or a floor on the conversion price) and the issuance will not result in a change of control.1263

Shareholder approval is not required for a public offering. Generally, any securities offering registered with the SEC and which is publicly disclosed and distributed in the same general manner and extent as a firm commitment underwritten securities offering will be considered a public offering for purposes of the shareholder approval rules.1264

(f) Listing agreementAn issuer must execute a Listing Agreement in the form designated by Nasdaq.1265

(g) Auditor registrationAn issuer must be audited by an independent public accountant that is registered as a public accounting firm with the Public Company Accounting Oversight Board, as provided for in Section 102 of the Sarbanes-Oxley Act.1266

(h) Code of conductAn issuer must adopt a code of conduct applicable to all directors, officers and employees and make it publicly available. A code of conduct satisfying this requirement must comply with the definition of a code of ethics set out in Section 406(c) of the Sarbanes-Oxley Act and any regulations promulgated thereunder. Also, the code must provide for an enforcement mechanism. Any waivers of the code for directors or executive officers must be approved by the issuer’s board and must be disclosed on a Form 8-K (or Form 6-K for foreign private issuers).1267

(i) Notification of non-complianceAn issuer must provide Nasdaq with prompt notification after an executive officer of the issuer becomes aware of material noncompliance by the issuer of the corporate governance standards required by the Nasdaq rules.1268

(j) Annual corporate governance certificationAn issuer must make an annual certification regarding various aspects of corporate governance, in a form prescribed by Nasdaq.1269

Nasdaq communication and notification requirementsExcept in “unusual circumstances,” Nasdaq requires an issuer to make prompt disclosure to the public through any Regulation FD-compliant method of disclosure of material information that would reasonably be expected to affect the value of its securities or influence investors’ decisions.1270 The Nasdaq corporate governance rules specifically require a public announcement of the receipt of an audit opinion that contains a “going concern” qualification.1271

The issuer must notify Nasdaq prior to the release of certain types of information (and should make that notification at least 10 minutes prior to the release), including:• financial-related disclosure (including earnings releases and

restatements);• corporate reorganisations and acquisitions;• new products or discoveries, or developments regarding

customers or suppliers;• material senior management changes or a change in control;• resignation or termination of independent auditors, or

withdrawal of a previously issued audit report; • events regarding its securities (such as defaults on senior

securities, calls for securities redemption, repurchase plans, stock splits or changes in dividends, changes to the right of security holders, or public or private sales of additional securities);

• significant legal or regulatory developments; and• any event requiring the filing of a Form 8-K.1272

An issuer (other than an issuer of ADRs) must notify Nasdaq on the appropriate form not later than 15 calendar days prior to certain events, including:• establishing or materially amending a stock option plan,

purchase plan or other equity compensation arrangement pursuant to which stock may be acquired by officers, directors, employees or consultants without shareholder approval;1273

• issuing securities that may result in a change of control of the issuer;1274

• issuing any common stock (or security convertible into common stock) in connection with the acquisition of another company, if an officer, director or substantial shareholder of the issuer has a 5% or greater interest in the company to be acquired;1275 or

• entering into a transaction that may result in the potential issuance of common stock (or securities convertible into common stock) greater than 10% of either total shares outstanding or the voting power outstanding on a pretransaction basis.1276 An issuer must also file a form prescribed by Nasdaq, within 10

days after any increase or decrease of any class of shares included in Nasdaq that exceeds 5% of the amount of securities of the class outstanding.1277

Corporate governance requirements for foreign private issuersA listed foreign private issuer is permitted to follow home country practice in lieu of Nasdaq’s corporate governance standards, other than the Nasdaq’s requirements that it must:1278

• make a public announcement of the receipt of an audit opinion that contains a “going concern” qualification;1279

• execute a listing agreement in the form designated by Nasdaq;1280

• provide Nasdaq with notification of material non-compliance by the issuer with its Nasdaq corporate governance requirements;1281 and

• have an audit committee that meets the requirements (including independence requirements) of Exchange Act Rule 10A-3.1282 A listed foreign private issuer that follows home country practice

in lieu of the Nasdaq corporate governance requirements must disclose in its annual report on Form 20-F each requirement which it does not follow and describe the home country practice followed by it in lieu of such requirements.1283 In addition, a foreign private issuer making its initial public offering or first listing on Nasdaq must make the same disclosure in its registration statement.1284


1. We do not discuss the multi-jurisdictional disclosure system applicable to Canadian foreign private issuers in this overview, or the special requirements applicable to registered investment companies.

2. Exchange Act Section 12(a) prohibits transactions on US national securities exchanges with respect to unregistered securities, while Section 12(b) sets out the requirement for that registration.

3. Exchange Act Section 12(g)(1); Exchange Act Rules 12g-1, 12g3-2(a).

4. Final Rule: Exemption from Registration Under Section 12(g) of the Securities Exchange Act of 1934 for Foreign Private Issuers, Exchange Act Release 58465, International Series Release 1309, [2008 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 88,268, 87,104 (September 5 2008), [Rule 12(g) Adopting Release].

5. See Exchange Act Rule 12g3-2(b)(1)(iii)(A) – (C). Non-US disclosure documents include information that a foreign private issuer: (1) has made public or is required to make public pursuant to the laws of the country of its incorporation, organisation or domicile; (2) has filed or been required to file with the principal stock exchange in its primary trading market on which its securities are traded and which has been made public by that exchange; and (3) has distributed or been required to distribute to its security holders.

6. In conjunction with the amendments to Exchange Act Rule 12g3-2(b), the SEC adopted conforming amendments to the Exchange Act Rule 15c2-11. These amendments enable broker-dealers to satisfy their obligation to make reasonably available upon request information that a foreign private issuer has published pursuant to Exchange Act Rule 12g3-2(b) by providing instructions on how to obtain this information electronically.

7. Exchange Act Rule 12g3-2(b)(1)(iii).

8. See Exchange Act Rule 12g3-2(b)(1), Note 2 to Paragraph (b)(1). This provision does not apply to issuers who are claiming the exception based on their termination of registration or report obligations for a class of securities under section 12(g) or section 15(d) of the Exchange Act.

9. Exchange Act Rule 12g3-2(b)(3)(i). The issuer is only required to disclose such information to the extent that it is material to an investment decision regarding the subject securities, such as (1) results of operations or financial condition; (2) changes in business; (3) acquisitions or dispositions of assets; (4) the issuance, redemption or acquisition of securities; (5) changes in management or control; (6) the granting of options or the payment of other remuneration to director or officers; and (7) transactions with directors, officers or principal security holders.

10. See Rule 12(g) Adopting Release, ¶ 88,268, at 87,107. The SEC specifically declined to permit “English versions” or summaries. However, an issuer may submit English summaries of documents if they would be permitted to do so under Form 6-K or Exchange Act Rule 12b-12(d)(3).

11. Exchange Act Rule 12g3-2(b)(1), Note 1 to Paragraph (b)(1).

12. Rule 12(g) Adopting Release, ¶ 88,268, at 87,113–14.

13. Id. at 87,114.

14. Id. at 87,115.

15. Exchange Act Sections 13(a), 15(d).

16. Form 20-F, General Instructions A(b). See also Exchange Act Rule 13a-1 (each issuer with Section 12 registered securities must file an annual report within the time period specified in the relevant form). The acceleration of the filing due date for annual reports on Form 20-F from six months to four months after the foreign private issuer’s fiscal year-end was part of the amendments to reporting requirements applicable to foreign reporting issuers adopted pursuant to recent SEC amendments. The adopting release noted that the SEC staff will consider what accommodations with regards to Industry Guide 3, which relate to bank holding companies, would be appropriate in light of the potential burdens placed on foreign private issuers that provide disclosures under Industry Guide 3. See Foreign Issuer Reporting Enhancements, Securities Act Release 8959, Exchange Act Release 58620, International Series Release 1310, [2008 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 88,287 (September 23 2008) [Foreign Issuer Reporting Enhancements Release].

17. See Directive 2004/109/EC of the European Parliament and of the Council (December 15 2004). For example, companies listed on a market that is subject to the European Union’s Transparency Directive are required to file their annual financial reports within four months of their fiscal year-end.

18. Large accelerated and accelerated domestic US issuers are required to file their annual reports on Form 10-K within 60 days and 75 days, respectively, of their fiscal year-ends. All other domestic US issuers are required to file their annual reports on Form 10-K within 90 days after their fiscal year-end.

19. Exchange Act Rule 13a-16(a); Form 6-K, General Instruction A.

20. Form 6-K, General Instruction B.

21. Certification of Disclosure in Companies’ Quarterly and Annual Reports, Securities Act Release 8124, Exchange Act Release 46427, Investment Company Act Release 25722, [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,720, at 86,125, 86,130 (August 28 2002) [Certification Adopting Release] (Section 302 certification not required for Form 6-K submissions); Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Securities Act Release 8400, Exchange Act Release 49424, [2003–2004 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,158, at 89,493 n.146 (March 16 2004) (Section 906 certification not required for Form 6-K submissions) [Additional Form 8-K Disclosure Adopting Release].

22. Exchange Act Sections 13(b)(2)-(7); Exchange Act Regulation 13B-2; see also Exchange Act Rules 13a-15(a), 15d-15(a) (reporting issuer must maintain “internal control over financial reporting”).

23. Exchange Act Section 30A. In addition, any “domestic concern” whether or not registered with the SEC is subject to substantially identical anti-bribery provisions. 15 USC Section 78dd-2(a). A domestic concern for these purposes means any US citizen, national or resident, or any entity (such as a corporation or a partnership) that has its principal place of business in the US or which is organised under the laws of a US state or territory. 15 USC Section 78dd-2(h)(1).

24. Exchange Act Section 10A.

endnOteS

Endnotes 109

25. Sarbanes-Oxley Act, Section 2(a)(7) (definition of issuer subject to Sarbanes-Oxley).

26. Securities Act Rule 405; Exchange Act Rule 3b-4.

27. Instruction to paragraph (c)(1) of Exchange Act Rule 3b-4; Instructions to paragraph (1) of the definition of “foreign private issuer” in Securities Act Rule 405. Note that these instructions send the reader to Exchange Act Rule 12g3-2(a), which in turn refers to Exchange Act Rule 12g5-1.

28. Instruction to paragraph (c)(1) of Exchange Act Rule 3b-4; Instructions to paragraph (1) of the definition of “foreign private issuer” in Securities Act Rule 405.

29. Exchange Act Rule 12g3-2(a)(1).

30. Id.

31. Instruction B to paragraph (c)(1) of Exchange Act Rule 3b-4; Instruction B to paragraph (1) of the definition of “foreign private issuer” in Securities Act Rule 405. The SEC has acknowledged that the information may not be available, if, for example, the nominee is not able to provide the information, refuses to do so, or imposes an unreasonable charge for providing the information.

32. Exchange Act Rule 3b-4(d).

33. Id.

34. Exchange Act Rule 3b-4(e). This is the same date used to determine accelerated filer status under Exchange Act Rule 12b-2 and smaller reporting company status in Item 10(f )(2)(i) of Regulation S-K under the Securities Act.

35. Exchange Act Rule 3b-4(e).

36. Id.

37. Exchange Act Rule 13a-13(b)(2).

38. Exchange Act Rule 13a-16(a)(3).

39. SEC Division of Corporation Finance, Current Issues and Rulemaking Projects Quarterly Update, March 31 2001, available at http://www.sec.gov/divisions/corpfin/cfcrq032001.htm#secv.

40. Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Accounting Standards Without Reconciliation to US Gaap, Securities Act Release 8879, Exchange Act Release 57026, International Series Release 1306, [2007–2008 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 88,032, at 85,756 (December 21 2007) [Use of IFRS Without Gaap Reconciliation Release].

41. See Form 20-F, Items 17(c), 18.

42. Exchange Act Rule 3a12-3(b).

43. Regulation FD, Rule 100.

44. Id. Rule 101(b)(ii).

45. Id.

46. Exchange Act Rule 3a12-3(b). These securities remain subject to the beneficial ownership reporting requirements of Sections 13(d) and 13(g).

47. Under Exchange Act Rule 3b-2, an accelerated filer is any issuer (including a foreign private issuer) that:

• has an aggregate market value of voting and non-voting common equity held by its non-affiliates that is $75 million or more;

• has been subject to SEC reporting for at least 12 calendar months;

• has filed at least one annual report with the SEC; and

• is not a domestic US small business issuer.

48. Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports, Securities Act Release 8128, Exchange Act Release 46464, Financial Reporting Release 63, [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,724, at 86,188 (September 5 2002) [Acceleration Release].

49. Acceleration Release, ¶ 86,724, at 86,199.

50. Foreign Issuer Reporting Enhancements, ¶ 88,287, at 87,225.

51. Exchange Act Rule 13a-13(b)(2).

52. Newly registered foreign private issuers would be able to take advantage of a transition period and would only have to file the Section 404 management assessments of internal controls and the auditor attestation to such internal controls as part of the second 20-F that such foreign private issuer would file with the SEC after becoming a registrant. See Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers and Newly Public Companies, Securities Act Release 8760, Exchange Act Release 54942, [2006–2007 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,721, at 83,858 (December 15 2006) [2006 Delay Release]; by Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers, Securities Act Release No 8934, Exchange Act Release No 58028, [2008 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 88,232, at 86,690 (June 26 2008) [2008 Delay Release].

53. Foreign private issuers provide executive compensation disclosure on an aggregate basis if the information is reported on such a basis in the issuer’s home country. See Form 20-F, Item 6B.

54. The final text of the rules were released on July 19 2005. Securities Offering Reform, Securities Act Release 8591, Exchange Act Release 52056, Investment Company Act 26993, Financial Reporting Release 75, International Series Release 1294, [2005 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,421, at 82,368 (July 19 2005) [Securities Offering Reform Release].

55. Plain English Disclosure, Securities Act Release 7497, Exchange Act Release 39593, Investment Company Act Release 23011, [1998 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,003, at 80,125 (January 28, 1998) [Plain English Disclosure Release].

56. In May 2004, the SEC approved Auditing Standard 1, which had been adopted by the PCAOB in December 2003. PCAOB Rulemaking: Public Company Accounting Oversight Board; Order Approving Proposed Auditing Standard No 1, References in Auditors’ Reports to the Standards of the Public Company Accounting Oversight Board (“Auditing Standard No 1”), Exchange Act Release 49707, File PCAOB 2003-10, [2004 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,211, at 80,360 (May 14 2004) [Guidance on References to PCAOB in Audit Reports Release]. Auditing Standard No 1 was effective beginning on May 24 2004. See PCAOB Press Release, PCAOB Auditing Standard 1 Effective May 24. Auditing Standard 1 requires that auditor’s reports on the financial statements of issuers include a statement that the engagement was conducted in accordance with the “‘standards of the Public Company Accounting Oversight Board (US)’” as opposed to US generally accepted auditing standards. See also Auditing Standard 1– References in Auditor’s Reports to the Standards of the Public Company Accounting Oversight Board, PCAOB Release No 2003-025, PCAOB Rulemaking Docket Matter No 010 (December 17 2003).

57. Securities Act Rule 155(c)(3).

58. Id.

59. Form F-3, General Instruction I.A.

60. Id. General Instruction I.B.

61. See Securities Act Rule 415.


62. Form F-4, General Instructions B, C.

63. Form F-6, General Instruction I.A.

64. See Rule 12(g) Adopting Release.

65. See also Latham & Watkins Client Alert No 779, Rule 12g3-2(b) Exemption Moves to the Web and Changes the Market for Unsponsored ADR Programmes (January 5 2009), available at http://www.lw.com/upload/pubContent/_pdf/pub2424_1.pdf

66. Mandated EDGAR Filing for Foreign Issuers, Securities Act Release 8099, Exchange Act Release 45922, International Series Release 1259, [2001–2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,640, at 85,471 (May 14 2002) [EDGAR Filing Release]. See also Securities Act Regulation S-T, Rule 100(a) (Regulation S-T applies to all registrants whose filings are subject to review by the SEC’s Division of Corporation Finance).

67. Regulation S-T, Rule 101(a).

68. Id. Rule 102(a).

69. Id. Rule 101(b)(1).

70. Id. Rule 101(b)(7).


72. Id.

73. Form 6-K, General Instruction D(1).


75. Securities Act Rule 403(c)(2); Exchange Act Rule 12b-12(d)(2).

76. Form 6-K, General Instruction D(2).

77. Securities Act Rule 403(c)(3)(ii); Exchange Act Rule 12b-12(d)(3)(ii); Form 6 K, General Instruction D(4).

78. See Interactive Data to Improve Financial Reporting, Securities Act Release 33-9002, Exchange Act Release 59324, International Series Release 28609, [2008–2009 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 88,435, at 81,635 (January 30 2009) [XBRL Adopting Release].

79. Id. (noting that the rules “will apply to public companies and foreign private issuers that prepare their financial statements in accordance with US generally accepted accounting principles (US Gaap), and foreign private issuers that prepare their financial statements using International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB)”).

80. Id. at 81,646–47.

81. See Exchange Act Rule 12b-2.

82. See id. In general, the primary determinant for “smaller reporting company” eligibility is whether the company has less than $75 million in public float or, in the case of issuers with a public float of zero (such as companies with no common equity outstanding or no market price for their outstanding common equity), revenue of less than $50 million in the last fiscal year. Smaller Reporting Company Regulatory Relief and Simplification, Securities Act Release No 8876, Exchange Act Release No 56994, [2007-2008 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 88,029, at 85,724 (December 19 2007) [Smaller Company Regulatory Relief Release]. Note that foreign private issuers would never be eligible to file as smaller reporting companies, unless they prepare their financial statements in accordance with US Gaap and file all forms with the SEC using domestic US issuer forms (such as Form 10-K, Form 10-Q, Form 8-K). Id. at 85,729-10.

83. SEC Staff to Publicly Release Comment Letters and Responses (June 24 2005) (http://www.sec.gov/news/press/2004-89).

84. Securities Act Rule 406 and Exchange Act Rule 24b-2. See also SEC Division of Corporation Finance, Staff Legal Bulletin No 1.

85. NYSE Rules 303A.00, 303A.11; National Association of Securities Dealers Inc [NASD Manual], Rule 435(a)(1).

86. Termination of a Foreign Private Issuer’s Registration of a Class of Securities Under Section 12(g) and Duty to File Reports Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, Exchange Act Release 55540, International Series Release 1301, [2006–2007 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,785, at 84,472 (March 27 2007) [Foreign Issuer Deregistration Release].

87. Exchange Act Rule 12h-6(a), 6(c).

88. While the rules do not specify how ADTV is measured (which is consistent with other provisions in the Exchange Act, such as Regulation M, where the concept of ADTV is used), the rules do provide welcome guidance in two central areas. First, the rules specify that the number of shares underlying an issuer’s ADRs shall be included in calculating ADTV. See Exchange Act Rule 12h-6 (Note to Paragraph (a)(4)). Second, the SEC has clarified that an issuer may include off-market transactions, including ones completed through an alternative trading system, in its calculation of worldwide ADTV. See Foreign Issuer Deregistration Release, ¶ 87,785, at 84,479. In addition, the rules provide that trading volume related to equity-linked securities, such as convertible debt securities, options and warrants, should be excluded when calculating ADTV. See Foreign Issuer Deregistration Release, ¶ 87,785, at 84,480.

89. Exchange Act Rule 12h-6(f )(6). A “recent 12-month period” is defined as a “12-calendar-month period that ended no more than 60 days before the filing date” of the Form 15F seeking to deregister.

90. Exchange Act Rule 12h-6(a)(4)(i). This change is the most significant change from the previous deregistration rules for foreign private issuers, which were based on the number of US resident holders of the issuer’s class of securities.

91. See Foreign Issuer Deregistration Release, ¶ 87,785, at 84,480–81; see also Termination of a Foreign Private Issuer’s Registration of a Class of Securities Under Section 12(g) and Duty to File Reports Under Section 13(A) or 15(D) of the Securities Exchange Act of 1934, Exchange Act Release 55005, International Series Release 1300, [2006-2007 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,735, at 84,008–09 (December 22 2006) [Foreign Issuer Deregistration Proposal].

92. Exchange Act Rule 12h-6(b).

93. Exchange Act Rule 12h-6(a)(4)(ii).

94. Exchange Act Rule 12h-6(e)(1)(i). If an issuer aggregates the trading volume in two jurisdictions for purposes of determining its primary trading market, it must look through nominee accounts in both jurisdictions for purposes of calculating the number of US holders.

95. Exchange Act Rule 12h-6(a)(1–3). This does not mean that a foreign private issuer must have timely filed all reports required during the 12-month period: “In the event that an issuer determines that it should have filed a Form 6K during this period, it can do so before it files its Form 15F.” See Foreign Issuer Deregistration Release, ¶ 87,785, at 84,483. The requirement of a 12-month reporting history is intended to ensure that US-based investors have ample time and information upon which to evaluate a foreign private issuer before that issuer terminates its reporting obligations under the Exchange Act. See Foreign Issuer Deregistration Release, ¶ 87,785, at 84,482–83.

96. Exchange Act Rule 12h-6(a)(2). Such exceptions include securities issued (1) to the issuer’s employees, (2) by selling security holders in non-underwritten offerings, (3) upon the exercise of outstanding rights granted by the issuer if the rights are granted pro rata to all existing security holders of the class of the issuer’s securities to which the rights attach, (4) pursuant to a dividend or interest reinvestment plan and

Endnotes 111

(5) upon the conversion of outstanding convertible securities or upon the exercise of outstanding transferable warrants issued by the issuer; provided that the exceptions in (3)-(5) are not available in respect of securities issued pursuant to a standby underwritten offering or other similar arrangement in the US.

97. Exchange Act Rule 12h-6(a)(2); see Foreign Issuer Deregistration Release, ¶ 87,785, at 84,483–84.

98. Exchange Act Rule 12h-6(f )(5). “Primary trading market” under Rule 12h-6 is defined as the market where at least 55% of the trading in the class of securities to be deregistered must have taken place through the facilities of a securities market during a recent 12-month period. Although two foreign jurisdictions can be aggregated to calculate this percentage, if this is done, the trading market for the class of securities in at least one of these jurisdictions must be larger than the US trading market for the same class of securities.

99. Exchange Act Rule 12h-6(a)(3); Foreign Issuer Deregistration Release, ¶ 87,785, at 84,484–85. This condition is meant to ensure that there is at least one jurisdiction regulating the class of securities that might still be owned by US-based investors.

100. Exchange Act Rule 12h-6(c).

101. Exchange Act Rule 12h-6(e).

102. Exchange Act Rule 12h-6(d)(1).

103. Exchange Act Rule 12h-6(d); see also Foreign Issuer Deregistration Release, ¶ 87,785, at 84,487–88.

104. Exchange Act Rule 12g3-2(e)(1); see Form 15F, Exchange Act Rule 12g3-2(b) exemption; see also Foreign Issuer Deregistration Release, ¶ 87,785, at 84,489–90.

105. Id. at 87,115–16; see also Exchange Act Rules 12g-4 and 12h-3 and Exchange Act Section 15(d).

106. Exchange Act Rule 13e-3(a)(3)(ii)(A).

107. See Foreign Issuer Reporting Enhancements Release, ¶ 88,287, at 87,236–37.

108. Securities Act Rule 135(a)(1).


110. Securities Act Rule 135e(a)(2), (b)(1), (b)(2).

111. Use of Electronic Media, Securities Act Release 7856, Exchange Act Release 42728, Investment Company Act Release 24426, [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304, at 83,384 n.68 (April 28, 2000) [Use of Electronic Media Release].

112. Securities Offering Reform Release, ¶ 87,421, at 82,392 n 170.

113. Securities Act Rule 163(a).

114. Securities Act Rule 163(b)(1).




118. Securities Offering Reform Release, ¶ 87,421, at 82,393.

119. Specifically, these communications will not be considered to be made in “connection with a securities offering registered under the Securities Act” for purposes of Rule 100(b)(2)(iv) of Regulation FD. Securities Act Rule 163(e).

120. Securities Offering Reform Release, ¶ 87,421, at 82,392 n 169.

121. Securities Act Rule 163A(a).

122. Like Rule 163 communications, Rule 163A communications are still subject to Regulation FD, as they would not be considered to be made in “connection with a securities offering registered under the Securities Act” for purposes of Rule 100(b)(2)(iv) of Regulation FD. Securities Act Rule 163A(d).

123. See Securities Act Rule 405, definition of “Free Writing Prospectus”, Section (3) (a free writing prospectus includes a written communication that constitutes an offer to sell or solicitation of an offer to buy securities).


125. Securities Act Rule 163A(a), (c); see also Securities Offering Reform Release, ¶ 87,421, at 82,390 (offering participants that are underwriters or dealers are not “agents or representatives of the issuer” for purposes of Rule 163A).


127. Securities Act Rule 163A(b).

128. Guidelines for the Release of Information by Issuers Whose Securities are in Registration, Securities Act Release 5180, [1970-1971 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 78,202 at 80,578 (August 16, 1971) [Information Guidelines].

129. Securities Act Rules 168(a) and 169(a).

130. See Securities Act Rule 405, “Free Writing Prospectus”, section (3) (a free writing prospectus includes a written communication that constitutes an offer to sell or solicitation of an offer to buy securities).


132. Id.





137. Securities Offering Reform Release, ¶ 87,421, at 82,386–87.

138. Securities Act Rule 168(d).


140. Securities Act Rule 169(a); see also Securities Offering Reform Release, ¶ 87,421, at 82,388 n.146 (principal relevance of Rule 169 is to issuers not eligible for Rule 168). Investment companies may not take advantage of Rule 169. Securities Act Rule 169(d)(4).



143. Securities Offering Reform Release, ¶ 87,421, at 82,389 n.149.

144. Securities Act Rules 168(c) and 169(c).


146. Information Guidelines,¶ 78,202, at 80,578.


148. Id.

149. Securities Act Sections 2(a)10, 5(b)(2), 10(a).

150. Additional considerations may apply if a portion of the securities were sold offshore under Regulation S. In particular, to the extent these periods expire before the expiration of the Regulation S distribution compliance period, publicity in the US will continue to be prohibited


until the distribution compliance period has ended.

151. Securities Act Rules 137(e), 138(d), 139(d).


153. Id.

154. In July 2008, the SEC proposed amendments to Securities Act Rule 138 and Rule 139. The SEC has proposed to amend these rules in connection with the proposed revisions to Forms F-3 and S-3. If the proposed amendments are adopted, issuers could only rely on Securities Act Rule 138 and Rule 139 if they meet the proposed eligibility requirements under Forms F-3 and S-3 which seek to remove and replace the references to security ratings from the listed eligibility requirements. For more information on the proposal see Proposed Rule: Security Ratings, Securities Act Release 8940, Exchange Act Release 58071 [2008 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 88,238, at 86,902 (July 1 2008) [Proposed Security Ratings Release].



157. See Proposed Security Ratings Release and the text accompanying note 149.





162. Securities Act Section 4(3).

163. Securities Act Section 5(d)(2).


165. Securities Act Section 4(3).

166. Securities Act Rule 174(b).


168. Securities Act Rule 405, definition of “Well-Known Seasoned Issuer”, paragraph (1).

169. Id. at paragraph (2). For purposes of determining whether an issuer qualifies as a WKSI, the determination date is the later of: (i) the time of filing of the issuer’s most recent shelf registration statement; (ii) the time of the most recent amendment to its shelf registration statement for purposes of satisfying Section 10(a)(3); or (iii) the date of filing the issuer’s most recent annual report on Form 20-F (if it has not filed a shelf registration statement for the prior 16 months).

170. The SEC interprets common equity for these purposes to include a class of participating voting or non-voting preferred stock of a foreign issuer where the issuance of the preferred stock results from requirements of the applicable non-US jurisdiction and where the class of preferred stock has liquidation or dividend preferences and other terms that cause it to be the “substantial economic equivalent” of a class of common stock. Securities Offering Reform Release, ¶ 87,421, at 82,374.

171. An “ineligible issuer” includes issuers that: (1) are not current in their Exchange Act reporting obligations (other than certain enumerated Form 8-K filings); (2) are blank cheque companies, shell companies, penny stock issuers or limited partnerships offering other than through a firm commitment underwriting; (3) have filed for bankruptcy within the past three years; (4) within the past three years, have been convicted of any felony or misdemeanour under certain provisions of the Exchange Act; (5) within the past three years, were made the subject of any judicial or administrative decree or order arising out of a

government action that prohibits certain conduct or activities regarding (including future violations of ) the US federal securities laws, requires them to cease and desist from violating the anti-fraud provisions of the US federal securities laws or determines that they have violated those anti-fraud provisions; or (6) have had any registration statement subject to a refusal order or stop order within the past three years. See Securities Act Rule 405, definition of “Ineligible Issuer.”


173. Securities Act Rule 405, definition of “Free Writing Prospectus.”

174. Securities Act Rule 405, definition of “Written Communication.”

175. Securities Act Rule 405, definition of “Graphic Communication.”



178. Securities Act Rule 405, definition of “Ineligible Issuer.”

179. Securities Act Rule 164(e)(2).

180. Securities Act Rule 164(g).



183. Securities Act Rule 433(b)(2)(i), Notes to paragraph (b)(2)(i).




187. Securities Act Rule 433(d)(1)(i).

188. Securities Act Rule 433(h)(1).



191. Securities Offering Reform Release, ¶ 87,421, at 82,403. In addition, such a security holder must evaluate whether it has access to material information about the issuer and whether that information is included in the free writing prospectus. Securities Act Rule 433(h)(3).

192. Securities Act Rule 433(d)(1)(ii).


194. Securities Act Rule 433(d)(3).



197. Securities Act Rule 433(e).

198. Securities Act Rule 433(f ).

199. Securities Act Rule 433(f )(1).

200. Securities Act Rule 433(f )(2).


202. Securities Act Rules 164(b), (c) and (d).



205. Securities Act Rule 405, definition of “Written Communication.”

206. Securities Act Rule 433(d)(8), Note to paragraph (d)(8).

Endnotes 113


208. Securities Act Rule 433(h)(5) defines a “bona fide electronic road show” as a road show that is a written communication transmitted by graphic means. If the issuer is using more than one electronic road show, the bona fide electronic road show must include a discussion of the “same general areas of information regarding the issuer,” management and the securities being offered as contained in other electronic road show or road shows for the same offering. The SEC has stated that the bona fide electronic road show need not address all of the same subjects or provide the same information as the other versions, and also need not provide an opportunity for questions and answers (even if this is done in other versions of the road show). See Securities Offering Reform Release, ¶ 87,421, at 82,408–09 n 297.



211. Securities Act Rule 903 (offers and sales by an issuer or distributor); Securities Act Rule 904 (offshore resales).

212. Securities Act Rule 902(h).


214. Securities Act Rule 902(c)

215. Offshore Offers and Sales, Securities Act Release 6863, Exchange Act Release 27942, Investment Company Act Release 17458, [1989–1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 84,524, at 80,661 (April 24, 1990) [Regulation S Adopting Release]. More generally, the Regulation S Adopting Release makes clear that offshore transaction in compliance with Regulation S will not be integrated with concurrent registered or private offerings in the US. Regulation S Adopting Release ¶ 84,524, at 80,681–82.

216. See Coral Gold Corporation, SEC No-Action Letter, [1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,707, at 78,229 (available February 19 1991).

217. Securities Act Regulation S, Preliminary Note 5.

218. Id. Preliminary Note 1.

219. Id. Preliminary Note 2. In addition, Regulation S is not available with respect to any transaction or series of transactions that, although in technical compliance with Regulation S, is part of a plan or scheme to avoid the registration requirements of the Securities Act.



222. Securities Act Rule 902(e). A “foreign issuer” is any foreign government or foreign private issuer.

223. Securities Act Rule 902(j) defines “Substantial US Market Interest.”

224. Securities Act Rule 903(b)(ii) defines what is considered an “overseas directed offering.”

225. Securities Act Rule 405 defines the term “equity securities” which includes debt securities convertible into equity securities.

226. Securities Act Rule 902(a) defines the term “debt securities” as all securities that are not equity securities, and includes non-participating preferred stock and asset-backed securities.


228. Securities Act Rule 902(g) defines the term “offering restrictions.”

229. Securities Act Rule 903 (b)(2)(i).


231. Securities Act Rule 903(b)(2)(ii).

232. Regulation S Adopting Release, ¶ 84,524 at 80,681–82.

233. Securities Act Rule 903(b)(2)(iii).



236. Securities Act Rule 903(b)(3)(i).

237. Securities Act Rule 903(b)(3)(iii).


239. Securities Act Rule 903(b)(3)(ii)(A) and (iii)(A).

240. Securities Act Rule 903(b)(3)(iii)(B).

241. Securities Act Rule 903(b)(3)(ii)(B).

242. Securities Act Rule 903(b)(3)(iv).

243. Securities Act Rule 144(a)(3) defines the term “restricted securities.”

244. Securities Act Rule 905.




248. Securities Act Section 12(a).

249. Regulation S Adopting Release, ¶ 84,524 at 80,681.

250. SEC v Ralston Purina Co, 346 US 119, 125 (1953) (the applicability of the private placement exemption “should turn on whether the particular class of persons affected needs the protection” of the Securities Act; an offering to those “who are shown to be able to fend for themselves” is a private placement).

251. See, for example, Securities Act Release 285, 1935 SEC LEXIS 485 (January 24 1935) (SEC General Counsel specifies four criteria to determine when a transaction qualifies as public offering: (1) the number of offerees and their relationship to each other and to the issuer; (2) the number of units offered; (3) the size of the offering; and (4) the manner of the offering).

252. Securities Act Release 4552 (November 6 1962), 1962 Lexis 166 (all the surrounding circumstances must be considered “including such factors as the relationship between the offerees and the issuer, the nature, scope, size, type and manner of the offering”).

253. Certain courts have held that this information must be comparable to the information investors would have received in a public offering. See, for example, Doran v Petroleum Mgmt. Corp., 545 F.2d 893, 903 (5th Cir. 1977).

254. Securities Act Rule 144(a)(3). Securities sold under Section 4(2) are “restricted securities” that may not be freely resold to the public.




258. Securities Act Rule 502(b)(2)(ii)(D).

259. Securities Act Rule 502(b)(2)(v).

260. Use of IFRS Without Gaap Reconciliation Release, ¶ 88,032, at 85,756. Effective March 4 2008, the financial statements may be prepared in accordance with IASB IFRS without US Gaap reconciliation.

261. Securities Act Rule 502(c).



263. Securities Act Rule 503.

264. See Electronic Filing and Revision of Form D, Securities Act Release 8891, Exchange Act Release 57280, Trust Indenture Act Release 2452, Investment Company Act Release 28145, [2007–2008 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 88,057, at 85,889 (February 6 2008) [Form D E-Filing Release]. “The primary purpose of the amendments adopted is to clarify, simplify and update the information requirements of Form D and modernise the related information capture process.” Id. at 85,917.

265. Id. at 85,890.



268. Securities Act Rules 504(b)(1); 502(b)(1).

269. Securities Act Rules 505(b)(2)(i).

270. Securities Act Rules 505(b)(2)(ii); 501(e)(1)(iv).




274. Securities Act Rule 506(b)(2)(ii); Securities Act Rule 501(h) defines “purchaser representative.”

275. 15 USC 77r(b)(4)(D). “State securities regulation of covered securities generally is limited under Section 18(b) of the Securities Act to imposing notice filing requirements on offerings, requiring the filing of a consent to service of process, and assessing a filing fee.” Regulation D Revisions Release, ¶ 87,939, at 85,175 n 45.

276. Securities Act Section 4(2); Regulation D, Preliminary Note 4.

277. Securities Act Rule 144A, Preliminary Note 6.

278. Securities Act Rule 144A(a)(1).

279. Securities Act Rule 144A(d)(1).




283. Exxon Capital Holdings Corp, SEC No-Action Letter, 1988 SEC NoAct. LEXIS 682 (available May 13 1988); Shearman & Sterling, SEC No-Action Letter, [1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 76,704, at 78,039 (available July 2 1993); Morgan Stanley & Co Inc, SEC No-Action Letter, [1991–1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 76,018, at 78,884 (available June 5 1991).

284. For a further discussion on the recent amendments to Rule 144 and its implications see also Latham & Watkins Client Alert No 685, SEC Reduces Restrictions on Resale of Restricted Securities (March 25 2008), available at http://www.lw.com/upload/pubContent/_pdf/pub2137_1.pdf.

285. See generally “The Section ‘4(11/2)’ Phenomenon: Private Resales of ‘Restricted’ Securities,” 34 The Business Lawyer 1961 (July 1979).








293. Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings, Securities Act Release 7759, Exchange Act Release 42054, Trust Indenture Act Release 2378, International Series Release 1208, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,214, at 82,536, 82,550 (October 22 1999) [Cross-Border Release].

294. General Notes to Securities Act Rules 800, 801 and 802, Note 6.

295. Securities Act Rule 144(a)(3)(vii).

296. Securities Act Rule 802(a)(1) (noting that the 10% limitation does not apply in the case of an exchange offer or business combination commenced during the pendency of a prior exchange offer); see also Securities Act Rule 802(c) (noting certain presumptions about the level of US ownership that are available in the case of a hostile exchange offer).

297. SEC Division of Corporation Finance, Manual of Publicly Available Telephone Interpretations, third supplement (July 2001), Section II.C, Question 1 (http://www.sec.gov/interps/telephone/phonesup plement3.htm) [2001 Telephone Interpretations].





302. Id.



305. Securities Act Rule 802(a)(3)(i).

306. Securities Act Rule 802(a)(3)(ii).

307. Securities Act Rule 802(a)(3)(iii).



310. Id. Note 9.


312. Cross-Border Release, ¶ 86,214, at 82,550.




316. 2001 Telephone Interpretations, Section II.C, Question 1.


318. Securities Act Rule 801(a)(4)(i).

319. Securities Act Rule 801(a)(4)(ii).

320. Securities Act Rule 801(a)(4)(iii).




Endnotes 115





328. Securities Act Rule 701, Preliminary Note 4.

329. Securities Act Rule 701, Preliminary Note 5.



332. Securities Act Rule 701(b)(c)(3) defines the term “family member.”


334. Id.




338. Securities Act Rule 701(d)(3)(i).



341. Id.

342. In particular, the financial statements are those required by Part F/S of Form 1-A under Regulation A. Securities Act Rule 701(e)(4). Part F/S requirements include the following (which need only be audited to the extent the issuer prepares audited financial statements for other purposes):

• the issuer’s balance sheet;

• a statement of the issuer’s income, cash flow and security holders’ equity for the two most recent fiscal years and any interim period;

• financial statements of significant acquired entities or entities proposed to be acquired, if any; and

• pro forma financial information in the event of any recent significant acquisitions.

Effective March 4 2008, the financial statements may be prepared in accordance with IASB IFRS without US Gaap reconciliation. See Use of IFRS Without Gaap Reconciliation Release ¶ 88,032, at 85,756, 85,777.

343. Use of IFRS Without Gaap Reconciliation Release, ¶ 88,032, at 85,777.


345. Securities Act Rule 701(g)(1).



348. Exchange Act Section 12(g)(1); Exchange Act Rules 12g-1, 12g3-2(a).

349. Rule 3(a)(11) defines “equity security” to include stock options for purposes of Section 12(g) of the Exchange Act and Section 12(g)(5) defines “class” to include “all securities of an issuer which are of substantially similar character and the holders of which enjoy substantially similar rights and privileges.” Exchange Act Section 12(g)(5), 3(a)(11).

350. In particular, the compensatory stock options must be issued under a written compensatory stock option plan that is established by the

issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parents. Exchange Act Rules 12h-1(f )(1)(ii), 12h-1(g)(1)(ii).

351. The stock options may be held only by persons described in Rule 701(c) under the Securities Act or permitted transferees described in Rule 12h-1(f )(1)(iv) under the Exchange Act. Exchange Act Rule 12h-1(f )(1)(iii).

352. See Exchange Act Rules 12h-1(f )(1)(iv), (v).

353. The information requirement is satisfied by providing the information required by Rule 701, including financial statements. See Exchange Act Rule 12h-1(f )(1)(vi).

354. The stock options may be held only by persons described in Rule 701(c) under the Securities Act or specified in General Instruction A.1(a) of Form S-8, provided that an issuer may rely on the Rule 12h-1(g) exemption even if there is an insignificant deviation from satisfaction of this condition so long as the issuer has made a good faith and reasonable attempt to comply. Exchange Act Rule 12h-1(g)(1)(iii).

355. Use of Electronic Media Release, ¶ 86,304, at 83,384.

356. Securities Act Rule 135c(a)(1).



359. Securities Act Rules 502(c), 902(c)(3)(vi).

360. Securities Act Rule 135c(b).

361. Securities Act Rule 135c(d).

362. Securities Act Rules 502(c), 902(c)(3)(vii).

363. We do not cover financial statements in M&A transactions. When securities are registered on Form S-4 or F-4 in connection with a stock-for-stock acquisition, different requirements might apply.

364. Generally, Form F-3 may be used by an issuer to sell non-convertible investment grade securities or other securities (provided that the issuer has at least $75 million of common equity outstanding held by non-affiliates) if the issuer has been subject to the Exchange Act reporting requirements and timely filed all Exchange Act reports for the 12 months before registration, and neither the issuer nor its subsidiaries have had any material defaults on a payment related to a dividend, sinking fund, indebtedness, or rentals under long-term leases. See Form F-3, General Instructions.

365. In particular, Form F-1 allows an issuer to incorporate information by reference from its previously filed Exchange Act reports if the issuer:

• is required to file Exchange Act reports;

• has filed all required materials under the Exchange Act during the prior 12 months; has filed an annual report for its most recently completed fiscal year;

• is not a blank check issuer, shell company or penny stock issuer; and makes its Exchange Act reports readily available on its website (including by way of hyperlink to the reports). See Form F-1, General Instructions.

366. See Form 20-F, Item 8.A.1.

367. See id. at Items 17(c), 18. Note that the SEC will not accept financial statements reconciled to US Gaap from all local Gaap (for example, the SEC currently does not allow issuers to report in Indian Gaap reconciled to US Gaap; instead, these issuers must report in US Gaap or IASB IFRS without reconciliation, or non-IASB IFRS with reconciliation).



369. See Form 20-F, Instruction 1 to Item 8. See also S-X Rule 3-02(a) (noting if the issuer has been in existence less than the prescribed number of years, it is sufficient to provide income statements for the life of the issuer and its predecessors); see also SEC Division of Corporation Finance, Accounting Disclosure Rules and Practices: An Overview (Training Material, 2000 Edition), Topic One, I.G (“Financial information of a registrant’s predecessor is required for all periods prior to the registrant’s existence, with no lapse in audited periods or omission of other information required about the registrant.”) [SEC Accounting Disclosure Rules and Practices]. The term “predecessor” is broadly defined. See 1933 Act Rule 405.

370. See Form 20-F, Instruction 1 to Item 8(a)(2).

371. See Form 20-F, Instruction 3 to Item 8(a)(2).

372. See S-X Rule 3-06. Under this rule, the SEC will accept financial statements for periods of not less than nine, 21 and 33 consecutive months as substantial compliance with the requirement to provide financial statements for one, two and three years, respectively. In particular, whenever audited financial statements are required for a period of one, two or three years, a single audited period of nine to 12 months may count as a year if:

• the issuer has changed its fiscal year during the period;

• the issuer has made a significant business acquisition for which financial statements are required under S-X Rule 3-05 and the financial statements covering the interim period pertain to the business being acquired; or

• the SEC grants permission to do so under 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. See id. Note, however, that permission is rarely granted.


374. See Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to US Gaap, Securities Act Releases 33-8879; 34-57026; International Series Release 1306 (March 4 2008), Section III.A.2 [IFRS Reconciliation Release]. A foreign private issuer can omit the US Gaap reconciliation of their unaudited interim financial statements if their audited annual financial statements included or incorporated by reference for all required periods are prepared in accordance with IASB IFRS. Alternatively, the issuer can amend its prior filings so that they are prepared in accordance with IASB IFRS and therefore can omit the reconciliation for its unaudited interim financial statements.

375. See id. at Items 17(c), 18; see also First-Time Application of International Financial Reporting Standards, Securities Act Release 8567, Exchange Act Release 51535, International Series Release 1285 [2005 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,404, at 81,964, 91,971–72 (April 12 2005) [First-Time Application of IFRS Release] (discussing the applicable exceptions).

376. See generally Form 20-F, Item 8.A.5.

377. See Form 20-F, Item 3.A.1. The selected financials must include at least each of the following line items: “net sales or operating revenues; income (loss) from operations; income (loss) from continuing operations; net income (loss); net income (loss) from operations per share; income (loss) from continuing operations per share; total assets; net assets; capital stock (excluding long-term debt and redeemable preferred stock); number of shares adjusted to reflect changes in capital; dividends declared per share in both the currency of the financial statements and the host country currency, including the formula used for any adjustments to dividends declared; and diluted net income per

share.” Id. The selected financials may also include any additional items that would enhance an understanding of the issuer’s financial condition and results of operations. See id.

378. See id.

379. See id. at Instruction 2 to Item 3(a).

380. See Form 20-F, Item 3.A.1. The requirement for comparative balance sheet data may be met by presenting the year-end balance sheet information. See id.

381. See S-K Item 301, Instruction 6.

382. See Form 20-F, Item 3.B.

383. See id.

384. SEC Division of Corporation Finance, International Reporting and Disclosure Issues, Section III.B.f (November 1 2004) [International Reporting and Disclosure Issues].

385. See id.

386. See S-K Item 503(d).

387. See id.

388. See id.

389. See Form 20-F, Item 8(a)(5).

390. See Form 20-F, Instruction 1 to Item 15 (providing a “transition period” for “newly public companies” pursuant to which the management’s assessment and the auditor’s attestation is not required until the company “either had been required to file an annual report pursuant to section 13(a) or 15(d) of the Exchange Act for the prior fiscal year or had filed an annual report with the Commission for the prior fiscal year”); see also Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers and Newly Public Companies, Release Nos 33-8760, 34-54942 [2006-2007 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,721 (December 15 2006) (adopting the foregoing transition period codified in Form 20-F).

391. See Form 20-F, Item 5.

392. See S-K Item 303(a).

393. See Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, Release Nos 33-8182, 34-47264 [2002-2003 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶¶ 86,821, at 86,969 (January 27 2003).

394. See Commission Statements about Management’s Discussion and Analysis of Financial Condition and Results of Operations, Release Nos 33-8056, 34-45321 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,617, at 85,152 (January 22 2002).

395. See Disclosure in Management’s Discussion and Analysis about the Application of Critical Accounting Policies, Release Nos 33-8098, 34-45907 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,638, at 85,409 (May 10 2002); see also Cautionary Advice Regarding Disclosure About Critical Accounting Policies, Release Nos 33-8040, 34-45149 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,609, at 85,097 (December 12 2001).

396. See Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, Release Nos. 33-8350, 34-48960 [2003-2004 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,127, at 88,887 (December 29 2003).

397. See id. at 88,888.

398. See id.

Endnotes 117

399. See id. at 88,891.

400. See id. at 88,892.

401. See id. at 88,896.

402. See id. at 88,899. In May 2002, the SEC proposed additional rules regarding critical accounting estimates. Those rules remain under consideration.

403. See Exchange Act Rule 3b-4(c).

404. See IFRS Reconciliation Release. The new rules apply to foreign private issuers that file on Form 20-F, regardless of whether the issuer complies with IASB IFRS voluntarily or in accordance with the requirements of the issuer’s home country regulator or exchange on which its securities are listed.

405. See IFRS Reconciliation Release. In addition to eliminating the requirement for financial statements to be reconciled to US Gaap, the SEC has also provided transition relief to SEC registrants from the European Union (“EU”) that have prepared their financial statements applying IFRS as adopted by the EU. The only difference between IASB IFRS and IFRS as adopted by the EU relates to International Accounting Standard (IAS) No 39 which offers greater flexibility with respect to hedge accounting for certain financial instruments. For the first two financial years that end after November 15 2007, financial statements of existing foreign private issuer registrants that have previously filed financial statements using the IAS No 39 carve-out will be accepted by the SEC without reconciliation to US Gaap, provided those financial statements otherwise comply with IIASB FRS and contain a reconciliation to IASB IFRS. Financial statements for years ending prior to November 15 2007 that used the IAS No 39 carve-out must continue to be reconciled to US Gaap.

406. See IFRS Reconciliation Release, Section III.A.2, at 31-32. If the financial statements comply with a jurisdictional variation of IFRS but also comply with IASB IFRS, then the financial statements will not have to be reconciled to US Gaap, as long as (i) its financial statements state compliance with both IASB IFRS and the jurisdictional variation of IFRS and (ii) its auditor unreservedly and explicitly so opines.

407. See IFRS Reconciliation Release, Section I.C, at 11.

408. See Form 20-F, Instruction 1 to Item 8(a)(4). The rules regarding the age or “staleness” of the required financial statements for foreign private issuers vary a great deal from those applicable to domestic US issuers. Generally speaking, the financial statements for domestic US issuers go “stale” at a much faster rate.

409. See SEC Accounting Disclosure Rules and Practices, Topic One, II.A.


411. See Form 20-F, Item 8.A.4. (requiring IPO issuers to provide audited financial statements “as of a date not older than 12 months at the time the document is filed” and noting that the audited financial statements in such cases “may cover a period of less than a full year”).

412. See Form 20-F, Instruction 2 to Item 8(a)(4); see also International Reporting and Disclosure Issues, Section III.B.

413. See Form 20-F, Instruction 2 to Item 8.

414. See Form 20-F, Item 8.A.5. This requirement applies to any publication of financial information that includes, at a minimum, revenue and income information, even if that information is not published as part of a complete set of financial statements. See Form 20-F, Instruction 3 to Item 8(a)(5).

415. See First-Time Application Release, Section II.F.2.

416. See id.

417. See Form 20-F, Item 17(c).

418. See IFRS Reconciliation Release. However, reconciliation is not required for interim financial statements included in an annual report. See Simplification of Registration and Reporting Requirements for Foreign Companies; Safe Harbours for Public Announcements of Unregistered Offerings and Broker-Dealer Research Reports, Securities Act Release 7053, Exchange Act Release 33918, International Series Release 653, Fed Sec L Rep (CCH) ¶ 85,331, at 85,354, n 36 (April 19 1994) [Simplification Release].


420. See Simplification Release, ¶ 85,331, at 85,356, n 36 (noting adoption of requirement that reconciliation for earliest of the three years may be omitted); see also Form 20-F, Item 17(c)(2)(i) (noting reconciliation of net income of the earliest of the required three years may be omitted if that information has not previously been included in a registration statement under the 1933 Act).

421. See Form 20-F, Instruction 2 to Item 3(a).

422. See id.; see also S-K Item 301, Instruction 6.

423. See Simplification Release at 85,356.

424. See id. at 85,356 n 37.

425. See IFRS Reconciliation Release at Section III.C.1., at 43.

426. See Form 20-F, Instruction 2 to Item 5.

427. See id.

428. See Form 20-F, Item 8.A.1. (noting required contents of a consolidated balance sheet); see also id. at Item 8(a)(3) (noting audit reports must cover each period of required disclosure).


430. See Form 20-F, Instruction to Item 8(a)(3). See also SAB 103, Topic 1.E.2 (financial statements on which the auditors’ opinions are qualified because of a limitation on the scope of the audit do not meet the requirements of S-X Rule 2-02(b); financial statements for which the auditors’ opinions contain qualifications relating to the acceptability of accounting principles used or the completeness of disclosures made are also unacceptable).

431. See Form 20-F, General Instruction E(c). See also International Reporting and Disclosure Issues, Section III.D (discussing the transition to Auditing Standard No 1).

432. See Form 20-F, General Instruction E(c).

433. See generally Notice of Filing and Order Granting Accelerated Approval of Proposed Amendment to Registration Deadline for Non-US Public Accounting Firms, Release No 34-49473, File No PCAOB 2004-01 (March 25 2004); see also Registration Deadline for Non-US Accounting Firms, PCAOB Release No 2004-003, PCAOB Rulemaking Docket Matter No 013 (March 25 2004).

434. See S-X Rule 3-20(a).

435. See generally International Reporting and Disclosure Issues, Section VIII.

436. See S-X Rule 3-20(b).

437. See id.; see also S-K Item 301, Instruction 5.C (noting if equity securities are being registered, a five year summary of dividends per share stated in both the currency in which the financial statements are denominated and US dollars must be included, based on the exchange rates at each respective payment date).

438. See S-X Rule 3-20(b) (providing that “[i]f the reporting currency is not the US dollar, dollar-equivalent financial statements


or convenience translations shall not be presented, except a translation may be presented of the most recent fiscal year and any subsequent interim period presented using the exchange rate as of the most recent balance sheet included in the filing, except that a rate as of the most recent practicable date shall be used if materially different”).

439. See id.; see also International Reporting and Disclosure Issues, Section VIII.D (discussing issues arising from material currency devaluations after the date of the balance sheet).

440. See Form 20-F, Item 3.A.3.; see also S-K Item 301, Instruction 5 (noting substantially identical requirements for foreign private issuers).

441. See Form 20-F, Item 3(a)(3). The average rate is the average of the exchange rates on the last day of each month during a year. See S-K Item 301, Instruction 7.

442. SEC Division of Corporation Finance, Manual of Publicly Available Telephone Interpretations, Other Exchange Act Forms, Item 56 (2008) available at http://www.sec.gov/interps/telephone/cftelinterps_other.pdf; see also S-K Item 301, Instruction 7.

443. S-K Item 10(e) limits the use of non-Gaap financial measures in registration statements, including non-Gaap financial measures that have customarily appeared in the summary financial data. For a further discussion, see Latham & Watkins Client Alert No 257, SEC Adopts Rules for Disclosure of Ebitda and Other Non-Gaap Financial Measures.

444. Regulation FD prohibits discussing material information with prospective investors unless it has been made public. Some companies will issue a “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” discussion of these results with prospective investors. See FD Rule 100.

445. See Form 20-F, Item 17(a) (financial statements must be included if they would be required for a registration statement on Form 10 or an annual report on Form 10-K); see also Form F-1, Item 4(b) (requiring issuers to provide the financial statements called for, among other things, by S-X Rule 3-05).

446. See S-X Rule 11-01(d). Under S-X Rule 11-01(d), whether an acquisition is of a “business” should be evaluated in light of the facts and circumstances involved and whether there is sufficient continuity of the acquired entity’s operations prior to and after the transactions so that disclosure of prior financial information is material to an understanding of future operations. A presumption exists that a separate entity, a subsidiary, or a division is a business. However, a lesser component of an entity may also constitute a business. Among the facts and circumstances which should be considered in evaluating whether an acquisition of a lesser component of an entity constitutes a business are:

• whether the nature of the revenue-producing activity of the component will remain generally the same as before the transaction; or

• whether any of the following attributes remain with the component after the transaction: (i) physical facilities, (ii) employee base, (iii) market distribution system, (iv) sales force, (v) customer base, (vi) operating rights, (vii) production techniques, or (viii) trade names. See id.

447. See S-X Rule 3-05(a)(3) (governing whether businesses are “related”); Rule 11-01(d) (governing whether an acquisition involves a “business”).

448. However, a different conclusion may be reached depending upon the customary practice for an industry or a particular issuer. For example, an issuer may be submitting a letter of intent as one of

many parties in a bidding process, or a roll up entity may routinely sign letters of intent to further its due diligence investigations of multiple potential targets, but with the acquisition of only a minority of those companies becoming probable.

449. By “pre-tax income” we mean the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principle. See S-X Rule 1-02(w)(3). If the acquired business had a net loss, then the absolute value of the negative amount is generally used for the test.

450. See generally S-X Rule 3-05(b)(2)(ii).

451. See id. at Rule 3-05(b)(2)(iii).

452. See S-X Rule 3-05(b)(2)(iv) (50% test); S-X Rule 3-05(b)(1) (registration of securities to be offered to acquired business security holders).

453. See S-X Rule 1-02(w).

454. “Foreign business” is defined in S-X Rule 1-02(l) as a business that is majority owned by persons who are not citizens or residents of the US and is not organised under US law, and either:

• more than 50% of its assets are located outside the US; or

• the majority of its executive officers or directors are not US citizens or residents.

Note that a non-US subsidiary of a US company would not be considered a “foreign business,” because the test looks to the ultimate holding company in determining ownership and officer/director nationality. See SEC Division of Corporate Finance, International Reporting and Disclosure Issues, Section IX.E (November 1 2004).

455. See S-X Rule 3-05(c) (financial statements of an acquired non-US business can meet Item 17 of Form 20-F); Form 20-F, Item 17(c)(v) (financial statements of an acquired business may omit reconciliation below the 30% significance level).

456. See Form 20-F, Item 17(c)(2)(v).

457. See S-X Rule 3-05 (financial statements of acquired businesses must be prepared and audited in accordance with Regulation S-X).

458. Although the due date for an acquired company’s financial statements is determined based on the status of the acquired company (as an accelerated or non-accelerated filer) and not on the status of the acquiring company, an interesting wrinkle may emerge where the acquiring company is on a faster track than the acquired company. In that fact pattern, the pro forma requirement can effectively accelerate the need for the acquired company’s financial information because the acquiring company will need to produce financial statements for the acquired business if the acquiring company wants to be in the market on or after its periodic report due date.

459. See S-X Rule 3-05(b)(4)(i). The date of an offering will be deemed to be the date of the final prospectus or prospectus supplement filed pursuant to Rule 424(b). See id. By analogy, the pricing date would be the date of an offering in a Rule 144A transaction. An issuer, other than a foreign private issuer required to file reports on Form 6-K, that omits from its initial registration statement financial statements of a recently consummated business transaction pursuant to S-X Rule 3-05(b)(4)(i) must furnish those financial statements and any pro forma information specified by S-X Article 11 under cover of Form 8-K no later than 75 days after consummation of the acquisition.

460. “Foreign business” is defined in S-X Rule 1-02(l) as a business that is majority owned by persons who are not citizens or residents of the

Endnotes 119

US and is not organised under US law, and either:

• more than 50% of its assets are located outside the US; or

• the majority of its executive officers or directors are not US citizens or residents.

Note that a non-US subsidiary of a US company would not be considered a “foreign business,” because the test looks to the ultimate holding company in determining ownership and officer/director nationality. See SEC Division of Corporate Finance, International Reporting and Disclosure Issues, Section IX.E (November 1 2004).

461. See S-X Rule 3-05(c) (financial statements of an acquired non-US business can meet Item 17 of Form 20-F); Form 20-F, Item 17(c)(v) (financial statements of an acquired business may omit reconciliation below the 30% significance level).

462. If, however, a foreign private issuer makes public any financial statements of significant acquired businesses or pro forma financial information pursuant to its home country requirements, the foreign private issuer should furnish or file such financial information under cover of Form 6-K as it is likely to be deemed to be material. The SEC considered requiring foreign private issuers to provide in their annual reports on Form 20-F three years of financial statements of significant acquired businesses and pro forma financial information if the acquired business was at the 50% or greater level of significance. Commenters expressed concern about the timeliness of the information, the burden and expense required to provide the information, and the potential disparity in the information available to investors in the foreign private issuer’s home country and the US, as well as questioned the value of the information. In light of concerns expressed by commenters, the SEC did not ultimately adopt this proposed amendment but indicated that it will continue to consider the proposal. See the SEC proposing release for Foreign Issuer Reporting Enhancements, Securities Act Release 8900, Exchange Act Release 57409, Fed. Sec. L. Rep. (CCH) ¶ 88,076 (February 29 2008).

463. Item 2.01 of Form 8-K requires domestic US issuers to report on Form 8-K specified information regarding an acquisition or disposition of a significant amount of assets, other than in the ordinary course of business, within four business days after the completion of the acquisition or disposition. For a business acquisition significant at the 20% or greater level, the financial statements of the acquired business must be filed with the initial report of the acquisition on Form 8-K, or by amendment no later than 71 calendar days after the date that the initial report on Form 8-K is due.

464. See S-X Rule 3-05(b)(4)(iii).

465. See id. It is generally understood that the SEC Staff interprets this provision to apply to acquisitions above the 70% significance level.

466. See S-X Rule 3-06.

467. See generally SAB 103, Topic 6.K.4. In order for the pre-acquisition statements of an acquiree to be omitted from the registration statement, each of the following conditions must be met:

• the combined significance of businesses acquired or to be acquired for which audited financial statements cover a period of less than nine months may not exceed 10%;

• the combined significance of businesses acquired or to be acquired for which audited financial statements cover a period of less than 21 months may not exceed 20%; and

• the combined significance of businesses acquired or to be acquired for which audited financial statements cover a period of less than 33 months may not exceed 40%. See id.

Combined significance is the total, for all included companies, of each individual company’s highest level of significance under the three tests of significance (investment, assets and pre-tax

income). For a serial acquirer going public, the application of SAB 80 is likely to allow for the exclusion of financial statements for an increasing number of acquired companies for each period prior to the IPO.

468. See S-X Rule 3-14(a). The additional disclosure includes (i) material factors considered by the issuer in assessing the property, including sources of revenue (including, but not limited to, competition in the rental market, comparative rents, occupancy rates) and expenses (including, but not limited to, utility rates, ad valorem tax rates, maintenance expenses and capital improvements anticipated) and (ii) an indication that, after reasonable inquiry, the issuer is not aware of any material factors relating to the property other than those discussed in (i) that would cause the reported financial information not to be necessarily indicative of future operating results. See S-X Rule 3-14(a)(1).

469. 1933 Act Rule 408 states that “In addition to the information expressly required to be included in a registration statement, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.”

470. See S-X Rule 11-01(a)(1) (noting pro forma financial information required for a “significant” business acquisition); see S-X Rule 11-01(b)(1) (noting a “significant” acquisition means an acquisition above the 20% significance level); see S-X Rule 11-01(c) (no pro forma financial information is needed if separate financial statements of the acquired business not included).

471. See S-X Rule 11-02(b)(1).

472. See 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 historical balance sheet. See S-X Rule 11-02(b)(6).

473. See S-X Rule 11-02(b)(1).

474. See S-X Rule 11-02(c)(2)(i). The pro forma condensed income statements should be prepared as if the transaction had taken place at the beginning of the latest fiscal year included in the filing. See S-X Rule 11-02(b)(6).

475. See S-X Rule 11-01(a)(4). A “significant” disposition for these purposes is one where the business would be a “significant subsidiary” under S-X Rule 1-02(w).

476. See S-X Rule 11-01(a)(8).

477. See generally S-X Rule 11-02.

478. See S-X Rule 11-02(b)(6).

479. See S-X Rule 11-02(c)(3).

480. See id. This updating could be accomplished by adding subsequent interim period results to the most recent fiscal year-end information and deducting the comparable preceding year interim period results. See id. Another common approach is to use the acquired company’s most recent quarterly information.

481. See International Reporting and Disclosure Issues, Section X.D.

482. See id.

483. See SEC Accounting Disclosure Rules and Practices, Topic 6.IV.A.7.

484. See S-X Rule 3-10(a). In the case of a foreign private issuer, these will be the financial statements required by Item 8.A of Form 20-F. See S-X Rule 3-10(a)(3). Note that S-X Rule 3-10 typically does not apply to credit enhancements that are not guarantees. However, in certain cases the financial condition of the party providing the credit enhancement could be material to investors and subject to disclosure. See Financial Statements and Periodic


Reports for Related Issuers and Guarantors, Release Nos 33-7878, 34-43124, Fed. Sec. L. Rep. (CCH) ¶ 86,320, at 83,711, n.50 (August 4 2000) [Guarantors Release].

485. The modified financial information permitted by S-X Rules 3-10(b)-(f ) is available only for guaranteed debt and debt-like instruments. See Guarantors Release at 83,724. Substance is determinative, and the characteristics that identify a guaranteed security as debt or debt-like for these purposes are: (i) the issuer has a contractual obligation to pay a fixed sum at a fixed time; and (ii) where the obligation to make such payments is cumulative, a set amount of interest must be paid. See id. at 83,716-83,718.

486. Under S-X Rule 3-10(h)(6), a subsidiary is “minor” if each of its total assets, stockholders’ equity, revenues, income from continuing operations before income taxes, and cash flows from operating activities is less than 3% of the parent company’s corresponding consolidated amount.

487. See S-X Rule 3-10(i)(12). The reconciliation may be based on Item 17 of Form 20-F. See id.; see also IFRS Reconciliation Release, Section III.D.3.

488. Under S-X Rule 3-10(h)(6), a subsidiary is minor if each of its total assets, stockholders’ equity, revenues, income from continuing operations before income taxes, and cash flows from operating activities is less than 3% of the parent company’s corresponding consolidated amount.

489. Under S-X Rule 3-10(h)(1), a subsidiary is 100% owned if all of its outstanding voting shares are owned, directly or indirectly, by its parent company. The term “voting shares” includes all rights, other than as affected by events of default, to vote for election of directors, and the sum of all interests in an unincorporated person. See S-X Rule 1-02(z). Convertible securities and options to buy voting shares would typically be considered voting shares. Note that this standard is different from the definition of “wholly-owned subsidiary” under S-X 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 other wholly owned subsidiaries.”

490. The Latham & Watkins standard form indenture includes a “savings clause” to limit the guarantee to the extent necessary for the guarantee not to constitute a fraudulent conveyance under insolvency laws. This exception does not vitiate the guarantee in the view of the SEC. Guarantees may also have different subordination terms than the guaranteed security.

491. Note 3 to S-X Rule 3-10(f ) provides that if any of the subsidiary guarantees is not joint and several with the guarantees of the other subsidiaries, then each subsidiary guarantor whose guarantee is not joint and several need not include separate financial statements, but the condensed consolidating financial information must include a separate column for each subsidiary guarantor whose guarantee is not joint and several.

492. S-X Rule 3-10(i) provides guidance for the preparation of the condensed consolidating financial information in the footnote.

493. The column for non-guarantor subsidiaries may be omitted if the parent has independent assets or operations and the non-guarantor subsidiaries are minor. See Note 3 to S-X Rule 3-10(e); see also Note 2 to S-X Rule 3-10(f ).

494. S-X Rule 3-10(h)(5).

495. A subsidiary is an operating subsidiary if it is not a “finance subsidiary.” See S-X Rule 3-10(h)(8). In turn, a subsidiary is a finance subsidiary “if it has no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the security being registered and any other

securities guaranteed by its parent company.” S-X Rule 3-10(h)(7).

496. Note 1 to S-X Rule 3-10(c) allows a conditional exemption from providing the footnote if the parent company has no independent assets or operations, the guarantee is full and unconditional, the non-guarantor subsidiaries are minor, and there is a footnote to this effect in the parent financial statements.

497. The column for non-guarantor subsidiaries may be omitted if the parent has independent assets or operations and the non-guarantor subsidiaries are minor. See Note 2 to S-X Rule 3-10(c).

498. As noted above, a subsidiary is a finance subsidiary “if it has no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the security being registered and any other securities guaranteed by its parent company.” S-X Rule 3-10(h)(7).

499. See Note to S-X Rule 3-10(b).

500. Pursuant to Note 4 to S-X Rule 3-10(d), if any of the subsidiary guarantees is not joint and several with the guarantees of the parent company or the guarantees of the parent company and the other subsidiaries, each subsidiary guarantor whose guarantee is not joint and several need not include separate financial statements, but the condensed consolidating financial information must include a separate column for each subsidiary guarantor whose guarantee is not joint and several.

501. For a finance subsidiary only, instead of providing this condensed consolidating financial information, the parent company’s financial statements may include a footnote stating (if true) that the parent company has no independent assets or operations, the issuer is a 100%-owned finance subsidiary, the parent company and all of the parent company’s subsidiaries other than the issuer have guaranteed the securities, and the guarantees are full and unconditional and joint and several. See Note 5 to S-X Rule 3-10(d).

502. The column for non-guarantor subsidiaries may be omitted if the non-guarantor subsidiaries are minor.

503. See Instruction 4 to S-X Rule 3-10(d).

504. See S-X Rule 3-10(g)(1)(i).

505. See Instruction 1 to S-X Rule 3-10(g)(1).

506. See Instruction 3 to S-X Rule 3-10(g)(1).

507. The audited and unaudited financial statements must comply with all aspects of S-X except for the filing of supporting schedules. See S-X Rule 3-10(g)(2)(ii). If the subsidiary is a non-US business, financial statements of the subsidiary meeting the requirements of Item 17 of Form 20-F will suffice. See id.

508. See S-X Rule 3-10(g)(1).

509. See S-X Rule 3-16.

510. See APB Opinion No 18, The Equity Method of Accounting for Investments in Common Stock.

511. See SAB 103, Topic 6.K.4.

512. See id.

513. Note this test is derived from S-X Rule 1-02(w)(1).

514. Note this test is derived from S-X Rule 1-02(w)(3).

515. See S-X Rule 3-09(a).

516. See S-X Rule 3-09(b).

Endnotes 121

517. See Note to paragraph (w) of S-X Rule 1-02(w).

518. See generally S-X Rule 4-08(g).

519. See Form 20-F, Item 17(c)(vi).


521. See id.

522. See S-X Rule 3-03(e); see also S-K Item 101(b).

523. SFAS 131 uses the term chief operating decision maker to identify a function rather than a specific person; the chief operating decision maker could be the CEO, CFO, or a group of senior managers, depending upon the circumstances.

524. In practice there is a great variety of ways in which management may view its business and there is no one right answer within a given industry. For example, Dell Computer considers that its enterprise is primarily operating on a geographic basis, but with two operating segments in the Americas (business and consumer); in comparison, IBM reports its results under six operating segments based upon customers, products, technology and delivery channels.

525. See SFAS 131, Quantitative Thresholds.

526. Under SFAS 131, the details provided in reporting a “measure of profit or loss” depend upon the information that is actually reviewed by the chief operating decision maker and may include revenues from external vs internal customers, interest revenue and expense, depreciation and amortisation, and extraordinary items, among others.

527. See generally S-X Rule 5-04(c).

528. Where restrictions on the amount of funds that may be loaned or advanced differ from the amount restricted as to transfer in the form of cash dividends, the amount least restrictive to the subsidiary may be used. Redeemable preferred stocks and minority interests are deducted in computing net assets for purposes of this test.

529. See generally S-K Item 801. Guide 1 has been removed and reserved. See id. at Item 801(a).

530. See Modernisation of Oil and Gas Reporting, Securities Act Release No 8995, Exchange Act Release No 59192, [2008 – 2009 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 88,423, at 81,436 (December 31 2008). Notably, these amendments apply to registration statements filed on or after January 1 2010 and for annual reports on Form 10-K and Form 20-F for fiscal years ending on or after December 31 2009.

531. Compare Form 20-F, Item 17(b) (financial statement must disclose information “substantially similar” to financial statements complying with US Gaap and Regulation S-X) with Id. at Item 18 (an issuer must provide all Item 17 information plus all other information required by US Gaap and S-X unless those requirements do not apply to foreign private issuers, subject to certain exceptions).

532. See SAB 103, Topic 1.D.1.

533. See id.

534. Form 20-F, Item 17(c)(2) requires a narrative discussion of reconciling differences, a reconciliation of net income for each year and any interim periods presented, a reconciliation of major balance sheet captions for each year and any interim periods, and a reconciliation of cash flows for each year and any interim periods. Under Form 20-F, Item 17, an issuer is not required to provide the footnote disclosures required by US Gaap and Regulation S-X unless these disclosures are otherwise required under its home country Gaap.

535. See Form 20-F, General Instruction E (c). Offerings of non-

convertible, investment grade securities and certain rights offerings need only comply with Item 17 of Form 20-F. See Form F-1, Item 4(c); see also Form F-3, General Instructions I.B.2 and I.B.4. Note that, in the case of acquisitions of a non-US business, the financial statements of the acquired business need only be presented under Item 17 of Form 20-F. See S-X Rule 3-05(c). Similarly, audited financial statements for a less than majority-owned equity investor that is a non-US business need only comply with Item 17 of Form 20-F. See S-X Rule 3-09(d).

536. See S-X Rule 3-05.

537. See S-X Rule 3-09.

538. See S-X Rule 3-16.

539. See S-X Rule 3-10.

540. Under the relevant Rule 10b-5 case law, a plaintiff must show more than a simple misstatement or omission. A showing of “scienter” or recklessness is also required to establish liability.

541. See Sarbanes-Oxley Act of 2002, § 2(a)(7) [SOX].

542. Public Company Accounting Oversight Board, Auditing Standard No 5 – An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, PCAOB Release No 2007-005A, PCAOB Rulemaking Docket Matter No 021, (June 12 2007) at http://www.pcaobus.org/Rules/Docket_021/2007-06-12_Release_No_2007-005A.pdf [Auditing Standard No 5 Release]. (Auditing Standard No 5 is the current standard on attestation engagements referred to in Section 404(b), having superseded the prior Auditing Standard No 2: Public Company Accounting Oversight Board, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements, PCAOB Release No 2004-001, PCAOB Rulemaking Docket Matter No 008, [2003–2004 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,151, at 89,327 (March 9 2004) [Auditing Standard No 2 Release]).

543. See Exchange Act Rules 13a-15(a); 15d-15(a).

544. See id. at Rules 13a-15(c); 15d-15(c).

545. See id. at Rules 13a-15(d); 15d-15(d).

546. See Form 20-F, Items 15(b) and 15T(b).

547. See Form 20-F, Items 15(c), (d) and Item 15T(d).

548. See Form 20-F, Item 15T (providing that non-accelerated filers may provide only a Section 404(a) management’s assessment until fiscal years ending on or after December 15 2009 and that this report will generally be deemed furnished and not filed for purposes of Section 18 of the Exchange Act); see also Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers, Release Nos. 33-8934, 34-58020 (June 26 2008) (adopting the delay embodied in Item 15T, and confirming that the requirement for non-accelerated filers to provide the Section 404(b) auditor’s attestation has been delayed until fiscal years ending on or after December 15 2009).


550. See id. In general, the primary determinant for “smaller reporting company” eligibility is whether the company has less than $75 million in public float or, in the case of issuers with a public float of zero (such as companies with no common equity outstanding or no market price for their outstanding common equity), revenue of less than $50 million in the last fiscal year. Smaller Company Regulatory Relief Release, Fed. Sec. L. Rep. (CCH) ¶ 88,029, at 85,724. Note that foreign private issuers would never be eligible to file as smaller reporting companies, unless they prepare their financial statements in accordance with US Gaap and file all forms with the SEC using domestic US issuer forms (for example Form 10-K, Form 10-Q, Form 8-K). Id. at 85,729-10.



552. See Form 20-F, Instructions to Item 15.

553. See id.

554. See Exchange Act Rules 13a-15(f ); 15d-15(f ).

555. See Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, Securities Act Release No 8810, Exchange Act Release No 55929, [2007 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,913, at 84,835, 84,838 (June 20 2007) [Interpretative Guidance Release].

556. See id.

557. See id; see also Amendments to Rules Regarding Management’s Report on Internal Control Over Financial Reporting, Securities Act Release No 8809, Exchange Act Release No 55928, [2007 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 87,912, at 84,819 and 84,821-823 (June 20 2007) [2007 Amendments to Rules on Management’s Report on Internal Control].

558. See Management’s Reports on Internal Control Adopting Release, ¶ 86,923, at 87,685.

559. See id; see also id., ¶ 86,923 at 87,685 n 67.


561. See Interpretive Guidance Release, ¶ 87,913, at 84,836.

562. See Interpretive Guidance Release, ¶ 87,913, at 84,840, n 27. The SEC has defined “controls” as follows: “A control consists of a specific set of policies, procedures, and activities designed to meet an objective. A control may exist within a designated function or activity in a process. A control’s impact on [management’s system of internal control over financial reporting] may be entity-wide or specific to an account balance, class of transactions or application. Controls have unique characteristics – for example, they can be: automated or manual; reconciliations; segregation of duties; review and approval authorisations; safeguarding and accountability of assets; preventing or detecting error or fraud. Controls within a process may consist of financial reporting controls and operational controls (that is, those designed to achieve operational objectives)”.

563. See id.

564. See id. at 84,841. With respect to entity-level controls, the SEC cautions that “[t]he more indirect the relationship to a financial reporting element, the less effective a control may be in preventing or detecting a misstatement.” The SEC goes on to say, however, that “[e]ntity-level controls may be designed to operate at the process, application, transaction or account-level and at a level of precision that would adequately prevent or detect on a timely basis misstatements in one or more financial reporting elements that could result in a material misstatement of the financial statements. In these cases, management may not need to identify or evaluate additional controls relating to that financial reporting risk.”

565. See id. at 84,837.

566. See Management’s Reports on Internal Control Adopting Release, ¶ 86,923, at 87,685–86.


568. See id.

569. See Form 20-F, Item 15(b)(3).

570. See 2007 Amendments to Rules on Management’s Report on Internal Control, ¶ 87,912, at 84,824; see also Exchange Act Rule 12b-2 and

Rule 1-02 of Regulation S-X.

571. See Auditing Standard No 5 Release at A1-43.

572. See Interpretive Guidance Release, ¶ 87,913, at 84,835, 84,838.

573. See Form 20-F, Instruction 2 to Items 15 and 15T; Management’s Reports on Internal Control Adopting Release, ¶ 86,923, at 87,687. The SEC has stated that it believes it is important for the internal control report to be located near the auditor’s attestation report, and that it expects issuers will place the report and attestation near the MD&A disclosure or immediately preceding the financial statements.


575. See id.

576. See id.

577. See Management’s Reports on Internal Control Adopting Release, ¶ 86,923, at 87,691; see also Item 308(c) of Regulation S-K.


579. See generally Office of the Chief Accountant, Division of Corporation Finance, Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports: Frequently Asked Questions (September 24 2007) available at http://www.sec.gov/info/accountants/controlfaq.htm [September 2007 FAQ].

580. See id. at Question 2.



583. See id.

584. See id. at Question 11


586. See id. at Question 15. Note that the September 2007 FAQ also discuss issues relating to foreign private issuers that file financial statements prepared in accordance with home country generally accepted accounting principles or IFRS, with a reconciliation to US Gaap (see questions 12 and 14). The SEC notes that foreign private issuers should always plan and conduct their evaluation process based on their primary financial statements and not the US Gaap reconciliation. The issues presented by these questions have, to a certain extent for issuers who prepare their financials under IASB IFRS, been superseded in that the SEC now accepts financial statements from foreign private issuers without reconciliation to US Gaap if prepared under IFRS as issued by IASB. See Use of IFRS Without Gaap Reconciliation Release, ¶ 88,032, at 85,756. See also Latham & Watkins Client Alert No 667, SEC Accepts Financial Statements From Foreign Private Issuers Without Reconciliation to US Gaap If Prepared Under International Financial Reporting Standards (January 16 2008), available at http://www.lw.com/upload/pubContent/_pdf/pub2082_1.pdf. In addition to permitting foreign private issuers to file financial statements prepared under IASB IFRS, the SEC has also proposed a “Roadmap” that could lead to the mandatory use of IASB IFRS by US issuers beginning in 2014 if the Commission believes it to be in the public interest and consistent with the protection of investors. See Securities and Exchange Commission, Speech by SEC Chairman: Proposing a Roadmap Toward IFRS by Chairman Christopher Cox (August 27 2008) available at http://www.sec.gov/news/speech/2008/spch082708cc_ifrs.htm. See also Securities and Exchange Commission, Speech by SEC Commissioner: Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards from US Issuers by Commissioner Elisse B Walter (August 27 2008) available at http://www.sec.gov/news/speech/2008/spch082708ebw.htm.

Endnotes 123

587. See generally Office of the Chief Accountant, Division of Corporation Finance, Staff Statement on Management’s Report on Internal Control Over Financial Reporting (May 16 2005), available at http://www.sec.gov/info/accountants/stafficreporting.htm. Since 2005, the SEC has incorporated parts of the SEC Staff Statement into published final rules (see, for example, Interpretive Guidance Release, ¶ 87,913, at 84,853), but the SEC has also specifically noted that the SEC Staff Statement “remains relevant” in its own right as a source of guidance (Interpretive Guidance Release, ¶ 87,913, at 84,858).

588. See also Interpretive Guidance Release, ¶ 87,913, at 84,836-837 (“[M]anagement can focus its evaluation process and the documentation supporting the assessment on those controls that it determines adequately address the risk of a material misstatement of the financial statements.”).

589. See id. at 84,836 (“The [SEC] has long held that “reasonableness” is not an “absolute standard of exactitude for corporate records.” In addition, the [SEC] recognises that while “reasonableness” is an objective standard, there is a range of judgments that an issuer might make as to what is “reasonable” in implementing Section 404 and the [SEC]’s rules. Thus, the terms “reasonable,” “reasonably,” and “reasonableness” in the context of Section 404 implementation do not imply a single conclusion or methodology, but encompass the full range of appropriate potential conduct, conclusions or methodologies upon which an issuer may reasonably base its decisions.”).

590. See id.

591. As noted above, the reference to interim financial statements in the definition of material weakness is not applicable to foreign private issuers. See September 2007 FAQ at question 13.

592. See Staff Statement on Management’s Report on Internal Control Over Financial Reporting at § C.

593. See id. at § D.

594. See id. at § E.

595. See id.

596. The SEC made this principle part of its final rule in the Interpretive Guidance Release, ¶ 87,913, at 84,842, 84,853 (The SEC notes “[s]pecifically, it is unnecessary to evaluate IT general controls that primarily pertain to efficiency or effectiveness of a company’s operations, but which are not relevant to addressing financial reporting risks”).

597. See Staff Statement on Management’s Report on Internal Control Over Financial Reporting at § F.

598. See id. at § G.

599. See Auditing Standard No 5 Release.


601. See Auditing Standard No 2 Release, ¶ 87,151, at 89,329. The PCAOB believed that “attestation” was “insufficient to describe the process of assessing management’s report on internal controls.”

602. See Auditing Standard No 5 Release at 15.

603. See id. at 5.

604. See id. at 4; see also Public Company Accounting Oversight Board, News Release: Board Approves New Audit Standard For Internal Control Over Financial Reporting and, Separately, Recommendations on Inspection Frequency Rule (May 24 2007) available at http://www.pcaobus.org/News_and_Events/News/2007/05-24.aspx [PCAOB News Release].

605. See id.

606. See Auditing Standard No 5 Release at A1-4, ¶ 3.

607. See id.

608. See id. at A1-5, ¶¶ 3-4.

609. See id. at A1-41, ¶ A2 (“A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A deficiency in design exists when (1) a control necessary to meet the control objective is missing or (2) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed, or when the person performing the control does not possess the necessary authority or competence to perform the control effectively.”).

610. See id. at A1-44, ¶ A11 ( “A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.”).

611. See id. at A1-44, ¶ 2; see also Interpretive Guidance Release, ¶ 87,913, at 84,837, n 11.

612. See Auditing Standard No 5 Release at A1-26, ¶ 62.

613. See id. at A1-26, ¶¶ 63-64.

614. See id. at A1-31, ¶¶ 78-79.

615. See id. at A1-32, ¶¶ 80-81.

616. See id. at A1-26, ¶ 65.

617. See id.

618. See id. at A1-28, ¶ 69.

619. See id. at A1-34, ¶ 85(k); see also the PCAOB News Release (discussing changes from Auditing Standard No 2 to Auditing Standard No 5, the PCAOB said “the new standard does not include the previous standard’s detailed requirements to evaluate management’s own evaluation process and clarifies that an internal control audit does not require an opinion on the adequacy of management’s process.”).

620. See Auditing Standard No 5 Release at A1-4, ¶ 2, A1-34, ¶ 87.

621. See id. at A1-55, ¶ C3.

622. See id. at A1-55 - A1-56, ¶¶ C3 – C6.

623. See id. at A1-37, ¶ 90.

624. See id. at A1-38, ¶ 91.

625. See id.

626. See Exchange Act Rules 13a-15(a), 15d-15(a).

627. See Exchange Act Rules 13a-15(a), 15d-15(e).


629. See id.


631. See Exchange Act Rules 13a-15(b), 15d-15(b).

632. See Form 20-F, Items 15(a) and 15T(a).

633. See Certification of Disclosure in Companies’ Quarterly and Annual Reports, Securities Act Release No 8124, Exchange Act Release No 46427, Investment Company Act Release No 25722, [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,720, at 86,132, 86,152 (August 28 2002) [Certification Adopting Release]. See also Smaller Company


Regulatory Relief Release, ¶ 88,029, at 85,724; Form 20-F, Instructions as to Exhibits, Instruction 12.

634. See Certification Adopting Release, ¶ 86,720, at 86,130. The SEC has stated that current reports, such as those on Form 6-K and Form 8-K, as opposed to periodic reports (quarterly and annual reports), are not covered by Section 302’s certification requirements. Foreign private issuers are nevertheless required to design and maintain disclosure controls and procedures to ensure full and timely disclosure in current reports.

635. See Form 20-F, Instructions as to Exhibits, Instruction 12.

636. See Management’s Reports on Internal Control Adopting Release, ¶ 86,923, at 87,701. Note, however, that no specific date for the evaluation is specified.

637. See Exchange Act Rules 13a-14(a), 15d-14(a) and Form 20-F, Instructions as to Exhibits, Instruction 12.

638. See Non-Accelerated Filer Delay Release; 2008 Delay Release, ¶ 87,721, at 86,693-86,694.

639. The SEC recently indicated in a compliance and disclosure interpretation that if an issuer files an amendment to its Form 20-F, paragraph three may be omitted from the certification filed with the amendment if no financial statements or other financial information is contained in the amendment, and paragraphs three and four may be omitted from the certification filed with the amendment if the amendment does not contain or amend disclosure related to internal control over financial reporting or disclosure controls and procedures. Paragraphs one and two, however, may not be omitted under any circumstances. See Office of the Chief Accountant, Division of Corporation Finance, Exchange Act Rules, Compliance and Disclosure Interpretations, Question 161.01 (September 30 2008) available at http://www.sec.gov/divisions/corpfin/guidance/exchangeactrules-interps.htm.

640. See Certification Adopting Release, ¶ 86,720, at 86,132; Form 20-F, Instructions as to Exhibits, Instruction 12.

641. See Management’s Reports on Internal Control Adopting Release, ¶ 86,923, at 87,699. Form 20-F, Instructions as to Exhibits, Instruction 13(b). Not “filing” will also limit enforcement of the certificate to criminal proceedings rather than civil litigation. See also The Practitioner’s Guide to the Sarbanes-Oxley Act, I-26 (John J. Huber et al. eds., American Bar Association, volume 1 2004) [the Huber Outline].

642. See Additional Form 8-K Disclosure Adopting Release, ¶ 87,158, at 89,493 n 146.

643. See Huber Outline at I-29.



646. See Conditions for Use of Non-Gaap Financial Measures, Securities Act Release No 8176, Exchange Act Release No 47226, Financial Reporting Release No 65 [2002-2003 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,816, at 86,830 (January 22 2003) [Non-Gaap Financial Measures Adopting Release].

647. See Proposed Rule: Conditions for Use of Non-G Financial Measures, Securities Act Release No 8145, Exchange Act Release No 46788, [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,737, at 86,445-46 (November 4 2002).

648. See Regulation G, Rule 100(a).

649. See id. at Rule 101(a)(1).

650. See id. at Rule 101(b).

651. See id. at Rule 101(a)(2).

652. See id. at Rule 101(a)(3).

653. See id. at Rule 100(a).

654. See id. at Rule 100(a)(2). In the case of forward-looking non-G measures, a quantitative reconciliation need only be provided to the extent available without unreasonable efforts.


656. See id. at Rule 100(c).

657. See Regulation S-K, Items 10(e)(2), 10(e)(4) and 10(e)(5).

658. See id. at Item 10(e)(1)(i).

659. See id. at Item 10(e)(1)(i)(B).

660. See id. at Item 10(e)(1)(i).

661. See id. at Item 10(e)(1)(ii).

662. See id. at Item 10, Note to Paragraph (e).

663. See SEC Office of the Chief Accountant, Division of Corporation Finance, Frequently Asked Questions Regarding the Use of Non-G Financial Measures, Question 8 (June 13 2003) available at http://www.sec.gov/divisions/corpfin/faqs/nongfaq.htm.



666. See Off-Balance Sheet Adopting Release, ¶ 86,821, at 86,969.

667. See Form 20-F, Item 5.E.1.

668. See Form 20-F, Items 5.E.1.(a) to (d).

669. See Form 20-F, Item 5.E.2.

670. See Off-Balance Sheet Adopting Release, ¶ 86,821, at 86,972, 86,977.

671. See Form 20-F, Instructions to Item 5, Instruction 5..

672. See Form 20-F, Item 5.F.1.

673. See Form 20-F, Item 5.F.2.

674. See Form 20-F, Instructions to Item 5, Instruction 5.

675. See SEC Advice on MD&A Disclosures Release, ¶ 86,617, at 85,152, 85,157.

676. See Off-Balance Sheet Adopting Release, ¶ 86,821, at 86,974-976.

677. See Exchange Act Rule 10A-3(b)(1)(i).

678. See id. at Rule 10A-3(b)(1)(ii)(A).

679. See id. at Rule 10A-3(b)(1)(ii)(B).

680. See id. at Rule 10A-3(e)(1)(i).

681. See id. at Rule 10A-3(e)(1)(ii)(A).

682. See id. at Rule 10A-3(b)(1)(iv)(C).

683. See id. at Rule 10A-3(b)(1)(iv)(D).

684. See id. at Rule 10A-3(b)(1)(iv)(E).

685. See id. at Rule 10A-3(b)(1)(iv)(A).

686. See id. at Rule 10A-3(b)(2).

687. See id. at Rule 10A-3(b)(3).

688. See id. at Rule 10A-3(b)(4).

Endnotes 125

689. See id. at Rule 10A-3(b)(5).

690. See Instruction 1 to Exchange Act Rule 10A-3.

691. See id.

692. See Instruction 2 to Exchange Act Rule 10A-3.

693. See Exchange Act Rule 10A-3(c)(3).

694. See id. at Rule 10A-3(d); see also Form 20-F, Item 16.D.

695. See Form 20-F, Items 16A(a)(1), 16A(a)(3).

696. See id. at Instruction 3 to Item 16A.

697. See id. at Item 16A(a)(2).

698. See id. For listed issuers the audit committee financial expert will need to satisfy the definition of independence as set out under Exchange Act Rule 10A-3.

699. See Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002, Securities Act Release 8177, Exchange Act Release 47235, Fed Sec L Rep (CCH) ¶ 86,818 at 86,886 (as amended, January 24 2003 and March 31 2003) [Sections 406 and 407 Adopting Release].

700. See Form 20-F, Item 16A(b).

701. See id.

702. See id. at Item 16A(c).

703. See id. at Instruction 3 to Item 16A.

704. See Sections 406 and 407 Adopting Release, ¶ 86,818, at 86,889

705. See Form 20-F, Item 16A(d)(1).

706. See id. at Items 16A(d)(2), 16A(d)(3).

707. See S-X Rule 2-01(c)(2)(iii)(B); see also Exchange Act Section 10A(l) (auditor may not audit an issuer whose CEO, controller, CFO, or chief accounting officer was employed by the auditor and participated in the audit during the one-year period preceding the date of the initiation of the audit in question). Generally speaking, persons other than the lead or concurring partner who provided 10 or fewer hours of audit, review, or attest services during the relevant period are not considered to be members of the audit engagement team. See S-X Rule 2-01(c)(2)(iii)(B)(2).

708. See S-X Rule 2-01(c)(4); see also Exchange Act Section 10A(g) (substantially identical limitations).

709. See S-X Rule 2-01(c)(6); see also Exchange Act Section 10A(j) (unlawful to act as auditor if lead (or coordinating) audit partner (having primary responsibility for the audit) or audit partner responsible for reviewing the audit has performed audit services for the issuer in the each of the prior five fiscal years of the issuer).

710. See S-X Rule 2-01(c)(7); see also Exchange Act Sections 10A(h) to (i) (all audit and permitted non-audit services must be pre-approved by the audit committee (subject to certain de minimis exceptions). The SEC has stated that an issuer’s audit committee must follow three requirements in its use of pre-approval through policies and procedures. First, the policies and procedures must be detailed as to the particular service to be provided. Second, the audit committee must be informed about each service. Third, the policies and procedures cannot result in the delegation of the audit committee’s authority to management. Accordingly, monetary limits cannot be the only basis for the pre-approval policies and procedures. SEC Office of the Chief Accountant, Application of the Commission’s Rules on Auditor Independence, Frequently Asked Questions, Audit Committee pre-Approval, Question 3 (issued August 13 2003) available at http://www.sec.gov/info/accountants/ocafaqaudind121304.htm. Note that under

PCAOB Rule 3525 (attached as Appendix 2 to Auditing Standard No 5), in order to be pre-approved to perform permissible non-audit services for an audit client, the accounting firm must (1) describe, in writing, to the audit committee of the issuer the scope of the service; (2) discuss with the audit committee of the issuer the potential effects of the service on the independence of the firm; and (3) document the substance of its discussion with the audit committee of the issuer. See Auditing Standard No 5 Release at A2-1.

711. See S-X Rule 2-01(c)(8).

712. See S-X Rule 2-07(a); see also Exchange Act Section 10A(k) (substantially identical requirements).

713. See Form 20-F, Item 16C(a).

714. See Form 20-F, Item 16C(b).

715. See Form 20-F, Item 16C(c).

716. See Form 20-F, Item 16C(d).

717. See Form 20-F, Item 16C(e).

718. See Form 20-F, Item 16C(f ).

719. See Public Company Accounting Oversight Board, Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, PCAOB Release No 2008-003, PCAOB Rulemaking Docket Matter No 017, (April 22 2008) available at http://www.pcaob.org/Rules/Docket_017/2008-04-22_Release_2008-003.pdf at A2-1, A2-2.

720. See id.

721. See id.

722. See Exchange Act Rule 13b2-2(b)(1).

723. See Improper Influence on Conduct of Audits, Exchange Act Release No 47890, Investment Company Act Release No 206050, Financial Reporting Release No 71, [2003 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,921, at 87,658 (May 20 2003).

724. See id. at 87,663.

725. See Exchange Act Rule 13b2-2(b)(2).

726. See S-X Rule 2-06(a). The SEC required a seven-year period rather than the five-year period mandated in Section 802, because, among other things, Section 103 of the Sarbanes-Oxley Act directs the Public Company Accounting Oversight Board to require auditors to retain audit work papers and other materials that support the audit for seven years. See also Retention of Records Relevant to Audits and Reviews, Securities Act Release No 8180, Exchange Act Release No 47241, Investment Company Act Release No 25911, Financial Reporting Release No 66, [2003-2003 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,819, at 86,917, 86,920 (January 24 2003).

727. See S-X Rule 2-06(b).

728. See S-X Rule 2-06(c).

729. Section 108 of the Sarbanes-Oxley Act provides that the SEC, in carrying out its authority under the Securities Act and the Exchange Act, “may recognise, as ‘generally accepted’ for purposes of the securities laws, any accounting principles established by a standard setting body” that meet certain minimum standards. This would include, of course, US Gaap. However, following the issuance of the Use of IFRS Without Gaap Reconciliation Release, foreign private issuers are now also permitted to submit financial statements to the SEC without reconciliation to US Gaap if they are prepared using IASB IFRS. The new rules became effective on March 4 2008 and apply to financial statements for financial years ending after November 15 2007. The phrase in Section 13(i) “prepared in accordance with (or reconciled


to) generally accepted accounting principles” should therefore be read to apply to financial reports filed with the SEC that contain (i) financial statements prepared in accordance with (or reconciled to) US Gaap or (ii) financial statements prepared in accordance with ISB IFRS.

730. See Certification Adopting Release, ¶ 86,720, at 86,130.

731. See Attorney Conduct Adopting Release, ¶ 86,823, at 87,069.

732. See Attorney Conduct Rules Part 205.2(a)(1).

733. See id. at 205.2(a)(2)(ii).

734. See id. at 205.2(j).

735. See id. at 205.2(i).

736. See id. at 205.3(b)(1).

737. See id. at 205.3(b)(2).

738. See id. at 205.3(b)(3).

739. See id. at 205.3(c)(1).

740. See id. at 205.2(k).

741. See id. at 205.3(c)(1).

742. See id. at 205.3(c)(2).

743. See Attorney Conduct Adopting Release, ¶ 86,823, at 87,069.

744. See Form 20-F, Item 16B(a).

745. See Form 20-F, Item 16B(b).

746. See Form 20-F, Item 16B(c).

747. See Form 20-F, Items 16B(d) and (e).

748. The term “individual account plan” is defined in Regulation BTR, Rule 100(j).

749. See Regulation BTR, Rule 100(b)(2).

750. See Regulation BTR, Rule 101(a).

751. See Regulation BTR, Rule 104.

752. See 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 separately required to include the notice as an exhibit to its annual report on Form 20-F.

753. See Regulation BTR, Rule 103(b).

754. See Regulation BTR, Rule 103(a).

755. See Regulation BTR, Rule 103(b).

756. See Exchange Act Section 13(k)(1).

757. See id.

758. See id.



761. See Sarbanes-Oxley Act: Interpretive Issues under Section 402 – Prohibition of Certain Insider Loans (October 15 2002) (http://www.realcorporatelawyer.com/pdfs/loan1002.pdf ).

762. See id. at 3-4

763. See id. at 4.

764. See id.

765. See id. at 4-5.

766. See id. at 6

767. See id. at 6-7

768. See id. at 8-11.


770. See id. at I-107.

771. See Regulation Analyst Certification, Securities Act Release 8193, Exchange Act Release 47384, Fed Sec L Rep (CCH) ¶ 86,833, at 87,233 (February 20 2003) [Regulation AC Release]; see also Division of Market Regulation, Responses to Frequently Asked Questions Regarding Regulation Analyst Certification (April 26 2005), available at http://www.sec.gov/divisions/marketreg/mregacfaq0803.htm.

772. See generally Division of Trading and Markets, Securities Analysts, NASD/NYSE Information (January 5 2006), available at http://www.sec.gov/divisions/marketreg/securitiesanalysts.htm.

773. See Regulation AC, Rule 501(a).

774. See id. at Rule 500.

775. See id. However, certification is not required from “junior analysts.” See Regulation AC Release, ¶ 86,833 at 87,23.

776. See Regulation AC Release, ¶ 86,833 at 87,235 n 11.

777. See id., ¶ 86,233 at 87,235.

778. See Regulation AC, Rule 502(a).



781. See id. at Rule 500. A “foreign issuer” is any foreign government or foreign private issuer. See Securities Act Rule 902(e).

782. Exchange Act Section 13d(1).

783. Exchange Act Rule 13d-1. The obligation to provide the issuer (and each exchange on which the issuer’s securities are traded) with copies of the Schedule 13D or 13G as set out in Exchange Act Section 13(d)(1).

784. Exchange Act Rule 13d-3(a).

785. Exchange Act Rule 13d-5.


787. Exchange Act Rules 13d-1(b), (c), (d).

788. Exchange Act Rule 13d-1(b)(1). See also Commission Guidance and Revisions to the Cross-Border Tender Offer, Exchange Offer, Rights Offerings, and Business Combination Rules and Beneficial Ownership Reporting Rules for Certain Foreign Institutions, Securities Act Release 8957, Exchange Act Release 58597, [2008 Transfer Binder], Fed. Sec. L. Rep. (CCH) ¶ 88,286, at 87,167 (September 19 2008) [2008 Cross-Border Release].

789. Exchange Act Rule 13d-1(c).

790. Exchange Act Rule 13d-1(d).

791. Exchange Act Rule 13d-1(e)(1).

792. Exchange Act Rule 13d-1(f )(1).

793. Exchange Act Rule 13d-1(b)(2).



Endnotes 127


797. Id.

798. Exchange Act Rule 13d-2(b).



801. Cross-border M&A transactions may also implicate the securities laws of the various US States (the so-called “blue sky” laws), and other areas of US federal law, such as the reporting requirements of the US HartScottRodino Antitrust Improvements Act of 1976, as amended. These laws are not discussed in this Overview. We also do not discuss liability issues in connection with tender and exchange offers, and in particular the key antifraud provision in this area, Section 14(e) of the Exchange Act. Section 14(e) has been interpreted in largely the same way as Rule 10b-5 under the Exchange Act, although the Rule 10b-5 requirement that there be a purchase or sale of securities to trigger liability is not present in the context of actions under Section 14(e). Piper v. Chris-Craft Indus., Inc., 430 US 1, 38–39 (1977). This is so despite the similarities in wording between Rule 10b-5 and Section 14(e). See, for example, Schreiber v Burlington Northern, Inc, 472 US 1, 9–10 (1985) (Section 14(e) was modelled on Rule 10b-5).

802. Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings, Securities Act Release 7759, Exchange Act Release 42054, Trust Indenture Act Release 2378, International Series Release 1208, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,214, at 82,536 (October 22 1999) [1999 Cross-Border Release].

803. See 2008 Cross-Border Release, ¶ 88,286, at 87,167. The amendments came into force on December 8 2008.


805. Id.

806. Id.

807. Id.

808. Exchange Act Rule 13e-3(g)(6).

809. Exchange Act Rule 13e-4(h)(8).

810. Exchange Act Rule 14e-5(b)(10). In addition, Tier I rights offerings of equity securities by foreign private issuers meeting the conditions of Rule 801 and Tier I exchange offers meeting the conditions of Rule 802 are both exempt from the registration requirements of the Securities Act.

811. Exchange Act Rule 13e-3(g)(6). Rule 13e-3 requires a filing with enhanced disclosure for transactions involving affiliates that have the effect of causing the target to become a private company. The kinds of transactions covered by Rule 13e-3 include tender offers, purchases of securities, mergers, reorganisations, reclassifications and sales of substantially all the assets of a company. See Rule 13e-3(a)(3)(i)(A)–(C). Rule 13e-3 requires that a Schedule 13E-3 be filed for these kinds of transactions. See Rule 13e-3(d)(1).

812. 1999 Cross-Border Release, ¶ 86,214, at 82,541.

813. Exchange Act Rule 14d-1, Instructions to Paragraphs (c) and (d) of this rule, Instruction 1.


815. Id. ¶ 86,214, at 82,541.

816. See Exchange Act Rule 14d-1(e). Tier I also imposes certain restrictions on publicity in connection with tender offers.


818. Exchange Act Rule 14d-1(c)(1); Exchange Act Rule 13e-4(h)(8)(i).

819. Exchange Act Rule 14d-1, Instructions to paragraphs (c) and (d) of this rule, Instruction 2; Exchange Act Rule 13e-4(h)(8), Instructions to paragraph (h)(8) and (i) of this rule, Instruction 2.

820. Exchange Act Rule 14d-1, Instructions to paragraphs (c) and (d) of this rule, Instruction 2(iii); Exchange Act Rule 13e-4(h)(8), Instructions to paragraph (h)(8) and (i) of this rule, Instruction 2(iii); see also Exchange Act Rule 12g3-2(a), Exchange Act Rule 12g5-1 and 1999 Cross-Border Release, ¶ 86,214, at 82,552–55 (discussing calculation).

821. Exchange Act Rule 14d-1, Instructions to paragraphs (c) and (d) of this rule, Instruction 2(i); Exchange Act Rule 13e-4(h)(8), Instructions to paragraph (h)(8) and (i) of this rule, Instruction 2(i). In the limited circumstances where the issuer or bidder is unable to complete the “look-through” analysis as of a date within the 90-day range, it may use a date within 120 days before announcement.

822. Exchange Act Rule 14d-1, Instructions to paragraphs (c) and (d) of this rule, Instruction 2(ii); Exchange Act Rule 13e-4(h)(8), Instructions to paragraph (h)(8) and (i) of this rule, Instruction 2(ii).

823. 2008 Cross-Border Release, ¶ 88,286, at 87,177–78. The adopting release for the amendments states that merely needing to dedicate substantial time and resources to the “look-through” analysis or having concerns about the completeness and accuracy of the US ownership levels obtained by completing a “look-through” analysis will not necessarily justify use of the alternate test. Furthermore, the adopting release makes clear that acquirors must make a good faith effort to conduct a reasonable inquiry into determining the level of US beneficial ownership. The Adopting Release provides indicative situations where an issuer or acquiror could employ the alternative test under the amendments, including: (1) non-US jurisdictions where security holder lists are generated only at fixed intervals during the year, are not otherwise available to the acquiror, and where the published information is as of a date outside the required range; (2) subject securities are issued in bearer form; (3) nominees are prohibited by law from disclosing information about the country of residence of the target securities’ beneficial owners; or (4) where a business combination is a non-negotiated transaction.


825. Exchange Act Rule 14d-1(c)(2); Exchange Act Rule 13e-4(h)(8)(ii).

826. Exchange Act Rule 14d-1(c)(2)(i); Exchange Act Rule 13e-4(h)(8) (ii)(A).

827. Exchange Act Rule 14d-1(c)(2)(ii); Exchange Act Rule 13e-4(h)(8)(ii)(B).

828. Exchange Act Rule 14d-1(c)(2)(iii); Exchange Act Rule 13e-4(h)(8)(ii)(C).

829. Exchange Act Rule 14d-1(c)(2)(iv); Exchange Act Rule 13e-4(h)(8)(ii)(D).

830. Exchange Act Rule 14d-1(c)(3)(i); Exchange Act Rule 13e-4(h)(8)(iii)(B).

831. Exchange Act Rule 14d-1(c)(3)(ii); Exchange Act Rule 13e-4(h)(8)(iii)(C).

832. Exchange Act Rule 14d-1(c)(3)(iii); Exchange Act Rule 13e-4(h)(8)(iii)(A). These materials are “furnished” and not “filed” within the meaning of Section 18 of the Exchange Act.

833. Exchange Act Rule 14d-1(c)(4); Exchange Act Rule 13e-4(h)(8)(iv).

834. Exchange Act Rule 14d-1(d)(2)(i); Exchange Act Rule 13e-4(i)(2)(i).

835. Exchange Act Rule 14d-1(d)(2)(ii); Exchange Act Rule 13e-4(i)(2)(ii).


For example, a bidder making a Tier II offer for a target organised in one non-US jurisdiction, listed in another non-US jurisdiction and with US beneficial ownership of its equity securities would be allowed to make separate offers in each of the three jurisdictions, if necessary, to accommodate regulatory conflict between the applicable regulatory regimes.


837. Id.

838. Exchange Act Rule 14d-1(d)(2)(iii); Exchange Act Rule 13e-4(i)(2)(iii).

839. Exchange Act Rule 14d-1(d)(2)(iv); Exchange Act Rule 13e-4(i)(2)(iv). The 2008 cross-border amendments provide that, where payment may not be made on a more expedited basis under home jurisdiction law or practice, payment may be made on a modified rolling basis of 20-business day intervals from the date of tender.

840. Exchange Act Rule 14d-11(d). This can create “back-end” withdrawal rights where a security holder that has tendered its shares may still withdraw its tender after the initial offering period has closed but before the bidder is able to settle payment for such shares. In many non-US jurisdictions the counting of tendered securities after the close of the initial offering period can take substantial time during which such “back-end” withdrawal rights create uncertainty in determining whether a minimum tender condition has been met.

841. Exchange Act Rule 14d-1(d)(2)(v).

842. Exchange Act Rule 14d-1(d)(2)(vii). These conditions are: (1) the bidder has provided an offer period (including withdrawal rights) of at least 20 US business days; (2) at the time withdrawal rights are suspended, all offer conditions other than the minimum acceptance condition have been satisfied or waived; and (3) back-end withdrawal rights are suspended only until tendered securities are counted and are reinstated immediately after that process, to the extent they are not terminated by the acceptance of tendered securities.

843. Exchange Act Rule 14d-11.

844. Exchange Act Rule 14d-1(d)(2)(vi).

845. Exchange Act Rule 14d-1(d)(2)(viii).

846. Exchange Act Rule 14d-1(d)(2)(ix).

847. See Securities Act Rule 162(a). This early commencement option was not previously available for exchange offers not subject to Rule 13e-4 (securities subject to issuer self-tender offers) or Regulation 14D (securities registered under Section 12 of the Exchange Act), including, for example, offers for unregistered equity securities and cross-border debt tender offers. Securities Act Rule 162(a) provides an exemption from the registration requirements of Section 5(a) of the Securities Act only for exchange offers subject to Rule 13e-4(e) or 14d-4(b).

848. Securities Act Rule 162(a); Securities Act Rule 162(b).

849. Exchange Act Rule 13e-4(i); Exchange Act Rule 14d-1(d).

850. Exchange Act Rule 13e-4(e)(3); Exchange Act Rule 14d-4(d).

851. 2008 Cross-Border Release, ¶ 88,286, at 87,189–91.

852. 2008 Cross-Border Release, ¶ 88,286, at 87,189–91. Thus, mere permissiveness of a foreign jurisdiction in this area will typically not be sufficient.



855. 1999 Cross-Border Release ¶ 86,214, at 82,544.


857. In adopting the 2008 cross-border amendments, the SEC provided the following additional interpretative guidance in respect of the application of SEC rules to cross-border transactions (not limited to Tier II exemptions):

• Special precautions in the context of exclusionary offers: With the adoption of the 2008 cross-border amendments, the SEC provides guidance on what special precautions bidders conducting exclusionary offers limited to non-US holders should take to prevent triggering the application of the US cross-border tender offer rules. 2008 Cross-Border Release, ¶ 88,286, at 87,201–03. Legends indicating that such offers are not being made into the US are unlikely to be sufficient in themselves to ensure that the offers do not use US jurisdictional means and thus are not subject to the US securities laws. Instead, bidders seeking to engage in exclusionary offers should consider employing legends coupled with adequate measures reasonably designed to guard against sales to and purchases and tenders from US holders, including limiting Internet availability of materials and establishing certain procedures and obtaining representations from tendering security holders to ensure that the offer has not triggered US jurisdictional means.

• Vendor placements: The SEC also provides in the adopting release to the 2008 cross-border amendments additional guidance with respect to vendor placements. 2008 Cross-Border Release, ¶ 88,286, at 87,203–04. Vendor placements involve the bidder hiring a third-party to sell in offshore transactions the securities to which US security holders are entitled in an exchange offer as a means to avoid the potential application of the registration requirements of the Securities Act – essentially converting an exchange offer into a cash only tender offer to US holders. The SEC has, in several no action letters, taken a position that such arrangements do not involve an offer or sale of securities into the US and therefore do not require registration under the Securities Act of the securities sold on account of US persons. The SEC states in the adopting release to the cross-border tender offer rule amendments that such relief will be granted only where it is in the interest of US investors. Bidders that seek to use the vendor placement structure for exchange offers subject to Regulation 14D at US beneficial ownership levels above Tier I must also seek an exemption from the US equal treatment rules. The factors that the SEC considers when determining whether a vendor placement will require Securities Act registration include: (1) the level of US ownership in the target company, (2) the amount of bidder securities to be issued overall in the business combination as compared to the amount of bidder securities outstanding before the offer, (3) the amount of bidder securities to be issued to tendering US holders and subject to the vendor placement, as compared to the amount of bidder securities outstanding before the offer; (4) the liquidity and general trading market of the bidder’s securities; (5) the likelihood that the vendor placement can be effected within a very short time after the termination of the offer and the bidder’s acceptance of shares tendered in the offer; (6) the likelihood that the bidder plans to disclose material information around the time of the vendor placement sales; and (7) the process used to effect the vendor placement sales, including whether the sales involve special selling efforts by brokers or others acting on behalf of the bidder.



Endnotes 129

860. Rule 14d-1(d)(1)(i); Rule 13e-4(i)(1)(i). Although the Rules and the 1999 Cross-Border Adopting Release do not state this explicitly, it appears that US and non-US bidders may rely on Tier II. See, for example, Rule 14d-1(d) (any person meeting Tier II conditions is entitled to Tier II relief ).

861. Exchange Act Rule 14e-5(a).

862. Exchange Act Rule 14e-5(b).

863. Exchange Act Rule 14e-5(b)(10)(v).

864. Exchange Act Rule 14e-5(b)(10)(ii) and (iii).

865. Exchange Act Rule 14e-5(b)(10)(iv).

866. Exchange Act Rule 14e-5(b)(11); Exchange Act Rule 14e-5(b)(12).

867. Exchange Act Rule 14e-5(b)(9).


869. Securities Act Section 2(a)(3).

870. David M Brodsky & Daniel J Kramer, Federal Securities Litigation, 4-16 to 4-17 (1st ed. 1997) [Federal Securities Litigation].

871. Id. at 4-2 to 4-3.

872. Id. at 5-20 (citing Pinter v Dahl, 486 US 622, 641–54 (1988)).

873. See TSC Indus., Inc. v Northway, Inc, 426 US 438, 449 (1976); see also Securities Act Rule 405 (“material” information is “matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered”). TSC involved the interpretation of Section 14(a) of the Exchange Act and Rule 14a-9. The Supreme Court has, however, 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 courts have generally used the TSC standard in all contexts involving the anti-fraud provisions of the US federal securities laws. See Louis Loss & Joel Seligman, Securities Regulation, 2074–75 (3rd edition 1992) [Loss & Seligman].

874. TSC Indus, Inc, 426 US at 449.

875. Id. at 450.

876. SAB 103, Topic 1.M.1 (SAB 103 recodifies Staff Accounting Bulletin 99).

877. Id.

878. Id.

879. Selective Disclosure and Insider Trading, Securities Act Release 7881, Exchange Act Release 43154, Investment Company Act Release 24599, [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,319, at 83,676, 83,684 (August 15 2000) [Regulation FD Release].

880. In the case of an omission, a plaintiff must show that there was a duty to disclose the material facts; merely being in possession of material non-public information does not, of itself, create a duty to disclose. Federal Securities Litigation at 6-4.

881. Ernst & Ernst v Hochfelder, 425 US 185, 193 (1976).

882. Federal Securities Litigation at 6-13 to 6-14.

883. Id. at 6-26 to 6-27.

884. Blue Chip Stamps v Manor Drug Stores, 421 US 723, 754–55 (1975).

885. Loss & Seligman at 3679 n 553.

886. See Loss & Seligman at 3688 (explaining that “[t]he Rule may be violated by feeding misinformation into the marketplace, or even withholding information too long,” regardless of whether the defendants themselves bought or sold securities) (citation omitted).

887. Federal Securities Litigation at 6-30 to 6-31. The SEC has stated that 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 the report.” Use of Electronic Media Release, ¶ 86,304, at 83,374, 83,381 n 54 (citing In the Matter of Presstek, Inc., Exchange Act Release 39472 (December 22 1997)).

888. Federal Securities Litigation at 6-32; see also Regulation FD Release, ¶ 86,319, at 83,682 (defining a temporary insider as “a person who owes a duty of trust or confidence to the issuer,” such as an attorney, investment banker or accountant).


890. Id. at 6-34.

891. Id. at 6-34 to 6-35 (citing United States v. O’Hagan, 521 US 642 (1997)). The SEC has added two rules to clarify issues that have arisen in insider trading cases. First, Rule 10b5-1 provides that trading “on the basis of” material non-public information includes all trading while in possession of that information, except certain trades previously contracted for in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1. Second, Rule 10b5-2 fleshes out the meaning of a “duty of trust or confidence” for purposes of the misappropriation theory.

892. Federal Securities Litigation, at 6-34.

893. Id. at 6-42.

894. Exchange Act Section 21D(e)(1); see also Federal Securities Litigation at 6-43 to 6-45 (discussing damages under Exchange Act Section 10(b)).

895. See, for example, Exchange Act Sections 21(d)(3) (providing for money penalties in SEC civil actions) and 32(a) (providing for criminal penalties for wilful violations of the Exchange Act).

896. Federal Securities Litigation at 6-42; see also Exchange Act Section 28(a) (limiting recovery for damages in actions under the Exchange Act to actual damages).

897. Federal Securities Litigation at 3-1.

898. See Loss & Seligman at 4217–18.

899. See Federal Securities Litigation at 3-8 to 3-10.

900. Id. at 3-11 (citing Securities Act Section 6(a)).

901. Id. at 3-12.

902. Id. at 3-14.

903. Securities Act Sections 11(b)(3)(A) and (B).

904. Securities Act Section 11(b)(3)(C).

905. Securities Act Section 11(e).


907. Gustafson v Alloyd Co., 513 US 561, 564, 584 (1995). There is some question whether Section 12(a)(2) liability extends to offshore public offerings under Regulation S. One lower US federal court has held that, despite Gustafson, “an offering issued pursuant to Regulation S is subject to” Section 12(a)(2) liability “if it is a public offering.” Sloane Overseas Fund Ltd v Sapiens Int’l Corp., 941 F. Supp. 1369, 1376 (S.D.N.Y. 1996).

908. Federal Securities Litigation at 5-20 (citing Pinter, 486 US at 641–54).


910. Securities Act Rule 159A, Notes to paragraph (a).



912. Id. at 82,422–24.

913. Id. at 82,414.

914. Id. at 82,408.

915. Securities Act Rule 159A(b)(1).

916. Securities Act Rule 159A(b)(2).

917. Securities Act Rule 405; see also Exchange Act Rule 12b-2.


919. Id. at 11-5 to 11-7.

920. See generally id. at 11-7 to 11-10 (discussing the defence).

921. See id. at I-187.

922. See SOX § 802(a) (adding new Section 1519 of 18 USC); see also Huber Outline at I-187.

923. See SOX § 1102 (amending 18 USC Section 1512); see also Huber Outline at I-190.

924. See SOX § 1107 (amending 18 USC Section 1513); see also Huber Outline at I-190.

925. See SOX § 807 (adding new Section 1348 to 18 USC); see also Huber Outline at I-190, I-191.

926. See SOX § 1106 (amending Exchange Act Section 32(a)); see also Huber Outline at I-191, I-192.

927. See SOX § 1103 (amending Exchange Act Section 21C(c)); see also Huber Outline at I-192, I-193.

928. See SOX § 1105 (amending Exchange Act Section 21C and Securities Act Section 8A); see also Huber Outline at I-193.


930. See SOX § 305 (amending Exchange Act Section 21(d)(2) and Securities Act Section 20(e)); see also Huber Outline at I-193.

931. See SOX § 806 (adding new Section 1514A to 18 USC); see also Huber Outline at I-195.

932. See SOX § 803 (adding new Section 523(a) to 11 USC); see also Huber Outline at I-195, I-196.

933. See SEC v Murphy, [1983–1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,688 (C.D. Cal. 1983).

934. For a comprehensive discussion of SEC Enforcement practice, see, for example, The Securities Enforcement Manual: Tactics and Strategies (Richard M Phillips, ed. 1997); William R McLucas, J Lynn Taylor & Susan A Mathews, A Practitioner’s Guide to the SEC’s Investigative and Enforcement Process, 70 Temp. L. Rev. 53 (1997).

935. See, for example, SEC v Lernout & Hauspie Speech Products NV, Litigation Release 17782 (October 10 2002) (charging Belgian corporation quoted on Nasdaq National Market System with financial fraud), available at http://www.sec.gov/litigation/litreleases/lr17782.htm; SEC v ACLN Ltd, Litigation Release 17776 (October 8 2002) (charging NYSE-listed Cypriot corporation and its Cypriot auditor with financial fraud), available at http://www.sec.gov/litigation/litreleases/lr17776.htm; SEC v Millennium Financial Ltd, Litigation Release 17528 (May 22 2002) (charging Uruguayan securities firm with securities fraud), available at http://www.sec.gov/litigation/litreleases/lr17528.htm.

936. See, for example, SEC v Unifund SAL, 910 F.2d 1028, 1033 (2d Cir. 1990) (upholdingpreliminary injunction barring insider trading against Lebanese investment company that purchased stock in a New York Stock Exchange-listed company through Beirut office of the

US broker-dealer). See also Federal Securities Litigation, at 1-5 to 1-8 (discussing the extra-territorial reach of the US federal securities laws).

937. 2002 SEC Annual Report at 13, available at http://www.sec.gov/pdf/annrep02/ar02full.pdf.

938. For a discussion of MLATs, See Symposium, Mann, Mari & Lavdas, International Agreements and Understandings for the Production of Information and Other Mutual Assistance, 29 Int’l Law 780, 781 n 248 and accompanying text (1995).

939. In the Matter of E.On AG, Exchange Act Release 43372, Administrative Proceeding File 3-10318 (September 28 2000), available at http://www.sec.gov/litigation/admin/34-43372.htm [E.On].

940. Id.


942. Id. at 6-4 to 6-5.

943. Id. at 6-5.

944. Regulation FD Release, ¶ 86,319, at 83,684.

945. Regulation AC Release, ¶ 86,833, at 87,242. In the SEC’s view, a research report contains an “inherent representation” that the views expressed in the report are not knowingly false and do not omit material facts necessary to make statements not misleading. Accordingly, “analysts may be found to have violated the anti-fraud provisions of the federal securities laws if they make baseless recommendations or recommendations that they disbelieve.”


947. See generally Federal Securities Litigation at 2-1 to 2-31 (discussing the PSLRA).

948. Securities Act Section 27A(c)(1).

949. Securities Act Section 27A(i)(1).

950. Securities Act Section 27A(b)(2).

951. Securities Act Section 27A(c)(1)(A)(i).

952. Basic, 485 US at 230–32.

953. Id. at 236 (quoting TSC Indus, Inc, 426 US at 450).

954. Id. at 238–41.

955. Id. at 238 (quoting SEC v Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968)).

956. See, for example, SEC v Geon Industries, Inc, 531 F.2d 39, 47–48 (2d Cir. 1976). (“Since a merger in which it is bought out is the most important event that can occur in a small corporation’s life, to wit, its death, we think that inside information, as regards a merger of this sort, can become material at an earlier stage than would be the case as regards lesser transactions – and this even though the mortality rate of mergers in such formative stages is doubtless high.”)

957. See E.On.

958. For an overview, see Use of Electronic Media Release, ¶ 86,304, at 83,384; see also Commission Guidance on the Use of Company Web Sites, Exchange Act Release 58288, Investment Company Act Release 28351, [2008 Transfer Binder], Fed. Sec. L. Rep. (CCH) ¶ 88,253, at 87,041 (August 1 2008) [Use of Company Web Sites Release]; see also Statement of the Commission Regarding the Use of Internet Websites to Offer Securities, Solicit Securities Transactions or Advertise Investment Services Offshore, Securities Act Release 7516, Exchange Act Release 39779, Investment Advisers Act Release 1710, Investment Company Act Release 23071 (March 23 1998) [Offshore Internet Offerings Release].

959. Use of Electronic Media Release, ¶ 86,304, at 83,381; Use of Company

Endnotes 131

Web Sites Release, ¶ 88,253 at 87,050–51.


961. Id. at 83,383–85.

962. See Offshore Internet Offerings Release, Section IV.A.2.


964. Use of Electronic Media Release, ¶ 86,304 at 86,381; Use of Company Web Sites Release, ¶ 88,253 at 87,043.

965. Id.

966. Use of Electronic Media Release, ¶86,304 at 83,381–83; Use of Company Web Sites Release, ¶ 88,253 at 87,043.

967. Use of Company Web Sites Release, ¶ 88,253 at 87,056.

968. Offshore Internet Offerings Release, Section IV.A.1.

969. Id. at Section IV.A.2.


971. The FINRA rules consist of NASD rules, Incorporated NYSE rules and FINRA rules. The FINRA rules are intended to consolidate the NASD rules and the Incorporated NYSE rules; however, the process is not yet complete. Therefore, the NASD rules and the Incorporated NYSE rules are still effective. The NASD rules generally apply to all FINRA members, while the Incorporated NYSE Rules apply only to those members of FINRA that are also members of NYSE. The consolidated FINRA rules will apply to all members. See http://www.finra.org/Industry/Regulation/ FINRARules/index.htm.

972. NYSE Rule 472 was amended on February 25 2009 to conform to FINRA’s Incorporated NYSE rule 472 by excluding “market letters” from the definition of “research reports.” See Self-Regulatory Organisations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No 1 Thereto by New York Stock Exchange LLC Amending NYSE Rule 472 (“Communications with the Public”), Exchange Act Release No 34-59450, File No SR-NYSE-2009-14 (February 25 2009).

973. Self-Regulatory Organisations; Order Approving Proposed Rule Changes by the New York Stock Exchange, Inc Relating to Exchange Rules 344 (“Supervisory Analysts”), 345A (“Continuing Education for Registered Persons”), 351 (“Reporting Requirements”) and 472 (“Communications with the Public”) and by the National Association of Securities Dealers, Inc. Relating to Research Analyst Conflicts of Interest and Notice of Filing and Order Granting Accelerated Approval of Amendment No 3 to the Proposed Rule Change by the New York Stock Exchange, Inc and Amendment No 3 to the Proposed Rule Change by the National Association of Securities Dealers, Inc Relating to Research Analyst Conflicts of Interest, Exchange Act Release 48252, [2003 Transfer Binder], Fed. Sec. L. Rep. (CCH) ¶86,947, at 88,004, 88,006–08 (July 29 2003) [SRO Analyst Conflict Rules Release].

974. NASD Rule 2711(b)(3); NYSE Rule 472(b)(3). These rules do not apply to certain small firms, which are defined as “member organisations that over the three previous years, on average per year, have participated in ten or fewer investment banking services transactions as manager or co-manager and generated $5 million or less in gross investment banking services revenues from those transactions.” NASD Rule 2711(k); NYSE Rule 472(m).

975. NASD Rule 2711(c)(2); NYSE Rule 472(b)(4).

976. NASD Rule 2711(c)(2)(A); NYSE Rule 472(b)(4).

977. NASD Rule 2711(c)(2)(B), (C); NYSE Rule 472(b)(4)(i), (ii).

978. NASD Rule 2711(c)(3); NYSE Rule 472(b)(4)(iii).

979. 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 is defined to include a member, allied member, or employee of a member or member organisation “primarily responsible for, and any person who reports directly or indirectly to such research analyst in connection with, the preparation of the substance of a research report, whether or not such person has the job title of ‘research analyst.’” NASD Rule 2711(a)(5); NYSE Rule 472.40.

980. NASD Rule 2711(h)(2)(A)(i)(a); NYSE Rule 472(k)(1)(ii)(a)(2)

981. NASD Rule 2711(d)(2); NYSE Rule 472(h)(2).

982. Id.

983. Id.

984. NASD Rule 2711(e); NYSE Rule 472(g)(1).

985. NASD Rule 2711(j); NYSE Rule 472(g)(2).

986. NASD Rule 2711(c)(4); NYSE Rule 472(b)(5).

987. Id.

988. NYSE Rule 472(b)(5). The NASD Rules do not contain a comparable exception.

989. NASD Rule 2711(c)(5); NYSE Rule 472(b)(6)(i).

990. NASD Rule 2711(c)(6); NYSE Rule 472(b)(6)(ii).

991. NASD Rule 2711(c)(7); NYSE Rule 472(b)(6)(iii).

992. NASD Rule 2711(f ); NYSE Rule 472(f ).

993. NASD Rule 2711(f )(1)(A), (f )(1)(B), (f )(4); NYSE Rule 472(f )(1), (2) and (4). Public appearance is defined to include “without limitation, participation by a research analyst in a seminar, forum (including an interactive electronic forum), radio, television or print media interview, or public speaking activity, or the writing of a print media article in which such research analyst makes a recommendation or offers an opinion concerning any equity securities.” NASD Rule 2711(a)(4); NYSE Rule 472.50.

994. The prohibitions contained in the last two bullets do not apply to public appearances or research reports published or otherwise distributed under Securities Act Rule 139 regarding an issuer with actively traded securities, as defined in Rule 101(c)(1) of Regulation M under the Exchange Act. NASD Rule 2711(f )(1)(B)(ii), (f )(4); NYSE Rule 472(f )(2), (4).

995. NASD Rule 2711(f )(1)(B)(i), (f )(4); NYSE Rule 472(f )(5).

996. NASD Rule 2711(f )(2); NYSE Rule 472(f )(3).

997. NASD Rule 2711(f )(5); NYSE Rule 472(f )(6).

998. Id. Examples given for impracticability are if the research analyst 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 issuer. If it is impracticable to provide a final recommendation or rating, the member firm must provide the rationale for the decision to terminate coverage.

999. NASD Rule 2711(g); NYSE Rule 472(e).

1000. NASD Rule 2711(g)(1-3); NYSE Rule 472(e)(1-3).

1001. There are exceptions to this blackout period for research analysts that recently began covering a company or for purchases and sales that are due to significant news or a significant event, as well as other exceptions. See NASD Rule 2711(g)(2)(A), (B); NYSE Rule 472(e)(4). There are further exemptions to the trading restriction rules for transactions such as sales of shares of registered diversified investment companies and sales pre-approved by the legal or compliance department based on unanticipated significant changes in personal


financial circumstances. See NASD Rule 2711(g)(4) and (5); NYSE Rule 472(e)(4).

1002. NASD Rule 2711(g)(6); NYSE Rule 472(e)(5).

1003. NASD Rule 2711(h); NYSE Rule 472(k).

1004. NASD Rule 2711(h)(2)(A)(ii); NYSE Rule 472(k)(1)(i)(a). The Conflict of Interest Rules provide for an exception to the disclosure required by the second and third bullets “to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking services transactions of the subject company.” NASD Rule 2711(h)(2)(C); NYSE Rule 472(k)(3).

1005. NASD Rule 2711(h)(8); NYSE Rule 472(k)(1)(i)(b).

1006. NASD Rule 2711(h)(1)(B), (h)(2)(A)(iii); NYSE Rule 472(k)(1)(i)(c), (d). If the research report is published less than 30 calendar days after the end of the most recent month, such information need only be provided as of the end of the second preceding month before the publication of the research report.

1007. NYSE Rule 472(k)(1)(ii)(b), (k)(1)(iii)(a); see NASD Rule 2711(h)(2)(A)(iii-v).

1008. The Conflict of Interest Rules provide for an exception “to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking transactions of the subject company.” NASD Rule 2711(h)(2)(C); NYSE Rule 472(k)(3).

1009. The rules provide that this disclosure requirement will be satisfied if any such compensation is disclosed in research reports within 30 days after the completion of the most recent calendar quarter, provided that the member has taken steps reasonably designed to 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 provide that an analyst and member would be presumed not to have reason to know of affiliate non-investment banking compensation from the subject company if the member maintains and enforces policies and procedures reasonably designed to prevent all research analysts and influential employees (those with the ability to influence the substance of research reports) for directly or indirectly receiving information from the affiliate concerning such compensation. NASD Rule 2711(h)(2)(A)(v)(b); NYSE Rule 472(k)(1)(iii)(a)(2).

1010. NASD Rule 2711(h)(1)(A), (C), (h)(2)(A)(i) and (h)(3); NYSE Rules 472(k)(1)(ii)(a), 472(k)(1)(iii)(b)–(d).

1011. NASD Rule 2711(h)(4)–(7); NYSE Rule 472(k)(1)(i)(e)–(h).

1012. NASD Rule 2711(h)(2)(C); NYSE Rule 472(k)(3). The Conflict of Interest Rules provide for an exception to this requirement and the requirement in the preceding bullet “to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking services transactions of the subject company.”

1013. Global Settlement, Litigation Release 18109-18118 (April 28 2003).

1014. Addendum, Section II.3.

1015. Addendum, Section I.1.e. In the Addendum, “research report” is defined, subject to certain technical exceptions, as “any written (including electronic) communication that is furnished by the firm to investors in the US and that includes an analysis of the common stock or any derivative thereof, including American Depository Receipts, of an issuer or issuers and provides information reasonably sufficient upon which to base an investment decision.”

1016. Addendum, Section I.1.






1022. Addendum, Section I.8. Compare to the similar requirements in the NASD and NYSE rule amendments, see NASD Rule 2711(f )(5); NYSE Rule 472(f )(5).

1023. 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.


1025. Addendum, Section II.1.c.

1026. Addendum, Section II.2.

1027. Defining the Term “Qualified Purchaser” Under the Securities Act of 1933, Securities Act Release 8041, [2001–2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,610, at 85,098, 85,103–04 (December 19 2001) [Definition of Qualified Purchaser Release].

1028. See Section 204.03 of the NYSE Listed Company Manual. These disclosures are substantially similar to those required by domestic US issuers. Foreign private issuers that are listed on the New York Stock Exchange are also required by that exchange to notify the market about a change in their auditors and furnish that information in a Form 6-K. To the extent the issuer’s home country requires information about a change in certifying accountant to be reported on a current basis, the issuer should also provide that information in a Form 6-K.

1029. Form 20-F was amended to include Item 16G pursuant to the Foreign Issuer Reporting Enhancements Release. The 20-F Enhancements Adopting Release noted that many US securities exchanges already require foreign private issuers to disclose, in their annual reports and/or on their websites, the significant ways in which their corporate governance practices differ from those followed by US companies under the relevant exchange’s listing standards. For example, see Section 303A.00 of the NYSE Listed Company Manual and Section 4350(a)(1) of the Nasdaq Manual. The SEC expects that the disclosure required under Item 16G will be similar or identical to that provided in response to the requirements of the exchanges on which many foreign private issuers’ securities are listed.

1030. Securities Act Rule 405, definition of “automatic shelf registration statement.”

1031. Forms S-3 and F-3, General Instruction D.5.

1032. Securities Act Rule 405, definition of “well-known seasoned issuer,” Section (2).

1033. Securities Offering Act Reform Release, ¶ 87,421, at 82,439.




1037. Securities Act Rules 430B(a), (b).

1038. Securities Act Rule 430B(d).






Endnotes 133

1044. Securities Act Rule 456(b)(1)(i). If the issuer fails, after a “good faith effort” to pay the filing fee by the required time, it will still be deemed to have timely paid if it pays the fee within four business days of its original due date. Id.


1046. Securities Act Rule 456(b)(2), (3).

1047. See Securities Act Rule 405. A “foreign private issuer” is any issuer (other than a foreign government) incorporated or organised under the laws of a jurisdiction outside the US, unless: (1) more than 50% of its outstanding voting securities are directly or indirectly owned by US residents; and (2) either (a) the majority of its executive offers or directors are US citizens or residents, (b) more than 50% of its assets are located in the US or (c) its business is principally administered in the US.

1048. See generally New York Stock Exchange Listed Company Manual, § 103.00 [NYSE Manual].

1049. Both affiliated companies and companies listing following emergence from bankruptcy have different listing standards.

1050. When considering a listing application from a company organised under the laws of Canada, Mexico or the US (North America), the NYSE will include all North American holders and trading volume in applying the minimum stockholder and trading volume requirements. For securities that trade in the format of American Depositary Receipts (ADRs), volume in the ordinary shares will be adjusted on an ADR equivalent basis. See NYSE Manual at § 102.01.B. The distribution of shares held out of North America does not count towards the domestic listing requirements. See id. at § 103.00 (noting domestic listing requirements call for a minimum distribution of a company’s shares within the US or, in the case of North American companies, within North America).

1051. See NYSE Manual at § 1.02. In addition, in certain circumstances, the NYSE will take into account certain other qualitative factors, including: the company must be a going concern, the degree of national interest in the company, the character of the markets for its products, its relative stability and position in its industry, and whether it is engaged in an expanding industry with prospects for maintaining its position. Higher minimum standards might apply if there is a lack of public interest in the securities of a company as evidenced, for example, by low trading volume on another exchange, lack of dealer interest in the over-the-counter market, unusual geographic concentration of holders of shares, slow growth in the number of shareholders and a low rate of transfers. See id. at § 102.01.C.

1052. See id. at § 1.02.01.A, A(B). If the issuer has less than 100 shares, the requirement relating to the number of publicly held shares will be reduced proportionately.

1053. See id. If the unit of trading is less than 100 shares, the requirement relating to number of publicly held shares will be reduced proportionately. Shares held by directors, officers, or other immediate families and other concentrated holdings of 10% or more are excluded in calculating the number of publicly held shares.

1054. See id. at § 1.02.01.A, A(B). If the issuer has less than 100 shares, the requirement relating to the number of publicly held shares will be reduced proportionately.

1055. See id.

1056. See id. If the unit of trading is less than 100 shares, the requirement relating to number of publicly held shares will be reduced proportionately. Shares held by directors, officers, or other immediate families and other concentrated holdings of 10% or more are excluded in calculating the number of publicly held shares.

1057. See id. at § 102.01.B. For IPOs, the NYSE will rely on a written

commitment from the underwriter regarding the anticipated value of the offering.

1058. See id.

1059. See id. at § 102.01.C(I).

1060. See id. at § 102.01.C(II)(a). For IPOs, the company’s underwriters must provide a written representation that demonstrates the company’s ability to meet the global market capitalisation requirement based upon the completion of the offering.

1061. See id. at § 1.02.01.C(II)(b).

1062. See id. 102.01C(IV). With respect to a company seeking to transfer to the NYSE or list its existing securities, the NYSE will, on a case by case basis, have the discretion to list companies whose stock is not previously registered under the 1934 Act, where such a company is listing without a related underwritten offering and registering only the resale of shares sold by the company in earlier private placements. In such cases, the NYSE will determine that the company has met this global market capitalisation value requirement based on a combination of both (i) a Valuation of the company in compliance with certain rules governing such Valuation and (ii) the most recent trading price for the company’s common stock in a Private Placement Market. The NYSE will list a company using this approach only if it determines that such company has a global market capitalisation of at least $180 million. The NYSE will attribute a global market capitalisation to the company equal to the lesser of (i) the value calculable based on the Valuation and (ii) the value calculable based on the most recent trading price in a Private Placement Market. The NYSE will also consider any market factors or factors particular to the company that would cause concern that the company’s value had diminished since the date of the Valuation and will continue to monitor the company and the appropriateness of relying on the Valuation up to the time of listing.

1063. In addition, a foreign private issuer listing its equity securities in the form of ADRs must sponsor its ADRs and enter into an agreement with a US depository bank to provide such services as cash and stock dividend payments, transfer of ownership, and distribution of company financial statements and notices, such as shareholder meeting material. See generally NYSE Manual § 103.04.

1064. See id. at § 103.01.A. Shares held by directors, officers, or other immediate families and other concentrated holdings of 10% or more are excluded in calculating the number of publicly held shares. If an issuer either has a significant concentration of stock, or if changing market forces have adversely impacted the public market value of an issuer which otherwise would qualify for listing on the NYSE such that its public market value is no more than 10% below $100 million, the NYSE will generally consider $100 million in stockholders’ equity as an alternate measure of size and therefore, as an alternative basis to list the issuer.

1065. See id. at § 103.01.A. The Alternative Listing Standards do not have a separate distribution criteria for a foreign private issuer seeking to list an IPO and a foreign private issuer seeking to transfer to the NYSE or list its existing securities. For IPOs, the NYSE will rely on a written commitment from the underwriter regarding the anticipated value of the offering. With respect to a company seeking to transfer to the NYSE or list its existing securities, the NYSE will, on a case by case basis, have the discretion to list companies whose stock is not previously registered under the 1934 Act, where such a company is listing without a related underwritten offering and registering only the resale of shares sold by the company in earlier private placements. In such cases, the NYSE will determine that the company has met this global market capitalisation value requirement based on a combination of both (i) an independent third-party valuation (a “Valuation”) of the company in compliance with certain rules governing such Valuation and (ii) the most recent trading price for the company’s common stock in a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer (a “Private Placement


Market”). The NYSE will list a company using this approach only if it determines that such company has a global market capitalisation of at least $600 million. The NYSE will attribute a global market capitalisation to the company equal to the lesser of (i) the value calculable based on the Valuation and (ii) the value calculable based on the most recent trading price in a Private Placement Market. The NYSE will also consider any market factors or factors particular to the company that would cause concern that the company’s value had diminished since the date of the Valuation and will continue to monitor the company and the appropriateness of relying on the Valuation up to the time of listing

1066. See id. For IPOs, the company’s underwriters must provide a written representation that demonstrates the company’s ability to meet the global market capitalisation requirement based upon the completion of the offering. For all other companies, market capitalisation valuation will be determined over a three-month average where the NYSE will consider whether the company’s business prospects and operating results indicate that the company’s market capitalisation value is likely to be sustained or increase over time. With respect to a company seeking to transfer to the NYSE or list its existing securities, the NYSE will, on a case by case basis, have the discretion to list companies whose stock is not previously registered under the 1934 Act, where such a company is listing without a related underwritten offering and registering only the resale of shares sold by the company in earlier private placements. In such cases, the NYSE will determine that the company has met this global market capitalisation value requirement based on a combination of both (i) a Valuation of the company in compliance with certain rules governing such Valuation and (ii) the most recent trading price for the company’s common stock in a Private Placement Market. The NYSE will list a company using this approach only if it determines that such company has a global market capitalisation of at least $900 million. The NYSE will attribute a global market capitalisation to the company equal to the lesser of (i) the value calculable based on the Valuation and (ii) the value calculable based on the most recent trading price in a Private Placement Market. The NYSE will also consider any market factors or factors particular to the company that would cause concern that the company’s value had diminished since the date of the Valuation and will continue to monitor the company and the appropriateness of relying on the Valuation up to the time of listing.

1067. See id. at § 103.01.B(I).

1068. See id. at § 103.01.B(II)(a). For IPOs, the company’s underwriters must provide a written representation that demonstrates the company’s ability to meet the global market capitalisation requirement based upon the completion of the offering.

1069. See id. at § 1.03.01.B(II)(b). For all other companies, market capitalisation valuation will be determined over a six-month average.

1070. See id. at § 802.01.A. If the unit of trading is less than 100 shares, the requirement relating to the number of shares publicly held will be reduced proportionately. See id. at § 103.01.A. Shares held by directors, officers, or other immediate families and other concentrated holdings of 10% or more are excluded in calculating the number of publicly held shares

1071. See id. at § 802.01.B(I).

1072. See id. at § 802.01.B(II).

1073. See id. at § 802.01.B(III).

1074. See generally id. at § 802.01.B.

1075. See id. at § 802.01.C. Notwithstanding this, if the subject security is not the primary trading common stock of the issuer (for example, a tracking stock or a preferred class) the NYSE may determine whether to apply these criteria to such security after evaluating the financial status of the issuer.

1076. See generally id. at § 8.02.01.D. The NYSE may also consider other factors, including either an intent to file or a filing for bankruptcy and/or liquidation. However, the NYSE may exercise its discretion if the issuer is seeking relief for reorganisation, has positive cash flow, or is demonstrably in sound financial health; authoritative advice has been received that the security is without value; the registration or exemption from registration pursuant to the Exchange Act is no longer effective for any reason; proxies are not solicited for all meetings of stockholders; the issuer, its transfer agent or registrar, violates any of its, or their, listing or other agreements with the NYSE; whenever the entire outstanding amount of a listed class, issue, or series is to be retired through payment at maturity, or through redemption, reclassification or otherwise; if the issuer or its management engages in operations that, in the opinion of the NYSE, are contrary to the public interest; an audit committee in conformity with NYSE requirements is not maintained; other conduct not in keeping with sound public policy; unsatisfactory financial conditions and/or operating results; the most recent independent public accountant’s opinion on the financial statements contains: (1) a qualified opinion, (2) an adverse opinion, (3) a disclaimer opinion, or (4) an unqualified opinion with a going concern emphasis; the inability to meet current debt obligations or to adequately finance operations; abnormally low selling price or volume of trading; and unwarranted use of company funds for the repurchase of its equity securities.

1077. See id. at § 303A.01.

1078. See id. at § 303A.02.

1079. See Commentary to NYSE Manual § 303A.02.

1080. See id.

1081. See id. at § 303A.02(b)(i).

1082. See id. at § 303A.02(b)(ii).

1083. See id. at § 303A.02(b)(iii).

1084. See id. at § 303A.02(b)(iv).

1085. See id. at § 303A.02(b)(v).

1086. See Commentary to NYSE Manual § 303A.02(b).

1087. See id. at § 303A.03.

1088. See id. at § 303A.04(a).

1089. See id. at § 303A.04(b)(i).

1090. See id. at § 303A.04(b)(ii).


1092. See NYSE Manual § 303A.05(a).

1093. See id. at § 303A.05(b)(i)(A).

1094. See id. at § 303A.05(b)(i)(B).

1095. See id. at § 303A.05(b)(i)(C).

1096. See id. at § 303A.05(b)(ii).


1098. See NYSE Manual §§ 303A.06, 303A.07(b).

1099. See id. at § 303A.07(c)(i)(A).

1100. See id. at § 303A.07(c)(i)(B).

1101. See id. at § 303A.07(c)(ii).

1102. See id. at § 303A.07(c)(iii).

1103. See id. at § 303A.07(c)(iii)(A).

Endnotes 135

1104. See id. at § 303A.07(c)(iii)(B).

1105. See id.

1106. See id. at § 303A.07(c)(iii)(C).

1107. See id.

1108. See id. at § 303A.07(c)(iii)(D).

1109. See id. at § 303A.07(c)(iii)(E).

1110. See id. at § 303A.07(c)(iii)(F).

1111. See id. at § 303A.07(c)(iii)(G).

1112. See id. at § 303A.07(c)(iii)(H).

1113. See id. at § 303A.07(a); see also Commentary to NYSE Manual § 303A.07(a). While the NYSE does not require that an audit committee include a person who satisfies the definition of audit committee financial expert as set out in Item 401(h) of Regulation S-K, a board may presume that such a person has accounting or related financial management expertise.

1114. See NYSE Manual § 303A.07(b).

1115. See id. at § 303A.07(d); see also Commentary to NYSE Manual § 303A.07(d).

1116. See NYSE Manual § 312.03(a); see also Commentary to NYSE Manual at § 303A.08.

1117. See NYSE Manual § 312.03(b).

1118. See id. at § 312.03(c). Shareholder approval will not be required for any issuance involving (1) any public offering for cash; (2) any bona fide private financing, if it involves a sale of common stock, for cash, at a price at least as great as each of the book and market value of the issuer’s common stock; or (3) securities convertible into or exercisable for common stock, for cash, if the conversion or exercise price is at least as great as each of the book and market value of the issuer’s common stock.

1119. See id. at § 312.03(d).

1120. See id. at § 303A.09; see also Commentary to NYSE Manual § 303A.09.

1121. See NYSE Manual § 303A.10; see also Commentary to NYSE Manual § 303A.10.

1122. See NYSE Manual §§ 303A.12(a), 303A.12(b).

1123. See id. at § 303A.12(c).

1124. See NYSE Listed Company Manual Section 303A Corporate Governance Listing Standards: Frequently Asked Questions, Question B.4 (February 13 2004).

1125. See NYSE Manual § 202.05.

1126. See id. at § 202.06(B).

1127. See id. at § 303A.00.

1128. See NYSE Listed Company Manual Section 303A Corporate Governance Listing Standards: Frequently Asked Questions, Question B.7 (February 13 2004).

1129. See NYSE Manual § 303A.11.


1131. The NGSM was implemented on July 1 2006.

1132. See Nasdaq Rule 5405(b)(1)(A).

1133. See id. at Rule 5405(a)(2).

1134. See id. at Rule 5000(a)(33). Shares held by directors and officers, or any person who is the beneficial owners of 10% or more of the total shares outstanding are not considered publicly held.

1135. See id. at Rule 5405(b)(1)(C).

1136. See id. at Rule 5405(a)(1).

1137. See id. at Rule 5405(b)(1)(B).

1138. See id. at Rule 5405(a)(3). A normal unit of trading is defined as 100 shares of a security.

1139. See id. at Rule 5405(b)(1)(D).

1140. See id. at Rule 5405(b)(2)(A).

1141. See id. at Rule 5405(a)(2).

1142. See id. at Rule 5405(b)(2)(C).

1143. See id. at Rule 5405(a)(1).

1144. See id. at Rule 5405(b)(2)(D).

1145. See id. at Rule 5405(b)(2)(B).

1146. See id. at Rule 5405(a)(3).

1147. See id. at Rule 5405(a)(2).

1148. See id. at Rule 5405(b)(3)(B).

1149. See id. at Rule 5405(a)(1).

1150. See id. at Rules 5405(b)(3)(C), 5405(b)(4)(C).

1151. See id. at Rule 5405(a)(3).

1152. See id. at Rule 5405(b)(3)(A).

1153. See id. at Rule 5405(b)(4)(A).

1154. See id. at Rule 5450(b)(1)(B).

1155. See id. at Rule 5450(b)(1)(C).

1156. See id. at Rule 5450(b)(1)(A).

1157. See id. at Rule 5450(a)(2).

1158. See id. at Rule 5450(a)(1).

1159. See id. at Rule 5450(b)(1)(D).

1160. See id. at Rules 5450(b)(2)(B), 5450(b)(3)(B).

1161. See id. at Rules 5450(b)(2)(C), 5450(b)(3)(C).

1162. See id. at Rule 5450(a)(1).

1163. See id. at Rule 5450(b)(2)(D), 5450(b)(3)(D).

1164. See id. at Rule 5450(a)(2).

1165. See id. at Rule 5450(b)(2)(A).

1166. See id. at Rule 5450(b)(3)(A).

1167. See id. at Rule 5810(c)(3).


1169. See id. at Rules 5305(c), (d).

1170. See id. at Rule 5315(f )(1)(A).

1171. See id. at Rule 5315(f )(1)(B).

1172. See id. at Rule 5315(f )(1)(C).

1173. See id. at Rule 5310(d).


1174. See id. at Rule 5315(e)(2).

1175. See id. at Rule 5315(f )(2)(A).

1176. See id. at Rule 5315(f )(2)(B).

1177. See id. at Rule 5315(f )(2)(C).

1178. See id. at Rule 5315(e)(3).

1179. See id.

1180. See id. at Rule 5315(e)(1).

1181. See id. at Rule 5315(f )(3)(A)(i).

1182. See id. at Rule 5315(f )(3)(A)(ii).

1183. See id. at Rule 5315(f )(3)(A)(iii)

1184. See id. at Rule 5315(f )(3)(B)(i).

1185. See id. at Rule 5315(f )(3)(B)(ii).

1186. See id. at Rule 5315(f )(3)(B)(iii).

1187. See id. at Rule 5315(f )(3)(C)(i).

1188. See id. at Rule 5315(f )(3)(C)(ii).

1189. See id. at Rule 5505(b)(1)(C).

1190. See id. at Rule 5505(b)(1)(A).

1191. See id. at Rule 5505(b)(1)(B).

1192. See id. at Rule 5000(a)(21).

1193. See id. at Rule 5505(b)(2)(A).

1194. See id. at Rule 5505(b)(2)(B).

1195. See id. at Rule 5505(b)(2)(C).

1196. See id. at Rule 5505(b)(3)(A).

1197. See id. at Rule 5505(b)(3)(B).

1198. See id. at Rule 5505(b)(3)(C).

1199. See id. at Rule 5505(a)(3).

1200. See id. at Rule 5505(a)(2).

1201. See id. at Rule 5505(a)(1).

1202. See id. at Rule 5505(a)(4).

1203. See id. at Rules 5505(a)(5).


1205. See id. at Rule 5550(a)(3).

1206. See id. at Rule 5550(a)(4).

1207. See id. at Rule 5550(a)(5).

1208. See id. at Rule 5550(a)(2).

1209. See id. at Rule 5550(a)(1).

1210. See id. at Rule 5810(c)(3).

1211. See id. at Rules 5605(b)(1). See also id. at Rule 5615(c)(1). “Controlled companies,” which are companies of which more than 50% of the voting power is held by an individual, a group or another company, are exempt from the requirements relating to having a majority of independent directors, executive compensation and director nominees

1212. See Nasdaq Interpretive Material 5605 [Nasdaq IM].

1213. See Nasdaq Rule 5605(b)(1).

1214. See Nasdaq IM 5605.

1215. See Nasdaq Rule 5000(a)(19), 5605(a)(2).

1216. See id. at Rule 5000(a)(19), 5605(a)(2)(A).

1217. See id. at Rules 5000(a)(19), 5605(a)(2)(B).

1218. See id. at Rules 5000(a)(19), 5605(a)(2)(B)(i).

1219. See id. at Rules 5000(a)(19), 5605(a)(2)(B)(ii).

1220. See id. at Rules 5000(a)(19), 5605(a)(2)(B)(iii).

1221. See id. at Rules 5000(a)(19), 5605(a)(2)(C).

1222. See id. at Rules 5000(a)(19), 5605(a)(2)(D).

1223. See id. at Rules 5000(a)(19), 5605(a)(2)(D)(i).

1224. See id. at Rules 5000(a)(19), 5605(a)(2)(D)(ii).

1225. See id. at Rules 5000(a)(19), 5605(a)(2)(E).

1226. See id. at Rules 5000(a)(19), 5605(a)(2)(F).

1227. See Nasdaq IM 5605.

1228. See Nasdaq Rules 5000(a)(17), 5605(a)(2) Excerpt.

1229. See id. at Rule 5605(b)(2) (the rule refers to these meetings as executive sessions).

1230. See Nasdaq IM 5605-2.

1231. See Nasdaq Rule 5605(e)(1)(A-B).

1232. See id. at Rule 5605(e)(2).

1233. See id. at Rule 5605(e)(3).

1234. See id. at Rule 5605(e)(4).

1235. See id. at Rule 5605(e)(5).

1236. See id. at Rules 5605(d)(1)(A-B), 5605(d)(2)(A-B).

1237. See id. at Rule 5605(d)(3).

1238. See Nasdaq IM 5605-1, 5605-2, 5605-3, 5605-4, 5605-5, 5605-6 and 5605-7.

1239. See Nasdaq Rule 5605(c)(1).

1240. See id. at Rule 5605(c)(1)(A).

1241. See id. at Rule 5605(c)(1)(B).

1242. See id. at Rule 5605(c)(1)(C).

1243. See id. at Rule 5605(c)(1)(D).

1244. In the case of investment company issuers, the term affiliated person is replaced with interested person, as defined in section 2(a)(19) of the Investment Company Act of 1940.

1245. See Nasdaq Rule 5605(c)(2)(A).

1246. See id.


1248. See Nasdaq Rule 5605(c)(2)(B).

1249. See id. at Rule 5605(c)(3).

1250. See generally Nasdaq Rules 5605(c)(4)(A), (c)(4)(B).


Endnotes 137



1254. See id. at Rule 5630(a-b).

1255. See Nasdaq IM 5635-1-paragraph 2. “Material amendments” to an equity compensation arrangement include any material increase in the number of shares to be issued under the plan (other than to reflect a reorganisation, stock split, merger, spin-off or similar transaction), any material increase in benefits to participants, any material expansion of the class of participants eligible to participate in the plan and any expansion in the types of options or awards provided under the plan.

1256. See Nasdaq Rule 5635(c). The exceptions include: (1) warrants or rights issued generally to all security holders of the issuer or stock purchase plans available on equal terms to all security holders; (2) certain tax-qualified non-discriminatory employee benefits and parallel nonqualified excess plans; (3) plans or arrangements involving mergers or acquisitions, either when conversions, replacements or adjustments of outstanding options or other equity compensation awards are necessary to reflect the transaction, or when shares available under certain plans acquired in acquisitions or mergers are to be used for certain post-transaction grants; and (4) employment inducements to new employees. The items described under (2) and (4) above must be approved by the issuer’s independent compensation committee or a majority of independent directors. See id. at Rule 5635(c)(1)-(4).


1258. See id. at Rule 5635(a)(2).

1259. See id. at Rule 5635(a)(1)(A-B).

1260. See id. at Rule 5635(d)(1).

1261. See id. at Rule 5635(d)(2).

1262. See id. at Rule 5635(f ).

1263. See id. at Rule 5635(e)(1); see also Nasdaq IM 5635-1.


1265. See Nasdaq Rule 5205(a).

1266. See id. at Rule 5210(b); see also 15 USC § 7212.

1267. See Nasdaq Rule 5610.


1269. See generally Nasdaq Rule 5600.

1270. See Nasdaq Rule 5250(b)(1).

1271. See id. at Rule 5250(b)(2).


1273. See Nasdaq Rule 5250(e)(2)(A).

1274. See id. at Rule 5250(e)(2)(B).

1275. See id. at Rule 5250(e)(2)(C).

1276. See id. at Rule 5250(e)(2)(D).

1277. See id. at Rule 5250(e)(1).

1278. See id. at Rule 5615(a)(3).

1279. See id. at Rule 5250(b)(2).



1282. See id. at Rules 5605(c)(3), (c)(2)(A).


1284. See id.


nOteS

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