{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.title}}
{{item.text}}
What companies should know about foreign private issuer IPOs
Foreign companies considering public offerings in US capital markets have the option to access accommodations not available to domestic filers. They should carefully consider the special rules for foreign private issuers (FPIs) before an IPO to determine if they meet eligibility requirements. These accommodations can help save many foreign companies both time and money. But a company that decides to take advantage of an FPI filing’s benefits should understand how the rules work in order to help maintain that status going forward because it can lose those benefits if FPI status is lost.
Qualifying as an FPI
Over the past two decades, the FPI landscape has ebbed and flowed depending on the strength of global markets, the geopolitical landscape and the US regulatory environment. The proportion of FPIs has typically ranged between 10% and 20% of all US IPOs annually. Companies perform a self-assessment in conjunction with legal counsel to help determine if they qualify for FPI status.
FPI filers should develop a strategy to monitor FPI status on a go-forward basis. Once an issuer qualifies as an FPI, the issuer should reassess its status on an annual basis as of the last business day of its second fiscal quarter.
But if the company no longer qualifies as an FPI it will likely need to become compliant with domestic regulations as of the beginning of the following year. This can give companies an approximate six-month window to comply with domestic standards once it loses FPI status.
It’s important to note that FPI status is lost immediately if an issuer chooses to reincorporate in the United States.
There’s been a shift in recent years in which the mix of FPIs has moved toward more single US-only listings over dual territory exchange listings. This can pose an increased risk of companies losing their FPI status, particularly if more than 50% of voting securities end up being held by US investors. However, companies can implement strategies such as super voting rights — where select shares carry more voting weight — to maintain a foreign ownership majority and thereby retain FPI status.
Qualifying as an FPI doesn't obligate a company to file as one, and some companies may choose to file as a domestic company in order to be included in stock index funds that only permit US domiciled registrants.The regulatory accommodations available to FPIs are “à la carte,” meaning they can be selectively adopted. Companies should therefore develop a strategy for adopting specific accommodations. There are a number of questions that companies should consider.
- Will the election of IFRS, as opposed to US GAAP, be accepted by the desired institutional investor base?
- Will investors expect to see quarterly financial results despite the FPI flexibilities?
- What is the likelihood of losing FPI status due to shifts in shareholding patterns that might necessitate a switch to US GAAP?
- What are the cost and timing implications of a US GAAP conversion and audit requirements?
- Are there US GAAP to IFRS differences that could distort peer comparisons?
Common benefits of qualifying as an FPI
Financial statement flexibility
One of the most appealing features of FPI status is the flexibility to present financial statements under either IFRS or US GAAP. A company qualifying as an FPI should consider its peer group’s reporting standards as well as investor expectations when choosing the most appropriate reporting standards.
Reporting requirements relief
Another significant advantage afforded to FPIs is the relief from ongoing Form 8-K current reporting and the absence of mandated quarterly reports. FPIs are not required to file their financial results quarterly. They are, however, subject to semiannual reporting requirements (imposed by the Nasdaq and NYSE) that are to be filed on a Form 6-K. FPIs can voluntarily file quarterly financials via Form 6-K and many choose to do so for various reasons, including investor expectations.
Flexibility in executive comp disclosures
FPIs are permitted to follow the compensation disclosure requirements as required by their local home country. In some countries, that could allow FPIs to avoid disclosing detailed executive compensation information for the highest paid individuals. Exemptions also are provided to FPIs for certain executive compensation disclosures such as say-on-pay and CEO pay ratio.
Ability to comply with home country governance regulations
FPIs also may elect to follow home country governance rules and utilize certain board and committee exemptions. Many companies are domiciled in countries with more relaxed corporate governance rules than the more stringent NYSE/Nasdaq requirements that domestic filers are required to follow. Still, companies should be aware of the expectations of their investor base, which may have a preference that the company follow the rules required for US public companies.
Investor considerations
In addition to these regulatory requirements, FPIs should assess how their decisions could impact their investor base.
- How will we gain investor interest?
- What investor mix do we want to attract?
- Based on our industry and desired investor base, how much would our investors value the use of US-domiciled company reporting standards despite the accommodations?
- What will our investors expect relative to our peers in regards to the frequency of reporting?
Balancing the mix of operational relief provided by the SEC with the expectations from investors for transparency and governance is key for long-term success. Far from being a mere compliance exercise, navigating this landscape requires a keen understanding of market dynamics and investor behavior. The ultimate challenge for FPIs lies in skillfully leveraging the available regulatory flexibility without sacrificing investor trust, thereby turning the intricacies of the US capital markets into a strategic asset for long-term growth.
{{filterContent.facetedTitle}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Follow us
