Foreign private issuer: Overview, definition, and example
What is a foreign private issuer?
A foreign private issuer is a company or entity that is incorporated or organized outside of the United States and meets specific criteria set by the U.S. Securities and Exchange Commission (SEC) to be classified as a "foreign private issuer." These companies are generally exempt from certain U.S. securities laws that apply to U.S. companies, but they must still comply with some disclosure requirements when they have securities listed on U.S. stock exchanges or engage in business activities involving U.S. investors. The criteria for being considered a foreign private issuer often involve the company's primary place of business, the nationality of its shareholders, and its level of connection to the United States.
For example, a company based in Germany that has shares listed on the New York Stock Exchange (NYSE) might be classified as a foreign private issuer, allowing it to comply with different reporting requirements compared to U.S. companies.
Why is being a foreign private issuer important?
Being classified as a foreign private issuer is important because it allows companies incorporated outside of the U.S. to be subject to different and often less stringent regulatory requirements compared to U.S. companies. These exemptions can make it easier and less costly for foreign companies to raise capital in U.S. markets. For example, foreign private issuers are generally not required to comply with the same corporate governance standards or financial reporting regulations that apply to U.S. companies.
For investors, understanding whether a company is a foreign private issuer helps clarify the extent of financial and governance information available and the level of regulatory oversight the company is subject to.
Understanding foreign private issuer through an example
Imagine a Japanese technology company that wants to list its shares on the NASDAQ exchange to access U.S. investors. If the company qualifies as a foreign private issuer, it may be exempt from certain U.S. regulations, such as the requirement to follow specific SEC rules for public company reporting. Instead, it may follow the financial reporting standards of Japan, which might be different from U.S. Generally Accepted Accounting Principles (GAAP). This allows the company to raise funds from U.S. investors while keeping its compliance costs lower and adhering to its home country's regulations.
In another example, a European-based fashion company that sells its products in the U.S. markets but does not have a significant U.S. shareholder base could qualify as a foreign private issuer. The company may have fewer disclosure obligations under SEC rules, but it still needs to file certain forms, like an annual report (Form 20-F), to keep U.S. investors informed.
An example of a foreign private issuer clause
Here’s how a clause related to a foreign private issuer might appear in an agreement:
“The Company qualifies as a foreign private issuer under the U.S. Securities and Exchange Commission’s regulations and will file periodic reports in accordance with the rules applicable to foreign private issuers.”
Conclusion
A foreign private issuer is a company based outside of the United States that meets specific criteria set by the SEC to be classified as such. This status provides foreign companies with some regulatory exemptions that make it easier and less costly to raise capital in the U.S. financial markets. For investors and businesses, understanding whether a company is a foreign private issuer is important for knowing the level of disclosure and regulatory compliance to expect when engaging with the company.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.