Global Capital Markets Update | June 2020
Reminder of Upcoming Date for Calculating Foreign Issuer Status
As a reminder to our clients and friends, June 30 is the annual calculation date for Israeli companies to confirm their foreign private issuer (FPI) status for U.S. federal securities law purposes. If not already done, we recommend that issuers make the necessary arrangements to obtain the required information in advance of June 30 in order to calculate the percentage of their securities held by U.S. residents.
Ownership of securities by U.S. residents is a key issue for many Israeli issuers because non-U.S. issuers with U.S. share ownership of 50% or less on June 30 will be considered FPIs regardless of other business factors.
FPI status is of considerable benefit to foreign issuers that access the U.S. markets, including reduced reporting requirements by such issuers and its officers, directors and 10% shareholders, and the ability to qualify for exemptions from various corporate governance requirements under the rules of The Nasdaq Stock Market (NASDAQ) and the New York Stock Exchange (NYSE).
An FPI is defined as any non-U.S. issuer (other than a foreign government), unless it meets the following two conditions:
- more than 50% of the issuer’s outstanding voting securities are held directly or indirectly of record by residents of the United States (the U.S. Share Ownership Test); and
- any of the following applies (the U.S. Business Connection Test):
- the majority of the issuer’s executive officers or directors are U.S. citizens or residents;
- more than 50% of the issuer’s assets are located in the United States; or
- the issuer’s business is administered principally in the United States.
In other words, a non-U.S. issuer that is not a foreign government will lose its FPI status if it meets both of the above tests and will its retain FPI status so long as it fails one of these tests. Therefore, for non-U.S. issuers that meet all three elements of the U.S. Business Connection Test due to their significant U.S. business connections, the calculation of the percentage of voting securities under the U.S. Share Ownership Test becomes critical.
To satisfy the U.S. Share Ownership Test, non-U.S. issuers must look through the record ownership of institutional custodians, such as Cede & Co., by obtaining the list of accounts for which the securities are held by such custodians. In addition, non-U.S. issuers must “look through” the record ownership of brokers, dealers, banks, and other nominees holding the issuer’s securities to determine the residence of the underlying customers for whom the nominees are holding shares. The “look through“ inquiry must only be made with respect to brokers, dealers, banks and other nominees in three jurisdictions: (i) the U.S.; (ii) the non-U.S. issuer’s home jurisdiction; and (iii) the primary trading market for the non-U.S. issuer’s securities, if different from non-U.S. issuer’s home jurisdiction. An issuer must also consider publicly available beneficial ownership reports and other ownership information it is aware of.
Because the ownership information must be obtained as of June 30, it is important that non-U.S. issuers order the necessary reports from their transfer agent, the Depository Trust Company (DTC), Broadridge and other entities and sources in advance of June 30 to ensure that its information is complete and up to date as of June 30th. Non-U.S. issuers that wait until after June 30 to collect information on their U.S. shareholdings as of June 30 may find it difficult to obtain the required information to conduct its analysis.