Many companies that are based outside of the United States but that issue securities in the United States are subject to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). As a result, these non-U.S. companies may find themselves subject to SEC requirements such as filing periodic reports and beneficial ownership information for company insiders.

Companies that are defined as foreign private issuers (FPIs) get the benefit of a number of special exemptions and accommodations from SEC rules. Qualifying for FPI status can carry a number of important advantages for a company.

While on the surface the test for FPI status appears simple, there are a variety of questions underlying the scope of the terms in the FPI tests. A company must satisfy one of the following tests to be considered a foreign private issuer.

Under test #1, the company must be incorporated outside the United States and more than half of its voting securities must be owned of record by non-U.S. residents. If a company meets these requirements, it will be considered an FPI.

Under test #2, the company must also be incorporated outside the United States. However, if it fails the other part of test #1, it can still qualify for FPI status if it can demonstrate that all three of the following factors are false:

• The majority of the company’s executive officers or directors are U.S. citizens or residents
• More than 50% of its assets are located in the United States
• The company’s business is administered principally in the United States

In order to apply the FPI tests correctly, one must be aware of how certain terms are generally interpreted. For example, “ownership” of shares under the FPI tests means record ownership, not beneficial ownership. As a consequence, shares underlying outstanding convertible and exchangeable securities and exercisable warrants are not counted as part of the share ownership calculation.

Foreign private issuers benefit from a number of exemptions from SEC reporting rules, stock exchange rules, and corporate governance obligations. FPIs are generally not required to file quarterly reports on Form 10-Q. The executive officers, directors, and significant stockholders of companies qualifying for FPI status are not subject to the beneficial ownership reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 (Exchange Act). Additionally, the short-swing profits disgorgement rules under Section 16(b) of the Exchange Act do not apply to FPIs.

Under the rules of the two major U.S. stock exchanges, the New York Stock Exchange (NYSE) and Nasdaq, foreign private issuers are granted relief from complying with many corporate governance rules. The stock exchange exemptions for FPIs cover corporate governance topics such as director independence determinations, certain shareholder approval requirements, and compensation committee requirements.

Another benefit of FPI status is the exemption from Regulation FD. Regulation FD prohibits public companies from selectively disclosing material, non-public information (MNPI) to certain persons without also disclosing such information to the public. Although foreign private issuers are exempt from Regulation FD, it is best practice to promptly disclosure MNPI to the broader public.