Potential Cessation of American Initial Public Offerings for European Businesses?
The U.S. Securities and Exchange Commission (SEC) has published a consultation paper on June 4, 2025, questioning the status of Foreign Private Issuers (FPIs) under the Securities Exchange Act (1934) and proposing a restriction of the current FPI definition. The decision to publish the consultation paper was a unanimous one among all SEC Commissioners, with Commissioner Caroline A. Crenshaw's individual statement reading as a strong plea for significant tightening.
Under the current FPI definition, a foreign company is considered an FPI unless it meets certain shareholder and business contact tests. However, statistics from the SEC reveal an interesting shift. Previously, issuers incorporated in the United Kingdom and Canada dominated the FPI landscape. Today, issuers incorporated on the Cayman Islands lead, with corporate headquarters often located in China. These Cayman Islands-incorporated FPIs are typically Chinese companies that are listed exclusively on U.S. exchanges.
The SEC's consultation paper outlines various options for adjusting the FPI criteria. These include expanding the shareholder and business contact tests, requiring a secondary listing, reviewing foreign regulatory frameworks, considering mutual recognition for selected non-U.S. jurisdictions, and incorporating an SEC assessment of foreign regulatory regimes.
One potential consequence of tightening the FPI definition could be that foreign companies will refrain from a US listing from the outset and opt for a private placement under Rule 144A. The outcome of the consultation process is still pending, with no result expected before early 2026.
If the SEC decides on a tightening, it will publish a corresponding regulatory proposal with the opportunity for further comment. It's important to note that FPIs, under U.S. law, currently enjoy easier access to the U.S. capital market, with exemptions from certain U.S. reporting, disclosure, corporate governance, and other obligations. These exceptions originally rested on the assumption that FPIs are subject to comprehensive oversight in their home countries, making full application of U.S. securities law akin to 'double regulation.'
However, FPIs face less extensive reporting forms and more flexibility in presenting financial information, and have four months after the end of their fiscal year to file their annual reports with the SEC. They can also prepare their annual reports using International Financial Reporting Standards (IFRS) instead of general U.S. accounting standards (US-GAAP) and are not required to report quarterly. Other easements for FPIs include proxy rules for proxy voting, insider trading rules, and certain capital market restrictions, disclosure of executive compensation, and certain corporate governance requirements of the NYSE and Nasdaq.
FPIs are not subject to Regulation Fair Disclosure (Regulation FD) rules on ad-hoc publicity, beneficial ownership, and transactions by directors, officers, and significant shareholders. This could potentially lead to information asymmetry between U.S. and foreign investors.
German and European issuers, as well as startups planning a US IPO, should closely monitor the further development of the FPI definition changes. The SEC proposes that FPIs could be required to demonstrate that their statutory or management seat is in the same jurisdiction and that they are supervised in a jurisdiction that has signed the 'IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information' from 2002.
In conclusion, the SEC's proposal to tighten the FPI definition could significantly alter the landscape of foreign companies listing in the U.S. It's a development that all foreign issuers, particularly those from China and Europe, should keep a close eye on. The outcome of the consultation process, expected in early 2026, will provide more clarity on this matter.
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