Foreign companies raising capital in the United States enjoy several types of relief in comparison to U.S. companies, which are intended to encourage foreign companies to go public in the United States rather than on another international market. A foreign company is defined as a company registered outside the United States, provided that fewer than 50% of its shareholders are U.S. residents (the test is one of beneficial ownership and the company is required to conduct a reasonable investigation into the place of residence of its shareholders), and further provided that a majority of the company's activities and assets are managed outside the United States. Following are the main forms of relief enjoyed by foreign companies.
Disclosure under International Disclosure Rules
Foreign companies file their registration statements in an IPO on Form F-1, the disclosure requirements of which are less strict than those required of U.S. companies filing a Form S-1. The main differences concern the disclosure of managers' salaries, information about the identity of customers, and the level of specification of the company's results in various segments of operations. The disclosure rules which apply to foreign companies in the United States are fixed in Form 20-F.
Relief in the IPO Process
Foreign companies receive special treatment from the SEC, and they enjoy the assistance of the SEC's personnel throughout the IPO process. Foreign companies submit the registration statement confidentially before the official filing. The comments received after the preliminary submission are implemented so that when the registration document is filed officially, it is almost in its final form.
Relief in Periodic Reporting Requirements
Foreign companies are not required to file quarterly and annual reports (including an annual report to shareholders) nor special reports (8-K) which are filed by U.S. companies. Foreign companies are required only to file an annual report within six months from the end of their fiscal year, and the form of the report (20-F) is abridged compared to the detailed report required of U.S. companies. The reporting requirements are, however, broader if listing for trade is accompanied by the raising of capital.
Foreign companies are also required to submit, on Form 6-K, information which is circulated among all the shareholders in any form in the country of origin. In practice, many foreign companies publish their financial results every quarter by way of a press release so as to meet investors' expectations, but this is not a full report subject to the liability imposed by the securities laws. The companies are also required to file reports according to the stock exchange rules at least once every six months. In addition, many companies deliver annual reports and proxy forms to their shareholders in order to keep up with investors' expectations.
Foreign companies are exempt from the requirement of filing annual reports to the shareholders and from the other proxy rules which apply to U.S. companies according to the Securities Exchange Act of 1934. In addition, directors and officers of foreign companies are not bound by the duties of reporting and the liability set in Section 16 of the act in connection with holdings of and transactions in the company's securities.
An ADR (American Depositary Receipt) is a certificate issued by a U.S. depository institution, which represents shares of a foreign company (listed on a non-U.S. exchange) deposited with the bank. Foreign companies whose shares are traded in their domestic market can issue an ADR rather than ordinary shares in order to facilitate trading in the U.S., since every trade of an ADR is registered in the bank's records in the United States with no need for a transfer in the domestic market (which might be problematic from the point of view of trading hours and may also involve additional commissions). The bank also arranges for the delivery of reports and information to the U.S. shareholders, the distribution of dividends in dollars, and other shareholder services. The use of ADR increases the interest of U.S. investors in the share, since it turns a foreign share into a quasi-U.S. share with respect to the administration involved in holding it and trading in it.
ADRs are popular among large companies from Europe, South America, and Asia. The shares of the larger companies among them are traded in several markets and are some of the most liquid in the U.S. capital markets (for instance, the shares of Nokia, Ericsson and many of the privatized national telephone companies). Although for many firms, the majority of the trade is shifting to the United States (together with a significant increase in volume), findings indicate an increase in the volume of trade in these shares also in their countries of origin, which results, among other factors, from trade by institutional investors trying to profit from momentary price differences in the underlying asset between the markets ("arbitrage opportunities").
In addition, some institutional investors who do not invest in companies that are not listed on a U.S. exchange, can invest in firms that are listed via an ADR (although they trade the shares without such restriction). There are various reasons for this, including limitations imposed on the permissible investment charter of such investors, as well as the legal "umbrella" provided by U.S. securities laws (via disclosure and reporting requirements) to investors in the shares of companies which are listed in the United States, even if the securities were actually bought in a different country. This interesting finding is now used as a highly important factor in attempts made to convince companies that dual-listing could in fact increase trading in the firm's home country.