New SEC Guidelines Clarify Activities, Definition of Foreign Private Issuers at a Time of Heightened Investment Activity in Indian Firms New Securities and Exchange Commission (SEC) guidelines published in late December 2016 provide clarity to the investment community about who and which companies qualify as foreign private issuers and how they must register, operate and report their activities to federal authorities. Among a total of 35 new compliance and disclosure interpretations (CD&I), seven help define foreign private investors and five address reporting and filing requirements. The CDIs come at time of heightened interest in U.S. investment in start-up firms based in India, considered one of the world’s fastest-growing economies, and in reverse-merger transactions by India-based firms with companies in the U.S., according to West Palm Beach Attorney Laura Anthony, founding partner of Legal and Compliance, LLC. Pent-up U.S. interest in Indian businesses picked up speed in 2016 when the Indian government overturned restrictive investment laws and finally allowed non-Indian individuals and companies to invest directly in Indian companies. Of particularly interest are companies in the defense, aviation, pharmaceutical and technology sectors. Less than a year later, evidence of the more open investment guidelines can be seen in the July 2016 reverse-merger agreement between India-owned online travel agency Yatra Online Inc., and U.S.-based Terrapin 3 Acquisition Corp. Likewise, two Indian companies – Vidocon d2h and Strand Life Sciences Pvt. Ltd – went public in the U.S. in 2016 as a result of reverse-merger agreements. Yatra and Strand both received several rounds of funds from U.S.-based companies, venture capital and private equity firms. “In my practice alone, I have been approached by several groups that see the U.S. public markets as offering incredible potential to the exploding Indian start-up and emerging growth sector,” Anthony writes in the Securities Law blog (March 14, 2017).
Several of new guidelines address Form 20-F, which foreign private investors must file with the SEC. Under certain circumstances, for example, foreign private issuers can register an F-series statement for securities guaranteed by the private company, even if the subsidiary itself does not qualify as a foreign private issuer. The same registration process can be used to co-issue securities by a parent foreign issuer and one or more subsidiaries that do not qualify – if both are eligible to present condensed, consolidating financial information. Additionally, wholly owned foreign subsidiaries of foreign private investors can omit certain information form the F-20 in the same way that wholly owned U.S. subsidiaries can omit information from annual reports (Form 10-K) filed with the SEC. In defining foreign private issuers, the SEC guidelines use these parameters: · Individuals (and shareholders) are considered U.S. residents if they have a green card for immigration purposes; other factors that can be considered include tax residency, nationality, mailing address, physical presence, location of a significant portion of their financial and legal relationships and immigration status. Immigration status is determined individually, not collectively, for all of a company’s directors and officers. · Determination can be made based on whether 50% or more a company’s outstanding securities are directly or indirectly owned by U.S. residents, and the 50% guideline can be used to determine if more than half of a company’s assets are located outside the U.S. The December guidelines and definitions also cover foreign private investor disclosure forms, reporting requirements other topics.