In the ever-evolving landscape of global business, tech companies are not confined by geographical boundaries – they are pioneering the path beyond borders. As in-house teams navigate the intricate realm of international expansion, the concept of becoming a foreign private issuer (FPI), or taking proactive steps to maintain FPI status, is a key focus. In this playbook, we delve into strategies that empower legal leaders to harness the potential of FPI status. Read on as we gain insights from David Boles, Tim Pitrelli, partners at Cooley, and Noah Zivan, senior corporate counsel – head of corporate securities at monday.com, to unravel the opportunities and challenges that lie beyond borders.

What is an FPI?

An FPI is an issuer that is incorporated or organized under the laws of a jurisdiction outside the United States, unless:

• More than 50% of its outstanding voting securities are directly or indirectly owned of record by US residents; and
• Any of the following applies:
  • The majority of its executive officers or directors are US citizens or residents; or
  • More than 50% of its assets are located in the US; or
  • Its business is administered principally in the US.

If 50% or less of a non-US issuer’s outstanding voting securities are held by US residents, the issuer qualifies as an FPI. A non-US issuer that has more than 50% US ownership can still be an FPI if it does not meet any of the three additional tests noted above.

For an issuer that is registering securities with the Securities and Exchange Commission (SEC) for the first time – for example, when conducting an initial public offering (IPO) in the US – the determination of whether such issuer qualifies as an FPI is made as of a date within 30 days prior to the issuer’s filing of an initial registration statement. Thereafter, as a public company, an FPI must determine its status on the last business day of its most recently completed second fiscal quarter (for a calendar year-end company, that is June 30). If an FPI no longer satisfies the FPI requirements, it will become a US domestic issuer subject to the US domestic reporting requirements on the first day of its fiscal year immediately succeeding such determination. This allows an FPI six months’ advance notice to prepare the necessary materials to comply with the US domestic reporting requirements.

Why is FPI status important?

FPIs benefit from a number of accommodations under US securities laws when compared to US domestic issuers. Many US rules contain exceptions for FPIs and defer to the FPI’s home country governance requirements. For example:

Quarterly reporting not required

FPIs are not required to file quarterly reports (including quarterly financial information) on Form 10-Q or current reports on Form 8-K with the SEC. However, FPIs are required to make filings under cover of Form 6-K to report the disclosure of financial results that they choose to make voluntarily or that they are required to make under the laws of their home jurisdiction. Many FPIs choose to voluntarily file quarterly reports to meet investor expectations. 

Ability to choose between US GAAP, IFRS or local GAAP (with a reconciliation to US GAAP)

The financial statements of FPIs may be prepared using US generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS) or local GAAP (with a reconciliation to US GAAP). Some FPIs, especially in highly regulated local industries (such as banks), choose to use local home country GAAP (local GAAP) with a reconciliation to US GAAP, though this is uncommon. In the case of FPIs that use IFRS other than the English language version of IFRS as issued by the International Accounting Standards Board (IASB), a reconciliation to US GAAP is needed. Domestic issuers must file US GAAP financials, which can be a challenge for non-US companies.

Exemption from proxy rules

The US proxy rules – which specify the procedures for soliciting shareholder votes – are not applicable to FPIs. This exemption creates a significant advantage for FPIs, particularly in light of the more stringent requirements under the Dodd-Frank Act.

Exemption from Regulation FD

Regulation FD requires issuers to make public disclosure of any material nonpublic information that has been selectively disclosed to securities industry professionals, shareholders or others. FPIs are expressly exempt from Regulation FD. It is important to note, however, that regardless of the exemption from Regulation FD, FPIs remain exposed to potential liability for selective disclosure of material nonpublic information, such as “tipping” securities analysts or selected shareholders. As a result, we recommend that FPIs comply with Regulation FD and, in our experience, most FPIs voluntarily do so.

Exemption from beneficial ownership reporting and short-swing profit recapture rules 

Under Section 16(a) of the Securities Exchange Act of 1934 (Exchange Act), any holder of more than 10% of any class of equity security registered under the Exchange Act, or who is an officer or director of an issuer, must file a statement of beneficial ownership with the SEC. Similarly, Section 16(b) requires any such shareholder, officer or director to disgorge to the issuer profits on purchases and sales within any period of less than six months. Securities of FPIs are exempt from Section 16.

Not subject to accelerated filing

FPIs are not subject to accelerated filing and may currently file annual reports within four months after the end of their fiscal year. Domestic issuers must file annual reports between 60 to 90 days after fiscal year-end (depending on their filing status). It should be noted, however, that if an FPI chooses to file as a domestic US issuer, then it will be subject to accelerated filing in the same manner as domestic US issuers.

Exemptions from Sarbanes-Oxley Act 

Although the Sarbanes-Oxley Act generally does not distinguish between domestic issuers and FPIs, the SEC has adopted a number of significant exemptions for the benefit of FPIs in the application of its rules adopted under the Sarbanes-Oxley Act, which an FPI should consider in consultation with its legal advisers.

More limited executive compensation disclosure

FPIs typically are subject to more limited home country executive compensation disclosure requirements than domestic US issuers.

Checklist: What questions must I consider in deciding where to list?

FPIs typically have the choice of listing in their home market or in another jurisdiction, like the US. The decision of where to list can be influenced by many factors, so use this checklist to help you in your decision-making.

What are the key benefits of a US listing?

While there are a range of reasons companies elect to list in their home market, there are several significant benefits to listing on a US exchange, including:

• Enhanced follow-on and secondary offering flexibility, including the availability of “at-the-market” offerings and shelf financings after a company has been listed on a US exchange for 12 months, as compared to more cumbersome rights issues in other markets.
• The potential fungibility of home country-listed shares and US-listed American depositary receipts (ADRs) can provide additional options for shareholders and increased liquidity. 
• Demand for company securities may increase as a result of inclusion on US funds and indices (subject to certain restrictions).
• An expanded US investor base, as well as specialist investors.
• Equity research coverage.
• Issuers can adopt 10b5-1 trading plans to facilitate liquidity for company insiders.
• Enhanced liquidity for US employees through the availability of equity incentive plans (EIPs).

In addition, companies consider listing in the US for a variety of commercial reasons – including potential enhanced valuation and increased liquidity.

In many cases, a cross-listing in both the home market and on a US exchange is a feasible option. In some jurisdictions, it is possible to list ordinary shares in the US. In jurisdictions where this is not possible, issuers list ADRs, which are familiar and accessible to US domestic investors while being fungible with home country-listed shares. A depositary bank assists in creating the ADRs and handles some administrative aspects of being listed in the US on behalf of the issuer. The depositary bank charges ADR holders annual fees to provide the ADRs – a portion of which can be received by the issuer – helping to offset the audit, legal and other costs of being listed in the US. Cross-listings can be accomplished either sequentially or concurrently with a US IPO. ADRs also have use cases for issuers that are not listed in their home market, and in some jurisdictions, settlement mechanics and other factors make a share listing in the US difficult or impossible, which requires companies to list ADRs.

There also are a range of specific issues to consider, depending on the location of the company. For example, the new regulations in the People’s Republic of China (PRC) that came into effect on March 31, 2023, require PRC companies to file with the China Securities Regulatory Commission before making any overseas offerings and listings. This has increased the uncertainty of overseas IPO projects and lengthened timelines.

At the end of the day, selecting the most appropriate listing venue(s) requires consideration of a number of issues, and we recommend that companies discuss the options with financial, accounting and legal advisers.

What are key risks and other considerations? 

In addition to the benefits outlined earlier, it’s essential to carefully assess the risks associated with a US listing, especially given the heightened public reporting and disclosure requirements under US securities laws, including the Securities Act of 1933 and the Exchange Act.

Securities class actions and due diligence

Most securities class actions are brought under Section 10(b) of the Exchange Act or Sections 11 and/or 12 of the Securities Act. Sections 11 and 12 of the Securities Act create liability for false or misleading statements made in the IPO offering documents. As a result, the Risk Factors section in the Form F-1 registration statement becomes critically important. The due diligence process is designed to prevent false or misleading statements or material omissions in the IPO offering documents, with the onus on underwriters, directors and officers to establish a reasonable investigation “due diligence” defense. However, issuers lack this defense and face strict liability for material misstatements.

Proactive risk mitigation strategies

According to Zivan, the best plan to proactively address potential risks is to give clear and complete disclosures.

“Make sure that everything you put out there is clear (in English, not legalese) and covers every aspect of the company. If you are organized and ahead of things, you can control the narrative and ensure that no surprises pop up at the last minute. In this manner, the relationship between in-house counsel, company counsel and underwriter counsel is of the utmost importance. When those three teams work together, it can go a long way to ensuring that everything is properly disclosed, and all risks are minimized and mitigated as much as possible.”
– Noah Zivan, senior corporate counsel – head of corporate securities at monday.com

Shareholder derivative suits and regulatory compliance 

Beyond class actions, the risk of shareholder derivative suits accompanies share price decreases. These suits primarily target directors and officers, alleging breaches of fiduciary duties related to specific board decisions or failure in oversight.

Furthermore, an US-listed company is subject to additional regulatory regimes – including the Sarbanes-Oxley Act, Foreign Corrupt Practices Act, anti-money laundering regulations and export controls. Recent SEC rules on cybersecurity disclosures add to the regulatory landscape, necessitating careful consideration of compliance costs and internal staffing requirements.

In addition, as of December 1, 2023, companies listed on the New York Stock Exchange (NYSE) or Nasdaq, including FPIs, must adopt policies for the recovery of erroneously awarded incentive-based compensation. Considering these complexities is crucial for companies preparing to navigate the intricacies of a US listing.

How long does the US IPO process typically take?

The US IPO process for FPIs typically takes about 18 to 24 weeks – though this could be longer in certain jurisdictions (in particular, Asia) – from the initial organizational meeting to pricing. The process can be divided into the following periods:

• Pre-filing period (weeks 1 – 6): This begins with the all-hands organizational meeting. Due diligence by the underwriters and legal counsels in consultation with management, as well as with the legal, financial, audit and commercial teams, will commence. During this time, the company, together with its legal counsel, drafts the registration statement on Form F-1 and will confidentially submit the draft F-1 registration statement to the SEC.
• Pre-effective period (weeks 7 – 16): Once the registration statement is confidentially submitted, the SEC will begin its initial review period. The company may conduct testing-the-waters meetings during this time, although due diligence will continue. The company will typically publicly file the registration statement with the SEC once it has responded to several rounds of SEC comments and is ready to conduct public marketing.
• Roadshow (weeks 17 – 18): The company will conduct its roadshow, and the registration statement will be declared effective by the SEC.
• Post-effective period (weeks 19+): Once the registration statement is declared effective by the SEC, the company can price its offering and begin trading. Closing of the IPO occurs two days after trading commences. The “quiet period” typically continues for 25 days.

Advice for in-house counsel

“The most important advice I can give an in-house counsel about to embark on an IPO is to really own the process from the timeline to the deal structure. Everyone outside of the company (banks, insurance, legal counsel, etc.) has a vested interest in running the IPO through a tried-and-true process where they have a set playbook they can implement. And while this works for many companies, there is no reason why you should limit yourselves. Securities laws are surprisingly flexible in ways a company can structure their IPO, and timing can be tailored to fit the company’s plans (both in terms of moving fast or lengthening the process). Each company has its own persona, and there is no reason why its IPO should feel cookie-cutter. Don’t be afraid to challenge everything and suggest ways to make the IPO process more bespoke to your company.”
– Noah Zivan, senior corporate counsel – head of corporate securities at monday.com

What are key risks to deal timing?

• Timing of completion of the audit for financial statements – in particular, where the company is converting accounting standards or upgrading existing IFRS financial statements to Public Company Accounting Oversight Board (PCAOB) audit standards.
• Market, economic and political conditions.
• Aging financials, speed of audit and review of subsequent financials.
• SEC review (generally accounting-related comments).
• Business challenges.

Checklist: What issues should be identified prior to the IPO?

There are a number of issues that are important to consider before – and sometimes well in advance of – commencing an IPO in the US. Use this checklist to identify them.

If the FPI prepares its financial statements based on an accounting standard other than US GAAP or IASB IFRS, what are the significant differences between local GAAP/non-IASB IFRS and US GAAP? How long will conversion or reconciliation take?

Have all required audits been conducted in accordance with the standards of the US PCAOB? The SEC requires all financial statements to be audited in accordance with the PCAOB’s standards, even in the case of an issuer using IFRS.

Does the issuer have the corporate governance procedures and mechanisms in place to comply with the requirements of the Sarbanes-Oxley Act (for example, management certifications, internal control over financial reporting, disclosure controls and procedures, appropriate audit committee functions, etc.)?

Are the auditors of every set of required financial statements prepared and qualified to have their audits used in a US securities offering and filed with the SEC? If not, re-audits may be necessary.

Has the issuer granted share options within the year prior to an equity offering? If so, the SEC will closely examine these grants to assess whether the fair market value of the common shares exceeded the exercise prices of the options on the date of grant, which could constitute additional compensation expense and reduce net income under US GAAP, if applicable. This so-called cheap stock issue is one that often draws SEC scrutiny, can cause delays in the IPO process and may require revisions to the issuer’s financial statements in the form of additional deferred compensation expenses.

Checklist: What can I do now to prepare for a US IPO? 

Use this checklist to help you prepare for a US IPO.

• Get to know the investment bankers and equity research analysts in your sector
• Become part of the “conversation.”
• Avoid pitfalls associated with excess publicity, including through social media.
• Ensure that your company has developed sufficient support from the US investment community through nondeal roadshows, testing-the-waters meetings and crossover financing.
• Work with your prospective lead banker(s) to identify potential investors.
• Understand the financial statement requirements to go public, including US GAAP versus IFRS, staleness of financial statements and PCAOB-level review. Remember that local affiliates have to run audits through a US “national office.”
• Ask your current audit partner if they have experience with this process at their firm.
• Revisit shareholders’ agreements and terms of outstanding securities to understand any preemptive rights, anti-dilutive provisions, veto rights and “qualified IPO” terms. 
• Consider obtaining an advance shareholder waiver of IPO size and amount limitations.
• Reconsider corporate governance practices and board/committee composition in light of US exchange requirements after accounting for home country exemptions.
• Consider any applicable board diversity requirements.
• Complete any requirements imposed by home stock exchange or corporate governance required as to disclosure and market price discounts.

What is the key US IPO registration and marketing documentation?

The primary disclosure documentation is the registration statement on Form F-1, which contains the “prospectus.” Drafting the Form F-1 will require multiple sessions with input from all parties, including your underwriters and auditors, to create the document. The main focus will be on the Business section, which tells the story of the company and requires key members of management to be involved in providing input, reviewing the section to ensure accuracy and helping to guide the way the story is being told. While members of management do not need to be at all drafting sessions, their involvement in reviewing the drafts and providing feedback will be critical to staying on the timeline. 

Certain sections of the Form F-1 are typically drafted by other teams. The MD&A section (Management’s Discussion and Analysis of Financial Condition and Results of Operations) may be drafted by the finance team, and the company’s external counsel and legal team will generally handle the “back half” sections – such as corporate governance and executive compensation. The lawyers also will prepare the initial draft of the Risk Factors section, although management should be involved in reviewing and providing input on what risks may be unique to the company.

Are there restrictions on publicity? 

Public communications about a company’s IPO plans are generally prohibited. US securities laws prohibit such communications – known as “gun jumping” – to limit actions that condition the public market or arouse public interest in an issuer or in the securities of an issuer in advance of a public offering.

Not all communications are prohibited under the gun jumping rules. Routine business communications that are consistent with past practice, are not aimed at potential investors and do not mention IPO plans are typically permitted. 

Discuss with counsel the rules that will govern your public communications during the IPO process. Standardize public communications to establish a track record and develop consistent processes for external communications, including review of press releases by outside counsel and fact-checking all of your public statements before they go out. Beware of media interviews and public appearances in which a potential IPO is discussed – not just by management but also by directors and insider shareholders – particularly when you do not control the timing of publication. CEO comments to business publications during the IPO process (or even just before) are one of the most likely areas for potential gun jumping.

What are the post-IPO reporting obligations for an FPI? 

After an FPI’s initial public listing on a US exchange, the FPI will have the following periodic reporting obligations. Use the bullets below to guide you: 

• Annual report on Form 20-F
  • A reporting FPI must file an annual report on Form 20-F with the SEC. The due date for filing annual reports on Form 20-F is four months after the FPI’s fiscal year-end. This annual report deadline provides a substantial accommodation to FPIs as compared to domestic US issuers, which must file their annual reports within 90 days or fewer from their fiscal year-end. Form 20-F contains detailed financial and nonfinancial disclosure requirements
• Form 6-K
  • A reporting FPI must submit reports to the SEC on Form 6-K. Form 6-K reports must contain all material information that the issuer:
    • Makes or is required to make public pursuant to the laws of its country of incorporation or organization.
    • Files or is required to file with a stock exchange on which its securities are traded and that was made public by the exchange.
    • Distributes or is required to distribute to its security holders. 
  • A Form 6-K must be furnished promptly after the material event contained in the report. A Form 6-K is furnished, rather than filed, so there is no liability under Section 17 of the Exchange Act.
• Disclosures required by the exchanges
  • If the company lists on Nasdaq, it will have to furnish interim financial statements as of the end of the second fiscal quarter on Form 6-K no later than six months thereafter. If the company lists on the NYSE, it must furnish semi-annual unaudited financial information on Form 6-K no later than six months following the end of its second fiscal quarter. Both exchanges also require that a listed company make prompt disclosure to the public through any Regulation FD-compliant method of any material information that would reasonably be expected to affect the value of the company’s securities or influence investors’ decisions, and that whenever unusual market activity takes place, the company should, in normal course, determine whether there is material information or news that should be disclosed. Certain events require advance notification to the appropriate exchange.
• Navigating reporting obligations and best practicesThe most important ability that the in-house counsel who oversees reporting should adopt is the ability to keep their ear to the floor of the company and ensure that they are aware of everything that is going on day to day.
  • “While having a good calendar and playbook are important, there is no replacement for making yourself aware of all that goes on in the company. This is critical, because you’ll want your reporting to be an accurate representation of what is actually going on in the company. Ninety-nine percent of your employees are not aware of the importance of reporting and won’t naturally come to you with updates and explanations of all that they are working on.”

– Noah Zivan, senior corporate counsel – head of corporate securities at monday.com

While an FPI is not required to file proxy statements, FPIs typically furnish invitations to their annual meetings on Form 6-K. Lastly, while no Section 16 beneficial ownership reports are required, holders of 5% or more will have to make Schedule 13D/G filings.

Closing remarks: Navigating global frontiers 

In the dynamic realm of global business, technology companies are at the forefront of breaking geographical barriers and venturing beyond borders. The playbook we’ve explored sheds light on the pivotal strategy of obtaining FPI status, offering insights from legal practitioners and industry leaders.
The journey to becoming an FPI is marked by strategic decision-making, including choosing a listing venue, understanding regulatory landscapes, and addressing cultural and communication challenges. It’s a transformative path that requires a nuanced approach to compliance, disclosure and governance. As you navigate this complex landscape, equip yourself with valuable resources, surround yourself with knowledgeable advisers and meet challenges head-on by applying for membership at TechGC today. 

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