SEC Signals Potential Overhaul of Foreign Private Issuer Framework

The SEC has opened the door to what could become the most significant reform in decades to its treatment of foreign private issuers (FPIs). On June 4, 2025, the SEC issued a concept release seeking public comment on whether the current definition of an FPI – an essential gateway to reduced reporting burdens for non-US companies – continues to function as intended in today’s rapidly evolving capital markets.

For over half a century, the FPI regime has recognized that companies based outside the US operate under different legal and regulatory frameworks. FPIs benefit from accommodations such as the ability to file annual reports on Form 20-F rather than Form 10-K, exemption from quarterly reporting, and greater flexibility in corporate governance disclosures. These accommodations aim to reduce regulatory frictions and attract foreign companies to US markets.

However, the composition of the FPI population has shifted dramatically over the last twenty years. These structure changes have prompted the SEC to ask whether the current definition still serves US investors and preserves fair competition between domestic issuers and FPIs.

An Evolving FPI landscape

The SEC’s release highlights several important developments. In 2003, most FPIs were incorporate or headquartered in Canada and the UK, each with mature securities regulatory regimes and active capital markets. By 2023, Cayman Islands become the most common place of incorporation, while China emerged as the most frequent headquarters location for FPIs.

Equally significant is the shift in trading patterns. A majority of FPIs now trade exclusively – or almost exclusively – on US exchanges, meaning they no longer be exposed to meaningful home-country regulations. According to SEC data, the share of FPIs traded only in US rose from roughly 44% in 2014 to nearly 55% in 2023.

These developments raise a key policy question: if an FPI is incorporated offshore but has its center of operations, capital-raising activities, and investor base in the US, should it continue to qualify for diminished disclosure obligations?

Current definition of a foreign private issuer

Under existing laws, a foreign issuer (other than a foreign government) qualifies as an FPI if:

Shareholder test

50% or less of its outstanding voting securities are held by US investors;

or

Business contacts test

If more than 50% of shares are held by US investors, the issuer may still qualify if all three conditions below are met:

• a majority of its directors and officers are not US citizens or residents;
• more than half of its assets are located outside the US;
• its business is principally administered outside the US.

This two-pronged test, unchanged for decades, is now under scrutiny.

Key issues and potential approaches

The SEC’s concept release does not propose specific rule changes but instead seeks broad feedback. Among the potential reforms under consideration are the following:

Revising eligibility criteria

The SEC is exploring whether to update either prong of the existing definition. Possibilities include reducing the 50% US shareholder threshold or modifying the business contacts factors and associated numerical thresholds. The Commission asks whether these indicators still reliably distinguish companies that genuinely merit FPI accommodations because of meaningful home-country oversight.

Introducing a foreign trading volume requirement

The release examines whether FPIs should be required to maintain a material portion of their trading volume on non-US exchanges. The rationale is that issuers trading significantly abroad are more likely to face substantive home-market regulation. The release invites comments on appropriate thresholds, data sources, and monitoring methodologies for a foreign trading volume test.

Requiring listing on a major foreign exchange

Another possible reform is requiring FPIs to maintain a listing on a “major foreign exchange”. While this could ensure a baseline of foreign regulatory oversight, identifying qualifying exchanges and coordinating ongoing information-sharing with them would require substantial SEC resources. The release seeks comment on how to define “major”, how frequently to reassess qualifying exchanges, and whether corporate governance or disclosure standards should play a role in the designation.

Evaluating the robustness of foreign regulatory regimes

The SEC also asks whether FPI eligibility should depend on incorporation in a jurisdiction with a “sufficiently robust” securities regulatory framework. This would require the SEC to assess foreign regimes on a continuing basis. Factors could include disclosure standards, enforcement mechanisms, corporate governance requirements, and cooperation with US regulators. The SEC acknowledges the complexity – and resource intensity – of such an approach.

Considering a mutual recognition system

The release raises the possibility of a mutual recognition framework similar to the Multijurisdictional Disclosure System for US-Canada cross-border offerings. Mutual recognition would allow FPIs from certain jurisdictions to meet SEC requirements primarily by complying with home-country rules. This approach would be limited to trusted jurisdictions with comparable regulatory standards, and the SEC seeks input on selection criteria.

Requiring cooperation agreements through IOSCO

Another option would require FPIs to be organized or headquartered in jurisdictions that participate in IOSCO cooperation and information-sharing arrangements. The release acknowledges that these arrangements are voluntary and do not replace domestic law. Commissioner Hester Peirce questioned whether such arrangements would adequately address investor-protection concerns, noting that they may give an illusion of robust oversight without actually guaranteeing disclosure quality.

Impacts on existing and future FPIs

The SEC is also seeking comments on transition considerations – whether any revised definition should apply only to new FPIs or whether existing FPIs should be required to re-qualify. Revising the definition could cause certain foreign companies listed only in their home markets to lose their exemption under Exchange Act Rule 12g3-2(b), potentially obligating them to register with the SEC for the first time.

Broad policy context

The concept release comes amid increased Congressional scrutiny of the disparate treatment between US issuers and FPIs. Recent bipartisan proposals would require FPIs to comply with Section 16 reporting obligations, reflecting concern that the balance between burden reduction and investor protection has shifted too far in favor of FPIs.

Still, not all Commissioners believe the existing framework is fundamentally flawed. Commissioner Mark Uyeda noted that there is no evidence of widespread market failures arising from the different regulatory regimes applicable to domestic issuers and FPIs. He emphasized that US investors benefit from access to foreign securities and cautioned against reforms that might deter foreign companies from entering US capital markets.

Conclusion

The issuance of the concept release signals that the SEC is seriously reassessing the role and appropriate scope of the FPI regime. Any resulting rulemaking could have material consequences for non-US companies that rely on US capital markets – especially those incorporated offshore but operating primarily within the US. How the SEC ultimately balances investor protection, regulatory efficiency, and market competitiveness will be closely watched by issuers, investors, and global market participants.

Torres & Zheng at Law, P.C., regularly advises clients on IPOs, SPACs, and de-SPACs. If you would like us to assist with your transaction, please contact our team.