On June 4, the U.S. Securities and Exchange Commission (SEC) issued a 71-page notice initiating a 90-day public comment period—ending September 8—on the definition of “Foreign Private Issuer” (FPI).
Since the last revision of the FPI definition in 2003, the SEC noted that both the number and characteristics of FPIs have changed significantly. Today, a large number of foreign companies are listed in the U.S. under FPI status and benefit from various regulatory exemptions, particularly in disclosure requirements. The SEC emphasized that, given the evolving landscape of U.S. securities markets, it is necessary to reassess whether the current definition still aligns with the principles of market fairness and regulatory efficacy.
Under current SEC regulations, FPIs enjoy several accommodations compared with U.S. domestic issuers. These include extended deadlines and reduced content for annual reports, exemption from filing quarterly Form 10-Q reports, exemption from federal proxy rules and Section 16 requirements, and the ability to use International Financial Reporting Standards (IFRS) or their home country’s Generally Accepted Accounting Principles (GAAP) instead of U.S. GAAP.
From 2003 to 2023, among issuers filing Form 20-F—an annual report required of FPIs—the most common place of incorporation was the Cayman Islands, accounting for 33%, while mainland China was the most common location for company headquarters, representing 22% of all FPIs. The number of FPIs incorporated in the Cayman Islands grew from 13 in 2003 to 322 in 2023, and the number of FPIs headquartered in China rose from 22 to 219 in the same period.
Additionally, the share of FPIs with a mismatch between place of incorporation and headquarters location increased from 7% in 2003 to 48% in 2023. This trend is largely driven by the surge in Chinese issuers establishing offshore entities—often in jurisdictions like the Cayman Islands—for overseas listings. For reference, Form 20-F is the disclosure document required of FPIs, whereas U.S. domestic companies file Form 10-K.
The SEC’s primary concern lies in the diminished oversight of companies that operate under offshore structures. Many FPIs subject to Form 20-F requirements have securities that trade almost exclusively on U.S. exchanges. Such FPIs, especially those incorporated in jurisdictions with limited disclosure obligations—such as the Cayman Islands, British Virgin Islands, Bermuda, and the Marshall Islands—are often not subject to effective home country regulation. As a result, U.S. investors may lack access to material information critical for informed investment decisions.
SEC Commissioner Paul Atkins stated, “Attracting foreign companies to the U.S. market and offering U.S. investors the ability to trade their securities within the U.S. legal and regulatory framework remains our goal. However, that objective must be balanced with other considerations, including ensuring investors receive meaningful information about these foreign issuers and that domestic companies are not placed at a competitive disadvantage due to unequal regulatory requirements.”
In its request for comment, the SEC proposed revisiting the eligibility criteria for FPI status—such as lowering the threshold for U.S. ownership, revising standards related to the location of assets, or introducing additional relevant metrics.
Currently, FPI status is determined based on a “shareholder test” or a “business contacts test.” Under the shareholder test, a company qualifies as an FPI if U.S. residents directly or indirectly hold 50% or less of its voting securities. Under the business contacts test, even if U.S. residents hold more than 50% of the voting securities, a company still qualifies as an FPI if it does not meet any of the following: (1) a majority of executive officers or directors are U.S. citizens or residents; (2) more than 50% of its assets are located in the U.S.; or (3) its business is principally administered in the U.S.
To enhance oversight, the SEC has also proposed adding a foreign trading volume test. Under this revision, FPIs would need to annually assess their trading volume inside and outside the U.S. to determine their ongoing eligibility. The SEC may also require FPIs to be listed on a major foreign exchange in order to qualify for existing disclosure accommodations, thereby ensuring they are subject to effective foreign oversight.
This proposal addresses a current regulatory gap wherein some FPIs are exempt from disclosure obligations both in their country of operation—thanks to their U.S. FPI designation—and in the U.S.—due to the relaxed FPI regime—thus enjoying a “double exemption.” This dual avoidance runs counter to the original intent of the FPI framework.
According to Alaric, if the SEC amends the FPI eligibility criteria, the change will have significant implications for Chinese companies planning U.S. listings, particularly those using red-chip structures registered in the Cayman Islands or British Virgin Islands. Compliance costs for red-chip structures will surge. Should a foreign trading volume test be adopted, particularly one requiring more than 20% of trading activity to occur outside U.S. markets, the impact could be severe for Chinese ADRs whose trading is heavily concentrated on U.S. exchanges.