Adoption of IOSCO Standards
The revised disclosure standards would be adopted by: (i) amending Form 20-F, used by foreign private issuers to register securities and make annual disclosure under the Exchange Act, (ii) deleting Rule 3-19 of Regulation S-X, and (iii) updating Forms F-1, F-2, F-3, F-4, F-6 and S-11, used by foreign private issuers pursuant to the Securities Act in connection with public offerings of securities, to refer to the appropriate disclosure items of the revised Form 20-F. The new requirements would be interpreted and enforced in the same manner as other Commission rules and forms and would not change current procedures and practices for reviewing and commenting on filed documents.
The Commission is proposing to adopt the IOSCO standards in their entirety, retaining only current Form 20-F items 9A (Quantitative and Qualitative Disclosures about Market Risk), 15 (Defaults upon Senior Securities), 16 (Changes in Securities, Changes in Security for Registered Securities and Use of Proceeds), 17 (Financial Statements), 18 (Financial Statements) and 19 (Financial Statements and Exhibits). No changes are proposed to Appendix A to item 2(b) (relating to material oil or gas operations) or to the Industry Guides (containing disclosure requirements for specific industries). Because the IOSCO standards are designed only for equity securities, certain adaptations are proposed in order to make the standards also applicable to non-equity securities.
The IOSCO standards consist of ten core disclosure items and a glossary of defined terms. Offering-related disclosures contained in Form 20-F applicable to Securities Act registrations would not be required to be completed for Exchange Act registration statements and annual reporting. The following identifies the ten core disclosure items and highlights their major differences from the current requirements.
Item 1: Identity of Directors, Senior Management and Advisors.
For registration statements only, not annual reports, the registrant would provide:
- the names, business addresses and functions of the company's directors and senior management;
- the names and addresses of the company's principal bankers and legal advisors (if there is an ongoing relationship with the company), and the names of the legal advisors to the issue; and
- the names and addresses of the company's auditors for the preceding three years.
Item 2: Offer Statistics and Expected Timetable.
For registration statements only, not annual reports, the registrant would include:
- the total expected amount of the issue for each method of offering and the number of securities expected to be issued;
- the time period during which the offer would be open and where and to whom subscription applications should be addressed, the manner and duration of any possible extension or early closure of the period and the manner in which offerees would be notified of any changes;
- the method and time limits for paying for securities and for the delivery of equity securities to purchasers; and
- the manner in which results of the distribution would be made public and the manner for refunding excess amounts paid by subscribers.
Item 3: Key Information.
This item includes requirements for selected financial data, exchange rate information, information about risk factors and, for Securities Act registration statements only, capitalization and indebtedness, the reasons for the offer and the expected use of proceeds. Selected Financial Data. The proposal would retain the selected financial data requirements of current item 8 substantially in their present form. The proposal provides that the registrant may omit selected financial data for either or both of the earlier two years of the five year period for which selected financial data are required if the registrant represents to the Commission that such information cannot be provided (or restated if necessary) without unreasonable efforts or expense. Also, the proposal would specifically require that if interim period financial statements are included in the document, the selected financial data be updated for that interim period (which may be unaudited). Comparative data from the same period in the prior financial year would be required; however, for comparative balance sheet data for the prior year, the year-end balance sheet would be sufficient. The current requirement merely states that if interim financials are included the issuer "should consider whether any or all of the selected financial data need to be updated."
Exchange Rate Information. While the proposal would retain the requirements of disclosure of the exchange rate between the currency in which financial statements are prepared and U.S. currency, the proposal would modify the requirements substantially. The proposal would eliminate the current requirement for disclosure of the high and low exchange rate for each year in the last five years. The proposal would also eliminate the current requirement for disclosure of a five year summary of dividends per share. The proposal would, instead, require disclosure of the exchange rate as of the most recent practicable date, the average rate for each year in the last five years (and any subsequent interim period) and the high and low exchange rates for each month during the most recent six months.
Risk Factors. Proposed item 3 would also require a risk factor discussion in both registration statements and annual reports.
Other. Also required, in registration statements only, would be a description of the capitalization of the company, including indebtedness within 60 days of the date of the document, as well as the reasons for the offer and the use of proceeds (similar to the currently required disclosure for registration statements).
Item 4: Information on the Company.
This item takes the place of current items 2 and 3 and includes requirements for a description of the registrant's business and properties.
Business Description. Among the major changes from the current requirements for the business description would be new disclosure line items similar to those required for domestic issuers with respect to seasonality, the sources and availability of raw materials, the marketing/sales channels of the company, competitive factors, government regulation and dependence on intellectual property rights, industrial, commercial or financial contracts.
Capital Expenditures. Also required would be a description of the registrant's principal capital expenditures and divestitures since the beginning of the company's last three financial years. The registrant would also have to disclose information regarding the principal capital expenditures and divestitures currently in progress, including the distribution of the investments geographically and the method of financing.
Takeover Offers. Also as a new requirement the registrant would indicate any public takeover offers by third parties in respect of the company or by the company in respect of other companies' shares during the last and current financial years and the terms and results of such offers.
Description of Group. Another new requirement would be a description of the group, if any, of which the company is a part, including a brief description of the company's position therein. "Group" is defined as a parent and all its subsidiaries. The company would also provide a listing of its significant subsidiaries, including the name, country of incorporation, percentage ownership interest and, if different, voting power. (Currently, similar information is required as an exhibit but only if required by the Commission.)
Property, Plant and Equipment. As part of new item 4, the registrant also would disclose information similar to that currently called for by item 2. While item 2 addresses principal plants, mines and other materially important physical properties, proposed item 4 would require disclosure about any "material tangible fixed assets". While the required disclosure would be very similar to that currently required, proposed item 4 would specifically require the following additional disclosures: size and uses of the property, how the assets are held, major encumbrances, products produced and location, any environmental issues that may affect utilization of the assets, any material plans to build, expand or improve facilities, including the reason for the plan, an estimate of the costs and the timing of the plan and the source of financing.
Item 5: Operating and Financial Review and Prospects.
This item corresponds to the current item 9 requirements for management's discussion and analysis of financial condition and results of operations. The proposed item includes specific line item disclosure requirements for liquidity and capital resources which are not articulated in the current rules (but which are generally included in MD&A disclosure):
- a statement by the registrant, that, in its opinion, its working capital is sufficient for its present requirements, or, if not, the means by which it intends to obtain the additional working capital needed;
- an evaluation of the sources and amounts of cash flow, including a discussion of any restrictions, legal or economic, on a subsidiary's ability to transfer funds upstream in the form of loans or cash dividends and the historical impact and expected future impact of any such restrictions on the registrant's ability to meet its cash obligations (currently included in the instructions to item 9);
- information on borrowing levels at the end of the period, the seasonality of borrowing needs, the maturity of borrowings and committed facilities and any restrictions on the use of borrowed funds;
- information on the types of financial instruments used, the maturity of debt, currency and interest rate structure, funding and treasury policies, use of financial instruments for hedging purposes; and
- a description of research and development policies for the last three years, including the amount spent on company-sponsored activities.
Item 6: Directors, Senior Management and Employees.
This item replaces parts of current items 4, 10, 11 and 12.
Business Experience, Etc. Pursuant to this item, registrants would have to provide disclosure regarding the name, business experience and functions of directors, members of senior management and key employees, their principal business activities outside the company, the nature of any family relationships between any directors or members of senior management and any arrangement or understanding pursuant to which any person was selected as a director or member of senior management. The primary difference from existing disclosure obligations would be the required disclosure of the principal outside business activities of directors and members of senior management.
In addition, the registrant would have to provide new disclosure with respect to the date of expiration of the current terms of office of directors and members of any administrative, supervisory or management bodies and the period during which the person has served as well as a description of any agreements providing benefits to directors upon termination.
Further, under the proposal the registrant would also identify the members of the audit and compensation committees and the mandate under which the committees function.
Compensation. Similar to the current disclosure under item 11, a registrant would provide the amount of compensation paid and benefits in kind granted by the registrant or its subsidiaries to the registrant's directors or members of senior management for the last financial year, including any contingent or deferred compensation accrued for the year. There is a subtle difference in wording between the current and proposed requirements. Under existing item 11, a registrant must disclose the information on an individual basis if it discloses such information to its shareholders or otherwise makes it public. Under the proposal, a registrant must disclose the information on an individual basis unless such disclosure is not required in the registrant's home country (defined as the jurisdiction of its organization and, if different, of its principal trading market) and is not otherwise publicly disclosed by the registrant.
Employees. Under the proposal, the registrant would now disclose the number of employees at the end of the period or the average for the period for each of the last three financial years, including, if possible, geographical and functional breakdowns. The registrant would also disclose any significant change in the number of employees and would describe the relationship between management and any labor unions.
Share Ownership. In this item, the registrant would disclose the information regarding share ownership by management currently required under item 4. Unlike current item 4 in which the disclosure is on an aggregate basis, the proposal would require that share ownership be disclosed on an individual basis.
Also, in addition to disclosing information regarding options held by senior management (similar to the disclosure currently required), under the proposal, the registrant would describe any arrangement "for involving the employees in the capital of the company."
Item 7: Major Shareholders and Related Party Transactions.
Beneficial Ownership. Similar to current item 4, this item would require disclosure of shareholder ownership by major shareholders, to the extent known to the registrant. The proposal would reduce the current disclosure threshold of 10% shareholders to a 5% level (or lower if required under the home country rules). As a significant change from the current rules, under the proposal, a registrant would have to disclose any significant change in the percentage ownership held by a major shareholder during the past three years (to the extent any such change is known by the registrant).
Related Party Transactions. Unlike current item 13 (interest of management in certain transactions) which requires disclosure of related party transactions only to the extent the registrant discloses such information to its shareholders or otherwise makes it public, proposed item 17 would make such disclosure mandatory in filings with the Commission.
Item 8: Financial Information.
This item contains requirements relating to the presentation of financial statements as well as requirements that correspond to current Rule 3-19 of Regulation S-X. For a description of the proposed changes to the requirements with respect to the age of financial statements, see below. In addition to the presentation of financial statements, this item also contains the requirements with respect to disclosure of legal proceedings.
Changes in Financial Position. Proposed item 8 would require a statement as to whether any significant change has occurred since the date of the latest annual financial statement or more recent interim financial statements included in the document.
Legal Proceedings. Current item 3 requires that the registrant describe any material pending legal proceedings to which the company or any of its subsidiaries is a party or its property subject. The proposal would word this requirement slightly differently, requiring simply that the registrant provide information on any legal or arbitration proceedings which may have or have had in the recent past a significant effect on the company's financial position or profitability. As with the current rules, the registrant would disclose any material proceedings in which a director, member of senior management or affiliate is an adverse party or has a material adverse interest.
Item 9: The Offer and Listing.
This item includes requirements for a description of the offering, trading markets and, for registration statements only, the plan of distribution, selling shareholders, dilution and expenses.
Trading Markets. Under the proposal, issuers would include (a) the annual high and low market prices for the five most recent full financial years, (b) the high and low market prices of each full financial quarter for the two most recent full financial years and any subsequent period and (c) the high and low market prices for each month in the most recent six months. Under current item 5, only (b) is required. Information would be required regarding the market price in the U.S. as well as the principal trading market outside the U.S.
Dilution/Selling Shareholders/Expenses/Plan of Distribution. The proposed disclosure requirements in these areas are similar to the current requirements. However, in the case of dilution, for which disclosure is only required currently for issuers which prior to the offering were not reporting companies or which had losses in each of the prior three years, the proposal would require disclosure by all registrants. In the case of the plan of distribution, the proposal would add the requirement that the registrant disclose (to the extent it knows) whether major shareholders, directors or members of management intend to subscribe and whether any person intends to subscribe for more than 5%.
Item 10: Additional Information.
Included within this item are requirements for a description of the registrant's share capital, major provisions of its constituent documents, exchange controls, applicable taxes and major terms of its material contracts.
Share Capital. The proposal would expand the required disclosure regarding the registrant's share capital to include such items as:
- a reconciliation of the share capital at the beginning and end of the period and a history of the share capital for the last three years (indicating the events during that time which changed the amount of issued capital and/or the classes of shares of which it is composed);
- the name of any person to whom any capital of any member of the group is under option; and
- where there is authorized but unissued capital or a commitment to increase capital, a description of all equity-linked securities and the authorized capital increase as well as the categories of persons having preferential subscription rights and the terms thereof.
Memorandum and Articles of Association. Under the proposal, a registrant would not only include the currently required description of capital stock but would also provide a description of the company's objects and purposes, a summary of any provisions of the constituent documents relating to a director's power to vote on certain issues, a summary of the rules governing the manner in which annual and extraordinary meetings of shareholders are held, a summary of any anti-takeover defenses and, to the extent the applicable laws in these areas differ materially from U.S. law, the effect of the differences.
Material Contracts. Under the proposal, a registrant must provide a summary of all material contracts (excluding contracts in the ordinary course of business) for the prior two years to which the registrant or any member of the registrant's group is a party. The disclosure must include the date of and parties to the contract, the general nature, terms and conditions of the agreement and the amount of consideration to or from the company or group.
The proposed changes would not affect the financial reconciliation to U.S. Generally Accepted Accounting Principles ("U.S. GAAP") currently required by items 17 and 18 of Form 20-F, which would be retained.
The Commission is also proposing to eliminate Rule 3-19 (relating to the content and age of financial statements by foreign private issuers) in favor of new item 8 of Form 20-F. The Rule 3-19 requirements would be essentially unchanged except for requirements relating to the age of financial statements. Rule 3-19 currently allows a registration statement to have 18 month old audited financial statements and 10 month old interim financial statements. New item 8 of Form 20-F would require audited financial statements no older than 15 months "at the time of the offering or listing" except that for an initial public offering, the audited financial statements could be no older than 12 months at the time of filing unless the foreign private issuer was already public in its home country. Additionally, if the date of a registration statement is more than nine months after the end of the issuer's last fiscal year, audited or unaudited interim financial statements (including U.S. GAAP information) covering at least the first six months of the issuer's fiscal year would be required.
The "Instructions As To Exhibits" would also be revised (in Plain English drafting) to conform the exhibit requirements for registration statements on Form 20-F with the exhibit requirements for registration statements filed by U.S. issuers contained in Regulation S-K item 601. This would add requirements to file copies of indentures of securities being registered, voting trust agreements, management contracts or compensatory plans in which directors or members of administrative, supervisory or management body participate (subject to the same exceptions available to domestic issuers), statements explaining the computation of earnings per share and earnings to fixed charges, a list of subsidiaries and any documents incorporated by reference or any additional documents filed voluntarily.
Amendment to definition of "Foreign Private Issuer"
The definition of "Foreign Private Issuer" contained in Rule 405 under the Securities Act and Rule 3b-4 under the Exchange Act currently includes any foreign issuer except, inter alia, where, "more than 50 percent of the outstanding voting securities of such issuer are held of record either directly or through voting trust certificates or depositary receipts by residents of the United States." This definition is proposed to be amended so that securities held of record by U.S. residents by any form of indirect ownership are counted as held by U.S. residents. The Commission states that this is intended as a clarification in light of the numerous questions it receives about the definition.
New instruction A would require that record ownership be calculated in accordance with Rule 12g3-2(a) under the Exchange Act. Rule 12g3-2(a) requires that securities held of record by a broker, dealer, bank or nominee for the accounts of customers resident in the U.S. be counted as held in the U.S. by the same number of separate accounts for which the securities are held.
New instruction B would require that holders of American Depositary Receipts be counted as U.S. holders of the underlying securities unless information provided by the depositary demonstrates otherwise. New instruction C would require that shares of voting securities beneficially owned by U.S. residents, as reported on beneficial ownership reports publicly filed or provided to the issuer, also be counted as held by U.S. residents.