Securities offerings and listings in the US: an overview ... · PDF fileSecurities offerings and listings in the US: ... Chapter 1 – Key statutes ... Segment reporting 46 (iii) Coverage

Securities offeringsand listings in the US:an overview for non-USissuers

Alexander F CohenGay Bronson

Bryant EdwardsMark Stegemoeller

A Euromoney Publication

IFLRinternational Financial Law Review

Alexander F CohenGay Bronson

Bryant EdwardsMark Stegemoeller

Latham & Watkins

Alexander F Cohen, Gay Bronson and Bryant Edwards are partners in the London office of Latham & Watkins, and Mark

Stegemoeller is a partner in the Los Angeles office of Latham & Watkins LLP. The authors would like to thank the following

partners and associates of the firm for their assistance in preparing this Overview and their comments on various drafts: Kirk A

Davenport and Adam B Cohen of the New York office (co-authors of the chapter entitled “Required Financial Statement

Disclosure”); Olof Clausson, Aino Bunge, Scott Colwell, Michael Dunn, Jonathan Nunes, Ulrik Pedersen, and Jamal

Qaimmaqami of the London office; Christopher T Burt of the Los Angeles office; Laurie B Smilan of the Northern Virginia

office; and William R Baker, III and Thomas J Kim of the Washington DC office. The authors would also like to thank Ravi

Rao, a director in the London office of PricewaterhouseCoopers LLP, for his helpful comments on the chapter entitled “Required

Financial Statement Disclosure.” Any errors or omissions are, of course, solely the responsibility of the authors.

Latham & Watkins operates as a limited liability partnership worldwide with affiliates in the United Kingdom and Italy, where the practice is

conducted through an affiliated multinational partnership.

© Euromoney Institutional Investor and Latham & Watkins 2003. All rights reserved. All or part of this document has been or may be used in

other materials published by the authors or their colleagues at Latham & Watkins and may be updated or changed in other materials. The

information contained in this document is published by Latham & Watkins as a service and should not be construed as legal advice. Should further

analysis or explanation of the subject matter of this document be required, please contact any of the authors or the Latham & Watkins attorney with

whom you normally consult.

www.iflr.com US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS

SECURITIES OFFERINGS AND LISTINGS INTHE UNITED STATES: AN OVERVIEW FORNON-US ISSUERS

About Latham & WatkinsLatham & Watkins is a global law firm with 21 officesworldwide. The firm, with over 1,500 lawyers, is a leaderin corporate finance, capital markets, M&A, projectfinance and complex business litigation.

Corporate finance practiceLatham & Watkins’ corporate finance lawyers represent abroad range of clients, from emerging companies to majormultinational corporations in virtually every industryniche, as well as nearly all major investment andcommercial banks as underwriters or initial purchasers.

The securities and corporate finance practice at Latham &Watkins is one of the most active and highly regardedamong international law firms. We have representedcorporate and partnership issuers, underwriters, placementagents and initial purchasers in hundreds of offerings ofequity, debt and asset-backed securities in both US andinternational markets. Our lawyers have extensiveexperience in public offerings, Rule 144A and RegulationS private placements, rights offerings, debt/equity swaps,exchange offers, underwritten calls of convertible debtsecurities, interest-rate and currency swaps, and othercapital-raising and risk-hedging transactions.

International activitiesOur securities expertise includes Regulation S and listingson foreign exchanges. Representing both issuers andunderwriters, our corporate finance lawyers have partic-ipated in numerous offerings on behalf of US and interna-tional clients in Europe, Asia and Latin America (includingtransactions registered under the securities laws of Japanand Singapore), often in “dual tranche” deals in whichsecurities are sold in contemporaneous offerings in the USand abroad. Our international practice is supportedthrough our offices in Brussels, Hamburg, Frankfurt,London, Hong Kong, Moscow, Milan, Paris, Singaporeand Tokyo.

Regulatory expertiseWe have significant knowledge in all aspects of regulatorycompliance, including SEC registrations, Regulation D,Rule 144A offerings, shelf registrations, trading rules (suchas Regulation M), rules of and reviews by the National

Association of Securities Dealers, exchange listings (such asNew York, American and The Nasdaq Stock Market) andblue sky work.

About the authorsAlexander F Cohen is a US securities partner in Latham &Watkins’ London office. He has extensive experience incross-border equity capital markets, debt capital marketsand M&A transactions. He has advised leading Europeanissuers and major investment banks in complex deals,typically involving multiple jurisdictions. He also hassignificant expertise in sovereign and structured finance.He is an expert on the US Sarbanes-Oxley Act of 2002and its implications for non-US issuers.

Gay Bronson is a US corporate partner in Latham &Watkins’ London office. Ms Bronson practices in the areasof corporate finance, restructurings, mergers andacquisitions and general corporate law. She has extensiveexperience representing underwriters and issuers in publicand private equity and high yield debt offerings, withspecific expertise in offerings for non-US issuers. Inaddition, Ms Bronson represents debtors and creditors inout-of-court and pre-arranged in-court restructurings.

Bryant Edwards is a partner in Latham & Watkins’London office and the chair of its 50-lawyer Londoncorporate department. His practice includes representingcompanies and investment banking firms in merger andacquisition transactions and in public and private offeringsof securities, with a particular emphasis on issuances andrestructurings of debt securities.

Mark Stegemoeller is a partner in Latham & Watkins’ LosAngeles office. He practices corporate law with significantexpertise in corporate finance, mergers and acquisitionsand securities matters. He has handled a wide variety ofpublic and private securities offerings for investmentbanking and corporate clients (including registered, Rule144A, Regulation S and dual currency high yield debtofferings, and initial public offerings), as well as restruc-turings, debt tender offers and consent solicitations. Healso advises corporate clients concerning compliance withregistration and reporting provisions of the Securities Actof 1933 and the Securities Exchange Act of 1934.

US SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS www.iflr.com

US securities contacts in Latham’s international offices

FrankfurtJohn Watson [email protected]

Hong KongJohn Otoshi [email protected] Zhang [email protected]

LondonGay Bronson [email protected] Clausson [email protected] F Cohen [email protected] Edwards [email protected] Immordino [email protected] Nelson [email protected] Trobman [email protected]

MilanMichael Immordino [email protected]

MoscowAnya Goldin [email protected]

ParisAlexander F Cohen [email protected]

SingaporeMark Nelson [email protected] Sturrock [email protected]

TokyoDavid Shapiro [email protected] Yoshii [email protected]


EditorNigel Savage

Production editor Richard Oliver

Associate publisherSimon Oliver

PublisherRichard Forster

DirectorChristopher Fordham

Image setting and printing by PW Reproprint Ltd, London.

This report states the law as at the end of September 2003. It is not a substitute for detailed local advice.

It is presented as a special supplement to the October issue of International Financial Law Review

© Euromoney Institutional Investor and Latham & Watkins 2003.

For additional copies of this supplement and more information on International Financial Law Review,including a sample copy, call Simon Oliver, on Tel: +44 20 7779 8496; Fax: +44 20 7779 8665 or

e-mail: [email protected]


Chapter 1 – Key statutes and concepts 1US Securities Act of 1933; US Securities Exchange Act of 1934 1

Registration under the Securities Act and the Exchange Act 1(i) Securities Act registration 1(ii) Exchange Act registration 2

Exchange Act reporting 2(i) Annual report on Form 20-F 2(ii) Current reports on Form 6-K 2(iii) Other consequences of Exchange Act reporting 3

Other relevant statutes 3

What is a “foreign private issuer?” 3(i) Definition 3(ii) How is ownership determined? 4(iii) Benefits for foreign private issuers 4

Chapter 2 – The registration process 6General 6

Key issues to identify in advance of registration 7

Registration forms 9(i) Form F-1 10(ii) Forms F-2 and F-3 10(iii) Form F-4 11(iv) Form F-6 11

ADRs and ADSs 12

Filing electronically – EDGAR 12

NASD review 13

NYSE and Nasdaq listing requirements 13

Prospectus delivery 14

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ii

Chapter 3 – Key exemptions from Securities Act registration 1 5General 15

Regulation S – offshore offerings 15(i) The issuer safe harbour 16(ii) The resale safe harbour 18(iii) Violation of safe harbour conditions 18

Section 4(2) private placements 18

Regulation D private placements 19(i) Background 19(ii) Regulation D general conditions 19(iii) Rule 504 – offers and sales not exceeding $1,000,000 20(iv) Rule 505 – offers and sales not exceeding $5,000,000 20(v) Rule 506 – unlimited offering amounts 20(vi) Rule 508 – deviations from Regulation D 21

Resales of privately-placed securities 21(i) Rule 144A resales to QIBs 21(ii) “Section 4 (1-1/2 )” resales 22(iii) Rule 144 22

Rule 802 – securities issuances in connection with cross-border exchange offers and business combinations 23(i) General 23(ii) Requirements of Rule 802 23

Rule 801 – rights offerings 24(i) General 24(ii) Requirements of Rule 801 24

Chapter 4 – Restrictions on publicity during securities offerings 2 6Registered transactions 26(i) The three stages of registration under the Securities Act 26(ii) Restrictions on publicity during the quiet period 26(iii) Restrictions on publicity during the waiting period 28(iv) Restrictions on publicity after effectiveness of the registration statement 28

Restrictions on publicity in unregistered offerings 28(i) Rule 135c 29(ii) Rule 135e 29

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Chapter 5 – Required financial statement disclosure 3 0General 30

Annual and interim financial statements 31(i) Audited annual financial statements 31(ii) Unaudited interim financial statements 33(iii) Selected financial information; capitalization 34

Reconciliation to US Gaap 34(i) Annual audited and interim unaudited financial statements 34(ii) Selected financial information 35(iii) MD&A 35

Audit reports; currency translation 36(i) Audit reports 36(ii) Currency translation 36

Financial statements of recent and probable acquisitions; pro forma financial information 36(i) General 36(ii) Financial statement requirements 37(iii) Operating real estate 39(iv) MD&A 39(v) Pro forma financial information 39(vi) Reconciliation to US Gaap 40

Guarantor financial statements 40

Investments accounted for under the equity method 43

Industry guides and other transaction-specific guidance 44(i) Industry guides 44(ii) Supplemental schedules for certain transactions 44

Special requirements for public offerings 45(i) Item 17 and Item 18 45(ii) Segment reporting 46(iii) Coverage ratios 47(iv) Financial statements for secured offerings 47(v) Other customary information 47

Summary financial data 47

Recent results 48

Recent developments and proposed acquisitions 48

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Special considerations in unregistered transactions 48

Chapter 6 – The US Sarbanes-Oxley Act of 2002 5 0Background 50(i) Who is subject to Sarbanes-Oxley? 50(ii) When does Sarbanes-Oxley take effect? 51

Key provisions of Sarbanes-Oxley, and related SEC rulemaking 51(i) Certification requirements 51(ii) Management’s reports on internal control over financial reporting 53(iii) Non-Gaap financial measures 55(iv) Off-balance sheet and other MD&A disclosure 56(v) Standards relating to listed company audit committees 57(vi) Audit committee financial expert 58(vii) Auditor independence 59(viii) Improper influence on the conduct of audits 60(ix) Auditor record retention 61(x) Material correcting adjustments 61(xi) Attorney conduct rules 61(xii) Code of ethics 62(xiii) Blackout trading restrictions 63(xiv) Loans to executives 63(xv) Forfeiture of bonuses 64(xvi) Research analysts 64(xvii)Liability issues 65

Chapter 7 – Liability under the US federal securities laws 6 6Background 66

Registration – Section 5 of the Securities Act 66

Anti-fraud – what is material? 66

Rule 10b-5 – purchase or sale of securities 67(i) Background 67(ii) Elements of a claim under Rule 10b-5 68(iii) Scope of Rule 10b-5 68(iv) Insider trading 68(v) Damages under Rule 10b-5 69

Section 11 of the Securities Act – registered offerings 69

Section 12(a)(2) of the Securities Act – registered offerings 70

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Controlling person liability 70

Liability issues relating to Sarbanes-Oxley 71

Enforcement 71(i) Background 71(ii) Enforcement against foreign private issuers and non-US nationals 72

Chapter 8 – Communications with research analysts, investors and the public 7 3Background 73

Guidelines for dealing with research analysts and investors 73(i) Nature of information 73(ii) “Material” 73(iii) “Misleading” 73(iv) Limit access 74(v) Disseminating materials to analysts and investors 74(vi) Reviewing draft analysts’ reports; distributing analysts’ reports 74(vii) Making or commenting on projections 75(viii) Inadvertent disclosures 76

Special situations 76(i) Market rumours 76(ii) Pending acquisitions/corporate transactions 76(iii) Roadshows 76(iv) Disclosures to employees 77

US securities laws and the internet 77(i) Background 77(ii) Internet offerings 78

Regulation of research analysts 79(i) Background 79(ii) NYSE Rule 472 and NASD Rule 2711 79(iii) Global settlement 83

Chapter 9 – Other relevant statutes 8 5US Investment Company Act of 1940 85

US federal tax laws – passive foreign investment companies 85

US state “blue sky” laws 86

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Chapter 10 – Conclusion and contacts 8 7

Annex A – Non-financial disclosure requirements of Forms F-1, F-2 , F-3 and Form 20-F 8 8

Annex B – NYSE and Nasdaq quantitative l isting criteria 129

NYSE quantitative listing standards 129(i) Minimum numerical listing standards — domestic issuers 129(ii) Minimum numerical listing standards — foreign private issuers 129

Nasdaq quantitative listing requirements 130(i) Basic Nasdaq inclusion criteria 130(ii) NNM 130(iii) SCM quantitative criteria 131

Annex C – Effective dates for certain Sarbanes-Oxley sections and related SEC rulemaking 132

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SECURITIES OFFERINGS AND LISTINGS INTHE UNITED STATES: AN OVERVIEW FORNON-US ISSUERS

This Overview summarizes the key provisions of the US federal securities laws that apply to foreign private issuers(a term that covers most non-US issuers, other than foreign governments) when they offer securities for sale in theUnited States or list their securities for trading or quotation on the US stock markets.1


US Securities Act of 1933; USSecurities Exchange Act of 1934

The two principal federal securities statutes in the UnitedStates are the US Securities Act of 1933 (the SecuritiesAct) and the US Securities Exchange Act of 1934 (theExchange Act). To simplify considerably, the SecuritiesAct governs the offer and sale of securities in the UnitedStates, while the Exchange Act regulates the trading ofsecurities on a US national securities exchange such as theNew York Stock Exchange (the NYSE) or the NasdaqStock Market (Nasdaq), ongoing periodic and annualreporting, and tender and exchange offers.

The US Securities and Exchange Commission (theSEC) has issued a comprehensive body of rules andregulations under the Securities Act and the ExchangeAct. These rules have the force of law.

Registration under the SecuritiesAct and the Exchange Act

Registration is a core concept in the US federalsecurities laws. The Securities Act requires issuers toregister transactions. By contrast, the Exchange Actrequires issuers to register classes of securities.

(i) Securities Act registrationThe Securities Act requires registration with the SEC ofany transaction involving the offer or sale of a security,unless the security is of a type that is exempt fromregistration or the transaction is structured to takeadvantage of an available exemption from registration.The terms “offer and sale” and “security” are verybroadly defined.

As we discuss in more detail below, registeredtransactions involve filing a registration statement withthe SEC and meeting detailed and specific disclosureand financial statement requirements. In addition,registered transactions trigger the wide-rangingprovisions of the US Sarbanes-Oxley Act of 2002 (theSarbanes-Oxley Act or Sarbanes-Oxley) and a compre-hensive liability scheme.

By contrast, the requirements of unregisteredtransactions are generally less demanding. A foreignprivate issuer will not typically become subject toSarbanes-Oxley merely by issuing securities in anunregistered transaction, and the liability regimegoverning unregistered transactions is more circum-scribed. Foreign private issuers contemplating anunregistered transaction look to exemptions such as:

• Offshore transactions: offers and sales made outsideof the United States pursuant to Regulation S underthe Securities Act (Regulation S);

• Private placements: offers and sales not involving apublic offering pursuant to Section 4(2) of theSecurities Act or Regulation D under the SecuritiesAct (Regulation D); and

• Rule 144A transactions: private placements involvingresales to qualified institutional buyers (QIBs)pursuant to Securities Act Rule 144A.

The decision whether to issue in a registered orunregistered transaction involves balancing business andlegal objectives. Broadly speaking, registeredtransactions are more complex and time-consuming.

Chapter 1 – Key statutes and concepts

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Chapter 1Key statutes and concepts


But not all securities issuances can take the form of anunregistered transaction. If a foreign private issuerwishes to list its securities in the United States, or tomake a public offering of securities to retail investors inthe United States, the transaction will have to beregistered.

(i i) Exchange Act registrationA foreign private issuer must register a class of securitiesunder the Exchange Act if that class will be listed on aUS national securities exchange (such as the NYSE orAmerican Stock Exchange) or quoted on Nasdaq.2 Inaddition, if a foreign private issuer has assets in excess of$10 million3 and a class of equity securities held by atleast 500 shareholders (of whom at least 300 are residentin the United States) it must register those securities,4

unless it can claim the benefit of the exemption fromregistration provided by Exchange Act Rule 12g3-2(b).

In order to qualify for the Rule 12g3-2(b) exemption, aforeign private issuer must first submit an application tothe SEC. Then, on an ongoing basis, the foreign privateissuer must furnish to the SEC certain materialinformation (such as information regarding the issuer’sfinancial condition, changes in business andmanagement, acquisitions or disposition of assets,issuances of securities, and transactions withmanagement or principal security holders)5 that:6

• it has made or is required to make public pursuant tothe law of the country of its domicile or in which itis incorporated or organized;

• it has filed or is required to file with a stock exchangeon which its securities are traded and that was madepublic by that exchange; or

• it has distributed or is required to distribute to itssecurity holders.

The Rule 12g3-2(b) exemption is not available undercertain circumstances. For example, an issuer may notclaim the exemption if, during the prior 18 months, ithad securities registered under the Exchange Act orotherwise had an obligation to file periodic reports with

the SEC.

Exchange Act reporting

Once a foreign private issuer has registered with theSEC under the Securities Act or the Exchange Act, itmust make certain filings and submissions to the SECunder the Exchange Act.7 Reporting foreign privateissuers also become subject to various other provisionsof the US federal securities laws.

(i) Annual report on Form 20-FA reporting foreign private issuer must file an annualreport on Form 20-F with the SEC within six monthsafter the end of its fiscal year.8 Form 20-F containsdetailed financial and non-financial disclosurerequirements. We include a checklist for non-financialdisclosure items in Annex A.

(i i) Current reports on Form 6-KA reporting foreign private issuer must submit currentreports to the SEC on Form 6-K.9 Form 6-K reportsmust contain all material information that the issuer:

• makes or is required to make public pursuant to thelaws of its country of incorporation or organization;

• files or is required to file with a stock exchange onwhich its securities are traded and which was madepublic by that exchange; or

• distributes or is required to distribute to its securityholders.10

Practice point:Annual reports on Form 20-F must be certified by anissuer’s chief executive officer (CEO) and chief finan-cial officer (CFO) under Sections 302 and 906 ofSarbanes-Oxley.

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(i i i) Other consequences of ExchangeAct reportingA reporting foreign private issuer becomes subject to avariety of other provisions of the US federal securitieslaws, including:

• Books and records; internal accounting controls:12 Areporting issuer must maintain and keep books,records and accounts that accurately and fairly reflectthe transactions and dispositions of assets of the issuer,and design and maintain a system of adequate internalaccounting controls.

• Limitations on payments to foreign officials:13 Areporting issuer may not make corrupt payments toforeign officials, foreign political parties or theirintermediaries.

• Audit requirements:14 A reporting issuer’s audit mustinclude procedures for the detection of illegal acts,and the issuer’s auditors are required to take certainsteps if illegal acts are found. Those steps includeinforming the issuer’s management and auditcommittee, and potentially include a requirement toresign from the engagement or notify the SEC (if theissuer’s board fails to take certain steps).

• Sarbanes-Oxley:15 A reporting issuer is subject to theprovisions of the Sarbanes-Oxley Act.

Other relevant statutes

In addition to the Securities Act and the Exchange Act,a foreign private issuer may trigger a number of otherstatutes when it issues securities in the United States,including:

• the Sarbanes-Oxley Act, which represents the mostcomprehensive restructuring of the regulatory systemgoverning the US capital markets since the enactmentof the Exchange Act in 1934;

• the US Investment Company Act of 1940 (theInvestment Company Act), which regulates offersand sales of securities by investment companies.Some foreign private issuers may be “investmentcompanies” within the meaning of the InvestmentCompany Act even though their primary activitiesare not investment related;

• US federal tax laws, which impose particular taxtreatment on securities of passive foreign investmentcompanies (PFICs) within the meaning of the USInternal Revenue Code (the Code). Certain foreignprivate issuers may be PFICs despite their operationalactivities; and

• the US Trust Indenture Act of 1939, which requiresthat indentures used for public offerings of debtsecurities in the United States meet varioussubstantive and procedural requirements.

What is a foreign private issuer?

(i) DefinitionA “foreign private issuer” means any issuer (other thana foreign government) incorporated or organized underthe laws of a jurisdiction outside of the United Statesunless:16

• more than 50% of its outstanding voting securities aredirectly or indirectly owned of record by USresidents; and

Practice point: Form 6-K submissions do not need to be certified byan issuer’s CEO and CFO under Sections 302 and906 of Sarbanes-Oxley.11

Practice point: Failure to submit Form 6-Ks when required will pre-vent a foreign private issuer from using Form F-2 orForm F-3, the “short form” Securities Act registrationstatements. As a result, foreign private issuers shouldtake care to submit Form 6-Ks on a timely basis.




• any of the following applies:

- the majority of its executive officers or directorsare US citizens or residents;

- more than 50% of its assets are located in theUnited States; or

- its business is administered principally in theUnited States.

(i i) How is ownership determined?Generally, an issuer may rely upon a review of theaddresses of its security holders in its records indetermining whether or not it is a foreign privateissuer.17 However, securities held of record by a broker,dealer, or bank (or nominee for any of them) for theaccounts of customers resident in the United States willbe counted as held in the United States by the numberof separate accounts for which the securities are held.18

The issuer may rely in good faith on information as tothe number of these separate accounts supplied bybrokers, dealers, banks or nominees.19

An issuer’s inquiry as to ownership of its securities by USresidents may be limited to those brokers, dealers andbanks (and other nominees) that are record holders of theissuer’s securities and that are located in (i) the UnitedStates, (ii) the issuer’s jurisdiction of incorporation, and(iii) the jurisdiction of the issuer’s primary trading marketfor its voting securities.20 If, after reasonable inquiry, theissuer is unable to obtain information about the amountof securities represented by accounts of customersresident in the United States, it may assume that thesecustomers are residents of the jurisdiction in which it hasits principal place of business.21

(i i i) Benefits for foreign private issuers Under the US federal securities laws and the SEC’s rulesand practice, foreign private issuers are not regulated inprecisely the same way as domestic US issuers. Inparticular, foreign private issuers are allowed a numberof key benefits not available to domestic US issuers.

These include the following:

• Quarterly reports: Unlike domestic US issuers,foreign private issuers are not required to file quarterlyreports (including quarterly financial information)with the SEC.22 Some foreign private issuers,however, choose (or are required by contract) to filethe same forms with the SEC that domestic US issuersuse. In that case, they must report quarterly as if theywere a domestic US issuer.23

• SEC staff policy on confidential submissions: Foreignprivate issuers that are registering for the first timewith the SEC may generally submit registrationstatements on a confidential basis to the SEC staff. Bycontrast, domestic US companies must file theirregistration statements publicly. Confidentialsubmissions can be a significant advantage becausethe procedure allows the complicated issues oftenencountered in an initial SEC review to be resolvedbehind closed doors. A foreign private issuer will stillbe required to file its registration statement publiclyprior to going on a road show or selling its securities(and will have to file any future registrationstatements publicly).

• Proxy rules: The US proxy rules – which specify theprocedures and required documentation for solicitingshareholder votes – are not applicable to foreignprivate issuers.24

Practice point:Previously, the SEC staff was willing to review draftregistration statements of all foreign private issuers ona confidential basis. The SEC has changed its policyon confidential review, and will now generally onlyaccept confidential submissions of draft registrationstatements by first-time foreign registrants.


• Regulation FD: Regulation FD (fair disclosure)requires issuers to make public disclosure of anymaterial non-public information that has beenselectively disclosed to securities industry profes-sionals (for example, analysts) or shareholders.25 TheRegulation provides that when a domestic US issuer,or someone acting on its behalf, discloses materialnon-public information to certain persons (includinganalysts, other securities market professionals andholders of the issuer’s securities who could reasonablybe expected to trade on the basis of the information),it must make simultaneous public disclosure of thatinformation (in the case of intentional disclosure) orprompt public disclosure (in the case of non-intentional disclosure).26

Foreign private issuers are expressly exempt fromRegulation FD.27 But foreign private issuers that filereports with the SEC typically consider complying withRegulation FD (at least in part), particularly since therestrictions in their home jurisdictions in many casesoverlap with Regulation FD’s requirements.

• Beneficial ownership reporting; short-swing profitrecapture rules: Under Section 16(a) of the ExchangeAct, anyone who owns more than 10% of any class ofequity security registered under the Exchange Act, orwho is an officer or director of an issuer of such asecurity, must file a statement of beneficial ownershipwith, and report changes in beneficial ownership to,the SEC. Similarly, Section 16(b) requires any suchshareholder, officer or director to disgorge to theissuer profits realized on purchases and sales withinany period of less than six months. Securities offoreign private issuers are exempt from Section 16.28

• Accelerated filing: Under the accelerated filing rulesadopted by the SEC in 2002, seasoned domestic USfilers will eventually be required to file annual reports60 days after the end of their fiscal year.29 Foreignprivate issuers are not subject to accelerated filing,and accordingly may file annual reports report withinsix months of the end of their fiscal year.30 A foreignprivate issuer that chooses, however, to file the sameforms with the SEC that are required for domesticUS issuers will be subject to accelerated filing.31

• Sarbanes-Oxley Act exemptions: Although theSarbanes-Oxley Act generally does not distinguishbetween domestic US issuers and foreign privateissuers, the SEC has adopted a number of significantexemptions for the benefit of foreign private issuersin its rules under the Sarbanes-Oxley Act. Theseexemptions cover areas such as: (i) audit committeeindependence; (ii) black-out trading restrictions(Regulation BTR); (iii) use of non-Gaap financialmeasures (Regulation G); and (iv) certification ofinterim reports.

Practice point:Regardless of the exemption from Regulation FD, foreign private issuers remain exposed to potential lia-bility from selective disclosure, for example from “tipping” securities analysts or selected shareholders.



General

A foreign private issuer commences the registrationprocess by submitting a registration statement on theapplicable form to the SEC staff. The SEC staff maythen elect to review the registration statement. Theywill almost always review the registration statement ofan issuer that does not already file reports with the SECand they will review all initial public offerings (IPOs).

The SEC staff will typically provide its first commentswithin 30 days of submission or filing. The length oftime of the registration process will depend on thenature of the SEC’s comments, particularly on thefinancial statements, and on the staff’s workload.

When the issuer initially submits the registrationstatement to the SEC, the registration statement isassigned to an examiner and a member of the SEC’saccounting staff for review. The examiner will be theissuer’s primary contact at the SEC in connection withthe comment process.

The examiner will provide comments regardingcompliance with prescribed disclosure requirements andwill often: (i) make requests for additional, clearer ormore concise disclosure; (ii) provide comments relatingto the SEC’s “Plain English” rules, which took effect inOctober 1998;32 and (iii) seek supplemental informationto document and supports statistics and claims containedin the registration statement relating to market data andthe issuer’s competitive position.

The SEC’s accounting staff will comment on thefinancial statements and other financial informationrequired by or included in the registration statement.The accounting staff generally provides wide-rangingcomments on many aspects of the issuer’s financialdisclosure, particularly with respect to:

• the accounting treatment of acquisitions and internalrestructurings;

• inclusion of historical financial statements of acquiredcompanies, guarantors and entities in which the issuerhas a minority investment;

• reconciliation to US Gaap by issuers with auditedfinancial statements prepared under other accountingstandards;

Practice point:The time required to complete the registrationprocess leads many issuers to structure transactions asprivate offerings under Rule 144A (for securities sold inthe United States) and Regulation S (for securities soldoutside the United States). This approach generallyallows much faster access to the capital markets.

Practice point:Registration statements are not considered “filed” untilthey are publicly filed. In the case of registrationstatements submitted for confidential review, publicfiling generally occurs after the SEC staff has given itscomments on the confidential filing and the issuer hassubstantially resolved the SEC’s comments.

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Chapter 2– The registration process

Chapter 2The registration process


• accounting for contingencies and the establishmentof reserves;

• disclosures concerning market risk exposure (interestrates, currencies, commodities) and hedgingtransactions;

• disclosure of off-balance sheet arrangements;

• the appropriateness of adjustments in pro formafinancial information;

• compliance with the newly adopted conditions foruse (and prohibitions on the use) of non-Gaapfinancial measures;

• revenue recognition; and

• accounting for stock options, particularly thosegranted less than one year prior to an equity offering.

After the issuer has resolved all issues raised in the SEC’scomment letters, the SEC will declare the registrationstatement effective at a time jointly determined by theissuer and the underwriters. Immediately aftereffectiveness, underwriters typically confirm ordersorally, with written confirmation mailed promptlythereafter along with the final prospectus. Note thatorders cannot be confirmed until the registrationstatement has been declared effective.

Key issues to identify in advance ofregistration

Any issuer considering a public offering in the UnitedStates, a private offering with US registration rights or alisting in the United States is strongly advised to consultwith its auditors’ SEC specialists well in advance of thefirst submission to the SEC to assure that the requiredfinancial statements are available and complete. Theavailability of required financial statements is veryfrequently a critical path that can significantly affect thetiming of an offering.

An issuer will also need to develop appropriatedisclosure for a Management’s Discussion and Analysis(MD&A) section discussing its financial results indetail.33 The SEC places great importance on MD&Aand has taken steps to require issuers to make signifi-cantly expanded MD&A disclosure. In particular,pursuant to Section 401(a) of the Sarbanes-Oxley Act,the SEC has adopted new rules requiring disclosure ofoff-balance sheet arrangements and certain contractualobligations.34 The rules build on an SEC interpretiverelease regarding three areas of MD&A: (i) liquidity andcapital resources, including off-balance sheetarrangements; (ii) certain trading activities involvingnon-exchange traded contracts accounted for at fairvalue; and (iii) relationships and transactions withpersons that derive benefits from their non-independentrelationship with issuers or parties related to the issuer.35

In addition, the SEC has proposed rules requiringsignificant additional disclosure of an issuer’s criticalaccounting policies.36

A first-time issuer must also compile significant amountsof non-accounting data about its business and markets,its strategy and the regulatory environment in which itoperates, and must distill this information into a clearand understandable prospectus and thoroughly checkthe disclosure for accuracy before submitting theregistration statement to the SEC. First-time issuers willalso become subject to Sarbanes-Oxley’s wide-rangingrequirements.

Practice point:The SEC’s review of accounting disclosures hasbecome more rigorous and time-consuming in thewake of Sarbanes-Oxley.




Prospective underwriters and counsel can assist theissuer in assembling this information and an assortmentof disclosure documents from comparable issuers, butthe process of preparing for a first-time registration oftentakes several months.

Additional important issues to address in advance of anyoffering include the following:

• A foreign private issuer can submit financialstatements prepared in accordance with home-country Gaap (local Gaap) or InternationalAccounting Standards (IAS), in either case with areconciliation to US Gaap. What are the significantdifferences between local Gaap or IAS and US Gaap?How long will reconciliation take?

• Have all required audits been conducted inaccordance with US generally-accepted auditingstandards (US Gaas)? The SEC requires all financialstatements to be audited in accordance with US Gaas,even in the case of an issuer using local Gaap or IAS.

• Does the issuer have the corporate governanceprocedures and mechanisms in place to comply withSarbanes-Oxley’s requirements (for example,management certifications, disclosure controls andprocedures, and appropriate audit committeefunctions)? Note that a first-time issuer that is notalready an SEC reporting company becomes subjectto Sarbanes-Oxley upon the initial public filing of itsregistration statement, even before the SEC declaresthat registration statement effective.

• Has the issuer completed any significant acquisitions ordispositions during the three full financial years or anysubsequent interim period preceding the date of theoffering? Separate subsidiary financial statements andpro forma financial information may be required.

• Guarantees in respect of a security are considered tobe separate securities under the US federal securitieslaws that must be registered, sometimes with separateaudited guarantor financial statements. Will theissuer’s securities be guaranteed by any company?

• If the issuer is offering debt securities, will they besecured by a pledge of the capital stock or inter-company debt of any related company? A pledgoroften must file separate financial statements for thecompany that issued the pledged securities.

• SEC registration requires many material contracts to befiled as exhibits (subject, under certain circumstances,to confidential treatment of designated portions). Doesthe issuer have any material contracts that containcommercially sensitive information, or that are subjectto confidentiality agreements that would be violated ifthey were filed publicly? Note that under the SECrules mandating electronic filing by all foreign privateissuers documents (including material contracts)generally have to be submitted in English. Does theissuer have any material contracts that must betranslated into English?

• Does the issuer have a significant minority investmentin any other entity or any 50/50 joint venture?Separate financial statements may be required for suchan entity and the issuer may not have access to thesestatements or to such entity’s auditors.

• Does the issuer manage its business in separatesegments and, if so, are the issuer’s internal accountssufficient to prepare financial statements that meetthe SEC’s segment reporting requirements?

• Are the auditors of every set of required financialstatements prepared and qualified to have their auditsused in a US securities offering and filed with theSEC? If not, re-audits may be necessary.

• Has the issuer granted stock options within the yearprior to an equity offering? If so, the differencebetween the exercise price and the offering pricecould constitute compensation expense that couldreduce net income under US Gaap.

• The SEC requires issuers in certain types of industries(such as banking and oil and gas) to provide detailed andspecific disclosure on various matters. Will the issuer beable to assemble and develop the required information?


• Is there a possibility that the issuer will wish to pursuean unregistered transaction instead of the publicoffering? Based on Securities Act Rule 155, an issueris permitted to conduct a private placement 30 daysafter withdrawing a public offering.37 Rule 155 givesgeneral guidance that 30 days is an appropriate quietperiod in advance of a private placement.38

Registration forms

The SEC has specific forms for the registration of securitiesunder both the Securities Act and the Exchange Act.Forms not only contain their own disclosure requirements,but also specify certain items that must be disclosed underSecurities Act Regulation S-K (for textual disclosurerequirements) (S-K) and under Securities Act RegulationS-X (S-X), which governs financial statements. Theprimary forms for foreign private issuers are:



SEC registration forms

Form F-1

Form F-2

Form F-3

Form F-4

Form F-6

Form S-8

Form 20-F

Form 8-A

The form for first-time issuers and all other issuers who are not eligible for Form F-

2 or F-3.

A “short form” available to seasoned issuers who do not necessarily meet the public

float requirements of Form F-3. Issuers may incorporate by reference information

contained in filings made under the Exchange Act, such as an annual report on Form

20-F, as long as copies of any information so incorporated are delivered with the

prospectus.

A “short form” available for investment grade debt and to seasoned issuers with a

public float (shares owned by non-affiliates) of at least $75 million. Issuers may

incorporate by reference information contained in filings made under the Exchange

Act, such as an annual report on Form 20-F.

The form for business combinations and exchange offers.

The form for American Depositary Shares (ADSs) evidenced by American

Depositary Receipts (ADRs).

The form for registering securities issued to employees under an employment

benefit plan, and interests in such plans.

The form for registering outstanding securities that will be listed on the NYSE or

quoted on Nasdaq, and for annual reports.

A “short-form” available for registering newly issued securities that will be listed on

the NYSE or quoted on Nasdaq in connection with a concurrent public offering in

the United States. Form 8-A is used in conjunction with the applicable Securities Act

registration form.

Description

Securities Act forms

Exchange Act forms


The central form for foreign private issuers is Form 20-F. Form 20-F sets out the required disclosure for USlistings and annual reports by foreign private issuers. Inaddition, the registration forms for public securitiesofferings refer extensively to Form 20-F.

For both the Securities Act and the Exchange Act, therelevant forms typically prescribe broad categories ofinformation, rather than specific disclosures. In the caseof a Securities Act registration form, the registrationstatement includes a prospectus containing prescribedcategories of financial and non-financial disclosure, aswell as additional information not included in theprospectus, including exhibits (such as corporatedocuments and material contracts). The registrationstatement, prospectus and annual report must contain abasic package of financial statements and other financialinformation to illustrate the financial condition andresults of operations of the issuer.

A checklist showing the non-financial informationrequired by Forms F-1, F-2, F-3 and 20-F is attached asAnnex A. Financial statement requirements arediscussed in “Required Financial Statement Disclosure,”below.

( i) Form F-1Form F-1 is the Securities Act form for any securities ofa foreign private issuer that is a first-time SEC registrantor for which no other form is authorized or prescribed.It requires the issuer to include all required informationin the prospectus itself (rather than to incorporate thatinformation by reference from Exchange Act filings), andis therefore typically a lengthy document.

(i i) Forms F-2 and F-3Form F-3 has both issuer and transaction requirements.It is available to a foreign private issuer that has:39

• securities registered under the Exchange Act or isrequired to file reports with the SEC under Section15(d) of the Exchange Act (by virtue of havingregistered an offering under the Securities Act);

• filed at least one annual report on Form 20-F;

• been subject to the reporting requirements of theExchange Act and filed all required materials on atimely basis for at least 12 months prior to the filingof the registration statement; and

• had no material default on loans or long-term leasesor failure to pay a sinking fund installment ordividend on preferred stock since the end of the lastfinancial year covered by audited financial statementsin its Exchange Act reports, and no subsidiary of theissuer has had such a default.

If an issuer is F-3 eligible, it may use Form F-3 for thefollowing transactions:40

• offerings by the issuer of non-convertible investmentgrade securities;

• offerings of securities by the issuer (other than non-convertible investment grade debt securities) for cashif the aggregate market value worldwide of theissuer’s common equity held by non-affiliates is atleast $75 million;

• secondary offerings of securities by holders of theissuer’s securities (often pursuant to a registrationrights agreement); and

• offerings of securities by the issuer upon exercise ofcertain outstanding transferable warrants, uponexercise of rights granted pro rata by the issuer toexisting holders of the class offered, pursuant to adividend or interest reinvestment plan, or uponconversion of outstanding convertible securities.

Form F-2 may be used by an issuer that has had (andwhose subsidiaries have had) no material defaults sincethe end of the last financial year and either has a longerhistory (36 months of Exchange Act reporting) than anF-3 issuer or meets the $75 million public floatrequirement of Form F-3.41 Form F-2 (but not FormF-3) requires the issuer to deliver a copy of the issuer’sincorporated Exchange Act filings with theprospectus.


( i i i) Form F-4Form F-4 is available to register securities issued inconnection with business combinations and exchangeoffers. Form F-4 requires information concerning:43

• the relevant transaction, including pro forma financialinformation for an acquisition or, as applicable, theterms of the exchange;

• the issuer, its business and the risks associated with therelevant investment, consistent with the disclosurerequired by Forms F-1, F-2 or F-3 (issuers eligible touse Forms F-2 and F-3 may incorporate by referencein Form F-4 to the same extent as permitted by thoseforms); and

• for acquisitions, the company being acquired,including most of the same business and financialinformation that is required for a similarly situatedissuer (if the company to be acquired already filesreports with the SEC, the necessary information maybe incorporated by reference in certain circumstances).

( iv) Form F-6Form F-6 is a separate, additional form filed by adepositary bank to register ADSs evidenced by ADRs,the form in which equity interests in foreign privateissuers are frequently held and traded in the UnitedStates. Form F-6 may only be used if:44

Practice point:Form F-4 is the applicable form for foreign privateissuers who are offering new securities for outstand-ing securities, including those who have sold debt orcertain preferred stock under Rule 144A andRegulation S in a private placement that is beingexchanged for identical, SEC-registered debt or pre-ferred securities. This technique, known as the A/Bexchange offer, is a commonly used financing struc-ture. It allows issuers and underwriters to access thefixed income markets quickly through a private place-ment while achieving public market pricing (that is,without liquidity discounts) because of the A/Bexchange offer.

Practice point:Form 20-F – from which much of the disclosure inForm F-3 and Form F-2 derives – has alternativefinancial statement requirements for Exchange Actperiodic reports and Securities Act registration state-ments, with the latter more extensive. An issuerseeking to incorporate by reference using Form F-3or F-2 must generally meet the more stringent Item18 standard in its Exchange Act reports.

Practice point:Foreign private issuers considering use of Form F-2 orForm F-3 should pay particular attention to timelysubmissions of current reports on Exchange Act Form6-K.

Practice point:An important advantage of Forms F-2 and F-3 overForm F-1 is that a significant portion of the requiredinformation may be incorporated by reference intoForms F-2 and F-3 from the issuer’s most recentannual report on Form 20-F and its other ExchangeAct filings (although use of Form F-2 requires deliveryof copies of any information that is so incorporated).Form F-3 also contemplates incorporation of subse-quent Exchange Act reports, which allows F-3 issuersto file a shelf registration statement and offer securitieson a delayed or continuous basis.42 Even though anF-2 or F-3 issuer is permitted to incorporate by refer-ence, in most underwritten deals the underwriterswill require the issuer to include in the prospectussome information regarding its business, strategy andother matters they consider necessary to market theoffering effectively.




• the deposited shares have been offered or sold intransactions registered under the Securities Act orexempt from registration;

• the foreign private issuer files periodic reports withthe SEC or is exempt from those filing requirementspursuant to Rule 12g3-2(b); and

• the holder of ADRs is entitled to withdraw thedeposited securities at any time, subject only totemporary delays for specified, limited reasons.

ADRs and ADSs

Many foreign private issuers sell equity securities intothe United States through the use of ADRs evidencingADSs. ADRs are issued by a depositary, usually a largemultinational bank, and represent a specified number ofthe issuer’s underlying equity securities held by thedepositary or its custodian. Although ADR holdershave essentially the same ultimate rights as holders of theunderlying securities and can always, with limitedexceptions, exchange their ADRs for the underlyingsecurities, ADR programmes have certain advantagesfor issuers and holders (such as denomination in USdollars).

The SEC considers ADRs to be separate securities fromthe underlying shares they represent. The issuer mustregister the offering of the underlying shares on theapplicable form. Issuances of ADRs in connection witha US public offering of the underlying shares by theissuer are known as Level III ADR programmes;issuances of ADRs in connection with listing or quotingexisting shares in the United States are known as LevelII ADR programmes; and issuances of ADRsrepresenting existing shares that are traded only over-the-counter in the United States are known as Level IADR programmes. ADR depositaries may establishADR programmes to facilitate secondary trading in aforeign private issuer’s previously issued shares eitherwith the issuer’s participation (a sponsored programme)or, less commonly, without the issuer’s participation (anunsponsored programme). In either case, assuming theADR programme results in more than 300 holders in

the United States, the issuer must either register theunderlying class of shares with the SEC under theExchange Act or claim the benefit of the Rule 12g3-2(b) exemption. If, however, the issuer desires to haveits ADRs listed on a US national securities exchange orquoted on Nasdaq, Rule 12g3-2(b) is not available andaccordingly the issuer must register the shares under theExchange Act.

The depositary receives fees for transactions in theunderlying shares, such as withdrawals from or depositsinto the ADR facility and currency exchanges inconnection with dividends.

Filing electronically – EDGAR

Since November 4 2002, the SEC has required foreignprivate issuers to use the SEC’s Electronic DataGathering and Retrieval (EDGAR) system for nearly allSEC filings.45 Previously, only domestic US issuers wererequired to file documents through EDGAR.

As a result, documents such as registration statements forofferings of securities, annual reports on Form 20-F andmost current reports on Form 6-K must be filedelectronically.46 In addition, all exhibits and attachmentsto SEC filings (such as material contracts) must be filedelectronically, except for exhibits and attachmentspreviously filed in paper form, which may generally beincorporated in an EDGAR filing by reference.47

There are only limited exceptions to the requirement tofile electronically. These include:

• a foreign private issuer’s annual report to the holdersof its securities submitted on Form 6-K;48

Practice point:Depositaries often compete intensively to manage anew issuer’s ADR programme, and multiple bids areusually considered, with fees often paid by the suc-cessful depositary to the issuer.


• a report or other document submitted on Form 6-Kthat the issuer is required to furnish and make publicunder the laws of its home country or the issuer’shome country exchange, that (i) is not a press release,(ii) is not required to be and has not been distributedto the holders of the foreign private issuer’s securities,and (iii) if discussing a material event, has alreadybeen the subject of a Form 6-K filing or other SECfiling via EDGAR;49 and

• material submitted under Rule 12g3-2(b).50

As a general matter, all filings in EDGAR must be madein the English language.51 Non-English documentsmust be fairly and accurately translated into English forfiling in accordance with the SEC’s rules on foreign-language documents,52 including most documentssubmitted to the SEC under cover of Form 6-K.53

Alternatively, a summary of certain documents filedwith the SEC as exhibits may be provided,54 althoughthe SEC’s rules require specified significant documents(for example, articles of incorporation, instrumentsdefining the rights of security holders and contracts onwhich an issuer’s business is substantially dependent) tobe provided in full translation.55 Similarly, certaindocuments provided to the SEC on Form 6-K may beprovided in English summary, including a reportrequired to be furnished and made public under the lawsof the issuer’s home country or the rules of the issuer’shome country stock exchange, as long as it is not a pressrelease and is not required to be and has not beendistributed to the issuer’s security holders.56 Anypermitted summary must fairly and accuratelysummarize the terms of each material provision of theoriginal text and fairly and accurately describe the termsthat have been omitted or abridged.57

NASD review

Underwritten public offerings in the United States are,in most cases, subject to the review and approval of theNational Association of Securities Dealers, Inc. (theNASD), a self-regulatory organization that, amongother things, monitors the terms of public offeringsunderwritten by US investment banks. The NASD

review will primarily focus on any pre-existingrelationships between the underwriters and the issuerand whether the underwriters’ proposed compensationis fair and not excessive (from the issuer’s perspective).The NASD compensation review will look at theunderwriting commission to be paid in connection withthe offering as well as any other compensation receivedby the underwriters from the issuer and any of itsaffiliates in any capacity. The NASD will also reviewthe terms of any securities transactions (includingpurchases of equity and warrants) between theunderwriters and their affiliates and the issuer and itsaffiliates. The SEC will not declare a registrationstatement effective until the NASD has formally clearedthe underwriting arrangements.

NYSE and Nasdaq listingrequirements

In order to be eligible for listing on the NYSE or forquotation on Nasdaq, a foreign private issuer must meetcertain quantitative listing requirements and corporategovernance standards. Once listed, foreign privateissuers must meet certain requirements relating toongoing shareholder communication and disclosure.We summarize the quantitative NYSE and Nasdaqlisting criteria in Annex B below.

NYSE and Nasdaq have proposed wide-rangingchanges in corporate governance requirements for listedcompanies (certain of which have been approved by theSEC) in response to recent corporate scandals andSarbanes-Oxley. The proposals include, among otherthings, heightened requirements of independence forboard and audit committee members and enhancedaudit committee powers and functions. However, boththe NYSE and Nasdaq have provided foreign privateissuers with certain exemptions to the proposedrequirements, to the extent consistent with Sarbanes-Oxley’s requirements:

• Under the NYSE proposals, foreign private issuersmay follow home-country practice in lieu of certainof the new corporate governance requirements, butmust publicly disclose any significant ways in which




their home-country practices differ from thosefollowed by domestic US companies under NYSElisting standards.58

• Under Nasdaq’s current listing rules, foreign privateissuers may obtain exemptions from corporategovernance standards if those rules would require theissuer to act contrary to applicable laws, rules,regulations, or generally accepted business practicesof the issuer’s home country.59 Nasdaq’s corporategovernance proposals provide that a foreign privateissuer must disclose these exemptions.

Prospectus delivery

Following effectiveness of the registration statement,and generally for 40 days thereafter,60 dealers may sell theregistered securities only if the confirmation of any saleis accompanied or preceded by the final prospectusincluded in the registration statement.61 However:

• the prospectus delivery period is 25 days if the issueris a first-time registrant, and the securities offered arelisted or quoted in the United States;62

• the prospectus delivery period is 90 days in all otherinitial public offerings;63 and

• there is no requirement to deliver a prospectus if theissuer was already a reporting company under theExchange Act immediately before the registrationstatement was filed.64


Chapter 3 – Key exemptions from Securities Act registration

General

As discussed above, the process of registering a securitiestransaction requires a foreign private issuer to meetspecific disclosure and financial statement requirementsand to undergo the SEC review process. By contrast,unregistered transactions are typically less complex andtime-consuming to execute. Many foreign privateissuers accordingly choose to structure securitiesofferings in the United States to take advantage ofavailable exemptions from registration.

We summarize the most common exemptions used byforeign private issuers below.

Regulation S – offshore offerings

Regulation S sets out the conditions under which anoffering outside the United States may be made withoutregistration under the Securities Act. It provides a safeharbour exemption for offers and sales by issuers, and a

resale exemption. Under Regulation S, unregisteredoffers and sales may generally be made if (i) the offer orsale is made in an offshore transaction; and (ii) there areno directed selling efforts in the United States.65 Werefer to these as the “Regulation S GeneralConditions.”

An offshore transaction is defined as an offer which isnot made to a person in the United States, and either:

• at the time the buy order is originated, the buyer isoutside the United States or the seller (and anyperson acting on the seller’s behalf) reasonablybelieves that the buyer is outside of the United States;

• for purposes of the issuer safe harbour, the transactionis executed in, on or through the physical tradingfloor of an established foreign securities exchangelocated outside of the United States; or

• for purposes of the resale safe harbour, the transactionis executed in, on or through the facilities of adesignated offshore securities market and neither theseller (nor any person acting on the seller’s behalf)knows that the transaction has been prearranged witha buyer in the United States.66

“Directed selling efforts” is broadly defined to includeany activities that have, or can reasonably be expected tohave, the effect of conditioning the market in theUnited States for the securities being offered in relianceon Regulation S.67 Prohibited efforts include mailingoffering materials into the United States; conductingpromotional seminars in the United States; grantinginterviews about the offering in the United States

Practice point:Unregistered transactions do not require the filing of aregistration statement and generally do not turn theissuer into a reporting company that is required to fileannual reports with the SEC. A key attraction of thesetransactions for a foreign private issuer is that it caninclude its financial statements under local Gaap (orinternational accounting standards) and need not pro-vide a reconciliation to US Gaap. The time andexpense involved in a US Gaap reconciliation can bea significant concern for a foreign private issuer that isseeking to access the US capital markets.


Chapter 3Key exemptions from SecuritiesAct registration


(including by telephone); or placing advertisementswith radio or television stations broadcasting in theUnited States.68 Importantly, legitimate selling activitiesin the United States in connection with concurrent USofferings – whether registered or private – do notconstitute directed selling efforts.69

(i) The issuer safe harbour

Securities Act Rule 903 provides a safe harbour forissuers, distributors (that is, any underwriter, dealer, orother person who participates pursuant to a contractualarrangement in the distribution of the securities offeredor sold in reliance on Regulation S),74 their respectiveaffiliates, and persons acting on their behalf. Theparticular requirements for the safe harbour depends onthe “category” applicable to the transaction.

(a) Category 1

This category has no requirements other than theRegulation S General Conditions, and is available for:75

• securities offered by foreign issuers76 who reasonablybelieve at the commencement of the offering thatthere is no “substantial US market interest”77 in thesecurities offered;

• securities offered and sold in an overseas directedoffering;78

• securities backed by the full faith and credit of aforeign government; or

• securities offered and sold pursuant to certainemployee benefit plans established and administeredunder the laws of a foreign country.

(b) Category 2

The second category involves securities that are noteligible for Category 1 and that are either (i) equitysecurities79 of a foreign issuer that is a reporting companyunder the Exchange Act or (ii) debt securities80 ofreporting issuers (domestic or foreign) and non-reporting foreign issuers.81 Issuers in this category maytake advantage of the safe harbour if the followingconditions are met along with the Regulation S GeneralConditions:

• Certain offering restrictions82 must be adopted,83

including:

- each distributor must agree in writing that alloffers and sales during a 40-day distributioncompliance period may be made only in

Practice point:Even if Category 1 is available, market practice fordebt offerings is often to follow Category 2 restric-tions where there is a concurrent Rule 144A offering.

Practice point:The safe harbours of Regulation S are not exclusiveand parties may use any other applicable exemptionsprovided by the Securities Act.71 Regulation S onlyapplies to the registration requirements of theSecurities Act and does not limit the applicability of theUS federal anti-fraud laws or any state laws relating tosecurities offerings.72 As a consequence, a Regulation Stransaction may be exempt from registration under theSecurities Act but – at least in theory – could still triggeranti-fraud liability in the United States.73

Practice point:A foreign private issuer may be required to furnish acopy of an offering memorandum relating to aRegulation S offering on Form 6-K (if, for example, itfiles that offering memorandum with a stock exchangeon which its securities are listed, and the exchangemakes the offering memorandum public). This willgenerally not constitute directed selling efforts.70


accordance with safe harbours underRegulation S, pursuant to registration under theSecurities Act or an exemption fromregistration; and

- prospectuses, advertisements, and all otheroffering materials and documents (other thanpress releases) used in connection with offersand sales during the distribution complianceperiod must disclose that the securities are notregistered under the Securities Act and cannotbe sold in the United States or to US persons(other than distributors) unless so registered oran exemption from registration is available.84

• During the 40-day distribution compliance period,offers and sales of the security cannot be made to aUS person other than a distributor85 (althoughexempt sales, such as to QIBs pursuant to Rule 144A,may be made).86

• Any distributor selling securities to anotherdistributor, dealer, or person receiving a sellingcommission must deliver, during the 40-day distri-bution compliance period, a confirmation or noticeto the purchaser stating that the purchaser is subjectto the same resale restrictions as the distributor.87

The 40-day distribution compliance period begins onthe later of the date of the closing or the date on whichsecurities were first offered to persons other thandistributors (generally, the pricing date).88

(c) Category 3

The third category is a catch-all and has the mostrestrictive conditions. It includes all securities that arenot eligible for Category 1 or 2, such as any securities ofa non-reporting domestic US issuer, equity securities ofa reporting domestic US issuer and equity securities of anon-reporting foreign issuer (with substantial USmarket interest in the equity securities of that issuer).89

In addition to the Regulation S General Conditions, anissuer must also meet the following conditions:

• Each of the offering restrictions described above forCategory 2 must be met,90 except that a one-yeardistribution compliance period applies to offerings ofequity securities91 and a 40-day distributioncompliance period applies to offerings of debtsecurities.92

• During the applicable distribution complianceperiod, offers or sales cannot be made to a US personother than a distributor93 (although exempt sales, suchas to QIBs pursuant to Rule 144A, may be made)and, in the case of equity securities:

- the purchaser (other than a distributor) mustcertify that it is not a US person;

- the purchaser must agree to resell the securitiesonly in accordance with Regulation S, pursuantto registration under the Securities Act or anexemption from registration; and

- certain other restrictions must be satisfied,including a prohibition against corporateregistration of transfers not made in accordancewith Regulation S.94

• Debt securities generally must be represented uponissuance by a temporary global security notexchangeable for definitive securities until theexpiration of the 40-day distribution complianceperiod and, for persons other than distributors, untilcertification of beneficial ownership by a non-USperson.95

• Any distributor selling the securities to anotherdistributor, dealer, or person receiving a sellingcommission must deliver, during the applicabledistribution compliance period, a notice or confir-mation to the purchaser stating that the purchaser issubject to the same resale restrictions as thedistributor.96




(i i) The resale safe harbourSecurities Act Rule 904 provides a safe harbour foroffshore resales by persons other than issuers,distributors, their affiliates, and persons acting on theirbehalf. Resales of securities by these persons are subjectonly to the Regulation S General Conditions.99

The resale safe harbour may also be relied upon bydealers and persons receiving selling concessions, exceptthat the following additional conditions apply if thesecurities being resold are of the type included withinthe Category 2 or Category 3 safe harbour and the resaleis within the distribution compliance period imposedwith respect to those securities:

• the seller and any person acting on behalf of the sellermust not knowingly offer or sell the securities to aUS person; and

• if the purchaser of the securities is also a securitiesprofessional, then the seller must deliver a confir-mation or other notice stating that the securities maybe offered and sold during the distributioncompliance period only in accordance withRegulation S, pursuant to registration under theSecurities Act or an exemption from registration.100

The resale safe harbour may also be relied upon bycertain officers and directors who are affiliates of theissuer or a distributor, provided that the Regulation SGeneral Conditions are met and no remuneration ispaid other than customary broker’s commissions.101

(i i i) Violation of safe harbour conditionsThe consequences of a breach of the conditions for useof Regulation S could be dire, since this wouldpotentially allow purchasers of the securities to rescindtheir transaction.102 If an issuer, distributor, any of theirrespective affiliates, or any person acting on their behalffails to comply with the Regulation S GeneralConditions, then the issuer safe harbour will not beavailable to any person in connection with the offer orsale of the securities. However, if any of these personsfails to comply with any of the other issuer safe harbourrequirements (in other words, other than theRegulation S General Conditions), then only the partywho fails to comply (as well as its agents and affiliates)will be unable to rely on the issuer safe harbourexemption. In that case, the fact that there may havebeen a breach on the part of the issuer, distributor, theiraffiliates, or agents (other than certain officers ordirectors relying on the resale exemption) does notgenerally negate a resale safe harbour exemption for anunaffiliated person.103

Section 4(2) private placements

Section 4(2) of the Securities Act exempts “transactionsby an issuer not involving any public offering.” Theterm “public offering” is not defined in the SecuritiesAct and the scope of the Section 4(2) exemption haslargely evolved through case law, SEC pronouncementsand market practice. It is hence not possible to map theborders of Section 4(2) precisely.

The core issue is whether the persons to whomsecurities are offered need the protection of theSecurities Act – that is, whether they are sufficientlysophisticated so as to be able to fend for themselves.104

In determining whether a transaction is a publicoffering, relevant factors include the number of offereesand their relationship to each other and the issuer, thenumber of securities being offered, the size of theoffering and the manner in which the offering isconducted.105 All of the surrounding circumstancesmust be considered in this analysis.106

Practice point:Equity securities issued by a domestic US issuer(whether reporting or non-reporting) pursuant toRegulation S are considered “restricted securities”97

subject to limitations on resale, and remain restrictedsecurities even after an exempt resale pursuant toRegulation S.98 As a practical matter, the required cer-tifications and other restrictions have severely limitedthe use of Regulation S for exempt sales of equitysecurities by domestic US issuers.


Private placements under Section 4(2) typically involve,among other things:

• a non-public offering (that is, an offering without anyform of general solicitation or advertising);

• to a limited number of offerees;

• who are buying for investment and not with a viewto distribution; and

• who are sophisticated investors and have beenprovided with or have access to information aboutthe issuer.107

In addition, the securities issued in a private placementgenerally include restrictions on resales by thepurchasers (such as through the use of stop-transferorders, restrictive legends and the like).108

Regulation D private placements

(i) BackgroundLargely in response to the difficulties experienced bypractitioners in interpreting the availability of Section4(2), the SEC adopted Regulation D to provide aclearly defined non-exclusive safe harbour fromregistration for offers and sales of securities by issuers.

Regulation D differentiates transactions based on thesize of the offerings and the types of investors to whomsecurities are being offered. Regulation D draws a coredistinction between accredited investors and other, non-sophisticated investors. Accredited investors include:109

• banks, savings and loan associations, and similarinstitutions;

• insurance companies, investment companies, smallbusiness investment companies and certain employeebenefit plans;

• private business development companies;

• certain tax-exempt organizations;

• corporations with assets over $5 million;

• directors, executive officers, and persons holdingsimilar positions with or in the issuer;

• natural persons with a net worth (alone or with thatperson’s spouse) exceeding $1 million;

• natural persons with individual income in excess of$200,000 per year or, with that person’s spouse, inexcess of $300,000 per year;

• certain trusts with assets in excess of $5 million; and

• any entity owned entirely by such persons.

(i i) Regulation D general conditionsRegulation D provides certain general conditions (theRegulation D General Conditions), including:

• Integration:110 All sales that are part of the sameRegulation D offering must meet all of the terms andconditions of Regulation D. However, offers andsales made more than six months before or after thecompletion of a Regulation D offering will generallynot be considered part of the same Regulation Doffering.

• Information requirements: Regulation D’sinformation requirements depend on the type oftransaction and the type of participants in thetransaction. The issuer must provide any purchaserthat is not an accredited investor with extensiveinformation regarding the issuer. If the issuer is notan Exchange Act reporting company, thatinformation includes non-financial and financialinformation substantially equivalent to that which it

Practice point:Section 4(2) is only available for offers and sales by anissuer; resales of securities acquired from an issuerrequire a separate exemption (such as Rule 144A,discussed below).




would have been required to provide in a registrationstatement under the Securities Act (for example,Form F-1 in the case of a first-time foreignregistrant).111 For a foreign private issuer that is areporting company, it may provide its most recentannual report on Form 20-F.112 The issuer must alsomake available to each purchaser the opportunity toask questions about the offering or the issuer.113

• Limitation on offering:114 Neither the issuer noranyone acting on its behalf may use any generalsolicitation or general advertising to offer or sell thesecurities.

• Limitation on resale:115 Securities acquired in aRegulation D transaction are restricted securities thatcannot freely be resold absent registration or anexemption from registration. The issuer must takereasonable care to make sure that purchasers wouldnot be deemed to be statutory underwriters (that is,engaged in a distribution of the securities), which istypically satisfied by requiring purchaser represen-tations about investment intent, restrictive legends oncertificates, and restrictions on transfer.

• Form D:116 The issuer must file a notice to the SECon Form D no later than 15 days after the first sale ofsecurities.

(i i i) Rule 504 – offers and sales notexceeding $1,000,000Rule 504 provides an exemption from registration forlimited offerings and sales of securities not exceeding

$1,000,000 in any 12-month period.117 Issuers subject tothe reporting requirements of the Exchange Act andinvestment companies, among others, may not use thisexemption.118 All of the Regulation D GeneralConditions apply to Rule 504 transactions, other thanRegulation D’s information requirements.119

(iv) Rule 505 – offers and sales notexceeding $5,000,000Rule 505 contains an exemption for limited offeringsand sales of securities not exceeding $5,000,000 in a 12-month period.120 An unlimited number of accreditedinvestors (subject to the limitations on general solici-tation and general advertising mentioned above) and upto 35 non-accredited investors may purchase securitiesin a Rule 505 offering.121 All of the Regulation DGeneral Conditions apply to Rule 505 transactions,except that Regulation D’s information requirementsdo not apply to any purchasers that are accreditedinvestors.122

(v) Rule 506 – unlimited offeringamountsRule 506 closely resembles Rule 505 except that theoffering amount is not limited. Like Rule 505, anunlimited number of accredited investors (subject to thelimitations on general solicitation and generaladvertising) and up to 35 non-accredited investors maypurchase securities123 and all of the Regulation DGeneral Conditions apply, except for Regulation D’sinformation requirements in the case of accreditedinvestors.124 In addition, each purchaser of the securitiesother than an accredited investor must demonstrate tothe issuer’s reasonable belief that the purchaser, “eitheralone or with his purchaser representative(s) has suchknowledge and experience in financial and businessmatters that he is capable of evaluating the merits andrisks of the prospective investment.”125 Issuers and theirplacement agents typically satisfy this requirement byhaving potential investors complete investor question-naires demonstrating their accredited status or theirsophistication.

Practice point:Regulation D’s information requirements effectivelymean that financial information provided by a foreignprivate issuer to a non-accredited investor must eitherbe prepared in accordance with US Gaap or recon-ciled to US Gaap. This has limited the usefulness ofRegulation D for those foreign private issuers that donot prepare US Gaap or US Gaap-reconciled financialstatements.


(vi) Rule 508 – deviations fromRegulation DUnder Rule 508, a person may establish the existence ofan exemption under Regulation D with respect to anypurchaser even if the person failed to meet one or moreof the requirements of Regulation D. In this case, theperson must show that:

• the failure to comply did not pertain to a term,condition, or requirement directly intended toprotect the purchaser;

• the failure to comply was “insignificant to theoffering as a whole;” and

• the person made a good faith and reasonable attemptto comply with the relevant requirements ofRegulation D.

Resales of privately placedsecurities

Both Section 4(2) and Regulation D apply only totransactions by issuers,126 and neither provides anexemption for resales. Purchasers who wish to resellsecurities acquired in a private placement must look tocertain resale exemptions – in particular, the exemptionsprovided by Rule 144A, “Section 4(1-1/2)” and Rule144 under the Securities Act.

(i) Rule 144A resales to QIBsAlthough market participants often refer to Rule 144Aofferings, as a technical matter Rule 144A transactionsinvolve two steps: sales to underwriters (or directly toinstitutional initial purchasers) under Section 4(2) orRegulation S, followed by resales to QIBs under Rule144A. As a result, Rule 144A transactions followvarious limitations not found directly in Rule 144Aitself (such as restrictions on publicity) as well as theexplicit requirements of Rule 144A.

(a) Definition of QIBA QIB is defined to include:128

• any of the following entities acting for its ownaccount or the account of other QIBs, that in theaggregate owns and invests on a discretionary basisat least $100 million in securities of issuers that arenot affiliated with the QIB:

- insurance companies;

- investment companies;

- small business investment companies;

- certain employee benefit plans;

- certain trusts;

- certain tax-exempt organizations corporations;and

- certain registered investment advisers; and

• certain broker-dealers, banks, and savings and loanassociations.

(b) Rule 144A requirementsThe requirements for a valid Rule 144A transactioninclude the following:

• Sales to QIBs:129 the securities must be offered andsold only to QIBs or to a person who the seller (andany person acting on its behalf) “reasonablybelieves” is a QIB;

• Notice to buyers:130 the seller (and any person actingon its behalf) must take reasonable steps to ensure

Practice point:Securities purchased under Rule 144A are deemed“restricted securities” and can only be resold pursuantto Rule 144A or another exemption (including theRegulation S resale safe harbour described above).127




that the buyer is aware that the seller is relying onRule 144A (generally by so noting in the offeringmemorandum, or in the trade confirmation in thecase of an undocumented offering);

• Fungibility:131 the securities must not be, whenissued, of the same class as securities listed on a USnational securities exchange or quoted on Nasdaq(or, in the case of convertible or exchangeablesecurities, have an effective conversion premium of10% or more); and

• Information delivery:132 If the issuer is a reportingcompany under the Exchange Act or is exemptfrom reporting under Rule 12g3-2(b), a sellerwishing to resell the securities is not obligated tofurnish the purchaser with information concerningthe issuer. However, if the issuer is not a reportingcompany and is not exempt under Rule 12g3-2(b),a holder or the purchaser must have the right toobtain from seller or issuer, upon request, certainminimal reasonably current information concerningthe business of the issuer and its financial statements.

(c) A/B exchange offersRule 144A has also become particularly popular forglobal offerings of debt securities, in part because of aline of SEC “no-action” letters that permits issuerswho have sold debt securities to QIBs pursuant toRule 144A to subsequently register an exchange offerof identical securities for the Rule 144A securities.133

This procedure allows QIBs, subject to limitedexceptions, to obtain freely tradable registeredsecurities in exchange for the restricted, legendedsecurities they obtained in the Rule 144A offering.Because the exchange offer will go through the SECregistration process, most issuers and underwriters seekto conform the original Rule 144A offeringmemorandum as closely as possible to the requirementsof a full registration statement (including US Gaapreconciliation).

The availability of this exchange procedure allowsissuers and underwriters to complete transactionsquickly under Rule 144A to take advantage of market

conditions, but with the expectation that the issuerwill promptly register an exchange of identicalsecurities. As a result, purchasers generally do notrequire the liquidity discount they would otherwisedemand if the securities were to remain private. Inaddition to promising public registration under theSecurities Act, the issuer also typically agrees to fileperiodic reports with the SEC under the ExchangeAct, thereby enhancing public information andliquidity.

( i i ) “Section 4 (1-1/2)” resales Market practice has developed the so-called “Section 4(1-1/2)” exemption for resales of privately placedsecurities.134 (Section 4 (1-1/2) does not actually appearin the Securities Act and is instead the name given tothe practice of certain resales of private securities.)Under this exemption, securities that are initiallyprivately placed may be resold if the resales essentiallycomply with the requirements for the original Section4(2) private placement.

Typical restrictions in a Section 4 (1-1/2) transactioninclude that resales may only be made:

• on a non-public basis;

• to sophisticated investors who could have partic-ipated in the original private placement and who arebuying for investment and not with a view to distri-bution; and

• subject to limitations on onward resales (such asletters of representation from purchasers).

( i i i ) Rule 144Rule 144 provides conditions under which privatelyplaced securities may be resold to the public withoutcomplying with the registration requirements of theSecurities Act.135 Rule 144 requires:

• One-year minimum holding period:136 securities mustbe held for a minimum of one year from the date ofpurchase before any Rule 144 resale;


• Sales after one-year minimum holding period: afterthe one-year minimum holding period has expired,limited resales of restricted securities may be madeif:

- Information:137 either the issuer is an Exchange Actreporting company that has been subject toreporting requirements for 90 days prior to the saleand has filed all required reports in the 12 monthsprior to the sale, or certain other informationabout the issuer must be publicly available;

- Volume limitations:138 only certain amounts ofsecurities may be resold;

- Manner of sale:139 securities must be resold inunsolicited brokers’ transactions; and

- Notice of sale:140 if more than 500 shares or $10,000worth of securities are sold in any three-monthperiod, the seller must file a notice on Form 144with the SEC.

• Sales after two years:141 non-affiliates of the issuermay freely resell restricted securities once two yearshave passed from the date the securities wereacquired from an issuer or an affiliate of an issuer.142

Rule 802 – securities issuances inconnection with cross-borderexchange offers and businesscombinations

(i) GeneralSecurities Act Rule 802 provides an exemption fromregistration for offers and sales in any exchange offeror business combination involving the acquisition ofsecurities of a foreign private issuer. Rule 802 doesnot impose a dollar limitation on the value of securitiessold to US investors in an exempt transaction, andboth domestic US and foreign private issuers may relyon Rule 802.143 Rule 802 provides an exemption onlyfor the issuer of securities and not for affiliates of theissuer or any person who seeks to resell the securities.144

Accordingly, resales of securities acquired under Rule

802 must either be registered or structured to takeadvantage of an available exemption from registration.

( i i ) Requirements of Rule 802The requirements of Rule 802 are as follows:

• Limitation on US ownership:145 US holders ofsecurities must hold 10% or less of the class ofsecurities that is the subject of the exchange offer orbusiness combination. However, if there are no USshareholders, Rule 802 is not available.146

• Calculation of 10% limit: A US holder is defined asa person resident in the United States.147 Indetermining whether or not a holder is a USresident, a bidder must look through the recordownership of securities held by brokers, dealers,banks and other nominees located in the UnitedStates, the target company’s jurisdiction of incorpo-ration, and the jurisdiction that is the primarytrading market of the target securities.148 This is nota determination of ultimate beneficial ownership;instead, only the first line of ownership behind thebroker or nominee must be established. Thecalculation date is 30 days prior to thecommencement of the exchange offer or the solici-tation for a business combination.149 However, thecalculation excludes securities held by personsowning more than 10% of the class of securitiessought in the exchange offer or businesscombination, as well as securities held by thebidder.150

• Equal treatment of US holders:151 The bidder mustpermit US holders of securities to participate in theexchange offer or business combination on terms atleast as favourable as those offered to other holders,but is not required to extend the offering into anyUS state that would require registration or qualifi-cation of the transaction.




• Informational documents in the United States: If thebidder publishes or otherwise disseminates aninformational document to security holders inconnection with the exchange offering or businesscombination, it must furnish an English-languagetranslation of that document to the SEC undercover of Form CB by the first business day afterpublication or dissemination, and must also file aconsent to service of process on Form F-X.152 Itmust disseminate any informational document toUS security holders, in English, on a comparablebasis to that provided to security holders in thehome jurisdiction.153 In addition, if the bidderdisseminates information by publication in its homejurisdiction, it must publish the information in amanner reasonably calculated to inform US securityholders of the offer.154

• Legends:155 Any US offering documentation mustcontain a legend regarding the non-US nature ofthe transaction and the bidder’s disclosure practices,and must state that investors may have difficulty inenforcing rights against the bidder and its officersand directors.

• Restricted securities:156 The securities acquired in aRule 802 transaction will be restricted securities tothe same extent and proportion as the targetsecurities sought in the exchange offer and businesscombination (in other words, restricted securitieswill yield restricted securities, and unrestrictedsecurities will yield unrestricted securities).

Rule 801 – rights offerings

(i) GeneralSecurities Act Rule 801 provides an exemption fromregistration for certain rights offerings by foreignprivate issuers. A “rights offering” is defined for thesepurposes as the sale for cash of equity securities inwhich existing securities holders of a particular class(including holders of ADRs) are granted the right topurchase additional securities of that class, and the

number of additional securities the holders maypurchase is in proportion to the amount of securitiesthey hold on the record date of the offering.157

Like Rule 802, Rule 801 does not impose a dollarlimitation on the value of securities sold to USinvestors in an exempt transaction, but unlike Rule802 only foreign private issuers may rely on Rule801.158 Rule 801 provides an exemption only for theissuer of securities and not for affiliates of the issuer orany person who seeks to resell the securities.159

Accordingly, resales of securities acquired pursuant toRule 801 must be registered or exempt fromregistration.

( i i ) Requirements of Rule 801The requirements of Rule 801 are as follows:

• Limitation on US ownership: US securities holdersmust hold 10% or less of the class of securities thatis the subject of the rights offering.160 Thecalculation is done in the same manner as thecalculation under Rule 802 exemption, except thatthe date of calculation is the record date of the rightsoffering.161 As for Rule 802, if there are no USshareholders, Rule 801 is not available.162

• Equal treatment of US security holders:163 Thebidder must permit US security holders toparticipate in the rights offering on terms at least asfavorable as those offered to other holders, but isnot required to extend the offering into any USstate that would require registration or qualificationof the transaction.

• Informational documents in the United States: If theissuer publishes or otherwise disseminates aninformational document to security holders inconnection with the rights offering, it must furnishan English-language translation of that document tothe SEC under cover of Form CB by the firstbusiness day after publication or dissemination, andmust also file a consent to service of process on


Form F-X.164 It must disseminate any informationaldocument to US security holders, in English, on acomparable basis to that provided to security holdersin the home jurisdiction.165 In addition, if the issuerdisseminates by publication in its home jurisdiction,it must publish the information in a mannerreasonably calculated to inform US security holdersof the offer.166

• Eligibility of securities:167 The securities offered inthe rights offering must be equity securities of thesame class as the securities held by offerees in theUnited States (directly or through ADRs).

• Limitations on transfer:168 The terms of the rightsmust prohibit transfers by US security holdersexcept in accordance with Regulation S.

• Legends:169 Any US offering documentation mustcontain a legend regarding the non-US nature ofthe transaction and the issuer’s disclosure practices,and must state that investors may have difficulty inenforcing rights against the issuer and its officers anddirectors.



Registered transactions

(i) The three stages of registrationunder the Securities ActIn a registered transaction, it is unlawful:

• to offer or sell a security unless a registrationstatement with respect to that offering has been filedwith the SEC;170

• to sell a security unless a registration statement withrespect to that offering is in effect;171

• to use a prospectus to offer or sell a security unlessthat prospectus meets the requirements of theSecurities Act and the SEC (a conformingprospectus);172 and

• to sell a security unless the security (or confirmationof the sale) is accompanied or preceded by aconforming prospectus.173

As a result of these basic principles, the registrationprocess is generally divided into three stages:

• the quiet period – from the time an issuer decides tomake a public offering until it files its registrationstatement;

• the waiting period – from the time the registrationstatement is filed until it is declared effective; and

• the post-effective period – after the registration

statement has been declared effective by the SEC.

During each of these stages, publicity about the issuer isrestricted in distinct ways.

(i i) Restrictions on publicity during thequiet periodAs noted above, the pre-filing or quiet period beginswhen an issuer decides to make a public offering(usually by retaining an investment bank or banks toundertake the offering) and ends when the registrationstatement relating to the offering is first filed publiclywith the SEC.

During this period, the issuer may not make offers orsales of the securities being registered. The SEC hasconstrued the concept of premature offers (frequentlycalled “gun jumping”) broadly to include publicity thatdoes not refer to the proposed offering but which maynevertheless stimulate investor or dealer interest in theissuer or its securities. During this period, an issuershould not release publicly any forecasts, projections orpredictions relating to revenues, income or earnings pershare or concerning expected valuations, and should putin place procedures for review of public statements andpress releases.

Practice point:An issuer and its underwriters should pay close atten-tion to the contents of their websites (including hyper-linked information), which are routinely reviewed bythe SEC staff during the registration process.

26

Chapter 4 – Restrictions on publicity during securities offerings

Chapter 4Restrictions on publicity duringsecurities offerings


Notwithstanding the prohibitions imposed by theSecurities Act during the quiet period, a foreign privateissuer may:

• continue to advertise products and services and toissue press releases regarding factual business andfinancial developments in accordance with pastpractice (ordinary course advertising and pressactivity);174

• release a limited notice regarding the offering withinthe United States under Securities Act Rule 135; and

• conduct certain press activities outside the UnitedStates under Securities Act Rule 135e.

(a) Rule 135Rule 135 provides a safe harbour for publicannouncements of a planned registered offering duringthe quiet period if the announcement:

• contains a legend to the effect that it does notconstitute an offer of any securities for sale;175 and

• contains only limited information, including:176

- the name of the issuer;

- the title, amount and basic terms of thesecurities offered;

- the anticipated timing of the offering; and

- a brief statement of the manner and purpose ofthe offering, without naming the prospectiveunderwriters for the offering.

(b) Rule 135eRule 135e provides a general safe harbour for offshorepress activity. Under Rule 135e, a foreign private issuerthat will not be conducting its offering solely in theUnited States – that is, which has a bona fide intent tomake an offering offshore in addition to the US offering– may hold press conferences or give interviews tojournalists (including US journalists) outside the United

States at which the issuer discusses its intention toundertake a public offering. The issuer must provideaccess to both US and non-US journalists and ensurethat any written press releases or other press-relatedmaterials it uses meet the following requirements:177

• the materials must be distributed to journalists(including US journalists) outside the United States;and

• the materials must contain a legend stating that:

- they are not an offer of securities for sale in theUnited States;

- securities may not be offered or sold in theUnited States absent registration or anexemption from registration;

- any public offering in the United States may bemade only by means of a prospectus that maybe obtained from the issuer and that willcontain detailed information about the issuerand management, as well as financial statements;and

- whether the issuer intends to register theoffering in the United States.

These materials also must not include any purchaseorder or coupon that could be used to indicate interestin the proposed offering.

Practice point:Although Rule 135e does not limit the content of off-shore press announcements, other restrictions of theUS federal securities laws – such as the anti-fraudprohibitions of Exchange Act Rule 10b-5 – continueto apply. Some caution is therefore warranted inrelying on the rule.




(i i i) Restrictions on publicity during thewaiting periodThe waiting period extends from the time that theregistration statement is filed publicly with the SECuntil the time that it is declared effective by the SEC.During this period, offers but not sales of the securitymay be made. Accordingly, a foreign private issuermay:

• continue ordinary course advertising and pressactivity;179

• distribute a preliminary prospectus that meets therequirements of the Securities Act;

• make a limited notice within the United States underSecurities Act Rule 134; and

• continue to conduct certain press activities outsidethe United States under Rule 135e.

Rule 134Rule 134 provides a safe harbour for a publicannouncement that contains only limited information,including:

• the name of the issuer;

• the title and amount of securities being offered;

• a brief indication of the general type of business ofthe issuer;

• the price of the security;

• the names of the managing underwriters; and

• the approximate date on which it is anticipated theproposed sale to the public will begin.

(iv) Restrictions on publicity aftereffectiveness of the registrationstatementDuring the period after effectiveness of the registrationstatement, once the distribution of the securities hasbeen completed (that is, when the securities have beensold to investors), the limitations on publicity by theissuer are largely eliminated. If, however, a portion ofthe securities was sold offshore in reliance onRegulation S, the issuer’s post-closing publicity in theUnited States will continue to be limited during thedistribution compliance period, which generally extendsfor 40 days after the closing for foreign private issuers.

Restrictions on publicity inunregistered offerings

As discussed above, directed selling efforts or generalsolicitation or general advertising in the United Statescan destroy the availability of an exemption fromregistration. Accordingly, publicity about a planned orpending unregistered transaction is subject to certainlimitations. In particular, a foreign private issuer may:

• continue ordinary course advertising and pressactivity;180

• distribute a preliminary and final offeringmemorandum to certain investors;

• if available, make a limited notice within the UnitedStates under Rule 135c under the Securities Act; and

Practice point:Rule 135e applies only to press activities, and doesnot protect the transmission of press-related materi-als, including press releases, to investors.

Practice point:Note that even if Rule 135e is otherwise available, anissuer may not rely on the rule to provide internetaccess to its offshore press conferences or writtenpress-related materials issued offshore, unless itimplements procedures to ensure that only personsphysically located outside the United States will haveaccess to the press conferences or materials.178


• conduct certain press activities outside the UnitedStates under Rule 135e.

(i) Rule 135cRule 135c provides a safe harbour that permits acompany to deliver notice in the United States that itproposes to make, is making or has made anunregistered offering of securities. Rule 135c is availableto issuers subject to the reporting requirements of theExchange Act or exempt from reporting. It requires thefollowing:

• the notice may not be used for purposes ofconditioning the market in the United States;181

• the notice must state that the securities offered havenot been or will not be registered under theSecurities Act and may not be offered absentregistration or an exemption from registration;182 and

• the notice must contain only limited information,including:183

- the name of the issuer;

- the title, amount and basic terms of thesecurities being offered;

- the amount of the offering, if any, being madeby selling shareholders;

- the time of the offering; and

- a brief statement of the manner and purpose ofthe offering, without naming the underwriters.

Under Rule 135c, the notice may take the form of anews release or a written communication directed tosecurity holders or employees, or other publicstatements.184 The notice itself must be sent to the SECunder cover of Form 8-K, Form 6-K, or in accordancewith the provisions of Rule 12g3-2(b), as applicable.185

(i i) Rule 135eAs noted above, Rule 135e provides a safe harbour for

offshore press activity. This safe harbour is available forunregistered as well as registered transactions.



General

The most frequently asked questions at all-handsmeetings is “What financial statements are needed?”That seemingly simple question can prove verycomplicated to answer. We summerize below thefinancial statement requirements that apply when aforeign private issuer offers securities to the public in theUnited States, list its securities for trading in the UnitedStates or files a US annual report. We also briefly discussfinancial statements in connection with unregisteredtransactions. (For ease of illustration, we have assumedbelow that the issuer’s fiscal year is the calendar year.)

Practice point:This is usually the most difficult challenge for foreignprivate issuers seeking to access the US public mar-kets. The requirements are technical and SEC-expe-rienced members of the issuer’s audit team must beinvolved at the earliest possible stage.

30

Chapter 5 – Required financial statement disclosure

Chapter 5Required financial statementdisclosure


Annual and interim financialstatements

(i) Audited annual f inancial statements



What must be provided? Consolidated annual financial statements of the issuer, audited by an independent

auditor and accompanied by an audit report, consisting of:186

• balance sheet;

• income statement;

• statement of changes in equity;

• cashflow statement;

• related notes and schedules required by the system of accounting standards under

which the financial statements were prepared; and

• if not included in the primary financial statements, a note analyzing the changes in

each caption of shareholders’ equity presented in the balance sheet.

Note that separate financial statements may need to be included for guarantors, and

that both separate financial statements and certain pro forma financial information

may be required for acquired entities.

How many years must be included? Audited financial statements must cover each of the latest three financial years,187

except that:

• if the issuer has been in existence less than the prescribed number of years, it is

sufficient to provide information for the life of the issuer and its predecessors;188

• if a jurisdiction outside the United States does not require a balance sheet for the

earliest year of the three-year period, that balance sheet may be omitted;189 and

• in an initial registration statement, if the financial statements are presented in

accordance with US Gaap (rather than reconciled to US Gaap), the earliest of the three

years of financial statements may be omitted if that information has not previously been

included in a filing made under the Securities Act or the Exchange Act.190

In addition, whenever audited financial statements are required for a period of one,

two or three years, under S-X Rule 3-06 a single audited period of nine to 12 months

may count as a year if:


Practice point:As a result of marketing considerations, the last yearof audited financial statements is rarely more than 12months old.


How many years must be included?

(continued)

• the issuer has changed its fiscal year during the period;

• the issuer has made a significant business acquisition for which financial statements

are required under S-X Rule 3-05 (discussed below) and the financial statements

covering the interim period pertain to the business being acquired; or

• the SEC grants permission to do so under S-X Rule 3-13, provided that financial

statements are filed that cover the full fiscal year or years for all other years in the

time period (note, however, that this permission is rarely granted).

How old can the financial statements

be?191

The last year of audited financial statements cannot be more than 15 months old at

the time of the offering or listing, except:

• in the case of a registration statement relating to an initial public offering, the

audited financial statements must be as of a date not older than 12 months prior to

the time the document is filed;192 and

• in the case of a registration statement relating to an offering of securities: (i) upon

the exercise of outstanding rights granted pro rata to all existing security holders of

the applicable class; (ii) pursuant to a dividend or interest reinvestment plan; or (iii)

upon the conversion of outstanding convertible securities or upon the exercise of

outstanding transferable warrants, the financial statements may be up to 18 months

old.193

Practice point:The SEC encourages (but does not require) issuers tohave an independent auditor review the interim finan-cial statements. It is not typical to refer to such areview in the registration statement. If this is done,however, a copy of the interim review report mustbe included in the document.195



What must be provided? If a registration statement becomes effective more than nine months after the end

of the last audited financial year, the issuer must also provide consolidated interim

financial statements. (Interim financial statements are not required for annual

reports.) Those financial statements:194

• may be unaudited, but must either be reconciled to, or prepared in accordance

with, US Gaap;

• must cover at least the first six months of the financial year, unless the issuer publishes

more current interim information, in which case that information must be included;

• should include a balance sheet, income statement, cash flow statement, statement

of changes to equity and selected note disclosures;

• may be in condensed form, as long as they contain the major line items from the

latest audited financial statements and include the major components of assets,

liabilities and equity (in the case of the balance sheet); income and expenses (in the

case of the income statement); and the major subtotals of cash flows (in the case of

the cashflow statement); and

• should include comparative interim statements for the same period in the prior

financial year, except that the requirement for comparative balance sheet

information may be met by presenting the year-end balance sheet.

(i i) Unaudited interim financial statements


(i i i) Selected financial information; capitalization


Statement of capitalization and

indebtedness

• The issuer must include a statement of capitalization and indebtedness as of a date

no earlier than 60 days prior to the date of the registration statement.199 (Annual

reports need not include a statement of capitalization and indebtedness.)200

• The capitalization statement must show the issuer’s capitalization on an actual

basis and, if applicable, adjusted to reflect the sale of the securities being issued and

the intended use of proceeds of the issuance.

• The capitalization statement should distinguish between guaranteed and unguar-

anteed, and secured and unsecured, indebtedness.

Selected financial information • The issuer must include selected historical financial income statement and balance

sheet data for each of the last five fiscal years.196

• However, selected financial data for either or both of the two earliest years may

be omitted if the issuer represents to the SEC in the review process that such

information cannot be provided, or cannot be provided on a restated basis, without

unreasonable effort or expense.197

• If interim financial statements are included, the selected financial data should be

updated for that interim period (which may be unaudited, if that fact is stated) and

comparative data from the same period in the prior financial year should be

provided, except that the requirement for comparative balance sheet data may be

met by presenting the year-end balance sheet information.198

Reconciliation to US Gaap

(i) Annual audited and interimunaudited financial statementsThe annual audited and interim unaudited financialstatements of a foreign private issuer included in aregistration statement or an annual report may beprepared using either US Gaap, IAS or local Gaap.201 Iflocal Gaap or IAS is used in the preparation of thefinancial statements, the consolidated financialstatements (both annual and interim) must include areconciliation to US Gaap.202 The reconciliationcomprises both disclosure of the material variationsbetween local Gaap or IAS and US Gaap, as well as anumerical quantification of those variations.203 A foreign

private issuer registering for the first time must reconcileonly the two most recently completed fiscal years (andany interim period).204

The following items frequently require discussion andquantification as a result of the reconciliation requirements:business combinations; stock compensation; restructuringcharges;205 impairments; deferred or capitalized costs;investments; foreign currency translations; deferred taxes;pensions; derivatives; research and development; andrevenue recognition.206 In particular:

• Income statements: net income is required to bereconciled in either of three ways: a tabular format;on the face of the income statement; or in a note tothe income statement. In addition, each materialvariation must be described and quantified as aseparate reconciling item, although several materialvariations may be combined on the face of theincome statement if shown separately in a note.207

Earnings per share computed according to US Gaapmust also be included if materially different fromearnings per share under local Gaap or IAS.208

• Balance sheets: a reconciliation must be prepared forany line item that would have been materiallydifferent had that item been prepared using USGaap.209

• Cash flow statements: for each period for which anincome statement is presented and reconciled, a cashflow statement prepared in accordance with US Gaapor International Accounting Standard No 7 must beincluded or, alternatively, an explanatory note to thefinancial statements must be included that describesthe differences that would have resulted if theinformation had been prepared using US Gaap.210

(i i) Selected financial informationLike the annual and interim financial statements, therequired selected financial information may also beprepared using US Gaap, local Gaap or IAS.211 Areconciliation to US Gaap of local Gaap or IAS selectedfinancial information must generally be provided for allfive years covered by the selected financial information(and any interim periods).212 First-time registrants,however, need only prepare reconciliations for the twomost recent years (and any interim periods).213 In thatcase, an additional year of reconciliation is required foreach year following the initial offering in subsequentannual reports.214

If a foreign private issuer prepares its primary financialstatements in accordance with US Gaap (rather thanreconciling to US Gaap), it may present the five years ofselected financial information under local Gaap or IASwithout reconciliation,215 although the SEC staff will

require at least two years of selected financial data underUS Gaap (and will require the full five years if theearliest three years are available under US Gaap).216

( i i i) MD&AA foreign private issuer’s MD&A disclosure should focuson its primary financial statements, whether thosestatements are prepared in accordance with US Gaap,local Gaap or IAS.217 To the extent those statements areprepared under local Gaap or IAS, a discussion shouldbe included of the reconciliation to US Gaap and anydifferences between local Gaap or IAS and US Gaap nototherwise discussed in the reconciliation and needed foran understanding of the financial statements as awhole.218

Nevertheless, some disclosures routinely made underUS Gaap may rise to a level of materiality requiringdisclosure in MD&A, including:219

• material undisclosed uncertainties (such as reasonablypossible loss contingencies220), commitments (such asthose arising from leases) and credit risk exposuresand concentrations;

• material unrecognized obligations (such as pensionobligations);

• material changes in estimates and accountingmethods, and other factors or events affectingcomparability;

• defaults on debt and material restrictions ondividends or other legal constraints on the use ofassets;

• material changes in the relative amounts ofconstituent elements comprising line items presentedon the face of the financial statements;

• significant terms of financings which would revealmaterial cash requirements or constraints;

• material subsequent events, such as events that affectthe recoverability of recorded assets;




• material related-party transactions that may affect theterms under which material revenues or expenses arerecorded; and

• significant accounting policies and measurementassumptions not disclosed in the financial statements,including methods of costing inventory, recognizingrevenues and recording and amortizing assets, whichmay bear upon an understanding of operating trendsor financial condition.

Audit reports; currency translation

(i) Audit reportsAudited financial statements must be accompanied by anaudit report, covering each of the audited periods.221 Theaudit report must include, among other things, theopinion of the responsible accountant as to (i) the financialstatements covered by the report and the accountingpractices and principles set forth in those financialstatements, and (ii) the consistency of the application ofthe accounting principles used.222 Any matter which theresponsible accountant takes exception to must be clearlyidentified.223 The SEC will generally not accept an auditreport containing a disclaimer or qualification.224

Note that the audit report must state that the audit hasbeen conducted in compliance with US Gaas, even fornon-US Gaap financials.225 The auditor must also meetUS standards for independence.226

(i i) Currency translationForeign private issuers may state amounts in their financialstatements in any currency they deem appropriate (thereporting currency).227 However, only one currency maybe used as reporting currency.228 The reporting currencymust be prominently disclosed on the face of the financialstatements.229 The issuer must also disclose if dividendswill be paid in a different currency and any material

exchange restrictions or controls relating to the reportingcurrency, the currency of the issuer’s domicile or thecurrency in which dividends will be paid.230

If the reporting currency is not the US dollar, USdollar-equivalent financial statements or conveniencetranslations must not be included, except that an issuermay present a translation of the most recent fiscal yearand any subsequent interim period.231 The exchangerate used for any convenience translations should be asof the most recent balance sheet date included in theregistration statement, except where the exchange rateof the most recent practicable date would yield amaterially different result.232 The SEC will allow anissuer to recast its previously reported financialstatements for periods prior to January 1 1999 intoeuros, using the exchange rate between the euro and theprior reporting currency fixed on January 1 1999.233

Issuers that do not prepare their financial statements inUS dollars must provide disclosure of the exchange ratebetween the reporting currency and the US dollar.234

That disclosure should show:

• the exchange rate at the last practicable date;

• the high and low exchange rates for each monthduring the previous six months; and

• for the five most recent financial years, and anysubsequent interim period covered by the financialstatements, the average rates for each period (basedon the average exchange rates on the last day of eachmonth during the period).235

Financial statements of recent andprobable acquisitions; pro formafinancial information

(i) GeneralIn addition to financial statements of the issuer, S-XRule 3-05 generally requires the inclusion inregistration statements for public offerings or US listings(but not annual reports)236 of audited financial statementsfor a significant acquisition of a business that has closed,

Practice point:Many auditing firms are not qualified or willing to filetheir audit reports with the SEC, and may be evenless willing to do so after Sarbanes-Oxley.


or as soon as the acquisition becomes probable in caseswhere the transaction is at the highest level of signif-icance (as discussed below). Furthermore, where amaterial acquisition has occurred or is probable, S-XRule 11-01 generally requires pro forma financialinformation in the registration statement for the mostrecent fiscal year and most recent interim period.237

The term “business” is defined in S-X Rule 11-01(d) toinclude an operating entity or business unit, but excludesmachinery and other assets that do not generate a distinctprofit or loss stream.238 Acquisitions of related businessesare treated as a single acquisition for purposes of the signif-icance tests. Businesses are considered “related” if they areowned by a common seller, under common management,or their acquisitions are conditional upon each other or asingle common event. The term “probable” is interpretedto mean more likely than not. The SEC staff has takenthe general view that an acquisition becomes probableupon the signing of a letter of intent.239

Whether financial statements for recent and probableacquisitions must be included in the filing also dependsupon the significance of the acquisition. Significance ofan acquired business is evaluated under S-X Rule 1-02(w) based upon three criteria:

• the amount of the issuer’s investment in the acquiredbusiness compared to the issuer’s total assets;

• the total assets of the acquired business compared tothe issuer’s total assets; and

• the pre-tax income240 from continuing operations ofthe acquired business compared to the issuer’s pre-taxincome from continuing operations;

in each case, based on the issuer’s most recent auditedfinancial statements.241

Generally:

• if the acquired business exceeds 20% of any of the threesignificance criteria, then one year of audited financialinformation is required, as well as the interim financial

information that would be required for the issuer;

• if it exceeds 40%, then two years of audited andinterim financial information is required; and

• if it exceeds 50%, three years of audited and interimfinancial information is required.

(i i) Financial statement requirementsThe table on the following page summarizes the financialstatement requirements in connection with acquisitions.

One notable exception to these rules is that below the50% significance level, no audited financial statementsare required in a registration statement for probableacquisitions or for completed acquisitions consummatedup to 74 days before the date of the offering.243

Practice point:If financial statements for an acquired business arerequired, the acquired company’s auditors may notbe qualified (or willing) to have their audit report filedwith the SEC. The auditors may also be unfamiliarwith the procedures required under US Gaas. Theadditional work required to get those financial state-ments into compliant form can be a significant timingissue.

Practice point:The rules require the amounts used to be determinedon the basis of US Gaap rather than local Gaap or IAS(as used by the issuer or the acquired company).242

However, foreign private issuers typically make thecalculation in the first instance on the basis of the sys-tem of accounting used in their primary financial state-ments (that is, local Gaap or IAS).

Practice point:These determinations are often difficult and should beaddressed by the issuer and its accounting firm beforecommencing the offering process.




Compliance with these rules is also facilitated by the S-XRule 3-06 exception that allows a single audited period ofnine to 12 months to count as a year for an acquiredbusiness.

Staff Accounting Bulletin 103 (SAB 103) provides a specialinterpretation of S-X Rule 3-05 for initial public offeringsinvolving businesses that have been built by theaggregation of discrete businesses that remain substantiallyintact after acquisition (that is, industry roll-ups). (SAB 103recodifies, with slight modifications, Staff AccountingBulletin 80.) SAB 103 allows first-time issuers to considerthe significance of businesses recently acquired or to beacquired based on the pro forma financial information forthe issuer’s most recently completed fiscal year.

While compliance with this interpretation requires anapplication of SAB 103’s guidance and examples on acase-by-case basis, the policy is to allow currently

Practice point:Notwithstanding this exception, market practice istypically to include financials for any acquisition abovethe 20% threshold as soon as it has become proba-ble and to require at least a one-year audit, even ifthe 74-day grace period has not yet expired.


1. Individual acquisition at or below the 20%

significance level.

2. Individual acquisition (or multiple acquisitions of

related businesses, as described above) in excess of the

20% significance level, but not above the 40% level.

3. Multiple acquisitions of unrelated businesses below the

20% significance level individually, but aggregating in

excess of the 50% level of significance.

4. Individual acquisition (or multiple acquisitions of

related businesses, as described above) in excess of the

40% significance level, but not above the 50% level.

5. Individual acquisition above the 50% significance level.

6. Securities being registered in an offering to

stockholders of the acquired company (such as a stock-

for-stock merger).

1. No requirement to include audited financials.

2. Audited financials for the most recent fiscal year and

unaudited financials for any interim periods will be required, as

specified in S-X Rules 3-01 and 3-02.

3. Audited financials for the most recent fiscal year and any

interim periods required for a substantial majority of the

individually insignificant acquisitions required.

4. Audited financials for the two most recent fiscal years

(including one balance sheet) and any interim periods required.

5. Three years of audited financial statements (including two

balance sheets) and any interim periods required for all

completed and probable acquisitions at this level of significance.

However, financial statements for the earliest of the three fiscal

years required may be omitted if net revenues reported by the

acquired business in its most recent fiscal year are less than $25

million.

6. Three years of financial statements (including two balance

sheets) of the business to be acquired in the transaction are

generally required and in most cases the most recent fiscal year

must be audited.244

Acquisition scenario Reporting requirement

insignificant business acquisitions to be excluded fromthe financial statement requirements while still ensuringthat the registration statement will include not less thanthree, two and one year(s) of financial statements for notless than 60%, 80% and 90%, respectively, of theconstituent businesses of the issuer.245

Note that the permitted age of financial statements ofacquired or soon-to-be acquired businesses is the same asfor the issuer itself.246 This means, for example, that theaudited annual financial statements of the acquired businessmay not be more than 15 months old (with certainexceptions noted above).

Notwithstanding the requirements outlined above,under S-X Rule 3-05(b)(4)(iii), separate financialstatements for the acquired business do not need to bepresented once the operating results of the acquiredbusiness have been reflected in the issuer’s auditedconsolidated financial statements for a complete fiscalyear (a full audit cycle) unless the financial statementshave not been previously filed by the issuer or unless theacquired business is of such significance to the issuer thatomission of such financial statements “would materiallyimpair an investor’s ability to understand the historicalfinancial results of the registrant.”247

(i i i) Operating real estateThe acquisition or probable acquisition of operating realestate is subject to an additional set of disclosurerequirements under S-X Rule 3-14. S-X Rule 3-14addresses income-producing real estate such asapartment buildings and shopping malls. (Incomparison, where real estate is incidental to the serviceprovided by a business, such as a hotel, S-X Rule 3-05alone would apply.) Generally, S-X Rule 3-14 requiresthat audited income statements must be provided for thethree most recent fiscal years for any such acquisition orprobable acquisition that would account for 10% ormore of the issuer’s total assets. S-X Rule 3-14 alsoprescribes certain variations from the typical form ofincome statement and allows for only one year ofincome statements to be provided if the property is notacquired from a related party and certain additionaltextual disclosure is made.248

( iv) MD&AWhenever historical financial statements of an acquiredbusiness (or probable acquisition) are included in aregistration statement, the issuer should consider whethera separate MD&A section discussing those financialstatements is appropriate.249 Although there is no specificline item requiring that a second MD&A be included, it isnot uncommon for issuers to interpret Securities Act Rule408250 as requiring a full discussion and analysis of thefinancial statements of an acquired business (or probableacquisition), particularly where it exceeds 50% on any ofthe three significance criteria discussed above.

(v) Pro forma financial informationAs noted above, whenever audited financials of anacquired business are required, S-X Article 11 requires:

• a condensed pro forma balance sheet as of the end ofthe most recent period for which a consolidatedbalance sheet is required (unless the transaction isalready reflected in that balance sheet);251 and

• a condensed pro forma income statement for themost recent fiscal year and the most recent interimperiod (unless the historical income statement reflectsthe transaction for the entire period).252

The SEC will permit the inclusion of additional proforma information that does not comply with S-XArticle 11 if this information is required by a foreignregulator.253 In that case, the issuer must indicate clearlywhat the presentation represents, state that theinformation does not comply with Article 11 andexplain why the information is being included.254

Practice point:The SEC’s pro forma rules permit adjustments thatare directly related to the acquisition and relatedfinancing transactions. Adjustments for expected syn-ergies and cost savings that are not expressly mandat-ed by the acquisition documents will generally not bepermitted.




(vi) Reconcil iation to US Gaap

The financial statements provided for an acquiredforeign business may be prepared using local Gaap orIAS, but must be reconciled to US Gaap when theacquired business is at or above the 30% level for any ofthe significance tests.255 The pro forma financialinformation should either be prepared on a US Gaapbasis or on a local Gaap or IAS basis accompanied by aquantified reconciliation to US Gaap.256

Guarantor financial statements

A guarantee of a security (such as a guarantee of a debtor preferred equity security) is itself a security that mustbe registered under the Securities Act, absent anapplicable exemption. As a result, under S-X Rule3-10(a), the general rule is that guarantors are requiredto present the same financial statements as the issuer ofthe guaranteed securities.257 Fortunately, S-X Rules 3-10(b) to (f) contain a number of important exceptionsthat permit issuers to disclose financial informationabout guarantors in a summary format using a footnoteto their financial statements.258 Although the footnoteapproach can involve a fair amount of effort, it is far less

burdensome than providing separate audited financialstatements for every guarantor, which would of coursebe prohibitively expensive in many cases.

S-X Rules 3-10(e) and (f) go even further, dispensingwith any additional information requirement forguarantors in the case of a parent company issuer thatdoes not have independent assets or operations if all ofthe non-guarantor subsidiaries are “minor.”259 US Gaapreconciliation is required in the footnote when theparent’s financial information is prepared under adifferent set of accounting principles.260 In the chartbelow, we review the provisions of S-X Rule 3-10 asthey apply to the following five common situations:

• parent company issuer of securities guaranteed byone or more subsidiaries;

• operating subsidiary issuer of securities guaranteed byparent company;

• finance subsidiary issuer of securities guaranteed byparent company;

• subsidiary issuer of securities guaranteed by parentcompany and one or more other subsidiaries ofparent company; and

• recently acquired subsidiary issuer or subsidiaryguarantor.

Practice point:A standstill period after a default before investors canpursue a guarantor (as is common in upstream guar-antee structures in Europe) will not satisfy the full andunconditional requirement, and will result in arequirement for separate financial statements.

Practice point:Even if pro forma adjustments for an acquired businessare not required because the financial statements of theacquired businesses are not required to be included inthe prospectus, the underwriters will often request thatthe adjustments resulting from such an acquisition nev-ertheless be included in the pro forma financial infor-mation. This in turn will require accountants’ “com-fort” on the historical information for the acquiredcompany included in the pro forma presentation.

Practice point:The SEC’s pro forma financial information require-ments may conflict with local stock exchange or listingrules or accounting requirements, which need to beconsidered carefully in any multi-jurisdictional offering.




1. Parent company issuer of securities guaranteed by some

or all of issuer’s subsidiaries, where:

• the subsidiary guarantors are 100% owned261 by the

parent company issuer;

• the guarantee is full – the amount of the guarantee may

not be less than the underlying obligation;262

• the guarantee is unconditional – holders must be able to

take immediate action against the guarantor after a

default on the underlying obligation; and

• the guarantees are joint and several (if there are

multiple guarantors).263

2. Operating subsidiary issuer of securities guaranteed by

parent company, where:266

• the operating subsidiary issuer is 100% owned by the

parent company guarantor;

• the guarantee is full and unconditional; and

• no other subsidiary of the parent is a guarantor.

2. No separate financial statements for operating subsidiary

required under S-X Rule 3-10(c) if the parent’s financial

statements are filed for the periods required and they include an

audited footnote with condensed, consolidating financial

information267 for each such period, with separate columns for:

• the parent company;

• the operating subsidiary issuer;

• any non-guarantor subsidiaries on a combined basis;268

• consolidating adjustments; and

1. No separate financial statements for subsidiaries required

under S-X Rules 3-10(e) and (f) if the parent’s financial


audited footnote with condensed, consolidating financial

information264 for each such period, with separate columns for:


• the subsidiary guarantor (or subsidiary guarantors on a

combined basis);

• any non-guarantor subsidiaries on a combined basis;265


• total consolidated amounts.

Note 2 to S-X Rule 3-10(e) and Note 1 to S-X Rule 3-10(f) allow

a conditional exemption from providing the footnote if the

parent company has no independent assets or operations, the

non-guarantor subsidiaries are “minor,” and there is a footnote

to this effect in the parent financial statements that also notes

that the guarantees are full and unconditional and joint and

several. Under S-X Rule 3-10(h)(5), a parent company has “no

independent assets or operations” if each of its total assets,

revenues, income from continuing operations before income

taxes, and cash flows from operating activities (excluding

amounts related to its investment in its consolidated subsidiaries)

is less than 3% of the corresponding consolidated amount.

Guarantee scenario Financial statement requirements



3. Finance subsidiary issuer of securities guaranteed by

parent company, where:269

• the finance subsidiary issuer is 100% owned by the

parent company guarantor;

• the guarantee is full and unconditional; and


4. Subsidiary issuer of securities guaranteed by parent

company and one or more other subsidiaries of parent

company – applies to both operating and finance

subsidiaries, where:

• the issuer and all subsidiary guarantors are 100% owned

by the parent company guarantor;

• the guarantees are full and unconditional, joint and

several;270 and



This exception is also available if an operating subsidiary issuer

meets these requirements except that the parent is a co-issuer with

the subsidiary, rather than a guarantor.

3. No separate financial statements for finance subsidiary

required under S-X Rule 3-10(b) if the parent’s financial


audited footnote with:

• a statement that the finance subsidiary issuer is a 100% owned

finance subsidiary of the parent and the parent has fully and

unconditionally guaranteed the securities; and

• additional disclosure under S-X Rule 3-10(b)(4) relating to

limitations on the ability of the issuer and guarantor to obtain

dividends and loans from their subsidiaries.

This exception is also available if a finance subsidiary issuer meets

these requirements except that the parent is a co-issuer with the

subsidiary, rather than a guarantor.

4. No separate financial statements for subsidiaries required

under S-X Rule 3-10(d) if the parent’s financial statements are

filed for the periods required and they include an audited

footnote with condensed, consolidating financial information271

for each such period, with separate columns for:


• the subsidiary issuer;

• the guarantor subsidiaries on a combined basis;272

• any non-guarantor subsidiaries on a combined basis;




Investments accounted for underthe equity method

S-X Rule 3-09 generally requires that registrationstatements and annual reports include audited financialstatements for significant investments in less-than-majority-owned investees that are accounted for underthe equity method. S-X Rule 3-09 applies whether theinvestee is held by an issuer, a subsidiary or anotherinvestee.274

Significance for these purposes is evaluated under S-XRule 1-02(w) based on the following two criteria:

• the amount of the issuer’s investment in and advancesto the investee compared to the total assets of theissuer and its subsidiaries on a consolidated basis; and

• the equity of the issuer and its other subsidiaries inthe pre-tax income from continuing operations ofthe equity investee compared to that income of theissuer and its subsidiaries on a consolidated basis.275

These tests are performed as of the end of each yearpresented in the issuer’s financial statements.

Full audited financial statements as of the same dates andfor the same periods as the audited consolidated financialstatements of the issuer are required where the equityinvestee meets either of the two criteria above at the 20%or greater significance level.276 For equity investees ornon-consolidated subsidiaries which meet any of thethree S-X Rule 1-02(w) criteria at the greater than 10%but not more than 20% significance level, S-X Rule 4-08(g) requires the presentation of summary financialinformation as described by S-X 1-02(bb). Financialstatements of equity investees that are prepared underlocal Gaap or IAS do not have to be quantitativelyreconciled to US Gaap unless either of the two criteria isgreater than 30% (calculated on a US Gaap basis).277 Adescription of the differences in accounting methods isrequired, however, regardless of the significance levels.278



5. Recently acquired subsidiary issuer or subsidiary

guarantor, where:

• the subsidiary has not been included in the audited

consolidated results of the parent company for at least

nine months of the most recent fiscal year; and

• the purchase price or net book value (as of the most

recent fiscal year end prior to the acquisition), whichever

is greater, of the subsidiary (or group of subsidiaries that

were related prior to the acquisition) is 20% or more of

the principal amount of the securities being registered.

This exception is also available if a subsidiary issuer meets these

requirements except that the parent is a joint and several co-issuer

with the subsidiary, rather than a guarantor.

5. Separate financial statements required under S-X Rule 3-10(g)

for each such subsidiary, including:

• audited financial statements for the subsidiary’s most recent

fiscal year prior to the acquisition; and

• unaudited financial statements for any required interim

periods. 273

Requirements apply even if (i) the recently acquired subsidiary would

otherwise be eligible for the use of condensed consolidating footnote

presentation or (ii) S-X Rule 3-05 would not require financial

statements.



Industry guides and othertransaction-specific guidance

(i) Industry guidesPursuant to Item 801 of Regulation S-K, the SECpublishes the following six industry guides whichrequire enhanced disclosure of financial and operationalmetrics for issuers in certain industries:279

• Guide 2 – Disclosure of oil and gas operations: requiresdisclosure of reserve estimates, sales and productioncosts per unit, numbers of productive wells,developed and undeveloped acreage, drilling activity,and delivery commitments;

• Guide 3 – Statistical disclosure by bank holdingcompanies: requires disclosure of analyses of interestearnings, investment and loan portfolios, loan lossexperience, deposit types, returns on equity andassets, and short-term deposits;

• Guide 4 – Prospectuses relating to interests in oil andgas programmes: requires enhanced disclosure relatingto the offering terms and participation in costs andrevenues among investors and others, as well as a ten-year financial summary of any drilling programmes bythe issuer and its associates, including recovery oninvestment for investors in those programmes;

• Guide 5 – Preparation of registration statementsrelating to interests in real estate limited partnerships:requires a summary of the financial performance ofany other real estate investment programmessponsored by the general partner and its affiliates;

• Guide 6 – Disclosure concerning unpaid claims andclaim adjustment expenses of property-casualtyinsurance underwriters: requires disclosure of detailsof reserves and historical claim data, if reserves forunpaid property casualty claims and claim adjustmentexpenses of the issuer, its consolidated and unconsol-idated subsidiaries and equity investees exceed 50% ofthe common stockholders’ equity of the issuer and itsconsolidated subsidiaries; and

• Guide 7 – Description of property by issuers engaged orto be engaged in significant mining operations: requiresdisclosure of information relating to each of themines, plants and other significant properties ownedor operated (or intended to be owned or operated)by the issuer, including location of the property, briefdescription of the title, claim or lease to the property,a history of previous operations, and a description ofthe present condition and operations on the property.

(i i) Supplemental schedules for certaintransactionsS-X Rule 5-04 requires a number of supplementalschedules for particular industries and circumstances.Each schedule contains additional financial informationthat must be audited and provided with the registrationstatement or annual report. The schedules include:

• Schedule I — Condensed financial information ofregistrant (known as “parent-only” financialstatements): requires condensed balance sheets andstatements of income and cash flows on a non-consolidated basis if as of the end of the latest fiscalyear the amount of restricted net assets of subsidiariesexceeds 25% of the issuer’s consolidated assets.Restricted net assets are the issuer’s proportionateshare of net assets of consolidated subsidiaries (afterinter-company eliminations) which as of the end ofthe most recent fiscal year may not be transferred tothe parent company by subsidiaries in the form ofloans, advances or cash dividends without the consentof a third party (that is, lender, regulatory agency,foreign government etc);280

Practice point:Compiling the information required by these industryguides may be a significant undertaking, and the audi-tors should coordinate with the issuer’s financial andoperating management early in the process if anindustry guide applies to an offering.


• Schedule II — Valuation and qualifying accounts:requires an analysis of each valuation and qualifyingaccount (for example, allowance for doubtfulaccounts, allowance for obsolescence);

• Schedule III — Real estate and accumulateddepreciation: requires real estate operating andinvestment companies to disclose certain financialdetails regarding each of their properties;

• Schedule IV — Mortgage loans on real estate: requiresreal estate operating and investment companies todisclose details of each mortgage loan which accountsfor 3% or more of the carrying value of all of theissuer’s mortgages; and

• Schedule V — Supplemental information concerningproperty-casualty insurance operations: requiresdisclosure as to liabilities on property-casualtyinsurance claims if the issuer, its subsidiaries or 50%-or-less owned equity basis investees have suchliabilities. However, the schedule may be omitted ifreserves for unpaid property-casualty claims andclaims adjustment expenses did not, in the aggregate,exceed 50% of common stockholders’ equity of theissuer and its consolidated subsidiaries as of thebeginning of the fiscal year.

Special requirements for publicofferings

(i) Item 17 and Item 18Form 20-F provides two levels of financial statementdisclosure: Item 17 and Item 18. Item 18 requires amore thorough adaptation of the financial statements toUS Gaap and the requirements of Regulation S-X thandoes Item 17.281 According to the SEC, the distinctionbetween Items 17 and 18 is based on a classification ofthe requirements of US Gaap and S-X into those thatspecify the methods of measuring the amounts shownon the face of the financial statements, and thoseprescribing disclosures that explain, modify orsupplement the accounting measurements.282

Disclosures that are required by US Gaap but not localGaap or IAS need not be furnished for Item 17283

(although they may need to be disclosed underMD&A).

Compliance with Item 17 is required for annual reportsand for Exchange Act registration statements in connectionwith listings in the United States, while registrationstatements under the Securities Act in connection withpublic securities offerings generally require compliancewith Item 18.284 Foreign private issuers may voluntarilyreport under Item 18 for all of their filings with the SEC.

The following is a list of disclosure items that are oftenrequired by Item 18 and therefore necessary to beincluded in any financial statements contained in apublic offering registration statement under theSecurities Act:

• disclosure of unconditional purchase obligations orother commitments and guarantees;

• a description of stock option plans including thenumber of shares under option and option price;

• description of property, plant and equipment undercapital leases;

• components of pension expense and description ofthe plans;

• disclosure of related-party transactions, including themonetary value of such transactions;

• a schedule of debt repayments over the next fiveyears;

Practice point:Many foreign private issuers listing existing securities inthe United States comply with the more extensiverequirements of Item 18, even if they have no plansto file a registration statement to sell new securities inthe United States in the future. The secondary mar-ket and securities analysts generally require the addi-tional information for comparability to other issuers.




• disclosure of possible loss contingencies that have notbeen recognized in the financial statements;

• disclosure of the fair value of financial instruments;and

• information on income taxes.

In addition, information on sales, assets and operatingprofit by business segment and geographic area must beprovided.

(i i) Segment reportingUnder Item 18, in addition to all the consolidatedfinancial information required to be included in aregistration statement, companies in more than one lineof business may also be required to include separaterevenues and operating data for each line of business.This requirement is a function of whether thecompany’s business is comprised of more than onesegment. S-X Rule 3-03(e) and Item 101(b) ofRegulation S-K require certain financial reporting andtextual disclosure for each segment, as defined by USGaap.

The Financial Accounting Standards Board Statement ofFinancial Accounting Standards No 131 (SFAS 131),“Disclosures About Segments of an Enterprise andRelated Information,” provides detailed guidance forwhen a business constitutes an operating segment andhow its discrete financial information must be reported.Generally, an operating segment is a component of alarger enterprise:

• that engages in business activities from which it mayearn revenues and incur expenses (including revenuesand expenses relating to transactions with othercomponents of the same enterprise);

• whose operating results are regularly reviewed by theenterprise’s chief operating decision maker285 to makedecisions about resources to be allocated to thesegment and assess its performance; and

• for which discrete financial information is available.

The aim of segment reporting is to align public financialreporting with a company’s internal reporting in order topermit financial analysts and the public to see the overallenterprise the way management sees it. Whether anissuer considers its enterprise as having more than onesegment is highly fact specific and often depends onfactors such as economic similarity, the similarity of theproducts or services sold, the nature of the productionprocess, customer type, distribution methods, and theregulatory environment for the business. The determi-nation is very subjective and is often the subject of muchdiscussion with the company’s accountants and, throughthe SEC comment process, with the SEC. The mostcritical factor in determining whether an issuer has morethan one segment is how management runs its business.286

Once a segment has been identified, the issuer mustprovide information about the segment if it meets anyof the following 10% thresholds:

• its reported revenue (including both sales to externalcustomers and intersegment sales) is 10% or more ofthe combined revenue (internal and external) of allreported operating segments;

• the absolute amount of its reported profit or loss is10% or more of the greater, in absolute amount, of(1) the combined profit of all operating segments thatdid not report a loss or (2) the combined loss of alloperating segments that did report a loss; or

• its assets are 10% or more of the combined assets ofall operating segments;

A company with more than one segment in excess ofthese size requirements must disclose information foreach such segment including the revenues from externalcustomers, a measure of profit or loss287 and the totalassets attributable to that segment, as well as a reconcil-iation to the corresponding consolidated amounts.Additional information on items such as equityinvestments and capital expenditures may be requiredunder SFAS 131 if such amounts are reviewed by thecompany on a segment basis. For interim periods,disclosure must include revenues, a measure of profit or


loss for each segment, reconciliations and materialchanges to total assets. Financial disclosure for segmentswill typically be included in the financial statements andbe cross-referenced as part of a discussion on operatingsegments in MD&A.288 The effect of these requirementsis to force disclosure of profitability by segment, whichmany issuers are reluctant to do for competitive reasons.

(i i i) Coverage ratiosUnder Item 503(d) of Regulation S-K, any registrationstatement covering debt securities must include the ratioof earnings to fixed charges and any registrationstatement covering preferred stock must include theratio of combined fixed charges and preferencedividends to earnings. Coverage ratios must be includedfor each of the last five fiscal years and for any interimperiods presented. If the proceeds from the sale of debtor preferred equity will be used to repay outstandingdebt or to retire other securities and the change in theratio would be 10% or greater, a pro forma ratio mustbe included for the most recent fiscal year and the latestinterim period presented.

(iv) Financial statements for securedofferings S-X Rule 3-16 generally requires separate audited and

interim financial statements for an issuer’s affiliate if thesecurities of that affiliate are pledged as collateral for theoffering and those securities constitute a substantialportion of the collateral for the securities beingregistered. Securities of the affiliate are deemed toconstitute a substantial portion of the collateral if theaggregate principal amount, par value, or book value ofthe pledged securities (as carried by the issuer), or themarket value of the pledged securities, whichever is thegreatest, equals 20% or more of the principal amount ofthe securities that are being secured.

If this test is met, the affiliate must file the same financialstatements that it would be required to file if it were theissuer. However, the affiliate’s financial statements do notneed to be filed if they are otherwise separately included(which may be through incorporation by reference, ifincorporation is otherwise permitted) in the filingindividually or consolidated with the affiliate’s subsidiaries.

(v) Other customary informationIn addition to the formal requirements of Form 20-Fand Regulation S-X, it is customary in a public offeringto include certain other information in the registrationstatement that may be material or convenient forinvestors in considering the financial condition of theissuer.

Summary financial data

A page of summary financial data is routinely includedin the summary box of the registration statement.Although there are no specific line item requirementsfor this key marketing page, it usually contains incomestatement, balance sheet, and other financial data for thelast three to five fiscal years and the most recent interimperiod (as well as the comparable interim period in theprior year) similar to that required on the “Selectedfinancial data” page appearing later in the disclosuredocument. Key operational metrics are also typicallyincluded in the summary under a heading such as“Other financial data.” These metrics will vary with thetype of issuer (for example, comparable store sales for aretailer, capital expenditures for a manufacturer, orsubscriber numbers for a cable television company).289

Practice point:The identification and reporting of financial informa-tion for operating segments will be critical in the offer-ing process as the time to prepare such information,the effect on textual disclosure and the impact onenterprise valuation may all be significant. Althoughthe requirement for segment reporting is usually con-sidered only when a company is issuing securities forthe first time, the issue should be revisited if the com-pany has entered into new business lines or if man-agement has begun to analyze its business in a newway that may impact the original segment analysis.Because the guidance of SFAS 131 is complex and itsapplication very fact-specific, it is important to beginan early dialogue with the accountants when theremay be segment reporting issues.





Recent results

Item 8B of Form 20-F requires disclosure of whether ornot any significant change has occurred since the date ofthe annual financial statements, or since the date of themost recent interim financial statements included in thedocument.290 The registration statement must also beupdated to include any audited or interim financials thatbecome available before the anticipated effective date.291

That information need not be reconciled to US Gaap,although a narrative disclosure about differences inaccounting principles is required and materialreconciling items that have not been previouslyaddressed in the filing must be quantified.292

Comparative prior periods are not required.293

Whether or not recent results are required in theregistration statement, it may also be desirable from amarketing perspective to include a summary of recentfinancial results in the summary box. If the recentresults are negative, it may be advisable to include recentresults disclosure to avoid any negative surprises forinvestors when the full quarterly (or semi-annual)numbers become available. For example, the issuer maybe aware that its sales are trending down in the currentquarter, or that significant charges will be taken inconnection with an acquisition after it closes. Even ifanalysts may be anticipating such an event, it ispreferable to disclose this information in the registrationstatement itself to avoid a risk of future litigation. At theroadshow meetings, prospective investors will be askingabout the results for a quarter or six-month period justor almost completed and presenting information in theoffering document will facilitate a discussion of theseresults.294

Recent developments and proposedacquisitions

To the extent material, the likely consequences ofmaterial recent developments may also be disclosed inthe summary box or the MD&A. For example, it iscustomary to discuss a material recent or proposedacquisition in the MD&A section of the offeringdocument, whether or not audited financials of the

acquired or to-be-acquired business are required to bepresented. This practice will often result in a discussionof the impact of pending or recent acquisitions onmargins, debt levels etc, in a section of the MD&Alabeled “Overview” or “Impact of the acquisition” or asimilar title. The textual disclosure may include adiscussion of any special charges or anticipated synergiesexpected to result from the acquisition or other pendingevent.

Special considerations inunregistered transactions

As noted above, unregistered transactions do not requirethe filing of a registration statement or a reconciliationto US Gaap. And unregistered transactions impose few(if any) specific financial information requirements. Forexample, Regulation S has no financial statementrequirements at all, while Rule 144A has only verymodest financial information requirements. It is hencenot possible to provide a precise answer to the questionof what financial statements must be included in anunregistered transaction.

Foreign private issuers tend to take a flexible approachto financial statements in unregistered transactionsdepending on a variety of factors, including the type oftransaction, local market practice, deal size, underwriterpractice, investor expectations and other marketingissues. For example, in the case of debt offerings whichare intended to be followed in a matter of weeks by aregistered exchange offer, buyers of the offeredsecurities will receive full Securities Act disclosureshortly after the closing. Most practitioners accordinglyelect to provide substantially the same disclosure toprospective purchasers before the closing wheneverpossible. In other instances, unregistered transactionshave excluded a good deal of the finer elements of thefinancial information requirements, such as some of thedetails of the required guarantor footnotes describedabove and some of the details of executive compen-sation.

The bedrock principle is that the financial informationprovided to investors in the United States must meet the

requirements of Exchange Act Rule 10b-5. In otherwords, the financial information must not misstatematerial facts or an omit material facts needed to makethe included information not misleading.



Background

On July 30 2002, US President George W Bush signedinto law the Sarbanes-Oxley Act, which he called the“most far-reaching reforms of American businesspractice since the time of Franklin Delano Roosevelt.”The Sarbanes-Oxley Act significantly modified the USfederal securities laws and has led to an unprecedentedwave of rulemaking by the SEC.

We summarize below the key provisions of theSarbanes-Oxley Act and the SEC’s rules under the Actthat are relevant to foreign private issuers.

(i) Who is subject to Sarbanes-Oxley?The Sarbanes-Oxley Act applies to all issuers –including foreign private issuers – that:

• have registered securities under the Exchange Act;

• are required to file reports under Section 15(d) of theExchange Act; or

• have filed a registration statement under theSecurities Act that has not yet become effective.295

This means, for example, that any foreign private issuerthat has listed its securities in the United States, or issuedsecurities to the public in the United States whether ornot listed (such as in a registered exchange offer forhigh-yield bonds) is subject to the Sarbanes-Oxley Act.A foreign private issuer that has not sold securities to thepublic in the United States, or that is exempt fromExchange Act registration by virtue of Exchange ActRule 12g3-2(b) is not subject to the requirements of the

Sarbanes-Oxley Act. Accordingly, in this section of theOverview when we refer below to “issuers” and“foreign private issuers” we mean those companies thatare subject to Sarbanes-Oxley.

Although the Sarbanes-Oxley Act does not generallydistinguish between US domestic and foreign privateissuers, the SEC has, in its implementing rules, madevarious exceptions for the benefit of foreign privateissuers.

Practice point:The Sarbanes-Oxley Act has caused some foreign pri-vate issuers to reconsider their listings in the UnitedStates. De-listing, however, only serves to exemptthe issuer from the requirements of Section 301 ofSarbanes-Oxley (concerning standards relating to list-ed company audit committees). In order to avoid theremainder of Sarbanes-Oxley’s provisions, the issuerwould also have to de-register under the ExchangeAct. Doing this requires that the issuer certify to theSEC that it has less than 300 US shareholders, which,unfortunately, is in many cases difficult for a foreignprivate issuer to establish and police.

50

Chapter 6 – The US Sarbanes-Oxley Act of 2002

Chapter 6The US Sarbanes-Oxley Act of 2002


(i i) When does Sarbanes-Oxley takeeffect?The Sarbanes-Oxley Act’s provisions have taken effectat different times, ranging from immediately uponenactment to later dates specified in the Act or on whichthe required SEC implementing regulations come intoforce. Annex C lists the effective dates for certain keyprovisions of Sarbanes-Oxley and the related SEC rules.

Key provisions of Sarbanes-Oxley,and related SEC rulemaking

(i) Certif ication requirementsSarbanes-Oxley contains two overlapping certificationsthat must be provided by an issuer’s principal executiveofficer and principal financial officer, or personsperforming similar functions (respectively, the CEO andthe CFO): the Section 302 certification, and theSection 906 certification. Section 302 amends theExchange Act, whereas Section 906 amends the USfederal criminal code.

(a) Section 302Section 302(a) of the Sarbanes-Oxley Act directs theSEC to adopt rules requiring CEO and CFO certifi-cation of each annual or quarterly report filed by issuers.In response, the SEC has adopted new Exchange ActRules 13a-14, 15d-14, 13a-15 and 15d-15; new Item15 of Form 20-F; and the text of a certification for Form20-F.296 The certification rules, Item 15 and the certifi-cation text took effect on August 29 2002.297

However, the certification rules, Item 15 and the certifi-cation text have been further modified by the rulesadopted under Section 404 of the Sarbanes-OxleyAct.298 As a result, we have summarized below therevised versions of the certification rules, Item 15 andthe certification text. The revised versions generallytook effect August 14 2003 (with certain exceptions thatwe note below).299

(1) Exchange Act Rules 13a-14, 15d-14; Form 20-

F

Rules 13a-14 and 15d-14 require a foreign privateissuer’s annual report on Form 20-F (but not its current

reports on Form 6-K)300 to include separate certificationsby the issuer’s CEO and CFO.301 The certificationsmust state that:302

• the officer has reviewed the annual report;

• based on the officer’s knowledge, the annual reportdoes not contain any untrue statement of a materialfact or omit to state a material fact necessary to makethe statements made, in light of the circumstancesunder which such statements were made, notmisleading;

• based on the officer’s knowledge, the financialstatements, and other financial information includedin the annual report, fairly present in all materialrespects the financial condition, results of operationsand cash flows of the issuer;

• the CEO and CFO are responsible for establishingand maintaining “disclosure controls andprocedures”303 [and “internal control over financialreporting”304]305 for the issuer and have:

– designed such disclosure controls andprocedures, or caused such disclosure controlsand procedures to be designed under theirsupervision, to ensure that material informationrelating to the issuer, including its consolidatedsubsidiaries, is made known to them by otherswithin those entities;

– [designed such internal control over financialreporting, or caused such internal control overfinancial reporting to be designed under theirsupervision, to provide reasonable assuranceregarding the reliability of financial reportingand the preparation of financial statements forexternal purposes in accordance with generallyaccepted accounting principles;]306

– evaluated the effectiveness of the issuer’sdisclosure controls and presented in the annualreport their conclusions about the effectivenessof the disclosure controls and procedures, as of




the end of the period covered by the reportbased on such evaluation;307 and

– disclosed in the report any change in the issuer’sinternal control over financial reporting thatoccurred during the period covered by thereport that has materially affected, or isreasonably likely to materially affect, the issuer’sinternal control over financial reporting; and

• the CEO and CFO have disclosed, based on theirmost recent evaluation of internal control overfinancial reporting, to the issuer’s auditors and theaudit committee:

– all significant deficiencies and materialweaknesses in the design or operation ofinternal control over financial reporting whichare reasonably likely to adversely affect theissuer’s ability to record, process, summarizeand report financial information; and

– any fraud, whether or not material, thatinvolves management or other employees whohave a significant role in the issuer’s internalcontrol over financial reporting.

The certifications must be included as an exhibit to theissuer’s annual report on Form 20-F.308 Except for theportions of the certifications appearing above in squarebrackets (which do not come into effect until April 152005), the wording of the certification may not bechanged in any respect, even if the changes wouldappear to be inconsequential.309

(2) Disclosure controls and procedures – Exchange

Act Rules 13a-15 and 15d-15; Item 15 of Form 20-F

Under Rules 13a-15 and 15d-15, a foreign private issuermust maintain disclosure controls and procedures.310 Inaddition, as of the end of each fiscal year, the issuer’smanagement, with the participation of the CEO andCFO, must make an evaluation of the effectiveness ofthe issuer’s disclosure controls and procedures.311

Finally, under Item 15 of Form 20-F, the issuer mustdisclose the conclusions of its CEO and CFO regarding

the effectiveness of the disclosure controls andprocedures based on their review as of the end of theperiod to which the report relates.312

For the purposes of Rules 13a-15 and 15d-15, and Item15 of Form 20-F (as well as the required certifications ofRules 13a-14 and 15d-14), “disclosure controls andprocedures” means controls and other procedures of anissuer that are designed to ensure that informationrequired to be disclosed by the issuer in the reports thatit files or submits under the Exchange Act is (i)recorded, processed, summarized and reported in atimely fashion, and (ii) accumulated and communicatedto the issuer’s management, to allow for timely decisionsabout disclosure.313

(3) Violations of Section 302

While Section 302 carries no specific criminal sanctions,false certifications are subject to SEC enforcementaction for violating the Exchange Act and also possiblyto both SEC and private litigation alleging violations ofthe anti-fraud provisions of the Exchange Act (forexample, Section 10(b) of the Exchange Act andExchange Act Rule 10b-5). A false certification alsomay have liability consequences under Sections 11 and12(a)(2) of the Securities Act if the accompanying reportis incorporated by reference into a registration statement(for example, on Form F-3) or into a prospectus.

(b) Section 906Section 906, which added new Section 1350 to the USfederal criminal code, took effect immediately uponenactment of the Sarbanes-Oxley Act on July 30 2002.Section 906 requires that each periodic reportcontaining financial statements filed by an issuer must beaccompanied by a certification by the issuer’s CEO andCFO that:

• the periodic report fully complies with therequirements of Section 13(a) or Section 15(d) of theExchange Act; and

• the information contained in the periodic reportfairly presents, in all material respects, the financialcondition and results of operations of the issuer.


Although Section 906 is self-implementing, the SEC hasadopted Exchange Act Rules 13a-14(b) and 15d-14(b)to require that the Section 906 certification (which maybe a joint certification of the CEO and CFO) must beprovided, and must be furnished as an exhibit to therelevant periodic report.314 Because the Section 906certification is not considered “filed” as a technicalmatter, it would not attract liability under Section 18 ofthe Exchange Act or be incorporated by reference intothe issuer’s subsequent Securities Act registrationstatements (unless specifically incorporated by theissuer).315

(1) Violations of Section 906

Under Section 906, an officer who certifies a statement“knowing that the periodic report accompanying thestatement” does not meet the certification can be finednot more than $1 million or imprisoned for not morethan 10 years, or both. By contrast, an officer whowillfully certifies his or her written statement whileknowing that the annual report does not “comport withall the requirements” of Section 906 can be fined notmore than $5 million or imprisoned not more than 20years, or both. The distinction between “knowing” and“willful” certification is not set out in the Sarbanes-Oxley Act, but in other contexts “willfully” normallyrequires a showing that the person had specificknowledge of the law he or she was violating, whereas“knowingly” does not.316

(c) Differences between Section 906 and Section 302 certificationsAlthough the text of the two required certificationsoverlap, there are some important differences betweenthem. First, unlike Section 302, the SEC has not issuedspecific guidance on whether Section 906 applies tocurrent reports on Form 6-K. We believe the Section906 certification is not required for Form 6-K currentreports (in view, among other things, of the fact that theSEC’s rules implementing Section 302 only apply toannual reports on Form 20-F). In April 2003, however,US Senator Joseph R Biden inserted comments into theUS Congressional Record to the effect that the Section906 certification was intended to apply to Form 6-Ksubmissions containing financial statements.317 The SEC

has taken note of Senator Biden’s comments, andalthough it stated that it was “concerned that extendingSection 906 certifications to Forms 6-K or 8-K couldpotentially chill the disclosure of information bycompanies,” it went on to comment that it was“considering, in consultation with the US Departmentof Justice, the application of Section 906 to currentreports on Forms 6-K and 8-K and annual reports onForm 11-K and the possibility of taking additionalaction.”318

Second, in contrast to the Section 302 certification, thetext of the Section 906 certification does not explicitlyprovide for the officer to certify as to his or herknowledge. However, the US Department of Justicehas confirmed that an officer may qualify a Section 906certification to his or her knowledge becauseknowledge would, in any event, be a necessary elementof criminal prosecution.319

Third, whereas the Section 302 certification is requiredfor any amendment to an annual report on Form 20-F,the SEC has stated that Form 20-F amendments do notrequire a new Section 906 certification.320

(i i) Management’s reports on internalcontrol over financial reportingSection 404 of Sarbanes-Oxley directs the SEC to issuerules requiring an issuer’s annual report to contain (i) aninternal control report from management and (ii) anattestation report of the issuer’s independent auditor.The SEC has accordingly adopted new Rules 13a-15and 15d-15 under the Exchange Act, and new Item 15of Form 20-F. A foreign private issuer must complywith these rules in connection with its annual report onForm 20-F for the first fiscal year ending on or afterApril 15 2005.321

For the purposes of Rules 13a-15 and 15d-15, and Item15 of Form 20-F (as well as the required certifications ofRules 13a-14 and 15d-14), “internal control overfinancial reporting” is defined as a process designed by,or under the supervision of, the issuer’s CEO and CFO,and effected by the issuer’s board of directors,management and other personnel, to provide reasonable




assurance regarding the reliability of financial reportingand the preparation of financial statements for externalpurposes in accordance with generally acceptedaccounting principles, and includes those policies andprocedures that:

• pertain to the maintenance of records that inreasonable detail accurately and fairly reflect thetransactions and dispositions of the assets of the issuer;

• provide reasonable assurance that transactions arerecorded as necessary to permit preparation offinancial statements in accordance with generallyaccepted accounting principles, and that receipts andexpenditures of the issuer are being made only inaccordance with authorizations of management anddirectors of the issuer; and

• provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use ordisposition of the issuer’s assets that could have amaterial effect on the financial statements.322

(a) Exchange Act Rules 13a-15 and 15d-15In addition to requiring the maintenance of disclosurecontrols and procedures, Rules 13a-15 and 15d-15require a foreign private issuer to maintain internalcontrol over financial reporting.323 As with disclosurecontrols and procedures, management (with the partic-ipation of the CEO and CFO) must evaluate theeffectiveness of the issuer’s internal control overfinancial reporting as of the end of each fiscal year.324

The SEC has, however, specified that management’sevaluation must be based on a recognized controlframework established by a body or group that hasfollowed due-process procedures, including a broaddistribution of the framework for public comment.325

Furthermore, the issuer’s management must alsoevaluate whether during the fiscal year any change inthe issuer’s internal control over financial reportingoccurred which materially affected, or is reasonablylikely to materially affect, the issuer’s internal controlover financial reporting.326

(b) Item 15 of Form 20-FIn an issuer’s annual report on Form 20-F, managementmust provide a report on the issuer’s internal controlover financial reporting that contains, among otherthings:327

• a statement of management’s responsibility forestablishing and maintaining adequate internalcontrol over financial reporting;

• a statement identifying the framework used bymanagement to evaluate the effectiveness of theissuer’s internal control over financial reporting;

• management’s assessment of the effectiveness of theissuer’s internal control over financial reporting as ofthe end of the most recent fiscal year, including astatement as to whether or not the issuer’s internalcontrol over financial reporting is effective (includingthe disclosure of any material weakness in the issuer’sinternal control over financial reporting discoveredby management);328 and

• a statement that the independent auditor that auditedthe financial statements included in the annual reporthas issued an attestation report on management’sassessment of the issuer’s internal control overfinancial reporting (the independent auditor’sattestation report must also be provided in the annualreport).329

An issuer must maintain “evidential matter, includingdocumentation” to provide reasonable support formanagement’s assessment of the issuer’s internal controlover financial reporting.330

In addition, the issuer must also disclose any change inits internal control over financial reporting, identified inconnection with the CEO and CFO’s evaluation as ofthe end of the fiscal year, that occurred during theperiod covered by the annual report that has materiallyaffected, or is reasonably likely to materially affect, theissuer’s internal control over financial reporting.331 TheSEC has cautioned that while there is no explicitrequirement in the rules under Section 404 to disclose


the reasons for any such change, an issuer must considerwhether the anti-fraud provisions of the US federalsecurities laws would require that disclosure, togetherwith other information about the circumstancessurrounding the change.332

(i i i) Non-Gaap financial measuresSection 401(b) of the Sarbanes-Oxley Act requires theSEC to issue rules limiting the use of pro forma financialinformation in various ways. In response, the SEC hasadopted both a new disclosure regulation, RegulationG, and new rules applicable to disclosure in filings withthe SEC under Item 10 of Regulation S-K.333 The SEChas chosen to refer in the rules to “non-Gaap financialmeasures” rather than pro forma financial information,to avoid confusion with existing SEC rules on proforma financial information (such as Article 11 ofRegulation S-X).334

(a) Regulation GRegulation G applies whenever an issuer, or a personacting on its behalf, publicly discloses materialinformation that includes a non-Gaap financialmeasure.335 A “non-Gaap financial measure” is broadlydefined as a numerical measure of financial performancethat excludes (or includes) amounts that are otherwiseincluded (or excluded) in the comparable measurecalculated and presented in the financial statementsunder Gaap.336 For a foreign private issuer, “Gaap”means the local Gaap under which the financialstatements were prepared, unless the measure inquestion is derived from US Gaap, in which case Gaapmeans US Gaap for purposes of applying therequirements of Regulation G to the disclosure of themeasure.337

Regulation G requires that disclosure of this sort beaccompanied by the most directly comparable financialmeasure calculated in accordance with Gaap, and areconciliation of the differences between the two.338 Inaddition, Regulation G prohibits an issuer from makingany non-Gaap financial measure public if it contains amaterial misstatement or omits to include informationneeded to make the included measure not misleading.339

Regulation G took effect on March 28 2003.340

A foreign private issuer is exempt from Regulation Gif:341

• its securities are listed or quoted outside the UnitedStates;

• the non-Gaap financial measure being used is notderived from or based on a measure calculated andpresented in accordance with US Gaap; and

• the disclosure is made outside the United States.

(b) Regulation S-K Item 10(e)Distinct from Regulation G, the SEC has adoptedlimitations on the use of non-Gaap financial measures infilings (whether annual reports on Form 20-F, orregistration statements in connection with offerings inthe United States or US listings) as new Item 10(e) ofRegulation S-K. Item 10(e) applies to any SEC filingsmade in respect of financial years ended after March 282003.342

Item 10(e) requires that whenever an issuer includes anon-Gaap financial measure in an SEC filing it must alsoinclude:343

• a presentation, with equal or greater prominence, ofthe most directly comparable Gaap financial measure;

• a reconciliation of the differences between the non-Gaap financial measure and the most directlycomparable Gaap financial measure;

• a statement why management believes the non-Gaapfinancial measure provides useful information forinvestors; and

• to the extent material, a statement of the additionalpurposes for which management uses the non-Gaapfinancial measure.

Furthermore, Item 10(e) prohibits in SEC filings,among other things:344

• non-Gaap measures of liquidity that exclude items




requiring cash settlement, other than EBIT andEBITDA;

• the adjustment of non-Gaap measures ofperformance to eliminate or smooth items charac-terized as non-recurring, unusual or infrequent whenthe nature of the charge or gain is such that it isreasonably likely to recur within two years or therewas a similar charge or gain within the prior twoyears; and

• the use of titles or descriptions for non-Gaap financialmeasures that are the same as, or confusingly similarto, titles or descriptions used for Gaap financialmeasures.

Item 10(e) contains an exemption from theseprohibitions for a foreign private issuer if the non-Gaapfinancial measure relates to the local Gaap used in theissuer’s primary financial statements, is required orexpressly permitted by the standard-setter thatestablishes the local Gaap, and is included in the issuer’sannual report for its home jurisdiction.345

(iv) Off-balance sheet and other MD&AdisclosureSection 401(a) of the Sarbanes-Oxley Act requires theSEC to implement rules requiring issuers to disclosematerial off-balance sheet transactions. The SEC’s rulesgo beyond off-balance sheet transactions, however, andalso address certain topics covered in its prior MD&Ainitiatives.346 The rules take the form of amendments toItem 5 of Form 20-F, and accordingly apply to allregistration statements filed by foreign private issuers(whether under the Securities Act or Exchange Act), aswell as annual reports.

(a) Off-balance sheet arrangementsEffective for SEC filings for fiscal years ending on orafter June 15 2003,347 an issuer must disclose, in aseparately captioned section of MD&A, off-balancesheet arrangements that either have, or are reasonablylikely to have, a current or future material effect on theissuer’s financial condition, results of operations, orliquidity.348 To the extent necessary to understand these

arrangements, the disclosure must include:349

• the nature and business purpose of the off-balancesheet arrangements;

• the importance to the issuer of the off-balance sheetarrangements in respect of liquidity, capital resources,market risk support, credit support or other benefits;

• the amount of revenues, expenses and cash flowsarising from these arrangements;

• the nature and amounts of any interests retained,securities issued or amounts incurred by the issuerunder these arrangements;

• the nature and amounts of any other obligations orliabilities (contingent or otherwise) arising from thesearrangements that are reasonably likely to becomematerial and the triggering events that could causethem to arise; and

• any known events or trends that will, or arereasonably likely to, result in the termination orreduction in availability to the issuer of thesearrangements and the course of action the issuerproposes to take in response.

An “off-balance sheet arrangement” is defined toinclude any transaction, agreement or contractualarrangement to which an entity unconsolidated with theissuer is a party under which the issuer has certainobligations or interests.350 Because the definition of“off-balance sheet arrangement” incorporates conceptsfrom US Gaap, foreign private issuers will need to referto US Gaap for some of the disclosure items.351

However, the MD&A disclosure should focus on theprimary financial statements in the document (whiletaking reconciliation to US Gaap into account).352

(b) Table of contractual obligationsFor fiscal years ending on or after December 15 2003,353

an issuer must also include in its SEC filings a table ofcontractual obligations as of the end of the latest balancesheet date showing the following items:354


The term “purchase obligations” means an enforceableagreement to purchase goods or services that is bindingon the issuer and that specifies key commercial terms(such as quantity and price).355 With the exception ofpurchase obligations, the classifications of categoriesshown in the table are defined by reference to US Gaap.However, an issuer that prepares financial statements inaccordance with non-US Gaap should include thoseitems of contractual obligations in the table that areconsistent with the classifications used in the Gaap underwhich its primary financial statements are prepared.356

(c) Contingent liabilities and commitmentsAlthough it has issued proposed rules with respect todisclosure requirements for contingent liabilities andcommitments, the SEC has declined to adopt final rules.In the meantime, the SEC’s existing guidance on thesubject – which suggests a tabular format of specifiedcategories357 – is controlling.358

(v) Standards relating to l isted companyaudit committeesSection 301 of the Sarbanes-Oxley Act adds newSection 10A(m) of the Exchange Act. Section 10A(m)charges the SEC with creating rules to prohibit thelisting of any security in the United States of an issuerthat is not in compliance with certain substantivestandards for audit committees. The SEC has adoptedfinal rules under Section 301 as Exchange Act Rule10A-3. Listed foreign private issuers must be incompliance with Rule 10A-3 by July 31 2005.359

Under Rule 10A-3, audit committee members eachhave to be a member of the board of directors andotherwise independent.360 To be independent, an auditcommittee member is barred from accepting anycompensatory fees other than in that member’s capacityas a member of the board361 and may not be an affiliatedperson of the issuer.362 The definition of “affiliatedperson” includes a person that, directly, or indirectlythrough one or more intermediaries, controls, or iscontrolled by, or is under common control with thespecified person.363 There is, however, a safe harbour forcertain non-executive officers and other persons that are10% or less shareholders of the issuer.364

Foreign private issuers are entitled to certain exemptionsfrom the independence prong of Rule 10A-3. Forexample, the inclusion of a non-management employeerepresentative,365 a non-management affiliated personwith only observer status,366 or a non-managementgovernmental representative on the audit committeewill not violate the affiliated person prong of theindependence test.367 In addition, issuers involved in anIPO are entitled to certain exemptions during a transi-tional period following their public offering.368

Rule 10A-3 also requires that:

• the audit committee must be “directly responsible”for the appointment, compensation, oversight andretention of the external auditors, who must reportdirectly to the audit committee;369



Contractual obligations Payments due by periodTotal Less than 1-3 3-5 More than

1 year years years 5 yearsLong-term debt obligations – – – – –Capital (finance) lease obligations – – – – –Operating lease obligations – – – – –Purchase obligations – – – – –Other long-term liabilities reflected – – – – –on the issuer’s balance sheet under the Gaap of the primary financial statementsTotal – – – – –


• the audit committee must establish procedures for thereceipt, retention and treatment of complaintsregarding accounting, internal controls or auditingmatters, and for the confidential, anonymoussubmission by employees of concerns regardingquestionable accounting or auditing matters;370

• the audit committee must have the authority toengage independent counsel and other advisers as itdeems necessary to carry out its duties;371 and

• the issuer must provide the audit committee withappropriate funding for payment of external auditors,advisors employed by the audit committee andordinary administrative expenses of the auditcommittee.372

These requirements are not intended to conflict withlocal legal or listing provisions (or requirements underthe foreign private issuer’s organizational documents),and instead relate to the allocation of responsibilitybetween the audit committee and the issuer’smanagement.373 Accordingly, the audit committee mayrecommend or nominate the appointment or compen-sation of the external auditor to shareholders if thesematters are within shareholder competence under locallaw,374 and it must be granted those responsibilities thatthe board of directors can legally delegate.375

Rule 10A-3 contains a general exemption for foreignprivate issuers that have a statutory board of auditors orstatutory auditors established pursuant to home countrylaw or listing requirements, which in turn meet variousrequirements.376

A foreign private issuer relying on Rule 10A-3’sexemption from independence, or the generalexemption noted above, will need to disclose in itsannual report its reliance on the exemptions and anassessment of whether this reliance will materiallyadversely affect the audit committee’s ability to actindependently and to satisfy any of the otherrequirements of Rule 10A-3.377

(vi) Audit committee financial expertSection 407(a) of the Sarbanes-Oxley Act directs theSEC to issue rules requiring an issuer to disclose in itsperiodic reports whether its audit committee has at leastone financial expert, or if not, why not.

The SEC’s final rules implementing Section 407(a) usethe term “audit committee financial expert” instead of“financial expert.” The SEC has implemented theserules as new Item 16A of Form 20-F. Item 16A appliesto annual reports of foreign private issuers for fiscal yearsending on or after July 15 2003.378

Under Item 16A, a foreign private issuer must disclosein its annual report that the issuer’s board of directors hasdetermined whether or not it has one audit committeefinancial expert serving on its audit committee, or if not,why not.379 If the issuer has a two-tier board of directors,the supervisory or non-management board would makethis determination.380 The issuer must also disclose thename of the audit committee financial expert (if any)381

and whether that person is independent frommanagement.382

In order to qualify as an audit committee financialexpert, the audit committee member must have thefollowing attributes:383

• an understanding of Gaap;

• the ability to assess the general application of Gaap inconnection with the accounting for estimates,accruals and reserves;

• experience preparing, auditing or analyzing financialstatements similar to those of the issuer, or activelysupervising others engaged in these activities;

• an understanding of internal controls and proceduresfor financial reporting; and

• an understanding of audit committee functions.

In addition, an audit committee financial expert musthave gained those attributes through:384


• education and experience as a principal financialofficer, principal accounting officer, controller,public accountant or auditor, or experience in similarpositions;

• experience actively supervising these functions;

• experience overseeing or assessing the performanceof companies or public accountants with respect tothe preparation, auditing or evaluation of financialstatements; or

• other relevant experience.

The term “Gaap” as used in Item 16A refers to the bodyof Gaap used by the issuer in its primary financialstatements.385 Accordingly, the audit committee financialexpert of a foreign private issuer need only be versed inlocal Gaap, and not in US Gaap or in reconciliation toUS Gaap (although that experience would, of course, beuseful).386

Item 16A also contains a liability safe harbour for theaudit committee financial expert, under which:

• a person who is determined to be an audit committeefinancial expert is not deemed to be an expert for anypurpose, such as Section 11 of the Securities Act;and387

• the designation of a person as an audit committeefinancial expert does not impose greater duties,obligations or liabilities on the person than on otheraudit committee and board members, and does notaffect the duties, obligations or liabilities of otheraudit committee and board members.388

(vii) Auditor independenceTitle II of the Sarbanes-Oxley Act creates a series ofrequirements relating to the work of external auditors,grouped under the heading “auditor independence.”Title II establishes new Sections 10A(g) through (l) ofthe Exchange Act. The SEC has implemented Title IIby the adoption of amendments to S-X Rule 2-01, newS-X Rule 2-07, new Exchange Act Rule 10A-2, and

new Item 16C of Form 20-F. S-X Rules 2-01 and 2-07, and Rule 10A-2, generally took effect on May 62003 (although many of the provisions of these ruleshave varying transition periods), while Item 16C takeseffect for annual reports in respect of fiscal years endingafter December 15 2003.389

Rule 10A-2 provides generally that it is unlawful for anauditor not to be independent under certain provisionsof S-X Rules 2-01 and 2-07. S-X Rules 2-01 and 2-07, in turn, track – and in some cases expand upon – therequirements of Sections 10A(g)-(l), and provide(among other things):

• certain restrictions on the ability of an issuer toemploy a former partner, principal, shareholder orprofessional employee of an accounting firm;390

• limitations on the non-audit services that anindependent auditor may provide;391

• that an audit partner must not act as the lead auditpartner or concurring partner for more than fiveconsecutive years, and must not provide certain otherservices for more than seven consecutive years;392

• that the audit committee must pre-approve theengagement of the auditor to provide audit and non-audit services to the issuer or its subsidiaries, or forpolicies or procedures for pre-approval of audit andnon-audit services (subject to certain de minimisexceptions);393

• that no audit partner may earn compensation basedon the partner’s procuring engagements with theissuer to provide any services other than audit, reviewor attest services;394 and

• that an auditor must report to the audit committee on(i) all critical accounting policies and practices to beused; (ii) all alternative treatments of financialinformation within Gaap that have been discussedwith the issuer’s management (as well as theimplications of those alternatives and the auditor’spreferred treatment); and (iii) all other material




written communications between the auditors andmanagement.395

Under new Item 16C of Form 20-F, a foreign privateissuer must disclose in its annual report:

• under the caption “audit fees,” aggregate fees billedby the auditor for each of the last two fiscal years foraudit services (and services in connection withstatutory and regulatory filings);396

• under the caption “audit-related fees,” aggregate feesbilled by the auditor for each of the last two fiscalyears for certain services “reasonably related” to theaudit and review of financial statements, as well as adescription of these services;397

• under the caption “tax fees,” aggregate fees billed bythe auditor for each of the last two fiscal years for taxservices, as well as a description of these services;398

• under the caption “all other fees,” aggregate feesbilled by the auditor for each of the last two fiscalyears for all other products and services, as well as adescription of these services;399

• the pre-approval policies and procedures of its auditcommittee for audit and non-audit services;400 and

• if greater than 50%, the percentage of hoursexpended on the audit by persons other than full-time permanent employees of the auditor.401

(vii i) Improper influence on the conductof auditsSection 303 of the Sarbanes-Oxley Act directs the SECto issue rules prohibiting any officer or director of anissuer from taking any action to improperly influence anauditor for the purpose of rendering the issuer’s financialstatements materially misleading.

The SEC has adopted Exchange Act Rules 13b2-2(a)through (c), largely tracking the text of Section 303.Rules 13b2-2(a) through (c) took effect on June 272003.402 Among other things, the rules prohibit an

officer or director of an issuer, or any other personacting under the direction of an officer or issuer, fromtaking any action to coerce, manipulate, mislead orfraudulently influence an auditor engaged in theperformance of an audit or review of financialstatements of the issuer that are required to be filed withthe SEC if that person knew or should have known thathis or her actions, if successful, could result in renderingthe issuer’s financial statements materially misleading.403

The reach of the new rules is quite broad. The phrase“persons acting under the direction” of an officer ordirector includes the issuer’s employees (even if they arenot under the supervision or control of that officer ordirector), customers, vendors, and even lawyers or otheroutside advisors who might be in a position to give outfalse or misleading information to the auditor. 404

In addition, the period during which an auditor can besaid to be “engaged in the performance of an audit” hasbeen given a wide interpretation by the SEC. Itaccordingly could encompass not only the professionalengagement period but any other time the auditor iscalled upon to make decisions or judgments regardingthe issuer’s financial statements, including, in certainsituations, periods prior to and after the retention of theauditor.405

Rule 13b2-2 also identifies certain types of actionswhich could cause an issuer’s financial statements to bematerially misleading, including improperly influencingan auditor:

• to issue or reissue a report on an issuer’s financialstatements that is not warranted in the circumstances(due to material violations of Gaap, Gaas, or otherprofessional or regulatory standards);

• not to perform audit, review or other proceduresrequired by Gaas or other professional standards;

• not to withdraw an issued report; or

• not to communicate matters to an issuer’s auditcommittee.406


(ix) Auditor record retentionSection 802 of the Sarbanes-Oxley Act (which amendsthe US federal criminal code) requires any accountantwho conducts an audit of an issuer to maintain all auditor review workpapers for a period of five years from theend of the fiscal period in which the audit or review wasconcluded. Section 802 also requires the SEC to issuerules relating to the retention of relevant records such asworkpapers and other documents that form the basis ofthe review. In response, the SEC has added new Rule2-06 to Regulation S-X. Rule 2-06 took effect onMarch 3 2003.407

Rule 2-06 requires that, for a period of seven years afteran accountant concludes an audit or review of an issuer’sfinancial statements, the accountant must retain recordsrelevant to the audit or review, including workpapers,which:408

• are created, sent or received in connection with theaudit or review; and

• contain conclusions, opinions, analyses or financialdata related to the audit or review.

“Workpapers” for these purposes means documentationof auditing or review procedures applied, evidenceobtained, and conclusions reached by the accountant inthe audit or review engagement.409

Rule 2-06 also provides that memoranda,correspondence, communications, and other documentsand records (including electronic records) must beretained whether they support the auditor’s finalconclusions about the audit or review, or containinformation that is inconsistent with thoseconclusions.410

(x) Material correcting adjustmentsSection 401(a) of the Sarbanes-Oxley Act adds newSection 13(i) to the Exchange Act. Under Section 13(i),each financial report containing financial statements thatis prepared in accordance with (or reconciled to) USGaap and filed with the SEC must reflect all materialcorrecting adjustments that have been identified by an

issuer’s auditors. This provision took effect on July 302002, and does not require implementing regulations bythe SEC.

The SEC has not provided guidance on the questionwhether Section 13(i) applies to interim financialstatements submitted on Form 6-K. We believe thebetter view of Section 13(i) is that it applies only to aforeign private issuer’s annual report on Form 20-F, andnot to any interim financial statements furnished to theSEC under Form 6-K. Submissions on Form 6-K arenot considered “filed” as a technical matter with theSEC, and are not required to be reconciled to US Gaap.In addition, the SEC has interpreted the Section 302certification requirement – which also refers to reportsfiled with the SEC – as not applying to Form 6-Ksubmissions.411 As a practical matter, however, an issuerwould likely face concerns under the anti-fraudprovisions of the US federal securities laws if it failed toreflect a material correcting adjustment in an interimfinancial statement furnished on Form 6-K.

(xi) Attorney conduct rulesSection 307 of the Sarbanes-Oxley Act requires theSEC to issue rules setting forth “minimum standards ofprofessional conduct for attorneys appearing andpracticing before the SEC in any way in the represen-tation of issuers.” Section 307 also directs the SEC toimplement rules requiring an attorney to report“evidence of a material violation of securities law orbreach of fiduciary duty or similar violation” by anissuer or its agent to the issuer’s CEO or chief legalcounsel, and to report the evidence to the auditcommittee, another independent board committee, orthe board of directors as a whole, if the CEO or chieflegal counsel “does not appropriately respond to theevidence.” The SEC adopted final rules under Section307 as new Part 205 Standards of Professional Conductfor Attorneys Appearing and Practicing Before theCommission in the Representation of an Issuer (theAttorney Conduct Rules).412 The Attorney ConductRules took effect on August 5 2003.

The term “appearing and practicing” before the SEC isbroader than it might first appear. It potentially covers




any lawyer who transacts business with the SEC,represents an issuer in SEC proceedings, provides adviceon the US securities laws regarding any document theattorney “has notice” will be provided to the SEC(including in the context of preparing documents to befiled), or advises an issuer whether information must beincluded in or filed with any SEC document.413

However, the Attorney Conduct Rules contain anexemption for “non-appearing foreign attorneys,”414

which is defined as a lawyer who (i) is himself or herselfadmitted to practice law in a jurisdiction outside of theUnited States and does not hold himself or herself out aspracticing US federal or state securities or other laws,and (ii) either:

• conducts activities that would constitute appearingand practicing before the SEC only incidentally to,and in the ordinary course of, the practice of law ina jurisdiction outside the United States; or

• is appearing and practicing before the SEC only inconsultation with counsel, other than a non-appearing foreign attorney, admitted or licensed topractice in a state or other United Statesjurisdiction.415

If a covered lawyer becomes aware of evidence of a“material violation” — which is defined to include amaterial violation of US securities law or a breach offiduciary duty or a similar material violation of any USfederal or state law416 – the Attorney Conduct Rulescreate a duty to report the matter to the issuer’s chieflegal officer (CLO) or to both the CLO and the CEO.417

The CLO must then open an inquiry into the matterand take all reasonable steps to cause the issuer to adoptan appropriate response.418 Unless the lawyer reasonablybelieves that the CLO’s response was adequate, he orshe must report the matter up-the-ladder to the auditcommittee, to another independent board committee (ifthe issuer does not have an audit committee), or to theboard of directors as a whole (if there is no independentboard committee).419

As an alternative to reporting to the CLO or CEO, thelawyer may refer the matter to the issuer’s qualified legal

compliance committee (QLCC), if one has been setup.420 A QLCC – which may also be the auditcommittee – is any committee of the issuer that includesat least one member of the audit committee and two ormore non-employee members of the board of directors,and that has been duly established by the board ofdirectors with certain requirements.421 If the lawyerreports the matter to the QLCC, he or she has nofurther obligations under the Attorney ConductRules.422 In addition, the CLO may refer a reportedmatter to the QLCC in lieu of conducting the requiredinvestigation, in which case the QLCC will beresponsible for responding.423

The SEC has also proposed, but not yet adopted, a noisywithdrawal provision, under which a covered lawyerwould be required to withdraw from representing anissuer under certain circumstances if there is not anappropriate response to the up-the-ladder reporting.424

The 60-day comment period for the noisy withdrawalproposal has expired, and the proposal has been thesubject of extensive comment by US lawyers.

(xii) Code of ethicsSection 406 of the Sarbanes-Oxley Act directs the SECto issue rules requiring issuers to disclose whether theyhave adopted a code of ethics for senior financialofficers, or if not, why not. The SEC has accordinglyadopted new Item 16B of Form 20-F, which takes effectfor annual reports for fiscal years ending on or after July15 2003.425

Item 16B requires the issuer to disclose whether it hasadopted a code of ethics that applies to its principalexecutive officers, principal financial officers, andprincipal accounting officer or controller (or personsperforming similar functions), and if not, it must explainwhy it has not done so.426 The term “code of ethics”means written standards that are reasonably designed todeter wrongdoing and to promote a specified set ofprinciples, such as honest and ethical conduct and full,accurate and timely disclosure.427 The code must be filedas an exhibit to the issuer’s annual report on Form 20-For posted on the issuer’s website, or the issuer mustundertake to provide to any person upon request, free


of charge, a copy of the code.428 An issuer must reportany amendment to the code relating to its coveredexecutive officers, as well as the nature and date, andname of the person involved, of any waivers (whetherexplicit or implicit) of the code for its covered executiveofficers.429

(xii i) Blackout trading restrictionsSection 306 of the Sarbanes-Oxley Act prohibitsdirectors and executive officers from acquiring ortransferring company equity securities during pensionfund blackout periods. The SEC has adopted newRegulation Blackout Trading Restrictions (RegulationBTR) to implement Section 306. Regulation BTRtook effect on January 26 2003.430

For a foreign private issuer, a blackout period generallymeans any period of more than three consecutivebusiness days during which the ability to purchase or sellan interest in the issuer’s equity securities held in anindividual account plan (such as a 401(k) plan)431 istemporarily suspended with respect to not less than 50%of participants or beneficiaries located in the UnitedStates and:

• the number of participants and beneficiaries locatedin the United States subject to the temporarysuspension exceeds 15% of the total number ofemployees of the issuer and its consolidatedsubsidiaries; or

• more than 50,000 participants or beneficiaries locatedin the United States are subject to the temporarysuspension.432

Regulation BTR prohibits, subject to certainexceptions, any director or executive officer of an issuerfrom purchasing, selling or otherwise transferring theissuer’s equity securities during any blackout periodapplicable to the securities, if the officer acquires orpreviously acquired the securities in connection with hisor her service or employment as a director or officer.433

Under Regulation BTR, in any case where a director orofficer is subject to a blackout trading restriction underSection 306 of Sarbanes-Oxley, the issuer must notify in

a timely fashion each director or officer and the SEC ofthe blackout period and provide certain additionalinformation (including the reasons for the blackoutperiod).434 The issuer must file any notice of this type asan exhibit to its annual report on Form 20-F.435

Subject to a two-year statute of limitations,436 profitsrealized by an insider in violation of Section 306(regardless of the insider’s intention upon entering intothe transaction) will be recoverable by the issuer.437 Inaddition, if the issuer fails to institute an action torecover such profits within 60 days after being requestedto do so by a shareholder, the shareholder can theninitiate the action to recover on behalf of the issuer.438

(xiv) Loans to executivesSection 402(a) of the Sarbanes-Oxley Act adds newSection 13(k) to the Exchange Act. Under Section13(k), it is illegal for an issuer to “extend or maintaincredit, to arrange for the extension of credit, or torenew an extension of credit, in the form of a personalloan to or for any director or executive officer (orequivalent thereof)” of that issuer.439 Section 13(k)covers both direct extensions and indirect extensions ofcredit, including through subsidiaries.440 Section 13(k)took effect on July 30 2002, and does not requireimplementing SEC regulations.

Section 13(k) contains certain exemptions, including:

• any loan existing on July 30 2003, unless its terms arematerially modified or the loan is renewed;441

• consumer credit and extensions of credit under acharge card;442 and

• certain bank loans.443

The broad sweep of Section 13(k), coupled with theabsence of SEC guidance, has raised a number of thornyquestions for issuers. In response, a group of 25 lawfirms (including Latham & Watkins) has issued a paperattempting to interpret Section 13(k) (the InterpretivePaper).444 The Interpretive Paper contends that thefollowing should generally be regarded as permissible




under Section 13(k):

• cash advances to reimburse travel and similarexpenses while performing executive duties;445

• personal usage of a company credit card andcompany car, and relocation expenses required to bereimbursed;446

• stay and retention bonuses subject to repayment if anemployee terminates employment before adesignated date;447

• indemnification advances for litigation;448

• tax indemnity payments to overseas-based executiveofficers;449

• loans by a parent or shareholder that is a foreignprivate issuer but not subject to Sarbanes-Oxley tothe executive officer of a wholly-owned subsidiarythat is subject to Sarbanes-Oxley, if the subsidiary hasnot “arranged” the loan and the loan is made byreason of service to the parent, not the subsidiary;450

and

• most cashless option exercises.451

(xv) Forfeiture of bonusesSection 304 of the Sarbanes-Oxley Act provides that ifan issuer is required to “prepare an accountingrestatement due to the material noncompliance of theissuer, as a result of misconduct” with any financialreporting requirements under the securities laws, theCEO and CFO must reimburse the issuer for:

• all bonuses or other incentive-based or equity-basedcompensation received from the issuer during the 12-month period following the first public issuance orfiling with the SEC (whichever is first) of thefinancial document embodying the financialreporting requirement; and

• any profits received from the sale of the issuer’ssecurities during that 12-month period.

Section 304 took effect on July 30 2002 and does notrequire SEC implementing rules. It remains unclearwhether, among other things, the definition of“misconduct” applies to mistakes as opposed toknowing or reckless conduct.452 In the case of foreignprivate issuers, it is also not certain how Section 304 willwork if the required repayment is in conflict with theCEO’s or CFO’s rights under local employment laws.453

(xvi) Research analystsSection 501 of the Sarbanes-Oxley Act added newSection 15D to the Exchange Act. Section 15D directsthe SEC to adopt rules “reasonably designed to addressconflicts of interest” involving securities analysts. TheSEC has implemented Section 15D by enactingRegulation Analyst Certification (Regulation AC).454 Inaddition, as discussed below, the NYSE and NASDhave issued new rules regarding research analysts that aredesigned to meet the requirements of Section 15D.Regulation AC took effect on April 14 2003.

Regulation AC requires that any broker or dealer, orcertain persons associated with brokers or dealers, mustinclude in any research reports that they publish orcirculate to a US person in the United States, a clear andprominent statement from the research analyst:455

• attesting that all of the views expressed in the researchreport accurately reflect the research analyst’spersonal views about the securities or issuers coveredin the report; and

• either that no part of the analyst’s compensation isrelated to specific recommendations expressed in thereport, or if it is related, details of the source, amountand purpose of the compensation and how thecompensation could influence the recommendationsexpressed in the report.

A research analyst is the person primarily responsible forthe preparation of the content of the research report.456

If more than one analyst is primarily responsible, allmust certify.457 Certifications should either appear on thefront page of the research report or the front pageshould disclose where the certification is to be found.458


The first certification (as to accuracy) applies both to therating as well as to the analysis in the research report,and the SEC has warned that a rating that contradictsthe analysis could both render the certification false, aswell as potentially violate the anti-fraud provisions ofthe US federal securities laws.459

In addition, Regulation AC mandates that brokers ordealers that provide research reports to US persons inthe United States prepared by an analyst employed bythem must keep certain quarterly records of publicappearances of the analyst containing:460

• a statement by the analyst attesting that the viewsexpressed in the public appearances accuratelyreflected his or her personal views about the securitiesor issuers covered in the report; and

• a statement that no part of the analyst’s compensationis related to specific recommendations or viewsexpressed in the public appearances.

However, the record-keeping requirement only appliesto public appearances when the research analyst isphysically present in the United States.461

Regulation AC contains an exclusion to cover foreignresearch. In particular, foreign persons located outsidethe United States who are not associated with a USregistered broker-dealer are exempt from RegulationAC if they:462

• prepare a research report concerning a foreignsecurity; and

• provide the research report to a US person in theUnited States in accordance with the exemptionunder Exchange Act Rule 15a-6(a)(2) for non-USbroker-dealers providing research reports to majorUS institutional investors.

A “foreign person” for these purposes means any non-US person, and a “foreign security” means a securityissued by a foreign issuer for which the US market is notthe principal trading market.463

(xvii) Liabil ity issuesThe Sarbanes-Oxley Act has a sweeping impact onliability under the US federal securities laws. For adiscussion of this, see “Liability Under the US FederalSecurities Laws – Sarbanes-Oxley Act,” below.



Background

A foreign private issuer becomes exposed to liabilityunder the US federal securities laws in a variety of wayswhen it offers or lists its securities in the United States.This liability can be civil or, in certain circumstances,criminal. Although litigation by private plaintiffs ismore common, the SEC (and, in the case of criminalmatters, the US Department of Justice) can initiatelawsuits, administrative proceedings and investigations.We here summarize the key areas of liability.

Registration – Section 5 of theSecurities Act

Section 5 of the Securities Act effectively requires everyUS offer and sale of securities to be either registeredwith the SEC or made pursuant to an availableexemption from registration. The terms “offer” and“sale” in the Securities Act are broadly construed. Forexample, an offer includes any attempt to dispose of asecurity for value.464 As a result, publicity in the UnitedStates about an impending offering, website disclosureof the offering or even an e-mail communication to“friends and family” announcing an offering canconstitute an unregistered offer in violation of Section5.

Violations of Section 5 can give rise to liability, asdiscussed below. They can also lead to the delay (oreven abandonment) of a securities offering if the SECimposes a cooling-off period. As a result of theseonerous remedies, it is critical to control publicity and

comply carefully with the requirements for anyapplicable exemptions from Section 5 registration.

Under Section 12(a)(1) of the Securities Act, an investorwho buys securities issued in transactions violatingSection 5 can rescind the sale and recover his or herpurchase price (plus interest, less any amount receivedon the securities). If the investor no longer owns thesecurities, he or she can recover damages equal to thedifference between the purchase and the sale price ofthe securities (again, plus interest, less any amountreceived on the securities).465

Section 12(a)(1) imposes strict liability, and an investoris not required to demonstrate any causal link betweenhis or her damages and the violation of Section 5.466

However, in order to be liable a defendant must be aseller – that is, a person who successfully solicits thepurchase, motivated at least in part by financial interest– and the plaintiff must actually have bought thesecurities from that defendant.467

Anti-fraud – what is material?

The various anti-fraud provisions of the Securities Actand the Exchange Act discussed below impose liabilityfor material misstatements or omissions in connectionwith an offer or sale of securities. The fundamental testfor materiality is whether there is a substantial likelihoodthat a reasonable investor would consider themisstatement or omission important in decidingwhether or not to purchase or sell a security.468 As theUS Supreme Court has explained, “there must be a

66

Chapter 7 – Liability under the US federal securities laws

Chapter 7Liability under the US federalsecurities laws


substantial likelihood that the disclosure of the omittedfact would have been viewed by the reasonable investoras having significantly altered the ‘total mix’ ofinformation made available.”469

The determination of materiality is a mixed question oflaw and fact,470 and the SEC has made clear that there isno bright-line quantitative test for materiality.471 Inparticular, the SEC has affirmatively rejected exclusivereliance on a commonplace rule of thumb that haddeveloped in the preparation of financial statements,under which matters causing a numerical impact of lessthan 5% were generally not considered material.472

Although the SEC addressed this point in the context ofpreparing of financial statements, its guidance shouldalso be taken into account in the preparation ofnarrative disclosure.

The SEC has pointed to several qualitative factors thatshould be considered in assessing materiality, and thatcould render a quantitatively minor misstatementmaterial:473

• whether the misstatement arises from an item capableof precise measurement or whether it arises from anestimate and, if so, the degree of imprecision inherentin the estimate;

• whether the misstatement masks a change in earningsor other trends;

• whether the misstatement hides a failure to meetanalysts’ consensus expectations;

• whether the misstatement changes a loss into incomeor vice versa;

• whether the misstatement concerns a segment orother portion of the issuer’s business that has beenidentified as playing a significant role in the issuer’soperations or profitability;

• whether the misstatement affects the issuer’scompliance with regulatory requirements;

• whether the misstatement affects the issuer’scompliance with loan covenants or other contractualrequirements;

• whether the misstatement has the effect of increasingmanagement’s compensation – for example, bysatisfying requirements for the award of bonuses orother forms of incentive compensation; or

• whether the misstatement involves concealment of anunlawful transaction.

In adopting Regulation FD, the SEC indicated that thefollowing subjects should be carefully reviewed todetermine whether they are material:474

• earnings information;

• mergers, acquisitions, tender offers, joint ventures, orchanges in assets;

• new products or discoveries, or developmentsregarding customers or suppliers (for example, theacquisition or loss of a contract);

• changes in control or in management;

• change in auditors or auditor notification that theissuer may no longer rely on an auditor’s audit report;

• events regarding the issuer’s securities – for example,defaults on senior securities, calls of securities forredemption, repurchase plans, stock splits, or changesin dividends, changes to the rights of security holders,public or private sales of additional securities; and

• bankruptcies or receiverships.

Rule 10b-5 – purchase or sale ofsecurities

(i) BackgroundSection 10(b) of the Exchange Act and Exchange ActRule 10b-5 provide a broad (and heavily litigated) basisfor liability in securities transactions. Rule 10b-5




prohibits:

• employing “any device, scheme, or artifice todefraud;”

• making “any untrue statement of material fact” oromitting “to state a material fact necessary in order tomake the statements made, in the light of the circum-stances under which they were made, notmisleading;” or

• engaging in any “act, practice, or course of businesswhich operates or would operate as a fraud ordeceit.”

(ii) Elements of a claim under Rule 10b-5The elements of a claim under Rule 10b-5 are:

• a misrepresentation or omission;475

• of a material fact;

• made with scienter — that is, either intent todeceive, manipulate or defraud,476 or recklessness(beyond mere negligence);477

• upon which the plaintiff relied; and

• which caused the injury.

Rule 10b-5 requires that the alleged fraud must havebeen in connection with the purchase or sale ofsecurities – in other words, that there was some nexusbut not necessarily a close relationship.478 As aconsequence, a private plaintiff must show that he or sheactually purchased or sold stock;479 a plaintiff cannotsucceed on a claim that he or she would have sold hadthe truth been known. But Rule 10b-5 does notrequire privity between the defendant and theplaintiff,480 and accordingly a plaintiff need not showthat he or she actually bought securities from the personwho made the misleading statements.

(i i i) Scope of Rule 10b-5Rule 10b-5 is not limited to public offerings of

securities, and applies to unregistered transactions andsecondary market trading. In addition, Rule 10b-5covers oral and written statements, whether or notrelating to a registration statement or prospectus.481

These would potentially include statements made:

• in an offering memorandum for a Rule 144Aoffering;

• during a press conference or an interview, or in apress release;

• in an annual report on Form 20-F; and

• in a document submitted on Form 6-K.

In addition while an issuer is generally not liable for thestatements of others, there may be exceptions if, forexample, a corporate insider participates sufficiently inthe preparation of an analyst’s report or circulates thereport to prospective investors.482

(iv) Insider tradingInsider trading is also prosecuted under Rule 10b-5.Generally speaking, Rule 10b-5 prohibits a person frombuying or selling securities on the basis of material non-public information in violation of a duty owed to theshareholders of the issuer or where the information hasbeen otherwise misappropriated.483 Rule 10b-5 imposesan obligation to disclose (or abstain from trading) on:

• corporate insiders, such as directors, officers andcontrolling shareholders, who owe a fiduciary duty tothe issuer’s shareholders;484

• temporary insiders, such as lawyers, accountants orinvestment bankers;485 and

• outsiders who misappropriate confidentialinformation for trading purposes in breach of a dutyowed to the source of the information.486

Bear in mind that a person can be liable under Rule10b-5 even if he or she did not actually trade on thematerial non-public information, but instead passed it to


a third party (a practice sometimes known as “tipping”).In addition to the “tipper” (the person who discloses theinformation), a “tippee” (the person to whom theinformation is disclosed and who had reason to knowthe information came from an insider who had violateda duty) may also be liable under Rule 10b-5 if he or shetrades on the basis of the tipped information.487

(v) Damages under Rule 10b-5Violations of Rule 10b-5 can lead to rescission ordamages.488 Damages for violations of Rule 10b-5 inprivate actions comprise a purchaser’s out-of-pocketloss, essentially limited to the difference between thepurchase or sale price the plaintiff paid or received andthe mean trading price of the security during the 90-dayperiod beginning on the date on which the informationcorrecting the misstatement or omission that is the basisfor the action is disseminated to the market.489 Civil orcriminal penalties (including imprisonment, fines ordisgorgement orders) and injunctions and administrativeproceedings are also possible.490 Punitive damages are,however, not available under Rule 10b-5.491

Section 11 of the Securities Act –registered offerings

Section 11(a) of the Securities Act imposes liability ifany part of a registration statement, at the time itbecame effective, “contained an untrue statement of amaterial fact or omitted to state a material fact requiredto be stated therein or necessary to make the statementstherein not misleading.” Section 11 liability only coversstatements made in a registration statement, and doesnot reach other documents that are not considered partof a registration statement (such as roadshow materialsor research reports).492 In addition, Section 11 does notextend to unregistered transactions, since these do notinvolve a “registration statement.”493

A Section 11 claim can be brought against:

• each person who signed the registration statement,including the issuer and members of management;495

• each member of the issuer’s board of directors, orsimilar governing body, regardless of whether he orshe signed the registration statement;496

• any expert named as responsible for a portion of theregistration statement, such as an issuer’s auditors; and

• each underwriter.

Issuers are strictly liable under Section 11. Potentialdefendants other than the issuer497 have a statutory duediligence defence to Section 11 liability, by virtue ofSection 11(b)(3):

• in the case of a non-expert with respect to the non-expertized portions of the registration statement, orin the case of an expert with respect to the expertizedportions (for example, the financial statements thatinclude the auditors’ opinion), a defendant mustshow that he or she had, after reasonable investi-gation, reasonable grounds to believe and did believethat the included information was true and that nomaterial facts were omitted;498 and

• in the case of a non-expert with respect to expertizedportions of the registration statement, a defendantmust show he or she had no reasonable ground tobelieve, and did not believe, that the registrationstatement contained a material misstatement oromission.499

Practice point:The trend in the case law is to allow secondary-mar-ket purchasers who can “trace” their securities to theoffering to bring claims under Section 11, at least tothe extent that the only shares in the market arethose subject to the registration statement.494




Damages for violation of Section 11 are generallylimited to:500

• the difference between the price paid for a securityand its value at the time a plaintiff brings a lawsuit;

• if the security has already been sold at the time alawsuit is brought, the amount paid for the security,less the price at which the security was sold in themarket; or

• if the security was sold after the lawsuit was broughtbut before judgment, the lesser of (i) the amount theplaintiff paid for the security, less the price at whichthe security was sold in the market, or (ii) the amountthe plaintiff paid for the security, less the value of thesecurity as of the time the suit was brought.

Punitive damages are not available under Section 11.501

Section 12(a)(2) of the SecuritiesAct – registered offerings

Section 12(a)(2) of the Securities Act imposes liabilityon any person who offers or sells a security by means ofa prospectus, or any oral communication, whichcontains “an untrue statement of a material fact or omitsto state a material fact necessary in order to make thestatements, in the light of the circumstances underwhich they were made, not misleading.” Section12(a)(2) overlaps with Section 11, but covers oralstatements as well as statements in a prospectus, ratherthan the registration statement alone (of which theprospectus is a part).

The US Supreme Court has interpreted the reference to“prospectus” in Section 12(a)(2) as a term of artmeaning a prospectus in connection with a publicoffering under the Securities Act. As a result, it hasruled that Section 12(a)(2) does not apply to privateunregistered transactions, secondary offerings orsecondary market transactions.502

Section 12(a)(2) provides a statutory due diligencedefence if the seller can show he or she did not know,

and in the exercise of reasonable care could not haveknown, of the material misstatements or omissions. Inaddition, as with Section 12(a)(1), in order to be liableunder Section 12(a)(2) a defendant must be a seller –that is, a person who successfully solicits the purchase,motivated at least in part by financial interest – and theplaintiff must actually have bought the securities fromthat defendant.503

Under Section 12(a)(2), a person who buys securities onthe basis of a prospectus that contains a materialmisstatement or omission — like a person who buyssecurities issued in violation of Section 5 of theSecurities Act — can rescind the sale and recover his orher purchase price (plus interest, less any amountreceived on the securities). And if the investor nolonger owns the securities, he or she can recoverdamages equal to the difference between the purchaseand the sale price of the securities (again plus interest,less any amount received on the securities).

Controlling person liability

Liability under the US federal securities laws potentiallyextends beyond issuers, underwriters and other directparticipants in securities offerings to the persons whocontrol those participants. In particular, Section 15 ofthe Securities Act and Section 20 of the Exchange Actprovide that controlling persons may be jointly andseverally liable with the persons they control. As aresult, an issuer’s significant shareholders, its board ofdirectors (or similar governing body) and members of itsmanagement may be liable along with the issuer forviolations of Section 11, Section 12 or Rule 10b-5.

The term “control” generally means the possession,directly or indirectly, of the power to direct or cause thedirection of the management and policies of a person,whether through the ownership of voting securities, bycontract or otherwise.504 This is not a bright-line test,and instead depends on the facts and circumstances ofany particular case. A defendant generally will be foundto have controlled an issuer if he or she actually partic-ipated in (that is, exercised control over) the operationsof the issuer and possessed the power to control the


specific transaction or activity from which the issuer’sprimary liability derives.505 Some courts have held thatthe defendant must be a “culpable participant” in theissuer’s wrongful conduct in order to trigger liability.506

The controlling person has a defence to liability underSection 15 if he or she “had no knowledge of orreasonable ground to believe in the existence of the factsby reason of which the liability of the controlled personis alleged to exist,” and a defence under Section 20 if heor she “acted in good faith and did not directly orindirectly induce the act or acts constituting theviolation or cause of action.” This analysis is obviouslyquite fact-specific,507 and may depend on such factors aswhether the defendant is an inside or outside director.

Liability issues relating to Sarbanes-Oxley

The Sarbanes-Oxley Act has a wide-ranging impact onliability under the US federal securities laws. It createsnew US federal criminal offenses relating to securities,substantially increases the penalties for existing offensesand increases the SEC’s enforcement powers in variousways.508 Among other things, the Sarbanes-Oxley Act:

• adds a new section to the US federal criminal codeoutlawing the alteration, destruction or concealmentof records to impede a US federal investigation;509

• amends existing law to provide for fines and impris-onment of up to 20 years for corruptly altering,destroying or concealing documents with the intentof obstructing an official proceeding;510

• amends existing law to provide for fines and impris-onment of up to 10 years for anyone who knowinglytakes any action to retaliate against a person forproviding information to US federal lawenforcement officials relating to violations orpotential violations of US federal law;511

• creates a new securities fraud crime (with penalties ofup to 25 years imprisonment plus fines) of knowinglyexecuting a scheme or artifice to defraud any person

in connection with any security of an issuer or toobtain, by means of false or fraudulent represen-tations, any money in connection with the purchaseor sale of a security;512

• increases the maximum individual penalty forviolations of the Exchange Act from $1 million and10 years imprisonment to $5 million and 20 yearsimprisonment, and raises the maximum corporatefine from $2.5 million to $25 million;513

• gives the SEC the ability, after notice and a hearing,to force an issuer subject to an SEC investigation toput extraordinary payments to directors, officers,partners, controlling persons, agents or employeesinto temporary escrow;514

• gives the SEC the administrative authority to imposea ban on a person from acting as a director or anofficer of an issuer (the so-called “officer and directorbar”);515 previously, the SEC could only impose theofficer and director bar by means of a court order;516

• lowers the standard for judicial imposition of theofficer and director bar to “unfitness” to serve as anofficer and director, from “substantial unfitness;”517

• prohibits an issuer from retaliating against whistle-blowing employees who provide information or assistan investigation regarding violations of US federalsecurities law, SEC regulations or US federal law onshareholder fraud; and518

• amends the US federal bankruptcy laws to prohibitthe discharge in bankruptcy of debts resulting fromjudgments, settlements or court orders in casesinvolving securities fraud.519

Enforcement

(i) BackgroundThe SEC has wide-ranging powers to investigate anyconduct that could constitute a violation of the USfederal securities laws.520 SEC investigations areconducted by the Division of Enforcement, which also




has responsibility for prosecuting civil violations of theUS federal securities laws.521 In addition to bringingcharges under the causes of action described elsewherein this Overview, the SEC can bring enforcementactions against participants in the securities markets(such as broker-dealers, investment advisers, issuers andtheir officers, directors, lawyers and accountants) usingcauses of action and remedies unavailable to privatelitigants. Charges may be brought administratively, orin a US federal district court.

While the SEC has civil enforcement authority only,Section 24 of the Securities Act and Section 32(a) of theExchange Act make it a felony for any person towillfully violate any provision of those acts or a rulepromulgated under the acts. Consequently, the SECalso works closely with criminal law enforcementagencies throughout the United States to develop andbring criminal cases when the misconduct warrantsmore severe action.

(i i) Enforcement against foreign privateissuers and non-US nationalsThe SEC actively enforces the US federal securities lawsagainst foreign private issuers and non-US nationals. 522

The SEC takes a very expansive view of its jurisdictionunder the US federal securities laws, and the US courtshave generally supported that view.523

The SEC’s power to enforce the US federal securitieslaws against foreign private issuers and non-US nationalsis limited by its ability to obtain evidence from outsidethe United States and to establish jurisdiction. In orderto facilitate its ability to obtain information from outsidethe United States, the SEC has entered into over 30information-sharing arrangements (often calledMemoranda of Understanding, or MOUs) with foreignfinancial regulators.524 These MOUs establish proceduresfor sharing information and providing assistance ininstances where key evidence lies outside of the UnitedStates. Another, more formal, negotiated mechanismused to obtain information is a Mutual Legal AssistanceTreaty (MLAT) between the United States and anothercountry. The SEC must make a MLAT request throughthe US Department of Justice.525

Particular difficulties may arise for foreign private issuersand non-US nationals who have legal obligations inboth the United States and in their home countries.While every jurisdiction prohibits fraud, there is nouniversally accepted definition of fraud and thusactivities that comply with local laws may violate the USfederal securities laws under certain circumstances. Forexample, in E.On AG,526 the SEC brought anenforcement action against a German company whoseshares were listed on the NYSE. The SEC charged thatthe company had denied falsely that it was involved inmerger negotiations and that the denials (issued in bothEnglish and German) violated Rule 10b-5. Whileacknowledging that disclosure practices regarding theexistence of negotiations may differ in otherjurisdictions, the SEC nevertheless asserted that it wouldnot apply a different standard to foreign private issuersfor commenting on pending merger negotiations thanto US domestic issuers.527


Chapter 8 – Communications with research analysts, investors and the public

Background

As a general matter, there is no duty under the USfederal securities laws to disclose material informationunless an applicable rule or regulation specificallyrequires disclosure.528 A foreign private issuer’s duty todisclose may arise in situations such as:

• purchasing or selling securities;

• filing a registration statement;

• filing an annual report on Form 20-F;

• submitting information on Form 6-K; and

• NYSE or Nasdaq requirements.

Once an issuer chooses to disclose information toinvestors or the public, it must do so completely andaccurately,529 and may not make selective disclosure,such as to favoured investors. In addition, if a priorstatement was accurate when made, but an issuersubsequently learns that the statement was false, an issuermust correct the statement.530 This is one reason whyprojections of future results are problematic.

Guidelines for dealing withresearch analysts and investors

In order to minimize potential liability in connectionwith statements to research analysts and investors, we

generally recommend the following guidelines to issuers(in addition to any applicable home jurisdiction rules).

(i) Nature of informationOne person or a small group of company personnel withan understanding of internal and reported financial dataand strategies should control the nature and scope ofinformation given to analysts and investors. That personor group should determine that such information,whether considered separately or together with otherinformation, has already been publicly disclosed in theissuer’s SEC filings or, if not so disclosed, is neithermaterial nor misleading.

(i i) “Material”It is not possible to give a precise, bright-line answer tothe question of what constitutes material information.In general, it is any fact which a buyer or seller(including a speculative buyer or seller) would want toknow, or any fact which would, if known, affect themarket value of the security.

(i i i) “Misleading”Information provided to analysts or released to thepublic would be construed as misleading if it is untrue,or if it omits any material facts necessary to make theother information provided not misleading under thecircumstances. Thus, information provided to investorsor analysts should not be one-sided in its positive tone ifthere are other material facts that would be necessary foran accurate and balanced description.


Chapter 8Communications with researchanalysts, investors and the public


(iv) Limit accessAn issuer should limit the number and identity ofpersonnel who have contact with analysts and investors.This will help ensure that disclosures are consistent witheach other and with the issuer’s internal and publiclyreported information, and that no analyst or group ofanalysts, or investor or group of investors, is being givenmore information than any other.

(v) Disseminating materials to analystsand investorsTo minimize selective disclosure risks, the issuer shouldgenerally disseminate information to analysts andinvestors in conference calls or webcasts rather thanone-on-one discussions. We recognize that it is difficultas a practical matter not to respond to inquiries byindividual analysts and investors, and the SEC continuesto permit individual communication under a mosaictheory. In other words, as the SEC stated it in its releaseadopting Regulation FD, “an issuer is not prohibitedfrom disclosing a non-material piece of information toan analyst, even if, unbeknownst to the issuer, that piecehelps the analyst complete a ‘mosaic’ of informationthat, taken together, is material.”531

Any written materials provided (which, as discussedabove, may not contain any material non-publicinformation or any material omissions) should bedisseminated to all analysts equally, and any materialinformation simultaneously released to the public. Themore varied an issuer’s analyst contacts, the greater therisks of an inadvertent isolated disclosure or an analyst’smisconception that could later develop into a materialityissue.

If an issuer does have material news it is extremelyimportant that any such announcement be madepublicly, rather than to an analyst or analysts or selectedinvestors.

Absent unusual circumstances, conference calls andwebcasts should be open to securities analysts, investors,the media and other interested parties. An issuer shouldannounce the date and time of the conference call in apress release and on its website inviting anyone who

may be interested to listen to the conference call orwebcast (or otherwise providing at least two businessdays’ advance notice to the public of the time and dateof the call, with instructions as to how to access the calland webcast). The release should provide dial-ininstructions for the conference call, or, if the issuerdecides to make the presentation by webcast, a websiteaddress. Although an issuer should permit anyone whomay be interested to listen to the conference call, theissuer may choose to permit only securities analysts orother designated individuals to ask questions during thequestion-and-answer period.

(vi) Reviewing draft analysts’ reports;distributing analysts’ reportsAbsent review or comment on the contents of analysts’reports, issuers are not responsible for the contents ofthose reports and no affirmative duty exists to correcterroneous statements in them.532 Many issuersaccordingly refrain from reviewing draft reports, andadoption of such a policy should be seriouslyconsidered. As noted above, review of analysts’ reportsby corporate insiders can potentially trigger liabilityunder Rule 10b-5 for statements made by the researchanalyst.533

If the issuer does find it necessary or appropriate toconduct any such review, the issuer is obligated tocorrect any material misstatements of fact in the draft,including the addition of any material facts necessary tomake statements in the draft report not misleading.(Note that, under new rules governing analysts adoptedby the NYSE and NASD, analysts may only submitportions of their research report to an issuer for factualreview: we discuss these rules below.) However, if theanalyst has done his or her job, it is unlikely that anycorrecting information will be found in documents thatare already publicly available, so that the issuer would beobligated to publicly disclose any new material factsbefore giving the correcting information to analysts toavoid potential liability for tipping (that is, favouring)the analysts. In a review of this sort, we encourage anissuer not to receive or review the analyst’s projectionsor valuations, and to limit the review to factual contentand so advise the analyst in writing.


Furthermore, there are liability risks for an issuer if itdistributes analysts’ reports to security holders orotherwise includes reports in public mailings or on itswebsite (including by hyperlink). Analysts’ reportstherefore should generally not be distributed to securityholders or otherwise included in any of an issuer’smailings or on its website, unless previously approved bycounsel and unless strong disclaimers are included thatthe views and projections expressed in the report aresolely those of the analyst. If an issuer decides to makeanalysts’ reports available with disclaimers, it shouldmake all reports available, not just favourable ones.

(vii) Making or commenting onprojections

(a) GeneralIssuers have varying practices on whether they statepublicly their specific financial performance plans orprojections. Since the adoption of Regulation FD, ithas become more common for companies to providethat information to the markets. Other companiesremain steadfast against releasing such information(whether in speeches, press releases, trade publications,statements to analysts, or otherwise). If an issuer decidesto make such an announcement, any projection shouldbe made in a public announcement (and not selectively)and should be accompanied by the key market variablesthat could cause actual results to vary from suchprojections and other relevant assumptions. It is alsopreferable to consult with counsel before making anyprojections. As noted above, projections may give riseto a duty to update if they become false or misleading inlight of subsequent events.

It is inherently difficult to determine the extent towhich an issuer’s actual performance (or revisions to itsinternal projections) must vary from previouslyannounced or endorsed projections before an update orcorrection must be published. In addition, even if anupdate or correction is published, the issuer could stillface litigation over whether the update or correctionwas published soon enough.

(b) PSLRA safe harbour534

The Private Securities Litigation Reform Act of 1995(the PSLRA) provides a safe harbour for SEC-reportingissuers, including SEC-reporting foreign private issuers,for certain types of written or oral forward-lookingstatements,535 including:536

• projections of revenues, income, losses, earnings andother financial items;

• statements of the plans and objectives of managementfor future operations; and

• statements of future economic performance.

The PSLRA does not, however, protect forward-looking statements made in connection with initialpublic offerings or tender offers, or those statements thatare included in financial statements prepared inaccordance with Gaap.537

In order to take advantage of the PSLRA safe harbour,among other things, the forward-looking statementmust be identified as such, and must be accompanied bymeaningful cautionary statements identifying importantfactors that could cause actual results to differ materiallyfrom those in the forward-looking statement.538 As apractical matter, issuers try to bring themselves withinthe safe harbour with respect to written forward-looking statements by inserting cautionary languagenoting that the relevant document contains forward-looking statements and by keeping current, in a widelyavailable public document such as a periodic SEC filing,the key market variables and risk factors affecting theissuer’s business. (This is the reason many earningsannouncements and other press releases routinelyinclude long disclaimers.) As for forward-looking oralstatements, a spokesperson will often make a formalstatement to the following (rather stilted) effect:

“The statements I am about to make include statementsabout our plans and future prospects for the companyand our industry that are forward-looking statementswithin the meaning of the Private Securities LitigationReform Act of 1995. Our actual performance may




differ materially from performance suggested by thosestatements. I encourage you to review the “CautionaryStatement” section of [our annual report on Form 20-F] filed with the SEC for additional informationconcerning factors that could cause those differences.”

We suggest that this statement be made at the beginningof each conference call with investors or analysts. Someissuers have the statement made by the moderator of thecall, rather than an officer.

(vii i) Inadvertent disclosuresInadvertent disclosure of material non-publicinformation, such as in an informal meeting with ashareholder or analyst, can sometimes occur. Inaddition to complying with local law requirements, aforeign private issuer should promptly disclose througha press release any material non-public informationinadvertently disclosed (notwithstanding the exemptionof foreign private issuers from the specific requirementsof Regulation FD).

Special situations

(i) Market rumoursIf analysts or journalists contact an issuer regardingmarket rumours, an issuer must either disclose publiclyall material information regarding the subject matter ofthe rumours or respond “no comment.” It isimpermissible to deny the subject matter of the rumours(for example, that acquisition negotiations are pending)if the denial is false. Many issuers institute a policy ofresponding “no comment” to all rumours.

However, if an issuer’s securities are listed on a nationalexchange or quoted on Nasdaq and the rumours relateto impending developments, the exchange willgenerally require the issuer to respond to the rumours.In addition, if an issuer determines that the rumoursoriginated from within the issuer, public disclosureshould be made.

(i i) Pending acquisitions/corporatetransactionsMerger negotiations or major corporate acquisitions can

pose particularly difficult disclosure questions. Aforeign private issuer that is holding merger negotiationsneed not disclose the existence of those negotiations,absent some other duty to disclose, or may respond topress inquiries by stating “no comment.” Once anissuer’s duty to disclose is triggered, however, it mustdisclose information about pending merger andacquisition transactions that are material and probable.539

Materiality is judged on the basic materiality standardunder the US federal securities laws – that is, whether areasonable investor would consider disclosure about thetransaction important in deciding whether or not topurchase or sell a security. There is no bright-line testfor when a transaction becomes probable. This mayoccur prior to the date a definitive agreement is signedand, therefore, prior to the date on which the partieswould otherwise be prepared to announce thetransaction.540

There is also an interaction between materiality andprobability, so that high probability can compensate fora lower level of significance and vice versa.541 The USSupreme Court has explained that “materiality ‘willdepend at any given time upon a balancing of both theindicated probability that the event will occur and theanticipated magnitude of the event in light of thetotality of the company activity.’”542 In short, the moresubstantial an acquisition or disposal is likely to be, theless probable it needs to be before it must be disclosed.543

More generally, if asked by investors or the press, aforeign private issuer may not deny that mergerdiscussions are taking place if this is not, in fact, true.544

(i i i) RoadshowsMost public offerings (and Rule 144A/Regulation Sofferings) for foreign private issuers include roadshowsin the United States and outside the United States.These are group and one-on-one meetings withpotential investors attended by key managers of theissuer and representatives of the underwriters. (In Rule144A offerings, only QIBs are permitted to attendroadshows in the United States.) Many issuers chooseto allow access to their roadshows over the internet; thismay be done if the procedures and restrictions specified


by the SEC in certain no-action letters are followed.545

The underwriters and the issuer typically prepare a slideshow of key points on the issuer’s business and strategy.Copies of the slides would be considered a non-conforming prospectus in a registered offering, as theywould not contain the level of detail that is included inthe prospectus or offering memorandum. Hard copiesof the slides therefore should not be distributed atroadshow presentations (or, if they are distributed, theyshould be retrieved at the end of the presentation). Thepreliminary prospectus or offering memorandum istypically distributed or made available to all attendees.The contents of the slide show and discussion points atroadshow meetings should be consistent with, and nobroader than, the contents of the offering document.

(iv) Disclosures to employeesIssuers should not disclose material non-publicinformation to employees (by newsletter or otherwise)and should make sure that employees involved inpotentially material developments (for example, newproducts, acquisitions) are restricted from trading. Mostpublic companies have policies that define when andunder what circumstances certain employees arepermitted to trade in the issuer’s securities.

US securities laws and the internet

(i) BackgroundThe rapid growth of the internet has significantly alteredthe means by which issuers and broker-dealerscommunicate with investors and the public at large.The SEC has issued several interpretive releases andno-action letters addressing the application ofUS securities laws to internet communications.546

As a general matter, the US federal securities laws applyto the content of an issuer’s website in precisely thesame manner as an issuer’s other communications.547

This has two key implications. First, as discussed above,issuers of securities in the United States are subject tovarious restrictions on publicity about a pending orproposed offering stemming from the registrationrequirements of the Securities Act. These restrictions

apply with equal force to statements made on an issuer’swebsite, or hyperlinked into an issuer’s website.548

Accordingly, statements in (or hyperlinked into) anissuer’s website may constitute illegal gun-jumping ifmade before a registration statement is filed or a non-compliant prospectus if made after a registrationstatement has been filed but before it has been declaredeffective by the SEC.549 In addition, in the case of anunregistered offering, these statements can constitutedirected selling efforts or general solicitation and generaladvertising of a sort that can destroy the availability ofthe exemption from registration on which the issuer isseeking to rely.550 As with other public statements,ordinary course business, product and financialcommunications are permissible, as is posting an issuer’slatest Exchange Act reports.551

Second, issuers are exposed to liability under the USfederal securities laws for communications via theinternet, in the same way as for their other communi-cations.552 Misleading website postings can, for, example,lead to liability under Rule 10b-5.553 Similarly, issuers arepotentially liable for statements made in websites towhich their website is hyperlinked.554

Practice point:Issuers that are considering a securities offering shouldcarefully review the contents of their websites withcounsel to make sure that the contents do not violatelimitations on communications during the registrationprocess, or violate prohibitions against general solicita-tion and directed selling efforts for a Rule144A/Regulation S offering. First-time issuers whohave not established a regular pattern of communica-tion with the investment community should be partic-ularly careful.




(i i) Internet offeringsIf a foreign private issuer wants to conduct an offeringof securities over the internet, or to make available viathe internet offering documentation that goes beyondthe limited category of information that is permissibleunder US publicity restrictions, it should implement thefollowing procedures:

(a) GeneralFor all types of offerings, a foreign private issuer should:

• Consider establishing a separate website relatingsolely to the offering: some of the restrictions outlinedbelow (such as certification requirements) may beimpractical for an issuer’s main website.

• Consider including only materials that are not inEnglish: this helps to reinforce the argument that thematerials are directed only to the local market andnot to the United States.

• Review hyperlinks: as noted above, hyperlinkedmaterial may give rise to liability.

• Ensure that information on the website is consistentin all respects with the printed offering documen-tation: for example, the material on the websiteshould not be more detailed than that contained inthe issuer’s prospectus filed with the SEC or in itsoffering memorandum.

(b) Offshore offering with no concurrent US offering A foreign private issuer that is planning an offshore

offering under Regulation S with no concurrent USoffering (registered or unregistered) must: 555

• include a prominent disclaimer on its website makingclear that the offer is directed only to countries otherthan the United States. For example, the website canstate that the securities are not being offered in theUnited States or to non-US persons; and

• implement procedures on its website that arereasonably designed to guard against sales to USpersons. Before allowing a prospective investor toview materials online, for example, the investorshould be required to certify non-US status and toprovide an addresses or telephone number outsidethe United States. The website should automaticallyreject any person who refuses to provide the certifi-cation (and preferably should be set up to reject anyperson who provides a US address).

(c) Offshore offering with concurrent US unregisteredofferingA foreign private issuer that is planning a Regulation Soffering in combination with an unregistered offering inthe United States (such as a Rule 144A offering) must: 556

• implement the restrictions for an offshore offeringdiscussed above;

• either exclude US persons from the website or takesteps to ensure that only QIBs (in the case of a Rule144A offering) or accredited investors (in the case ofa private placement) have access to the website, forexample, by limiting access in the United States tothose investors who have been provided with apassword; and

• to the extent practicable, limit information posted onthe website to information about the offshoreoffering, and only include information on the privateUS offering that is required by foreign law. (Thismay, however, be difficult to accomplish if a singleoffering memorandum is used for the global offering,as is commonly the case.)

Practice point:Issuers should not post press releases on their web-site while an offering is pending unless those pressreleases comply with Rule 134 or 135 (in the case ofa registered offering) or Rule 135c (in the case of aprivate offering). These rules allow for less informa-tion than would be permitted under Rule 135e,which applies exclusively to offshore press activity.


(d) Registered offeringA foreign private issuer that is planning a Regulation Soffering in combination with a registered public offeringin the United States must:557

• implement the restrictions for an offshore offeringdiscussed above; and

• either exclude US persons from the website or onlyallow US persons to participate in accordance withcertain specified SEC procedures.

Regulation of research analysts

(i) BackgroundAs noted above, the Sarbanes-Oxley Act imposesvarious requirements on research analysts and theresearch reports they publish. The NYSE and NASDhave also adopted several sets of rules to address researchanalyst conflicts of interest. In addition, under a globalsettlement of certain litigation, leading investment bankshave agreed to further restrictions. We summarize theNYSE and NASD rules, and the global settlement,below.

(i i) NYSE Rule 472 and NASD Rule 2711In May 2002, the SEC approved rule amendments bythe NYSE and the NASD governing how memberorganizations of both groups, their research analysts andinvestment banking departments manage and discloseconflicts of interest between their research andinvestment banking activities.558 On July 29 2003 theSEC approved further amendments to the rulesproposed by the NYSE and the NASD (as so amended,the Conflict of Interest Rules).559 The primary purposeof the amendments is to conform the Conflict ofInterest Rules to the requirements of theSarbanes–Oxley Act.560

The NYSE and NASD versions of the rules are substan-tially identical and are intended to operate in the sameway.561 The Conflict of Interest Rules generally applyonly to research reports on equity securities. Inaddition, they apply only to the members and memberorganizations of the NASD and NYSE.

(a) Gatekeeper provisionsUnder the Conflict of Interest Rules, non-researchpersonnel, including investment banking personnel,may review a research report prior to its publicationonly to “verify the factual accuracy of information in theresearch report or to identify any potential conflict ofinterest” provided that:562

• any written communication concerning the contentof research reports between non-research personneland research personnel must be made either throughauthorized legal or compliance personnel or in atransmission copied to those personnel; and

• any oral communication concerning the content ofresearch reports between non-research personnel andresearch personnel must be documented and madeeither through authorized legal or compliancepersonnel acting as intermediary or in a conversationconducted in the presence of those personnel.

Similarly, firms may not submit research reports prior totheir publication to the company that is the subject ofthe report, except for sections of the research report tobe reviewed by the company solely to verify the factualaccuracy of information in those sections.563 Under nocircumstances may the research firm provide thesections of the research report that include the researchsummary, the research rating or the price target.564 Anyresearch report that is to be provided to the subjectcompany must first be provided to the firm’s legal orcompliance personnel and any rating change after thereport is provided to the company must receive priorwritten authorization from legal or compliancepersonnel.565 The research firm may not notify thecompany of a proposed rating change until after theclose of trading one business day prior to theannouncement of the change.566




(b) Restrictions on research analyst compensationThe Conflict of Interest Rules prohibit any memberfirms of the NASD or NYSE from paying “any bonus,salary or other form of compensation to a researchanalyst that is based upon a specific investment bankingservices transaction.”567 If an analyst received compen-sation that was based on the firm’s general investmentbanking revenues, the fact must be disclosed in thefirm’s research reports.568

The Conflict of Interest Rules further separate researchanalysts’ compensation from investment bankinginfluence by requiring procedures for annual review andapproval of research analysts’ compensation by acommittee that reports to the board of directors or asenior executive if the member organization has noboard of directors.569 The committee may not includerepresentatives from the firm’s investment bankingdepartment.570 The Conflict of Interest Rules alsoprohibit the committee from considering the researchanalyst’s contribution to the firm’s investment bankingbusiness and set forth criteria that the committee mustconsider.571

(c) Prohibition of promise of favourable researchNo member firm may “directly or indirectly offerfavorable research, a specific rating or a specific pricetarget, or threaten to change research, a rating or a pricetarget, to a company as consideration or inducement forthe receipt of business or compensation.”572 TheConflict of Interest Rules also prohibit member firmsfrom retaliating against a research analyst as a result of anadverse, negative or otherwise unfavourable researchreport by the analyst that may harm the member firm’sinvestment banking relationship with the company thatis the subject of the report.573

Research analysts are also prohibited from participatingin efforts to solicit investment banking business.574 Thiswould include participation in pitch meetings withprospective investment banking clients or having othercommunications with companies for the purpose ofsoliciting investment banking business.575 The rulesprovide an exception for communications between theresearch analyst and the subject company or non-

research personnel for the sole purpose of duediligence.576

(d) Restrictions on publishing research reports and publicappearancesThe Conflict of Interest Rules require quiet periodsduring which a firm acting as an underwriter or dealerof a securities offering may not issue a research report ona company and a research analyst with such firm maynot recommend or offer an opinion on such company’ssecurities in a public appearance.577

Specifically, a member organization acting as a manageror co-manager in a securities offering may not publishor otherwise distribute research reports regarding theissuer and any research analyst of such member organi-zation may not recommend or offer an opinion on theissuer’s securities in a public appearance:578

• for 40 calendar days following an IPO;

• for 10 calendar days following a secondary offering;and

• within 15 days prior to or after the expiration, waiveror termination of a lock-up or similar agreementbetween the member organization and the issuer orits shareholders that restricts or prohibits the sale ofissuer securities after the completion of a securitiesoffering.579

There are exceptions to these requirements for researchreports that are published or otherwise distributed, orresearch analyst recommendations made in a publicappearance, due to significant news or events, providedthat the firm’s legal or compliance personnel authorizethe publication of the research report before it is issuedor authorize the public appearance before it is made.580

In addition, no member firm that has agreed toparticipate or is participating as an underwriter or dealer(other than as a manager or co-manager, in which casethe 40-day period described above would apply) of anissuer’s initial public offering may publish or otherwisedistribute a research report regarding that issuer and a


research analyst of such member firm may notrecommend or offer an opinion on that issuer’ssecurities in a public appearance for 25 calendar daysfollowing the offering date.581

The Conflict of Interest Rules also require that if amember firm intends to terminate its research coverageof a subject company, member firms must providenotice of this termination.582 Firms terminating coveragemust make a final research report available comparablein scope and detail to prior research reports on the issuerand must include a final recommendation or rating,unless it is impracticable to provide a comparablereport.583

(e) Analyst trading restrictionsThe Conflict of Interest Rules also impose variousrestrictions on an analyst’s personal trading, includingrestrictions on trading by members of the researchanalyst’s household.584 No research analyst or member ofthe analyst’s household may:585

• purchase or receive an issuer’s securities prior to itsinitial public offering if the issuer is principallyengaged in the same types of businesses as companieswhich the research analyst usually covers in researchreports;

• purchase or sell any security issued by a company thatthe research analyst follows, or any option on orderivative of such security, for a period beginning 30calendar days before and ending five calendar daysafter the publication of a research report concerningthe company or a change in rating or price target ofthe company’s securities;586 or

• purchase or sell any security or any option on orderivative of such security in a manner inconsistentwith the research analyst’s recommendation asreflected in the most recent published researchreport.

The Conflict of Interest Rules also require that legal orcompliance personnel give prior approval to transactionseffected by a person who (i) supervises research analysts

or (ii) has direct influence or control over thepreparation of the substance of research reports ordecisions regarding ratings in research reports, in eachcase to the extent such transactions involve equitysecurities of companies covered by the research analystsor research reports such person oversees.587

(f) Disclosure requirementsThe Conflict of Interest Rules impose several disclosurerequirements on research reports and public appearancesby research analysts.588 For example, research reportsmust disclose if the member firm distributing theresearch report or its affiliates:589

• has managed or co-managed a public offering ofsecurities for the subject company in the past 12months;

• has received compensation for investment bankingservices from the subject company in the past 12months; or

• expects to receive or intends to seek compensationfor investment banking services from the subjectcompany in the next three months.

Research reports must also disclose if, as of the last dayof the month immediately preceding the publication ofa research report:590

• the member firm issuing the research report or itsaffiliates beneficially owns more than 1% of any classof common equity securities of the subject company;

• the subject company is a current client, or within the12 months prior to the distribution of the researchreport was a client, of the member firm issuing theresearch report and the types of services provided bythe member firm to the subject company; or

• the member firm received any compensation forproducts or services other than investment bankingservices from the subject company in the last 12months.




Research reports must also disclose client relationshipswith and non-investment banking compensation fromsubject companies, to the extent known by the researchanalysts involved in preparing the report or by anyemployee of the member firm with the ability toinfluence the substance of the research report (aninfluential employee). In particular, the Conflict ofInterest Rules require that research reports disclose:591

• if the research analyst or an influential employeeknows that the subject company is a current client, orwithin the 12 months prior to the distribution of theresearch report was a client, of the member firmissuing the research report and the types of servicesprovided by the member firm to the subjectcompany;592

• if the research analyst or an influential employeeknows that the member firm or an affiliate of themember firm received any compensation forproducts or services other than investment bankingservices from the subject company in the last 12months; and

• if the research analyst or the member firm has reasonto know that an affiliate of the member firm receivedany compensation for products or services other thaninvestment banking services from the subjectcompany in the past 12 months.593

Further, the Conflict of Interest Rules require thatcertain potential conflicts of interest involving theresearch analyst preparing a report are disclosed.Specifically, a member must disclose in researchreports:594

• if a research analyst received any compensation fromthe subject company in the past 12 months or anycompensation based upon (among other factors) themember’s overall investment banking revenues;

• if the research analyst or a member of the researchanalyst’s household has a financial interest in thesecurities of the subject company and the nature ofthat financial interest;

• if the research analyst or a member of the researchanalyst’s household is an officer, director or advisoryboard member of the subject company; and

• any other actual, material conflict of interest of theresearch analyst or member firm which the researchanalyst knows or has reason to know at the time ofthe publication or other distribution of the researchreport.

The Conflict of Interest Rules also require detailedqualitative and quantitative disclosures relating to thefirm’s research reports that must accompany each reportpublished, such as:595

• the valuation methods used to determine a pricetarget;

• the meanings of each of the ratings the firm uses;

• the percentage of all securities rated by the firm thatare assigned each particular rating category and thepercentage of companies within each rating categorythat are clients of the firm; and

• a chart depicting the stock price of the subjectcompany and the history of ratings by the firm on thesubject company’s securities.

In addition to the disclosures required in researchreports described above, research analysts must alsodisclose certain compensation and potential conflicts ofinterest in any public appearance by the researchanalyst.596 A research analyst must disclose in publicappearances:

• if, as of the last day of the month immediatelypreceding the publication of a research report, themember firm issuing the research report or itsaffiliates beneficially owns more than 1% of any classof common equity securities of the subject company;

• if the research analyst knows or has reason to knowthat the subject company is a current client, or withinthe 12 months preceding the public appearance was a


client, of the member firm of the research analyst andthe types of services provided by the member firm tothe subject company;

• if the research analyst knows or has reason to know thatthe member firm of the research analyst or any affiliateof the member firm received any compensation fromthe subject company in the past 12 months;597

• if the research analyst or a member of the researchanalyst’s household has a financial interest thesecurities of the subject company and the nature ofthat financial interest;

• any other actual, material conflict of interest of theresearch analyst of member firm which the researchanalyst knows or has reason to know at the time thepublic appearance is made;

• if the research analyst or a member of the researchanalyst’s household is an officer, director or advisoryboard member of the subject company; and

• if a research analyst received any compensation fromthe subject company in the past 12 months.

(i i i) Global settlementOn April 28 2003 the SEC, in conjunction with theNYSE, NASD, New York State Attorney General, theNorth American Securities Administrators Associationand state securities regulators announced the finalizingof a global settlement (the Global Settlement) against anumber of leading investment banking firms.598 As partof the Global Settlement, the defendant firms agreed toabide by new restrictions designed to insulate researchanalysts from pressures by the investment bankingdepartments at these firms. These new rules are set forthin Addendum A to the Global Settlement, entitled“Undertakings” (the Addendum).

(a) Separation of research and investment bankingAmong the reforms contained in the Addendum aimedat separating the research and investment bankingfunctions within each firm are:

• research and investment banking will be separateunits with entirely separate reporting lines within thefirm and cannot report directly or indirectly to theother department;599

• research will have its own dedicated legal andcompliance staff, although it may be part of the firm’soverall compliance/legal infrastructure;600

• the firm’s senior management will determine theresearch department’s budget without influence fromthe investment banking department and withoutregard to specific revenues or results derived frominvestment banking;601

• the research and investment banking departmentswill be physically separated;602

• research analysts’ compensation may not be based,directly or indirectly, on investment bankingrevenues or input from investment bankingpersonnel, and investment bankers will have no rolein evaluating analyst’s job performance;603

• the investment banking department will have noinput into company-specific coverage decisions,including decisions to terminate coverage;604

• if a firm decides to terminate coverage, the firm willmake a final research available report on the companyusing the means of dissemination equivalent to those itordinarily uses (no such report is required if the priorcoverage was limited to purely quantitative analysis);605

• research analysts are prohibited from participating inefforts to solicit investment banking business, such as“pitch” meetings, and are prohibited from partici-pating in company- or investment banking-sponsored road shows related to a public offering orother investment banking transaction;606 and

• the firms will create and enforce firewalls restrictingcommunication between investment banking andresearch except in specifically designated circum-stances.607




Some of these provisions take effect 60 days after theentry of final judgment; the remainder take effect 120days after the entry of final judgment.

“Firm” for these purposes is defined to include affiliatesof the defendants, other than exempt investment advisoraffiliates. However, “the restrictions and requirementsonly apply in respect of a research report that is both (i)prepared by the firm and (ii) that relates to either (A) aUS company or (B) a non-US company for which a USmarket is the principal equity trading market” (acovered company).608 “Research report” is defined as“any written (including electronic) communication thatis furnished by the firm to investors in the United Statesand that includes an analysis of the common stock, orany derivative thereof, including American DepositaryReceipts, of an issuer or issuers and providesinformation reasonably sufficient upon which to base aninvestment decision,” subject to certain technicalexceptions.609 The separation and other provisions of theAddendum do not, therefore, apply to debt research orto research provided solely to non-US customers.

(b) Disclosures in research reportsEach defendant firm must disclose prominently on thefirst page of any research report and any summary listingof recommendations or ratings contained in previously-issued research reports, that:

• “[Firm] does and seeks to do business with companiescovered in its research reports. As a result, investorsshould be aware that the firm may have a conflict ofinterest that could affect the objectivity of thisreport.”

• With respect to companies as to which the firm isrequired to make available independent research (asdescribed below): “Customers of [firm] can receiveindependent, third-party research on the companycovered in this report, at no cost to them, where suchresearch is available. Customers can access thisindependent research at [website address/hyperlink]or can call [toll-free number] to request a copy of thisresearch.”

• “Investors should consider this report as only a singlefactor in making their investment decision.”610

Each firm must also make publicly available on itswebsite, in a downloadable format, certain informationcontained in its published research reports, including therating and explanation thereof, price targets (if any) andearnings per share forecasts.611

These disclosure requirements become effective 120days after the entry of the final judgment, other than therequirement to disclose the availability of independentresearch, which becomes effective 270 days after theentry of a final judgment.612 Like the requirementsregarding separation of research and investmentbanking, the disclosure requirements apply only toresearch reports both prepared by the firm and relatingto a covered company.613


Chapter 9 – Other relevant statutes

US Investment Company Act of1940

The Investment Company Act and the SEC’s rules andregulations thereunder establish a comprehensive set ofregistration and reporting requirements for investmentcompanies. The Investment Company Act’s definitionof “investment company” is broad. As a result, foreignprivate issuers that view themselves as operatingcompanies rather than investment companies cannevertheless trigger the Investment Company Act.

The Investment Company Act prohibits unregisterednon-US investment companies from issuing securities tothe public in the United States. Foreign private issuersare generally unable to comply with the registration andreporting requirements of the Investment CompanyAct. This means that a foreign private issuer that intendsto offer its securities in the United States must:

• fall outside of the definition of “investmentcompany” under the Investment Company Act;

• structure the offering to fit within an exception to orexemption from the Investment Company Act; or

• obtain special exemptive relief from the SEC.

Violations of the Investment Company Act canpotentially lead to civil and criminal liability. Inaddition, contracts in violation of the InvestmentCompany Act may be unenforceable.

US federal tax laws – passiveforeign investment companies

Depending on the sources of its income and thecomposition of its assets, a foreign private issuer may beconsidered a passive foreign investment company (aPFIC) under the US federal tax laws. In particular, theUS Internal Revenue Code (the Code) defines a PFICas any foreign corporation if, for any taxable year:

• passive income of the corporation equals or exceeds75% of gross income of the corporation for thattaxable year; or

• the average percentage of assets (by value) held bythat corporation during the taxable year that producepassive income or are held for the production ofpassive income equals or exceeds 50% of its totalassets during that taxable year.

Passive income for these purposes generally includesinterest, dividends, rents, royalties, certain propertytransactions, commodities transactions, foreign-

Practice point:A foreign private issuer should consult with US coun-sel at an early stage of a proposed securities offeringto determine if the Investment Company Act applies,and if so what steps need to be taken. This determi-nation may require a detailed analysis of the issuer’sassets and income sources.


Chapter 9Other relevant statutes

Chapter 9 – Other relevant statutes

currency gains and income equivalent to interest.

If a foreign private issuer is deemed to be a PFIC underthe Code, holders of the issuer’s equity securities whoare subject to US federal income taxation face variousunattractive tax consequences, which in turn can hinderthe issuer’s ability to market its equity securities in theUnited States. A PFIC can assist holders to mitigatethese consequences to a certain degree by agreeing totake various steps (including providing information onan ongoing basis to its securities holders).

US state “blue sky” laws

Nearly every state of the United States requires that anissuer of securities must register certain offers and salesof securities within that state. In addition to US federalliabilities, most states also have separate liabilityprovisions that give investors claims against issuers andunderwriters for material misstatements or omissions.These state securities laws are known as “blue sky” laws.

Under the National Securities Markets ImprovementAct of 1996 (NSMIA), offers and sales of coveredsecurities need not be registered under state blue skylaws. Covered securities include any securities that are:

• listed, or authorized for listing, on the NYSE orNasdaq, or are securities that rank equal to or seniorto a security of the same issuer that is so listed;

• sold to qualified purchasers; or

• sold in Rule 144A transactions where the issuer is areporting company under the Exchange Act.

The SEC has proposed a definition for “qualifiedpurchaser” that would essentially include almost allprivate placement transactions involving sophisticatedinvestors.614 Most state blue sky laws also allow issuers tooffer and sell securities to certain classes of sophisticatedinstitutional investors without registration.

An issuer offering a security that is not a coveredsecurity or pursuant to an offering that is not exemptfrom registration under state law must register the offerand sale. Typically this will require completion of asimple form, payment of a filing fee and filing with thestate the same registration statement filed with the SEC.The level of state review of these offerings varies widelyand, in some states, an offering may not be registered ifit is unfair, unjust or inequitable in the judgment of thestate securities authorities.

Practice point:A guarantee of a covered security is often not itself acovered security, requiring many debt offerings to relyon state-by-state compliance with institutional investorexemptions.

Practice point:As with the Investment Company Act, a foreign pri-vate issuer should consult with US tax counsel at anearly stage of a proposed securities offering to deter-mine if the issuer may be considered a PFIC, and if sowhat steps need to be taken.


Chapter 10 – Conclusion and contacts

The US federal securities laws are a continuouslyevolving area. We regularly issue client alertssummarizing important recent developments. These canbe found on our website, www.lw.com.

If you have any questions about this Overview, pleasecontact:

Alexander F Cohen — +44-20-7710-1014;

Gay Bronson — +44-20-7710-1006;

Bryant Edwards — +44-20-7710-1163;

John Huber — +1 (202) 637-2242; or

Mark Stegemoeller — +1 (213) 891-8948.

Also, of course, please feel free to call your usual Latham& Watkins lawyer.


Chapter 10 Conclusion and contacts

Annex A – Non-financial disclosure requirements of Forms F-1, F-2, F-3 and Form 20-F

This checklist summarizes the non-financial disclosuresrequired by Forms F-1, F-2, F-3 and Form 20-F (whenused either as a registration statement or an annualreport). Issuers eligible to use Form F-2 and Form F-3are generally permitted to incorporate much of thisnon-financial information by reference to the issuer’s

annual report on Form 20-F. Note that, whether or notprescribed by any form, all material information must bepresented. In addition, the checklist is only a summaryof certain key provisions. Please refer to the relevantform for the full text of the disclosure requirements.



DisclosureFormF-1

FormF-2

FormF-3

Registrationstatementon Form2 0-F

Annualreport onForm 20-F

Forepart of registration statement and outside front cover of the prospectus(Regulation S-K 501).

The prospectus cover must include, among otherthings:

• Name of issuer, including an English translation ofa foreign name.

• Title and amount of securities being offered.

• Offering price of the securities.

• US stock market on which the securities aretraded or will be listed or quoted.

• Cross-reference to the risk factors section.

• Required SEC, state and other legends.

• Names of the lead or managing underwriters.

• The date of the prospectus.

✔ ✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



Inside cover and outside back cover of theprospectus (Regulation S-K 502).

• Table of contents for the prospectus.

• A legend describing the prospectus deliveryrequirements for dealers.

✔ ✔ ✔

Prospectus summary (Regulation S-K 503(a)).

• A summary of the prospectus written in “plainEnglish.”

✔ ✔ ✔

Address and telephone number (RegulationS-K 503(b)).

• The address and telephone number of theissuer’s principal executive offices should be provid-ed on the prospectus cover or in the prospectussummary.

✔ ✔ ✔

Directors and senior management (Form 20-F, Item 1.A).

• Provide the names, business addresses and func-tions of the issuer’s directors and senior manage-ment.

✔ ✔ ✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



Advisers (20-F, Item 1.B).

• If required by a jurisdiction outside the UnitedStates, provide the names and addresses of theissuer’s principal bankers and legal advisers to theextent the issuer has a continuing relationship withsuch entities, the sponsor for listing (whererequired by US regulations), and the legal advisersto the issuer.

✔ ✔ ✔ ✔

Auditors (Form 20-F, Item 1.C).

• Provide the names and addresses of the issuer’sauditors for the preceding three years (togetherwith their membership in a professional body).

✔ ✔ ✔ ✔

Offer statistics (Form 20-F, Item 2.A).

• For each method of offering (e.g., rights offering,general offering, etc.), state the total expectedamount of the issue, including the expected issueprice or the method of determining the price andthe number of securities expected to be issued.

✔ ✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



Method and expected timetable (Form 20-F,Item 2.B).

• The time period during which the offer will beopen, information regarding shortening or lengtheningof such time period, and where and to whom pur-chase or subscription applications shall be addressed.

• Method and time limits for paying up securities;where payment is partial, the manner and dates onwhich amounts due are to be paid.

• Method and time limits for delivery of equity securi-ties to subscribers or purchasers.

• In the case of pre-emptive purchase rights, specifythe procedure for the exercise of any right of pre-emption, the negotiability of subscription rights andthe treatment of subscription rights not exercised.

• Provide a full description of the manner in whichresults of the distribution of securities are to be madepublic, and when appropriate, the manner for refund-ing excess amounts paid by applicants (includingwhether interest will be paid).

✔ ✔ ✔

Capitalization and indebtedness (Form 20-F,Item 3.B).

Include the following:

• A statement of capitalization and indebtedness(distinguishing between guaranteed and un-guaran-teed, and secured and unsecured, indebtedness) asof a date no earlier than 60 days prior to the dateof the document.

✔ ✔ ✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



Capitalization and indebtedness (Form 20-F,Item 3.B), continued.

• The statement should show the issuer’s capital-ization on an actual basis and, if applicable, asadjusted to reflect the sale of new securities beingissued and the intended application of the net pro-ceeds therefrom.

✔ ✔ ✔ ✔

Reasons for the offer and use of proceeds(Form 20-F, Item 3.C).

• The estimated net amount of the proceeds bro-ken down into each principal intended use thereof.If the issuer has no specific plans for the proceeds,it should discuss the principal reasons for the offer-ing.

• If the proceeds are being used directly or indi-rectly to acquire assets, other than in the ordinarycourse of business, briefly describe the assets andtheir cost.

• If the proceeds may or will be used to financeacquisitions of other businesses, give a briefdescription of such businesses and information onthe status of the acquisitions.

• If any material part of the proceeds is to be usedto discharge, reduce or retire indebtedness,describe the interest rate and maturity of suchindebtedness and, for indebtedness incurred withinthe past year, the uses to which the proceeds ofsuch indebtedness were put.

✔ ✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



Risk factors (Form 20-F, Item 3.D).

• Prominently disclose risk factors that are specificto the issuer or its industry and make an offeringspeculative or one of high risk.

• Companies are encouraged, but not required, tolist the risk factors in the order of their priority tothe issuer.

• The risk factors section is intended to be a sum-mary of more detailed discussion contained else-where in the document.

✔ ✔ ✔

Risk factors (Regulation S-K 503(c)).

• A discussion of the most significant factors thatmake the offering speculative or risky. This discus-sion should follow the prospectus summary.

✔ ✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



History and development of the issuer(Form 20-F, Item 4.A).

• The legal and commercial name of the issuer.

• The date of incorporation and the length of lifeof the issuer, except where indefinite.

• The domicile and legal form of the issuer, itscountry of incorporation and the address and tele-phone number of its registered office (or principalplace of business if different from its registeredoffice). Provide the name and address of theissuer's agent in the United States, if any.

• The important events in the development of theissuer’s business, such as any material reclassifica-tion, merger or consolidation of the issuer; acquisi-tions or dispositions of material assets; materialchanges in conduct of the business; materialchanges in the types of products produced or ser-vices rendered; name changes; or any bankruptcy,receivership or similar proceedings. (Note: Sincebeginning of last financial year for annual reports on20-F.)

• A description of the issuer’s principal capitalexpenditures and divestitures for the last threefinancial years.

• Principal capital expenditures and divestiturescurrently in progress.

• Any public takeover offers by third parties inrespect of the issuer’s shares or by the issuer inrespect of other companies’ shares which haveoccurred during the last and current financial yearand the price and outcome of such offers.

✔ ✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



Business overview (Form 20-F, Item 4.B).

• The nature of the issuer’s operations and itsprincipal activities, including the main categories ofproducts sold and/or services performed for eachof the last three financial years and any significantnew products.

• The principal markets in which the issuer com-petes, including a breakdown of total revenues bycategory of activity and geographic market for eachof the last three financial years.

• The seasonality of the issuer’s main business.

• The sources and availability of raw materialsincluding a description of whether prices arevolatile.

• The marketing channels and any special salesmethods used by the issuer.

• Summary information regarding the extent towhich the issuer is dependent, if at all, on patentsor licenses, industrial, commercial or financial con-tracts (including contracts with customers or suppli-ers) or new manufacturing processes.

• The basis for any statements made by the issuerregarding its competitive position.

• The material effects of government regulationson the issuer’s business.

• Issuers that have not received operating rev-enues for three years prior to filing Form F-1 mustdisclose their plan of operations.

✔ ✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



Organizational structure (Form 20-F, Item4.C).

• If the issuer is part of a group, include a briefdescription of the group and the issuer’s positionwithin the group.

• A listing of the issuer’s significant subsidiaries,including name, country of incorporation or resi-dence, proportion of ownership interest and, if dif-ferent, proportion of voting power held.

✔ ✔ ✔

Property, plants and equipment (Form 20-F,Item 4.D).

•Material tangible fixed assets, including leasedproperties, and any major encumbrances thereon,including a description of the size and uses of theproperty; productive capacity and extent of utiliza-tion of the issuer’s facilities; how the assets areheld; the products produced; and the location.

•Any environmental issues that may affect theissuer’s utilization of the assets.

•Any material plans to construct, expand orimprove facilities, including the nature of and rea-son for the plan, an estimate of the amount ofexpenditures including amounts already paid, themethod of financing the activity, the estimated datesof start and completion of the activity, and theincrease of production capacity anticipated aftercompletion.

✔ ✔ ✔



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Operating results (Form 20-F, Item 5.A).

• Significant factors, including unusual or infrequentevents or new developments, materially affectingthe issuer’s income from operations, indicating theextent to which income was so affected, as well asany other significant component of revenue orexpenses necessary to understand the issuer’sresults of operations.

• If the financial statements disclose materialchanges in net sales or revenues, discuss the extentto which such changes are attributable to changesin prices or to changes in the volume or amount ofproducts or services being sold or to the introduc-tion of new products or services.

• The impact of inflation, if material. If the currencyin which financial statements are presented is of acountry that has experienced hyperinflation, pro-vide a five-year history of annual rates of inflationtogether with a discussion of the impact on theissuer.

• The impact of foreign currency fluctuations onthe issuer, if material, and the extent to which for-eign currency net investments are hedged by cur-rency borrowings and other hedging instruments.

• Any governmental economic, fiscal, monetary orpolitical policies or factors that have materiallyaffected, or could materially affect, the issuer’soperations or investments by US shareholders.

✔ ✔ ✔



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Liquidity and capital resources (Form 20-F,Item 5.B).

• The issuer’s liquidity (both short and long term),including:

- internal and external sources of liquidity and abrief discussion of any material unusedsources of liquidity;

- a statement by the issuer that the workingcapital is sufficient or a description of how itproposes to provide additional capital;

- the sources and amounts of the issuer’s cashflows, including the nature and extent of anylegal or economic restrictions on the ability ofsubsidiaries to transfer funds to the issuer;and

- the level of borrowings, the seasonality ofborrowing requirements and the maturityprofile of borrowings and committed bor-rowing facilities.

• The type of financial instruments used, the matu-rity profile of debt, currency and interest rate struc-ture. Treasury policies, currency in which cash isheld, extent to which borrowings are at fixed rates,use of financial instruments for hedging.

• The issuer’s material commitments for capitalexpenditures as of the end of the latest financialyear and any subsequent interim period.

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Research and development, patents andlicenses, etc. (Form 20-F, Item 5.C).

• A description of the issuer’s research and devel-opment policies for the last three years, where it issignificant, including the amount spent during eachof the last three financial years on issuer-sponsoredresearch and development activities.

✔ ✔ ✔

Trend information (Form 20-F, Item 5.D).

• The most significant recent trends in production,sales and inventory, the state of the order bookand costs and selling prices since the latest financialyear.

• For the current financial year, any known trends,uncertainties, demands, commitments or eventsthat are reasonably likely to have a material effecton the issuer’s net sales or revenues, income fromcontinuing operations, profitability, liquidity or capi-tal resources, or that would cause reported infor-mation not to be indicative of future operatingresults or financial condition.

✔ ✔ ✔

Off-balance sheet arrangements (Form 20-FItem 5.E; effective for reports including financialstatements for fiscal years ending on or after June15 2003).

• Discussion in a separately-captioned section ofthe issuer’s off-balance sheet arrangements thathave or are likely to have a material effect on theissuer’s financial condition, changes in financial con-dition, revenues and expenses, results of opera-tions, liquidity, and capital resources.

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• To the extent necessary for an understanding ofthe off-balance sheet arrangements and theireffects:

- the nature and business purpose of thearrangements;

- the importance of the arrangements to theissuer for liquidity, capital resources, marketrisk or credit risk support or other benefits;

- the financial impact of the arrangements onthe issuer (for example, revenues, expenses,cash flows or securities issued) and the com-pany's exposure to risk as a result of thearrangements (for example, retained interestsor contingent liabilities); and

- known events, demands, commitments,trends or uncertainties that affect the availabil-ity or benefits to the issuer of material off-bal-ance sheet arrangements.

✔ ✔ ✔

Tabular disclosure of contractual obligations (Form 20-F Item 5.F; effective forreports including financial statements for fiscal yearsending on or after December 15 2003).

• The issuer must provide in a table an overviewof its aggregate contractual obligations as of the lat-est balance sheet date.

• Disclosure is required of the amounts, aggregat-ed by type of contractual obligation, for at least theperiods specified by the SEC (less than 1 year, 1-3years, 3-5 years and more than 5 years).

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• The required categories of contractual obliga-tions are long-term debt obligations, capital(finance) lease obligations, operating leases, pur-chase obligations and other long-term liabilitiesreflected on the balance sheet under the Gaap ofthe primary financial statements. If the primaryfinancial statements do not distinguish betweencapital and operating leases these can be presentedunder one category.

• The issuer may disaggregate the specified cate-gories and use the categories most suitable to itsbusiness (provided that the table includes all obliga-tions that fall under the specified categories).

✔ ✔ ✔

Directors and senior management (Form 20-F, Item 6.A).

With respect to the issuer’s directors and seniormanagement, and any employees such as scientistsor designers upon whose work the issuer isdependent, disclose:

• Name, business experience, functions and areasof experience in the issuer.

• Principal business activities performed outside theissuer, including in the case of directors director-ships.

• Date of birth or age (if required to be reportedin the home country).

• The nature of any family relationship betweenany of the persons named above.

• Any arrangement or understanding with majorshareholders, customers, suppliers or others pur-suant to which any such person was selected.

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Compensation (Form 20-F, Item 6.B).For the last full financial year for the issuer’s direc-tors and members of its administrative, supervisoryor management bodies, disclose:

• The amount of compensation paid, and benefitsin kind granted, to such persons by the issuer andits subsidiaries for services in all capacities to theissuer and its subsidiaries by any person.

• Disclosure of compensation is required on anindividual basis unless individual disclosure is notrequired in the issuer’s home country.

• If any portion of the compensation was paid (i)pursuant to a bonus or profit-sharing plan, providea brief description of the plan and the basis uponwhich such persons participate in the plan; or (ii) inthe form of stock options, provide the title andamount of securities covered by the options, theexercise price, the purchase price (if any), and theexpiration date of the options.

• The total amounts set aside or accrued by theissuer or its subsidiaries to provide pension, retire-ment or similar benefits.

✔ ✔ ✔

Board practices (Form 20-F, Item 6.C).For the issuer’s last completed financial year, dis-close the following information with respect to theissuer’s directors, and members of its administra-tive, supervisory or management bodies:

• Date of expiration of the current term of officeand the period during which the person has servedin that office.

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• Directors’ service contracts providing for benefitsupon termination of employment or an appropriatenegative statement.

• Issuer’s audit committee and remuneration com-mittee, including the names of committee mem-bers and a summary of the terms of referenceunder which the committee operates.

✔ ✔ ✔

Employees (Form 20-F, Item 6.D).

• The number of employees at the end of theperiod or the average for the period for each ofthe past three financial years (and changes in suchnumbers, if material).

• If possible, a breakdown of persons employed bymain category of activity and geographic location.

• Any significant change in the number of employ-ees, and information regarding the relationshipbetween management and labor unions.

• If the issuer employs a significant number of tem-porary employees, disclose the number of tempo-rary employees on average during the most recentfinancial year.

✔ ✔ ✔

Share ownership (Form 20-F, Item 6.E).

• With respect to the persons listed in“Compensation” above, disclose their ownership ofissuer shares and stock options as of the mostrecent practicable date.

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• For options, disclose the title and amount ofsecurities called for by the options, the exerciseprice, the purchase price, if any; and the expirationdate of the options.

• Any arrangements for involving the employees inthe capital of the issuer, including any arrangementthat involves the issue or grant of options or sharesor securities of the issuer.

✔ ✔ ✔

Major shareholders (Form 20-F, Item 7.A).

• With regard to the beneficial owners of 5% ormore (or a lower percentage if required by thehome country) of each class of the issuer’s votingsecurities, disclose:

- Their names, the number of shares and thepercentage of outstanding shares of each classowned by each of them.

- Any significant change in the percentage own-ership during the past three years.

- Whether the major shareholders have differ-ent voting rights.

• Note: Beneficial ownership is defined to includethe power to direct voting or disposition of sharesor to receive the economic benefit of ownership.

• Disclose the portion of each class of securitiesheld in the United States and the number ofrecord holders in the United States.

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• Disclose whether the issuer is directly or indi-rectly owned or controlled by another corpora-tion(s), by any foreign government or by any othernatural or legal person(s) severally or jointly.

• Discuss any arrangements the operation ofwhich may at a subsequent date result in a changein control of the issuer.

✔ ✔ ✔

Related party transactions (Form 20-F, Item7.B).

Describe transactions and loans during the preced-ing three financial years (and any interim period),or, for an annual report on Form 20-F, since thebeginning of the last financial year and to the latestpracticable date, between the issuer and:

• enterprises that directly or indirectly control orare controlled by, or are under common controlwith, the issuer;

• associates;

• significant shareholders (beneficial ownership of a10% voting interest is presumed to be significant)and close members of such person’s family;

• key management personnel and close membersof such person’s family; and

• enterprises in which a substantial voting interestis owned by significant shareholders or key man-agement or over which any such person is able toexercise significant influence (beneficial ownershipof a 10% voting interest is presumed to be signifi-cant).

✔ ✔ ✔



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Interests of experts and counsel (Form 20-F,Item 7.C).

• If any of the named experts or counselors wasemployed on a contingent basis, owns issuershares in an amount material to that person, has amaterial direct or indirect economic interest in theissuer or depends on the success of the offering,disclose the nature and terms of such contingencyor interest.

✔ ✔ ✔

Legal or arbitration proceedings (Form 20-F,Item 8.A-7).

• Provide information with respect to legal or arbi-tration proceedings that may have, or have had inthe recent past, significant effects on the issuer’sfinancial position or profitability, including govern-mental proceedings pending or known to be con-templated.

• Include any material proceeding in which anydirector, any member of senior management, orany affiliate is adverse to the issuer or its sub-sidiaries or has a material interest adverse to theissuer or its subsidiaries.

• For annual reports on Form 20-F, discuss disposi-tions of previously reported litigation.

✔ ✔ ✔

Dividend policy (Form 20-F, Item 8.A-8).

• Describe the issuer’s policy on dividend distribu-tions.

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Significant changes (Form 20-F, Item 8.B).

• Disclose whether or not any significant changehas occurred since the date of the annual financialstatements, and/or since the date of the mostrecent interim financial statements, if any, includedin the document.

✔ ✔ ✔

Offering and listing details (Form 20-F, Item9.A).

• The expected offering price or the method ofdetermining the price and the amount of expensesspecifically charged to the purchaser.

• If there is no established market for the securi-ties, the manner of determining the offering price.

• Description of any pre-emptive purchase rights.

• The price history of the offered or listed securi-ties.

• The market price in the US market and the prin-cipal trading market outside the United States andsignificant trading suspensions and lack of liquidity.

• Whether the securities are registered or bearer,the number of offered securities to be issued andthe minimum offer price.

• Arrangements for transfer and any restrictions onthe free transferability of the offered securities.

• Any limitation or qualifications of the rights ofholders of the offered securities.• Description of terms of any warrants or rightsbeing offered.

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• If securities are redeemable, a description ofredemption provisions.

✔ ✔ ✔ ✔ ✔

Plan of distribution (Form 20-F, Item 9.B).

• Names and addresses of the underwriters.

• Subscription by major shareholders, directors ormanagement to the offering and whether any per-son intends to subscribe for more than 5% of theoffering.

• Whether the offering is being made in two ormore countries using different tranches.

• Any preferential allocation arrangements.

• Any over-allotment option or “greenshoe.”

• Any distribution otherwise than through under-writers, including arrangements with brokers ordealers.

• Whether the securities are to be offered in con-nection with the writing of exchange-traded calloptions.

• Any simultaneous private or public offering.

• Description of underwriting arrangements.

• Any material relationship between an under-writer and the issuer and in certain cases informa-tion regarding the managing underwriter’s experi-ence.

✔ ✔ ✔



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Markets (Form 20-F, Item 9.C).

• All stock exchanges and other regulated marketson which the securities to be offered or listed aretraded and any applications for future listing.

• The dates on which the shares will be listed.

✔ ✔ ✔ ✔ ✔

Dilution (Form 20-F, Item 9.E).

• Where there is a substantial disparity betweenthe public offering price and the effective cash costto directors or senior management, or affiliatedpersons, of equity securities acquired by them intransactions during the past five years, include acomparison of the public contribution in the pro-posed public offering and the effective cash contri-butions of such persons.

✔ ✔ ✔

Selling shareholders (Form 20-F, Item 9.D).

• Names and addresses of selling shareholders andthe nature of any position, office or other materialrelationship within the past three years with theissuer or any of its predecessors or affiliates.

• The number and class of securities being offeredby each selling shareholder.

• The number and percentage of the securitiesbeneficially held by the selling shareholder beforeand immediately after the offering.

✔ ✔ ✔



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• Disclose the amount and percentage of immedi-ate dilution resulting from the offering, computedas the difference between the offering price pershare and the net book value per share for theequivalent class of security, as of the latest balancesheet date.

• In the case of a subscription offering to existingshareholders, disclose the amount and percentageof immediate dilution if they do not subscribe tothe new offering.

✔ ✔ ✔

Expenses of the issue (Form 20-F, Item 9.F).

• Underwriting discounts or commissions, statedon a percentage and per share basis.

• A reasonably itemized statement of the majorcategories of offering expenses and by whom theexpenses are payable, if other than the issuer.

• The portion of such expenses to be borne byany selling shareholder.

✔ ✔ ✔

Share capital (Form 20-F, Item 10.A).

• Note: Not applicable for offerings of securitiesother than common equity.

• The amount of issued capital and, for each classof share capital: (i) the number of shares autho-rized; (ii) the number of shares issued and fully paidand issued but not fully paid; (iii) the par value pershare, or that the shares have no par value; and(iv) a reconciliation of the number of shares out-standing at the beginning and end of the year.

✔ ✔ ✔



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• If more than 10% of capital has been paid forwith assets other than cash within the past fiveyears, that fact should be stated.

• If there are shares not representing capital, thenumber and main characteristics of such sharesshall be stated.

• Indicate the number, book value and face valueof shares in the issuer held by or on behalf of theissuer itself or by subsidiaries of the issuer.

• Description of authorized but unissued capitaland rights to subscribe for such capital.

• Description of outstanding options to purchaseshare capital.

• A three-year history of share capital, includingchanges in the amount of the issued capital and/orthe number and classes of shares of which it iscomposed.

• An indication of the resolutions, authorizationsand approvals by virtue of which the shares havebeen or will be created and/or issued.

✔ ✔ ✔

Memorandum and articles of association(Form 20-F, Item 10.B).

• Note: If unchanged, this information may be incor-porated by reference to a previous 20-F or registra-tion statement.

• The issuer’s objects and purposes.

• The registor and the entry number therein.

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• Provisions of the articles of association or charterand bylaws with respect to powers and rights ofdirectors.

• The rights, preferences and restrictions attaching toeach class of the shares.

• Action necessary to change the rights of holders ofthe stock.

• Conditions for convoking annual general meetingsand extraordinary general meetings of shareholders.

• Any limitations on the rights to own securities.

• Any provision that could delay, defer or prevent achange in control of the issuer.

• Any bylaw provision governing the ownershipthreshold above which shareholder ownership mustbe disclosed.

• Description of material differences between certainprovisions of home country law and US law.

• Any condition imposed by the memorandum andarticles of association on changing the capital, wheresuch condition is more stringent than is required bylaw.

✔ ✔ ✔

Material contracts (Form 20-F, Item 10.C).

• A summary of each material contract (other thangenerally contracts entered into in the ordinarycourse of business), including dates, parties, generalnature of the contracts, terms and conditions, andamount of any consideration passing to or from theissuer. Such contracts must also be filed as anexhibit to the report.

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Taxation (Form 20-F, Item 10.E).

• Information regarding taxes (including withhold-ing provisions) to which shareholders in the UnitedStates may be subject.

• Whether the issuer assumes responsibility for thewithholding of tax at the source and applicable pro-visions of any reciprocal tax treaties between thehome and host countries, or a statement, if applic-able, that there are no such treaties.

✔ ✔ ✔

Exchange controls (Form 20-F, Item 10.D).

Describe any governmental laws, decrees, regula-tions or other legislation of the home country ofthe issuer which may affect:

• the import or export of capital, including theavailability of cash and cash equivalents for use bythe issuer’s group; or

• the remittance of dividends, interest or otherpayments to nonresident holders of the issuer’ssecurities.

✔ ✔ ✔

Dividends and paying agents (Form 20-F, Item10.F).

• Note: Not applicable for offerings of securitiesother than common equity.

• Any dividend restrictions, date on which entitle-ment to dividends arises, and any procedures fornonresident holders to claim dividends.

• Paying agents in countries where admission hastaken place or is expected to take place.

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Statement by experts (Form 20-F, Item 10.G).

• Where a statement or report is attributed to aperson as an expert, provide such person’s name,address and qualifications and a statement to theeffect that such statement or report is included, inthe form and context in which it is included, withthe consent of that person. The consents shouldalso be filed as an exhibit.

✔ ✔ ✔ ✔

Documents on display (Form 20-F, Item 10.H).

• Where the documents concerning the issuerwhich are referred to in the document may beinspected.

• Exhibits and documents on display generallyshould be translated into English, or a summary inEnglish should be provided.

✔ ✔ ✔

Quantitative analysis of market risk (Form20-F, Item 11(a)).

• Provide quantitative information, as of the end ofthe latest financial year, about market risk, includinginterest rate risk, foreign currency exchange raterisk, commodity price risk, and other relevant mar-ket rate or price risks (for example, equity pricerisk).

• Categorize market risk sensitive instruments intoinstruments entered into for trading purposes andinstruments entered into for purposes other thantrading purposes.

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• Within both the trading and other than tradingportfolios, present separate quantitative informa-tion, to the extent material, for each market riskexposure category (namely, interest rate risk, for-eign currency exchange rate risk, commodity pricerisk, and other relevant market risks, such as equityprice risk).

• Use one of the three disclosure alternatives setforth in Item 11(a) of Form 20-F for all of therequired quantitative disclosures about market risk.Examples of the mandatory quantitative disclosureare set forth in the Appendix to Item 11 of Form20-F.

✔ ✔ ✔

Qualitative information about market risk(Form 20-F, Item 11(b)).

To the extent material, describe:

• The issuer’s primary market risk exposures,including: interest rate risk, foreign currencyexchange rate risk, commodity price risk, and otherrelevant market rate or price risks (for example,equity price risk).

• How those exposures are managed, including,but not be limited to, a discussion of the objectives,general strategies and instruments, if any, used tomanage those exposures.

• Changes in either the primary market risk expo-sures or how those exposures are managed, whencompared to what was in effect during the mostrecently completed financial year and what isknown or expected to be in effect in future report-ing periods.

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• Qualitative information about market risk shouldbe presented separately for market risk sensitiveinstruments entered into for trading purposes andthose entered into for purposes other than trading.

✔ ✔ ✔

Description of debt securities being registered (Form 20-F, Item 12.A).

• Interest, conversions, maturity, redemption,amortization, sinking funds or retirement.

• The kind and priority of any lien securing theissue, as well as a brief identification of the principalproperties subject to each lien.

• Subordination of the rights of holders of thesecurities to other security holders or creditors.

• If the securities are subordinated, give the aggre-gate amount of outstanding indebtedness that issenior to the subordinated debt.

• Restrictive covenants.

• Events of default and consequences thereof.Consequences of failure to make payments.

• Modification of the terms of the security or therights of security holders.

• If rights may be materially limited or qualified byany other authorized class of securities, describesuch limitations or qualifications.

• The tax effects of any original issue discount.

• The name and address of the trustee and payingagents. Relationships between trustee and issuer.

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• The currency or currencies in which the debt ispayable.

• Any law or decree determining the extent towhich the securities may be serviced.

• If the securities are guaranteed, the name of theguarantor and a brief outline of the contract ofguarantee.

✔ ✔ ✔ ✔

Ratio of earnings to fixed charges (RegulationS-K 503(d)).

• If debt securities are being offered, the ratio ofearnings to fixed charges must be shown for thelast five financial years and for the latest interimperiod for which financial statements is required.

• If preferred stock is being offered, the ratio ofearnings to fixed charges and preferred stock divi-dends must be shown for the same periods.

• If proceeds from sale of debt securities or pre-ferred stock will be used to repay outstanding debtor to retire other securities and the change to theratio would be greater than 10% a pro forma ratiomust be included.

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Description of warrants or rights to purchase the securities being registered(Form 20-F, Item 12.B).

• The amount of securities for which the warrantsor rights are exercisable.

• The period during and the price at which thewarrants or rights are exercisable.

• The amount of warrants or rights outstanding.

• Provisions for changes or adjustments in theexercise price.

• Any other material terms of the warrants orrights.

✔ ✔ ✔ ✔

Description of American Depositary Sharesbeing registered (Form 20-F, Item 12.D).

• The name of the depositary and the address ofits principal executive office.

• The title of the American Depositary Receiptsand the deposited security. Briefly describe theAmerican Depositary Shares, including:

- the amount of deposited securities representedby one unit of American Depositary Receipts;

- any procedure for voting;

- the procedure for collecting and distributingdividends;

- the procedures for transmitting notices,reports and proxy soliciting material;

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- the sale or exercise of rights;

- the deposit or sale of securities resulting fromdividends, splits or plans of reorganization;

- amendment, extension or termination of thedeposit arrangements;

- inspection rights;

- any transfer restrictions applicable to theunderlying securities; and

- any limitation on the depositary’s liability.

• All fees and charges that a holder of Americandepositary receipts may have to pay.

✔ ✔ ✔ ✔

Defaults, dividend arrearages and delinquencies (Form 20-F, Item 13).

• If there has been a material payment default, orany other material default not cured within 30days, in respect of indebtedness of the issuer orany of its significant subsidiaries that exceeds 5% ofthe issuer’s consolidated assets, identify the indebt-edness and the nature of the default, including theamount of the default and total arrearages on thedate of filing.

• Describe dividend arrearages and any othermaterial default not cured within 30 days on anyseries of preferred stock of the issuer or its signifi-cant subsidiaries.

• Note: These items may be incorporated by ref-erence from any previously submitted Form 6-K.

✔



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Material modifications to the rights of security holders (Form 20-F, Items 14.A-D).

• Describe material modifications to the instru-ments governing any class of registered securities,including by means of issuing or modifying anyother class of securities.

• Describe any withdrawal or substitution of amaterial amount of collateral securing a registeredsecurity, including a reference to the provisions ofthe underlying indenture authorizing the withdraw-al or substitution (unless the withdrawal or substitu-tion has been made in compliance with therequirements of the Trust Indenture Act).

• Identify any changes to trustees or paying agents.

• Note: This information can be incorporatedfrom a previously submitted report on Form 6-K.

✔

Use of proceeds (Form 20-F, Item 14.E).

• Describe the actual use of proceeds from securi-ties sold under any previously filed registrationstatement under the Securities Act, unless all pro-ceeds have been accounted for in previous Form20-F filings.

• Unless unchanged from a previous Form 20-F,provide details relating to any previous registrationstatement under the Securities Act, including:

- registration statement file number;

- offering date (or an explanation of why theoffering has not commenced or has been termi-nated);

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- managing underwriters, if any;

- title of securities registered and, if applicable,class of securities into which a registered con-vertible security may be converted;

- amount registered, aggregate offering price,amount sold to date (for the account of theissuer and any selling shareholders);

- expenses and underwriting discounts incurredfrom the effective date of the registrationstatement to the end of the most recentfinancial period (indicating which of suchamounts are estimates and which paymentshave been made to directors, officers, gener-al partners, 10% shareholders or affiliates);

- net proceeds to the issuer after expenses andunderwriting discounts;

- itemization of uses of proceeds by specificcategories specified in Item 14E.4(g) of Form20-F, including payments made to directors,officers, general partners, 10% shareholdersor affiliates; and

- description of any material differencebetween the actual use of proceeds and theuse of proceeds described in the prospectus.

Note: This information can be incorporated from apreviously submitted report on Form 6-K. Thereporting of use of proceeds may cease on thelater of the date of disclosure of the application ofall the offering proceeds, or the date of the termi-nation of the offering.

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Controls and procedures (Form 20-F, Item 15).

• Disclose the conclusions of the issuer's principalexecutive officer or officers and principal financialofficer or officers, or persons performing similarfunctions, about the effectiveness of the issuer's dis-closure controls and procedures (as defined inExchange Act Rules 13a-14(c) and 15d-14(c))based on their evaluation the controls and proce-dures as of a date within 90 days prior to the filingdate of the report.

• Disclose whether or not there were significantchanges in the issuer's internal controls or in otherfactors that could significantly affect these controlssubsequent to the date of their evaluation, includ-ing any corrective actions with regard to significantdeficiencies and material weaknesses.

✔

Audit committee financial expert (Form 20-F,Item 16A; effective for annual reports for fiscalyears ending on or after July 15 2003).

• The company must disclose (i) whether it has atleast one “audit committee financial expert” servingon the audit committee and, if so, (ii) such person’sname. (It is sufficient to name one financial expert,even if more than one expert serves on the com-mittee.)

• If the company does not have an audit commit-tee financial expert, the company must disclosethat fact and the reasons why.

✔



DisclosureFormF-1

FormF-2

FormF-3



Code of ethics (Form 20-F, Item 16B; effectivefor annual reports for fiscal years ending on or afterJuly 15 2003).

• The issuer must disclose whether it has adopteda written code of ethics that applies to its principalexecutive officer, principal financial officer, principalaccounting officer or controller, or persons servingsimilar functions. If the company has not adoptedsuch a code of ethics, it must explain why it has notdone so.

• Disclosure is also required of the nature of anyamendment to or waiver of the code of ethicsaffecting the above officers (and, in the case of awaiver, to whom the waiver was granted).

• The code of ethics must be filed as an exhibit toForm 20-F, be available for free upon request or beposted on the issuer’s website.

✔

Principal accountant fees and services (Form20-F, Item 16C; effective for annual reports for fiscal years ending on or after December 15 2003).

• The issuer must disclose, under the caption auditfees, the aggregate amount audit fees, audit-relatedfees, tax fees and all other fees billed for each ofthe two most recent fiscal years. The companymust also describe in subcategories the nature ofthe services provided that are categorized as audit-related fees and all other fees.

• The issuer must disclose the audit committee’spolicies and procedures concerning pre-approval ofaudit and non-audit services to be performed bythe auditor.

✔



DisclosureFormF-1

FormF-2

FormF-3



• The issuer must disclose the percentage of audit-related fees, tax fees and all other fees describedabove that were approved by the audit committee.

• If greater than 50%, disclosure is required of thepercentage of hours expended on the principalaccountant's engagement to audit the registrant'sfinancial statements for the most recent fiscal yearthat were attributed to work performed by per-sons other than the principal accountant's full-time,permanent employees.

✔

Certifications required by Section 302 ofthe Sarbanes-Oxley Act (filed as an exhibit toForm 20-F).

Provide a separate certification for each principal execu-tive officer and principal financial officer of the registrant.

See Rules 13a-14 and 15d-14.

✔

Certifications required by Section 906 ofthe Sarbanes-Oxley Act (filed as an exhibit toForm 20-F).

Provide a separate certification for each principalexecutive officer and principal financial officer of theregistrant.

✔

SEC position on indemnification for SecuritiesAct liabilities (Regulation S-K, Rule 510).

• Issuers are required to include a statement tothe effect that insofar as indemnification for liabilitiesarising out of the Securities Act may be permittedto directors, officers or persons controlling theissuer, the issuer has been informed that in theopinion of the SEC, such indemnification is againstpublic policy and is unenforceable.

✔ ✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



Material changes (Item 5 in Forms F-2 and F-3).

• Describe material changes in issuer’s affairswhich have occurred since the end of the latestfinancial year for which certified financial statementswere included in the latest filing under theExchange Act.

• If not included in the Exchange Act documentsincorporated by reference:

- financial statements of acquired companies inaccordance with Rule 3-05 of Regulation S-X;

- pro forma financial information in accordancewith Article 11 of Regulation S-X;

- restated financial statements if there is achange in accounting principles or a correc-tion of an error that requires materialretroactive restatements;

- restated financial statements where there hasbeen one or more business combinationswith significant businesses accounted for bythe pooling of interests method subsequentto the most recent financial year end; and

- any financial information required because ofa material disposition of assets outside thenormal course of business.

• If financial statements incorporated by referencein the registration statement are not sufficiently cur-rent to comply with Item 8.A of Form 20-F, updat-ed financial statements must be presented in theprospectus or in a subsequent filing under theExchange Act that is incorporated by reference inthe prospectus.

✔ ✔



DisclosureFormF-1

FormF-2

FormF-3



Incorporation of documents by reference:Form F-2 (Form F-2, Item 6).The issuer must state that it will:

• provide at no cost to each person to whom aprospectus is delivered, and who submits an oralor written request, a copy of any of all or the infor-mation that has been incorporated by reference inthe prospectus but not delivered with the prospec-tus; and

• provide the name, address and telephone num-ber to which the request for this information mustbe made.

✔

Incorporation of documents by reference:Form F-3 (Form F-3, Item 6).

• The issuer’s latest Form 20-F, Form 40-F, Form10-K or Form 10 filed pursuant to the ExchangeAct shall be incorporated by reference.

• Any report on Form 10-Q or Form 8-K filedsince the date of filing of the annual report will alsobe incorporated by reference.

• All subsequent reports on Form 20-F, Form 40-For Form 10-K, and all subsequent filings on Form10-Q and 8-K, in each case prior to the termina-tion of the offering, must be incorporated by refer-ence.

• The issuer may incorporate by reference Form6-K submissions.

• If the issuer is registering capital stock, the issuermust incorporate by reference the Exchange Act fil-ing that describes such capital stock.

✔



DisclosureFormF-1

FormF-2

FormF-3



Information not required in the prospectus

In addition, the issuer must state that it will:

• provide at no cost to each person to whom aprospectus is delivered, and who submits an oralor written request, a copy of any of all or the infor-mation that has been incorporated by reference inthe prospectus but not delivered with the prospec-tus; and

• provide the name, address and telephone num-ber to which the request for this information mustbe made.

✔

Indemnification of directors and officers(Regulation S-K, Rule 702).

• State the general effect of any statute, charterprovisions, by-laws, contract or other arrange-ments under which any controlling persons, direc-tor or officer of the issuer is insured or indemnifiedin any manner against liability which he may incurin his capacity as such.

✔ ✔ ✔

Recent sales of unregistered securities(Regulation S-K, Rule 701).

• Provide the information specified in Item 701 ofRegulation S-K regarding all securities of the issuersold by the issuer during the past three years whichwere not registered under the Securities Act.

✔



DisclosureFormF-1

FormF-2

FormF-3



Exhibits and financial statement schedules(Regulation S-K, Rule 601, Form 20-F, Item 19).

• For Securities Act registration statements, referto Item 601 of Regulation S-K for a chart specifyingall exhibits required to be filed as part of the regis-tration statement.

• For annual reports and registration statementsunder the Exchange Act, refer to the instructions toItem 19 of Form 20-F.

✔ ✔ ✔ ✔ ✔

Undertakings (Regulation S-K, Rule 512).

• Refer to Item 512 of Regulation S-K for variousundertakings and commitment required to bemade by the issuer in connection with differentforms of registration statement and different typesof offerings.

✔ ✔ ✔

Annex B –NYSE and Nasdaq quantitative listing criteria


NYSE quantitative listing standards

Under the NYSE’s listing standards, a foreign privateissuer may use either the NYSE’s domestic listingcriteria or its alternative listing standards (which arespecifically designed for foreign private issuers with aliquid market for their securities outside the UnitedStates).615 The NYSE’s listing standards include thefollowing.

(i) Minimum numerical l isting standards— domestic issuersUnder the general domestic listing standards for UScompanies, an issuer must meet the following minimumdistribution and size requirements:

• Size/volume criteria:616

- 2,000 holders of 100 shares or more (or of aunit of trading if less than 100 shares);

- 2,200 total stockholders, together with averagemonthly trading volume (for the most recentsix months) of 100,000 shares; or

- 500 total stockholders, together with averagemonthly trading volume (for the most recent 12months) of one million shares and 1.1 millionpublicly-held shares (excluding shares held bydirectors, officers or their immediate families,and other concentrated holdings of 10% ormore); and

• Market value of publicly-held shares:617 Aggregatemarket value of publicly held shares of $60 million,in the case of IPOs or spin-offs, and $100 million forall other companies.

In addition, an issuer must meet one of the followingfinancial standards:

• Pre-tax earnings:618 pre-tax earnings (from continuingoperations and after minority interest, amortization

and equity in the earnings or losses of investees,subject to certain adjustments) must total at least:

- $2.5 million in the latest fiscal year togetherwith $2 million in each of the preceding twoyears; or

- $6.5 million in the aggregate for the last threefiscal years together with a minimum of $4.5million in the most recent fiscal year, and positiveamounts for each of the preceding two years;

• Market capitalization (1):619 market capitalization ofnot less than $500 million, revenues of not less than$100 million during the most recent 12-monthperiod and operating cash flow of at least $25 millionin the aggregate for the last three fiscal years (andeach year is reported as a positive amount); or

• Market capitalization (2):620 market capitalization ofnot less than $1 billion and $100 million in revenuesin the most recent fiscal year.

(i i) Minimum numerical l isting standards— foreign private issuersThe alternative listing standards for foreign privateissuers provide the following minimum distribution andsize requirements.

• Size/volume criteria:621 5,000 worldwide holders of100 shares or more;

• Number of publicly-held shares:622 2.5 millionworldwide, excluding shares held by directors,officers or their immediate families, and otherconcentrated holdings of 10% or more; and

• Market value of publicly-held shares:623 Aggregateworldwide market value of publicly held shares of$100 million.

Annex B – NYSE and Nasdaq quantitative listing criteria


In addition, an issuer must meet one of the followingfinancial standards:

• Pre-tax earnings:624 pre-tax earnings (from continuingoperations and after minority interest, amortizationand equity in the earnings or losses of investees,subject to certain adjustments) of $100 million in theaggregate for the last three fiscal years, together witha minimum of $25 million in each of the most recenttwo fiscal years; or

• Market capitalization (1):625 market capitalization ofnot less than $500 million, revenues of not less than$100 million during the most recent 12-monthperiod and operating cash flow of at least $100million in the aggregate for the last three fiscal years(and each of the two most fiscal years of at least $25million); or

• Market capitalization (2):626 market capitalization ofnot less than $1 billion and $100 million in revenuesin the most recent fiscal year.

Nasdaq quantitative listingrequirements

There are two tiers of Nasdaq: the Nasdaq NationalMarket (NNM) and the Nasdaq SmallCap Market(SCM). The NNM has more stringent requirements forinclusion than the SCM.

(i) Basic Nasdaq inclusion criteriaFor initial inclusion on Nasdaq (whether the NNM orthe SCM), a non-Canadian foreign private issuer musthave:627

• Stockholders’ equity: $5 million;

• Market capitalization: $50 million; or

• Net income: $750,000 (excluding extraordinary ornon-recurring items) in the most recently completedfiscal year or in two of the last three most recentlycompleted fiscal years.

In addition, a foreign private issuer must have:

• Foreign shares – round lot holders:628 in the case offoreign shares, there must be at least 300 “round lotholders” (that is, a holder of a normal unit oftrading629);

• Foreign shares – publicly-held shares:630 in the case offoreign shares, there must be at least one millionpublicly held shares; and

• ADRs:631 in the case of ADRs, at least 100,000 mustbe issued.

( i i) NNMA foreign private issuer must generally meet thefollowing entry standards to be designated for inclusionin the NNM. These standards are in addition to thebasic criteria set out above (except that an issuer meetingentry standard 3 need not meet the basic criteria):

• Entry standard 1:632

- annual pre-tax income of at least $1 million(excluding extraordinary or non-recurringitems) in the most recently completed fiscal yearor in two of the last three most recentlycompleted fiscal years;

- at least 1.1 million publicly held shares;

- market value of publicly held shares is at least $8million;

- bid price per share is $5 or more;

- stockholders’ equity of at least $15 million;

- at least 400 round lot shareholders; and

- at least three registered active and active marketmakers with respect to the security.


• Entry standard 2: 633

- stockholders’ equity of at least $30 million;


- market value of publicly held shares is at least$18 million;


- at least three registered active and active marketmakers with respect to the security;

- a two-year operating history; and

- at least 400 round lot shareholders.

• Entry standard 3:634


- market value of publicly held shares is at least$20 million;


- at least four registered active and active marketmakers with respect to the security;

- at least 400 round lot shareholders; and

- either a market capitalization of $75 million ortotal assets and total revenue of $75 millioneach for the most recently completed fiscal yearor two of the last three most recently completedfiscal years.

As an alternative to the entry standards, Nasdaq mayconsider including the securities of an issuer in theNNM if:635

• the issuer has assets in excess of $100 million andstockholders’ equity of at least $10 million;

• there are a minimum of 400 holders of the security;

• for equity securities, there is a minimum publicdistribution of one million trading units; and

• the aggregate market value of the security is at least$4 million.

(i i i) SCM quantitative criteriaA foreign private issuer meeting the basic Nasdaqinclusion criteria will be included in the SCM unless itis designated for inclusion in the NNM.



Annex C – Effective dates for certain Sarbanes-Oxley Sections and related SEC rulemaking


Annex C – Effective dates for certain Sarbanes-Oxley sectionsand related SEC rulemaking

Provision (Sarbanes-Oxley Section and SEC Rule(s)) Effective as of

Material correcting adjustments(Sarbanes-Oxley §401(a); Exchange Act Section 13(i)) July 30 2002

Blackout trading restrictions(Sarbanes-Oxley §306; Regulation BTR) January 26 2003

Auditor record retention(Sarbanes-Oxley §802; Regulation S-X, Rule 2-06) March 3 2003

Section 906 certification requirement(Sarbanes-Oxley §906; Exchange Act Rules 13a-14(b) and 15d-14(b))

July 30 2002, for the requirementto certify; however, the require-ment to provide the Section 906certification as an exhibit took effectAugust 14 2003

Section 302 certification requirements; disclosure controls and procedures(Sarbanes-Oxley §302; Exchange Act Rules 13a-14, 15d-14, 13a-15, 15d-15; Form 20-F, Item 15)

August 29 2002; however, the textof the Section 302 certification asmodified by the rules adoptedunder Section 404 generally tookeffect August 14 2003 (except withrespect to the portions of the certi-fication dealing with internal controlover financial reporting, which takeeffect on April 15 2005)

Loans to executives(Sarbanes-Oxley §402(a); Exchange Act Section 13(k)) July 30 2002

Forfeiture of bonuses(Sarbanes-Oxley §304) July 30 2002

Annex C – Effective dates for certain Sarbanes-Oxley Sections and related SEC rulemaking


Provision (Sarbanes-Oxley Section and SEC Rule(s)) Effective as of

Non-Gaap financial measures(Sarbanes-Oxley §401(b); Regulation G; Regulation S-K, Item 10(e)) March 28 2003

Research analysts(Sarbanes-Oxley §501; Regulation AC) April 14 2003

Auditor independence(Sarbanes-Oxley Title II; Regulation S-X, Rules 2-01 and 2-07; Exchange Act Rule 10A-2; Form 20-F, Item 16C) May 6 2003

Improper influence on the conduct of audits(Sarbanes-Oxley §303; Exchange Act Rule 13b2-2(a)-(c)) June 27 2003

Audit committee financial expert(Sarbanes-Oxley §407(a); Form 20-F, Item 16A) July 15 2003

Code of ethics(Sarbanes-Oxley §406; Form 20-F, Item 16B) July 15 2003

Attorney conduct rules(Sarbanes-Oxley §307; Part 205) August 5 2003

Management assessment of internal controls(Sarbanes-Oxley §404; Exchange Act Rules 13a-15, 15d-15; Form 20-F,Item 15) April 15 2005

Standards relating to listed company audit committees(Sarbanes-Oxley §301; Exchange Act Rule 10A-3) July 31 2005

Off-balance sheet and other MD&A disclosure(Sarbanes-Oxley §401(a); Form 20-F, Item 5)

June 15 2003, except with respectto inclusion of a table of contractualobligations in MD&A, which takeseffect on December 15 2003

Endnotes

1 We do not discuss the Multijurisdictional Disclosure System applicableto Canadian foreign private issuers in this Overview, or the specialrequirements applicable to registered “investment companies.”

2 Exchange Act Section 12(a) prohibits transactions on US nationalsecurities exchanges with respect to unregistered securities, whileSection 12(b) sets out the requirement for that registration.Technically, Nasdaq is not a “national securities exchange” and therequirements of Sections 12(a) and 12(b) accordingly do not apply tosecurities quoted on Nasdaq. Nasdaq rules, however, require a foreignprivate issuer to register securities under Exchange Act Section 12(g)prior to quotation. National Association of Securities Dealers, Inc.,NASD Manual, Rules 4320(a), (b) [hereinafter NASD Manual].Section 12(g)(1) permits voluntary registration of equity securities.

3 In the case of a foreign private issuer whose securities are quoted onNasdaq, this threshold is $1 million, not $10 million. See ExchangeAct Rule 12g-1.

4 Exchange Act Section 12(g)(1); Exchange Act Rules 12g-1, 12g3-2(a).

5 Exchange Act Rule 12g3-2(b)(3).

6 Exchange Act Rule 12g3-2(b)(1)(i).

7 Exchange Act Sections 13(a), 15(d).

8 Form 20-F, General Instructions A(b). See also Exchange Act Rule13a-1 (each issuer with Section 12 registered securities must file anannual report within the time period specified in the relevant form).

9 Exchange Act Rule 13a-16(a); Form 6-K, General Instruction A.

10 Form 6-K, General Instruction B.

11 Note that in April 2003, US Senator Joseph R. Biden insertedcomments into the US Congressional Record to the effect that theSection 906 certification was intended to apply to Form 6-Ksubmissions containing financial statements. Legislative History ofTitle IX of the Sarbanes-Oxley Act of 2002, 149 Cong. Rec. S5325,S5331 (April 11 2003). The SEC has taken note of Senator Biden’scomments, and although it stated that it was “concerned that extendingSection 906 certifications to Forms 6-K or 8-K could potentially chillthe disclosure of information by companies,” it went on to commentthat it was “considering, in consultation with the US Department ofJustice, the application of Section 906 to current reports on Forms 6-K and 8-K and annual reports on Form 11-K and the possibility oftaking additional action.” Management’s Reports on Internal ControlOver Financial Reporting and Certification of Disclosure in ExchangeAct Periodic Reports, Securities Act Release No 8238, Exchange ActRelease No 47986, Investment Company Act Release No 26068 (June5 2003).

12 Exchange Act Section 13(b)(2)-(7); Exchange Act Regulation 13B-2.

13 Exchange Act Section 30A.

14 Exchange Act Section 10A.

15 Sarbanes-Oxley Act, Section 2(a)(7) (definition of “issuer” subject toSarbanes-Oxley).

16 Securities Act Rule 405; Exchange Act Rule 3b-4.

17 Instruction A to Securities Act Rule 405; Exchange Act Rules 12g3-2(a)(1), 12g5-1(a).

18 Exchange Act Rule 12g3-2(a)(1).

19 Id.

20 Instruction A to Securities Act Rule 405.

21 Instruction B to Securities Act Rule 405.

22 Exchange Act Rule 13a-13(b)(2).

23 Exchange Act Rule 13a-16(a)(3).

24 Exchange Act Rule 3a12-3(b).

25 Regulation FD, Rule 100.

26 Id.

27 Id. Rule 101(b)(ii).

28 Exchange Act Rule 3a12-3(b). Note that these securities remainsubject to the beneficial ownership reporting requirements of Sections13(d) and 13(g).

29 Acceleration of Periodic Report Filing Dates and DisclosureConcerning Website Access to Reports, Securities Act Release No8128, Exchange Act Release No 46464, Financial Reporting ReleaseNo 63 [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,724, at86,188 (September 5 2002).

30 Id. at 86,199.

31 Exchange Act Rule 13a-13(b)(2).

32 Plain English Disclosure, Securities Act Release No 7497, ExchangeAct Release No 39593, International Series Release No 1113 (January28 1998).

33 Form 20-F refers to MD&A as “Operating and Financial Review andProspects.” See Form 20-F, Item 5.

34 Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations,Securities Act Release No 8182, Exchange Act Release No 47264,International Series Release No 1266 (January 27 2003).

35 Commission Statements about Management’s Discussion and Analysisof Financial Condition and Results of Operations, Securities ActRelease No 8056, Exchange Act Release No 45321, FinancialReporting Release No 61 [2001-2002 Transfer Binder] Fed. Sec. L.Rep. (CCH) ¶ 86,617, at 85,152 (January 22 2002).

36 Disclosure in Management’s Discussion and Analysis about theApplication of Critical Accounting Policies, Securities Act Release No8098, Exchange Act Release No 45907, International Series ReleaseNo 1258 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶86,638, at 85,409 (May 10 2002). See also Cautionary AdviceRegarding Disclosure About Critical Accounting Policies, SecuritiesAct Release No 8040, Exchange Act Release No 45149, FinancialReporting Release No 60 [2001-2002 Transfer Binder] Fed. Sec. L.Rep. (CCH) ¶ 86,609, at 85,097 (December 12 2001).

37 Securities Act Rule 155(c)(3).

38 Id.

39 Form F-3, General Instruction I.A.

40 Id. General Instruction I.B.

41 Form F-2, General Instruction I.


Endnotes

42 See Securities Act Rule 415.

43 Form F-4, General Instructions B, C.

44 Form F-6, General Instruction I.A.

45 Mandated EDGAR Filing for Foreign Issuers, Securities Act ReleaseNo 8099, Exchange Act Release No 45922, International SeriesRelease No 1259 [2001-2002 Transfer Binder] Fed. Sec. L. Rep.(CCH) ¶ 86,640, at 85,471 (May 14 2002) [hereinafter EDGAR FilingRelease]. See also Securities Act Regulation S-T, Rule 100(a)(Regulation S-T applies to all registrants whose filings are subject toreview by the SEC’s Division of Corporation Finance).

46 Regulation S-T, Rule 101(a).

47 Id. Rule 102(a).

48 Id. Rule 101(b)(1).

49 Id. Rule 101(b)(7).

50 EDGAR Filing Release, ¶ 86,640, at 85,476.


52 Id.

53 Form 6-K, General Instruction D(1).


55 Securities Act Rule 403(c)(2); Exchange Act Rule 12b-12(d)(2).

56 Form 6-K, General Instruction D(2).

57 Securities Act Rule 403(c)(3)(ii); Exchange Act Rule 12b-12(d)(3)(ii);Form 6-K, General Instruction D(4).

58 Corporate Governance Rule Proposals, Exchange Act Release No47672, Rule 303A(11) (April 11 2003).

59 NASD Manual, Rule 4350(a).

60 Securities Act Section 4(3).

61 Securities Act Section 5(d)(2).

62 Securities Act Rule 174(d).

63 Securities Act Section 4(3).

64 Securities Act Rule 174(b).

65 Securities Act Rule 903 (offers and sales by an issuer or distributor);Securities Act Rule 904 (offshore resales).

66 Securities Act Rule 902(h).

67 Securities Act Rule 902(c)(1).

68 Securities Act Rule 902(c)

69 Offshore Offers and Sales, Securities Act Release No 6863, ExchangeAct Release No 27942, Investment Company Act Release No 17458[1989-1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 84,524, at80,661 (April 24 1990) [hereinafter Regulation S Adopting Release].More generally, the Regulation S Adopting Release makes clear thatoffshore transactions in compliance with Regulation S will not beintegrated with concurrent registered or private offerings in the UnitedStates. Id. ¶ 84,524, at 80,681-82.

70 See Coral Gold Corporation (available February 19 1991) [1991Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,707, at 78,229.

71 Regulation S, Preliminary Note 5.

72 Id. Preliminary Note 1.

73 In addition, Regulation S is not available with respect to anytransaction or series of transactions that, although in technicalcompliance with Regulation S, is part of a plan or scheme to avoid theregistration requirements of the Securities Act. Id. Preliminary Note2.


75 Securities Act Rule 903(b)(1).

76 A “foreign issuer” is any foreign government or foreign private issuer.Securities Act Rule 902(e).

77 “Substantial US market interest” is defined in Securities Act Rule902(j).

78 “Overseas directed offering” is defined in Securities Act Rule903(b)(ii).

79 The term “equity securities” is defined in Securities Act Rule 405, andincludes debt securities convertible into equity securities.

80 The term “debt securities” is defined as all securities that are not equitysecurities, and includes non-participating preferred stock and asset-backed securities. Securities Act Rule 902(a).


82 The term “offering restrictions” is defined in Securities Act Rule902(g).

83 Securities Act Rule 903 (b)(2)(i)

84 Securities Act Rule 902(g).

85 Securities Act Rule 903(b)(2)(ii).

86 Regulation S Adopting Release, ¶ 84,524 at 80,681-82.

87 Securities Act Rule 903(b)(2)(iii).

88 Securities Act Rule 902(f).


90 Securities Act Rule 903(b)(3)(i).

91 Securities Act Rule 903(b)(3)(iii).

92 Securities Act Rule 903(b)(3)(ii).

93 Securities Act Rule 903(b)(3)(ii)(A) and (iii)(A).

94 Securities Act Rule 903(b)(3)(iii)(B).

95 Securities Act Rule 903(b)(3)(ii)(B).

96 Securities Act Rule 903(b)(3)(iv).

97 The term “restricted securities” is defined in Securities Act Rule144(a)(3).

98 Securities Act Rule 905.

99 Securities Act Rule 904(a).



102 Securities Act Section 12(a).

103 Regulation S Adopting Release, ¶ 84,524 at 80,681.

104 SEC v. Ralston Purina Co., 346 US 119, 125 (1953) (the applicabilityof the private placement exemption “should turn on whether the

Endnotes


Endnotes

particular class of persons affected needs the protection” of theSecurities Act; an offering to those “who are shown to be able to fendfor themselves” is a private placement).

105 See, for example, Securities Act Release No 285, 1935 SEC LEXIS485 (January 24 1935) (SEC General Counsel specifies four criteria todetermine when a transaction qualifies as public offering: (i) thenumber of offerees and their relationship to each other and to theissuer; (ii) the number of units offered; (iii) the size of the offering; and(iv) the manner of the offering).

106 Securities Act Release No 4552 (November 6 1962), 1962 Lexis 166(all the surrounding circumstances must be considered “including suchfactors as the relationship between the offerees and the issuer, thenature, scope, size, type and manner of the offering”).

107 Certain courts have held that this information must be comparable tothe information investors would have received in a public offering.See, for example, Doran v. Petroleum Mgmt. Corp., 545 F.2d 893, 903(5th Cir. 1977).

108 Securities sold under Section 4(2) are “restricted securities” that maynot be freely resold to the public. Securities Act Rule 144(a)(3).




112 Securities Act Rule 502(b)(2)(ii)(D).

113 Securities Act Rule 502(b)(2)(v).

114 Securities Act Rule 502(c).


116 Securities Act Rule 503.



119 Securities Act Rules 504(b)(1); 502(b)(1).


121 Securities Act Rules 505(b)(2)(ii); 501(e)(1)(iv).




125 Securities Act Rule 506(b)(2)(ii). “Purchaser representative” is definedin Rule 501(h).

126 Securities Act Section 4(2); Regulation D, Preliminary Note 4.

127 Rule 144A, Preliminary Note 6.

128 Rule 144A(a)(1).

129 Rule 144A(d)(1).

130 Rule 144A(d)(2).

131 Rule 144A(d)(3).

132 Rule 144A(d)(4).

133 Exxon Capital Holdings Corp. (publication available May 13 1988)1988 SEC No-Act. LEXIS 682; Shearman & Sterling (publicationavailable July 2 1993) Fed. Sec. L. Rep. (CCH) [1993 Transfer Binder]

¶ 76,704, at 78,039; Morgan Stanley & Co. Inc. (publication availableJune 5 1991) Fed. Sec. L. Rep. (CCH) [1991-1992 Transfer Binder] ¶76,018, at 78,884.

134 See generally “The Section ‘4(1-1/2)’ Phenomenon: Private Resales of‘Restricted’ Securities”, 34 The Business Lawyer 1961 (July 1979).

135 Rule 144(b).

136 Rule 144(d).

137 Rule 144(c).

138 Rule 144(e).

139 Rule 144(f).

140 Rule 144(h).

141 Rule 144(k).

142 Id. “Affiliate” is broadly defined to include any person that, directly orindirectly, controls an issuer. Securities Act Rule 405.

143 Cross-Border Tender and Exchange Offers, Business Combinationsand Rights Offerings, Securities Act Release No 7759, Exchange ActRelease No 42,054, Trust Indenture Act Release No 2378,International Series Release No 1208 [1999-2000 Transfer Binder]Fed. Sec. L. Rep. (CCH) ¶ 86,214, at 82,536, 82,550 (October 221999) [hereinafter Cross-Border Release].

144 General Notes to Securities Act Rules 800, 801 and 802, Note 6.

145 Securities Act Rule 802(a)(1). The 10% limitation does not apply inthe case of an exchange offer or business combination commencedduring the pendency of a prior exchange offer. Securities Act Rule802(a)(1). Certain presumptions about the level of US ownership areavailable in the case of a hostile exchange offer. See Securities ActRule 802(c).

146 SEC Division of Corporation Finance, Manual of Publicly AvailableTelephone Interpretations, 3rd Supplement (July 2001), Section II.C,Question 1 (http://www.sec.gov/interps/telephone/phonesup-plement3.htm) [hereinafter Telephone Interpretations].


148 Securities Act Rule 800(h)(3).

149 Securities Act Rule 800(h)(1).

150 Securities Act Rule 802(h)(2)

151 Securities Act Rule 802(a)(2).

152 Securities Act Rule 802(a)(3)(i).

153 Securities Act Rule 802(a)(3)(ii).

154 Securities Act Rule 802(a)(3)(iii).



157 Securities Act Rule 800(g).

158 Cross-Border Release, ¶ 86,214, at 82,550.




162 Telephone Interpretations, Section II.C, Question 1.



164 Securities Act Rule 801(a)(4)(i).

165 Securities Act Rule 801(a)(4)(ii).

166 Securities Act Rule 801(a)(4)(iii).




170 Securities Act Section 5(c).

171 Securities Act Section 5(a)(1).

172 Securities Act Section 5(b)(1).

173 Securities Act Section 5(b)(2).

174 Guidelines for the Release of Information by Issuers Whose Securitiesare in Registration, Securities Act Release No 5180 (August 16 1971)[hereinafter Information Guidelines].



177 Securities Act Rule 135e(b)(1), (2).

178 Use of Electronic Media, Securities Act Release No 7856, ExchangeAct Release No 42728, Investment Company Act Release No 24426[2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304, at 83,384n.68 (April 28 2000) [hereinafter Use of Electronic Media Release].

179 Information Guidelines.

180 Electronic Media Release, ¶ 86,304, at 83,384

181 Securities Act Rule 135c(a)(1).



184 Securities Act Rule 135c(b).

185 Securities Act Rule 135c(d).

186 Form 20-F, Item 8.A.1.

187 Id. Item 8.A.2.

188 S-X Rule 3-02(a).

189 Form 20-F, Instruction 1 to Item 8.A.2.

190 Id. Instruction 3 to Item 8.A.2.

191 The rules regarding the age or “staleness” of the required financialstatements for foreign private issuers vary a great deal from thoseapplicable to domestic issuers. Generally speaking, the financialstatements for domestic issuers go “stale” at a much faster rate.

192 Form 20-F, Item 8.A.4. The SEC will, however, waive thisrequirement, and apply the 15-month rule, in an initial public offeringwhere the issuer is able to represent that it is not required to complywith this requirement in any other jurisdiction outside the UnitedStates and that complying with the requirement is impracticable andwould involve undue hardship. As a result, the SEC expects that themajority of initial public offerings will be subject only to the 15-monthrule. Id. Instruction 2 to Item 8.A.4; SEC Division of CorporationFinance, International Financial Reporting and Disclosure Issues, May1 2001, Section II.A.1(c) [hereinafter International Financial

Reporting and Disclosure Issues].

193 Form 20-F, Instruction 2 to Item 8.

194 Id. Item 8.A.5.

195 Id.

196 Id. Item 3.A.1. The selected financials must include at least each of thefollowing line items: net sales or operating revenues, income (loss)from operations, income (loss) from continuing operations, net income(loss), net income (loss) from operations per share, income (loss) fromcontinuing operations per share, total assets, net assets, capital stock(excluding long-term debt and redeemable preferred stock), number ofshares adjusted to reflect changes in capital, dividends declared pershare in both the currency of the financial statements and US dollars,including the formula used for any adjustments to dividends declared,and diluted net income per share. The selected financials may alsoinclude any additional items that would enhance an understanding ofthe issuer’s financial condition and results of operations. Id.

197 Id.

198 Id.

199 Id. Item 3.B.

200 Id. Instruction 1 to Item 3.

201 Id. Item 17(c).

202 Id. However, reconciliation is not required for interim financialstatements included in an annual report. Simplification of Registrationand Reporting Requirements for Foreign Companies; Safe Harboursfor Public Announcements of Unregistered Offerings and Broker-Dealer Research Reports, Securities Act Release No 7053, ExchangeAct Release No 33918, International Series Release No 653 [1993-1994 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 85,331, at 85,206,n.36 (April 19 1994) [hereinafter Simplification Release].

203 Form 20-F, Item 17(c).

204 International Financial Reporting and Disclosure Issues, SectionIII.A.2. See also Simplification Release, ¶ 85,331, at 85,206 (adoptionof requirement that reconciliation for earliest of the three years may beomitted); Form 20-F, Item 17(c)(2)(i) (reconciliation of net income ofthe earliest of the required three years may be omitted if thatinformation has not previously been included in a registrationstatement under the Securities Act).

205 Note that it is not permissible to present restructuring charges in theincome statement as a separate caption after income from continuingoperations before income taxes (that is, preceding income taxes and/ordiscontinued operations). Codification of Staff Accounting Bulletins,Staff Accounting Bulletin No 103, Topic 5.P.3 (May 9 2003)[hereinafter SAB 103]. When a restructuring charge is classified as anoperating expense, it is generally inappropriate in the Staff’s view topresent a preceding subtotal captioned or representing operatingincome before restructuring charges, since this is not a measurement ofoperating results under Gaap. However, it is permissible to discuss theeffect on net income and earnings per share of restructuring chargeswithin MD&A, since in the Staff’s view discussions in MD&A (andelsewhere) that quantify unusual or infrequent items are beneficial. Id.

206 For a discussion of revenue recognition issues, see id., Topic 13.

207 Form 20-F, Item 17(c)(2)(i).

208 Id. Instruction 2 to Item 17.

209 Id. Item 17(c)(2)(ii).

Endnotes


Endnotes

210 Id. Item 17(c)(2)(iii).

211 Id. Instruction 2 to Item 3.A.

212 Id.

213 Simplification Release, ¶ 85,331, at 85,206.

214 Id.

215 Id. n.37; International Financial Reporting and Disclosure Issues,Section III.A.3.

216 SEC Division of Corporation Finance, Accounting Disclosure Rulesand Practices: An Overview, Topic 6.III.A.2.b (March 31 2000)[hereinafter SEC Accounting Overview].

217 Form 20-F, Instruction 2 to Item 5.

218 Id.

219 SAB 103, Topic 1.D.1

220 For a discussion of the disclosure of loss contingencies, see id. Topic5.Y.

221 Form 20-F, Item 8.A.1, Item 8.A.3.

222 S-X Rule 2-02.

223 Form 20-F, Item 8.A.3.

224 Id. Instruction to Item 8.A.3. See also SAB 103, Topic 1.E.2 (financialstatements on which the auditors’ opinions are qualified because of alimitation on the scope of the audit do not meet the requirements ofS-X Rule 2-02(b); financial statements for which the auditors’ opinionscontain qualifications relating to the acceptability of accountingprinciples used or the completeness of disclosures made are alsounacceptable). As an example, the SEC recently released a statementregarding certain advice rendered by The Institute of CharteredAccountants of England and Wales. The advice concerned theinclusion of certain language in audit opinions limiting the right ofreliance by third parties on those opinions. The SEC made clear thatsuch language would not be acceptable in audit reports accompanyingSEC filings. See Letter from SEC Acting Chief Accountant andDirector of Corporation Finance to The Institute of CharteredAccountants of England and Wales re: the Use of Clarifying Languagein UK Audit Opinions (February 28 2003)(www.sec.gov/info/accountants/staffletters/icaew022803.htm).

225 Form 20-F, General Instruction E.(c), second paragraph.

226 Id.

227 S-X Rule 3-20(a).

228 International Financial Reporting and Disclosure Issues, SectionVII.C.1.

229 S-X Rule 3-20(b).

230 Id.

231 Id.

232 Id. See also International Financial Reporting and Disclosure Issues,Section VII.E (discussing issues arising from material currency devalu-ations after the date of the balance sheet).

233 International Financial Reporting and Disclosure Issues, SectionVII.D.1. Note that disclosure may be required about the impact of theeuro conversion on items such as the business description, MD&A andmarket risk disclosure. Id. Section VII.D.2.

234 Form 20-F, Item 3.A.3.

235 Id.

236 See id. Item 17(a) (financial statements must be included if they wouldbe required for a registration statement on Form 10 or an annual reporton Form 10-K); Form 10-K, Item 8 and Instruction 1 to Item 8(financial statements must comply with Regulation S-X, other than S-X Rule 3-05 and S-X Article 11). See also Form F-1, Item 4(b)(requiring issuers to provide the financial statements called for by Rule3-05).

237 S-X Rule 11-01 also requires pro forma financial information wheredisposition of a “significant portion of a business” by an issuer hasoccurred or is probable, and that disposition is not “fully reflected” inthe issuer’s filed financial statements.

238 Whether an acquisition is of a “business” should be evaluated in lightof the facts and circumstances involved and whether there is sufficientcontinuity of the acquired entity's operations prior to and after thetransactions so that disclosure of prior financial information is materialto an understanding of future operations. A presumption exists that aseparate entity, a subsidiary, or a division is a business. However, alesser component of an entity may also constitute a business. Amongthe facts and circumstances which should be considered in evaluatingwhether an acquisition of a lesser component of an entity constitutes abusiness are:

• whether the nature of the revenue-producing activity of thecomponent will remain generally the same as before thetransaction; or

• whether any of the following attributes remain with thecomponent after the transaction: (i) physical facilities; (ii) employeebase; (iii) market distribution system; (iv) sales force; (v) customerbase; (vi) operating rights; (vii) production techniques; or (viii)trade names.

239 However, a different conclusion may be reached depending upon thecustomary practice for an industry or a particular issuer. For example,an issuer may be submitting a letter of intent as one of many parties ina bidding process, or a roll-up entity may routinely sign letters of intentto further its due diligence investigations of multiple potential targets,but with the acquisition of only a minority of those companiesbecoming probable.

240 If the acquired business had a net loss, then the absolute value of thenegative amount is generally used for the test.

241 S-X Rule 3-05(b)(3). Note that, under Rule 3-05(b)(3), the calculationof the significance of an acquired business for purposes of determiningwhether separate audited financials need to be included in a registrationstatement (and if so, how many years) is generally made on the basis ofthe issuer's most recent annual financial statement. However, if theissuer has made a significant acquisition subsequent to the latest fiscalyear end and filed a report on Form 8-K that included audited financialstatements for that business for the periods required by Rule 3-05 andthe pro forma information required by S-X Rule 11-01, the test is basedupon the pro forma amounts for the latest fiscal year in the Form 8-Krather than the historical amounts for the latest fiscal year.

242 SEC Accounting Overview, Topic 2.I.D.1.e.2.

243 The date of an offering will be deemed to be the date of the finalprospectus or prospectus supplement filed pursuant to Rule 424(b). Byanalogy, the pricing date would be the date of an offering in a Rule144A transaction.

244 Item 17(b) of Form F-4 provides some accommodations with respectto acquirees that are not reporting companies under the Exchange Actand in certain other cases where financial statements have previouslybeen provided to security holders.


245 In order for the pre-acquisition statements of an acquiree to be omittedfrom the registration statement, each of the following conditions mustbe met:

• the combined significance of businesses acquired or to be acquiredfor which audited financial statements cover a period of less than 9months may not exceed 10%;

• the combined significance of businesses acquired or to be acquiredfor which audited financial statements cover a period of less than 21months may not exceed 20%; and

• the combined significance of businesses acquired or to be acquiredfor which audited financial statements cover a period of less than 33months may not exceed 40%.

Combined significance is the total, for all included companies, of eachindividual company’s highest level of significance under the three testsof significance (investment, assets and pre-tax income). For a serialacquirer going public, the application of SAB 103 is likely to allow forthe exclusion of financial statements for an increasing number ofacquired companies for each period prior to the IPO.

246 See S-X Rule 3-05 (financial statements of acquired businesses must beprepared and audited in accordance with Regulation S-X).

247 For example, if, at the date of acquisition, the acquired business met atleast one of the conditions in the S-X Rule 1-02 definition ofsignificant subsidiary at the 80% level, the deal team might likelyconclude that the income statements of the acquired business shouldnormally continue to be furnished for such periods prior to theacquisition as would, along with the issuer’s audited financials post-acquisition, cover the equivalent of the three-year period specified inS-X Rule 3-02.

248 The additional disclosure includes (i) material factors considered by theissuer in assessing the property, including sources of revenue(including, but not limited to, competition in the rental market,comparative rents, occupancy rates) and expense (including, but notlimited to, utility rates, ad valorem tax rates, maintenance expenses andcapital improvements anticipated) and (ii) an indication that, afterreasonable inquiry, the issuer is not aware of any material factorsrelating to the property other than those discussed in (i) that wouldcause the reported financial information not to be necessarily indicativeof future operating results.

249 Form 20-F refers to MD&A as “Operating and Financial Review andProspects.” See Form 20-F, Item 5.

250 Rule 408 states that “In addition to the information expressly requiredto be included in a registration statement, there shall be added suchfurther material information, if any, as may be necessary to make therequired statements, in the light of the circumstances under which theyare made, not misleading.” See also Form 20-F, General InstructionC.(c) (referring to Exchange Act Rule 12b-20, which contains substan-tially identical language to Securities Act Rule 408).

251 S-X Rule 11-02(c)(1). The pro forma condensed balance sheet shouldbe prepared as if the transaction had occurred on the date of the latesthistorical balance sheet. S-X Rule 11-02(b)(6).

252 S-X Rule 11-02(c)(2). The pro forma condensed income statementsshould be prepared as if the transaction had taken place at thebeginning of the latest financial year included in the filing. Id. Rule11-02(b)(6).

253 International Financial Reporting and Disclosure Issues, SectionVIII.C.

254 Id.

255 Form 20-F, Item 17(c)(v). As discussed below under “SpecialRequirements for Public Offerings,” while registrants in most publicofferings must comply with Item 18 with respect to their consolidatedfinancial statements, they need only comply with Item 17 with respectto any separate financial statements provided for significant acquiredbusinesses. S-X Rule 3-05(c).

256 SEC Accounting Overview, Topic 6.IV.A.7.

257 In the case of a foreign private issuer, these will be the financialstatements required by Item 8.A of Form 20-F. S-X Rule 3-10(a)(3).Note that S-X Rule 3-10 does not apply to credit enhancements thatare not guarantees. However, in certain cases the financial conditionof the party providing the credit enhancement could be material toinvestors and subject to disclosure. See Financial Statements andPeriodic Reports for Related Issuers and Guarantors, Securities ActRelease No 7878, Exchange Act Release No 43124 [2000 TransferBinder] Fed. Sec. L. Rep. (CCH) ¶ 86,320, at 83,711, n.50 (August 42000) [hereinafter Guarantors Release].

258 The modified financial information permitted by S-X Rules 3-10(b)-(f) is available only for “debt and debt-like securities” for which theissuer has a contractual obligation to pay a fixed sum at a fixed time,and, where the obligation is cumulative, a set amount of interest(which may be determined using an adjustable rate) must be paid.

Guarantors Release ¶ 83,711, at 83,724.

259 Under S-X Rule 3-10(h)(6), a subsidiary is “minor” if each of its totalassets, stockholders' equity, revenues, income from continuingoperations before income taxes, and cash flows from operatingactivities is less than 3% of the parent company's corresponding consol-idated amount.

260 S-X Rule 3-10(i)(12). The reconciliation may be based on Item 17 ofForm 20-F. Id.

261 Under S-X Rule 3-10(h)(1), a subsidiary is 100% owned if all of itsoutstanding voting shares are owned by its parent company, eitherdirectly or indirectly, including convertible securities and options tobuy voting shares. A subsidiary not in corporate form is 100% ownedif the sum of all interests are owned, either directly or indirectly, by itsparent company, other than securities that are guaranteed by its parentand, if applicable, other 100% owned subsidiaries of its parent, andsecurities that guarantee securities issued by its parent and, if applicable,other 100% owned subsidiaries of its parent. Note that this standard isdifferent from the definition of “wholly-owned subsidiary” under S-XRule 1-02(aa), which is “a subsidiary substantially all of whoseoutstanding voting shares are owned by its parent and/or the parent'sother wholly owned subsidiaries.”

262 The Latham & Watkins standard form indenture includes a “savingsclause” to limit the guarantee to the extent necessary for the guaranteenot to constitute a fraudulent conveyance under insolvency laws. Thisexception does not vitiate the guarantee in the view of the SEC.Guarantees may also have different subordination terms than theguaranteed security.

263 However, pursuant to Note 3 of S-X Rule 3-10(f), if any of thesubsidiary guarantees is not joint and several with the guarantees of theother subsidiaries, then each subsidiary guarantor whose guarantee isnot joint and several need not include separate financial statements, butthe condensed consolidating financial information must include aseparate column for each subsidiary guarantor whose guarantee is notjoint and several.

264 S-X Rule 3-10(i) provides guidance for the preparation of thecondensed consolidating financial information in the footnote.

265 The column for non-guarantor subsidiaries may be omitted if the

Endnotes


Endnotes

parent has independent assets or operations and the non-guarantorsubsidiaries are minor.

266 A subsidiary is an operating subsidiary if it is not a finance subsidiary (asdefined below).

267 Note 1 to S-X Rule 3-10(c) allows a conditional exemption fromproviding the footnote if the parent company has no independent assetsor operations, the non-guarantor subsidiaries are minor, and there is afootnote to this effect in the parent financial statements that also notesthat the guarantee is full and unconditional.

268 The column for non-guarantor subsidiaries may be omitted if theparent has independent assets or operations and the non-guarantorsubsidiaries are minor.

269 A subsidiary is a finance subsidiary if it has no assets, operations,revenues or cash flows other than those related to the issuance,administration and repayment of the security being registered and anyother securities guaranteed by its parent company.

270 However, pursuant to Note 4 of S-X Rule 3-10(d), if any of thesubsidiary guarantees is not joint and several with the guarantees of theparent company or the guarantees of the parent company and the othersubsidiaries, each subsidiary guarantor whose guarantee is not joint andseveral need not include separate financial statements, but thecondensed consolidating financial information must include a separatecolumn for each subsidiary guarantor whose guarantee is not joint andseveral.

271 For a finance subsidiary only, instead of providing this condensedconsolidating financial information, the parent company’s financialstatements may included an audited footnote (if true) that parentcompany has no independent assets or operations, the issuer is a 100%owned finance subsidiary, the parent company and all of the parentcompany’s subsidiaries other than the issuer have guaranteed thesecurities, and the guarantees are full and unconditional and joint andseveral. Note 5 to S-X Rule 3-10(d).

272 The column for non-guarantor subsidiaries may be omitted if the non-guarantor subsidiaries are minor.

273 The audited and unaudited financial statements must comply with allaspects of Regulation S-X except for the filing of supporting schedules.

274 SAB 103, Topic 6.K.4.

275 S-X Rule 3-09(a).

276 Id.

277 Form 20-F, Item 17(c)(vi).

278 Simplification Release, ¶ 85,331, at 85,206.

279 Guide 1 has been removed and reserved. Regulation S-K, Item801(a).

280 Where restrictions on the amount of funds that may be loaned oradvanced differ from the amount restricted as to transfer in the form ofcash dividends, the amount least restrictive to the subsidiary may beused. Redeemable preferred stocks and minority interests are deductedin computing net assets for purposes of this test.

281 Compare Form 20-F, Item 17(b) (financial statement must discloseinformation “substantially similar” to financial statements complyingwith US Gaap and Regulation S-X) with id. Item 18 (must provide allItem 17 information plus all other information required by US Gaapand Regulation S-X unless those requirements do not apply to foreignprivate issuers, subject to certain exceptions).

282 SAB 103, Topic 1.D.1.

283 Id.

284 Form 20-F, General Instruction E.(c). Offerings of non-convertible,investment grade securities and certain rights offerings need onlycomply with Item 17. Form F-1, Item 4(c); Form F-3, GeneralInstructions I.B.2 and I.B.4. Note that, in the case of acquisitions of aforeign business, the financial statements of the acquired business needonly be presented under Item 17. S-X Rule 3-05(c). Similarly,audited financial statements for a less than majority owned equityinvestor that is a foreign business need only comply with Item 17. Id.

S-X Rule 3-09(d).

285 SFAS 131 uses the term “chief operating decision maker” to identify afunction rather than a specific person; the “chief operating decisionmaker” could be the CEO, CFO, or a group of senior managers,depending upon the circumstances.

286 In practice there is a great variety of ways in which management mayview its business and there is no one right answer within a givenindustry. For example, Dell Computer considers that its enterprise isprimarily operating on a geographic basis, but with two operatingsegments in the United States (business and consumer); in comparison,IBM reports its results under seven operating segments based uponcustomers, products, technology and delivery channels.

287 Under SFAS 131, the details provided in reporting a “measure of profitor loss” depend upon the information that is actually reviewed by thechief operating decision maker and may include revenues from externalvs. internal customers, interest revenue and expense, depreciation andamortization, and extraordinary items, among others.

288 Note that a foreign private issuer need not reconcile segmentinformation to US Gaap in its MD&A discussion. InternationalFinancial Reporting and Disclosure Issues, Section V.A.3.

289 In January 2003, the SEC adopted new rules limiting the use of non-Gaap financial measures that have customarily appeared in thesummary financial data. See Latham & Watkins Client Alert No 257,SEC Adopts Rules for Disclosure of EBITDA and Other “Non-GaapFinancial Measures,” for more information on this important topic(http://www.lw.com/resource/publications/_pdf/pub578.pdf).

290 This requirement applies to annual reports as well as registrationstatements. See also Form F-2, Item 5.a and Form F-3, Item 5.a(requiring disclosure of any material change in the issuer’s affairs sincethe end of the last fiscal year for which certified financial statements areincluded in the registration statement or are incorporated by referencefrom the last filing on Form 20-F, to the extent those changes have notbeen described in a current report, such as on Form 6-K, that isincorporated in the registration statement).

291 Form 20-F, Item 8.A.5. This requirement does not apply to annualreports. Id. Instruction 1 to Item 8.A.5. Although Item 8.A.5 refersonly to interim financial statements, the SEC takes the position that thisrequirement applies to annual financial statements as well.International Financial Reporting and Disclosure Issues, SectionVIII.A.

292 International Financial Reporting and Disclosure Issues, SectionVIII.A.

293 Id.

294 Regulation FD prohibits discussing material information withprospective investors unless it has been made public. Foreign privateissuers are exempt from Regulation FD, but many companies attemptto comply because of liability concerns. Some companies will issue a“recent results” press release ahead of schedule in order to allow for theinclusion of these results in the offering document and a “road show”discussion of these results with prospective investors.


295 Sarbanes-Oxley Act Section 2(a)(7).

296 Certification of Disclosure in Companies’ Quarterly and AnnualReports, Securities Act Release No 8124, Exchange Act Release No46427, Investment Company Act Release No 25722 [2002 TransferBinder] Fed. Sec. L. Rep. (CCH) ¶ 86,720, at 86,132, 86,152 (August28 2002) [hereinafter Certification Adopting Release].

297 Id. ¶ 86,720, at 86,126.

298 Management’s Reports on Internal Control Over Financial Reportingand Certification of Disclosure in Exchange Act Periodic Reports,Securities Act Release No 8238, Exchange Act Release No 47986,Investment Company Act Release No 26068 (June 5 2003)[hereinafter Management’s Reports on Internal Control AdoptingRelease].

299 Id.

300 The SEC has stated that current reports such as those on Forms 6-Kand 8-K, as opposed to periodic reports (that is, quarterly and annualreports), are not covered by Section 302’s certification requirements.Certification Adopting Release, ¶ 86,720, at 86,130. Foreign privateissuers are nevertheless required to design and maintain disclosurecontrols and procedures to ensure full and timely disclosure in currentreports. Id.

301 Exchange Act Rules 13a-14(a), 15d-14(a).

302 Form 20-F, Instructions as to Exhibits, Instruction 12.

303 The term “disclosure controls and procedures” is defined in ExchangeAct Rule 13a-15(e) and 15d-15(e).

304 The term “internal control over financial reporting” is defined inExchange Act Rule 13a-15(f) and 15d-15(f).

305 This portion of the Section 302 certification does not take effect untilthe annual report on Form 20-F for the first fiscal year ending on orafter April 15 2005. Management’s Reports on Internal ControlAdopting Release, Sections II.J, III.E.

306 Similarly, this portion of the Section 302 certification does not takeeffect until April 15 2005. Id.

307 Note, however, that no specific date for the evaluation is specified.Management’s Reports on Internal Control Adopting Release, SectionIII.E.


309 Certification Adopting Release, ¶ 86,720, at 86,132. However, “acompany’s certifying officers may temporarily modify the content oftheir Section 302 certification to eliminate certain references to internalcontrol over financial reporting until the compliance date.”Management’s Reports on Internal Control Adopting Release.


311 Exchange Act Rules 13a-15(b), 15d-15(b).

312 Form 20-F, Item 15(a).

313 Exchange Act Rules 13a-15(e), 15d-15(e).

314 Pending effectiveness of Rules 13a-14(b) and 15d-14(b), the SEC hasreiterated its prior guidance that an issuer should provide the Section906 certification as an exhibit to the annual report to which it relates.Management’s Reports on Internal Control Adopting Release, SectionIII.C.

315 Management’s Reports on Internal Control Adopting Release, SectionIII.B. Not “filing” will also limit enforcement of the certificate to

criminal proceedings rather than civil litigation. John Huber, ThomasKim and Catherine Groves, The Sarbanes-Oxley Act of 2002 and SECRulemaking, ¶ II.B.1.d, at 12 (March 28 2003)(http://www.lw.com/upload/docs/doc33.pdf) [hereinafter HuberOutline].

316 Huber Outline, ¶ II.B.3.b(1), at 17.

317 Legislative History of Title IX of the Sarbanes-Oxley Act of 2002, 149Cong. Rec. S5325, S5331 (April 11 2003).

318 Management’s Reports on Internal Control Adopting Release, SectionIII.A.

319 Huber Outline, ¶ II.B.2.b(3), at 15.

320 Management’s Reports on Internal Control Adopting Release, SectionIII.B.

321 Management’s Reports on Internal Control Adopting Release, SectionII.J.

322 Exchange Act Rules 13a-15(f); 15d-15(f).


324 Exchange Act Rules 13a-15(c), 15d-15(c).

325 Id. Although Rules 13a-15 and 15d-15 do not require the use of aparticular framework, the Committee of Sponsoring Organizations ofthe Treadway Commission’s “Internal Control – IntegratedFramework”, the Canadian Institute of Chartered Accountant’s “TheGuidance on Assessing Control”, and the Institute of CharteredAccountants in England and Wales’ “Turnbull Report” are allapproved frameworks. Management’s Reports on Internal ControlAdopting Release, at n.67.

326 Exchange Act Rules 13a-15(d), 15d-15(d).

327 Form 20-F, Item 15(b).

328 Even if the evaluation framework used by a foreign private issuer doesnot require a statement as to the effectiveness of the issuer’s system ofinternal control over financial reporting, the issuer must neverthelessstate affirmatively whether such controls are effective. Management’sReports on Internal Control Adopting Release, n.68.

329 Form 20-F, Item 15(c).

330 Id. Instruction 1 to Item 15. The SEC has stated that it believes it isimportant for the internal control report to be located near theauditor’s attestation report, and that it expects issuers will place thereport and attestation near MD&A disclosure or immediately precedingthe financial statements. Management’s Reports on Internal ControlAdopting Release, Section II.B.3.e.

331 Form 20-F, Item 15(d).

332 Management’s Reports on Internal Control Adopting Release, SectionII.F.3.

333 Conditions for Use of Non-Gaap Financial Measures, Securities ActRelease No 8176, Exchange Act Release No 47226, FinancialReporting Release No 65 (January 22 2003) [hereinafter Non-GaapFinancial Measures Adopting Release]; see also Latham & WatkinsClient Alert No 257, SEC Adopts Rules for Disclosure of EBITDAand Other “Non-Gaap Financial Measures”(http://www.lw.com/resource/publications/_pdf/pub578.pdf).

334 Conditions for Use of Non-Gaap Financial Measures, Securities ActRelease No 8145, Exchange Act Release No 46788 [2002 TransferBinder] Fed. Sec. L. Rep. (CCH) ¶ 86,737, at 86,444-86,446(November 4 2002).

Endnotes


Endnotes

335 Regulation G, Rule 100(a).

336 Id. Rule 101(a)(1). The term does not cover operating measures. Id.

Rule 101(a)(2).

337 Id. Rule 101(b). In addition, if the foreign private issuer prepares itsprimary financial statements under US Gaap, “Gaap” would mean USGaap. Id.

338 Id. Rule 100(a).

339 Id. Rule 100(b).

340 Non-Gaap Financial Measures Adopting Release.

341 Regulation G, Rule 100(c).

342 Non-Gaap Financial Measures Adopting Release.

343 Regulation S-K, Item 10(e)(1)(i).

344 Id. Item 10(e)(1)(ii).

345 Id. Item 10, Note to Paragraph (e).

346 See Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations,Securities Act Release No 8182, Exchange Act Release No 47264,Financial Reporting Release No 67, International Series Release No1266 (January 27 2003) [hereinafter Off-Balance Sheet AdoptingRelease].

347 Id.

348 Form 20-F, Item 5.E.1.

349 Id. Items 5.E.1.(a)-(d).

350 Id. Item 5.E.2.

351 Off-Balance Sheet Adopting Release, Sections II.B.1 and III.A.1.

352 Id. Section III.G.

353 Id.

354 Form 20-F, Item 5.F.1.

355 Id. Item 5.F.2.

356 Off-Balance Sheet Adopting Release, Section III.D and n.73.

357 Commission Statement about Management’s Discussion and Analysisof Financial Condition and Results of Operations, Securities ActRelease No 8056, Exchange Act Release No 45321, FinancialReporting Release No 61 (January 22 2002).

358 Off-Balance Sheet Adopting Release, Section II.B.4.

359 Exchange Act Rule 10A-3(a)(5)(i)(A); see also Standards Relating toListed Company Audit Committees, Securities Act Release No 8220,Exchange Act Release No 47654, Investment Company Act ReleaseNo 26001 (April 9 2003).

360 Exchange Act Rule 10A-3(b)(1)(i).

361 Exchange Act Rule 10A-3(b)(1)(ii)(A).

362 Exchange Act Rule 10A-3(b)(1)(ii)(B).

363 Exchange Act Rule 10A-3(e)(1)(i).

364 Exchange Act Rule 10A-3(e)(1)(ii)(A).

365 Exchange Act Rule 10A-3(b)(1)(iv)(C).

366 Exchange Act Rule 10A-3(b)(1)(iv)(D).

367 Exchange Act Rule 10A-3(b)(1)(iv)(E).

368 Exchange Act Rule 10A-3(b)(1)(iv)(A).

369 Exchange Act Rule 10A-3(b)(2).




373 Instruction 1 to Exchange Act Rule 10A-3.

374 Id.

375 Instruction 2 to Exchange Act Rule 10A-3.

376 Exchange Act Rule 10A-3(c)(3).

377 Exchange Act Rule 10A-3(d) and Form 20-F, Item 16.D.

378 Id.

379 Form 20-F, Items 16A(a)(1) and (3).

380 Id. Instruction 3 to Item 16A.

381 Id. Item 16A(a)(2).

382 Id. Note that for listed issuers the audit committee financial expert willneed to satisfy the definition of “independence” as set forth underExchange Act Rule 10A-3. Id

383 Id. Item 16A(b).

384 Id. Item 16A(c).

385 Id. Instruction 3 to Item 16A.

386 Sections 406 and 407 Adopting Release, Section II.A.4.d.i.

387 Form 20-F, Item 16A(d)(1).

388 Id. Items 16A(d)(2)-(3).

389 Strengthening the Commission’s Requirements Regarding AuditorIndependence, Securities Act Release No 8183, Exchange Act ReleaseNo 47265, Investment Company Act Release No 25915, InvestmentAdvisers Act Release No 2103 (January 28 2003).

390 S-X Rule 2-01(c)(2)(iii); see also Exchange Act Section 10A(l) (auditormay not audit an issuer whose CEO, controller, CFO or chiefaccounting officer was employed by the auditor and participated in theaudit during the one-year period preceding the date of the initiation ofthe audit in question).

391 S-X Rule 2-01(c)(4); see also Exchange Act Section 10A(g) (substan-tially identical limitations).

392 S-X Rule 2-01(c)(6); see also Exchange Act Section 10A(j) (unlawfulto act as auditor if lead (or coordinating) audit partner (having primaryresponsibility for the audit) or audit partner responsible for reviewingthe audit has performed audit services for the issuer in the each of theprior five fiscal years of the issuer).

393 S-X Rule 2-01(c)(7); see also Exchange Act Sections 10A(h)-(i) (allaudit and permitted non-audit services must be pre-approved by theaudit committee (subject to certain de minimis exceptions)).

394 S-X Rule 2-01(c)(8).

395 S-X Rule 2-07(a); see also Exchange Act Section 10A(k) (substantiallyidentical requirements).

396 Form 20-F, Item 16C(a).


397 Id. Item 16C(b).

398 Id. Item 16C(c).

399 Id. Item 16C(d).

400 Id. Item 16C(e).

401 Id. Item 16C(f).

402 Improper Influence on Conduct of Audits, Exchange Act Release No47890, Investment Company Act Release No 26050, FinancialReporting Release No 71 (May 20 2003) [hereinafter ImproperInfluence Adopting Release].

403 Exchange Act Rule 13b2-2(b)(1).

404 Improper Influence Adopting Release, Section II.B.

405 Id.

406 Exchange Act Rule 13b2-2(b)(2).

407 Retention of Records Relevant to Audits and Reviews, Securities ActRelease No 8180, Exchange Act Release No 47241, InvestmentCompany Act Release No 25911, Financial Reporting Release No 66(January 24 2003) [hereinafter Retention Release].

408 S-X Rule 2-06(a). The SEC required a seven-year period rather thanthe five-year period mandated in Section 802, because, among otherthings, Section 103 of the Sarbanes-Oxley Act directs the PublicCompany Accounting Oversight Board to require auditors to retainaudit workpapers and other materials that support the audit for sevenyears. Retention Release, Section II.

409 S-X Rule 2-06(b).

410 S-X Rule 2-06(c).

411 See Certification Adopting Release, ¶ 86,720, at 86,130.

412 Implementation of Standards of Professional Conduct for Attorneys,Securities Act Release No 8185, Exchange Act Release No 47276,Investment Company Act Release No 25919 (January 29 2003)[hereinafter Attorney Conduct Adopting Release].

413 Part 205.2(a)(1).

414 Part 205.2(a)(2)(ii).

415 Part 205.2(j).

416 Part 205.2(i).

417 Part 205.3(b)(1).

418 Part 205.3(b)(2).

419 Part 205.3(b)(3).

420 Part 205.3(c)(1).

421 Part 205.2(k).

422 Part 205.3(c)(1).

423 Part 205.3(c)(2).

424 Attorney Conduct Adopting Release.

425 Sections 406 and 407 Adopting Release.

426 Form 20-F, Item 16B(a).

427 Id. Item 16B(b).

428 Id. Item 16B(c).

429 Id. Items 16B(d) and (e).

430 Insider Trades During Pension Fund Blackout Periods, Exchange ActRelease No 47225, Investment Company Act Release No 25909(January 22 2003).

431 The term “individual account plan” is defined in Regulation BTR,Rule 100(j).

432 Id. Rule 100(b)(2).

433 Id. Rule 101(a).

434 Id. Rule 104.

435 Form 20-F, Instructions as to Exhibits, Instruction 10. Although theissuer need not submit the notice under Form 6-K, if it does so it is notseparately required to include the notice as an exhibit to its annualreport on Form 20-F. Id.

436 Regulation BTR, Rule 103(b).

437 Id. Rule 103(a).

438 Id. Rule 103(b).

439 Exchange Act Section 13(k)(1).

440 Id.

441 Id.



444 Sarbanes-Oxley Act: Interpretive Issues under Section 402 –Prohibition of Certain Insider Loans (October 15 2002)(http://www.lw.com/upload/docs/doc29.pdf).

445 Id. at 3-4.

446 Id. at 4.

447 Id.

448 Id. at 4-5.

449 Id. at 6.

450 Id.

451 Id. at 8-11.

452 See Huber Outline, ¶ V.C.1, at 77-79.

453 Id. ¶ V.C.2, at 79.

454 Regulation Analyst Certification, Securities Act Release No 8193,Exchange Act Release No 47384 (February 20 2003) [hereinafterRegulation AC Release].

455 Regulation AC, Rule 501(a).

456 Id. Rule 500.

457 Id. Certification is not, however, required from “junior analysts.”Regulation AC Release, Section III.A.1.

458 Regulation AC Release, at n.11.

459 Id. Section I.A.

460 Regulation AC, Rule 502(a).

461 Id. Rule 502(c).

462 Id. Rule 503.

Endnotes


Endnotes

463 Id. Rule 500. A “foreign issuer” is any foreign government or foreignprivate issuer. Securities Act Rule 902(e).

464 Securities Act Section 2(a)(3).

465 David M. Brodsky & Daniel J. Kramer, Federal Securities Litigation,4-16 to 4-17 (1st ed. 1997) [hereinafter Federal Securities Litigation].

466 Id. at 4-2 to 4-3.

467 Id. at 5-20 (citing Pinter v. Dahl, 486 US 622, 641-54 (1988)).

468 See TSC Indus., Inc. v. Northway, Inc., 426 US 438, 449 (1976); see alsoSecurities Act Rule 405 (“material” information is “matters to whichthere is a substantial likelihood that a reasonable investor would attachimportance in determining whether to purchase the securityregistered”). TSC involved the interpretation of Section 14(a) of theExchange Act and Rule 14a-9. The Supreme Court has, however,explicitly extended TSC’s definition of materiality to Rule 10b-5, Basic

Inc. v. Levinson, 485 US 224, 231-32 (1988), and the lower US federalcourts have generally used the TSC standard in all contexts involvingthe anti-fraud provisions of the US federal securities laws. Louis Loss& Joel Seligman, Securities Regulation 2074-75 (3rd ed. 1992)[hereinafter Loss & Seligman].

469 TSC, 426 US at 449.

470 Id. at 450.

471 SAB 103, Topic 1.M.1 (SAB 103 recodifies Staff Accounting Bulletin99).

472 Id.

473 Id.

474 Selective Disclosure and Insider Trading, Securities Act Release No7881, Exchange Act Release No 43154, Investment Company ActRelease No 24599 [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶86,319, at 83,676, 83,684 (August 15 2000) [hereinafter RegulationFD Release].

475 In the case of an omission, a plaintiff must show that there was a dutyto disclose the material facts; merely being in possession of materialnon-public information does not, of itself, create a duty to disclose.Federal Securities Litigation, at 6-4.

476 Ernst & Ernst v. Hochfelder, 425 US 185, 193 (1976).

477 Federal Securities Litigation, at 6-13 to 6-14.

478 Id. at 6-26 to 6-27.

479 Blue Chip Stamps v. Manor Drug Stores, 421 US 723, 754-55 (1975).

480 Loss & Seligman, at 3679 n.553.

481 See Loss & Seligman, at 3688 (explaining that “[t]he Rule may beviolated by feeding misinformation into the marketplace, or evenwithholding information too long,” regardless of whether thedefendants themselves bought or sold securities) (citation omitted).

482 Federal Securities Litigation, at 6-30 to 6-31. The SEC has stated thatan issuer may be “fully liable” if it disseminates and adopts false third-party reports “even if it had no role whatsoever in the preparation ofthe report.” Use of Electronic Media, Securities Act Release No 7856,Exchange Act Release No 42728, Investment Company Act ReleaseNo 24426 [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304,at 83,374, 83,381, n.54 (April 28 2000) (citing In the Matter of Presstek,

Inc., Exchange Act Release No 39472 (December 22 1997)).

483 Federal Securities Litigation, at 6-32; see also Regulation FD Release,¶ 86,319, at 83,682 (defining a temporary insider as “a person who

owes a duty of trust or confidence to the issuer,” such as an attorney,investment banker or accountant).


485 Id. at 6-34.

486 Id. at 6-34 to 6-35 (citing United States v. O’Hagan, 521 US 642(1997)). The SEC has recently added two rules to clarify issues thathave arisen in insider trading cases. First, Rule 10b5-1 provides thattrading “on the basis of” material non-public information includes alltrading while in possession of that information, except certain tradespreviously contracted for in good faith and not as part of a plan orscheme to evade the prohibitions of Rule 10b5-1. Second, Rule10b5-2 fleshes out the meaning of a “duty of trust or confidence” forpurposes of the misappropriation theory.

487 Federal Securities Litigation, at 6-34.

488 Id. at 6-42.

489 Exchange Act Section 21D(e)(1); see also Federal Securities Litigation,at 6-43 to 6-45 (discussing damages under Exchange Act Section10(b)).

490 See, for example, Exchange Act Sections 21(d)(3) (providing formoney penalties in SEC civil actions), 32(a) (providing for criminalpenalties for willful violations of the Exchange Act).

491 Federal Securities Litigation, at 6-42; see also Exchange Act Section28(a) (limiting recovery for damages in actions under the Exchange Actto “actual damages”).


493 See Loss & Seligman, at 4217-18.

494 See Federal Securities Litigation, at 3-8 to 3-10.

495 Id. at 3-11 (citing Securities Act Section 6(a)).

496 Id. at 3-12.

497 Id. at 3-14.

498 Securities Act Sections 11(b)(3)(A) and (B).

499 Securities Act Section 11(b)(3)(C).

500 Securities Act Section 11(e).


502 Gustafson v. Alloyd Co., 513 US 561, 564, 584 (1995). There is somequestion whether Section 12(a)(2) liability extends to offshore publicofferings under Regulation S. One lower US federal court has heldthat, despite Gustafson, “an offering issued pursuant to Regulation S issubject to” Section 12(a)(2) liability “if it is a public offering.” Sloane

Overseas Fund Ltd. v. Sapiens Int’l Corp, 941 F. Supp. 1369, 1376(S.D.N.Y. 1996).

503 Id. at 5-20 (citing Pinter v. Dahl, 486 US 622, 641-54 (1988)).

504 Securities Act Rule 405; see also Exchange Act Rule 12b-2.


506 Id. at 11-5 to 11-7.

507 See generally id. at 11-7 to 11-10 (discussing the defence).

508 Huber Outline, ¶ X.A, at 134.

509 Sarbanes-Oxley Act Section 802(a) (adding new Section 1519 of 18USC); Huber Outline, ¶ X.A.1.a.1, at 135.


510 Sarbanes-Oxley Act Section 1102 (amending 18 USC Section 1512);Huber Outline, ¶ X.A.1.b, at 137.

511 Sarbanes-Oxley Act Section 1107 (amending 18 USC Section 1513);Huber Outline, ¶ X.A.2.a, at 137.

512 Sarbanes-Oxley Act Section 807 (adding new Section 1348 to 18USC); Huber Outline, ¶ X.A.3, at 137.

513 Sarbanes-Oxley Act Section 1106 (amending Exchange Act Section32(a)); Huber Outline, ¶ X.A.4.a.7, at 138.

514 Sarbanes-Oxley Act Section 1103 (amending Exchange Act Section21C(c)); Huber Outline, ¶ X.B.1, at 139.

515 Sarbanes-Oxley Act Section 1105 (amending Exchange Act Section21C and Securities Act Section 8A); Huber Outline, ¶ X.B.2.a, at 139.

516 Huber Outline, ¶ X.B.2.a, at 139.

517 Sarbanes-Oxley Act Section 305 (amending Exchange Act Section21(d)(2) and Securities Act Section 20(e)); Huber Outline, ¶ X.B.2.c,at 140.

518 Sarbanes-Oxley Act Section 806 (adding new Section 1514A to 18USC); Huber Outline, ¶ X.C.2.a, at 141.

519 Sarbanes-Oxley Act Section 803 (adding new Section 523(a) to 11USC); Huber Outline, ¶ X.C.3.a, at 141.

520 See SEC v. Murphy, [1983-84 Transfer Binder] Fed. Sec. L. Rep.(CCH) ¶ 99,688 (C.D. Ca. 1983).

521 For a comprehensive discussion of SEC Enforcement practice, see, forexample, The Securities Enforcement Manual: Tactics and Strategies(Richard M. Phillips, ed. 1997); William R. McLucas, J. Lynn Taylor& Susan A. Mathews, A Practitioner’s Guide to the SEC’s Investigativeand Enforcement Process, 70 Temp. L. Rev. 53 (1997).

522 See, for example, SEC v. Lernout & Hauspie Speech Products, N.V.,Litigation Release No 17782 (October 10 2002) (charging Belgiancorporation quoted on Nasdaq National Market System with financialfraud), available athttp://www.sec.gov/litigation/litreleases/lr17782.htm; SEC v.

A.C.L.N., Ltd., Litigation Release No 17776 (October 8 2002)(charging NYSE-listed Cypriot corporation and its Cypriot auditorwith financial fraud), available athttp://www.sec.gov/litigation/litreleases/lr17776.htm; SEC v.

Millennium Financial, Ltd., Litigation Release No 17528 (May 22 2002)(charging Uruguayan securities firm with securities fraud), available athttp://www.sec.gov/litigation/litreleases/lr17528.htm.

523 See, for example, SEC v. Unifund SAL, 910 F.2d 1028, 1033 (2d Cir.1990) (upholding preliminary injunction barring insider trading againstLebanese investment company which purchased stock in a New YorkStock Exchange-listed company through Beirut office of US broker-dealer). See also Federal Securities Litigation, at 1-5 to 1-8 (discussingthe extra-territorial reach of the US federal securities laws).

524 2002 SEC Annual Report at 13, available athttp://www.sec.gov/pdf/annrep02/ar02full.pdf.

525 For a discussion of MLATs, see Symposium, Mann, Mari & Lavdas,International Agreements and Understandings for the Production ofInformation and Other Mutual Assistance, 29 Int’l Law. 780, 781n.248 and accompanying text (1995).

526 In the Matter of E.On AG, Exchange Act Release No 43372,Administrative Proceeding File No 3-10318 (September 28 2000),available at http://www.sec.gov/litigation/admin/34-43372.htm[hereinafter E.On AG].

527 Id.


529 Id. at 6-4 to 6-5.

530 Id. at 6-5.

531 Regulation FD Release, ¶ 86,319, at 83,684.

532 Note that, in the SEC’s view, a research report contains an “inherentrepresentation” that the views expressed in the report are notknowingly false and do not omit material facts necessary in order tomake statements not misleading. Regulation AC Release, Section II.I.Accordingly, “analysts may be found to have violated the anti-fraudprovisions of the federal securities laws if they make baselessrecommendations or recommendations that they disbelieve.” Id.


534 See generally Federal Securities Litigation, at 2-1 to 2-31 (discussingthe PSLRA).

535 Securities Act Section 27A(c)(1).

536 Securities Act Section 27A(i)(1).

537 Securities Act Section 27A(b)(2).

538 Securities Act Section 27A(c)(1)(A)(i).

539 Basic Inc. v. Levinson, 485 US 224, 230-232 (1998).

540 Id. at 236 (quoting TSC Indus., Inc. v. Northway, Inc., 426 US 438, 450(1976)).

541 Id. at 238-41 (1998).

542 Id. at 238 (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849(2d. Cir. 1968)).

543 See, for example, SEC v. Geon Industries, Inc., 531 F.2d 39, 47-48 (2d.Cir. 1976) (“Since a merger in which it is bought out is the mostimportant event that can occur in a small corporation’s life, to wit, itsdeath, we think that inside information, as regards a merger of this sort,can become material at an earlier stage than would be the case asregards lesser transactions—and this even though the mortality rate ofmergers in such formative stages is doubtless high.”).

544 E.On AG.

545 See, for example, Charles Schwab & Co., Inc. (publ. avail. November15 1999) [1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶77,650, at 76,310.

546 For an overview, see Use of Electronic Media Release; see also Use ofInternet Web Sites to Offer Securities, Solicit Securities Transactions,or Advertise Investment Services Offshore, Securities Act Release No7516, Exchange Act Release No 39779, Investment Advisers ActRelease No 1710, Investment Company Act Release No 23071(March 23 1998) (www.sec.gov/rules/interp/33-7516.htm)[hereinafter Offshore Internet Offerings Release].

547 Use of Electronic Media, Securities Act Release No 7856, ExchangeAct Release No 42728, Investment Co. Act Release No 24426 [2000Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304, at 83,381 (April28 2000).

548 Id. at 83,383.

549 Id. at 83,383-85.

550 See Offshore Internet Offerings Release, Section IV.A.2.

551 Use of Electronic Media Release, ¶ 86,304, at 83,384.

Endnotes


Endnotes

552 Id. at 86,381.

553 Id.

554 Id. at 83,381-83,383.

555 Offshore Internet Offerings Release, Section IV.A.1.

556 Id. Section IV.A.2.

557 Use of Electronic Media Release, ¶ 86,304, at 83,386.

558 Order Approving Proposed Rule Changes by the National Associationof Securities Dealers, Inc. and the New York Stock Exchange, Inc. andNotice of Filing and Order Granting Accelerated Approval ofAmendment No 2 to the Proposed Rule Change by the NationalAssociation of Securities Dealers, Inc. and Amendment No 1 to theProposed Rule Change by the New York Stock Exchange, Inc.Relating to Research Analyst Conflicts of Interest, Exchange ActRelease No 45908 [2001-2002 Transfer Binder] Fed. Sec. L. Rep.(CCH) ¶ 86,639, at 85,457 (May 10 2002). The Conflict of InterestRules are NYSE Rule 472, Communications with the Public, andNASD Rule 2711, Research Analysts and Research Reports.

559 Order Approving Proposed Rule Changes by the New York StockExchange, Inc. Relating to Exchange Rules 344 (“Supervisory Analysts”),345A (“Continuing Education for Registered Persons”), 351 (“ReportingRequirements”) and 472 (“Communications with the Public”) and by theNational Association of Securities Dealers, Inc. Relating to ResearchAnalyst Conflicts of Interest and Notice of Filing and Order GrantingAccelerated Approval of Amendment No 3 to the Proposed Rule Changeby the New York Stock Exchange, Inc. and Amendment No 3 to theProposed Rule Change by the National Association of Securities Dealers,Inc. Relating to Research Analyst Conflicts of Interest, Exchange ActRelease No 48252 (July 29 2003), 68 Fed. Reg. 45,875 (August 4 2003).These amendments to the Conflict of Interest Rules generally becomeeffective 60 days after the approval of the rule amendments by the SEC,or September 27 2003, although certain provisions of the amendmentstake effect at later dates. Id. at Section III.M.

560 Id. at Section II.B.

561 Id. at Section II.B.

562 NASD Rule 2711(b)(3); NYSE Rule 472(b)(3). These rules do notapply to certain small firms, which are defined as “member organi-zations that over the three previous years, on average per year, haveparticipated in ten or fewer investment banking services transactions asmanager or co-manager and generated $5 million or less in grossinvestment banking services revenues from those transactions.” NYSERule 472(m); see NASD Rule 2711(k).

563 NASD Rule 2711(c)(2); see NYSE Rule 472(b)(4).

564 NASD Rule 2711(c)(2)(A); NYSE Rule 472(b)(4).

565 NASD Rule 2711(c)(2)(B), (C); NYSE Rule 472(b)(4)(i), (ii).

566 NASD Rule 2711(c)(3); NYSE Rule 472(b)(4)(iii).

567 NASD Rule 2711(d)(1); see NYSE Rule 472(h)(1). Here and for allother purposes under the Conflict of Interest Rules, “research analyst”is defined to include a member, allied member, or employee of amember or member organization “primarily responsible for, and anyperson who reports directly or indirectly to such research analyst inconnection with, the preparation of the substance of a research report,whether or not such person has the job title of ‘research analyst.’”NYSE Rule 472.40; NASD Rule 2711(a)(5).

568 NASD Rule 2711(h)(2)(A)(i)(a); NYSE Rule 472(k)(1)(ii)(a)(2)

569 NASD Rule 2711(d)(2); NYSE Rule 472(h)(2).

570 Id.

571 Id.

572 NASD Rule 2711(e); see NYSE Rule 472(g)(1).

573 NASD Rule 2711(j); NYSE Rule 472(g)(2).

574 NASD Rule 2711(c)(4); NYSE Rule 472(b)(5).

575 Id.

576 NYSE Rule 472(b)(5). The NASD Rules do not contain acomparable exception.

577 NASD Rule 2711(f); NYSE Rule 472(f).

578 NASD Rules 2711(f)(1)(A), (f)(1)(B), (f)(4); NYSE Rules 472(f)(1), (2)and (4). “Public appearance” is defined to include “without limitation,participation by a research analyst in a seminar, forum (including aninteractive electronic forum), radio, television or print mediainterview, or public speaking activity, or the writing of a print mediaarticle in which such research analyst makes a recommendation oroffers an opinion concerning any equity securities.” NYSE Rule472.50; see NASD Rule 2711(a)(4).

579 The prohibitions contained in the second two bullets do not apply topublic appearances or research reports published or otherwisedistributed under Securities Act Rule 139 regarding an issuer with“actively-traded securities,” as defined in Rule 101(c)(1) of RegulationM under the Exchange Act. NASD Rule 2711(f)(1)(B)(ii), (f)(4);NYSE Rule 472(f)(2), (4).

580 NASD Rule 2711(f)(1)(B)(i), (f)(4); NYSE Rule 472(f)(5).

581 NASD Rule 2711(f)(2); NYSE Rule 472(f)(3).

582 NASD Rule 2711(f)(5); NYSE Rule 472(f)(6).

583 Id. Examples given for impracticability are if the research analystcovering the issuer has left the employ of the member firm or themember firm has terminated coverage of the industry or sector of theissuer. Id. If it is impracticable to provide a final recommendation orrating, the member firm must provide the rationale for the decision toterminate coverage. Id.

584 NASD Rule 2711(g); NYSE Rule 472(e).

585 NASD Rule 2711(g)(1-3); NYSE Rule 472(e)(1-3).

586 There are exceptions to this blackout period for research analysts thatrecently began covering a company or for purchases and sales that aredue to a significant news or a significant event, as well as otherexceptions. See NASD Rules 2711(g)(2)(A), (B); NYSE Rule 472(e)(4).There are further exemptions to the trading restriction rules fortransactions such as sales of shares of registered diversified investmentcompanies and sales pre-approved by the legal or compliance departmentbased on unanticipated significant changes in personal financial circum-stances. See NASD Rules 2711(g)(4) and (5); NYSE Rule 472(e)(4).

587 NASD Rule 2711(g)(6); NYSE Rule 472(e)(5).

588 NASD Rule 2711(h); NYSE Rule 472(k).

589 NASD Rule 2711(h)(2)(A)(ii); NYSE Rule 472(k)(1)(i)(a). TheConflict of Interest Rules provide for an exception to the disclosurerequired by the second and third bullets “to the extent such disclosurewould reveal material non-public information regarding specificpotential future investment banking services transactions of the subjectcompany.” NASD Rule 2711(h)(2)(C); NYSE Rule 472(k)(3).

590 NASD Rules 2711(h)(1)(B), (h)(2)(A)(iii); NYSE Rules472(k)(1)(i)(c), (d). If the research report is published less than 30


calendar days after the end of the most recent month, such informationneed only be provided as of the end of the second preceding monthprior to the publication of the research report.

591 NYSE Rules 472(k)(1)(ii)(b), (k)(1)(iii)(a); see NASD Rules2711(h)(2)(A)(iii-v).

592 The Conflict of Interest Rules provide for an exception “to the extentsuch disclosure would reveal material non-public informationregarding specific potential future investment banking transactions ofthe subject company.” NASD Rule 2711(h)(2)(C); NYSE Rule472(k)(3).

593 The rules provide that this disclosure requirement will be deemedsatisfied if any such compensation is disclosed in research reports within30 days after the completion of the most recent calendar quarter,provided that the member has taken steps reasonably designed toidentify such compensation during that calendar quarter. NASD Rule2711(h)(2)(A)(v)(a); NYSE Rule 472(k)(1)(iii)(a)(1). The rules furtherprovide that an analyst and member would be presumed not to havereason to know of affiliate non-investment banking compensationfrom the subject company if the member maintains and enforcespolicies and procedures reasonably designed to prevent all researchanalysts and influential employees (those with the ability to influencethe substance of research reports) for directly or indirectly receivinginformation from the affiliate concerning such compensation. NASDRule 2711(h)(2)(A)(v)(b); NYSE Rule 472(k)(1)(iii)(a)(2).

594 NASD Rules 2711(h)(1)(A), (C), (h)(2)(A)(i) and (h)(3); NYSE Rules472(k)(1)(ii)(a), 472(k)(1)(iii)(b-d).

595 NASD Rule 2711(h)(4-7); NYSE Rule 472(k)(1)(i)(e-h).

596 See note 578 for the definition of “public appearance” for purposes ofthe Conflict of Interest Rules.

597 The Conflict of Interest Rules provide for an exception to thisrequirement and the requirement in the preceding bullet “to the extentsuch disclosure would reveal material non-public informationregarding specific potential future investment banking servicestransactions of the subject company.” NASD Rule 2711(h)(2)(C).NYSE Rule 472(k)(3).

598 Global Settlement, Litigation Release Nos. 18109-18118 (April 282003).

599 Addendum, Section I.1.






605 Addendum, Section I.8. Compare to the similar requirements in theNASD and NYSE rule amendments. NASD Rule 2711(f)(5); NYSERule 472(f)(5).

606 Addendum, Section I.9, I.11. Compare to NASD Rule 2711(c)(4) andNYSE Rule 472(b)(4), each of which as proposed applies only topitches for IPO business.


608 Addendum, Section II.3.

609 Addendum, Section I.1.e.

610 Addendum, Section II.1.c.




614 Defining the Term “Qualified Purchaser” Under the Securities Act of1933, Securities Act Release No 8041 [2001-2002 Transfer Binder]Fed. Sec. L. Rep. (CCH) ¶ 86,610, at 85,098, 85,103-85,104(December 19 2001).

615 New York Stock Exchange Listed Companies Manual, ¶ 103.00.A

616 Id. ¶ 102.01A.

617 Id. ¶ 102.01.B. For IPOs, the NYSE will rely on a written commitmentfrom the underwriter regarding the anticipated value of the offering. Id.

618 Id. ¶ 102.01.C.I.

619 Id. ¶ 102.01.C.II.

620 Id. ¶ 102.01.C.III.

621 Id. ¶ 103.01.A.

622 Id.

623 Id. For IPOs, the NYSE will rely on a written commitment from theunderwriter regarding the anticipated value of the offering. Id.

624 Id. ¶ 103.01.B.I.

625 Id. ¶ 103.01.B.II.

626 Id. ¶ 103.01.B.III.

627 National Association of Securities Dealers, Inc., NASD Manual, Rule4320(e)(2)(A).

628 Id. Rule 4320(e)(4).

629 Id. Rule 4200(a)(30).

630 Id. Rule 4320(e)(5).

631 Id. Rule 4320(e)(6).

632 Id. Rule 4420(a).

633 Id. Rule 4420(b).

634 Id. Rule 4420(c).

635 Id. Rule 4420(f).

Endnotes


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