During the American Bar Association’s Business Law Section Fall Meeting, the International Securities Matter Subcommittee of the Federal Regulation of Securities Committee discussed recent market trends affecting foreign private issuers (FPIs) from Latin America and other emerging markets, including the below:
Increase in Initial Public Offerings (IPOs). There is a notable increase in the number of foreign (non-U.S. domiciled) companies interested in conducting initial public offerings in the United States as opposed to Rule 144A offerings.
Different Jurisdictions for IPOs. Companies are increasingly using entities domiciled in jurisdictions different from those in which they are headquartered in connection with undertaking their IPOs. This strategy often serves to (i) mitigate political risk by reducing the stigma and political risks that may be associated with their home countries and (ii) permit issuers to adopt new corporate governance practices without the baggage associated with their home country’s regulatory environment.
Dual-Class Voting Mechanisms. Dual-class voting structures are becoming more common. This mechanism helps founding families maintain control over their businesses while monetizing their investments. A dual-class structure may allow founders to maintain control and leverage the founders’ reputation. For a highly leverage company, a dual class structure also might allow the issuer to avoid triggering a change of control in connection with the IPO or thereafter. However, dual-share class companies often are not included in broad-based indices and some institutional investors perceive the entrenchment of control as a negative. This might be addressed by implementing a sunset provision.
SEC Regulatory Philosophy. In his remarks at the 2024 U.S.-China Symposium hosted by Harvard Law School, SEC Commissioner Mark T. Uyeda highlighted that SEC appears to be diverging from its historical view of providing certain accommodations to FPIs. Recent regulations have increased compliance burdens for FPIs.
Auditor Concerns. The subcommittee also discussed auditors’ concerns regarding hyperinflationary accounting, which poses significant challenges for companies operating in high-inflation environments. Under the new Form 20-F rules, companies in hyperinflationary economies must include one year of financial statements and Management’s Discussion and Analysis. However, this has raised some issues with respect to comfort letters and that has led issuers towards Rule 144A issuances.
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