Being a public company has many benefits. However, public markets in different countries are not all the same. Markets differ in size, trading volume, government regulation, and many other ways. These differences cause many companies to cross-list or foreign-list their shares to take advantage of alternative markets. While companies can list on most major exchanges if they meet the regulatory requirements, this article addresses only foreign companies (non-US companies) listing their shares on United States (“US”) exchanges.
Why list in the US?
Capital is the main reason that companies decide to list in the US. The US has the two largest stock exchanges in the world by market cap, the New York Stock Exchange (NYSE) at over $20 trillion and the NASDAQ at over $10 trillion. When foreign companies list in the US, more often than not, they are listing on an exchange that is four or five times the size of their native country’s exchange. The amount of capital these companies gain access to can be significant. For example, Alibaba, a Chinese company, issued shares on the NYSE in 2014. The NYSE is more than five times larger than both the Shanghai Stock Exchange (SSE) and the Hong Kong Exchange (HKEX). The SSE and HKEX are the fourth and fifth largest exchanges in the world, respectively, each having market cap of $4-5 trillion. A comprehensive list of stock exchanges and their market caps can be found here.
Liquidity is also a very important reason that companies list in the US. The NYSE is not only the largest exchange by market cap but also by monthly trading volume with a trading volume of over $1,500 billion. The NASDAQ is also very large and has a trading volume of over $1,000 billion. To compare, the London Stock Exchange (LSE) and the SSE have trading volumes of about $240 billion and $900 billion, respectively. Therefore, companies can increase their liquidity if their shares are traded on US markets. An example of this is Royal Dutch Shell, commonly known as Shell. Shell is incorporated in the UK and trades on both the LSE ($39.4 billion) and the NYSE ($250 million). While most of Shell’s shares are traded in the LSE, the NYSE provides Shell more liquidity because of its higher trading volume.
Listing in the US creates a liquidity advantage in another way beyond trading volume. Companies that list in the US may lengthen the amount of time during which their stock can be traded each day. All major stock exchanges trade for a certain amount of time each day. The NYSE, for example, is open from 9:30 AM to 4:00 PM ET each day, while the SSE is open from 9:30 AM to 3:00 PM CST. Though some exchanges offer after-hours trading, most exchanges limit trading to a set number of primary hours. If a company is cross-listed on the SSE and the NYSE, because of the 12-hour time difference when trading stops at 3:00 PM in Shanghai you only need to wait 7.5 hours until your shares begin trading on the NYSE as opposed to waiting 18.5 hours for trading to begin again in Shanghai.
The NYSE and NASDAQ are viewed by many as the home for established, respected, and successful companies. Several of the world’s largest and most trusted companies trade on US exchanges. The success of these companies can provide a credibility boost to other companies on the same exchanges whether they deserve it or not. The increase in credibility and recognition can be especially true for companies coming from lesser-known exchanges or from smaller foreign countries that don’t typically produce internationally successful and trusted companies. Getting listed on a large US exchange can make a big difference for these companies.
Companies that list on a US exchange may also have more credibility because the listing standards of US exchanges are relatively high compared to other exchanges. Listing on a US exchange also exposes foreign companies to US courts. In other words, a foreign company that lists in the US can be sued by shareholders in US courts according to the US securities laws. Thus, typically only quality companies that meet a rigorous set of listing standards will list on a US exchange.
In the US, we may not see the process of listing on the NYSE or NASDAQ as easy, but some foreign exchanges have even more strict rules and regulations. China, for example, is known for having incredibly strict listing requirements and overbearing regulations once companies are public. This has led some of China’s largest companies to list in the US. Baidu has become one of the most successful companies to come out of China, but when it was ready to go public, it could not meet China’s requirements. In order to list on the Chinese Small and Medium Cap Market, a company’s profits must reach over about $5 million in the three years leading up to an IPO1. Baidu had only $300,000 of profit in the quarter prior to its IPO. In addition to the profit requirements in China, countless regulations around IPOs or even secondary offerings can cause the process to take longer than it does in the US.
Foreign Issuer Listing Requirements
In general, foreign issuers that list on the NYSE or NASDAQ follow the same rules and regulations as US companies, but there are certain exceptions for companies that qualify as foreign private issuers (the process of qualifying as a foreign private issuer will be discussed later in this article). Some of the more significant regulations are listed below.
The following regulations apply to US-based public companies but not foreign issuers:
- Report on a quarterly basis. Unlike domestic filers that have 10-K and 10-Q filings, international companies file their annual report as a 20-F, and interim notices (minimum frequency is set by home country requirements) are submitted, like any press release, on a Form 6-K.
- Have a majority independent board. The independence test is focused on the Audit Committee, and the Audit Committee can consist of one person for an international company.
- Have a compensation or nominating committee. The only committee required for an international company is the Audit Committee.
- Receive shareholder approval for equity compensation or other stock issuances.
Additionally, foreign issuers may choose to do the following:
- Use IFRS (in its original IASB version) instead of US GAAP. While not an option (yet) for US Companies, rule changes passed in 2007 enable international companies to use IFRS reporting language in their filings.
- Follow home country corporate governance practices. Numerous corporate governance requirements adhered to by US companies are not required for foreign private issuers. Among the most notable, US proxy rules do not apply to international companies. For the proxy process, international companies are only required to solicit proxies from their US holders. In doing so, they do not need to use a proxy statement compliant with US rules.
- List ADRs2 or Common Shares (same requirements). A foreign private issuer (whether it is a dual listing or a single listing) is not limited to using only ADRs.
The regulations surrounding foreign private issuers (“foreign issuers”) can be very advantageous even to the point where some US companies complain about foreign issuers having such loose standards (e.g., using IFRS rather than GAAP or not having to report quarterly). A company could save millions of dollars and thousands of hours if they qualify to be a foreign private issuer and are allowed to use local accounting standards or governance practices. While listing in a foreign country can be a difficult process, qualifying as a foreign private issuer can significantly lessen the burden.
Foreign Private Issuer
As discussed in this article, many foreign companies list on US exchanges. However, not all these companies are considered foreign private issuers. A foreign company must meet certain requirements to be considered a foreign private issuer and be eligible for the relaxed benefits that status brings. To qualify, a foreign company must pass either the shareholder test or the business contacts test.
To pass the shareholder test, US residents must hold 50% or less of a company’s voting securities.
“As an initial matter, a foreign company must determine whether more than 50% of its outstanding voting securities are held ‘of record’ by US residents. For purposes of this test, foreign companies must ‘look through’ the record ownership of brokers, dealers, banks, or nominees holding securities for the accounts of their customers, and also consider any beneficial ownership reports or other information available to the issuer3.”
If a company determines that 50% or less of its voting securities are held by US residents, then it qualifies as a foreign private issuer and does not need to consider the business contacts test. If more than 50% of a company’s voting securities are held by US residents, then the company must consider the business contacts test.
Business Contacts Test
A company does not meet the business contacts test if “(1) the majority of its executive officers or directors are US citizens or residents, (2) more than 50% of the issuer’s assets are located in the US, or (3) the issuer’s business is administered principally in the US4.” If one of these circumstances applies and more than 50% of the voting securities are held by US residents, then the company is not eligible to be a foreign private issuer.
Foreign Listing Trends
Foreign listings are becoming increasingly popular. As they become more popular, the impact of foreign listings on US and world markets expands. The following are significant trends and statistics demonstrating the impact of foreign listings on US markets:
- The largest IPO in history was the Alibaba group. The Chinese company listed on the NYSE in 2014 for $25 billion.
- The number of foreign listings has increased since 2012. During 2012 there were 12 cross-border5 IPOs, but since 2012 there have been over 20 cross-border IPOs each year. The highest number came in 2014 when there were 67 cross-border IPOs.
- During 2017 there were 41 cross-border IPOs, making up 24% of the total US IPOs.
- 25% of the total proceeds raised in the US during 2017 were cross-border IPOs.
- Five of the largest ten IPOs during the fourth quarter of 2017 were cross-border IPOs.
- The US was the top destination for foreign IPOs with 41 total in 2017 (22 on the NASDAQ and 19 on the NYSE).
- The country with the most IPOs outside of its home country was Mainland China with 25 outbound IPOs.
The NYSE and NASDAQ are not only for US companies. If you are a non-US company thinking about an IPO or a foreign listing, then you may want to consider listing in the US. Listing in the US can provide many benefits including access to capital and increased liquidity. Additionally, your company may be eligible for foreign private issuer status which will simplify the process of listing in the US.
- Stock Market Clock: List of Stock Exchanges
- The Money Project: All of the World’s Stock Exchanges by Size
- World Federation of Exchanges: Statistics
- Business Insiders: 4 Reasons Chinese Companies IPO in America
- SEC: Accessing the U.S. Capital Markets – A Brief Overview for Foreign Private Issuers
- Investopedia: ADR Basics – What is an ADR?
- EY: IPO insights – Comparing global stock exchanges
- Shell: Share Prices
- The China Stock Exchange – IPO Overview
- ADR: American Depository Receipts are stocks traded in the US that represent a certain number of shares of a non-US company
- SEC: Accessing the U.S. Capital Markets — A Brief Overview for Foreign Private Issuers
- SEC: Accessing the U.S. Capital Markets — A Brief Overview for Foreign Private Issuers
- IPOs by non-US companies on US exchange