WHAT Foreign Filers Need to KNOW.

• Author: Arnold, Jerry
• Position: American securities exchanges

From SEC scrutiny to investor expectations to a lawsuit-happy securities bar, all kinds of challenges and pitfalls face foreign companies seeking to list on U.S. exchanges.

The internationalization of securities markets is a reality. Numerous companies trade on exchanges and in markets as geographically diverse as the world itself. A major reflection of this phenomenon is the influx of foreign private issuers (FPIs) into U.S. capital markets. There are many reasons for this trend, including: increased access to capital at potentially lower cost, the ability to establish stock option plans for American employees, increased public awareness of the company and its products, and the ability to use their shares to make acquisitions in the U.S.

According to the Securities and Exchange Commission, the number of FPIs has increased from 434 in 1990 to approximately 1,200 today. These entities must comply with SEC requirements to reconcile their financial statements to a U.S. GAAP basis or to convert the presentation of their financial statements to U.S. principles. There is a noticeable trend for foreign entities to convert their primary financial statements to a U.S. GAAP basis, with examples including Siemens AG, Alliance AG and Honda Motors.

There are a number of significant reasons for a foreign entity to consider adopting U.S. GAAP. Currently, in order to raise capital in the U.S., the SEC generally requires compliance with Item 18 of Form 20-F. This item mandates that the company prepare a comprehensive reconciliation of its financial statements to U.S. GAAP recognition and measurements, and provide complete U.S. GAAP disclosures (e.g., derivatives and segment reporting).

Another factor motivating foreign entities to consider this conversion is the sense that the financial analyst and the investment communities are more comfortable with financial statements prepared in accordance with U.S. principles. Further, most observers would probably agree that U.S. GAAP is the most demanding and comprehensive in the world. FPIs perceive that direct and indirect benefits may accrue from utilization of a rigorous accounting model that more closely reflects the economic performance of a business. One should note, however, that some research suggests that analysts can effectively interpret non-U.S. GAAP-based financial statements.

U.S. Regulatory Environment

As a registrant in the U.S., a foreign company is subject to virtually every aspect of federal securities laws, regulations adopted and actions taken by the SEC. Recently, in several Staff Accounting Bulletins, the SEC has aggressively addressed the issues of materiality, restructuring charges and enterprise-wide goodwill, and revenue recognition. In addition, the staff has commented on such thorny issues as its expectations regarding implementation and disclosures involving derivative financial instruments under the Financial Accounting Standards Board's (FASB) Statement No. 133.

The "culture shock" to a foreign company seeking to comply with the U.S. regulatory structure can be enormous. The SEC has virtually absolute authority to question the...