The Commission’s analysis of recent developments in the FPI population

By Sanjay Shirodkar, Andrew Ledbetter, Gina Lee & Jenna Fontenot on June 24, 2025

Posted in Foreign private issuers, SEC reporting

As discussed in our prior blog posts, on June 4, 2025, the US Securities and Exchange Commission (Commission) published a concept release (Release) soliciting comments on whether to revise the definition of “foreign private issuer” (FPI) under Commission rules in light of considerable changes to the FPI population over the past two decades.

In this alert, we discuss the data and related statistics underlying the Commission’s rationale for reassessing the definition of FPI and potentially updating the current regulatory framework to better align with the realities of today’s global markets.

Comments solicited by the Release must be received by the Commission on or before September 8, 2025.

The data

The Commission conducted a broad review of reporting FPIs focusing primarily on the information disclosed in these issuers’ annual reports on Form 20-F from fiscal year 2003 through 2023 and related statistics. The key trends observed in the FPI population relate to issuers’ jurisdictions of incorporation and headquarters, trading volumes in US capital markets, and global market capitalizations:

Composition of home country jurisdictions. In 2003, the most prevalent 20-F FPI jurisdictions of incorporation and headquarters disclosed by FPIs filing Forms 20-F (20-F FPIs) were Canada and the United Kingdom, respectively. However, by 2023 the most common jurisdictions of incorporation headquarters disclosed by 20-F FPIs were Cayman Islands and China, respectively. The number of 20-F FPIs that chose a different jurisdiction of incorporation from their headquarters also increased from 7 percent in 2003 to 48 percent in 2023. In particular, the Commission highlighted that there was a strong tendency for China-based issuers to be incorporated in the Cayman Islands or the British Virgin Islands.

Increased reliance on US capital markets. For 55 percent of 20-F FPIs in 2023, more than 99 percent of their equity trading volume occurred in US capital markets, indicating that the US was their primary or sole trading venue. The Commission observed that the 20-F FPIs that traded almost exclusively in US capital markets tended to have a higher propensity of being incorporated in the Cayman Islands and headquartered in China.

Disproportionate impact from small-cap FPIs. Despite the increase in proportion of 20-F FPIs that exclusively trade in US capital markets, such FPIs only account for approximately 9.2 percent of the aggregate global market capitalization of all 20-F FPIs in 2023, demonstrating a disproportionate impact from issuers with relatively small market capitalizations. A significant proportion of such small market capitalization FPIs were China-based issuers incorporated in the Cayman Islands or the British Virgin Islands.

1. Distribution of jurisdictions of incorporation and headquarters

The significant change in the composition of home country jurisdictions between 2003 and 2023 implicates regulatory oversight and raises questions on whether regulations of such jurisdictions are sufficient to protect US investors.

In 2023, the Cayman Islands was the most common jurisdiction of incorporation, comprising more than 30 percent of 20-F FPI jurisdictions of incorporation and China was the most common jurisdiction for headquarters, comprising more than 20 percent of 20-F FPI headquarters in 2023. While the total number of 20-F FPIs in 2003 was similar to 2023, the number of 20-F FPIs incorporated in the Cayman Islands increased from 13 issuers to 322 issuers (approximately 2,300 percent) and the number of 20-F FPIs headquartered in China increased from 20 issuers to 219 issuers (approximately 1,000 percent). In comparison, the number of 20-F FPIs incorporated in Canada decreased from 224 issuers to 75 issuers (approximately 66 percent) and 20-F FPIs incorporated in the United Kingdom decreased from 106 issuers to 44 issuers (approximately 58 percent).

The change in jurisdictional composition is also apparent in the number of 20-F FPIs that had a different jurisdiction of incorporation from their headquarters, which increased from 7 percent in 2003 to 48 percent in 2023. This divergence is largely attributable to the increase in China-based issuers, which the Commission defines as being incorporated or headquartered in either mainland China, Hong Kong (SAR), or Macau (SAR), from 5 percent of 20-F FPIs in 2003 to 28 percent of 20-F FPIs in 2023. Most notably, 97 percent of China-based issuers in 2023 were incorporated in one of two jurisdictions – the Cayman Islands (82 percent) or the British Virgin Islands (15 percent). As discussed further below, China-based issuers that are incorporated in the Cayman Islands or the British Virgin Islands have had a disproportionate impact in driving the key trends observed in the FPI population, including their almost exclusive reliance on US capital markets as their primary or sole trading venue.

The significant increase of 20-F FPIs that are incorporated in the Cayman Islands and headquartered in China demonstrates one of the key issues the Commission is wrestling with: neither the Cayman Islands nor China requires these FPIs to have robust regulatory and oversight frameworks comparable to those applicable to US issuers. As Commissioner Hester M. Peirce highlighted, underlying the Commission’s inquiry was the broader fundamental question of whether the characteristics of the current FPI population contravenes the policy rationales and objectives that have made the FPI regulatory regime into what it is today. Such observations have led the Commission to consider (i) requiring that FPIs be incorporated or headquartered in jurisdictions that the Commission determines to have robust regulatory and oversight frameworks sufficient to protect US investors or (ii) establishing mutual recognition systems or international cooperation arrangements with select foreign jurisdictions or foreign securities authorities.

2. Increased reliance on US equity trading markets

The Commission also reviewed the global and US trading volume of 20-F FPIs from 2014 through 2023, which demonstrated increasing reliance of FPIs on US capital markets for trading of their equity securities. In its analysis, the Commission used a metric entitled “U.S. Percentage of Global Trading,” which was the ratio between (i) aggregated global daily trading volume and (ii) aggregated US dollar trading volume in US capital markets for a 20-F FPI, each observed for a 12-month period at the time of its fiscal year-end. Higher U.S. Percentage of Global Trading indicated a stronger reliance on US capital markets and increased likelihood that the US would be such FPI’s primary or sole trading venue.

In 2023, 55 percent of 20-F FPIs had a U.S. Percentage of Global Trading of more than 99 percent (US Exclusive FPIs), which had increased from 44 percent in 2014. For FPIs with a U.S. Percentage of Global Trading of less than 99 percent (Non-US Exclusive FPIs), similar trends of increasing reliance on US capital markets were also observed in the 90-percent and 50-percent thresholds.

As questioned by Commissioner Caroline Crenshaw, the miniscule trading volumes of FPIs in foreign markets are not likely to result in any meaningful regulatory oversight from home country jurisdictions. The issue is compounded by certain home country regulatory frameworks which rely on the FPI regime in the US to be the primary regulations governing their issuers. The concern for regulatory arbitrage becomes heightened when home country jurisdictions are significantly relying on the US FPI regime to provide regulatory oversight while the US FPI regime is providing exemptions premised on adequate oversight under home country rules. Such observations have led the Commission to consider (i) requiring a major foreign exchange listing for FPIs, which would be a significant impediment for FPIs with low foreign trading volume to maintain FPI status, and (ii) imposing a foreign trading volume requirement, in which a one-percent threshold would result in more than half of all 20-F FPIs in 2023 to lose FPI status.

3. Disproportionate impact from small market capitalization issuers

A more granular review of US Exclusive FPIs in 2023 demonstrates how it interacts with the trends observed of shifting home country jurisdictions and market capitalization of such issuers. US Exclusive FPIs had (i) a higher propensity of being incorporated in the Cayman Islands and headquartered in China and (ii) a smaller aggregate global market capitalization on average than that of Non-US Exclusive FPIs. The most common jurisdiction of incorporation and headquarters for US Exclusive FPIs in 2023 was Cayman Islands (51 percent) and China (34.1 percent), respectively. Non-US Exclusive FPIs demonstrated much less concentration for both jurisdiction of incorporation and headquarters. Although US Exclusive FPIs comprised 55 percent of 20-F FPIs in 2023, they only accounted for approximately 9.2 percent of the aggregate global market capitalization of 20-F FPIs in the same period.

The analysis demonstrates that FPIs with small market capitalizations have had a disproportionate impact on driving the trends observed in the FPI population, resulting in the change in distribution of jurisdictions and increased reliance on US capital markets. When reviewing the three trends together, the data analyzed in the Release indicates that an increasing number of FPIs with small market capitalizations, often those that are more resource constrained, are preferentially selecting jurisdictions where there is a lower cost of compliance with regulatory oversight while trading exclusively in US capital markets in order to seek access to US investors and attractive capital. Meanwhile, otherwise similarly situated domestic US issuers are subject to more extensive and expensive regulatory requirements, which in some cases may prohibit them from accessing the US capital markets.

Conclusion

The Commission’s analysis of the data driving their proposed changes to the current FPI definition and regulatory framework demonstrates an effort to better align with the realities of today’s global markets. The gap in regulatory oversight may have allowed certain issuers to take advantage of the exemptions afforded to FPIs and engage in regulatory arbitrage to a certain extent. As noted by Chair Paul S. Atkins and Commissioner Mark T. Uyeda, there is a need to reassess our FPI regime by balancing the promotion of capital formation by foreign companies in US markets while ensuring that foreign competitors are not provided an unfair advantage by exploiting “regulatory vacuums” stemming from outdated regulations.

For more information, please contact the authors.

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