This article was published in the June 12, 2014 issue of Westlaw Journal Securities Litigation & Regulation (Volume 20, Issue 3), published biweekly by Thomson Reuters.
Can a Foreign Issuer Participate and Present in Meetings with the Investment Community in the United States?
As long as a foreign issuer is careful that no activities will constitute an offer or a sale of its securities under U.S. securities laws, it may present to the U.S. investment community. An offer is defined very broadly, and includes every attempt to offer or sell, or solicitation of an offer to buy, securities of the issuer. Publicity that may be deemed to condition the market or arouse interest in the securities may also be considered an offer of the securities, especially if done with the issuer’s participation or cooperation.
Generally, foreign issuers with no tradeable securities in U.S. markets will not be deemed to be making an offer in the United States, absent targeted deliberate sales efforts. If the activities of the foreign issuer are deemed to constitute an offer or a sale of the issuer’s securities, the issuer may be in violation of U.S. securities laws that govern how offers and sales of securities may be made in the United States.
Accordingly, foreign issuers must exercise great caution in participating and speaking at industry meetings, investor conferences or trade shows, or in handing out written materials about the company. They must insure those activities and interactions do not constitute an offer to sell or the solicitation of an offer to buy the securities of the issuer.
What Guidelines Should the Foreign Issuer Follow?
The foreign issuer should insure these guidelines are followed in all presentations at industry meetings, investor conferences or trade shows:
- All discussions should be prefaced with a disclaimer that no offers or sales of the issuer’s securities are being made.
- All written materials, if any, distributed to meeting participants should include a prominent legend to the effect that no offers or sales are being made to the recipients of the materials, along with other U.S. securities law disclaimers.
- No references should be made orally, or in the materials, to any offering or sale of securities of the issuer, or to the trading activity of the issuer’s securities on a home country or overseas exchange.
- The substance of presentations (oral or written) should be limited to only factual information about the issuer, its business, its products and services, its financial developments, the industry in which it operates or other aspects of its business.
- The presentation should not cover future financial performance of the company, including projections as to financial performance or statements about future financial condition or results of operations.
- The activities should not be made concurrently with an offering of securities being done in the issuer’s home country, or shortly before an offering of securities that is planned to be launched by the issuer. This may make the activity seem designed to generate interest in an offering.
- If the issuer is publicly traded in its home country, all statements should be materially consistent with the issuer’s home public disclosures.
- The issuer should be mindful of any kind of selective disclosure or insider-trading issues that may arise in its home country in relation to the statements made or provided in writing in the United States, even if privately.
How Can a Foreign Company Raise Capital Under U.S. Securities Laws?
If a foreign issuer wants to raise capital in the United States, it must do it either in a registered public offering pursuant to a registration statement declared effective by the U.S. Securities and Exchange Commission, or on an exempt basis pursuant to an exemption from such registration requirements.
What Is a Registered Offering and What Does It Mean for the Issuer?
A registered offering of a security is made to the public pursuant to a registration statement and prospectus that is filed with, and subject to the review of, the SEC. The offer may not be made until the registration statement (including the prospectus) has been filed with the SEC, and sales may not be made until the registration statement has been declared effective by the SEC.
Raising capital through a registered offering will result in the issuer being subject to extensive disclosure requirements under the U.S. Securities Act of 1933, as amended. The issuer will also be subject to certain ongoing obligations to file annual and periodic reports in the United States.
These include certain financial statement information under International Financial Reporting Standards or U.S. Generally Accepted Accounting Principles — or reconciled to U.S. GAAP — under the U.S. Securities Exchange Act of 1934, as amended. In addition, the audit of the issuer’s financial statements will need to be made in accordance with U.S. Generally Accepted Auditing Standards.
The issuer will also become subject to the disclosure controls and procedures and internal control over financial reporting requirements of the Sarbanes-Oxley Act. If the securities being offered and sold are listed on a U.S. securities exchange (such as the New York Stock Exchange or Nasdaq), the foreign issuer will also become subject to certain additional governance and compliance obligations. Finally, the issuer will be subject to liability under the anti-fraud provisions of Rule 10b-5 of the Exchange Act, among other liability.
What Exempt Offerings Can Foreign Issuers Conduct to Raise Capital in the United States?
The most commonly used exemptions to raise capital in the United States in a non-registered offering include the following:
- Private placements under Section 4(a)(2) of the Securities Act to a small number of sophisticated investors.
- Offerings of limited amounts under Rule 504 (offerings not exceeding $1 million) or Rule 505 of Regulation D (offerings not exceeding $5 million); these exemptions are subject to additional conditions and are not often relied upon, due to the small exempt offering size and requirement to qualify such transactions in various states.
- Private sales of unlimited amounts of securities to an unlimited amount of “accredited investors” and not more than 35 non-“accredited investors” under Rule 506(b) of Regulation D.
- Public sales of unlimited amounts of securities to an unlimited amount of “accredited investors” only under Rule 506(c) of Regulation D.
- Resales of unlimited amounts to “qualified institutional buyers” under Rule 144A of the Securities Act.
What Are the Guidelines to Qualify for a Good Private Placement Under Section 4(A)(2) of the Securities Act?
Section 4(a)(2) exempts from registration offers and sales that do not constitute a “public offering.” In order to not constitute a public offering:
- The issuer must insure the offer and sale is made only to a small number of investors who are sophisticated and able to bear the economic risk of their investment (e.g., institutional investors, certain key officers and employees, and select wealthy individuals with a pre-existing relationship and knowledge of the issuer).
- The investor must be provided with, or have access to, information regarding the issuer, including information the investor specifically requests.
- The investor must represent that it is purchasing the securities with the intent to invest and not with a view to further resell or distribute the securities.
- There must be no general solicitation or general advertising, including through notices, publications, media or other broadcasts, or through seminars or meetings whose attendees have been invited by any general solicitation or general advertising (see below for other exemptions that permit general solicitation or advertising under certain circumstances).
In addition, issuers must exercise caution if they conduct multiple private placements under this Section 4(a)(2) exemption, because the sales may be deemed to be “integrated” with one another and to ultimately constitute a “public offering.” This would subject the issuer to the registration and other reporting and compliance requirements described above.
Securities issued to investors in a Section 4(a) (2) private placement are “restricted” in the hands of the investor and may not be freely resold by the investor. The issuer will affix a restrictive legend on the securities so that they may not be transferred or sold without SEC registration or an exemption from SEC registration. In order to resell the securities, the investor will need to comply with certain holding periods and other resale conditions.
What Is Necessary to Qualify for an Exempt Offering Under Rule 506(B) of Regulation D?
Regulation D is a non-exclusive safe harbor under the registration requirements of the Securities Act and permits large capital raises from U.S. investors so long as certain conditions are met. Because Regulation D is non-exclusive, issuers who fail to satisfy the conditions of the Regulation D exemption may look at other available registration exemptions as well (e.g., the Section 4(a)(2) private placement exemption described above).
Rule 506(b) under Regulation D exempts sales of an unlimited amount of securities to an unlimited amount of “accredited investors” and not more than 35 non-“accredited investors” as follows:
- Each purchaser who is not an “accredited investor” must have (either individually or through a “purchaser representative”) such knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the investment (or the issuer must reasonably believe this to be the case).
- No specific information needs to be provided to “accredited investors.” Regulation D proscribes, however, specific information requirements related to the issuer, its business, its securities and the offering to the non-“accredited investors.” For larger offerings (in excess of $7.5 million), the disclosure requirements are almost as extensive as those in a fully registered public offering (including financial statements); as a result, in practice, most Rule 506(b) offerings are limited to “accredited investors” only.
- As in the Section 4(a)(2) private placement, offerings under Rule 506(b) must not involve any general solicitation or general advertising (see below for the Rule 506(c) exemption that permits general solicitation or advertising under certain circumstances).
- The issuer must also confirm the investor is purchasing the securities with the intent to invest and not with a view to act as underwriters and further resell or distribute the securities.
What Is Necessary to Qualify for an Exempt Offering Under Rule 506(C) of Regulation D?
Rule 506(c) under Regulation D exempts offers and sales of any amount of securities so long as all purchasers of the securities in the offering are “accredited investors” as follows:
- Unlike in Rule 506(b), under the |Rule 506(c) exemption, the issuer must take reasonable steps to verify that the investors are indeed “accredited investors.” A simple representation by the investor as to its status is not sufficient.
Rule 506(c) details certain steps issuers may take to confirm the status of the investors, including review of tax returns, bank statements, consumer reports and other documentation. Such steps are not exclusive and not mandatory, so long as the issuer has taken other reasonable steps to confirm such status.
- No specific information needs to be provided to the investors under this exemption, because all are “accredited investors.”
- The issuer must confirm that the investor is purchasing the securities with the intent to invest and not with a view to act as an underwriter and further resell or distribute the securities.
- Unlike Section 4(a)(2) private placements or offerings, under Rule 506(b), there are no restrictions on general solicitation or general advertising for offerings under Rule 506(c).
Who Are the ‘Accredited Investors’ for Purposes of Regulation D?
Accredited investors include:
- Banks, savings and loan institutions, registered broker-dealers, insurance companies and registered investment companies.
- Corporations and other entities with more than $5 million in total assets.
- Directors and executive officers of the issuer.
- Individuals who (alone or jointly with their spouse) have a net worth exceeding $1 million (excluding the value of their principal residence).
- Individuals who have an annual income in excess of $200,000 in each of the prior two years (or $300,000 if jointly with their spouse) and have a reasonable expectation of reaching the same income level in the current year.
Are There Additional Considerations for Exemption Under Regulation D?
As with the Section 4(a)(2) private placement exemption, issuers must exercise caution if they conduct a series of securities offerings, because the sales may be deemed to be “integrated” with one another, ultimately constituting a “public offering.” Unlike Section 4(a)(2), however, under Rule 506, offers and sales will not be integrated if they are made more than six months before, or more than six months after completion of, the Rule 506 offering. That is, so long as during those six month periods, there are no offers or sales of securities of the issuer of a similar class as those offered and sold under Rule 506.
Offers and sales under Rule 506 are generally also exempt from U.S. state securities laws (blue sky laws).
As with the Section 4(a)(2) private placement exemption, securities issued to investors under Rule 506 are “restricted” in the hands of the investor and may not be freely resold by the investor. In order to resell the securities, the investor will need to comply with certain holding periods and other resale conditions.
For all Regulation D offerings, the issuer must file a notice of sale with the SEC no later than 15 calendar days after the first sale of securities in the offering. This notice contains certain limited information relating to the issuer and the securities for each new offering of securities.
Finally, the Rule 506 exemption is not available to any issuer— or affiliate, officer, director, promoter, 20 percent voting stockholder, underwriter or paid solicitor involved in the offering — that has, within the 10 years prior to the sale, been convicted of a crime in connection with securities transactions or subject to certain other injunctions, bars or disqualifications (referred to as the “bad actor” exclusion).
What Are the Guidelines to Follow to Qualify for an Exempt Offering to ‘Qualified Institutional Buyers’ Under Rule 144A?
Rule 144A under the Securities Act permits the resale of any amount of securities to “qualified institutional buyers.” Under Rule 144A, the securities to be sold may not be of the same class as securities of the issuer that are traded on a U.S. securities exchange. Securities traded in the over-the-counter markets are eligible, however.
Sales may only be made to qualified institutional buyers or to purchasers the issuer reasonably believes are qualified institutional buyers by an initial purchaser. This is usually a broker-dealer who purchased under a different SEC registration exemption. Qualified institutional buyers are generally institutions that own and invest on a discretionary basis at least $100 million in securities of entities not affiliated with the issuer.
The issuer will be obligated to provide certain prescribed information to the investors. The information includes two years of financial statements. Foreign issuers may instead provide home country information on their websites, pursuant to Rule 12g3-2(b) described below.
As with the Section 4(a)(2) private placement and Rule 506 exemptions, securities sold under Rule 144A are “restricted” in the hands of the investor and may not be freely resold by the investor. In order to resell the securities, the investor will need to comply with certain holding periods and other resale conditions, and the securities will bear a restrictive legend.
If the Offer and Sale Are Made on an Exempt Basis, Are There Liability Concerns for the Foreign Issuer Under U.S. Securities Laws?
Foreign issuers making offers and sales of securities pursuant to any of the exemptions above are subject to certain antifraud and other civil liability provisions under U.S. federal securities laws and, in some cases, state securities laws as well. In particular, Rule 10b-5 under the Exchange Act provides liability for misstatements or omissions in connection with the purchase or sale of securities in the United States.
Are There Other Avenues for Foreign Issuers to Trade Their Securities in the U.S. without Raising Capital?
Foreign issuers who are not looking to raise capital but seek to raise their profile among U.S. investors, diversify their shareholder base and increase liquidity for their shareholders may consider establishing a Level I ADR program. American depository receipts are receipts issued by a depository bank against the foreign issuer’s securities traded in the foreign issuer’s home market.
ADRs are considered U.S. securities, are denominated in U.S. dollars, pay dividends in U.S. dollars and trade and settle under U.S. rules in the U.S. markets. As a result, they are attractive investment opportunities for U.S. investors that are otherwise prohibited from investing in non-U.S. securities or are wary of subjecting their investments to foreign rules. Note that holders of ADRs may, at any time, convert their ADRs into the underlying foreign shares of the foreign issuer.
ADRs Can Be Issued Under Level I, II or III Programs.
In a Level I ADR program, the foreign issuer does not issue any additional shares or raise capital. ADRs are issued with respect to the existing shares of the issuers and traded in the United States on the U.S. over-the-counter markets (e.g., OTCQX). ADRs in a Level I program may not trade on a U.S. stock exchange (the NYSE or Nasdaq).
In a Level I ADR program, the issuer does not become subject to the registration, reporting, auditing, governance and control requirements described above. The issuer does, however, become subject to liability under the antifraud provisions of Rule 10b-5 of the Exchange Act.
In a Level II ADR program, the foreign issuer does not issue any additional shares or raise capital, but the ADRs become registered under the Exchange Act and listed on a U.S. stock exchange (the NYSE or Nasdaq). In a Level II ADR program, the issuer becomes subject to an Exchange Act registration and all the reporting, auditing, governance and control requirements described above for registered public offerings. The issuer also becomes subject to liability under the antifraud provisions of Rule 10b-5 of the Exchange Act.
The Level III ADR program is the equivalent of an initial public offering in the United States with capital raising, listing on a U.S. stock exchange and all registration, reporting, auditing, governance and control provisions of Rule 10b-5 of the Exchange Act.
Many foreign issuers use the Level I ADR program to “test” the U.S. markets and increase their visibility in the U.S. investment and broker-dealer community with a view to capital raising (privately pursuant to one of the exemptions or publicly in a Level III ADR program or other public offering) in the future.
What Are the Regulatory Requirements for a Level I ADR Program?
The main regulatory requirement of the Level I ADR program is the registration of the ADRs (not the underlying ordinary shares of the company) with the SEC on a Form F-6 under the Securities Act. The Form F-6, a short document prepared by the depositary and signed by both the depositary and the company, consists of limited information about the depositary, a description of the terms of the ADRs and the deposit agreement.
In addition, under Rule 12g3-2(b) of the Exchange Act, the foreign issuer must publish (in English) information that is (i) made public or, (ii) filed with the home stock exchange or distributed to the issuer’s shareholders. It may do this on its website or through an electronic information delivery system generally available to the public in its primary trading market.
This information must be information that is deemed material to investors, such as results of operations and financial condition; changes in business; material acquisitions and dispositions of assets; issuance, redemption and acquisition of securities; changes in management and control; granting of options or payment of other remuneration to directors and officers; and transactions with officers, directors and security holders. This information includes annual reports, including or accompanied by annual financial statements, interim reports including financial statements, press releases and all other communications distributed directly to security holders of each class of securities to which the exemption relates.
No other filing or compliance will be required with the SEC for the issuance and sale of the ADRs in the United States, so long as the foreign issuer:
- Continues to be a “foreign private issuer.”
- Does not list on a stock exchange or make a public offer of securities in the United States.
- Maintains a listing of its ordinary shares on a non-U.S. stock exchange that represents at least 55 percent of the trading of its shares.
- Complies with the information requirements described above.
A foreign issuer will cease to be deemed a “foreign private issuer” if more than 50 percent of its outstanding voting securities are directly or indirectly owned by U.S. residents and the majority of its executive officers or directors are U.S. citizens or U.S. residents (or more than 50 percent of its assets are located in the United States or its business is administered principally in the United States).
This host of information gives foreign issuers a lot to prepare for when dealing in the United States, but by following these guidelines, they can stay within the securities laws and achieve their goals in the foreign market.