International Securities Part I: Theories of Securities Regulation I. Domestic Markets: Justifications for Governmental Regulation A. General Theories 1.

In theory, securities regulation is optimal where at any given moment a proper balance is struck between the private interest, which stresses freedom and efficiency, and the public interest, which allows for limitations and proscriptions. 2. One of the major objectives of most forms of securities regulation is investor protection. This principle informs the idea of mandatory disclosure which underlies much of securities law in many countries of the world. 3. Risks: the probability that the actual return on an investment will differ from its expected return. The general character of investment securities makes some of them inherently riskier than others. 4. Private controls work most effectively in primary and secondary securities markets where the investors are very sophisticated and the transactions are privately negotiated. In these situations, most—but not all—risks can be evaluated prior to investment. B. Regulatory Goals and the Means to Achieving Them 1. Theoretically, both public and private interests can be served where regulation is designed to achieve, simultaneously, three important goals: a. Market efficiency: securities markets are efficient where market forces and competition are the predominant limitations. All resources are used to their potential. b. Investor protection: this is all about defining unfair advantages in investment decision making. c. Reduction of systemic risk: reduce the financial failure of market intermediaries, and, where such failure occurs, to reduce the impact of that failure on the market and its participants. 2. Free market folks argue that in an efficient market, market forces and competition—not governmental regulation—must remain the predominant limitations. This is a challenge. 3. At a minimum, a highly sophisticated scheme for protecting investors should address all of the critical aspects of investment, including the following: a. Material information: of course, implicit in this is the need for uniform and rigorous standards for determining what information in “material” and when it should be disclosed. b. Intermediaries: controls over the business activities of the major market intermediaries, such as stock exchanges, broker-dealers, transfer agents, and clearance and settlement firms, can be justified because of their importance in the capital markets. c. Availability of credit: for folks that borrow on margin.

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d. Sanctions and remedies: as markets grow, the need for deterrence against fraud and the like increases. C. Policies Underlying Regulatory Practices 1. Three main reasons forwarded for the public interest in securities markets: national property resource; availability of capital (safety, soundness and efficiency of trading markets has a direct bearing on the flow of new capital into private enterprises); general economic health. 2. Policies Underlying US Federal Regulation: two basic concepts predominate —mandatory disclosure, and broad definitions of fraud. a. These define the two predominant roles of securities law: 1) The bargaining role: it is in substance informational. Although bargaining disadvantages are not redressed structurally, the system is designed to fill the needs of investors for information in order to make intelligent investment choices. a) Originally based predominately on the “protective model” that saw investors as unsophisticated persons who were likely to make irrational decisions, who needed protection from their ignorance. Related to disclosure predominately about issuers. b) Now the “informational model” serves ordinary investors and institutional investors by defining what information is “material.” 2) The inhibiting role—deterrence, et al. D. Arguments For and Against the Modification of US Securities Laws in the Face of Increased Cross Border Activities by Foreign Parties in US Capital Markets 1. Pro free trade: a. It offers investors more choice at a lower cost—as opposed to investing in foreign issuers abroad. b. It supplies more competition in the primary market, increasing investor returns, i.e., more issuers seeking capital. c. It deepens secondary markets, adding liquidity. d. It eliminates retaliation by regulators in other countries. Unless access is allowed, other countries will deny access to US issuers, intermediaries, and investors. 2. Protectionism: a. By reducing regulatory costs for foreign persons, US policy makers create an inequity for domestic persons—higher costs—the effect of which may be to drive more US capital market participants abroad. b. If modification means less information for domestic investors concerning foreign issuers, domestic investors not only face greater risks with foreign investments but they may also have problems comparing domestic with foreign investments. E. Movement Toward Effective Int’l Regulation

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1. Most ambitious effort at creating a single regulatory body for the world capital markets is found in the work of the International Organization of Securities Commissions (IOSCO) founded in 1983. See pg. 4-19 for their goals. Part II: Impact of Securities Act of 1933 and Investment Company Act of 1940 on the Offer and Sale of Securities I. Primary and Secondary Offerings: Securities of Domestic Issuers in Domestic Transactions A. Overview 1. The SEC states that “only through the steady flow of timely, comprehensive and accurate information can people make sound investment decisions.” 2. Congress’ main objectives were to deal with disclosure in primary and secondary markets. 3. The benefits of mandatory disclosure effect: a. Intended offerees and purchasers, b. Investors and intermediaries in primary and secondary markets—could impact their decisions. c. Gov’t agencies and private regulators. 4. 1933 Act background info: only concerned with offerings of securities. a. Its purpose: 1) Provide investors with material info concerning new issues or securities offered for sale to the public, 2) To prohibit fraudulent sales of securities, and make sure that disclosure works. b. Investor protection measures: §5 protects purchasers of securities by providing them full and fair disclosure of the character of securities to be sold; and contemplates that a copy of the prospectus be given to each investor prior to sale, or at time of delivery of security after sale. 1) Registration and prospectus delivery requirements, 2) Prevention of registration violations, 3) Prevention of fraud by three anti-fraud provisions: a) §8(A) provides for cease and desist proceedings for fraud to be brought by the government. §20 also provides that the SEC can bring civil actions for injunctions and money penalties. a) §17 prohibits fraudulent interstate transactions. Provides basis for criminal sanctions by USDJ, and enforcement by SEC in administrative proceedings or in court. b) §11 gives private remedy to persons who buy in a registered offering where misrepresentations or omissions of material fact are in the registration statement when it became effective. c) §12(a)(2) protects defrauded buyers in either registered or unregistered public offerings of securities. P can recover

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as well as many specialized investment interests. The perimeters have been left to the courts to determine. b. B. Primary offerings by domestic operating companies 1. SEC v. a security or interest in a security. Engages in rulemaking to maintain fair and orderly markets and to protect investors by altering regulations or creating new ones. for value. couldn’t have known. stock.” a. broker-dealers. The SEC: a. Howey (S.” 2) The terms “offer” and “sale”--§2(a)(3) provides a very broad definition that includes “every contract of sale or disposition of a security or interest in a security. Established by the Securities and Exchange Act of 1934. A defense is “I didn’t know. Note that a communication that qualifies as an “offer” under §2(a)(3) might only constitute a part of the preliminary negotiations leading up to an “offer” under the common law K principles. a. and with reasonable care.damages against any person who fraudulently sells a security. for value. Ct 1946)—held that a security is a particular kind of investment contract—“a contract. transaction. bond. C. and public utility holding companies. d. mutual funds. Note that judicial interpretations of procedural requirements that conduct or communication involve the mails or interstate commerce have been very liberal. or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. Among its many services is its role in interpreting and explaining the mandatory disclosure system. Oversees other essential participants in the primary and secondary markets. 3) “Interstate commerce”--§2(a)(7) provides that interstate commerce includes “trade or commerce in securities or any transportation or communications relating thereto” among the states or between any state and any foreign country. Registration requirements: basis distinctions a.” It also provides that the term “offer” shall include “every attempt or offer to dispose of. Public offerings and non-public offerings: 4 . Definitions 1) “Security”--§2(a)(1) defines securities as and note.” 5. A defense is “I had no knowledge or reasonable grounds to believe in existence of facts that make me liable. investment advisors. a. including stock exchanges.” d) §15 allows secondary liability to attach to a controlling shareholder of a corporation that is liable for fraudulent selling of securities. c. or solicitation of an offer to buy.

direct or indirect.” 4) SEC presumption for identifying an affiliate: any person who is a director or officer of the issuer or a person who owns 10% or more of the issuer’s voting securities. a) Therefore the selling shareholder is unable to claim an exemption under §4(1). 2) “Restricted securities” include any securities acquired directly or indirectly from the issuer or an affiliate of that issuer in a transaction not involving a public offering. of the power to direct or cause the direction of the management and policies of a person. 3) Special obligations are imposed on shareholders who are controlling persons. and the full scale process applies only where offers and sales of securities do not qualify for an exemption. unrestricted securities: 1) Securities that are not freely tradeable by the owner are restricted securities—i. 2) A “distribution” is contemplated as covering both primary and secondary distributions. or otherwise. any person directly or indirectly controlling or controlled by the issuer. and has violated §5. 1) The application of the transaction exemption for ordinary trading—not distributions. Restricted securities v.e. a) Rule 405 defines “control” as “the possession. delivery of freely tradeable securities). whether through the ownership of voting securities. 3) SEC requires the owner of such securities to hold them for an appropriate period of time (see Rule 144. 4) Generally. c. Affiliates (owners of control shares) and non-affiliates (owners of non-control shares). the distribution” of any security. no transaction exemptions are available where the offering is made generally to the public and where it possesses the characteristics of traditional registered public offering (i. 5 ..e. b. infra). “Issuer” includes. c) §2(a)(11) provides that an “underwriter” means any person who has purchased securities “from an issuer with a view to . b) Note that non-affiliates who resell unrestricted securities are not at risk of becoming an underwriter with respect to those securities. 3) Registration and prospectus delivery requirements apply to all offers and sales.. general advertising.” 2) The primary focus of §5 is the regulation of public offerings of securities. by contract. otherwise such a person will be considered an “underwriter” under §2(a)(11). in addition to the issuer. . .1) Public offerings is used synonymously with the term “distribution. issuer may impose resale limitations.

and some limited offers (limited to preliminary prospectus included in registration statement filed with SEC). Pre-filing period: 1) §5(c) prohibits any person from making an offer to sell securities prior to the time that the issuer files a registrations statement with the SEC. c. a. but §5(b) permits oral offers. Waiting period: 1) §5(a) prohibits sales during the period after filing a registrations statement and effective date of registration statement. 2) Policy: to prevent conditioning the market in a way that would encourage investors to form premature opinions of value without the benefit of the full set of facts contained in the prospectus. Disclosure requirements: 1) §7 is entitled “Information Required in the Registration Statement. However. 1..D. and be accompanied by such other documents. b. §5 requires the issuers. to Schedule A (which specifies 32 items). a secondary public offering) or simply a trading transaction. Compliance with registration forms: all issuers which offer and sell securities to the public are subject to the registration and prospectus requirements of §5. a) Other information: §7(a) states that any registration statement filed under the 1933 Act “shall contain such other information.e. Registration and Prospectus Delivery Requirements: Registered Primary Distributions and Section 5 Note: Resales are a different matter altogether.” and it refers. Post-effective period: 1) Sales may take place. 2) Post-effective developments that make the prospectus inaccurate with respect to material facts must be reflected in changes to the prospectus. an issuer is encouraged to avoid using forecasts or projections and publishing opinions concerning values. 2) Policy: to encourage the issuer and intermediaries to solicit indications of interest by means of preliminary prospectus. as the SEC may by rules or regulations require 6 . 2. underwriters and dealers to deliver a copy of the final prospectus to each purchaser in connection with the sale of the registered securities. The registration process: a. in part. but also encouraging issuers to continue to disclose factual information to shareholders. Whether purchasers of securities in a registered public offering may resell without filing a registration statement will depend on the status of the seller and whether the proposed resales will involve a distribution (i. 3) In order to minimize the risk that its pre-filing activity is actually improper selling.

1) SEC v. 3) Regulation C.” 4) As a result of §§7 and 10. if any. Statutory relief for the issuer--§4(2): not involving public offerings.” and also contains specific disclosure requirements. the SEC has adopted forms to be used—including the Form S-1. infra. §4(2) of the 1933 Act provides that the registration and prospectus delivery requirements of §5 shall not apply to “transactions by an issuer not involving any public offering. an operating company using Form S-1 would provide the following info: a) Description of the company’s properties and business. 1953)—held that §4(2) ought to be read in light of the purpose of the statute. what this actually meant was up in the air.as necessary or appropriate in the public interest or for the protection of investors. d) Statement about intended use of proceeds from sale of offered securities. require an issuer to take reasonable steps to ensure that purchasers of its privately placed securities do not become underwriters with respect to those securities. b) Rule 408 provides that “there shall be added such further material information. not misleading. which is a collection of rules (Rules 400 through 498) was adopted to govern every registration statement of securities under the act. e) Financial statements certified by independent accountants. find that the issuer’s offering was public.” But for about 30 years after this case. Ralston Purina (S. b) Description of security to be offered.” 2) §10 of the Act is entitled “Information Required for the Prospectus. a) Pursuant to Rule 401. in the light of the circumstances under which they are made. Transaction Exemptions 1. A court faced with a §12 claim against the issuer by other purchasers in the offering might conclude that the entire transaction included the offers and sales by the purchaser who resold too quickly and. as may be necessary to make the required statements. which must be used for the registration of securities of all registrants unless another form is authorized or prescribed. as applying to offerings made to those who can “fend for themselves. E.” Note: §4(2) and Rule 506. Ct. and a requirement that information in the prospectus be up to date. 7 . therefore. c) Information about company management. a.

d). directors and executive officers of a corporate issuer.” It is available for trading. It is a non-exclusive safe harbor interpretation of §4(2). such securities are “restricted securities” within the meaning of Rule 144(a)(3). a) It allows any issuer to sell an unlimited amount of its securities to an unlimited number of “accredited investors” and to 35 non-accredited investors. 2. natural persons who have a net worth of $1 million. which is designed to assist companies in raising capital in limited offerings. f)As a result.000. b) General advertising by issuer or affiliates is prohibited. It provides a list of conditions that must be met in order to benefit from its safe harbor. or dealer. Resales by owners of Securities of domestic operating companies--§4(1): the trading exemption a. Issuer must file with the SEC a notice of sales on Form D. Note: The potential problem areas regarding secondary sales are (1) any person who resells restricted securities in the public trading 8 . and natural persons who have individual income in excess of $200.2) Rule 506 was adopted in 1982. §4(1) of the 1933 Act provides that the provisions of §5 shall not apply to “transactions by any person other than an issuer. (1) Issuer must get letter from purchaser saying that they are buying for investment and not with a view towards distribution. and a part of Regulation D. (3) Issuer must give instructions to transferee that they are not to be transferred w/o opinion of consul. c) Specified info must be available to non-accredited investors prior to sale. (2) Issuer must clearly indicate on certificate that it is not freely transferable w/o opinion of consul that resale is not premature. underwriter. (1) Rule 501(a) provides that an “accredited investor” includes certain institutions. and does not exempt sales that would constitute a distribution. Note: It is non-exclusive in that an issuer’s failure to satisfy all of the terms and conditions of Rule 506 does not foreclose an opportunity to take an exemption provided by §4(2) if available. It is concerned with purchasers only. e)Issuer must take reasonable care to make sure that purchasers of Rule 506 securities are not underwriters.

It sets forth objective criteria for determining the holding period before resale. b) Scenario #2: affiliate sells restricted or unrestricted securities. §4(1) applies. (1) Rule 144 will provide an objective test. 1) Rule 144 a) Provides benefits to at least 3 groups of persons: (1) Benefits both affiliates and non-affiliates who wish to resell restricted securities. and (2) that an affiliate’s resale will constitute a distribution of unregistered securities. (2) Benefits affiliates who plan to resell their control shares (whether restricted or not) by giving volume limitations to protect against possibility of “distribution. §144(e). No problem.” §144(e). The issue is whether they are being sold too quickly. and thus the seller becomes an underwriter “with a view toward distribution. c) Scenario #3: restricted securities sold by affiliate of non-affiliate. The issue is how much can he/she sell before considered making a distribution? (1) Is this a distribution? (2) How long must the affiliate hold the securities? (3) Rule 144 will answer these questions. 1) Threshold questions: the issue—can the seller claim an exemption under §4(1)? a) What is the status at the time of the proposed resale of the person reselling the securities? (1) Is the person an affiliate? (2) A non-affiliate? b) What is the status of the securities to be resold? (1) Unrestricted? (2) Restricted? 2) Three case scenarios that illustrate the relevant issues: a) Easiest case scenario: non-affiliate sells un-restricted securities into the secondary market.” Seller may violate §5. and thus not eligible for a §4(1) exemption.market runs the risk of becoming an underwriter. Note: SEC essentially provides that any person who meets all of the terms and conditions in Rule 144 or Rule 144A is entitled to claim the protection of §4(1). b. 9 . and the amounts that can be resold. Rules 144 and 144A: safe-harbor interpretations of 4(1).

(a) This essentially exempts such persons from the requirements of paragraphs (c). an amount equal to the greater of (a) 1% of the outstanding securities of that class.(3) Not available to issuers. 10 .(e).000. b) Rule 144 terms and conditions: (1) “Restricted Securities” under Rule 144(a) includes any securities acquired from an issuer or affiliate thereof in a transaction not involving a public offering. and regardless of such sales being through brokers’ transactions. (2) Current public info under Rule 144(c): adequate public info about issuer must be available before the Rule can be used for resales. (f) and (h) of Rule 144. or (b) the average weekly trading volume on organized markets during the four calendar weeks preceding the proposed resale. (3) One year holding period for restricted securities under Rule 144(d): one year holding period commences when the recipient purchases securities. (6) Filing of Form 144 in certain circumstance under Rule 144(h): filing Form 144 is required where the number of securities to be sold exceeds 500 and the aggregate selling price will be greater than $10. (a) Policy: to prevent disruptions in trading markets. No Form 144 need be files either. during any three month period. (7) Non-affiliate 2-year rule under Rule 144(k): any non-affiliate who has been a non-affiliate for at least three months and who has owned restricted securities for at least two years can sell an unlimited amount of securities. (4) Sales of restricted securities under Rule 144(e): person can sell. (5) Necessity of “brokers” transactions under Rule 144(f): a person relying on Rule 144 must resell in brokers’ transactions—which include those in which a broker does no more than execute a sell order as agent and receives no more than the usual customary commission. regardless of the availability of current information available about issuer. but helpful for holders to use in connection with potentially troublesome secondary sales.

or foreign government. (2) Eligible securities: the rule is not available for securities that. It also covers most corporate and partnership purchasers. seller must take reasonable steps to ensure that buyer is aware that seller may 11 . when issued. (4) Other requirements: Rule 144A does not impose resale restrictions even though securities acquired in such a transaction are “restricted securities. (a) This relegates the Rules application to non-convertible debt and preferred stock.” However. (a) But if securities are issued by a company not subject to reporting requirements. (b) To prevent side-by-side public and private markets of the same class of securities of issuer. and have a net worth of at least $25 million. (a) Broker-dealer registered under the Exchange-Act is deemed a QIB if it owns and invests at least $10 million of unaffiliated securities. then seller must be able to obtain info concerning the business of the issuer and financial statements if buyer requests. (b) Banks and S&Ls must satisfy the $100 million requirement. were of the same class as or fungible with securities listed on a national securities exchange or quoted on Nasdaq. (b) Information required is the same as that required in Rule 15c2-11(a)(5).2) Rule 144A a) Rule 144A provides a non-exclusive safe harbor from the registration requirements of the Act for resales or restricted securities and control shares to any “qualified institutional buyer” as that term is defined. or exempt under 12g3-2(b). a holder wishing to resell under Rule 144A has no duty to provide information on issuer. (3) Information requirements: if issuer is a reporting company. (1) Eligible purchasers: “Qualified institutional buyer” is an entity which owns and invests on a discretionary basis at least $100 million of securities not affiliated with it (it is assumed that these entities can “fend for themselves”).

which are traded as any other corporate stock might be traded —i. A diversified fund has a more varied choice of investments. b. 12 . 2. may pay a premium or a discount.e. Investment Company Act of 1940--Introduction a. b. where there has been a failure to register with the SEC. Determination of price: the price of an investment fund’s shares is based on the net asset value per share. the registration requirements of the 1933 Act apply. b. See 5-35 for example. 1) §30 of 1940 Act subjects all investment companies to periodic reporting. the fund may not have more than 10% of the outstanding voting securities of any one company. Assuming that a domestic fund has registered under the 1940 Act and wishes to make a public offering. like the 1933 and 1934 Act. 3. 1) Often the only secondary market for owners of such shares is is the fund itself. Closed-end funds have a fixed number of shares issued and outstanding. Primary Offerings by Domestic Investment Companies: The Investment Company Act of 1940 A. in investment company is diversified if meets each of the following conditions with respect to 75% of the value of the fund’s total assets: 1) Of the securities so included.” 5. Registered investment funds must file such information and reports as are required by other federal securities laws. unless exempted. Open-end and closed-end funds: a. depending on the popularity of the fund.rely on the rule as an exemption from registration and prospectus delivery requirements of the Act. They are redeemable at the option of the holders. c. US Regulations of Offerings by Domestic Investment Companies a. A non-diversified fund is organized to invest only in voting securities of one company. Introduction to Investment Funds 1. §7 of the 1940 Act prohibits an investment company from any form of interstate commerce. 4. Investors in a closed-end fund. It is the value of all investment owned by the fund divided by its number of shares. Diversified and non-diversified: a. 3) If a fund is not diversified it qualifies as “non-diversified.. and 2) Not more than 5% of the fund’s assets may be in the securities of any one company. who do not buy directly from the issuer. a. Open-end funds are the most common—issues unlimited numbers of shares to the public directly. Diversified fund: under §5(b)(1) of the 1940 Act. II. on the NYSE.

b. 2) Open-end funds. the SEC may determine that the funds should be integrated and treated as a single issuer. an open-ed fund’s prospectus must be revised and updated annually to reflect changes in the business. Note: a fund relying on §3(1) must be careful if it is affiliated with any other §3(1) funds. are continuously offering their shares for sale to the public. and 2) Which is not making and does not presently propose to make a public offering of those securities. Primary and Secondary Offerings: Securities of Foreign Issuers in Domestic Transactions 13 . by contrast. 2) A family owned company with at least $5 million in investments. b. 4) Any person who invests at least $25 million from his and other qualified purchasers’ accounts. Resales by Owners of Securities of Domestic Investment Companies a. Resales of securities issued by a closed-end fund are regulated in the same way as securities of operating companies. Where such funds are so related. III. These shareholders can cause issuer to redeem their shares at any time. §3(c)(1)of the1940 Act provides that the following person is not an investment company within the meaning of the Act: an issuer whose securities are 1) Beneficially owned by not more than 100 persons. No secondary market exists for holders. As a result. 3) A sophisticated trust. 1) Holders of these shares are not subject to the registration requirements of §5 of the 1933 Act. §3(c)(7) of the 1940 Act excludes from the definition of an investment company any private investment company that consists solely of highly sophisticated qualified purchasers. Private offerings: 2 exemptions for hedge funds a. a) Each time a closed-end fund makes a new public offering.1) Closed-end funds in need of more capital to invest are similar to operating businesses that go to the primary markets on a periodic basis—and must comply with registration and prospectus delivery requirements of 1933 Act. nor is it necessary. 6. 1) Any natural person owning $5 million in investments. An open-end fund is both the issuer and purchaser of its shares. it files a new registration statement for the shares it plans to sell. 7.

2. b. ADRs can be publicly offered or privately placed. 5. Practical problems for domestic investors 1. b. Capital markets have developed a convenient method for domestic investors to purchase and sell securities of foreign issuers on their own. Dividends and interest paid out in foreign currency. to make direct investments. ADRs is the answer.. Privately placed securities are sold to Qualified Institutional Buyers (QIBs). Difficulty in transferring title at death under foreign law. i. 8. 9. Difficulty acquiring information about the foreign issuer and about related topics that would permit comparisons with other foreign investments. 7. 4. clearing and settling a transaction under foreign standards and in foreign currency. 4. Depositary receipts defined: a. Sponsored depositary v. The custodian. 3. c. Difficulty to find a broker to execute the transaction. a. B. Trading. b. affiliate or correspondent of the depositary bank. Foreign investment restrictions which control the amount of foreign money that can be invested in local companies. American Depository receipts (ADRs) 1. Un-sponsored facilities are rare. which are institutions that own or invest at least $100 million in securities and registered broker dealers that own or invest on a discretionary basis $10 million in securities of non-affiliates. might be an overseas branch. d.e. A depository is a bank that provides all stock transfer and agency services in connection with a DR program. Depositary Trust Companies hold physical evidence of securities. 14 . 2. 3. and is responsible for holding the shares underlying the ADRs. settle transactions between clearing companies. un-sponsored depositary facilities: a. Theory behind ADRs: a. Possible need for foreign global custodian of the foreign securities and the difficulty in locating and costs in using it. The bank is usually in the US. in connection with ADRs. the depositary is the “legal entity” for registration purposes—must file a Form F-6 with the SEC. Stock quotations in foreign country. etc. 2) In the case of ADRs. Each DR denotes depositary shares which represent a specific number of the underlying shares remaining on deposit in the issuer’s home market. maintain book entry ownership of securities.A. Based on the notion of “beneficial ownership” where legal owner hold an asset in a fiduciary capacity for 3rd parties (the beneficial owners). Sponsored depositary facilities are the norm—where the facility is established jointly by the foreign issuer and the depositary. Possibility of foreign tax withholding. A negotiable certificate evidencing ownership of shares in a foreign corporation from a country outside the market where the DRs are traded. 1) For example. 6.

(3) §5 of 1933 Act requires the depositary to deliver the F-6 prospectus to purchasers of depositary receipts.1) The issuer of the deposited securities enters into a deposit agreement with the depositary and signs the Form F-6 registration statement that the SEC requires to be filed under the 1933 Act. This also happens with Level 3 offerings. (2) Foreign issuer must co-sign with the depositary. c) Level 3: Are used by foreign issuers in connection with efforts to raise capital. on Nasdaq or on the OTC Bulletin Board. Relate to securities which a foreign issuer has already sold and which are in the hands of investors. b) SEC also requires a registration statement to be filed by the depositary as part of the creation of any depositary receipt program. b) Level 2: Involve sponsored facilities for outstanding securities of a foreign issuer which trade or will trade on a national stock exchange. (1) This registration statement is on Form F-6. d) To enable employees to invest easily in the parent company. 2) The benefits to a foreign issuer: a) To enlarge the market for its shares through a broadened and more diversified exposure which may increase or stabilize the share price. 1933 and 1934 Acts contemplate three categories of issuers: 15 . C. (1) Registration statement contains a prospectus which will provide investors with material information about the foreign issuer and the offering. Primary Offerings by Foreign Operating Companies 1. Level 3 sponsored facilities assist a foreign issuer to sell its securities in the primary market. 4) Disclosure in connection with a Level 3 ADR program: a) Foreign issuer must file a registration statement with the SEC in connection with the offering and in connection with a Level 3 ADR program. Also relate to securities already sold. services or financial instruments in a marketplace outside its home country. 3) Three categories of sponsored facilities: a) Level 1: Involve arrangements between a depositary and outstanding securities of a foreign issuer which trade or will trade in the OTC but not on Nasdaq or OTC Bulletin Board. b) To enhance the image of the company’s products. c) To provide a mechanism for raising capital or as a vehicle for an acquisition.

2) Any one of the following: a) The majority of executive officers or directors are US citizens or residents. S-2. Issuers that are organized under the laws of a foreign jurisdiction and that are essentially foreign in character. Unless the foreign issuer is a government or political entity. etc. Foreign issuers: disclosure obligations under the 1933 Act a.a. d. the SEC has developed special forms of disclosure for foreign private issuers that are planning to make a registered public offering of their securities in the US: 1) Forms F-1. Definition of “foreign private issuer”— a. Where the foreign issuer meets the definition of a foreign private issuer in SEC Rule 405 or SEC Rule 3b-4. F-2. SEC modified the accounting requirements under US GAAP. and S-3. A foreign issuer that does not qualify as a foreign private issuer under the SEC’s definition of that term does not enjoy the regulatory benefits that obtain for foreign private issuers. or c) The business o the issuer is administered principally in the US. 16 . such an issuer might claim the same protections as a domestic issuer in making a private placement under §4(2) or Rule 506 of Regulation D. Resales of securities of a foreign private issuer in domestic transactions are subject to the same limitations as resales of securities of domestic issuers in US secondary markets. Foreign private issuers: obligations under the 1933 Act a. Note: “resident” means the address of any person that appears on the records of the issuer.g. only not as demanding—e. as being located in the US. b. c. it will be regulated as if it were a domestic issuer. 4. Thus. 3. for example. Issuers that are organized under the laws of a foreign jurisdiction but that are “essentially” domestic in character. Rule 405 provides that the term “foreign private issuer” means any foreign issuer other than a foreign government except an issuer meeting the following conditions: 1) More than 50% of the outstanding voting securities of such issuer are held of record either directly or through voting trust certificates or DRs by residents of the US. b. Issuers that are organized under US federal and state laws. c. b. There are no exemptions designed especially for a foreign private issuer.. Under 1933 Act. and F-3. 2. They are comparable to the registration forms S-1. it is eligible for less stringent regulation under the 1933 and 1934 Acts. b) More than 50% of the assets of the issuer are located in the US.

Protecting US investors in primary offerings regardless of where those investors are located at the time of an investment. 17 . B. Rule 901—the general rule: a.” shall be deemed to include offers and sales that occur within the US and shall be deemed not to include offers and sales that occur outside the US. The SEC has interpreted this to allow only Canadian investment companies to register under the 1940 Act. So if an investment company is organized outside the country. b. b. Primary and Secondary Offerings: Securities of Domestic or Foreign Issuers in Offshore Transactions A.” “sale.” “sell.” by clarifying the registration requirements of the 1933 Act to offshore transactions.D. Regulation S 1. IV. 2. or into its citizens hands. especially where those securities carry unusual risks for individuals who are unsophisticated investors. the SEC cannot easily monitor it. Possible US interests in such “foreign” transactions: 1. 2. §7(d) of the 1940 Act says that the only foreign investment companies that can make public offerings are those created under the laws of the U. 1) If a sale satisfies either safe harbor it will be deemed “outside the US” for purposes of Rule 901. 3. Adopted by SEC in 1990 as party of its goal of “achieving a truly global market system. For the purposes only of §5 of the Act. Regulation S provides both an issuer safe harbor and a resale safe harbor from the registration requirements of §5 for certain offshore transactions. leaving the US investors unprotected. 3.” and “offer to buy. Regulating US companies in primary offerings regardless of where they sell their securities. Regulating US trading markets that receive securities that are issued in primary offerings outside the US. Policies: 1) Guard against possibility that unregistered securities sold abroad would flow back into the US. This codifies the territorial approach to §5 of the Act.” “offer to sell. Policies behind the protectionism: 5 reasons investment companies are in the public interest--§1(a)—and the eight ways public interest can be adversely effected--§1(b). Primary Offerings by Foreign Investment Companies 1. (?) 2. d. c. infra. the terms “offer. The Regulation is available for offers and sales of securities of any investment company that is not registered or required to register under the 1940 Act.S.Generally a.

e. (3) Securities backed by the full faith and credit of a “foreign government. Three categories. (2) Securities offered and sold in an “overseas directed offering.” (Rule 902(h)) An offshore transaction requirement has two prongs. big advertisement in a publication with general circulation. 1) Rule 902(c) defines directed selling efforts as those activities undertaken for the purpose of or could reasonably be expected to have the effect of conditioning the market—i.” (SUSMI) (a) Definition of SUSMI permits an issuer to rely upon its reasonable belief as to the existence of a SUSMI. and b) The sale must not be specifically targeted to any US citizens abroad—like members of US armed forces. sales and resales made in reliance on the safe harbors of Rules 903 and 904. the requirement that the offering be “directed” at a single country is key. etc. Rule 903--the issuer safe harbor: a. No “directed selling efforts” may be made in the US in connection with an offer or sale of securities in reliance of Rule 903 or 904. b) This first category imposes no additional conditions on the offering—only the two general conditions discussed above are applicable.3. distributor. a) The buyer must be outside the US when the buy order is originated. 1) Issuer Category 1: a) Types of securities falling in this category are: (1) Securities of a “foreign issuer” with “no substantial US market interest. Two general conditions that apply to all offers. (b) Rule 902(j) provides objective criteria— the single largest market test. 4.. or the 20% test.” (ODO) (a) In the definition of an ODO. a. 2) No directed selling efforts may be made in the US by the issuer. 2) And at time of sale. any of their respective affiliates. Note that the procedural safeguards become more onerous as one progresses from Category 1 to Category 3. The offer or sale must be made in an “offshore transaction. 18 . both of which must be satisfied: 1) No offer is to be made to a person in the United States. or seller must believe that buyer is outside the US.” (4) Securities offered and sold pursuant to certain employee benefit plan. infra. or any person acting on the behalf of any of the foregoing. b.

drives the definition of US person—Rule 902(k). Types of securities included in this category are (1) Equity securities of a reporting domestic issuer. Note that residency.c) Offers and sales of such securities that are made to US investors who are overseas at such time will not preclude reliance on this safe harbor category. (c) If distributors sell to professionals. 3) Issuer Category 3: a. (4) Convertible debt of foreign reporting issuer. (b) Must disclose that securities have not been registered and may not be offered or sold in the US or to a US person (other than a distributor) unless registered or exempt from registration. not citizenship. (b) Seller must ensure that no nondistributor to whom securities are sold is a US person. (2) Offering restrictions: (a) Each distributor must agree in writing that all its offers and sales will be made in compliance with the safe harbor or with registration or an exemption under the 1933 Act. 2) Issuer Category 2: a) Types of securities encompassed in this category are (1) Debt securities of a domestic reporting issuer. (1) Transaction restrictions: (a) 40-day distribution compliance period before being sold to or for benefit of US person. (2) Equity securities of a non-reporting domestic issuer. b) Offerings of securities in this category are subject to the two general conditions discussed above. must advise them that he is subject to same restrictions. as well as subject to specified selling restrictions: Note: The policy behind these restrictions is that there is a greater likelihood that the securities will flow back into the US. 19 . (3) Debt securities of a non-reporting foreign issuer. (2) Equity securities of a foreign reporting issuer with a substantial US market interest.

Rule 904 provides an outlet to certain persons who acquire securities from Category 2 or Category 3 issuers who wish to resell those securities during the applicable distribution compliance period. and if they go abroad. and convertible debt of a non-reporting foreign issuer with SUSMI in its convertible debt.(3) Equity securities of a non-reporting foreign issuer with a SUSMI in its equity securities. but no problem with category 1. etc. a distributor. their respective affiliates and persons acting on behalf of any of the foregoing parties. (4) Legends are to be placed on securities sold offshore advising that transfer is prohibited other than in accordance with Regulation S. b. Securities in this category are subject to the two general conditions above. they cannot be offered category 2 or 3 securities (w/ compliance periods). or an exemption. For equity securities the following apply: (1) Distribution compliance period of 1 year. c. Increased transaction restrictions: these vary according to the characteristics of the securities. b. and receive no remuneration in 20 . (2) Purchaser certification—“not purchasing securities for the account or benefit of any US person. (5) Stop transfer instructions—where an issuer must bind itself by contract. 5. as well as being subject to the offering restrictions applicable to Category 2. they cannot buy category 2 or 3 securities prior to expiration of compliance period.” (3) Purchase agreements—agree to resell in accordance with Regulation S. etc. (4) Convertible debt securities of domestic issuers. or through another means. to refuse to register any transfer not made in accordance with Regulation S. Rule 904—The resale safe harbor a. the registration requirements of the Act. 1) Officers and directors of issuers and distributors can use the Rule 904 safe harbor if they are affiliates solely by virtue of their position as an officer or director. Note: what this means is that (a) US citizens traveling abroad. (b) Non-US citizens resident in the US are treated the same as US persons. It applies only to resales by persons other than the issuer.

the SEC added Rule 905 in 1998.” to resell Regulation S securities during the distribution compliance period. as well as the following: 1) If Category 1: no more resale requirements. Introduction: 1) Rule 903 imposes transactions restrictions in connection with offer and sale of securities under Regulation S. 7. c. 3) But Rule 904 is not the only way holders of securities acquired in a Regulation S transaction can resell during the distribution compliance periods imposed by Rule 903. 21 . 2) If Category 2 or 3: Purchasers can resell to other non-US persons in offshore transactions during the compliance period. a) Rule 144A is available for such persons. b) Such resales must be made into the US private resale market in accordance with the requirements of Rule 144A.connection with the offer or sale other than customary broker’s commission. Resales must comply with the two general conditions above. whether or not they are “qualified institutional buyers. a) The resales must be made in an offshore transaction and cannot involve directed selling efforts in the US. or any of their respective affiliates in a transaction subject to Regulation S are “restricted securities” as defined in Rule 144(a)(3). 4) Rule 905: important limitations on resales-a) Equity securities of domestic issuers that are acquired from the issuer. Note: This resale safe harbor is available whether or not the securities were acquired in an offshore transaction. a distributor. 2) Rule 904 provides a resale safe harbor to certain persons during the distribution compliance periods that apply to securities in Category 2 and Category 3 of Rule 903. therefore permitting use of Rule 904 for resales of restricted securities originally acquired in a private placement under Regulation D or §4(2) or for securities acquired in a Rule 144A transaction. registration under the 1933 Act. Potential abuses under Regulation S: a. The availability of this safe harbor is unaffected by the activities o the issuer or affiliates. or pursuant to an exemption. b) Any resales of domestic equity securities must be made in accordance with Regulation S. c) Because of resale abuses.

and to regulation of many of its other activities. The issuer decides to list a class of equity securities on a national securities exchange. The 1934 Act requires that certain securities be registered with the SEC.c) Equity securities will remain “restricted securities” even if acquired in a transaction pursuant to Regulation S—they cannot be freely sold. The purpose of the Act is to protect interstate commerce and to ensure the maintenance of fair and honest securities trading markets. which is also the holding period for Rule 144(a)(1). Once a company has registered its securities. a non-affiliate may make unlimited resales of those securities pursuant to Rule 144(k). 2. a foreign purchaser resells during the distribution compliance period. Part III: Impact of Securities Exchange Act of 1934 on Disclosures to Trading Markets by Certain Issuers and Key Persons I. 3. b) After the 1-year compliance has expired. has total assets greater than $10 million. Register on Form 10. Purchaser can resell immediately into the US to a QIB pursuant to Rule 144A—but the QIB holds restricted securities and must honor the requirements of Rule 144. The issuer. triggering events: 1. B. Securities Exchange Act of 1934—General stuff 1. his purchaser continues to hold restricted securities. 22 . but presumably. at the end of the fiscal year. §12(g)(1). instead. Registration under §12 of the Act. b. The securities are still restricted. Register on Form 10. What is the consequence of registering for a company with outstanding “restricted securities” according to the 1933 Act? a. c) After the expiration of 2 years. Mandatory Disclosure: Securities of Domestic Issuers A. 5) Hypo: Domestic issuer sells securities offshore pursuant to Rule 903. a. The short answer is that there is no effect. a. a) If. (b). a holder of any domestic equity securities sold initially pursuant to Rule 903 may now resell in the US pursuant to Rule 144. pursuant to Rule 904. §§12(a). has 500 or more record owners of a class of equity securities and is doing business in interstate commerce. Note that this doesn’t apply if the securities of the company are listed on a national exchange. 2. it is subject to continued reporting under the Act. there will be a better market for holders of such securities after the holding period if another class of securities is registered.

§18 imposes liability for making misleading statements on filed documents. Note that now Nasdaq and the OTC Bulletin Board require registration under the 1934 Act. b. The Act also provides for continuous scrutiny by the SEC. Consequences for certain persons associated with the issuer 1. §13(a) requires periodic disclosure and filings with the SEC. The section applies to persons subject to the reporting requirements of §13(a) (>5%). §13(d)(1) provides that any person (or entity) that becomes the owner of more than 5% of any class of securities registered under §12 must file with the issuer of those securities and the SEC Schedule 13D. and >10% equity holders— (Rules 16a-1 through 16a-13) on Forms 3. c. §21E of the Act provides a safe harbor for forward-looking statements. b. a. The protection and regulation of forward-looking statements 1. and must be reported within 6 months.. Rule 10b-5 gives private parties a cause of action for use of deceptive devices. Regulation under §16(a): a. The issuer voluntarily decides to register. Regulation under §13: a. C. §14(a) provides that it is unlawful for a §12 company to solicit any proxy. Such statements are not deemed fraudulent so long as they can be shown to have had a reasonable basis. The Act governs the manner in which voting proxies are solicited from shareholders. Rule 3b-6 protects companies when making forward-looking statements from lawsuits when such statements do not come to fruition. The consequences of registration for domestic companies: 1. 2. The Act also governs the practices used in making a tender offer. etc.e. E. 2. Most information is unaudited. No liability if the statements are clear and cautionary. to provide the market with updated and ad hoc info when important events occur—i. d. Form 10-Q: quarterly reports every three months of fiscal year. b. §10(b) is a powerful anti-fraud provision. Form 10-K: annual and transition reports. a.3. directors. D. Information is audited. Reporting obligations for officers. Such a filing is for the purpose of fully disclosing their actions. changing auditors. bankruptcy. Register on Form 10. §14(d)(1) provides that it is unlawful for a §12 company to attempt to make tender offers of securities registered under §12. 2. changes in control. SROs and Market professionals demand constant diligence. Form 8-K: Current reports. a. 4 and 5 b. 23 . 4. a. SROs and Market Professionals. 3. c. §12(g)(1).

If the info is generally couched in language that a reasonable investor would take with a grain of salt. and 8-K. This applies to “certain foreign issuers. 2) Such reports must be made on Forms 10-Q. e. 2. c. 10-K. and 15d-11. broker-dealers must have up-to-date info about the issuer for investors. b. Exception--if a company registers pursuant to §12. The purpose. F. Broker-dealers are regulated under §15(c)(1)(A) and §15(c)(2)(A). but some §15(d) companies can be reporting companies while not registered. Disclosure obligations of domestic companies not registered under §12 1. Under Rule 15c2-11. This means that if a company wants a market in one’s stock. Limited periodic reporting after a 1933 Act registered offering: a.b. even if only in the pink sheets. If such claims are adequately presented. or 2) The dealer has current reports on file under the 1934 Act. or 3) The dealer has specified current financial info on file and other info about the issuer. If nothing is done. and to have a reasonable basis to believe that the information is true and accurate and obtained from reliable sources. §15(d) of the 1934 Act imposes periodic reporting obligations on any company that has filed a registration statement under the 1933 Act. Disclosure for dealers in issuer’s securities (fraudulent statements rules): a. Obligations under §15(d) are also suspended if <300 shareholders of record after the first fiscal year after registration was recorded. Auditors cannot be liable. Rule 15c2-11 prohibits a broker dealer from making a market in any security unless the issuer 1) Has recently made a public offering under the 1933 Act. as required by Rules 15d-13. §10A requires independent auditors to bring apparent fraud to the attention of the board of directors. of this rule is to prevent the creation of public trading markets in securities that have not been registered under either the 1933 or 1934 Act. 15d-1. Note: All §12 companies are “reporting companies” under the 1934 Act. the claims will be dismissed on summary judgment (FRCP §12(b)(6)). and effect. b. 1) Such issuers must make periodic reports that a company registered under §12 would make under §13(a). then they are exempted from §15(d)—sort of a safe harbor. respectively. they are to take it to the SEC. d.” 24 . c. dealers must also review the info before making any quotations for any security. 3. then the “bespeaks caution doctrine” suggests that courts will dismiss any claims.

it too must register under §12—this includes Nasdaq or the OTC Bulletin Board. Disclosure Obligations of Foreign Companies Not Registered under §12. a. 25 . foreign private issuers and their insiders are exempted from the proxy solicitation rules under §14(a) and filing obligations under §16(a). Of course. regardless of where the assets are located. 2. Reporting and proxy requirements under §13(a) and §14(a) are not as onerous. B. regardless of where those record holders reside. When foreign private issuers register under §12. The SEC doesn’t assume the incorporation of other rules into the instructions (i. 2) Form 6-K is the 8-K corollary for foreign private issuers. regulate dissemination of the foreign issuer’s periodic disclosures to holders of its DRs after the depositary receipts program for the foreign issuer has been established.. 5. 1) Form 20-F is the 10-K corollary for foreign private issuers. as well as Form F-6. and does business in interstate commerce. Disclosure obligations for foreign companies registered under §12: a. and 500 or more record holders of a class of equity securities. This applies to any foreign issuer with assets > $10 million. and on Form 6-K for interim reports. Regulation S-K is literally incorporated into the instructions for Form 20-F). Where a foreign issuer meets the definition of a foreign private issuer in Rule 3b-4 of the 1934 Act. Mandatory Disclosure for Securities of Foreign Private Issuers A. Disclosure for depositary receipts holders: a. they register on SEC Form 20-F. 4. §5 of the 1933 Act requires the depositary to deliver the F-6 prospectus to purchasers of depositary receipts. Without an exemption. 3. c. But foreign private issuers have two special exemptions from the requirements of §12(g)(1)—Rule 12g3-2(a) and Rule 12g3-2(b). pursuant to §13(a) is done on Form 20-F for the annual report. a foreign private issuer that does some business in the US.II. It defers to the disclosure obligations of the home country. Registration Under §12 1. When a foreign private issuer decides to list a class of equity securities on a US national securities exchange. 1) Under Rule 3a12-3.e. but does not have any assets or record holders in the US would be required to register under §12. b. The deposit agreement between the foreign issuer and the depositary. it is eligible for less stringent regulation. a foreign private issuer can also voluntarily choose to register. Periodic reporting by registered foreign private issuers. b. b.

§13(d) filing obligations for beneficial owners (>5% owner) pertain to the filing of Schedule 13D. Disclosure Obligations of Key Persons Associated with Foreign Companies Registered under §12 1. b. the issuer must file Form 15. This is actually ongoing disclosure. 2) They must also provide info to US broker-dealers pursuant to Rule 15c2-11. 26 . b. 2. 2. Rule 13d-1(c) permits certain persons. To take advantage of this suspension of obligations under §15(d). are subject to limited periodic reporting under §15(d) of the 1934 Act pursuant to Rule 15d-16 on form 20-F and 6-K. and requires filing of Form 6-K whenever necessary. 3. supra. supra. Rule 12h-3(b)(2) provides for the suspension of filing obligations under §15(d) if 1) Securities held by < 300 persons resident in the US. III. a. This rule is deferent to home country disclosure requirements. including passive investors with <20% ownership to file a shorter form. 1) Note that these folks must disclose something in order to have an ADR distribution in the US (Form F-6). C. prohibits broker-dealers from making a market in any security without certain information about the issuer. Rule 15c2-11. This essentially means that non-registered companies with a Rule 12g3-2(a) exemption must provide some information for investors through the broker dealer. directors and 10% shareholders of foreign private issuers from §16(a) filing obligations.1. Rule 3a12-3 exempts certain officers. A foreign private issuer which is exempt from §12g(1) because of Rule 12g32(b) must furnish information on a continuous basis to the SEC as a condition of the exemption. Rule 12g3-2(a) provides a total exemption from §12(g) if the company has < 300 holders of record resident in the US. or 2) < 500 persons resident in the US where the total assets of issuer have not exceeded $10 million on the last day of each of issuers three most recent fiscal years. The quality of information disclosed by a foreign issuer to US investors depends on the nature of the issuer and the type of securities offering it makes into the primary market—and the relevant disclosure obligations. Quality of Information Available to US Investors of Foreign Issuers 1. Rule 12g3-2(b) provides that securities of a foreign private issuer shall be exempt from §12(g) if the issuer provides home country disclosure. a. This is a fiscal year exemption only—applicability evaluated each year. Policy Implications of SEC Regulation of Foreign Companies A. Foreign private issuers that make registered public offerings under the 1933 Act and which are not registered under §12 of the 1934 Act.

” 3. 2. Disclosure in private offerings is controlled by the conditions of the registrations exemption and the potential liability under anti-fraud provisions of the domestic security laws. §15(a) of the 1934 Act requires anyone meeting the statutory definition of brokers and dealers to register with the SEC. Note. either individually or in some fiduciary capacity. B. 2. then investors will receive periodic reports as required by §13 of that statute. Foreign private issuer—not registered under the 1934 Act: a. Domestic investors are entitled to information in an annual report on Form 20-F. Congress has imposed certain obligations on brokers and dealers as conditions for participating in the national securities markets. 3. Registration carries with it continuing obligations. If they have not made a registered public offering and if not subject to §12 of the 1934 Act. If relying on either 12g-1 or 12g3-2(a) as an exemption from registration under §12 of the 1934 Act. If subject to §12 of the 1934 Act.” 4. but does not include a bank. and to periodic reporting on SEC Form 6-K. b. through a broker or otherwise. including anti-fraud rules of §15(c) and regulations 27 . Introductory Remarks 1. which is the same information disclosed in the issuers home country. Registration of Broker-Dealers A. If claiming an exemption under 12g3-2(b) of the 1934 Act. To ensure that the public is not disappointed in their expectations of brokers and dealers. investors will receive indirectly only that info required by Rule 15c2-11 as disclosed to broker-dealers. Summary of Disclosure Requirements of Foreign Issuers: 1. Foreign Issuer—essentially a US Issuer: a. §3(a)(4) of the 1934 Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others. If they make a public offering in the US domestic investors will receive information required by §15(d) of the 1933 Act following the distribution. or any person who buys or sells securities for his own account. that filing on Form F-6 is necessary of depositary receipts are to be used. c.2. the foreign private issuer must provide US shareholders with the same information as disclosed in the issuers home country. b. but does not include a bank. but not as part of a regular business. Foreign private issuer—registered under the 1934 Act: a. §3(a)(5) defines a “dealer” as “any person engaged in the buying and selling securities for his own account. Part IV: Impact of US Securities Regulation on Broker-Dealers and Other Intermediaries I. then they are not required to furnish any information to investors (see supra).

b. Broker-Dealer Involvement in Advertising and Sale of Securities During the Registration Process: 1. B. c. 3. D. Rule 15a-6.imposed by §15(c)(3) which focuses on the financial soundness of the brokerdealer. The Rule 15a-6 exemption for certain foreign brokers and dealers: 1. 4. such as the mails or telephone lines. Effects transactions in securities for persons that have not been solicited by the foreign broker or dealer. The present or proposed offering is not conducted solely in the US. a. Furnishes research reports to major US institutional investors. provides an exemption from §15 requirements for certain foreign brokers and dealers. Rule 135e provides that issuers or selling security holders will not be deemed to offer any security for sale by virtue of providing any journalist with access to its press conferences held outside the US. and 3) Not include any purchase order or the like with the materials. Induces or attempts to induce the purchase or sale of any security by a US institutional investor. Generally. and effects transactions in securities mentioned in the reports with or for such institutions with certain limitations. as a sufficient basis for regulating that person or firm. Offshore Press Releases 1. The main issue for the SEC is whether the issuer’s communication or other activity attempt to “instigate publicity for the purpose of facilitating the sale or securities in a proposed offering. to contact a US person located in the US. Access is provided to both US and foreign journalists. certain foreign persons temporarily present in the US or certain US citizens resident outside the US. Effects transactions in securities with or for. or induces the sale of any security by certain professionals. if a. with certain limitations. Broker-dealers must also become a member of NASD. etc. and c. adopted in 1989. b. 2) Include a statement of any intention to register any part of the present or proposed offering in the US. All press-related materials must 1) State that they are not an offer of securities in the US. government organizations. broker-dealers can continue to advise the trading market for securities of certain issuers in registration within reasonable limits.” C. 28 . No consideration for such information. d. or meetings with issuer and the like. 2. Rule 15a-6 sets forth an exemption from registration for a foreign broker or dealer to the extent that he or she: a. Generally the SEC considers the use by a foreign broker-dealer of any jurisdictional means.

b. b. §202(a)(11) of the 1940 Act defines an investment advisor as “any person who. Registration of Investment Advisors A. issues or promulgates analysis or reports concerning securities. 2. Receiving transaction-based compensation (it seems that charging a flatfee would be fine). but must furnish a consent to service of process with the SEC and undertake to furnish books and records to the SEC upon request. either directly or indirectly or through publications or writings. 29 . B. and publishers of newspapers or magazines or general and regular circulation. Registered foreign investment advisors need not maintain an office or staff in the US. a.e.II. Participating in presentations and negotiations. 2) Is in the business of providing such services. The definition excludes banks. Making recommendations concerning securities—i. research and advice in the decision making stage. lawyers and accountants (professionals) that give some advice incidental to the practice of his or her profession. engages in the business of advising others. 3) Is receiving compensation for such services.” a. Making recommendations about the nature of securities to be offered. 1) Foreign advisors are required to count only their US clients for purposes of determining their eligibility for this exemption. or selling securities.. Hypos 1. Is this person a broker dealer and thus must register? The determination hinges on the presence of any of the following factors: a. for compensation. Exemption: §203(b)(3) provides for an exemption for any advisor who during the course of the preceding 12 months has had fewer than 15 clients and who neither holds itself out generally to the public as an investment advisor nor acts as an advisor to a US registered investment company or business development company. or exempted or excluded from the registration requirement. §203(a) of the Advisors Act prohibits any investment advisor from using any US jurisdictional means in connection with its business unless registered with the SEC. Investment Advisors Act of 1940 1. for compensation and as part of a regular business. as to the value of securities or as to the advisability of investing in. broker-dealers whose advice is likewise incidental. c. 1) Note that foreign advising companies with separate US registered subsidiaries may be subject themselves to the provisions of the Act if they share personnel. purchasing. d. Hypo #1: Foreign company w/out knowledge of or connections in the US market get help from a US or foreign person with experience. The test for an investment advisor focuses on whether the person: 1) Is providing advice or issuing reports or analyses concerning securities. b. or who.

and is not at all affiliated with the issuer (unlike Paul Anka). 4) Is not otherwise disqualified—i. It could be problematic if the lawyer sends information willy-nilly to prospective finders. and has no K with the issuer. b. The SEC has indicated that mass-emailing or “spamming” would be considered comparable to the use of the mails. a. Is he a broker or dealer? a. 5. 2) Paid a regular salary. Note: these factors determine whether one is considered a bona-fide finder like Paul Anka. he is in the business. 4. which provides that a person is not a broker if 1) The person has a good reputation and no bad juju. The lawyer cannot make general solicitations or general advertising. Yes: he is receiving compensation. etc. the professional is functioning entirely as an intermediary.e. Wirthland No-Action Letter: finders for broker-dealers are soliciting investments. Any transaction based compensation would be problematic.. even if he has another job. Hypo #4: US broker-dealer asks a US lawyer if he knows of some folks interested in a particular foreign investment. The SEC passed Rule 3a4-1. 7516 said that passive posting of offering and solicitation materials on a web page would not be considered activity taking place in the US for purposes of registration requirements of securities laws. and he is providing advice. 2. B. Hypo #2: Hot-shot guy brought into a company to make connections like a finder and consultant advisor. 3) Not affiliated with a broker-dealer. Continuing involvement in the securities of the company. a.e. Foreign broker-dealers on the internet: advertising on a web site will not be considered an attempt to induce a transaction with US persons so long as the foreign broker dealer 30 . and the lawyer has not preexisting ties with the company. III. He takes only a 10% totally voluntary donation. Hypo #3: Foreign issuer wants to use a lawyer in the US to find prospective investors in the US. not compensated by commissions. a. The lawyer is to just find interested parties. Hypo #5: A pilot makes charts and wants to recommend stocks to folks on an email list. Is he an investment advisor? a. regardless of whether it is voluntary. Internet issues A. SEC Policy Release No. must have other duties in the company that persist. Generally: 1. In this situation. Because Lawyers are often involved in negotiations. 3. they may have problems passing the test.

d. may be able to rely on the exemption from registration under §203(b)(3) of the Advisers Act if they have < 15 US clients. Note: Rule 15a-6 of the 1934 Act. 2.” Note that the Asahi “purposeful availment/minimum contacts” and “reasonableness” analysis applies. 1934 Act: §10(b) prohibits fraudulent misstatements in connection with the purchase or sale of securities. c. SRO actions to sanction violators of SRO rules. b. The Supreme Court has also implied a private cause of action under Rule 10b-5. The USDJ has authority under §24 to bring criminal charges against anyone in violation of §17. The SEC has jurisdiction under §17 to seek equitable relief against persons who offer to sell or sell securities by fraudulent means (misleading statements). and b.1. Posting a prominent disclaimer. C. Private litigation. Also. generally. Refuse to provide brokerage services to any potential customer the brokerdealer has reason to believe is a US person. 2. I. Implementing procedures designed to guard against directing information to US persons. Foreign investment advisors on the internet: 1. supra. a foreign advisor offering services on the internet. Enforcement of anti fraud policies can take at least 4 different forms: a. Posts a prominent disclaimer stating that services are not available to US persons. Subject Matter Jurisdiction for Transnational Securities Fraud A The Anti-fraud provisions of the 1933 and 1934 Acts and other enforcement mechanisms: 1. and the SEC and the USDJ can use it as a basis for their claims also. Rule 10b-5 is applicable to purchases and sales of securities of all issuers. such an advisor is considered holding itself out to the US public unless they take reasonable measures: a. USDJ criminal actions. and 2. Part V: Subject Matter Jurisdiction/Enforcement Remedies and Sanctions Note: Personal Jurisdiction pursuant to the 1933 and 1934 acts has been extended “to the full reach permitted by the due process clause. exempts broker-dealer registration for foreign broker-dealers that effect transactions in securities with or for persons that they have not solicited. 3. SEC enforcement. In general. whether or not they are registered under §12 of the 1934 Act. 31 . 1933 Act: §§11 and 12(a)(2) provide purchasers with private causes of action for damages.

” 2) The fact that the Assn’ wasn’t getting any value doesn’t matter. SEC is paranoid about certain “bad” governments raising $ in the US (like Japan and Germany). b. They should have filed.” 3) Majority says that “continual solicitation” means you are an underwriter. and (2) Didn’t believe it was inaccurate. and (2) Reasonable grounds to believe in the accuracy of statements. etc. Clearly an offer and sale in the US. 3) The D sold the securities to the P. State Bank of Pakistan (SEC 1992): Foreign issuer government is subject of enforcement action by the SEC. Non-Fraud cases: most lawsuits involve unregistered offerings—the remedy is to get $ back (private action). For the “non expert” portions of the statement: (1) Reasonable investigation. The government or private persons can bring suit. 1941): Association formed to send $ to China ultimately for the Republic Government. The D must show that they had an exemption. underwriters. c. Essentially domestic transactions—the easy cases: a. Benev. They had unregistered bonds. Extraterritorial Application of US Securities Laws 1. a person acquiring securities can sue just about anyone who signed the registration statement —directors. b.B. 32 . 4) Statute of limitations has not run. Appellate court says that the Assn’ is acting as an “underwriter”— essentially offering and selling for the issuer. Chinese Consol.” The language “for an issuer” means “for the benefit of an issuer. the court issues an injunction. Ass’n (2nd Cir.” b. 2. 1) §11(b)(3)(A) provides for two “due diligence” defenses for anyone but the issuer: a. 2) Jurisdictional means was used. Generally: a. Lost of connections outside the US. For the “expert” portions of the statement: (1) No reasonable grounds to believe. 1) Acting for the benefit of a company is enough to be an “underwriter. On appeal. All activities demonstrate actions of a “broker. The “for value” criteria actually means “for value to the issuer. The P only has to show the following: 1) No registration. In Matter of Lai Sum Pang (SEC 1995): Hung Foo effects transactions with US persons for securities of Taiwan companies. experts. No relationship between the issuer and people being sued—SEC just wants an injunction. Fraud cases: According to §11 of the 1933 Act.—but they are only liable for their contributions to the statement.

Closing for all Ks took place in London. and to eliminate parochialism in US courts. The effects test: 1) Schoenbaum (2nd Cir. cannot be assumed in all fact scenarios. Domestic and foreign transactions—the not-so-easy cases: a. a) The court has subject matter jurisdiction. and the exemption was not intended for such distributions by an issuer. 1967): Banff Oil shareholder sues for fraud under 10b-5. 2) Scherk holding also applies: securities case with arbitration clause calling for arbitration in France with US law as applicable law. Foreign transactions—the difficult cases: a. b. Aquitaine purchased shares of its subsidiary corporation. The D was participating in the transaction with the issuer. Lloyds of London (9th Cir. but Banff was listed and traded on an American Stock Exchange. for reasons of clarity.e.” The whole series of event makes up the transaction. 4) Court assumes that context in which the securities were sold— i. 1995): US D invokes forum selection clause in K signed by Ps (but not by Ds) to throw it out of US court. 5) Court doesn’t accept the notion that the broad scope of US securities law automatically renders another forum inferior. b. Hold: forum selection clauses are like any K clause.” b) After this case. the question “how much effects?” became a major issue. Freitsch (7th Cir. upheld a choice of forum provision. Ps bring fraud suit. The clauses are enforceable. The conduct test: 33 .. In other words. 3. offerings in the US to sophisticated investors. at an unfair price based on inside information about an oil discovery. The effects of the fraud are in this country and is “detrimental to the interests of US investors. Banff Oil. 4. the forum selection clause is used as a defense. and all US investors signed choice of law and choice of forum clauses. Both corporations are Canadian and all events took place in Canada. Ct. of course.4) §4(1) exempts only trading “transactions. 3) The primary concern was over the availability of protection under UK law. Posner says no. 1) Bremen holding applies to securities: S. and cast doubt on the usefulness of the test. 1998): Int’l agreement where US investors signed agreements where they would indemnify Lloyds in case of problems with underwriting syndicates. it has to be able to do what it is supposed to do—and can be used against you. Court upheld both clauses. This.

c) Because of abundant misrepresentations in the US—the D passes the “substantial conduct test. and neither was its “effects” analysis. a) DC Circuit: Zelch case—all elements of 10b-5 occurred in the US. 7th Circuits: The middle route. This is one extreme. c) 2nd. and (2) Apply to losses from sales of securities to Americans resident abroad. Court rejects the claim that the effects test is enough. P brings suit in the US. (2) Sales to Americans. 1972): P contacted by UK company and led to believe that they should buy some of the company’s stock. a) Court said that Schoenbaum wasn’t applicable. lots of controversy over what kind of conduct is sufficient for foreign Ps to bring suit. b) Conduct test focuses on conduct that takes place in the US in relation to alleged fraud. but mere preparatory activities is not enough.” 2) Bersch (2nd Cir. but (3) Do not apply to losses from sales o securities to foreigners outside the US unless acts within the US directly caused such losses. When foreign person brings suit. Eventual fraud. a) District court found subject matter jurisdiction using 3 factors: (1) Amount of activity in the US. 1975): Class action suit where investors lost $ when company collapsed. See Bersch. but only if. must show that conduct directly causing the loss (completing the fraud) occurred in the US. All offerings for company were abroad. and D contests subject matter jurisdiction. 9th Circuits: some activity designed to further fraudulent scheme must happen in the US. This actually goes quite far to protect foreign persons. 3) Since Bersch. 5th. 8th.1) Leasco (2nd Cir. 34 . and takes into account the nature of the P. b) 3rd. b) The proper test is the “conduct” test: whether there has been enough conduct by D for the statute to apply. acts of material importance in the US have significantly contributed thereto. (3) Generally adverse effects upon the US securities market from public collapse. c) Hold: We have thus concluded that the anti-fraud provisions of the federal securities laws: (1) Apply to losses from sales of securities to Americans resident in the US whether or not acts of material importance occurred in this country.

1995): Court said that the conduct test is not an either/or proposition. use of the mails. Note: All 10b claims require a jurisdictional basis. The court allowed the P to bring the case because the D filed with the SEC. and continued to disclose fraudulent materials. and (2) Do we have a jurisdictional connection—i. c. 35 . A combination of both tests: 1) Itoba (2nd Cir. If effects and some conduct in the US. then a court may take jurisdiction.(1) But in 1998 the 2nd Circuit “let the effects test in the back door” when they ruled that jurisdiction should not attach unless there is a national interest for taking the case.e. so the analysis for such claims is: (1) Do we have a basis as a court to take the case—effects/conduct analysis..