For early-stage and seasoned companies outside the United States, the internet age has brought unprecedented visibility to the U.S. capital markets.
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U.S.-based investor blogs and business networking web sites have become very popular and are easily accessible in foreign countries. Given such visibility, it can be tempting for foreign companies to utilize these sites as a way to tap into the U.S. capital markets, either by posting messages in attempt to attract the interest of U.S. investors in an investment opportunity, or by directly soliciting offers or sales from U.S. investors who frequent these sites.
But as innocent and attractive as these fund raising activities sound, they may violate the U.S. securities laws, and the very act of directing such activities towards U.S. investors would subject any foreign company that engages in them to the regulatory regime of the U.S. securities laws. Therefore, companies outside the U.S. should exercise caution in communicating with U.S. investors (particularly through the internet) to avoid violating the U.S. securities laws, and as such it is important that these companies have a basic understanding of the types of securities offerings that are permitted by the U.S. securities laws for raising capital from U.S. investors. This article will examine one of the most commonly employed offering types used by foreign companies, the so-called "private placement" of securities.
Security offerings in the U.S. are regulated by federal and state securities laws. The principal federal law implicated in any offering or sale of securities to U.S. investors is the Securities Act of 1933. At its core, this law prohibits the offer or sale of securities in the U.S. unless the securities are registered with the U.S. Securities and Exchange Commission or unless an exemption from registration applies. Because registration is a costly and time consuming process which results in the non-U.S. company being subject to periodic reporting obligations in the U.S., foreign companies typically prefer to avoid registration and instead offer their securities pursuant to an exemption from registration.
One of the most commonly used exemptions by foreign companies offering debt or equity securities is the private placement exemption in which the company offers securities to U.S. investors in a non-public offering which satisfies the requirements of Regulation D under the Securities Act of 1933. Regulation D requires, among other things, that the company not engage in any general advertising or solicitation in connection with the offering and that the company file a Form D with the U.S. Securities and Exchange Commission within 15 days after the first sale is made.
There are also additional requirements that apply based upon the size of the offering. If the company seeks to raise more than $1 million but no more than $5 million within a 12-month period (subject to integration rules which are not discussed here), then the company can sell the securities to an unlimited number of "accredited investors" (generally for individual investors this means net worth in excess of $1 million or annual income in excess of $200,000 currently and in each of the two most recent years) but cannot sell the securities to more than 35 non-accredited investors, and if the offering includes non-accredited investors, the company must provide the non-accredited investors with a private placement memorandum prior to the sale which contains certain financial and non-financial information about the company and the offering.
If the company seeks to raise more than $5 million within a 12-month period (subject again to integration rules which are not discussed here), then in addition to being able to sell only to accredited investors and not more than 35 non-accredited investors, all accredited investors who purchase the securities must have sufficient knowledge and experience in financial and business matters to make an informed decision regarding the investment and must be furnished with a private placement memorandum prior to the sale.
In addition to meeting the requirements of Regulation D, a non-U.S. company seeking to offer debt or equity securities to U.S. investors in a private placement must also comply with state securities laws in each state where an offeree is located. In some states, these laws simply require the company to file with the state a copy of the Form D that was filed with the U.S. Securities and Exchange Commission, while in others, such as New York, the company may be required to file a number of additional documents, such as state prescribed forms and notices, and in some cases may even be required to register as a broker dealer.
In light of all the federal and state requirements that need to be satisfied in a private placement, it is important that any non-U.S. company seeking to raise capital from U.S. investors retain and consult with a qualified attorney early in the process and prior to approaching any U.S. investors. The private placement exemption is not appropriate in all circumstances, and so a qualified attorney should evaluate the facts and circumstances applicable to the particular offering to determine the suitability of the exemption.
If a private placement is suitable, the attorney will be able to advise the company as to the best way to approach investors and carry out the offering, including the due diligence review of potential offerees and the preparation of the offering documents, such as the private placement memorandum and subscription agreement.
The information provided in this article is not intended to be and cannot be relied upon as legal advice.