Foreign Investors: Navigating Us Securities Laws

The applicability of US securities laws to foreign investors has been a prominent topic for US courts in recent years. The US Supreme Court's 2010 decision in Morrison v. National Australia Bank Ltd. established a transactional test to determine whether US securities laws apply to international transactions. This test states that US securities laws only apply to international transactions if they involve domestic securities or are domestic transactions in other securities.

The Court's decision made it clear that foreign issuers could subject themselves to US securities laws by listing American Depository Receipts (ADRs) on a US exchange. However, the Court provided little guidance on when companies could be subject to liability by otherwise engaging in a domestic transaction of securities.

Subsequent court decisions have interpreted this language, finding that companies listed outside the US could be liable if they established a sponsored ADR program to sell shares on the US over-the-counter market. In these cases, a company enters into an agreement with an investment bank to provide its non-US-listed shares, which the bank then sells as ADRs to US investors.

The 2018 case Stoyas v. Toshiba Corp. further expanded the scope of US securities laws by holding that a foreign issuer could be liable for the sale of unsponsored ADRs if two conditions are met. First, the purchase of securities must occur in the US. Second, the foreign issuer must be sufficiently involved in the ADR transaction.

This evolving landscape underscores the importance of seeking legal guidance when navigating US securities laws, particularly in the context of international transactions.

The Securities Act of 1933

• To require that investors receive financial and other significant information about securities being offered for public sale.
• To prohibit deceit, misrepresentations, and other fraud in the sale of securities.

The Act ensures that companies selling securities to the public disclose material information and that securities transactions are not based on fraudulent information or practices. This helps provide investors with accurate information so that they can make informed investment decisions.

Under Section 5 of the Act, issuers must register non-exempt securities with the Securities and Exchange Commission (SEC). Section 5 outlines the timeline and distribution process for issuers offering securities for sale. The actual registration process is detailed in Section 6, which consists of two parts:

• The issuer must submit information that forms the basis of the prospectus, which will be provided to prospective investors.
• The issuer must also submit additional information that is accessible to the public but not included in the prospectus.

The SEC determines the appropriate registration form based on the type of issuer and the securities offered. While Section 7 grants the SEC full authority to determine the required information, it generally includes details about the issuer, its business, past performance, management, executive compensation, risks, legal issues, and the terms of the securities issued.

The SEC reviews registration statements to ensure compliance with disclosure requirements. The registration statement becomes effective within 20 days, as per Section 8, barring any significant deficiencies or omissions. The SEC can issue "deficiency letters" suggesting changes to aid issuers in shaping their disclosures to meet investor needs.

The registration process protects investors by requiring issuers to disclose information about their company and by developing and delivering a prospectus reviewed by the SEC. Issuers are strictly liable for any misstatements or omissions in the prospectus or registration statement.

The SEC enforces the Securities Act through various mechanisms, including prosecuting issuers and sellers of unregistered securities. The Act also allows individual investors to bring civil actions under several provisions, such as Sections 11, 5, 12(a)(1), 12(a)(2), 15, and 17(a). These provisions enable investors to seek remedies for fraudulent or misleading practices related to the sale of securities.

In summary, the Securities Act of 1933 plays a crucial role in regulating the securities industry by promoting transparency, protecting investors, and preventing securities fraud.

The Securities Exchange Act of 1934

US securities laws are applicable to foreign investors, and foreign companies wishing to access the US capital markets should be familiar with the relevant laws and regulations.

The Act gives the SEC broad authority over all aspects of the securities industry, including the power to register, regulate, and oversee brokerage firms, transfer agents, clearing agencies, and securities self-regulatory organizations (SROs). It identifies and prohibits certain types of conduct in the markets and provides the SEC with disciplinary powers over regulated entities and associated persons.

The Act also mandates that companies with more than $10 million in assets and whose securities are held by more than 500 owners must file annual and other periodic reports, which are publicly available through the SEC's EDGAR database.

Additionally, the Securities Exchange Act of 1934 governs the disclosure in materials used to solicit shareholders' votes during annual or special meetings for the election of directors and approval of other corporate actions. Proxy materials must be filed with the SEC in advance to ensure compliance with disclosure rules, allowing shareholders to make informed decisions.

The Act further requires disclosure of important information by anyone seeking to acquire more than 5% of a company's securities, which is often done to gain control of the company. This provision ensures that shareholders are well-informed about critical corporate events.

Moreover, the Act empowers the SEC to demand periodic reporting of information by companies with publicly traded securities, enhancing transparency and investor protection.

The Investment Company Act

The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of the Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations.

Under the Act, the definition of "investment company" is broad and, in addition to covering traditional mutual fund-type investment companies, it can include entities with investment securities comprising more than 40% of their total assets, including operating companies that have substantial minority interests in other companies.

Section 3(c)(7) provides an exemption from registration under the Act for funds that place securities with highly sophisticated investors who meet the definition of "qualified purchasers" (QPs). QPs are investors that are considered sophisticated enough to evaluate such investments and the related financial risks, so they do not require the same level of protection as retail investors.

Section 3(c)(7) does not limit the number of investors to whom an issuer can sell its securities as long as such investors are all QPs. Because of this, many issuers prefer the Section 3(c)(7) exemption over the other major Investment Company Act exemption, Section 3(c)(1), which imposes a limit of 100 investors.

The Foreign Corrupt Practices Act

The FCPA defines a US person or company as any officer, director, employee, or agent of a company or any stockholder acting on behalf of the company. A foreign official is defined as a foreign political party or candidate for foreign political office. The FCPA also covers the authorization of any money, offer, gift, or promise of giving anything of value to any person, with the knowledge that all or part of it will be offered to a foreign official for the purpose of assisting the US person or company in obtaining or retaining business.

The FCPA's accounting provisions require publicly listed companies to maintain accurate books and records and implement a system of internal accounting controls. These provisions also prohibit individuals and businesses from knowingly falsifying books and records or failing to implement a system of internal controls.

Violations of the FCPA can result in significant sanctions. The US Securities and Exchange Commission (SEC) may bring civil enforcement actions against issuers and their officers, directors, employees, stockholders, and agents for violations of the FCPA's anti-bribery or accounting provisions. Companies and individuals may be subject to disgorgement of ill-gotten gains, prejudgment interest, civil penalties, and oversight by an independent consultant. The SEC and the US Department of Justice are jointly responsible for enforcing the FCPA.

The Hart-Scott-Rodino Antitrust Improvements Act of 1976

The HSR Act requires companies to file premerger notifications with the Federal Trade Commission (FTC) and the Antitrust Division of the Justice Department for certain acquisitions, mergers, and transfers of securities or assets, including grants of executive compensation. The Act establishes waiting periods that must elapse before such transactions may be completed, and authorises the enforcement agencies to extend these periods until they have sufficient information to determine whether the transaction is likely to violate Section 7 of the Clayton Act, which relates to the substantial lessening of competition.

The Act requires a filing fee, which is split evenly between the FTC and the Antitrust Division. The fee amount is based on the size of the transaction, with six fee tiers that are adjusted annually to account for increases in the Gross National Product. The fee was $45,000 for transactions of at least $78.2 million but less than $156.3 million as of February 25, 2016; $125,000 for transactions of $156.3 million to $781.5 million; and $280,000 for transactions over $781.5 million.

The filing requirement is triggered only if the value of the transaction and, in some cases, the size of the parties, exceeds certain dollar thresholds. The general rule is that a filing is required if three tests are met:

• The transaction affects US commerce.
• One of the parties has annual sales or total assets of $151.7 million or more (as of 2014), and the other party has sales or assets of $15.2 million or more (as of 2014).
• The value of the securities or assets of the other party held by the acquirer after the transaction is $68.2 million or more (as of 2012).

There is also a rule prohibiting "interlocking directorates", which means a person cannot serve on the board of directors of competing companies valued over a certain size (this amount was $27.7 million in 2012).

The HSR Act is an essential piece of legislation that decision-makers in companies seeking to merge, acquire, or be acquired must understand. It requires a detailed filing with two federal agencies, and non-compliance can result in steep financial penalties or increased regulatory scrutiny. An HSR filing is required when mergers, acquisitions of assets or equity, and joint ventures exceed a minimum value and, in some cases, an additional threshold based on the size of each party. New thresholds are issued annually.

The HSR filing is a "notification and report form" that requires companies to disclose basic information about the transaction and their businesses, such as subsidiaries, revenues, and competitive overlaps between their companies. During the waiting period, one of the US antitrust agencies reviews the transaction to ensure it is not likely to substantially harm competition. At the end of the waiting period, the investigating agency can allow the transaction to close or file a suit in court to block it. Alternatively, the agency may negotiate a settlement with the parties to resolve competitive concerns, such as requiring a divestiture of a line of business.

The initial waiting period is usually 30 days (15 days for all-cash tender offers or bankruptcy sales), during which the regulatory agencies may request further information. Failure to file can result in a civil penalty of up to $41,484 per day against the parties, their officers, directors, or partners. It is also unlawful to complete the transaction during the waiting period, and the same penalties apply.

Frequently asked questions