Raising Capital from Foreign Investors

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Foreigners can invest in U.S. securities offerings easier than U.S. persons. That’s because the Securities Act of 1933 protects U.S. investors by placing numerous restrictions on securities offered to U.S. persons. However, those restrictions do not apply to foreign investors who invest under Regulation S of the Act. Note that the issuer of securities can decide to treat foreign investors as the same as U.S. investors, in which case all of the same restrictions will apply to both U.S. and foreign investors. But, if the issuer wants to simplify the process for foreign investor, the issuer can rely on Regulation S.

With Reg. S, there are no investor qualification requirements (i.e.they don’t have to be accredited or “sophisticated”) and no limit on the number of investors. To be eligible for Reg S: (1) offers and sales of the securities must be made only to foreign investors, and (2) no offering participant can engage in “directed selling efforts”that target the US market. “Foreign investors” are non-U.S. citizens who do not reside in the U.S. and who are not in the United States at the time of the offer and sale. “Directed selling efforts” are defined by Rule 902(c) as “any activity undertaken for the purpose of, or that could be reasonably expected to result in, conditioning the U.S. market for the relevant securities.” In other words, issuers cannot advertise the offering in the US, send promotional materials to US investors or hold promotional conferences in this country. But the issuers can sell from the US to investors located abroad. Any Internet selling efforts must ensure that: (1) the Web site includes a prominent disclaimer that the offer is directed only to foreign countries, and (2) the Web site offeror implements procedures to reasonably ensure no securities actually get sold to U.S. persons.

A separate Regulation D offering can be made to U.S. investors that overlaps the offering to foreign investors. The two offerings must be kept separate, even if the materials for each may be similar.

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