The Long Arm of U.S. Law -- U.S. Regulation Reaches into the City

The Long Arm of U.S. Law -- U.S. Regulation Reaches into the City

Raúl Grable

Hunton & Williams LLP

Securities Regulation, Anti-terrorist Laws and Antitrust Enforcement

U.S. investor interest in London market

Traditional SEC concern with “flow back”

Relative ease of U.S. investor access

Worldwide criminal enforcement of securities laws – NatWest 3 and Foreign Corrupt Practices Act

USA Patriot Act, OFAC Regulations

Antitrust enforcement

Increased interest in criminal penalties as enforcement mechanism

UK/US Extradition Treaty, 2003

Basic Framework of U.S. Securities Laws

Federal statutes enacted after Stock Market Crash of 1929 to protect individual and institutional investors

U.S. Securities Act of 1933 Regulates offerings of equity and debt securities Offerings “registered” with Securities and Exchange

Commission or “exempt from registration” U.S. Securities Exchange Act of 1934

Regulates trading of equity and debt securities Companies that “register” equity securities with SEC

are “public companies” Special rules for debt securities and American

Depositary Receipts (ADRs)

Exemption from SEC Registration

Exemptions available from registration of offerings under the ’33 Act and registration of securities under the ’34 Act

There is no exemption from the anti-fraud rules under the U.S. securities laws

Potential liabilities under U.S. securities laws whenever dealing with U.S. investors

Maintaining Exemption of Shares from ’34 Act Registration

Even if you have not targeted sales to U.S. investors, they may turn up uninvited

Statutory rule – less than 500 holders of record Exemption for companies with total assets less than

$10 million (non-U.S. companies must also not be quoted on NASDAQ or OTCBB)

Rule 12g3-2 exemption for non-U.S. companies with 300 holders of record or more located in U.S. Must submit periodic reports required by host

country authorities to SEC (deemed not “filed”) No NASDAQ trading of shares or ADRs (other than

grandfathered companies)

Regulation S Offering Exemption

Safe-harbour regulation for offerings outside the United States

Recognition of some limits to extraterritorial application of U.S. law

“Offshore transaction”

No “directed selling efforts” in U.S.

Offering restrictions

No sales to “U.S. persons”

Distribution and transfer restrictions may apply

Broker U.S. contacts strictly regulated by Rule 15a-6

Reg. S Offering Exemption (Distribution and Transfer Restrictions)

Category 1 (no distribution restrictions)

Non-U.S. issuer with no “substantial U.S. market interest” (less than 20% of trading in U.S. markets and 55% or more of trading in single other country)

Category 2 (40-day distribution compliance)

Shares of non-U.S. companies registered with SEC or debt of any non-U.S. company or SEC-registered U.S. company

Category 3

All offerings not satisfying either Category 1 or Category 2

Reg. S Offering Exemption (Category 3 Distribution and Transfer Restrictions)

Category 3 distribution compliance No offers or sales to U.S. persons for one year

(equities of companies not registered with SEC) or 40 days (debt)

Buyer must certify it is not U.S. person or has other SEC exemption

Buyer must agree to limit resales Category 3 transfer restrictions

Mem/Arts or similar restriction on transfers to U.S. persons in absence of registration or available exemption

Share certificates of U.S. companies must bear similar legend restricting transfer

Regulation D Offering Exemption

Regulation D “safe harbour” criteria

Accredited investors

No general sales efforts

Limitations on resale

Information for investors not meeting “accredited investor” standard

Series of private placements can be “integrated” and considered a public offering

Reg. D Offering Exemption (Rule 144A)

“Rule 144A Offering” Strictly speaking, Reg. D offering, Rule 144A resales In effect, Rule 144A offering is exclusively to

Qualified Institutional Buyers QIBs automatically qualify as “accredited

investors” under Reg. D – prescriptive list, buyer verification

QIBs have no resale restrictions so long as selling to other QIBs

QIBs have more difficult burden to claim information inadequate

U.K. Offering to U.S. Investors

Reg. S offering and Reg. D private placement Care with selling channels and offering and

distribution restrictions Resale restrictions – must use paper share

certificates for AIM trading (for time being) Due diligence if Reg. D not restricted to Rule 144A

QIBs Simple U.S. wrapper for U.K. offering circular

Rule 144A “offering” Less burden in tracking resales and buyer due

diligence U.S. wrapper simpler and more standardised

U.K. Offering to U.S. Investors

Rule 15a-6 restrictions on activities of non-U.S. brokers apply to SEC-registered offerings and private placements alike

Placing arrangements need to reflect Reg. S, Reg. D and (if applicable) Rule 144A warranties from prospective buyers and agreements as to restrictions on resale (i.e., accredited investor or QIB warranties, no sales to non-U.S. persons in absence of SEC registration or exemption from registration)

Criminal Enforcement of U.S. Securities Laws

Securities laws had criminal penalties from outset

Insider trading (Chiarella and Milken)

Criminal fraud (Skilling, Lay et al.)

Prosecutors also used “wire fraud” statute (18 USC § 1343) and “false statements” statute (18 USC § 1001)

NatWest 3

Foreign Corrupt Practices Act

NatWest 3

Wire fraud instead of securities fraud

“Fraud” against employer

Faxes, e-mails and wire transfers between London and Houston

UK/US Extradition Treaty, 2003

Extradition battle lost

Case set for trial in September 2007

Defendants confined to Houston

US/UK Extradition Treaty, 2003

Ratified by U.S. Senate, 30 September 2006

Must be an offence in both countries

Even with ratification, treaty is still asymmetrical

U.S. requirements

“Such information as would provide a reasonable basis to believe that . . . offense committed”

Certified by “principal diplomatic or consular officer of the United States” in relevant part of UK

UK requirements

No additional information beyond warrant

Signed by U.S. magistrate and certified by U.S. Department of State

Foreign Corrupt Practices Act

1977 “Watergate” era anti-bribery law incorporated into ’34 Act

Improper payments or gifts to foreign officials “material” no matter how relatively small

Criminal sanctions

Recent prosecutions

Statoil

Schnitzer Steel

Cooperation does not always avoid criminal penalties

Anti-terrorist Legislation

USA Patriot Act

Compliance in addition to Sarbanes-Oxley

Office of Foreign Assets Control, Dep’t of the Treasury

Sanctions

Foreign financial institutions are subject

Extradition and U.S. Antitrust Enforcement

Treaty makes U.S. criminal antitrust enforcement less difficult

Norris – Morgan Crucible in contrast to Tennant – Christie’s

Both price-fixing cases

Recharacterisation of price-fixing as “conspiracy to defraud” – added obstruction of justice

Price-fixing now criminal under Enterprise Act

Morgan Crucible settled criminal case with U.S. Department of Justice without including Mr Norris

Antitrust Criminal Penalty Enhancement and Reform Act, 2004

Corporate penalty raised to $100 million

Individual penalty raised to $1 million and 10 years imprisonment

The Long Arm of U.S. Law – U.S. Regulation Reaches into the City

Questions and answers