Alternatives Available for Non-U.S. Companies Looking to Trade Securities or Raise Capital in U.S. Capital Markets
With the global economy in apparent recovery and markets thawing, many non-U.S. companies—i.e., companies that satisfy the definition of "foreign private issuer" under Rule 3b-4(c) under the Securities Exchange Act of 1934 and Rule 405 under the Securities Act of 1933—are looking for opportunities in the U.S. capital markets. Their goals may include enhancing their company's profile, increasing liquidity for their securities and raising additional capital.
Asian companies have been especially active in the U.S. in 2009 with five of the 15 initial public offerings that had priced in the U.S. this year by early September being from Asia. Alternatively, companies may go public in their home markets-Hong Kong has been active this year-and then look later to the U.S. markets as a complementary trading venue. Foreign companies already trading in the U.S. over-the-counter market may also look to "uplist" to major exchanges, often as part of a capital raising effort.
Foreign companies desiring to enter the U.S. capital markets will encounter a thicket of federal and state securities laws. The degree to which these laws impose burdensome requirements on a foreign company depend in large part on whether and how it will raise capital in the U.S. or list interests in its securities in the U.S. This article highlights several common vehicles (specifically, American Depositary Receipt Programs, private placements, resales under Rule 144A, and reverse mergers) used by non-U.S. companies to facilitate trading of their securities or to raise new capital in the U.S. capital markets.
I. Alternatives for Secondary Trading in and Other Access to the U.S. Capital Markets
A. Level I and Level II American Depositary Receipt Programs
A non-U.S. company listed on a foreign stock exchange can facilitate ownership of and trading in its securities by investors in the U.S. capital markets through an American Depository Receipt (ADR) program. An ADR is a negotiable certificate issued by a U.S. depositary bank that represents an interest in a specified number of shares in the equity of a non-U.S. company that have been deposited with the depositary bank. An ADR program facilitates U.S. ownership of equity issued by non-U.S. companies by allowing share pricing in U.S. dollars and share transfers within U.S. clearing systems. A non-U.S. company may establish either a level I or level II ADR program simply to facilitate U.S. ownership and trading, or may raise new capital by offering its equity in the U.S. through a level III ADR program (see the discussion below on Level III ADR programs in Part II.A. for more details).
Non-U.S. issuers not interested in listing securities on a U.S. exchange or the Over-the-Counter Bulletin Board (OTCBB), and which are otherwise exempt from registering their securities under the Securities Exchange Act of 1934, may set up a level I ADR program to trade their securities on the U.S. over-the-counter market through the pink sheets. Trading in the pink sheets requires minimal disclosure and, assuming certain requirements are met, no Exchange Act registration or periodic reporting with the SEC, although a simple registration statement must be filed under the Securities Act of 1933 with respect to the initial issuance of the ADRs. Non-U.S. companies with less than 300 U.S. shareholders or whose primary trading market is overseas and who maintain a website in English on which material information about the company is promptly posted, are generally exempt from the Exchange Act registration requirements. The benefits of a level I ADR program may be limited. Companies with level I ADRs do not receive much publicity, and investor interest in securities traded on the pink sheets is significantly less than is enjoyed on the exchanges. Trading in level I ADRs may be sporadic and volatile.A non-U.S. issuer desiring to be listed on a U.S. national exchange (e.g. NYSE or NASDAQ) may establish a level II ADR program to list the ADRs that represent the issuer's equity securities. To establish a level II ADR program, an issuer must file under the Exchange Act with the SEC a detailed registration statement as well as annual and interim reports. The issuer must also meet the additional listing requirements of the exchange where it desires to be listed and file the simple registration statement under the Securities Act for the initial issuance of the ADRs. Due to the additional burden of complying with these disclosure and reporting requirements, a level II ADR program costs considerably more to establish and maintain than a level I ADR program. Nonetheless, the benefits of the level II ADR program are significant because the issuer will greatly enhance its visibility by being listed on the NYSE or NASDAQ, which may boost investor confidence and interest in the issuer. As a listed company, the issuer will be better positioned for future capital-raising in the U.S.
B. Reverse Merger
The so-called "reverse merger" is one way that a non-U.S. company can go "public" in the United States. Although a reverse merger does not enable the non-U.S. company to raise new capital immediately, it provides the non-U.S. company access to the U. S. national exchanges or the OTCBB.
To effect a reverse merger transaction, a private non-U.S. company locates a suitable U.S. public company shell. Once a suitable shell is located, an agreement is executed whereby control of the public company shell is conveyed to the non-U.S. company shareholders in exchange for 100 percent of the shares of the non-U.S. company, and the non-U.S. company becomes a wholly owned subsidiary of the public company shell. Typically the surviving U.S. public company takes the name of the non-U.S. company, its directors and officers are replaced by those of the non-U.S. company and, most importantly, the U.S. company shares continue to trade on whichever stock exchange (including the OTCBB) the public company shell previously traded. Where trading is to continue on a national exchange or the OTCBB, the combined company files on Form 8-K information that is comparable to that required in an Exchange Act registration statement.
One benefit of a reverse merger transaction it that it can be accomplished faster than an initial public offering (IPO). In addition, the non-U.S. company can enter the U.S. capital markets when market conditions for an IPO might be unfavorable. On the other hand, a reverse merger transaction can be time consuming and expensive depending on the diligence required of the public company shell. Further, because the securities are not being offered through an underwriter, the transaction will generate less public visibility for the non-U.S. company operations than an underwritten IPO.
II. Alternatives for Raising Capital in the U.S.
A. Public Offering: Level III American Depositary Receipt Programs
Under a level III ADR program, a non-U.S. issuer offers its ADRs in a registered public offering to U.S. investors, and typically lists the securities on a national securities exchange. While it is possible for the non-U.S. company to make an initial offering of its shares through an IPO, the typical route to capital for a non-U.S. company is through the level III ADR process. The use of level III ADR program alleviates certain administrative burdens that an offering of non-U.S. company's shares imposes because the ADR shares are priced in U.S. dollars and share transfers occur with U.S. clearing systems. The non-U.S. company must file a registration statement with the SEC under the Securities Act prior to the offering, register the securities under the Exchange Act and file periodic reports as required under the Exchange Act after the offering. A level III ADR program allows an issuer to raise capital publicly and greatly enhances the company's profile and liquidity for interests in its equity. However, the associated costs of registration are high. Moreover, the extensive and ongoing disclosure requirements can be burdensome on the issuer.
B. Private Offering and Resale
i. Private Placement Using Rule 506 Under Regulation D
As a less burdensome alternative to the level III ADR program, a private placement allows a non-U.S. company to offer its shares as "restricted securities" to certain qualified U.S. investors. Offering securities under Rule 506 of Regulation D is one of the most common and flexible forms of private placement. A Rule 506 offering allows an issuer to raise an unlimited amount of capital without filing a registration statement or periodic reports with the SEC as long as the shares are only offered to accredited investors (e.g. financial institutions, insurance companies, and investment companies, etc.) or to no more than 35 non-accredited investors. However, unlike securities issued through a public offering, securities issued through a private placement are restricted, which means the investors receiving these securities cannot sell them publicly for at least one year (if the issuer remains a private company). Compared to a public offering, a private placement generally costs less and takes a shorter time to complete. Also, general solicitation of investors is not allowed in a Rule 506 offering, so there are limits on the manner in which the offering may be conducted. These limitations, coupled with the limitations on the number and type of purchasers and on resales, make a Rule 506 offering a relatively unsatisfactory alternative for a non-U.S. issuer to gain access to the public markets or enhance the company's investment visibility and liquidity.
ii. Private Resale of Securities Under Rule 144A
Securities of a non-U.S. issuer that have been sold in or outside the U.S. may be resold to and among U.S. investors in accordance with Rule 144A. Rule 144A permits resales of a non-U.S. company's unregistered securities to and among large institutional investors that qualify as "Qualified Institutional Buyers," or "QIBs." Typically, Rule 144A resales follow the initial private placement of the securities under Rule 506 of Regulation D to a securities firm acting as an initial purchaser. The securities firm agrees to resell the securities to QIBs. The securities sold to the QIBs are "restricted securities," but they can be traded freely among QIBs. Additionally, because the securities are not listed or traded publicly, the non-U.S. issuer will be exempt from the Exchange Act reporting obligations so long as it is not otherwise required to file a registration statement with the SEC under the Exchange Act. While a Rule 144A transaction does not give the non-U.S. company the same level of visibility or publicity as an IPO, when coupled with a private placement, it can be a quicker and more efficient way to raise capital.
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