More and more U.S. companies are interested in having foreign investors
invest in their offerings of securities (stock, limited liability company
units, etc). Additional requirements apply, but often the extra effort is
easily worth it.
A securities offering limited to California only (an “intrastate”
offering) is governed by California law alone. (Actually, to qualify as
an intrastate offering, the offering must not only be limited to California
investors; in addition, the company must be a California company, must have
its principal place of business in California and must have at least 80%
of its assets, revenues and expenditures in California.) If the offering
is made to non-U.S. investors, then because transactions between a state
and a foreign country are deemed to be “interstate” transactions,
federal law applies even if the offering is not being made to investors
in other U.S. states besides California.
That means that federal registration or use of a federal exemption (such
as Rule 506) is required. It is perfectly fine to use one of the standard
federal exemptions like Rule 506 when an offering includes both U.S. and
foreign investors. The problem is that the company making the offering may
not like some of the restrictions the exemption imposes. For example, with
a Rule 506 offering no public advertising is allowed and all investors must
be accredited or sophisticated (which often rules out some friends and family
Federal Regulation S provides another exemption, though. It states that
no registration or exemption is required if an offering is completely limited
to foreign residents, each investor is not present in the U.S. when the
sale is made, and each signs certificate stating that the investor will
not sell the securities into the U.S. unless they comply with U.S. securities
laws. (There must also be a legend on the stock certificate or other evidence
of ownership to that effect.) Note, though, that federal law regarding securities
fraud still applies, so all information that a potential investor would
reasonably want to know before deciding to invest must be disclosed.
The company can still make a separate (even simultaneous) intrastate offer,
though, as the federal regulations state that a Reg. S offering will not
be considered to be “integrated” with another offering even if
that offering is coincident.
The state’s securities laws still apply to an intrastate (single state)
offering, though. California law, for example, still requires that California
registration or a California exemption be used. While the California 25102(f)
exemption does not allow public advertising, the California 25102(n) exemption
allows a brief public “tombstone” advertisement, and California
qualification by permit allows full public advertising.
With a California qualification by permit offering, the only to allow public
advertising to potential foreign investors is to use TWO of these offerings,
one for California investors only and one for foreign investors only. (Otherwise
federal law applies as well.)
With the California 25102(n) offering, a SINGLE offering can be used for
both California and foreign investors (even though federal law then also
applies) if the amount being raised is $5 million or less. The reason is
that federal Rule 1001 expressly exempts California 25102(n) offerings from
the federal registration/exemption requirements if the amount of the offering
is $5 million or less. If a company wants to raise more than $5 million,
then the solution is to use TWO 25102(n) offerings, one for foreign investors
only and one for California investors only. That requires two private placement
memorandums, two subscription agreements and separate filings for the 25102(n)
forms – but it takes relatively little additional work to edit the first
offering to make a second one.
You are welcome to copy and distribute this document for non-commercial purposes, but both of the following must be left on it:
Bruce E. Methven
2232 Sixth Street Berkeley, CA 94710
Phone: (510) 649-4019; Fax: (510) 649-4024
Web Site: www.TheCaliforniaSecuritiesAttorneys.com
Copyright 2009 Bruce E. Methven, All Rights Reserved.
The foregoing article constitutes general information only and should not be relied upon as legal advice.