US securities laws applicable to European and UK equity offerings

The US is the world’s largest capital market. It is a significant potential source of funding for issuers, and as a result, many issuers who have, or will have, a primary listing in Europe or the UK want the ability to offer securities to US investors.

The US federal securities laws are broadly construed and in many cases apply to offerings made outside of the United States. As a result, issuers need to be very careful about how they offer and sell securities in the United States. An understanding of US securities laws is important and engaging legal counsel that is able to provide US legal advice on an offering provides significant advantages.

The basic rule for raising capital in the United States, which is found in the US Securities Act of 1933, as amended (Securities Act), is that all securities must be either registered with the US Securities and Exchange Commission (SEC) before they are offered or sold to US investors, or otherwise offered and sold subject to an available exemption from the registration requirements of the Securities Act. SEC registration is an expensive and time consuming process. Consequently, many issuers that intend to list on a primary market outside of the United States typically rely on one of the exemptions or safe harbours from the registration requirements of the Securities Act in order to offer and sell securities to investors in the United States without first having to register that offer and sale with the SEC. Issuers typically offer securities to a select number of sophisticated US investors through a private placement, which operates as an “add on” to the initial or follow-on public offering made in their home jurisdiction. 

This section provides a basic overview of the framework of US securities regulation relevant to European and UK equity offerings. The framework focuses on common exemptions and safe harbours under the Securities Act from registration used in the international markets, as well as an overview of the liability regime in the United States.

Federal securities laws in the United States are administered by the SEC. The most important US federal securities laws for a foreign private issuer are the Securities Act; the Securities Exchange Act of 1934, as amended (Exchange Act); the Trust Indenture Act of 1939, as amended; and the Investment Company Act of 1940, as amended (Investment Company Act). In addition to the SEC and the relevant federal legislation, each of the fifty US states also imposes some securities regulations, and there are other extra-territorial US laws which foreign private issuers should be aware of, including the Foreign Corrupt Practices Act of 1977, as amended (FCPA) and the Office of Foreign Assets Control (OFAC), some of which are discussed below.

1.The Securities Act

The purpose of the Securities Act is to enable investors to receive full and fair disclosure in connection with securities offerings in the US capital markets. The Securities Act generally governs the offer and sale of securities (including equity shares) into the public marketplace either by the issuer itself or by certain persons who, because of their relationship with the issuer, are deemed for purposes of the Securities Act to “stand in the shoes” of the issuer. Thus, it applies not only to the issuer when it is issuing equity shares in an exchange offer, but also to:

• any person who acquires equity shares directly from the foreign private issuer rather than in an open market transaction (a subscriber);
• any person who acquires equity shares from a subscriber in a private transaction (such as a family member to whom a subscriber transfers equity shares); and
• all directors, executive officers and principal shareholders in respect of any equity shares they have acquired or may acquire in any manner (i.e., regardless of whether from the foreign private issuer or in an open market transaction).

The Securities Act provides, among other things, that it is unlawful for the foreign private issuer or any of the above persons to offer or sell securities unless either:

• the securities have been registered with the SEC (i.e., there is a Securities Act registration statement then in effect and a prospectus is available) with respect to that offer and sale (See The Securities Act: registration of securities below); or
• one of several possible exemptions or safe harbours from registration is used.

2.The Exchange Act

In broad terms, the Exchange Act governs reporting obligations for US registered companies and trading of securities within the public (or so-called “secondary”) marketplace. It is designed to assure that: (a) the public marketplace has an adequate and continuing flow of current information concerning the issuer; (b) “insiders” (such as the issuer’s directors, executive officers and principal shareholders) do not take unfair advantage of their positions and internal sources of information to profit from trading in equity shares, and that the SEC and the investing public is kept informed by such “insiders” as to their holdings of, transactions in, and plans and proposals with respect to, the equity shares; (c) public (i.e. “non-insider”) security holders are assured of true and complete disclosure when being asked to vote or make investment decisions with regard to their securities; (d) investors are provided with true and complete disclosure when they are asked to vote or make investment decisions with regard to their securities; (e) an issuer’s books and records are properly maintained; and (f) there is full and prompt disclosure of accumulations of large blocks of securities by certain purchasers.

The Exchange Act also contains key antifraud provisions and regulates “change-in-control transactions” (such as takeovers, election contests and tender offers), securities exchange matters, the conduct of brokers and dealers and a number of other matters.

• Beneficial ownership reporting
  Section 16(a) of the Exchange Act requires the reporting of beneficial ownership of a US public company’s equity securities by (i) directors. (ii) officers and (iii) security holders owning more than 10% of the company’s common stock. These persons are subject to scrutiny because they are presumed to have “inside” information about the company and trading on the basis of insider is prohibited. Each person or entity reporting beneficial ownership must disclose their holdings of, and transactions in, the US public company’s equity securities, including any derivatives of the securities (for example, stock options, warrants, rights and other convertible securities).
  In addition to Section 16 reporting, Section 13(d) and Section 13(g) of the Exchange Act requires the reporting of beneficial ownership of a US public company’s equity securities by each person or entity owning more than 5% of the company’s common stock, including any derivatives of the securities (for example, stock options, warrants, rights and other convertible securities). Each greater than 5% security holder must disclose their ownership, and any changes in their ownership, of the US public company’s equity securities.

Section 5 of the Securities Act prohibits offers or sales of securities involving interstate commerce or mail unless such securities are registered with the SEC (unless otherwise exempt). However, there are certain exemptions to this requirement that are commonly used by issuers and which are discussed in turn below. Securities sold under these exemptions are deemed to be “restricted securities” and are subject to transfer or resale restrictions.

Section 4(a)(2) of the Securities Act allows issuers to offer their securities in the United States without registration if the securities are privately placed in transactions that do not involve a public offering. In order to give issuers certainty about conducting a Section 4(a)(2) private placement, Regulation D was adopted by the SEC to supplement Section 4(a)(2).

Many private placements under Section 4(a)(2) are structured to comply with one of two exemptions promulgated under that Section: Regulation D and Rule 144A. Section “(4)(a)(1½)” is also a useful resale exemption developed through market practice among sophisticated investors, although not yet formally adopted by the SEC. The most recent resales exemption, Section 4(a)(7), was adopted in 2015 and we will briefly discuss it.

1.Regulation D

Regulation D provides a set of non-exclusive guidelines (each with its own requirements) for issuers conducting a private placement of securities under the Section 4(a)(2) exemption to “accredited investors” (as defined in Regulation D). Accredited investors are investors that are considered to be more sophisticated than typical retail investors but that are not necessarily large enough to qualify as “qualified institutional buyers” (QIBs) to whom an offering can be made under Rule 144A. The general guidelines for a Regulation D private placement are as follows:

• No general solicitation or advertising. Pursuant to Rule 506(b) of Regulation D neither the issuer nor any person acting on its behalf (including selling agents) may offer or sell the securities by any form of general solicitation or general advertising. General solicitation and advertising are permitted under Rule 506(c), provided certain conditions are met, although this exemption is less frequently used than Rule 506(b).
• Number of purchasers. Rule 506(b) of Regulation D does not limit the number of accredited investors who may purchase the securities, but it does limit the number of non-accredited investors to 35. Rule 506(c) is restricted to accredited investors only, but an unlimited number of them. Each purchaser needs to provide written certification providing certain representations and warranties as to their (i) investor suitability (for example, that they are an accredited investor) and (ii) investment intent (that they are acquiring the securities for their own account or for others for whom they exercise investment discretion without a view to distribution).
• Information requirements. If the securities are sold only to accredited investors, Regulation D does not require the issuer to provide investors with specific information. However, even if a private placement is limited to accredited investors, a private placement memorandum will usually be prepared and circulated to prospective purchasers both for marketing reasons and to reduce the potential liabilities of participants in the offering.
• Notice requirements. If the offering is made pursuant to Regulation D, the issuer must file Form D with the SEC within 15 days of the first sale of securities in the offering. Form D is a relatively short, “fill in the blanks” type of form that requires basic information about the issuer and the offering. Include legending securities and notifying purchasers of any “stop transfer” procedures applicable to the securities.
• Bad Actor Disqualification. If the issuer is deemed to be a “bad actor”, it cannot utilise the exemptions under Regulation D. This includes circumstances where any officers, directors, general partners, 20% owners, or underwriters have been involved in a “disqualifying event” (criminally convicted or subject to SEC or other prohibiting orders within the past five to ten years).

2.Rule 144A

Rule 144A is a re-sale exemption that allows private placements to QIBs.  It has become a popular means for issuers to place unregistered securities in larger transactions that are underwritten by investment banks such as IPOs. To qualify for an exemption under Rule 144A each of the following matters must be satisfied:

• Sales must be made to QIBs only in the US. Broadly, a QIB is defined as: (i) an institution that in aggregate owns and invests on a discretionary basis at least USD 100 million in securities of issuers that are not affiliated with the issuer, provided that any bank must have a net worth of at least USD 25 million; or (ii) a dealer with USD 10 million or more to invest on a discretionary basis acting for its own account or the account of other QIBs.
  The seller of the securities must reasonably believe that the purchaser is a QIB and should obtain certification of the purchaser’s status as a QIB.
• Information delivery requirement. Subject to a few limited exceptions, if requested by the purchaser or prospective purchaser, the issuer must provide: (i) a brief description of the issuer’s business, products and services; (ii) audited financial statements for the last two or three years (or such shorter time as the issuer has been in operation); and (iii) the most recent balance sheet, income statements and statements of security holders’ equity.
  For marketing purposes, and because of concerns about liability, an offering document is usually prepared that substantially complies with SEC disclosure rules. The timetable for a Rule 144A transaction must therefore take account of the time required to prepare an offering document that is substantially equivalent to what would be required in a US public offering. The extent to which the offering document deviates from the SEC disclosure rules will depend on factors such as the participating investment banks’ internal policies; the degree of assurance provided through 10b-5 disclosure letters (see Securities regulation liability: Rule 10b-5 below); and offering documents produced for similar transactions involving similar issuers.
• Fungibility. The securities offered cannot be of the same class as securities of the issuer listed in a US exchange or quoted on the NASDAQ. American Depositary Receipts (ADRs) issued in the United States are not considered fungible with the underlying securities listed abroad.
  Notice. The seller must take reasonable steps to ensure the purchaser is aware that the seller is relying on Rule 144A.

3.Section 4(a)(1½)

The Section “4(a)(1½)” resale procedure is not formally established by any written SEC rule or regulation and has been developed over time through market practice (however, see the paragraph below on Section 4(a)(7)). The procedure is used in private resales of restricted securities and “side-by-side” offerings made to both QIBs in reliance on Rule 144A and “institutional accredited investors” (IAIs). In these side-by side offerings the pool of investors is limited to IAIs (natural persons who meet the definition of accredited investor under Rule 501(a) are excluded from these resales).

To qualify for an exemption under Section 4(a)(1½) each of the following must be satisfied:

• Number of purchasers. The number of purchasers needs to be limited (market practice is for less than 25 purchasers) and each needs to provide a written certification providing certain representations and warranties as to their (i) investor suitability (for example, that they are QIBs or IAIs) and (ii) investment intent (that they are acquiring the securities for their own account or for others for whom they exercise investment discretion without a view to distribution).
• General solicitation and advertising. Market practice generally abides by the prohibition on general solicitation and general advertising.
• Information requirements. Purchasers need to be provided with the type of information about the issuer and the securities required in an issuer’s initial private placement of the securities. 
• Notice requirements. Include legending securities and notifying purchasers of any “stop transfer” procedures applicable to the securities.

4.Section 4(a)(7)

Section 4(a)(7) of the Securities Act brings legislative certainty to the historical resale transactions that were completed under Section 4(a)(1½) and makes clear that an individual who is not an issuer may privately resell a security if certain conditions are met, including:

• No general solicitation and advertising. The seller nor any person acting on their behalf is permitted to use general solicitation or general advertising to offer or sell the securities.
• Information requirements. If the securities are of certain non-reporting issuers, the selling security holder must request from the issuer specific information (including certain financial statements of the issuer, including the most recent balance sheet and profit and loss statement for the two preceding fiscal years).
• Bad Actor Disqualification. The seller is not a “bad actor” under Rule 506(d)(1) under Regulation D.
• Securities outstanding for 90 days. The securities must have been outstanding for at least 90 days prior to the resale.

A security holder may prefer to use Section 4(a)(7) to resell the security because the securities sold under Section 4(a)(7) will generally be exempt from state “blue sky” regulation. However, Section 4(a)(1½) may remain useful where specific financial information of the issuer is not available.

5.Regulation S

Technically the US Securities laws apply to every capital raising transaction that is conducted in Europe or the UK, regardless of whether there is a clear US nexus or not. Regulation S provides an exemption for sales outside of the US, which renders them outside the reach of the registration requirements of the Securities Act. It provides issuers, affiliates and underwriters with a safe harbour from the registration requirements and also provides a safe harbour for re-sales under Rule 904. Regulation S is not technically an exemption from the Securities Act filing requirements; instead, it provides safe harbour guidelines for determining when an offering of securities will be deemed to have occurred outside the United States (and therefore it will not be subject to registration under the Securities Act). For Regulation S to apply each of the following is required:

• The presence of an “offshore transaction”. The buyer must be outside the US when the buy order is originated, or the transaction must be executed on the physical trading floor of a foreign securities exchange.
• The absence of “directed selling efforts” in the United States. “Directed selling efforts” are defined as activities undertaken for the purpose of conditioning the United States market for any of the securities offered in reliance on Regulation S.
  Activities that could reasonably be expected to have this conditioning effect are also considered directed selling efforts. Directed selling efforts include advertisements in any publications printed primarily for distribution in the United States or with a general circulation in the United States of more than 15,000 copies per issue (including the internet), and mailing printed material to prospective investors in the United States.
  However, selling activities to QIBs in connection with a concurrent unregistered US offering of securities of the same class under Rule 144A and routine product advertising and corporate communications are not classified as directed selling efforts.
  The prohibition on directed selling efforts applies for as long as any participant in the offering is offering or selling securities, throughout the applicable “distribution compliance period” (as discussed below), if any and until any unsold allotments are sold.
• Additional category requirements are met. Regulation S divides issuers into three categories. Category 1 issuers are those whose offerings of securities have the least risk of flowing back to the United States, and include foreign issuers with no substantial US market interest in the securities being offered. Category 2 and Category 3 issuers, being issuers with certain connections to the US market, have additional restrictions imposed on their securities and are subject to a 40-day and one-year distribution compliance period respectively during which the securities may not be sold to “US persons”, as well as other restrictions.
  Category 3 restrictions are the most onerous and generally apply to US issuers. A US company (wherever it is incorporated) is treated as a US issuer for the purposes of Regulation S if (i) a majority of shares in the company are held by US persons or residents and (ii) either: a majority of the directors and officers are US persons or residents; a majority of the group’s assets are in the United States; or the business of the company is principally managed from the United States.

Rule 10b-5, promulgated under the Exchange Act, applies to any offer or sale of a security, whether public or private.  It provides that in connection with a purchase or sale, it is unlawful to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading. 

Claims under Rule 10b-5 can be brought by private investors (including class-action suits brought by multiple investors) against an issuer and financial institutions involved in the offer or sale. Financial institutions can protect themselves against liability by:

• carrying out appropriate due diligence on the issuer and its securities;
• obtaining confirmation from lawyers acting for the issuer that they have undertaken certain due diligence procedures and that, on the basis of such procedures, they have no reason to believe that the offering document contains any untrue statement of a material fact or omits any material fact (known as a Rule 10b-5 disclosure letter); and
• obtaining confirmation from the issuer’s auditors that they have undertaken certain due diligence procedures to verify the financial information in the offering document and that, on the basis of such procedures, they have no reason to believe that any material modification needs to be made to that financial information (sometimes known as a SAS-72 letter, as it is issued in accordance with the US accounting profession’s Statement on Auditing Standards no. 72 “Letters for Underwriters and Certain Other Requesting Parties”).

As a result, US offerings with a higher risk profile, particularly those made under the exemption in Rule 144A, are often accompanied by the above procedures for each offer and sale of securities. The risk profile is often determined by looking at a variety of criteria, including the size of overall offering; the proportion of the offering being sold into the United States; whether there was active marketing in the United States (e.g., a roadshow); the number of US investors; the relationship of US investors to the issuer and the financial institution involved in the offer or sale; and market interest in the United States.

10b-5 letters are typically delivered to the underwriters by securities counsel for the issuer, and by the underwriters’ own securities counsel.

A tender offer is an offer, to purchase shares of stock directly from the stockholders of a public company, for cash, other securities, or a combination of cash and securities. By making a direct tender to a target company’s stockholders to acquire their interests, the offeror can take a controlling position in a company if the majority of stockholders agree to sell their securities.

The parties engaging in a tender offer, that is extended to shareholders in the United States must comply with the SEC’s rules, which aim to ensure that stockholders are sufficiently informed of the offer to make an investment decision to prevent deceptive and manipulative conduct. Rule 14(d) under the Exchange Act and its implementing regulations set out: (i) the scope of the offer and the best price requirement, (ii) the time frames the offer must remain open for (typically 20 US business days), (iii) the method of disclosure and documentation required for the offer and process for the tendering of the stockholder securities, and (iv) the prompt payment of the tendered securities.

A tender offer is sometimes combined with a consent solicitation and/or an exchange offer.

The Investment Company Act and related SEC regulations are designed to regulate investment companies such as mutual funds. The Investment Company Act prohibits an investment company from publicly offering securities in the United States unless it is registered under the Investment Company Act or an exemption from registration applies. Registration subjects the company to far-reaching disclosure requirements, including the company’s investment objectives, types of investments, recordkeeping and its overall structure and operation. Under the Investment Company 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 Investment Company Act for funds that place securities with highly sophisticated investors who meet the definition of “qualified purchasers” (QPs) under the Investment Company Act. QPs are investors that are considered sophisticated enough to evaluate such investments and the related financial risks, so that 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. 

Where possible, issuers and their finance subsidiaries should seek to avoid registration under the Investment Company Act as the Act embodies a broad regulatory scheme intended primarily for mutual funds, unit investment trusts and closed-end investment companies.  It contains requirements that are not consistent with conducting normal commercial operations.

The FCPA is a federal law prohibiting US citizens and permanent residents (both public and private US companies and certain non-US individuals and entities) from bribing foreign government officials to obtain a business advantage and requiring companies to maintain controls designed to prevent the hiding of corrupt payments.

In securities offerings, underwriters and brokers include FCPA representations in Underwriting Agreements and Placing Agreements and those participants are typically reluctant to consider issuer-side requests to narrow or weaken the language because violations can lead to severe civil and criminal penalties and significant reputational damage. The US Department of Justice and SEC enforce the FCPA.

OFAC is an agency within the US Department of the Treasury that administers and enforces US economic sanctions programs. OFAC’s goal is to isolate the countries, entities and individuals targeted by the sanctions programs it administers. Compliance with OFAC sanctions is an important issue for US persons (which include US incorporated entities and their foreign branches) participating in a securities offering because of the severe legal and reputational consequences of violation. OFAC sanction can conflict with EU and UK sanctions, so even on European transactions it is important to consider all relevant regimes.

In securities offerings representations are included in Underwriting Agreements and Placing Agreements confirming that none of the proceeds of the offering will be received by a sanctioned individual, entity or country on the sanctions list.   

Hart-Scott-Rodino Act of 1976

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, requires certain mergers, acquisitions, and joint ventures over a certain threshold (which for 2023 is $111.4 million) be cleared by the US federal antitrust authorities before completion. Companies proposing transactions that meet the threshold must notify the Federal Trade Commission and the Antitrust Division of the Department of Justice and wait for the authorities approval prior to proceeding with the transaction.

Cryptoassets

A key area of regulatory focus in the US is on cryptoassets, which come in varying forms, including digital securities, stablecoins and non-fungible tokens. A number of legislative proposals that would set up a regulatory framework for cryptoassets are pending in Congress and may be enacted in the near future. However, formal US regulation of these assets has been largely limited to date as federal agencies continue to debate how they should respond to the complex regulatory challenges that such assets pose. This has resulted in a number of high profile cases, including the collapse of cryptocurrency exchange FTX, where US investors and others have suffered losses because they lack formal protection under regulation. As a result, agencies including the SEC, the Department of Treasury, the Internal Revenue Service and Financial Crimes Enforcement Network have been stepping up their enforcement efforts in recent years.

The SEC has indicated that it views cryptocurrencies as a security like any other stock or ETF on a stock exchange. Accordingly, it views cryptoassets as subject to relevant US securities laws, including the Securities Act and the Exchange Act. Should any issuer seek to offer cryptoassets, they should be cognisant of the ongoing regulatory environment and ensure that US securities laws are considered prior to the offer or sale of any such securities.

Marketing Restrictions

Issuers conducting private placements under Section 4(a)(2) or Rule 506(b) of Regulation D are prohibited from engaging in general solicitation or general advertising of their unregistered offerings. Issuers conducting an offshore transaction under Rule 902(C) of Regulation S are prohibited from engaging directed selling efforts in or into the US. Breaches of these provisions can result in an illegal offer of securities under US securities laws.

As a result, where an offering is extended to US investors or shareholders, care should be taken by both issuers and underwriters in how they market the offering. Issuers can continue to advertise products and services and to issue press releases regarding factual business and financial developments in accordance with past practice.

 Rule 135e allows a foreign private issuer to provide journalists with access to: (i) its press conferences held outside the United States; (ii) meetings with issuer representatives conducted outside the United States; and (iv) written press-related materials released outside the United States at or in which the issuer discusses its intention to undertake an offering. In order to comply with this rule, the offering must not be conducted solely in the United States and the issuer must   make an offering offshore concurrently with the US offering. The issuer must also provide access to both US and non-US journalists, and ensure that any written press releases are distributed to journalists outside the United States and contain a specified legend. In practical terms, for concurrent offshore offerings and US unregistered offerings, additional steps must be taken to ensure the offshore offering does not solicit buyers for the unregistered private placement.  These steps may include making the offering documents and other relevant materials that are available online password protected to ensure only QIBs or accredited investors are able to access the materials and using non-US mailing and telephone numbers.

Rule 241 allows issuers to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities and excluding certain “demo day” communications from being deemed general solicitation or general advertising. However, this Rule does not modify the terms of Rule 144A and issuers need to be cautious to avoid triggering antifraud liability under US federal law and state securities laws (blue sky laws).