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

1
The Long Arm of U.S. Law -- U.S. Regulation
Reaches into the City

• Raúl Grable
• Hunton Williams LLP

2
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

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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)

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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

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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)

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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

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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

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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

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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

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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

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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

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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)

13
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

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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

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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

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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

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Anti-terrorist Legislation

• USA Patriot Act
• Compliance in addition to Sarbanes-Oxley
• Office of Foreign Assets Control, Dept of the
  Treasury
• Sanctions
• Foreign financial institutions are subject

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Extradition and U.S. Antitrust Enforcement

• Treaty makes U.S. criminal antitrust enforcement
  less difficult
• Norris Morgan Crucible in contrast to Tennant
  Christies
• 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

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

• Questions and answers