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Foreign Investment

Securities markets have become increasingly international in scope in recent years. This has raised issues as to the extent to which the Securities and Exchange Commission (SEC) and U.S. courts can apply U.S. securities laws to transactions with connections to the U.S. and to foreign countries. There are three categories of transactions that raise jurisdictional issues:

  • U.S. transactions in foreign securities,
  • Foreign transactions in U.S. securities, and
  • Foreign transactions in foreign securities that have an impact on U.S. investors or markets.

The substantive provisions of many U.S. securities laws speak in terms of "the use of facilities of interstate commerce or of the mails" to effect a transaction. Interstate commerce includes commerce between any foreign country and the U.S., meaning that most transactions in the above categories are covered by U.S. securities laws.

Foreign issuers who wish to make public offerings of securities to U.S. investors are, like domestic issuers, subject to the registration requirements of the Securities Act of 1933 (1933 Act). Between the United States and Canada, a "multi-jurisdictional disclosure system" was adopted in 1991 whereby Canadian issuers can accomplish U.S. registration of their securities according to the requirements of the Canadian regulatory authorities. Likewise, several Canadian provinces have adopted comparable rules permitting U.S. issuers to register securities in Canada according to the requirements of U.S. securities laws. This is a major step toward internationalized securities regulation.

Foreign issuers are in most cases entitled to rely on the same exemptions from registration as domestic issuers. However, the entire offering, including the part of the offering that occurs in the foreign country, must meet the requirements of the exemption.

When U.S. investors purchase foreign securities in secondary transactions, and the securities come to be traded on U.S. exchanges or on the over-the-counter markets, U.S. securities laws requiring registration and filing of annual reports and proxy solicitation materials come into effect. However, because in these circumstances the foreign issuers have made no securities offering in the United States and are not subject to U.S. jurisdiction, there is no way for the SEC to enforce these requirements. To address this problem, Congress has given the SEC authority to exempt foreign issuers if it is found that such exemption is "in the public interest and consistent with the protection of investors." The SEC has adopted a rule exempting the securities of foreign issuers if the issuer furnishes the SEC each year with copies of all material information made public in its home country during the preceding year.

Foreign investors who purchase registered U.S. securities are entitled to the same right of action as a U.S. investor in the event of a material misstatement or omission in the registration statement. However, the SEC has determined that it will not concern itself with U.S. companies making unregistered public offerings in foreign countries, solely to foreign investors, so long as the offering is not designed to result in redistribution of the securities in the United States or to U.S. investors. Even if a foreign offering by a U.S. issuer is exempt from registration, a foreign purchaser may still be able to state a claim under the antifraud provisions of the federal securities laws if misrepresentations were made in connection with the transaction.

A foreigner who engages in an illegal transaction in securities of a U.S. issuer may be held liable under U.S. securities laws if the foreigner used the mails or facilities of interstate commerce in connection with the transaction. Valid service of process on the offender can be accomplished in the offender's home country.

The courts have applied the antifraud provisions of the U.S. securities laws to transactions in foreign securities taking place outside the United States where there has been harm to U.S. shareholders of the corporation, which was defrauded. The antifraud provisions of U.S. securities laws have been held applicable where some of the actions alleged to constitute the violation occurred within the United States.

The Pros & Cons of International Joint Ventures

Many businesses choose an international equity joint venture as their international business form. An international equity joint venture involves two or more businesses in different countries combining resources to achieve a particular goal. All participants put resources into the joint venture, which operates as a separate company. While this business form can help smaller companies "go international," it does have some risks. An attorney can help you decide if an international equity joint venture is right for your business.

ProsCons
A joint venture can fill in the gaps in your company's international plan. For example, if your company has a great product idea, and another company has a production facility, the two companies can both benefit.By sharing risks at the outset, your company must also share the rewards realized in a successful venture.
Your joint venture partner can provide specialized market know-how for a particular target country.You may end up relying almost entirely on your joint venture partner's expertise in a particular market.
Joint venture partners can learn from one another and revitalize each company with new ideas and vision.Distinct corporate cultures can clash when combined, often with bad results. This is particularly true when different national cultures are involved.
Joint ventures allow companies to share the risk of a new undertaking.It can be difficult to effectively share the burden of costs and management.
Joint ventures can benefit from the combined experience of top managers.Joint ventures usually imply "joint and several liability" on the parties-meaning that if there's a lawsuit, a single joint venture partner might be liable for all of the damages from the lawsuit.

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DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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