The ability to conduct a public offering outside the
US without triggering the onerous requirements of
US registration depends largely on the offer not being targeted at US persons. Similarly, the ability to conduct a
US private placement depends upon avoiding general solicitation of investors and the advertising of the offering materials.
Before the internet age, one could avoid US regulation by refraining from sending offering materials by mail into the US, conducting promotional seminars in the US, advertising in the US and making a transatlantic sales pitch.
Today it has become much harder to patrol information borders or to distinguish a private placement from a public offering. Offering materials posted on a company website are immediately accessible to all persons, everywhere. Furthermore, the interactive nature of the internet can turn such offering materials into instant sales. Even as the US securities regulators enthusiastically endorse the internet as a means of increasing the transparency and efficiency of the markets, they worry that the dismantling of information barriers can lead to the evasion of US securities laws.
The recently adopted Alternative Investment Market (AIM) Rule 26 which commences 20 August, 2007, will require AIM-listed companies to post their admission documents and any similar publications sent to shareholders within the previous 12 months on their websites. Failure to comply with AIM Rule 26 can lead to the imposition of fines and expulsion from AIM.
Will the availability of non-US internet public offering of issuers or funds to US persons through the internet in compliance with AIM Rule 26 require their registration under the US Securities Act of 1933 or the US Investment Company Act of 1940? Will the requirements of AIM Rule 26 transform US private placements into public offerings?
Although the Securities and Exchange Commission (SEC) has not addressed the question of Rule 26 directly, it seems the answer to both these questions lies in the meaning of the word ‘targeting’. In several no-action letters and in a 1998 release, the SEC has provided some guidance on the effect that the internet might have on offshore offerings and private placements. The bad news is that according to the SEC, the posting of offering materials on the issuer’s website without taking any measures to guard against sales to US persons transforms an otherwise non-US offering into a US offering and transforms a private placement into a public offering requiring registration in the US.
The good news is that the SEC has prescribed certain precautionary measures that can be implemented to ensure that offshore internet offers are not deemed targeted to persons in the US or to US persons and that private offerings are not deemed offered to the public.
The extent of the prescribed precautionary measures depends on whether the issuer offering the securities is a non-US issuer or a US issuer.
In the case of a non-US issuer, the SEC would not view an offshore internet offering as targeting US persons if: (i) the website includes a prominent disclaimer making it clear that the securities are not being offered in the US or to US persons and (ii) procedures are implemented that are reasonably designed to guard against sales to US persons. Such procedures might include ascertaining the purchaser’s residence through his mailing address or telephone number prior to the sale, thereby avoiding delivery of offering materials or securities to a person at a US address. In addition, care should be taken that the offering materials include no language that appear by their content to be targeted at US persons, such as language that addresses the investor’s ability to avoid US income taxes on investments.
If the issuer conducts a US private placement concurrently with a public offering outside the US, there is a danger that the public availability of the admission documents on the internet, pursuant to AIM Rule 26, will be deemed a general solicitation and will undermine the US private placement exemption. Accordingly, in addition to the precautionary measures discussed, the issuer should implement other procedures to prevent the non-US internet public offering from being used to solicit participants for the US private placement. Such procedures might include keeping a record of investors who responded to the internet offering and precluding them from participating in the private placement even if they are otherwise qualified to do so. In addition, access to the posted offering materials should be limited to persons who first satisfy the issuer that they are not US persons. As a further precaution, and to the extent possible under UK law, the offering materials posted on the website should not refer to the US private placement.
In the case of an internet public offering outside the US by a US issuer, because there is a strong likelihood that such securities will enter the US trading markets, additional precautionary measures are required. Accordingly, in addition to the measures outlined above, password-type procedures should be implemented to ensure that only non-US persons can obtain access to the offering materials on the website.
The SEC concedes that even the best precautions can be circumvented by a US investor who responds falsely to residence questions, disguises his country of residence or uses offshore nominees in order to participate in offshore offerings. Tell-tale signs that should alert an issuer to a US purchaser’s involvement would include receipt of payment drawn on a US bank, or the provision of a US social security number. Should an offshore issuer discover the infiltration of a US person into the offering, it should re-evaluate its precautionary measures to guard against a future occurrence.
Raphael Grunfeld is a partner at Carter Ledyard & Milburn in New York.
