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SEC Jurisdiction cont'd
purchased almost
$114 million of Lep's ordinary (common) shares on the London
Exchange. Subsequently, Lep disclosed adverse information about
its business activities, and its stock price fell 97 percent.
In the United States District Court,
Itoba argued that Lep had violated U.S. securities laws by failing
to disclose material information earlier. One of Lep's directors
sold a large block of Lep ADRs on the same day that Itoba purchased
a block of Lep shares in London. Itoba claimed that the Lep director
did not properly report his trading activity and asserted that
it would not have purchased the stock if Lep and the director
had properly reported this information.
The District Court held that it
did not have jurisdiction over this case because it involved
the purchase of stock of a London based company on the London
Exchange. However, in a decision that appears to have extended
the extra-territoriality of the United States securities law,
the Circuit Court asserted jurisdiction.
In finding that it had the authority
to hear this case, the Circuit Court modified the existing standard
for evaluating whether jurisdiction exists. Previous opinions
had been based on two discrete tests: "conduct" and
"effects." Conversely, in this case, the Court stated
that if the facts do not meet one of the established guidelines,
then the two tests could be combined in order to evaluate the
facts. The result, however, has been a clouding of the standard
for future decisions.
It is unclear whether the Court
found that it had jurisdiction because fraud existed and many
United States investors were injured (about 50 percent of ADT's
shareholders are United States citizens), or if the Court's decision
reflected a desire to increase the class of cases that fall within
American boundaries. This issue will not be clarified until another
case reaches the Court. Foreign businesses will need to be concerned
whether their conduct abroad might adversely affect United States
investors. If so, these businesses would be wise to comply with
the securities laws of the United States to avoid finding themselves
defending a suit brought against them in a Federal court. No
longer does the mere offshore nature of the transaction protect
the issuer.
| . . . Reg S continued
period restricted by the Regulation,
or that the transaction is such that there is no reasonable expectation
that the securities could be viewed as actually coming to rest
abroad. As such, these transactions should not be receiving the
benefits of Regulation S and should not be considered to be an
offer and sale outside of the U.S.
The Commission notes that there
are also situations involving parking securities with offshore
affiliates of an issuer or distributor. In such cases, Regulation
S is typically used as the basis to sell securities to offshore
shell entities formed by the issuer or a distributor to purchase
the securities. The entities then hold the securities for the
restricted period prescribed by the Regulation. Once that period
has passed, the sale proceeds make their way back to the issuer
or distributor. This type of transaction, according to the SEC,
should not qualify for either of Regulation S's safe harbors.
The SEC is taking enforcement action
against those seeking to evade registration requirements of the
33 Act by improper use of Regulation S. The SEC is also considering
whether it is necessary to amend the Regulation to avoid abuses
and is asking for comments. The following are suggestions received
by the SEC currently under consideration:
Changing restricted period. The
current restricted period for the issuer safe harbor for offerings
of securities of domestic companies reporting under the Securities
Act of 1934 ("Category 2") is 40 days. It has been
suggested that the restricted period be extended to one year.
It has also been suggested that the share certificates bear an
appropriate legend.
Exclusion of discounted offers
from the safe harbor. It has been suggested that Category 2 of
the issuer safe harbor be limited for use by domestic issuers
offering common stock to those offerings sold at market price
or with a specified nominal discount. Issuers selling at a disqualifying
discount could only proceed under the Regulation where the facts
and circumstances established that the placement was in fact
an offshore offer and sale and not part of a plan or scheme to
evade the registration requirements of the 33 Act.
Restrict risk shifting transactions
during the restricted period. The SEC is considering whether
the safe harbor should require selling restrictions limiting
a purchaser's ability during the restricted period to sell short
or otherwise take a short position with respect to, or otherwise
hedge the risk of, holding common equity securities.
Prohibit payment with certain types
of non-recourse or other types of promissory notes where the
expectation of repayment derives solely from the resale of securities.
The SEC is considering whether the issuer safe harbor should
be amended to prohibit (or limit through tolling the restricted
period) payment for common equity securities with certain types
of non-recourse or other types of promissory notes where the
expectation of repayment derives primarily from the proceeds
on resale of the securities.
If you would like to submit comments
to the SEC or if you wish to discuss Reg S and its implications,
you can do so by forwarding them to our office or by calling
us.
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