Transcript www.sii.org.uk

The Long Arm of U.S. Law -- U.S.
Regulation Reaches into the City
Raúl Grable
Hunton & Williams LLP
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
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)
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
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)
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
Reg. S Offering Exemption (Distribution and
Transfer Restrictions)

Category 1 (no distribution restrictions)


Category 2 (40-day distribution compliance)


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)
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
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
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
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
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
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 nonU.S. persons in absence of SEC registration or
exemption from registration)
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
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
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Extradition battle lost

Case set for trial in September 2007

Defendants confined to Houston
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

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“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
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
Anti-terrorist Legislation

USA Patriot Act


Compliance in addition to Sarbanes-Oxley
Office of Foreign Assets Control, Dep’t of the Treasury

Sanctions

Foreign financial institutions are subject
Extradition and U.S. Antitrust Enforcement

Treaty makes U.S. criminal antitrust enforcement less difficult

Norris – Morgan Crucible in contrast to Tennant – Christie’s

Both price-fixing cases
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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
The Long Arm of U.S. Law – U.S. Regulation
Reaches into the City
Questions and answers