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Cross-Border Reach of US Securities Regulation

Cross-Border Reach of US Securities Regulation. US firms selling abroad Foreign firms selling in US Foreign securities transactions in US courts. Last updated 05 Mar 12. Flows. US offering abroad that flows back to US (flowback). Flows. Foreign offering that seeps into US (seepback).

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Cross-Border Reach of US Securities Regulation

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  1. Cross-Border Reachof US Securities Regulation US firms selling abroad Foreign firms selling in US Foreign securities transactions in US courts Last updated 05 Mar 12

  2. Flows • US offering abroad that flows back to US • (flowback)

  3. Flows • Foreign offering that seeps into US • (seepback)

  4. Fraud • Fraud shot from USinto foreign country • (US “conduct”)

  5. Fraud • Fraud from foreigncountry aimed at US • (US “effects”)

  6. Flowback

  7. Electro Motors Corp. (a California corporation) is a start-up company with plans to develop and sell electric cars.  It does not have any public investors and is not a reporting company under the Exchange Act.  It is looking for financing. Identify any problems with the following: Regulation S (see preliminary notes) Hypo #1 (flowback)

  8. Electro Motors will sell readily-negotiable bearer bonds denominated in U.S. dollars in Europe (so-called "Eurobonds"), principally in stock exchanges in car-crazy Germany and Italy. Reg S treats as “outside US” if debt offering – by reporting U.S. issuer - Rule 903(b)(2) [by non-reporting issuer] in "overseas directed offering" - Rule 903(b)(1) [non-reporting issuer] subject to offering restrictions using 40-day temporary global security - Rule 903(b)(3) Hypo #1a (flowback)

  9. Electro Motors will sell its Eurobonds denominated in US dollars only in Germany on the Frankfurt Stock Exchange. Reg S treats as “outside US” if debt offering – [by non-reporting issuer] in "overseas directed offering" - Rule 903(b)(1) Hypo #1b (flowback)

  10. Electro Motors will denominate its non-convertible bond offering in Euros and sell them only on the Frankfurt Stock Exchange, though to make the offering more marketable there will be no restrictions on resales. Reg S treats as “outside US” if debt offering – [non-reporting issuer] subject to offering restrictions using 40-day temporary global security - Rule 903(b)(3) Hypo #1c (flowback)

  11. Dulces, Inc. (a Delaware corporation) designs and sells women's footwear worldwide.  Its common stock is traded on Nasdaq, and Dulces is a reporting company under the Exchange Act.  Any problems with the following?  Dulces issues new common stock at 40% discount to mysterious Swiss investors Dulces receives unsecured promissory notes on which no interest will accrue for 51 days After 40-day restricted period, Swiss purchasers can resell shares on U.S. trading markets Swiss purchaser then uses proceeds from these resales to pay Dulces. In re Candie’s, Inc. Securities Act Release No. 7263 (Feb. 21, 1996) Hypo #2 (circumvention)

  12. International securities fraud

  13. Hypo #3 (Int’l securities fraud) ADT Lep Group is a British holding company. Its stock trades on the London stock exchange. (Lep Group’s ADRs also trade on NASDAQ.) ADT Ltd (NYSE-listed) owns ADT Securities Systems, a Delaware-based security protection firm. ADT wants to expand and increase its holdings in Lep Group, which owns National Guardian – an ADT competitor. ADT investigates and through its finance arm Itoba buys $114 million of LEP Group stock on the London exchange. Itoba Purchases stock NASDAQ London Stock Exchange stock ADRs Lep Group

  14. Hypo #3 (Int’l securities fraud) ADT Within a year, Lep Group collapses. Its stock prices falls 97%. Business reversals! ADT says that Lep Group knew about the pending collapse and had failed to disclose in its UK annual reports and its US Form 20F. Can ADT/Itoba sue under 10b-5 in US court? • Conduct test – rely on Warburg’s reading of 20F • Effects test – collapse of price harms ADT Itoba Purchases stock NASDAQ London Stock Exchange stock ADRs Lep Group

  15. Morrison v. Nat’l Australia Bank …the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States. [Thus, §10(b) applies only to] transactions in securities listed on domestic exchanges, and domestic transactions in other securities …. Facts: NAB acquires Florida mtg servicer. NAB shareholders, who bought on Australia stock exchange, claim NAB covered up shaky acquisition – 10(b) fraud.

  16. The end

  17. Flows US offering abroad that flows back to US Foreign offering that seeps into US Int’l securities fraud Fraud “shot” from US into foreign country Fraud “shot” from abroad into US What’s the problem?

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