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Foreign Investors in U.S. Securities Offerings

More and more U.S. companies are interested in having foreign investors invest in their offerings of securities (stock, limited liability company units, etc). Additional requirements apply, but often the extra effort is easily worth it.

A securities offering limited to California only (an "intrastate" offering) is governed by California law alone. (Actually, to qualify as an intrastate offering, the offering must not only be limited to California investors; in addition, the company must be a California company, must have its principal place of business in California and must have at least 80% of its assets, revenues and expenditures in California.) If the offering is made to non-U.S. investors, then because transactions between a state and a foreign country are deemed to be "interstate" transactions, federal law applies even if the offering is not being made to investors in other U.S. states besides California.

That means that federal registration or use of a federal exemption (such as Rule 506) is required. It is perfectly fine to use one of the standard federal exemptions like Rule 506 when an offering includes both U.S. and foreign investors. The problem is that the company making the offering may not like some of the restrictions the exemption imposes. For example, with a Rule 506 offering no public advertising is allowed and all investors must be accredited or sophisticated (which often rules out some friends and family members).

Federal Regulation S provides another exemption, though. It states that no registration or exemption is required if an offering is completely limited to foreign residents, each investor is not present in the U.S. when the sale is made, and each signs certificate stating that the investor will not sell the securities into the U.S. unless they comply with U.S. securities laws. (There must also be a legend on the stock certificate or other evidence of ownership to that effect.) Note, though, that federal law regarding securities fraud still applies, so all information that a potential investor would reasonably want to know before deciding to invest must be disclosed.

The company can still make a separate (even simultaneous) intrastate offer, though, as the federal regulations state that a Reg. S offering will not be considered to be "integrated" with another offering even if that offering is coincident.

The state's securities laws still apply to an intrastate (single state) offering, though. California law, for example, still requires that California registration or a California exemption be used. While the California 25102(f) exemption does not allow public advertising, the California 25102(n) exemption allows a brief public "tombstone" advertisement, and California qualification by permit allows full public advertising.

With a California qualification by permit offering, the only to allow public advertising to potential foreign investors is to use TWO of these offerings, one for California investors only and one for foreign investors only. (Otherwise federal law applies as well.)

With the California 25102(n) offering, a SINGLE offering can be used for both California and foreign investors (even though federal law then also applies) if the amount being raised is $5 million or less. The reason is that federal Rule 1001 expressly exempts California 25102(n) offerings from the federal registration/exemption requirements if the amount of the offering is $5 million or less. If a company wants to raise more than $5 million, then the solution is to use TWO 25102(n) offerings, one for foreign investors only and one for California investors only. That requires two private placement memorandums, two subscription agreements and separate filings for the 25102(n) forms – but it takes relatively little additional work to edit the first offering to make a second one.