Part 1 of this entry introduces the hypothetical foreign broker from Qatar, Petra Ventures, which finds GCC investors for private U.S. ventures. Petra of course prefers to avoid registering as a broker with the securities laws of both its domestic and foreign jurisdiction, considering that registration is both costly and time-intensive. Assuming Petra confirms that the GCC’s regulatory regime offers a shelter from registration for foreign finders, it must still make certain of its legal standing as an unregistered entity brokering private deals partly in the U.S.
The SEC requires brokers that transact in private securities on behalf of others to register,[i] and it includes domestic private placement agents and finders into this scheme.[ii] Commission Staff guidance defines a finder as any person who finds investors for, makes referrals to, or splits commissions with registered brokers, investment companies, or other securities issuers and intermediaries—including for private venture capital placements.[iii]
The Commission offers two registration exemptions for the activities of parties to private trades.
Regulation S Exemption
Via the Regulation S Exemption, the Commission exempts issuers, distributors, and any of their respective affiliates who offer and sale outside the United States from the registration requirements.[iv] Offers occur outside the United States if:
(1) The offer or sale is made in an offshore transaction;
(2) The issuer, distributor, or any of their affiliates make no directed selling efforts in the United States; and
(3) The purchaser of the securities (other than a distributor) certifies that it is not a U.S. citizen, and is not acquiring the securities for the account or benefit of any U.S. person. Moreover, the purchaser must agree to wait one year before reselling such securities back into the U.S.
Unfortunately, Regulation S states that nothing in its Rules obviates the need for any issuer or any other person to comply with the broker registration requirements of the Exchange Act when applicable. Though at first glance it seems the Commission carved out shelter for foreign brokers by exempting affiliates of an issuer or distributor. However, the Commission shuts the door to this potential brokers exemption by explicitly mentioning just paragraphs later that broker registration requirements remain largely in tact. Petra’s ability to rely on the Regulation S exemption is at best tenuous, and it must still search elsewhere for an appropriate regulatory shelter from registration.
Foreign Broker Exemption
The SEC generally uses a territorial approach in applying registration requirements to the international operations of foreign brokers. Under this approach, all brokers physically operating within the United States that solicit securities transactions must register with the SEC, even if their activities are directed only to foreign investors outside of the United States. Additionally, foreign brokers that operate from outside of the United States who solicit U.S. investors through using the instrumentalities of interstate commerce must register.[v]
However, the Commission does provide a narrow exemption for foreign brokers who 1) operate outside the U.S., and 2) solicit exclusively to foreign entities. The Commission defines a foreign broker as any non U.S.-resident person whose securities activities, if conducted in the United States, would be described by the definition of “broker” in the Exchange Act.[vi] The Commission includes brokers temporarily present in the U.S. as well as brokers that are U.S. citizens residing abroad, into its definition of a foreign broker.[vii] Petra falls within the Commission’s definition of a foreign broker, as long as Petra maintains a substantial business presence abroad and only solicits only to foreign investors.
This Foreign Broker exemption states that a foreign broker can help U.S. investors purchase any security from foreign issuer, as long as the foreign broker transacts alongside a registered broker intermediary.[viii] Though a step in the right direction, the Foreign Broker exemption hardly fits Petra like a glove. Petra connects foreign investors to U.S issuers, rather than bring U.S. investors to foreign issuers. The language in the exemption suggests that the Commission intended to focus this exemption on transactions that bring U.S. money to foreign entities, and not the other way around. The Commission’s requirement that foreign brokers work in tandem with a U.S. registered broker as an intermediary supports this interpretation. Though both Regulation S and the Foreign Broker exemption address brokering activities within the penumbra of Petra’s business model, neither affords Petra unambiguous shelter from registration.
Persuasive secondary sources shed some light on the ambiguity of Petra’s registration requirements, stating that the SEC has not indicated that it requires registration for brokers purchasing securities in the United States and selling them to foreign investors abroad. [ix] Although the SEC could require such registration in the future, the SEC’s primary concern is the protection of American investors, not foreign.
Though the SEC has not provided an explicitly apt registration exemption for Petra Ventures, Petra may continue operating its current business model without registering as long as it complies with the following guidelines:
(1) Petra must conduct all brokering through Petra ME. Petra requires further research to determine how to appropriately separate the business activities of its two branches.
(2) Petra must only solicit non-U.S. investors, including non-U.S. Citizens temporarily in the U.S., green card holders, and foreign students.
(3) Petra ME may not even hold itself out as a broker to U.S. investors, nor may it even advertise in the United States.
(4) Petra may only solicit in the GCC region to institutional investors, government authorities, investment managers, and Petra may transact with individual investors who seek out Petra without prompting.
(5) Petra must contact a lawyer familiar with Dubai Securities Law, and conduct a more thorough understanding of this foreign regulatory system.
[i] 15 U.S.C. § 78c.
[ii] Guide to Broker-Dealer Registration, Division of Trading and Markets, SEC, April 2008, available at http://www.sec.gov/divisions/marketreg/bdguide.htm#II.
[iv] Rule 903; 17 CFR §230.903.
[v] Id. at footnote 3.
[vi] Rule 15a-6(b)(3) of the Exchange Act.
[viii] 17 CFR §240.15a-6(a)(3).
[ix] “The Regulation of Investment Management and Fiduciary Services,” 1 Reg. of Invest. Mgmt. & Fiduciary Serv. § 19:7.
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