By: Jordan Lofaro*
The Securities and Exchange Commission (SEC) regulates nearly every transaction in and party to the U.S. securities industry through its exceedingly comprehensive registration process. The Commission requires public companies to register their shares for easy tracking, and advisors, brokers, finders, and associated parties to public trades must follow suit.
Registration requirements are barely less burdensome for private market players. Unlike their public counterparts, private companies are relieved of their duty to register issued stock.[i] However, The advisors, brokers, and finders for these private transactions must still register under the Commission’s complex regulatory regime. [ii] Registration is costly and time intensive, costing upwards of $10,000 and requiring over six months to complete. With three federal Acts, thousands of pages of statutory interpretation, and 80 years of experience, the SEC rarely skips a beat. The SEC offers a handful of limited exemptions and shelters for private intrastate dealers,[iii] insurance transactions, and even now equity crowd-funding.[iv] Yet the Foreign Finder finds no clear regulatory scheme charting its path, and no conclusive registration for its transnational business model.
Consider the hypothetical Petra Ventures,[v] the Qatari foreign finder that introduces the GCC’s elite network of private investors to American start-ups. With a foot in both the U.S. and the GCC, Petra must not only abide by the often unenforced registration requirements promulgated by the Securities and Commodities Authority of Dubai (SCA),[vi] but also the SEC’s foreign finder requirements. Regulatory structures in both Petra’s domestic and foreign jurisdiction leave the firm with an inconclusive understanding of its registration requirements, but Petra must nonetheless search for its definitive regulatory structure as a transnational foreign finder.
The SCA has a limited web presence poorly translated into English from Arabic, leaving anyone without a GCC Securities lawyer with no guidance. The Securities and Commodities Authority (SCA) is the governing regulatory body for securities in Dubai, UAE. Though all six GCC nations have adopted the SCA as their own regulatory body governing securities, the GCC nations have not made clear whether the SCA has transnational enforcement authority outside of the UAE. Furthermore, those states that enforce SCA regulations do so on inconsistent and opaque terms.
The SCA’s 2013 amendments to the Investment Funds Regulation offer new guidance on the registration requirements for brokers that bring securities established outside the UAE to investors from within the UAE.[vii] Article 36 of the Regulation further requires SCA approval for any promotion of interests in a Foreign Fund in the UAE, with no general exemptions available for private equity placements or for funds targets solely at sophisticated or institutional investors. Article 36 requires GCC brokers to register with the SCA further requires foreign funds to appoint a “local promoter or placement agent” when offering a foreign fund in the UAE.[viii] These transactions must bring minimum subscription amount per investor of AED 10 million (approximately US$ 2.7 million). The SCA imposes a series of obligations on local placement agents, including a duty of care in selecting a Foreign Fund, record-keeping duties, certain “know-your-client” obligations, and a duty to facilitate the exchange of ownership documents.
However, the SCA’s regulatory exemptions still provide Petra Ventures with a glimmer of clarity, and a pathway toward registration-free business dealings. GCC brokers that solicit exclusively foreign funds exclusively to certain GCC investors fall outside the scope of Article 36 entirely. Those certain investors include:[ix]
(1) UAE authorities and governments;
(2) Institutional investors;
(3) Investment managers who have authority to make investment decisions on behalf of their clients; and
(4) Deals that were initiated by UAE investors on a reverse-solicitation basis. However, brokers must keep records that prove the enquiry originated from the investor.
Through the 2013 Amendments, the SCA creates a prudent balance between maintaining retail investor protection, and promoting the UAE as an attractive financial hub for foreign fund sponsors and managers.[x] Once Petra Ventures obtains appropriate legal counsel from a securities lawyer well-versed in the UAE’s securities law, it may well confirm that it’s free to find GCC investors for U.S. ventures.
Petra may have won the domestic half of the battle, but the foreign jurisdiction’s requirements loom large. The firm must still search for the SEC’s exemption for foreign finders, or else succumb to its burden to register under the U.S.’s securities regime.
Stay tuned for Part 2 of Regulatory Wild West for Foreign Finders.
[i] 15 U.S.C. § 77(d)(a)(2).
[ii] 15 U.S.C. § 78o(a).
[iv] “Crowdfunding under the JOBS Act,” Carlton Fields Jordan Burt law blog, available at http://www.cfjblaw.com/crowdfunding-under-jobs-act/.
[vii] Board Resolution No. 36-37, Investment Funds Regulation, Securities and Commodities Authority, available at http://www.sca.gov.ae/English/legalaffairs/LegalLaws/AmendedRules/2000_1_R.pdf.
[viii] Board Resulution No. 38, Investment Funds Regulation, Securities and Commodities Authority, available at http://www.sca.gov.ae/English/legalaffairs/LegalLaws/AmendedRules/2000_1_R.pdf.
[ix] Interpretive Guidance, available at file:///C:/Users/lofaro.j/Downloads/amendments-uae-investment-funds-regulation.pdf.
[x] SCA Guidance, available at http://www.nortonrosefulbright.com/knowledge/publications/70447/update-uae-investment-funds-regulations-issued.
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