Regulatory Wild West for Foreign Finders: Part 2

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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 tactPetra’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.

[iii] Id.

[iv] Rule 903; 17 CFR §230.903.

[v] Id. at footnote 3.

[vi] Rule 15a-6(b)(3) of the Exchange Act.

[vii] Id.

[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.

Disclaimer: These materials have been prepared by Amin Consulting LLC for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

About Amin Consulting LLC: Amin Consulting is a uniquely positioned advisory and consulting Firm that, through our diverse team of Legal and Business experts, provides unique and niche services for Middle Eastern and United States based companies and investors.  Whether you are a U.S. Company expanding in the Middle East, or a High Net Worth Family from the Middle East looking to diversify or protect its assets, you have come to the right place.

Our team is compromised of professionals with decades of collective consulting, legal, and business experience–specifically between those two regions of the world.  Most of our consultants are Accredited and Licensed United States Attorneys as well as International Business Consultants.  That allows us to provide, not only expert advice, but also added value through vertical integration of these often interconnected services.

For more information or a free consultation, send us a message here!

Changing Markets and New Opportunities in the GCC

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By: Eduardo Gonzalez

The GCC equity market experienced what many are calling a rollercoaster ride caused by recent market corrections in oil prices at the end of 2014. The recent developments, however, also resulted in more attractive valuations of well managed oil companies that have helped retain market confidence and reports indicate the 2015 market looks promising for investors. While oil will continue to account for a large portion of GCC revenues, the volatility in emerging-market currencies will create a shift in the market psychology of the region, and consequently the region will be poised to open its borders to economic competition in other non-oil sectors.

Domestic Sovereign Wealth Investment in Other Sectors: Long-term instability in the oil market will likely cause problems for the GCC’s economic outlook, but the region’s sovereign wealth funds indicate it is well prepared to compensate for the decline in oil revenues. Collectively, the region accounts for 37 percent of the world’s sovereign wealth funds, creating an opportunity for GCC investors to generate growth in sectors the GCC has not traditionally targeted. Many argue that sovereign funds will be the drivers of economic development in the region—in particular, the region’s focus on education and real estate indicates a push to leverage human capacity. Sovereign funds will play an increasingly important role in determining the regions economic trajectory, and taking into the account the surrounding area’s financial trends will ensure investors make the best possible decisions.

Increasing Foreign Investment: Continued free trade agreement (FTA) negotiations with the Association of Southeast Asian Nations (ASEAN), China, Australia, and Europe will allow the region to benefit from more open trade borders and establish strategic partnerships with regions that excel in areas the GCC is targeting. An FTA with Singapore, for example, went into effect at the start of this year that illustrates a commitment to enhancing bilateral trade between the two regions. Ongoing talks with nearby economies will streamline the trade of goods and services, and expand the GCC’s capacity for growth. In effect, the declining profitability of oil may actually accelerate economic reform that could remove restrictions on foreign investment and generate opportunities for the GCC to address its regional challenges.

Domestic Development via Bolstering Human Capital: The GCC will experience two catalysts in 2015 that will increase growth in non-oil sectors: the first is the UAE’s and Qatar’s upgrade to emerging market status in 2014. These states will receive a great deal of attention from foreign investors—that view ‘emerging market status’ as the “Wild Wild West of investing”—and may become critical elements to the GCC’s success across different sectors in the coming years. As the region’s markets become more flexible there will be increasing opportunities for the GCC to guide investments into areas it has traditionally left out. In fact, many argue that the booming markets will be most profitable through diversified approaches. This reality highlights the second factor to watch this year: the region’s focus on increasing human capital. Dubai, for example, struggles to attract expatriates because of rising living costs, and the residential markets in both Dubai and Abu Dhabi have experienced a growing ‘supply and demand’ imbalance. This indicates a low rate of middle class nationals seeking to establish professional networks in a region experiencing infrastructure growth in all sectors. Dubai responded to this mismatch by focusing on improving the quality of education and working with foreign investors to provide first-class education systems that compete with nearby regions. Similar approaches will help the GCC retain skilled nationals and attract highly capable professional that will improve demographic imbalances across the MENA region.

The GCC is prepared to see a great deal of success in 2015, but the region will need to maneuver its efforts to work against a reliance on oil and towards development in other sectors. The GCC expects increased investment across all economic sectors as it relinquishes restrictions on foreign trade; and the region has the opportunity to strategically plan infrastructure developments to retain regional talent. The GCC has the means and resources to maintain its position as one of the most attractive regions for the tech-boom and it will do so by becoming a leader in modern standards.

Disclaimer: These materials have been prepared by Amin Consulting LLC for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

About Amin Consulting LLC: Amin Consulting is a uniquely positioned advisory and consulting Firm that, through our diverse team of Legal and Business experts, provides unique and niche services for Middle Eastern and United States based companies and investors.  Whether you are a U.S. Company expanding in the Middle East, or a High Net Worth Family from the Middle East looking to diversify or protect its assets, you have come to the right place.

Our team is compromised of professionals with decades of collective consulting, legal, and business experience–specifically between those two regions of the world.  Most of our consultants are Accredited and Licensed United States Attorneys as well as International Business Consultants.  That allows us to provide, not only expert advice, but also added value through vertical integration of these often interconnected services.

For more information or a free consultation, send us a message here!