U.S. Regulation of the International Securities and Derivatives Markets, § 3.01, INTRODUCTION U.S. Regulation of the International Securities and Derivatives Markets, § 3.01, INTRODUCTION U.S. Regulation of the International Securities and Derivatives Markets 1 Edward F. Greene, Alan L. Beller, Edward J. Rosen, Leslie N. Silverman, Daniel A. Braverman, Sebastian R. Sperber, Nicolas Grabar & Adam E. Fleisher, U.S. Regulation of the International Securities and Derivatives Markets § 3.01 (11th and 12th Editions 2014-2017) 11th and 12th Editions Click to open document in a browser p. 3-7 In the early 1990s, when the first edition of this book was published, many foreign companies, [1] including many large companies, sought to undertake public offerings or exchange listings or otherwise access the public capital markets in the United States. This phenomenon continued and even accelerated for many years. However, more recently, and especially since the passage of the Sarbanes-Oxley Act in 2002, there have been at least four major shifts in the way that foreign companies and investors consider global capital pools and flows and global financial markets. These shifts all affect the U.S. capital markets. First, the locus of capital has become far more diversified across the globe, with important potential investors located throughout the world, in Europe, Asia, the Middle East and Latin America, as well as North America. As a result, accessing capital in the United States is less important than it used to be. Second, and related to the first, exchanges and markets outside the United States have become deeper and more liquid, in Asia and Latin America as well as Europe. So for at least some foreign issuers, a U.S. listing may not add a major additional source of liquidity, and for investors, at least some local markets outside the United States provide sufficient liquidity to support their investment. In these cases, the additional liquidity, if any, provided by U.S. markets or exchanges (or other major international markets, such as London) is therefore no longer necessary. Third, p. 3-7 p. 3-8 investors perceive that global accounting, financial and other disclosure standards and trading market quality and integrity have improved in many markets to the point where, as in the case of market liquidity, a listing in the United States, and compliance with its standards, is no longer essential. There is a view that, with global institutional investor pressure and vigilance, local markets outside the United States are not only sufficiently deep and liquid but also sufficiently open and honest to support significant investment. And fourth, at the same time as the advantages to foreign companies of accessing U.S. markets have become less clear, heightened U.S. regulatory burdens, initiated by the Sarbanes-Oxley Act and the Dodd-Frank Act, have increased the apparent disadvantages of accessing the U.S. capital markets in a manner that requires registration or reporting under the U.S. securities laws, and the resultant entanglements with U.S. regulations. The Sarbanes-Oxley Act reflects the U.S. approach to regulating foreign issuers present in or wishing to access the U.S. market—that is, national treatment. The same rules apply to domestic and foreign issuers. With very limited exceptions, there is no deference to the regulatory requirements of the home country in the case of foreign issuers, whether or not there is a conflict with the home country regulatory regime. An alternative to the national treatment model is mutual recognition or a finding of equivalency, in which case the United States as host country would rely on, and defer to, the regulatory requirements of the home country. As we discuss in Chapter 13, the United States implemented a Multi-Jurisdictional Disclosure System with Canada, implementing mutual recognition between the two countries. Canadian and U.S. companies as a result can use their home country disclosure documents when raising capital in the host country and can comply with the periodic disclosure requirements of the home country. However, the United States has not pursued this approach with Europe or other key markets with respect to capital raising, [2] except insofar as it revised the requirements applicable to foreign issuers in Form 20-F, © Cleary Gottlieb Steen & Hamilton LLP, 2019. 58 All rights reserved. U.S. Regulation of the International Securities and Derivatives Markets, § 3.01, INTRODUCTION incorporating international standards, and it allowed foreign issuers to use International Financial Reporting Standards in connection with listings or capital raising. Rather, the United States continues to set and revise the [3] ground rules for access to the U.S. capital markets and generally does not defer to the home country. p. 3-8 p. 3-9 While the environment has changed dramatically both within and outside the United States, a foreign company's determination as to whether and how to approach the U.S. markets, as always, depends principally on the company's objectives. These objectives can include one or more of the following: • raising capital in the United States (separately or as part of a larger global offering); • entering the U.S. public market to facilitate the use of its securities as consideration for an acquisition from U.S. securityholders; [4] • obtaining a U.S. exchange listing to broaden its trading market, especially where its local market cannot support global trading or does not satisfy investors' standards; • taking a less extreme step to broaden its trading market by facilitating over-the-counter trading in the United States; or • seeking to obtain valuations or analyst coverage that may accompany listing on a U.S. exchange. The various choices open to foreign issuers can be taken one-at-a-time; they can be viewed as possible incremental steps towards accessing the U.S. markets; and no one choice precludes a different choice in the future. The principal source of capital in the United States and globally for most foreign issuers, as for most U.S. issuers, is institutional investors. In recent years, p. 3-9 p. 3-10 against the backdrop of the changes in U.S. and global markets described above, foreign issuers that have an adequate local market and seek to raise capital in the United States have in a majority of cases attracted U.S. institutional investors in private offerings without a U.S. listing or extending their offering to the U.S. public market. That approach, which does not require registration of an offering of securities with the SEC or ongoing compliance with U.S. reporting requirements, is described in Chapter 7. In the case of an unregistered private offering accompanying a non-U.S. offering, the issues relating to the non-U.S. offering are discussed in Chapter 8. Any of the other options for accessing the U.S. markets enumerated above, other than facilitating over-the- counter trading in the United States, [5] requires registration of the issuer's securities under the Exchange Act and, in the case of a public offering in the United States, the registration of the transaction with the SEC under the Securities Act. The relative benefits of accessing the U.S. public markets have become fact-specific and require analysis of the circumstances of particular issuers and particular offering strategies. There is a clear perception that in some cases the benefits do not justify the burdens. [6] Consistent with the market changes enumerated above, a few factors do appear to be noteworthy, including the following: • Accessing the U.S. public markets and registering securities under the Exchange Act involves a number of complex steps. The legal and regulatory risks and burdens to which a company and certain of its officers become subject by virtue of Exchange Act registration are significant and have increased in recent years. p. 3-10 p. 3-11 • As noted above, global institutional investors have been increasingly willing to invest in securities of issuers from certain markets that do not have a U.S. listing, or even any secondary listing in an [7] international market center. © Cleary Gottlieb Steen & Hamilton LLP, 2019. 59 All rights reserved. U.S. Regulation of the International Securities and Derivatives Markets, § 3.01, INTRODUCTION • Significant numbers of high-tech foreign issuers continue to undertake public offerings and list in the [8] United States and register under the Securities Act and the Exchange Act. • There seems to be a general consensus, although not unanimity, that valuations remain higher for [9] companies with U.S. listings. As to the first point, U.S. disclosure and accounting requirements are more onerous in most cases than the requirements imposed by the foreign company's domestic regulator or market. Moreover, the effort and expense required to list or publicly offer securities in the United States can be significantly greater than for listings or public offerings in other markets. Furthermore, there is no assurance that creating an ADR program in the United States—even a listed program—will actually result in significant U.S. trading or that securities offered in the United States will stay there and not flow promptly back into the home market (assuming the issuer has a home market listing as well), thus frustrating an issuer's possible goal of expanding its shareholder base through the creation of an active U.S. secondary market. Once public, additional disclosure or other obligations not in effect at the time of the offering may be imposed, as exemplified by the Sarbanes-Oxley Act. Finally, there is a general belief among many that the litigation, enforcement and liability risk that accompanies U.S. offerings or listings is higher than in other jurisdictions. p. 3-11 p.