As the world’s largest national economy, with a GDP of over $15 trillion in 2011, the American market is very attractive for overseas companies, from large publicly held corporations, to small and medium-sized enterprises.
Indeed, the New York Times reported in 2009 that: “foreign-owned companies in the United States have a work force of more than 5.3 million, or some 3.5 percent of all workers, and are spread across the 50 states in sectors from manufacturing to retail and publishing, citing their “significant” and “positive” impact on the health of the American economy.
With this in mind, it’s important for foreign companies seeking to secure capital in the US market, that while there are a variety of options for small and medium-sized companies as well as large corporations, legal and regulatory issues associated both with raising capital and entering the market safely and effectively, are vital to take into consideration for any corporate management team contemplating accessing the US market.
Accessing US capital markets
US capital markets, as a result of their size, credibility and willingness for investors to seek new opportunities among overseas companies, represent an excellent source of capital for overseas corporate management teams, as Prequin, a leading data source for the alternative asset industry outlines.
As a result of an increasingly globalized and digital economy, overseas companies have unprecedented access via the internet and social media – to prospective American investors. It is important, however, to be aware that US capital markets are heavily regulated, and proceed with caution in order to avoid violating US securities laws. Ensure you are familiar with what methods for raising capital are permissible before embarking on any fundraising effort.
For example, companies seeking to raise capital in the US must demonstrate their ability maintain the highest standards of corporate governance, particularly in relation to the management of corporate finances, as Hunter Taubman Weiss LLP outlined recently.
Special considerations for small and medium-sized companies
For small and medium-sized business who do not wish to consider navigating the expensive and regulatory burdensome public financing route in the US – there are a number of private financing options available also, as PriceWaterhouseCoopers (PWC) has outlined in detail.
Benefits of raising capital in the US for non-US companies
- A US private or public offering can provide a company with growth capital for the long term.
- Shareholder value will be amplified by securing US capital.
- Trading in US currency will permit companies to more easily raise additional US capital.
- Enhancement of corporate reputation.
- A lower overall cost of capital via access to US debt and commercial paper markets.
- The ability to create share or stock option plans for US based employees.
Methods by which non-US companies can raise US capital
As US AmLaw 100 law firm Faegre Baker Daniels has outlined:
“American Depository Receipt (ADR) program
A non-U.S. company listed on a foreign stock exchange can facilitate ownership of and trading in its securities by investors in the U.S. capital markets through an American Depository Receipt (ADR) program. An ADR is a negotiable certificate issued by a U.S. depositary bank that represents an interest in a specified number of shares in the equity of a non-U.S. company that has been deposited with the depositary bank. An ADR program facilitates U.S. ownership of equity issued by non-U.S. companies by allowing share pricing in U.S. dollars and share transfers within U.S. clearing systems.
Reverse Merger
The so-called “reverse merger” is one way that a non-U.S. company can go “public” in the United States. Although a reverse merger does not enable the non-U.S. company to raise new capital immediately, it provides the non-U.S. company access to the U. S. national exchanges or the Over-The-Counter Buletin Board (OTCBB). To effect a reverse merger transaction, a private non-U.S. company locates a suitable U.S. public company shell. Once a suitable shell is located, an agreement is executed and control of a public company shell is conveyed to a non-U.S. company shareholder(s) in exchange for 100 percent of the shares of the non-U.S. company, and the non-U.S. company becomes a wholly owned subsidiary of the public company shell.
Private Placement
A private placement allows a non-U.S. company to offer its shares as “restricted securities” to certain qualified U.S. investors. Offering securities under Rule 506 of Regulation D is one of the most common and flexible forms of private placement. A Rule 506 offering allows an issuer to raise an unlimited amount of capital without filing a registration statement or periodic reports with the SEC as long as the shares are only offered to accredited investors (e.g. financial institutions, insurance companies, and investment companies, etc.) or to no more than 35 non-accredited investors.
Qualified Institutional Buyers
Securities of a non-U.S. issuer that have been sold in or outside the U.S. may be resold to and among U.S. investors in accordance with Rule 144A. Rule 144A permits resales of a non-U.S. company’s unregistered securities to and among large institutional investors that qualify as “Qualified Institutional Buyers,” or “QIBs.” Therefore, companies seeking to secure US capital may wish to first consider going public in their home jurisdiction for purposes of selling shares to QIB’s in the US.”
Emerging Growth Companies
As Chris Manderson recently outlined in Strategic Deals Law Blog : “To encourage IPOs and ease public reporting burdens for smaller companies, the JOBS Act created a new category of issuer under the Securities Act, the “emerging growth company.” This provision, commonly referred to as the “IPO Fast Track” or the “IPO On-Ramp,” was effective immediately on April 5, without any SEC rulemaking. As explained in “How to Get Your Emerging Growth Companies on the IPO Fast Track, an emerging growth company (1) is a domestic or a foreign private issuer with total annual gross revenues of less than $1 billion during its most recently completed fiscal year and (2) prices its IPO on or after Dec. 9, 2011.” Torys LLP recently outlined the provisions of the JOBS Act in extensive detail.
Private Equity and Venture Capital
For innovative overseas companies, private equity and venture capital is a significant potential option. According to the National Venture Capital Association, “11% of US private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP. Indeed, the US has attracted the largest amount of private equity capital over the years among the various nations of the world. In 2011, there were 327 funds with 153 Billion Dollars of capital to deploy.
Most venture capital in the US focuses on innovative ideas and the companies that seek to bring them to market. Venture capitalists and their funds comprise experts in their industries, and offer overseas companies with a wealth of knowledge and guidance. Investments usually comprise significant long term commitment. It is important for overseas companies seeking to access this market do so with experienced advisors in both the US and home jurisdictions. Private equity groups are distinct from venture groups in the US in that they focus on more established mid-sized companies with proven track records in often traditional industries. A healthy overseas company with plans for American expansion can access these markets for equity partners with industry expertise (many of whom are members of America’s largest association dedicated to private equity investors, the Association for Corporate Growth (ACG), larger sums of capital, potential merger partners and more. As both private equity and venture capital are robust in America, they offer the small and medium sized overseas companies with a large number of options should they properly navigate this sector of the US economy in search of investment funds.”
Strategic Investors
Where an overseas company may be able to offer access to their home market to a US company seeking to penetrate that market via access to distribution channels, among other instruments that will assist a US company access your market – foreign companies can secure investments from US companies. These investments provide market access to the US investor company, as well as US market access via that investor company. Not easy to find, it’s important to work with advisors with extensive contacts in both markets, who would be in a position to find those opportunities for you. But as Tom Taulli has written in Bloomberg Businessweek – beware of possible complications
Angel Investors
Wealthy individuals comprise an important market niche in America. Overseas companies can access these networks by first working with advisors with strong networks in the US market among advisors to high net worth individuals and corporate executives who enjoy working with and investing in new market entrant companies. Silicon Valley companies received 39% of the $7.5B invested in US-based companies throughout Q2 2011, so overseas companies with a value add in high tech, internet-related, biotech or other cutting edge technology with significant potential will be at an advantage when seeking this type of funding in the US.
Legal and Regulatory Considerations
The US market poses significant legal and regulatory hurdles (as well as some unique opportunities) for foreign companies of any size that plan to enter the market, as Anastasius (Tassos) Efstratiades, a partner in the Philadelphia and Cherry Hill offices of Obermayer Rebmann Maxwell & Hippel LLP has outlined, including:
Litigation
Companies doing business in the United States face unique potential legal liabilities which they may not face in their own domestic markets. It is, therefore, necessary to conduct a comprehensive liability audit before considering raising capital or entering the market.
Intellectual Property
Intellectual property rights are often one of the main pillars of any companies value, particularly those companies in sectors which tend to attract venture capital and other private capital investment sources. A non-US company may lose the rights to the IP anywhere else in the world without proper licensing. Therefore, determine the value of your IP and who owns it before entering the market or seeking investors there.
Corporate Formation and Administration
When incorporating, forming joint ventures, create employment structures and complying with governmental regulations, including relevant tax codes and reconciling them with any tax treaty the US may have with your country are key concerns that must be addressed before you enter the market. Decisions relating to the establishment of a corporate headquarters are vital in the areas of what state you establish those headquarters in, both for tax reasons, as well as in some states incentives exist for foreign companies to locate there. As well, establishing a corporate headquarters strategically in a state where there is both significant sectoral synergies is also very beneficial. These decisions should be taken with care so as to maximize your position in the market.
Business Incubator Programs
Business incubators are programs designed to support the successful development of entrepreneurial companies through an array of business support resources and services, while increasing the likelihood of success of companies that participate in these programs by 50%. Local communities in America welcome foreign corporations into incubator programs, as successful participants go on to create jobs and help strengthen local economies in a variety of ways. In 2005 alone, North American incubation programs assisted more than 27,000 companies that provided employment for more than 100,000 workers and generated annual revenues of $17 billion. The main trade association for this industry sector is the National Business Incubation Association.
Public Procurement
The US federal government spends more than $500 billion a year in public contracts, making it the largest purchaser of goods and services in the world. Determine whether the US Government can be an additional customer. The federal government has specific statutory provisions in place to set aside a percentage of US government contracts for small and medium-sized business. Foreign companies may participate in these contracts by partnering with US companies in joint-partnerships to provide goods and services to the US government.
Conclusion
It is imperative for every overseas company, before embarking upon any effort to secure capital from the United States, to first seek legal counsel domestically to determine what initiatives can be taken. The opportunities the US capital markets represent are substantial, however the regulatory hurdles are significant. Markets currently reflect an appetite for good companies among US investor groups. Companies should seriously consider the US capital markets as a fundraising option, but not without first securing expert counsel on how best to navigate the complex legal landscape governing the market. If you rely on sound judgement and wise counsel of those best positioned to guide you – your company can realize a safe, stable and expanding profit center from a US expansion.
Filed under: Cap Markets, Funds & IBanks, Middle Market, N America, USA
