As companies grow, so do their need for capital. In today’s global economy, U.S. companies have a viable option to raise capital from foreign investors. Countries like Canada, which have similar laws and customs to those of the U.S., are a logical place to seek financing. Although raising capital from foreign investors is relatively easy, there are several factors from a legal perspective that companies need to consider when seeking foreign investment. This article will address several of these factors.
1. What Securities Laws Should be Considered?
When raising capital from foreign investors, in addition to complying with U.S. securities laws, companies also need to comply with the securities laws of the country in which the investor is located. Qualified local counsel will need to be engaged early in the fundraising process to ensure compliance with foreign laws and regulations.
In addition, as with any issuance of securities by a U.S. company, consideration needs to be given to the securities law exemption in the U.S. that will be relied upon to issue securities without registration under the Securities Act of 1933 (the “Act”). The most common exemption relied upon is Rule 506(b) in an offering only to “accredited investors” (which accredited investors may also include foreign investors in addition to domestic investors). An alternative is issue securities to foreign investors in compliance with Regulation S. Regulation S provides an exclusion from the registration requirements of the Act for offerings made outside the U.S., subject to compliance with certain restrictions, including that no “direct selling efforts” are made in the United States. A potential benefit of Regulation S offerings is that, subject to compliance with local law, securities can be sold to non-accredited investors.
2. What About Bad Apples?
Before taking capital from foreign investors, U.S. companies need to ensure that the country in which the investor resides and the prospective investor are not barred from doing business with U.S. entities. The Office of Foreign Asset Control (“OFAC”) maintains a website that lists Terrorists and Specially Designated Nationals and Blocked Persons as well as embargoed countries and regions that can be checked for this purpose. Ensuring that a potential foreign investor is not on a prohibited list is important, as companies may be subject to severe consequences for violating OFAC regulations.
In addition, companies raising capital from foreign investors will need to gather information to assist banks in complying with their “know your customer” or “KYC” obligations. KYC is designed to prevent banks from being used by criminal organizations for money laundering activities.
3. Tax. Tax. Tax?
Central to any cross-border financing are the tax implications of the transaction both to the company and to the investor. As an example, if a U.S. corporation is an “S” Corporation for tax purposes and is subject to pass through taxation, taking on foreign investors will automatically convert the corporation to a “C” corporation for tax purposes, and subject the company to corporate level taxation---a situation which may not be desirable for the company and its founders. From the perspective of a foreign investor, they may prefer tax assessed at the company level to avoid the prospect of the IRS deeming the investor to be doing business in the U.S. and thus subjecting the investor to the requirement of filing U.S. tax returns. Knowledgeable tax advisers should always be utilized when conducting international transactions to avoid unnecessary and costly mistakes.
If you are interested in raising capital from foreign investors, you need to consider the above issues, among others, and should always consult counsel to ensure your transaction is in legal compliance.
Jonathan Friedman is partner at the firm. Jonathan advises a wide range of both public and private clients, including development-stage, emerging-growth and middle-market companies as well as angel investors, venture capital firms and strategic investors. Jonathan’s practice focuses on corporate finance, mergers and acquisitions, securities law, intellectual property licensing and general corporate and business matters. Jonathan also has experience forming venture capital funds. Jonathan has represented corporations and other entities in a variety of industries, including Internet and e-commerce, apparel, medical devices, entertainment and high technology.
Jonathan has substantial experience managing strategic transactions, including private equity and debt financings transactions, mergers and acquisitions in the public and private markets, offerings by public companies and angel and venture capital financing transactions. In addition, Jonathan counsels companies in connection with SEC reporting requirements and registrations, federal and state securities laws, corporate governance issues, joint ventures and strategic alliances and commercial contracts. Jonathan also has expertise advising companies in their formation process.
As part of his practice, Jonathan facilitates cross-border financings, mergers and acquisitions and expansions by companies into new markets and works to promote bi-lateral trade opportunities between Canada and the United States that will result in the job creation, investment connection and trade partnership support.
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. To learn more about foreign investors, contact Jonathan Friedman at
Greg Akselrud
Q. I want to run a sweepstakes, why are there so many restrictions?
A. Sweepstakes and contests offer companies a relatively inexpensive, but effective, way to market their products and services. However, state laws have been passed to, among other things, prevent companies from operating an illegal lottery (entry into a random drawing for consideration) and to prevent false advertising. As such, each state has statutes addressing sweepstakes/contests and advertising requirements.
Q. What is the difference between a sweepstakes and a contest?
A. A sweepstakes, like a lottery, is a random drawing. The key difference, however, in operating a sweepstakes (and avoiding the operation of an illegal lottery) is consideration. To properly run a sweepstakes, a company must eliminate consideration from any entry requirement. As such, a company must provide a free form of entry – at least as an alternative. A contest is essentially a skill-based game or competition. The ability to win a contest is not by random drawing, like in a sweepstakes, but is rather based on skill-based judging criteria set forth in advance.
Q. Do I have to include all the fine print?
A. An essential part of operating any sweepstakes or contest is to have a proper set of official rules. These rules are designed to address the many state by state regulations of sweepstakes and contests (and advertising issues). They also clearly set forth key information – such as, among other things, the fact that no purchase is necessary to enter or win, the method of entry (and collection of personal information), the eligibility requirements, the period of time that the promotion is offered, the manner in which winners are selected, and information about prizes and their value. Of course, the official rules also address some of the key legal issues – like obtaining rights to use the winner’s name once they win, limitations of liability, and dispute resolution. Certain states have registration and bonding requirements so it is also important to address whether residents of those states should be eligible (and if so, whether the company is complying with those requirements). Also, if a promotion is intended to be international, countries regulate sweepstakes and contests differently, which will of course affect what is stated in the official rules.
Greg Akselrud is a founder and partner of the Firm. He chair’s the Firm’s Internet, New Media and Entertainment practice group. Greg advises a wide range of public and private clients across a number of industries, including companies in the entertainment, Internet, technology, and apparel industries. Greg’s practice involves providing advice in connection with general corporate matters (including company formation, stock incentive plans, executive employment agreements, and various commercial and business contracts), venture capital and angel financings, mergers and acquisitions (including public reverse mergers), private equity and debt securities offerings, public offerings, federal and state securities law reporting requirements, intellectual property strategic counseling, Internet and e-commerce matters, and entertainment, content and digital media transactional matters.
Do you have a question for one of our attorneys? Send your questions to to be featured in future 3 Questions columns.
What is the most important element of providing effective representation?
I believe the most important element in effectively representing a client is understanding their business, strategy and goals. Many times lawyers and other representatives try to solve their client’s problems before they fully understand them. It is crucial to spend the time early on in any representation talking and listening to a client so one can provide guidance and solutions that really address the client’s issues – whether it is in connection with forming a new business or selling a mature business.
You mentioned forming a new business, what issues typically arise?
There are a multitude of issues, from selecting the correct corporate structure, corporation or limited liability company, to developing equity incentive programs to attract the talent necessary to help and manage the company’s growth, and if intellectual property is involved, how best to protect and exploit such intellectually property. To provide effective advice on these matters, your attorney has to have a thorough understanding of the company’s planned business, strategy and goals, as well as the technical expertise and experience.
In connection with a M&A transaction, I assume there are numerous issues that have to be considered and addressed?
Yes, absolutely. And before your attorney can effectively address these issues, they have to understand the motivation behind the transaction and your goals in pursuing the transaction. Is it a strategic combination or a complete sale of the business? Are you retiring or is it a step along a growth path? Is an earn-out or schmuck insurance appropriate, and if so, what is the appropriate structure. There are more issues than can be covered in this forum, but a key to your attorney properly addressing all of them is understanding your business and goals. Hiring an experienced M&A attorney is only half the equation.
Scott Galer is a partner at Stubbs Alderton & Markiles, LLP and co-chairs the firm's Mergers and Acquisitions Practice Group. Scott's practice focuses on counseling private and public middle-market and emerging growth companies in areas of mergers and acquisitions, corporate and securities law and other strategic business arrangements.
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