January 9, 2019

Three Questions with Jonathan Friedman on Foreign Investors

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 

Related news