Basic HTML Version
14
Issuer Services
U.S. Securities Regulations
and DRs
Issuers of DRs must comply with the
regulations of the markets in which
their DRs are issued. In the U.S.,
the U.S. Securities and Exchange
Commission (SEC) was created as
an independent agency of the U.S.
government to enforce federal
securities laws governing securities
offerings, trading practices and persons
dealing in the securities markets.
The SEC protects U.S. investors and
U.S. markets by requiring disclosure
of material facts concerning public
offerings of securities. The SEC is
empowered to issue regulations and
enforce provisions of both federal
securities laws and its own regulations.
The two key U.S. securities laws with
which DR issuers must comply are:
• Securities Act of 1933; and
• Securities Exchange Act of 1934.
The primary purpose of the Securities
Act is to provide investors with full and
fair disclosure of material information
regarding an issuer in connection with
the offer and sale of its securities. The
Securities Exchange Act is different
in that its primary purpose is to
provide investors trading securities
in the secondary market with access
to full and fair disclosure of material
information about an issuer on an
ongoing basis.
With the arrival of the more stringent
regulatory climate in the U.S., in 2002
some DR issuers initially felt a need
to reassess the costs compared to the
benefits of their U.S. listings. Many did
not see the U.S. regulatory climate as
Regulatory Considerations for DRs
There are various regulatory aspects to DRs which not only depend on the type of DR, but also
the market in which they operate and the issuer’s objective. However, there have been certain
regulatory changes which have facilitated the use of the DR product.
an obstacle, given that most countries
have tightened their compliance rules
in recent years. In fact, many equities
markets outside the U.S. are known
to have equally strict, and perhaps
even stricter, corporate governance
requirements. Some Investor Relations
experts argue that more stringent
standards represent an opportunity for
companies to differentiate themselves.
When investors calculate the risk/
reward equation, there is a greater
“comfort factor” with companies
known to have cleared certain
regulatory hurdles. The SEC noted
issuer concerns regarding some of the
burdens caused by recent corporate
governance legislation. For example,
the SEC has applied and is continuing
to evaluate certain exemptions for
non-U.S. companies from provisions
of the Sarbanes-Oxley Act. In addition,
a series of reforms came into effect
in December 2005 that impacted the
securities offering process in the U.S.
These measures simplify access to the
U.S. capital markets for both U.S. and
non-U.S. companies, including those
issuing DRs.
Safe Harbor Laws of GDRs
through Regulation S and
Rule 144A
Regulation S provides an exclusion
from the registration requirements of
the Securities Act of 1933 for offerings
made outside the U.S. by both U.S.
and foreign issuers. A securities
offering, whether private or public,
made by an issuer outside of the U.S.
in reliance on Regulation S need not
be registered under the Securities Act.
The Regulation S safe harbors are non-
exclusive, meaning that an issuer that
attempts to comply with Regulation
S also may claim the availability of
another applicable exemption from
registration (such as Rule 144A).
Regulation S is available for offerings
of both equity and debt securities,
such as Global Depositary Receipts and
Notes, and targeted towards non-U.S.
institutional investors.
Similarly, Rule 144A provides a
safe harbor from the registration
requirements of the Securities Act of
1933 for resales to U.S. institutional
investors reasonably believed to
be “qualified institutional buyers”
(“QIBs”). QIBs include institutions that
own and invest at least $100 million in
securities and also include registered
broker-dealers that own or invest, on
a discretionary basis, $10 million in
securities of non-affiliates. As a result,
securities sold in a Rule 144A offering
are “restricted securities” and resales
inside the U.S. may only be made to
a purchaser that the seller (and any
person acting on its behalf) reasonably
believes is a QIB. The seller must take
reasonable steps to ensure that the
purchaser is aware that the seller
is relying on Rule 144A exemption.
However, securities sold under Rule
144A offerings may not be the same
class as listed or quoted securities in
the U.S., and cannot be upgraded to
unrestricted facilities.
The availability of these exemptions
for GDR deals makes them an
efficient and cost-effective means
of implementing cross-border capital-
raising transactions. The predominant
listing venues for Reg S GDRs are
the London and Luxembourg Stock
Exchanges, however, GDRs have