TAPPING THE UNITED STATES

CAPITAL MARKETS

Prepared for The Kyiv Chapter of NYSBA, Committee on Eastern Europe, the International Section

of the New York State Bar Association and the Ukrainian Bar Association Program

“New York Law in International Transactions and

Dispute Resolutions”

Arthur Kozyra SEWARD & KISSEL LLP

One Battery Park Plaza New York, New York 10004 Tel: (212) 574-1200 Fax: (212) 480-8421 E-Mail: kozyra@sewkis.com Website: www.sewkis.com

What are the Capital Markets?

• Financial markets where capital funds are raised and securities are traded

“channel the wealth of savers to those who can put it to

productive use”

• Capital funds: other than the business owner’s equity and bank debt

• Available in many forms of equity or debt

• Available publicly or privately

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Why Access the U.S. Capital

Markets? • Great liquidity of the U.S. markets

• Depth and sophistication of the U.S.

investor base

– higher valuations and competitive funding terms

• Confidence in the integrity of the U.S.

securities markets

• New York: the financial capital of the world

– largest global trading markets (NYSE, Nasdaq),

established legal framework, skilled finance

professionals

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Why Access the U.S. Capital

Markets?

• Case in point: Manchester United IPO – A U.K.-based company initially planned to list in Asia

(Hong Kong and Singapore)

– Listed on the New York Stock Exchange in August 2012 raising $234 million with 16.7 million shares ($14 per share)

– Average March 2013 share price $16.75

– Average daily trading volume since IPO 160,900 shares

“The story has been incredibly well received, especially in the U.S.” –Ed Woodward, Vice Chairman of Manchester United

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Primary Capital Markets Equities

• Common stock

• Preferred Stock

• American Depositary Receipts (“ADRs”) – negotiable receipts issued by a U.S. depository bank

– represent an interest in a specified number (or fraction) of a foreign company’s shares deposited with a custodian

– traditional way for foreign companies to test U.S. capital markets (created in 1927)

– means for U.S. investors to receive dollar denominated securities and dividends

– avoidance of complications relating to the foreign company’s shares (bearer shares; stamp taxes)

– great source of administrative income for depositary banks – expensive for investors

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ADR Programs

• Sponsored and unsponsored

• ADRs registered with the SEC on Form F-6

• Three levels of sponsored ADR programs

– Level I ADRs: • Allows for ADRs to be traded in the US over-the-counter market

(Pink Sheets)

• Cannot be used to raise capital

• Issuer must qualify for an exemption under Rule 12g3-2(b) of the Securities Exchange Act of 1934 (no SEC reporting obligations; primary trading market is non-US; publish disclosure documents in English)

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ADR Programs

– Level II ADRs: • Allows for ADRs to be traded on a U.S. securities exchange

• Cannot be used to raise capital

• File Form 20-F registration statement to register the underlying securities for trading in the secondary market

• Comply with ongoing SEC reporting requirements

– Level III ADRs: • Allows for ADRs to be traded on a U.S. securities exchange

• Can be used for capital-raising

• File a registration statement on Form F-1 to register the offering

• Comply with ongoing SEC reporting requirements

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Primary Capital Markets Debt

Securities

• Medium-term notes

• Bonds

– Senior notes (such as “high yield” notes)

– Subordinated notes

– Secured and unsecured

• Commercial paper

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The Choice: Public or Private Offering?

• General Rule: All securities offerings must be registered with the SEC unless an exemption from registration is available

• A foreign company must choose between: – Seeking to register securities with the SEC for an offering

to the U.S. public; or

– Offer securities only to institutional or other sophisticated U.S. investors in a private placement exempt from registration with the SEC

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Advantages

Public Offering Private Offering

• Better pricing

• Makes future capital raising easier (shelf registration)

• Provides a liquid market for company securities (owners and employees)

• “Currency” for acquisitions of other businesses

• Attract, compensate and incentivize employees

• Enhanced corporate profile, prestige, brand recognition and publicity

• No delay from an SEC review

• Not subject to corporate governance requirements

• Minimal requirements for ongoing reporting

• Privacy and flexibility to address financial and disclosure issues

• Potentially lower costs

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Disadvantages

Public Offering Private Offering

• SEC review

• Takes longer to effect

• Ongoing reporting

requirements

• Loss of privacy

• Enhanced corporate

governance and

accountability standards

• Expensive

• Lack of liquidity

(secondary market resale

restrictions)

• Potential price discount

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Public Offering: The Legal

Framework

• The Securities Act of 1933: governs the offering and sale of securities to the public by an issuer or certain selling shareholders

• The Exchange Act of 1934: governs the trading of securities in the secondary market, imposes periodic reporting requirements on the issuer and certain ownership reporting obligations on insiders

• The Sarbanes-Oxley Act of 2002 and Stock Exchange Rules: impose certain corporate governance and corporate accountability standards

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Players in a Public Equity Offering

• The Issuer

• The Selling

Shareholders

• The Managing

Underwriter

• The Selling Syndicate

• The Stock Exchange

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• The Lawyers

• The Auditors

• Experts

• Financial Printer

• The Transfer Agent

• The SEC

The U.S. Securities and

Exchange Commission

• The SEC will review whether the issuer’s prospectus meets the requirements of its administrative forms

• The SEC does not judge a transaction or its participants on their merits

• Successful completion does not constitute an approval of the offering or of the issuer

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SEC Divisions

• Division of Corporation Finance

• Division of Trading & Markets

• Division of Investment Management

• Division of Enforcement

• Division of Risk, Strategy & Financial

Innovation

In an IPO, we work with the Division of Corporation Finance and hope we will never hear from the Division of Enforcement

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SEC and Foreign Issuers

• The SEC encourages them

• Adopted a special regime applicable to foreign issuers: – Financial statements may be presented pursuant to U.S. GAAP, IFRS as

issued by IASB, or home accounting standards reconciled to U.S. GAAP

– Foreign issuers are exempt from proxy rules relating to disclosure and solicitation of shareholder votes

– Insiders are exempt from filing Section 16 beneficial ownership reports and are not subject to short-swing liability

– Less burdensome periodic reporting (Form 6-K)

– A first time registration statement can be reviewed confidentially, without first paying the filing fee or making public disclosure

– Special disclosure requirements (“F” Forms)

– Exempt from many corporate governance requirements

• May be combined with JOBS Act regime for Emerging Growth Companies (EGC) with up to $1 billion of revenues

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SEC Disclosure Requirements

for Offerings by Foreign Issuers

• Registration statement on Form F-1

• More like European prospectus

• Description of the issuer’s business and the offering

• Financial statements for IPOs

– 5 (2 EGC) years of selected financial data

– 3 (2 EGC) years audited financial statements required; no more than 12-15 months old

– 6 month unaudited interim financial statements if prospectus dated more than 9 months after end of financial year

• Risk factors (industry, issuer, offering)

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• Management’s Discussion and Analysis of Financial Conditions and Result of Operations (“MD&A”)

• Industry section

• Management (Directors and Executive Officers) – Must disclose individual share ownership if more than 1%

– No disclosure of individual compensation, only management group aggregate compensation required

• Principal Shareholders – Must disclose individual beneficial owners of 5% or more of each class of

the company’s voting securities

• Related party transactions

• Tax considerations

• Disclosure of material contracts (Exhibits)

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SEC Disclosure Requirements

for Offerings by Foreign Issuers

SEC Review • Confidential SEC review prior to the first public filing

available to: – Emerging Growth Companies

– Foreign issuers • conducting dual listings or already listed on a non U.S. exchange

• being privatized by foreign government

• public filing conflict with the law of foreign jurisdiction

• Review assigned to a team on an industry basis

• Financial information is reviewed by staff accountants

• SEC comment process – a dialogue with a company about its disclosure

– categories: deal specific, industry specific, legal form and accounting

• Registration statement declared “effective”

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SEC Comments By Category

45%

10%

26%

19% Deal Specific

Industry Specific

Legal Form

Accounting

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Race to the finish

• File on the SEC electronic database (EDGAR)

• Printing the “red herring”

• The road show

• Finalize your listing

• Pricing: The point of no return! Billions of

dollars on a handshake

• Preparing the final prospectus

• The closing

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The Exchange Act Reporting

Obligations

• Annual Report on Form 20-F

– filed within 4 months after end of fiscal year

– annual discussion and update of disclosure

– reviewed by the SEC at least once every 3 years

• Quarterly reports not required (unless disseminated)

• Interim Reports on Form 6-K

– filed “promptly”

– material information that the foreign issuer:

• makes public pursuant to domestic law

• files with a stock exchange

• distributes to security holders

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Corporate Governance: Sarbanes-

Oxley & Exchange Rules

• The Sarbanes-Oxley Act (“SOX”) – Disliked but actually, not too bad for foreign companies

– Does not apply to private issuers and relaxed to EGCs

– Foreign issuers are required: • Independent Audit Committee and whistleblowing procedure

• Internal control over financial reporting

• Disclosure controls and related CEO/CFO certifications

• NYSE Corporate Governance Requirements – Allows foreign issuers to follow their home country governance

practices, other than: • Independent Audit Committee (which can be as small as one member)

• Disclose how its corporate governance differs from those of U.S. companies

• Certify that the foreign issuer observes corporate governance standards

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U.S. Private Offerings

• U.S. private placement exemptions from SEC registration: – Section 4(a)(2) “transactions by an issuer not involving any public

offering”

– Regulation D: • Rule 504: sales of up to $1 million of securities within a 12-month period

• Rule 505: sales of up to $5 million of securities within a 12-month period to unlimited number of accredited investors and up to a maximum of 35 non-accredited investors

• Rule 506: sales of unlimited amount to unlimited number of accredited investors and up to a maximum of 35 non-accredited but sophisticated investors (JOBS Act removes the prohibition against general solicitation and advertising so long as the ultimate purchasers qualify as accredited investors)

• “Accredited Investor” – a natural person who has net worth >$1 million or >$200,000 income

– a bank or an investment company

– an entity or organization with >$5 million in assets

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The Consequences of Private

Placements

• Resales by buyers in private transactions

– Securities placed privately became “Restricted

Securities”

– Cannot be freely resold in U.S. public markets

• Price (illiquidity) discount

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Rule 144A

• Rule 144A provides a resale safe harbor for buyers in private transactions

• Exempts resales made to “Qualified Institutional Buyers” (QIBs)

– generally large institutional investors that own and invest at least $100 million in securities

• Creates a free resale market among QIBs

• Designed primarily for unlisted companies or for listed companies offering debt or convertible securities

• Simple disclosure undertakings

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Regulation S and

Rule 144A

• Resale restrictions relating to the U.S. private placements do not apply to “offshore transactions” outside the U.S. pursuant to Regulation S

• Simultaneous U.S. private placement (Rule 144A to QIBs) and Regulation S offshore offering in a “Designated Offshore Securities Exchange”

• The ability to resell U.S. privately placed securities offshore

• Increases liquidity and more competitive pricing

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Time Table

• Initial public offering (4 – 5 months)

• Rule 144A offering (1 – 2 months)

• Private Placement (2 weeks – 2 months)

• Depends on the complexity of the

transaction and how much parties negotiate

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