Academic journal article Law and Policy in International Business

Barriers to Foreign Issuer Entry into U.S. Markets

Academic journal article Law and Policy in International Business

Barriers to Foreign Issuer Entry into U.S. Markets

Article excerpt

I. INTRODUCTION

This paper is a summary and updating of a report we prepared as independent consultants to the New York Stock Exchange, Inc. (NYSE) in February 1991, which explored the barriers to foreign issuer listings on U.S. exchanges created by Securities and Exchange Commission (SEC or Commission) regulations.(1) The impetus for the report was the growing recognition that despite the dramatic increase in the appetite of U.S. investors for foreign securities, the ability of U.S. investors, particularly non-institutional investors, to purchase foreign securities in the United States remains extremely limited. Although the securities of more than 2000 foreign issuers were traded in the United States in 1991, only 180 of these securities were traded on a U.S. exchange and only about 260 were traded on the National Association of Securities Dealers, Inc. Automated Quotation System (NASDAQ).(2) At year-end 1991, there were 105 foreign entities traded on the NYSE, of which twenty-six were United Kingdom (U.K.) companies, the second largest number after Canada, which had twenty-seven companies listed.(3) At year-end 1992, there were 120 foreign entities traded on the NYSE; thirty were U.K. companies and twenty-eight were Canadian companies.(4) In both years, nine Japanese companies, but no German companies were listed.(5) The vast majority of foreign securities, including the securities of world class foreign issuers, are traded in the over-the-counter "pink sheets" or the OTC Bulletin Board Display Service of the National Association of Securities Dealers, Inc. (NASD), services that do not provide real-time quotation or transaction information.

Although the SEC now permits offshore offerings by foreign issuers to U.S. institutions and has deregulated the domestic private placement market, these developments have not encouraged foreign issuers to enter U.S. markets. This situation, which disadvantages both foreign issuers and U.S. investors, underscores the importance of developing appropriate mechanisms for dealing with cross-border transactions in international equity markets. The most common approaches to regulating cross-border transactions are: (1) requiring non-U.S. securities market participants to comply with host country standards ("national treatment"); (2) creating special host country rules for them; (3) developing harmonized transnational or international standards; and (4) accepting compliance with home country regulation by way of mutual recognition.

The United States has historically been a strong advocate of national treatment and the free international movement of goods, services and capital. National treatment is the easiest way to regulate cross-border securities activity because it does not require changes in domestic regulation. Foreign and domestic investors, financial products and financial institutions are treated alike. However, national treatment may not dismantle structural barriers to free trade. Harmonization and mutual recognition may be better policies than national treatment for regulating cross-border securities activities.

As a general matter, the SEC has insisted that foreign issuers comply with the registration provisions of the federal securities laws, including the presentation of financial statements in accordance with U.S. generally accepted accounting principles (GAAP). Nevertheless, various exemptions and special rules have been designed for securities offerings by foreign issuers. Regulation S under the Securities Act of 1933 (Securities Act) permits U.S. investors to purchase unregistered foreign securities abroad.(6) Rule 144A under the Securities Act permits institutional investors to resell such securities immediately to qualified institutional buyers in the United States.(7) Furthermore, after three years, such securities may be resold in the U.S. markets by any unaffiliated investor, even though no current public information is available with respect to the issuer. …

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