When I was a kid, back in the 1840s, we referred to people who live outside the United States as “foreigners.” Using the more globalist and clinical term “non-U.S. persons,” I’m going to summarize how people and companies outside the U.S. fit into the U.S. Crowdfunding and Fintech picture.
Can Non-U.S. Investors Participate in U.S. Crowdfunding Offerings?
Yes. No matter where he or she lives, anyone can invest in a U.S. Crowdfunding offering, whether under Title II, Title III, or Title IV.
The Crowdfunding laws don’t distinguish U.S. investors from non-U.S. investors. Thus:
- To invest in an offering under Title II (SEC Rule 506(c)), a non-U.S. investor must be “accredited.”
- If a non-U.S. investor invests in an offering under Title III (aka “Regulation CF”), he or she is subject to the same investment limitations as U.S. investors.
- If a non-U.S. investor who is also non-accredited invests in an offering under Tier 2 of Title IV (aka “Regulation A”), he or she is subject to the same limitations as non-accredited U.S. investors, e., 10% of the greater of income or net worth.
What About Regulation S?
SEC Regulation S provides that an offering limited to non-U.S. investors is exempt from U.S. securities laws. Mysterious on its face, the law makes perfect sense from a national, jurisdictional point of view. The idea is that the U.S. government cares about protecting U.S. citizens, but nobody else.
EXAMPLE: If a U.S. citizen is abducted in France, the U.S. military sends Delta Force. If a German citizen is abducted in France, Delta Force gets the day off to play volleyball.
Regulation S is relevant to U.S. Crowdfunding because a company raising money using Title II, Title III, or Title may simultaneously raise money from non-U.S. investors using Regulation S. Why would a company do that, given that non-U.S. investors may participate in Title II, Title III, or Title IV? To avoid the limits of U.S. law. Thus:
- A company raising money using Title II can raise money from non-accredited investors outside the United States using Regulation S.
- A company raising money using Title III can raise money from investors outside the United States without regard to income levels.
- A company raising money using Tier 2 of Title IV can raise money from non-accredited investors outside the United States without regard to income or net worth.
Thus, a company raising money in the U.S. using the U.S. Crowdfunding laws can either (1) raise money from non-U.S. investors applying the same rules to everybody, or (2) place non-U.S. investors in a simultaneous offering under Regulation S.
What’s the Catch?
The catch is that the U.S. is not the only country with securities laws. If a company in the U.S. is soliciting investors from Canada, it can satisfy U.S. law by either (1) treating the Canadian investors the same way it treats U.S. investors (for example, accepting investments only from accredited Canadian investors in a Rule 506(c) offering), or (2) bringing in the Canadian investors under Regulation S. But to solicit Canadian investors, the company must comply with Canadian securities laws, too.
Raising Money for Non-U.S. Companies
Whether a non-U.S. company is allowed to raise money using U.S. Crowdfunding laws depends on the kind of Crowdfunding.
Title II Crowdfunding
A non-U.S. company is allowed to raise money using Title II (Rule 506(c)).
Title III Crowdfunding
Only a U.S. entity is allowed to raise money using Title III (aka “Regulation CF”). An entity organized under the laws of Germany may not use Title III.
But that’s not necessarily the end of the story. If a German company wants to raise money in the U.S. using Title III, it has a couple choices:
- It can create a U.S. subsidiary to raise money using Title III. The key is that the U.S. subsidiary can’t be a shell, raising the money and then passing it up to the parent, because nobody wants to invest in a company with no assets. The U.S. subsidiary should be operating a real business. For example, a German automobile manufacturer might conduct its U.S. operations through a U.S. subsidiary.
- The stockholders of the German company could transfer their stock to a U.S. entity, making the German company a wholly-owned subsidiary of the U.S. entity. The U.S. entity could then use Title III.
Title IV Crowdfunding
Title IV (aka “Regulation A”) may be used only by U.S. or Canadian entities with a “principal place of business” in the U.S. or Canada.
(I have never understood why Canada is included, but whatever.)
If we cut through the legalese, whether a company has its “principal place of business” in the U.S. depends on what the people who run the company see when they wake up in the morning and look out the window. If see the U.S., then the company has it’s “principal place of business” in the U.S. If they see a different country, it doesn’t. (Which country they see when they turn on Skype doesn’t matter.)
Regulation S allows U.S. companies to raise money from non-U.S. investors without worrying about U.S. securities laws. But once those non-U.S. investors own the securities of the U.S. company, they have to think about U.S. tax laws. Often non-U.S. investors, especially wealthy non-U.S. investors, are unenthusiastic about registering with the Internal Revenue Service.
The alternative, especially for larger deals, is for the U.S. entity to form a “feeder” vehicle offshore, typically in the Cayman Islands because of its favorable business and tax climate. Non-U.S. investors invest in the Cayman entity, and the Cayman entity in turn invests in the U.S. entity.
These days, it has become a little fashionable for U.S. token issuers to incorporate in the Cayman Islands and raise money only from non-U.S. investors, to avoid U.S. securities laws. Because the U.S. capital markets are so deep and the cost of complying with U.S. securities laws is so low, this strikes me as foolish. Or viewed from a different angle, if a company turns its back on trillions of dollars of capital to avoid U.S. law, I’d wonder what they’re hiding.
What About the Caravan from Honduras?
Yes, all those people can invest.
Questions? Let me know.