Considering the globalization, we see around us it is important understanding international business and financial transactions both in the United States and around the world. Modern life is international with U.S. companies regularly raising capital abroad, where regulation is often less burdensome and financing cheaper. Similarly, foreign companies seek to access the U.S. capital markets which are the most transparent and deepest in the world.
The U.S. capital markets are where investors, small or large, put capital to work in order to drive economic growth and job creations, among others. The U.S. capital markets are the bedrock of the American’s economy and the most liquid in the world. Capital markets comprise of tradeable financial instruments commonly known as securities and include stocks and bonds, either public or private, and other financial securities such as derivatives and futures.
Securities trade on one or more competitive markets in the United States. The New York Stock Exchange is by far the largest U.S. equity market, and the next largest market is NASDAQ. Securities not listed on an exchange are referred to as over-the-counter securities and can be traded in the over-the-counter market. Securities are regulated at the federal level under the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In addition, securities are regulated at the state level under the state securities laws of each U.S. state and these laws are generally referred to as blue sky laws.
The Securities Act of 1933 regulates the public offering and sale of securities in interstate commerce, while the Securities Exchange Act of 1934 provides a system of continuous disclosure for companies required to register under its provisions. The Sarbanes-Oxley Act of 2002 regulates areas such as loans to officers and directors and provides for broad rules for corporate governance. Finally, most of Dodd-Frank Act of 2010 is aimed at the regulation of depositary institutions, derivatives, and consumer finance.
Foreign investors have a big appetite for U.S. securities and as of 2007 held about $2.8 trillion of public U.S. equity securities. At the same time, U.S. investors internationalized their portfolios and in 2007 held $4.8 trillion in foreign equity securities. The Securities Act of 1933 intends to regulate both U.S. and foreign securities offerings into the United States and by its terms, it regulates the following:
• Public offerings by U.S. issuers to foreign investors outside the United States,
• Secondary distributions by U.S. investors who resell to foreign investors, and
• Public offerings by foreign issuers outside the United States if any of the securities are purchased by U.S. investors.
However, Regulation S provides a set of nonexclusive safe harbors (Rule 903 and 904) from registration of securities with the U.S. Securities and Exchange Commission (SEC) for offshore transactions deemed to be “without the Unites States.” In order to satisfy the safe harbors, both the issuer of securities and investor resales (1) must be made in an offshore transaction and (2) may not involve directed selling efforts in the Unites States. In addition, there are other flowback safeguards.
Similar to the foreign appetite for U.S. securities, the U.S. investors have an appetite for foreign securities and as a result the U.S. securities markets have been a magnet for foreign issuers. However, the presence of foreign securities in the U.S. exposes the regulatory dilemma of cross-border securities markets. In 2008, the SEC changes its rules to permit foreign private issuers of securities to file home-country financial statements in English that conform to the International Financial Reporting Standards (IFRS) without reconciliation to U.S. Generally Accepted Accounting Principles (GAPP). The reform makes it easier for foreign issuers to access the U.S. and global capital markets without being subject to multiple accounting standards. Similarly, it moves the U.S. and Europe toward a single accounting regime.
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