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Multijurisdictional offering strategy: how to avoid legal risks

Learn about the main principles of global compliance brought to you by scrupulous research of over 50 jurisdictions and avoid legal risks when doing an international fundraising campaign.
28 OCTOBER 2021
Legal
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Thanks to technological innovations, barriers to the movement of capital through national borders have significantly decreased. Today, it's easy to invest in a company located on the other side of the world. This fact alone creates a variety of new possibilities for business owners who can now attract a lot more capital and build an international community. At the same time, it also creates new challenges: the first order of business is complying with the legislation of each country where you’d like to start raising capital.

Disclaimer

This article is not intended to be financial, investment, or legal advice. We highly encourage you to consult professional licensed advisors before making any decisions relating to any trading marketing or the purchase or sale of any speculative instruments. This author's opinion does not reflect an official position of Stobox technologies inc. or any affiliated entities.

Two principal milestones of the global offering

When launching an international offering, there are two primary questions you need to answer.

  1. In which jurisdiction will your company be incorporated?
  2. Which jurisdictions will your investors be coming from?

An unobvious statement implied here is that the answer to these questions can be different. For example, it's possible to set up the company in the United States while attracting investors solely from Europe, or vice versa.

The answer to the first question depends on the convenience of the given country's corporate law in things like reporting and taxation. The answer to the second question depends on the security offering rules in the countries where the investments are attracted. This article is primarily about the second one. Still, if you feel like you could benefit from broader legal expertise, book Stobox specialists for legal consulting.
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The main challenge of global compliance

The main challenge of global fundraising is the need to comply with the legislation of each country where the investments come from. If the company is raising funds from 50 states, the offering must comply with the law of every single one of them. While it's enormously challenging, it's still entirely real to implement. To understand how it becomes possible, you need to comprehend the difference between two potential forms of offering: public offering and private placement, the latter also known as an exempted public offering.

Public offerings vs. private placements\exempted public offerings

A public offering is a kind of securities offering that is not limited by anything: you can trade any possible way you would like, and you can sell the securities to anybody. Private placement and the exempted public offering are targeted at the limited group of investors and impose limits on trading.

The difference between the two is that a public offering must obtain approval from competent authorities in a certain country where it is being conducted. On the contrary, the private placement doesn't require such approval or only takes sending a general notification to the regulators.

Tokenization can be applied to both public offering and private placements but is itself conducted differently. You can learn more about the difference in our video "Security Token Offering vs. IPO, private placements, and equity crowdfunding | Alternative finance."

Typical rules for private placements

There are two most common requirements for private placements.

1. Private placements are only open to the so-called professional or accredited investors' money. These people are believed to be independent and skillful enough and possess an amount of capital sufficient to withstand the loss if the investment isn't successful, so regulators don't have to check every single investment they make.

2. The size of the offering. It is considered that if the offering is not very big, the harm of a scam company attracting this capital is accordingly small, and, at the same time, it creates space for smaller companies to attract capital as well. This is why many jurisdictions allow raising funds to a certain figure without registering it. Let's look closely at the examples.

North American countries (the USA and Canada) have an extensive scope of rules regarding this matter, but the one implemented most frequently is about fundraising from accredited investors. In the US, this group includes big institutions or high-net-worth individuals with either more than a million-dollar net worth or two hundred thousand dollars income, which is slightly over 10% of the United States population. It also includes people with significant proven experience in financial markets.

Apart from the accredited investors rule, many European countries, including the European Union level, do not demand registration until a certain sum isn't reached. This figure varies in every country engaged in fundraising, but most commonly, it's 5 or 8 million. An interesting rule implemented here is the equivalence of capital markets. If two countries have an equivalent capital market, you can't raise $8 million from one country and do the same with the other: this sum may only be taken from 2 countries simultaneously.

In the EU, capital markets of all the Member States are considered equivalent. It means that the registration threshold is applied to the sum of all the capital raising within the European Union. The specific value of the threshold is the lowest common denominator of all the countries you are targeting. For example, the registration threshold is €5 million in Malta and €8 million in France. Therefore, if you target those two countries, you need to raise less than €5 million to avoid registration. Five million is the most common threshold, so this is the figure we usually recommend our clients to stick with, along with excluding countries with the lower threshold from the active promotion.
Switzerland and Great Britain have the same situation. They are equivalent between themselves but not comparable to the EU, which basically means you can attract 5 to 8 million from the EU, and another 8 million from Switzerland and the UK combined without going through the registration of the offering.

Еhe rule about accredited investors applies in all the European area, so it's possible to raise an unlimited amount from professional investors without completing registration. Similar regulations exist in Middle Eastern countries and South-Eastern Asia. Some countries like Japan or South Korea do not allow foreign governments to raise capital without using local brokers and investment firms as intermediaries while promoting the offering. Due to these regulations, we also recommend excluding such countries from the list of targeted jurisdictions.

Reverse solicitation rule

The reverse solicitation rule comes into play when the issuer targets their offering primarily to the jurisdiction one (let's say the United States), but eventually, it's an investor from a completely different spot (Brazil, for example) who contacts them and expresses the desire to invest. According to the reverse solicitation rule, if it's not you who targeted the particular country's audience but rather them who found you, you can accept the investment from the investor who addressed you. The reverse solicitation rule works in most countries except for the USA, where offering promotions is stringent. Therefore, in the majority of countries, you can accept investments from individuals even if you are not targeting those countries directly and are not familiar with all of the nuances of reverse solicitation rules there. However, this does not refer to sanctioned countries, such as Iran or Afghanistan, accepting investments from which can create significant issues.

KYC/AML

While crafting a multinational offering, the investors' verification process is an absolute must: all of them have to pass the know-your-client and anti-money laundering requirements ― AML and KYC for short. As you aren't introduced to each of your investors personally, it's crucial to make sure that none of them is engaged in money laundering. It creates a risk of your business becoming a tool for money laundering and, therefore, a risk of criminal offenses against company directors.

Also, on a more practical level, you cannot control adherence to the private placement limits if you don't know where your investors come from. This is why it's necessary to request their documents upon registration, and in case they are investing a considerable figure like $20,000 or $50,000, it's worth verifying the source of funds. The threshold starting from which you are doing an advanced verification depends on the risk profile of the investor, e.g., whether they come from a low-risk jurisdiction such as Germany or a high-risk one like Russia.

How can this be done technically?

An additional challenge you face while launching a global offering is a technical platform. Investors from other countries need a convenient way to buy shares or bonds, keep track of their investments, and interact with the issuer or other investors. On the other hand, the business also would require an all-purpose digital infrastructure to manage hundreds or even thousands of their investors.

To resolve this issue, you can turn to blockchain platforms to help you raise funds and attract investors more efficiently. Your shares or bonds are sold as tokens on the blockchain. The Stobox team developed the Digital Securities Dashboard ― a comprehensive solution to streamline all operations with tokenized securities. DS Dashboard allows you to reach investors globally, enable trading of your shares, and tap into new rich sources of capital.

The strategy of making a truly global offering without spending a fortune is about using private placement or an exempted public offering regime in different countries. The Stobox team researched private placement rules in more than 50 countries, and we can share valuable information to make your business grow. Having built over 25 partnerships in more than ten countries, we provide exclusive expertise on international law and DeFi regulations. If you are interested in taking your offering to a global level, book a complimentary 30-minute consultation on our Tokenization Consulting page.
28 OCTOBER, 2021
Legal

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