240 B.E. Eckbo et al.
flotation method was only available to larger, financially sound issuers meeting the fol-
lowing requirements: common stock (with or without voting rights) having a market
value of at least $75 million, no defaults on any debt, preferred stock or rental payments
for 3 years, all SEC disclosure requirements have been met for the last 3 years and the
firm’s debt is investment grade.
Under U.S. securities regulations, a foreign issuer has a choice of issuing either pub-
licly or privately held equity or debt in the U.S. Typically, a foreign issuer of equity in
the U.S. employs an American Depository Receipt (ADR) or Global Depository Receipt
(GDR) mechanism which eliminates the domestic investors need to undertake foreign
exchange transactions to acquire and dispose of these securities and convert cash div-
idend payments to dollars. An ADR is a financial instrument backed by a depository
bank owning the underlying foreign shares, to which the ADR has a fractional claim,
but which pays cash distributions and trades in dollars and settles trades in the U.S. mar-
ket. Arbitrage keeps the prices of the underlying shares and the ADR in close alignment
after adjusting for foreign exchange movements. GDRs are similar financial instruments
which pay cash distributions and trade in a specific foreign currency and settle trades on
a particular foreign stock exchange.
In April 1990 the SEC approved Rule 144A, which allows immediate sale and re-
sale of private placements to “qualified institutional buyers” (QIBs) without having to
register these securities or hold them for a year, as previously required.^3 This rule was
particularly aimed at reducing regulatory costs and improving the liquidity of privately
placed securities issued by privately held companies and foreign issuers. It gives pri-
vately held U.S. firms the ability to either privately place securities with accredited and
sophisticated investors pursuant to Section4.2of the 1933 Securities Act or Rule 506 of
Regulation D or to sell them to QIBs as a Rule 144A issue. The approval of Rule 144A
also has the effect of allowing international firms to gain access to U.S. institutional in-
vestors without having to meet the strict disclosure and GAAP accounting requirements
of U.S. public companies.
Under U.S. regulation, there are several ways a foreign company can tap the U.S.
capital market. A firm can first make a small Rule 144A private placement and trade
over-the-counter, which is called a Level I program. If it chooses to list on a U.S. ex-
change, it moves to a Level II program. Alternatively, it may undertake a Level III public
offer of stock in the U.S. with listing on a U.S. stock exchange. An issuer can simply
undertake a large 144A private placement or a firm can begin by seeking Level I or II
market listing in the U.S., followed by a public offering. One key benefit of a 144A
private placement is that a foreign issuer can raise capital in the U.S. sooner, since
the issuer does not have to meet U.S. accounting and disclosure standards to tap this
market. However, the stock’s issue price is likely to be significantly discounted for its
lower liquidity in the private placement market. In addition, issuers often need to obtain
(^3) QIB typically refers to an institution (e.g., insurance companies, investment companies and pension funds)
that own or invest $100 million in securities of non-affiliated companies.