We have generally been covering developments related to the Outbound Investment Security Program on DealLawyers.com, but, since its adoption, capital markets practitioners and investment banks have been raising issues with the fact that it wasn’t crystal clear that certain routine public capital markets offerings weren’t captured because of the way the publicly traded securities exception was worded. As this Simpson Thacher article notes, the Treasury Department updated its FAQs (interactive version) at the end of last year to clarify what types of offerings are covered by the exception. This excerpt describes the new clarifications:

– Follow-On Offering Is Excepted: The Treasury Department makes clear that a follow-on offering falls under the publicly traded security exception where the new offering of securities are of the same CUSIP as publicly traded securities or otherwise “are of the same class as the securities that are already publicly traded and, upon issuance [and] will be fungible with such publicly traded securities,” and does not afford the U.S. person rights beyond standard minority shareholder protections with respect to the issuer. The participation in such follow-on offerings by both U.S. investors and U.S. underwriters likewise qualifies under the same exception.

– Convertible Bond Offering Is Excepted: The acquisition of a contingent equity interest “that is convertible into, or provides the right to acquire, only a publicly traded security” also qualifies as an excepted transaction provided again that it does not convey rights beyond standard minority shareholder protections. The FAQ expressly offers as an example a convertible note issuance where the debt interest may be converted into publicly traded securities. The exception will apply equally where the security may be converted alternatively into cash or another form of consideration that is not covered by the OIR.

– IPO Subscription Is Excepted: The publicly traded securities exception also applies to acquisition of IPO shares by U.S. investors pursuant to a subscription agreement (or other agreement such as a standby underwriting agreement) even if entered into prior to such listing, so long as “at the time of such acquisition the equity interest is publicly traded.” This clarification will be helpful to cornerstone investors who typically sign subscription agreements prior to the occurrence of an IPO.

– Director Nomination Right Is A Standard Minority Shareholder Protection: Because the publicly traded securities exception and other passive investment exceptions apply only where the U.S. person will not be afforded rights beyond standard minority shareholder protections, exactly what rights are considered standard minority protection is crucial and has been subject to different views. The Treasury Department here makes clear that a shareholder’s “right to nominate (that is, propose for election) an entity’s directors” would be considered a standard minority shareholder protection for purposes of publicly traded securities and passive investments exceptions “if that right is generally available to similarly situated shareholders of that entity solely by virtue of their minority shareholding.” By contrast, the Treasury Department warned that the right to appoint a director does not constitute a minority shareholder protection. That is so regardless of whether such a right is accorded to similarly situated shareholders.

– Treasury Reverses Its Prior Position Regarding PRC Statute: Further to the last point on standard minority shareholder protections, the Treasury Department explains that, upon further consideration, it “has determined that proposal rights generally available to similarly situated shareholders (such as shareholders meeting a certain low ownership threshold set in PRC statute) would qualify as standard minority shareholder protections.”

The alert says these FAQs will be “welcomed by global capital markets” with a caveat:

[N]one of the new FAQs exempts U.S. underwriters in connection with a new IPO where the underwriters would acquire shares before they become publicly traded (ancillary services by underwriters that do not involve the acquisition of non-publicly traded shares are permitted). As we discussed in our earlier alert, that is not the case with the NDAA, which explicitly excepts “the temporary acquisition of an equity interest for the sole purpose of facilitating underwriting services.” Until and unless the Treasury issues new regulations, parties should continue to act in full compliance with the OIR, including restrictions on U.S. underwriters in connection with IPOs.

– Meredith Ervine