NEW YORK, February 13, 2009—The Committee on Capital Markets Regulation (“Committee”), an independent and nonpartisan research organization dedicated to improving the regulation of U.S. capital markets, has completed a survey regarding the explosive growth in the use by foreign issuers of the private Rule 144A equity market in the Unites States. This growth is especially striking compared to the shrinking use by foreign companies of the U.S. public equity market, as documented by the Committee’s quarterly updates of the competitiveness of the U.S. public equity market. Responses from counsel representing 17 of the 50 largest Rule 144A IPOs in 2007 identified five principal reasons for the growth in the private Rule 144A equity market: more developed home markets and increased liquidity outside the U.S.; the burdens imposed by the Sarbanes Oxley Act; the risk of securities class actions; compliance with U.S. GAAP; and increased liquidity in the Rule 144A market.
The Committee’s quarterly updates of the competitiveness of the U.S. public equity market have shown an explosive growth in the use by foreign issuers of the private Rule 144A equity market, peaking in 2006 before the financial crisis. (Because the crisis has distorted equity and debt markets in 2008, we limit ourselves to data prior to 2008). Unlike public U.S. equity markets, the Rule 144A market is not subject to SEC regulation of public offering rules under the ’33 Act nor to ongoing regulation under the ’34 Act (including the Sarbanes-Oxley Act). Furthermore, the standard of liability for 144A offerings is lower than in the public market. Moreover, because access to this market is restricted to large institutions, the incidence of securities class actions is significantly lower.
Increased use by foreign issuers of the private Rule 144A equity market is evident in both the initial IPO decision and the overall amount of equity raised by foreign issuers in the Rule 144A market relative to U.S. public markets.
• Rule 144A IPOs by Foreign Companies “Rule 144A IPOs”—IPOs by foreign companies listed outside their home country and privately offered in the U.S. pursuant to Rule 144A—account now for essentially all IPOs by foreign companies in the U.S. From 1996 to 2006, 64.1% of global IPOs by foreign companies (by value) in the U.S. were Rule 144A IPOs. By 2007, that figure had increased to 87.9%.
• Rule 144A Equity Privately Raised by Foreign Issuers in the U.S. The value of Rule 144A equity privately raised in the U.S. by foreign issuers via American Depositary Receipts (“ADRs”) issued by the principal depositary bank—Bank of New York Mellon—has increased dramatically.1 Averaging just $0.9 billion in the period from 2000 to 2005, total Rule 144A equity ADR issuance by BONY reached $9.9 billion in 2006 and was $4.5 billion in 2007. These amounts, however, significantly understate total Rule 144A issuances because many foreign issuers now directly issue Rule 144A shares without using ADRs (consolidated data regarding these proceeds is not available).
• Relative Size of the Private Rule 144A and Public Equity Markets In the period from 2000 to 2005, we estimate that foreign issuers raised on average 6.8% as much equity via Rule 144A ADRs as they raised in the U.S. public market. After spiking to 80.8% in 2006, the ratio declined to 24.0% in 2007. Again, because the Rule 144A ADR figures do not include Rule 144A equity directly issued by foreign issuers, these figures significantly understate total Rule 144A issuances by foreign companies.2 Also, given the small amounts raised in either the public or 144A markets due to the credit crunch, current percentage shares probably are somewhat of anomaly.
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