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American securities laws regarding foreign transactions

On Behalf of | Mar 22, 2022 | Federal Securities Law |

In 2021, the U.S. Court of Appeals for the Second Circuit reinforced the rule that federal laws do not apply to predominantly foreign transactions, even those that occur in the U.S. Previously used securities tests and laws are no longer relevant to extraterritorial activities. Financial buyers and sellers in Pennsylvania should become more familiar with the basic terms of this federal regulation.

The history of securities laws

The Supreme Court had previously allowed the “conduct and effects” test to evaluate extraterritorial claims that violated federal securities laws. However, the Morrison v. National Australia Bank 2010 case claimed that the securities law must apply only to misstatements or omissions that relate to the sale or purchase of securities.

New rules and regulations

In 2021, the Second Circuit do not apply to transactions that are predominantly foreign. For example, a company in the Caribbean that buys shares from a company in New York later complains about misrepresentations in the sale. The foreign buyer sues the American seller under the Securities Exchange Act of 1934 and claims that the transaction was domestic. However, the Second Circuit claims that the transaction is predominantly foreign because it involves a foreign investor and involves only the interests of foreign companies.

Complying with federal laws

Determining if and how U.S. securities laws pertain to foreign transactions is a popular topic in United States courts. Different tests have been used to determine the extent of U.S. liability in foreign sales and purchases of securities. In many cases, it’s been difficult to determine the precise definition of a domestic or foreign transaction. However, the Second Circuit has reaffirmed that U.S. securities laws no longer deal with international business interests.

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