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October 5, 1998
 

Ou Ref. No. 98-435-CC 

REPONSE OF TH OFFCE OF CIlF COUNSEL
 Gowin, Procter & Hoar DIVSION OF INTMNT MAAGEMENT File No. 132-3
 

Your lettr date October 5, 1998 requests our confiration tht an investment
 

company formed under the laws of a jursdiction other th the Unite States ("Foreign
 

Fund") would not be deemed to be mag a public offerig for purses of Section 7(d) of
 

the Investent Company Act of 1940 (the" Act") if cert fuctions tht, for U.S. ta
 

purses, previously have ben performed offshore by or on beha of the Foreign Fund are
 

performed in the Unite States. You also reest our conftion tht a Foreign Fund wil


not be deemed to be mag a public offerig for purse of Section 7(d) of the Act if it 

simultaeously conducts a private U.S. offeri and an offshore public offerig ~d uses, .
 

U.S. jurdictiona mean in connection with the offshore offeri. 

FACTS 

You state tht a foreign entity engaging in a trde or businss in the Unite States 

generay subjects itslf or its shaholders to U.S. taation. Section 864(b)(2)(A)(ü) of the
 

Intern Revenue Code of 1986, as amended (the "Code"), contain a spifc safe habor
 

tht generay provides tht mere trdig in seties by a company, other th as a deaer,
 

for its own accunt, does not constitute a trde or business in the Unite States. i You state 

tht unti rently, ths safe har was not avaiable to a Foreign Fund tht had its "pricipal
 

offce" in the Unite States. 

You state tht the determtion of whether a Foreign Fund's pricipal offce was in
 

the Unite States for U.S. ta purses was made by comparg the activities (other th 

trding in seurties) tht the fud conducte from offces locte in the Unite States to the 

activities tht it conducte from offces locte outside of the Unite States. If the Foreign 

Fund performed "al or a substtial porton" of ten speifc activities, tyicay referred to 

as the "Ten Commdments," from offces outside of the Unite State, the Intern Revenue 

Service considered the fud not to have its pricipal offce in the Unite States.2 You state
 

26 U.S.C. § 864 (1998).
 

2 See Trea. Reg. § 1.8642(c)(2)(ii). The Ten Commdments activities were as follows: (1) 

communcating with the fud's shaeholders (including the fuhig of fincial report); (2) :....
 

communcating with the general public; (3) soliciting sales of the fud's stock; (4) accpting 

subscriptions of new shaeholders; (5) matag the fud's principal corporate recrds and books of 

accunt; (6) auditing the fud's books of accunt; (7) disburing 
 payments of dividends', legal fees, accounting fee, and offcers' and diectors' salares; (8) publishig or fushig the offering and 

redemption price of the stock issued by the fud; (9) conducting meetings of the fud's shareholders 

and board of directors; and (10) mag redemptions of the fud's stock (collectively, the "Ten 
- 2­

tht U.S. sponsors of Foreign Funds generaly have sought to comply with the Ten
 

Commandments by hi trt companes an other independent contrctors locte in 

foreign jurictions to ca out the spifed fuctions. You assert tht, in ma caes, ths 

strctue ha resute in operatig ineffciencies beus U.S. spnsors have ben unble to 

combine the back offce fuctions of their Foreign Funds with those of their fuds tht are
 

organ and operate in the Unite States. 

The Taxpayer Relief Act of 1997 modifed the seurties trding safe habor by
 

elimtig the reuiement tht a foreign entity's pricipal offce be locte outside of the 

Unite States.3 Th chage, which is effecve for ta yea beging afr Decmber 31, 

1997, eliminate the ne for a Foreign Fund to comply with the Ten Commandments. 


4

Beus the performce of the Ten Commandments activities in the Unite States represents 

a depar from the hitorica operations of Foreign Funds, you reqest our confation 

tht a Foreign Fund would not be deemed to be mag a public offerig for puroses of
 

Section 7(d) of the Act if the Ten Commdments activities ar performed by or on behalf of 

the Foreign Fund in the Unite States. In parcular, you sek our concurnce tht the Ten 

Commandments activities generay may be performed in the Unite State in connection with 

a Foreign Fund's private U.S. offerig of its seurties, as long as those activities tht 

amount to the offer or sale of securties ar consistent with the reguatory restrctions on nonpublic offerigs. Simarly, you reuest our concunce tht the Ten Commdments 

activities generay may be performed in the Unite States in connection with a Foreign 

Fund's offshore public offerig, as long as those activities tht amount to the offer or sale of 

securties are dite offshore to non-U.S. persons. In a separte but relate question, you
 

. ask us to confir tht a. Foreign Fund wil not be deeed to be mag a public offerig for 

puroses of Section 7(d) of the Act if-it simultaeously conducts a private U.S. offerig and

an offshore public offerig and uses U. S. jurctiona mea in connection with the 

offshore offerig.
 

ANALYSIS 

Section 7(d) of the Act states: 

No investment company, uness organ or otherwis crete under the laws of the 

Unite States or of a State . . . sha make us of the mas or an mea or 

intrentaity of interste commerc, dirtly or indirtly, to offer for sae, sell, or 

deliver afr sale, in connection with a public offerig, any seurty of which such 

company is the issuer. 

Commdments activities"). Id. 

3 Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1162, 111 Stat. 788 (1997). 

4 See H.R. Rep. No. 220, 105th Cong., 1st Sess. (1997). 
- 3 ­

The Commssion ha indicate tht the prohibitions of Section 7(d) apply only to a public 

offerig by a Foreign Fund in the Unite States or to U.S. persons.5 Severa positions taen 

by the staff have applied a simar priciple in permttg a Foreign 'Fund to simultaeously 

mae an offshore public offerig and a private U.S. offerig of its securties. Under these 

positions, a Foreign Fund tht is conducting an offshore offerig also. may make, under 

certin cirumtaces, a private U.S. offerig in reliance on Section 3(c)(1)6 or 3(c)(7)' of 

the Act consistnt with the U.S. public offerig prohibition in Section 7(d). A Foreign Fund 

generay may rely on the definition of "U.S. person" in Rule 90(k) of Regulation Sunder 

the Securties Act of 1933 ("Securties Act") in determg whether a potential investor must
 

be counte or quaifed for puroses of coinlying with Section 3(c)(1) or 3(c)(7) of the Act, 

8 respetively. 

5 Investment Company Act Releae No. 23071 (Mar. 23, 1998) at n. 12 and accmpanying
 

text. See also S.. Rep. No. 1775, 76th Cong., 3d Sess. 13 (1940); H.R. Rep. No. 2639, 76th Cong., 

3d Sess. 13 (1940) ("foreign investment companes may not register as investIent companes or 

publicly offer securities of which th are the issuer in the United Staes uness the Commsion fids 

tht these foreign'investment companes ca be effectively subjected to the same ty of reguation as
 

domestic investment companes") (emphasis added). 

We note tht Section 7(d) ofthe Act is imlicated only when a Foreign Fund uses U.S. 

jurisdictiona mea in connection with its public offerig. As a result, we believe tht an offshore 

public offerig by a Foreign Fund to U.S. persons tht does not 
 mae use of U.S. jursdictiona mea would not constitute a public offerig for purses of Section 7(d) of the Act. Global Mutual 

Fund Surey (pub. avaiL. Jiiy 14, 1992). 

6 Touche Remnt & Co. (pub. avai. Aug. 27, 1984). Section 3(c)(I) of the Act provides an 

exclusion from the defition of investment compan for any fud tht is not conductg, and does not 

presently propose to conduct, a public offerig of its secties and tht ha 100 or fewer beneficial
 

owners. 

7 Gowin, Procter & Hoar (pub. avai. Feb. 28, 1997). Section 3(c)(7) of the Act provides an 

exclusion from the defition of investment company for any fud the securties of which are owned 

exclusively by persons who, at the tie of acqisitiòn, are "quafied purchaers," and th is not
 

conducting, and doe not at tht time propose to conduct, a public offerig of its securities. The term 

"quaified purchaer" is defmed in Section 2(a)(51) of the Act to include cert investors with a high
 

degree of fincial sophistication.
 

8 Goodwin, Procter & Hoar, supra note 7. We note that if U.S. persons beme shareholders 

of a Foreign Fund as a result of activities beyond the control of the fud or persons acting on its 

behaf, the fud would not be required to count those shaeholders as U.S. persons for purposes of
 

determng whether it may rely on Section 3(c)(I) or 3(c)(7) of the Act. See Investment Funds 

Intitute of Cada (pub. avaiL. Mar. 4, 1996); Investment Company Act Releae No. 23071, supra
 

note 5, at n. 41. 
- 4­

Ten Commandments Activities 

You request our confirtion tht a Foreign Fund would not be deemed to be makg 

a public offerig for purses of Section 7(d) of the Act if the Ten Commdments activities 

are performed by or on behaf of the Foreign Fun in the United States.9 As discusse 

below, we believe tht the Ten Commanents activities generay may be performed in the 

Unite States in connection with a private U.S. offerig of a Foreign Fund's seurties, as 

long as those activities tht amount to an offer or sae of seties ar consistent with the 

reguatory restrctions on non-public offerigs. We also believe tht the Ten Commandments 

activities generay may be performed in the Unite State in conntion with a Foreign 

Fund's offshore public offerig, as long as those acvities tht amount to an offer or sale of 

securties are dirte offshore to non-U.S. persns. 
 10 

Private Oferings 

We believe tht the Ten Commandments activities generay may be performed in the 

Unite States in connection with a Foreign Fund's private offerig without implicatig 

Section 7(d). We believe, however, tht any Ten Commdments activities conducte by or 

on beha of the Foreign Fund tht amount to an offer or sae of the fud's securties must be 

consistent with the reguatory restrctions on.non-public offerigs. Speifcay, an
 

unegistere seurties offerig in the Unite States by a Foreign Fund must be made in .
 

compliance with Section 4(2) of the Securties Act, or Reguation D or other exemption from 

9 We note tht in several prior no-action letters, we have taen the position tht we would 


recmmend enforcment action under Section 7(d) of the Act agait a Foreign Fund tht peñormed not

certin of its activities ~, reciving and effecing purchae and redemption orders for its shaes) in 

the United States. See G. T. Global Fincial Service, Inc. (pub. avai. Aug. 2, 1988); Merrll
 

Lynch (pub. avaiL. May 12, 1986); and Shea 
 on Inernona Dollar Reserves (pub. avai. July 15, 1981). In each of those situtions, counel represented th the Foreign Fund was not doin business 

in the United States for federal ta purses. Ths represention seems to indicate tht those Foreign
 

Funds were peñormg all or a substatial porton of the Ten Commdment activities outside of the
 

United States. We believe th a Foreign Fund th strctes its operaions consistent in all maerial
 

respets with these prior letters, and conduct its Ten çommdments activities in the United States
 

consistent with the stadads aricuated in th response, should not be deemed to be mag a public 

offeri for purses of Secion 7(d) of the Act. .
 

10 In anyzing whether the peñormce of the Ten Commdments activities in the United 

States by or on behalf of a Foreign Fund imlicates Section 7(d) of the Act, we recgn that may 

of the activities tht mae up the Ten Commdments ~, matainig the fud's pricipal .:"C. 

corporate recrds and books of accunt; auditing the fud's books of accunt; and disbursing
 

payments of dividends, legal fee, accunting fee, and offcers' and diectors' salaries) tyicaly are
 

not par of 
 ,

the offer or sale of securties. The peñormce of those Ten Commdments activities 

that could be par of the offer or sale of securties ~, soliciting sales of the fud's stock) in the 

United States wil only imlicate Section 7(d) if such activities result in the' Foreign Fund mag a 

public offering of its securities in the United States or to U.S. persons. . 
- 5 ­

registrtion under the Securties Act, as well as Section 3(c)(1) or 3(c)(7) of the Act.
 

Ofshore Public Oferings 

We believe tht the Ten Commandments activities generaly may be performed in the 

Unite States in connection with a Foreign Fund's offshore public offerig without 

imlicatig Section 7(d). We believe, however, tht those Ten Commandments activities
 

performed in the Unite States tht amount to an offer or sale of securties must be directed 

offshore to non-U.S. persons in a maer consistent with an exemption or safe habor from 

the registrtion requirements of the Seties Act. Reguation S under the Securties Act 

provides gudace in evaluatig whether any Ten Commdments activities performed in the 

Unite State should be viewed as dite offshore to non-U.S. persons for purposes of
 

Section 7 (d) of the Act.
 

Reguation S clares the extterrtorial application of the registrtion provisions of 

the Securties Act.11 The reguation generay provides tht Section 5 of the Securties Act 

,does not apply to any offer or sae of seurties by certin issuers, including Foreign Funds
 

not registered or reuired to be regisred under the Act, tht ocur outside of the Unite 

StateS.12 By its term, Reguation S doe not dirtly address whether an offshore public
 

offerig by a Foreign Fund trggers the U.S. public offerig prohibition of Section 7(d) of 

the Act. The reuirements of Reguation S, however, are intended to ense tht an issuer
 

relyin on the reguation is offerig and selling its seurties offshore.13 For example,
 

under Rule 903 of Reguation S, an issuer whose securties have no substatial U.S. maket 

interest must satify only two conditi0!1 to comply with the safe har: (1) any offer or sae
 

of its seurties must be made in an "offshore traction;" and (2) no "directed selling 

effort" may be made in the Unite States. 

Rule 902(h) under Reguation S generay dermes an "offshore traction" as a
 

traction in which no offer is made to a person in the Unite States and, at the time tht
 

the buy order is originte, the buyer is outside of the Unite States or the seller reasonably
 

11 Securties Act Releae No. 6863 (Apr. 24, 1990) (adopting Reguation S). 

12 Prelim Note 8 of Reguation S states that the reguation doe not apply to offers and sales 

of securties issued by open-end investment companes or unt investment truts registered or required 

to be registered or closed-end investment companes required to be registered, but not registered, 

under the Act. 

13 Reguation S does not preclude a Foreign Fund from selling its securities to U.S. persons, 

provided tht the conditions of the reguation are satisfied. For purses of Section 7(d), however, a 

Foreign Food may not mae a public offerig to U.S. persons if it maes use of U.S. jurisdictiona 

mea. We believe that a Foreign Fund must count (for Section 3(c)(I) purses) or quaify (for Section 

3(c)(7) purses) all U.S. persons to whom it sells securities as par of its offshore offering. See 

Goodwin, Procter & Hoar, supra note 7. ­
- 6­

believes tht the buyer is outside of the Unite States. In our view, the Ten Commdments 

activities generay may be performed by or on behaf of a Foreign Fund in the Unite States 

consistent with the offshore traction reuiment of Regulation S beus all of these 

activities ca be conducte from or in the Unite States whie al offeres and buyers are 

outside of the Unite States. 14 

Rule 90( c) under Reguation S generay dermes "dirte selling effort" as an
 

activity underten for the purose of, or tht could reasonably be expte to have 


the effect
 of, conditionig the U.S. maket for any of the seties being offered in reliance on the
 

reguation. We believe tht the performce of the Ten Commandments activities in the 

Unite States in connection with the offer or sae of a Foreign Fund's seurties offshore 

generay would not constitute diecte selling effort with the meag of rue 902(c), as 

long as these activities ar dirte offshore. For example, although we believe tht it would 

not be consistent with Section 7 (d) for a Foreign Fund or its service providers to mail prite
 

materials to U.S. investors, or place advertements in publications with a genera cirulation 

in the Unite States, we believe tht it would be consistent with Section 7(d) to develop and
 

distrbute mailings or advertements from the Unite 


States for dissemition offshore. 15
 

Use of U.S. Jursdictiona Mea 

You ask us to conf tht 
 a Foreign Fund wil not be deemed to violate Section 7(d) of the Act if it simultaeously conducts a private U.S. offerig and an offshore public 

offerig and uss. U.S. jurictiona mea in connection with the offshore offerig. You
 

state tht some confion ha arn from the wordg 
 of a 1997 no-action lettr which implies tht an offshore offerig undelthese cirumtaces should involve only "inidental 

U.S. jurdictiona contacts. "16
 

As disussed above, although Section 7(d) refers broadly to a Foreign Fund using 

U.S. jursdictiona mea to make a public offerig, the Commsion ha interprete the 

prohibitions of Section 7(d) to apply only to a public offerig in the Unite States or to U.S.
 

14 We note th we would not view offers and saes th 


are specificay tageted at identifiable groups of U.S. citizns abroad, such as members of the ared force serving oversea, as meeting the 

offshore tranaction requirement. Ths view is consistent with the provisions of Regulation S. See 

Rule 902(h)(2) of Regulation S. 

is We note tht we would view selling effort tageted at identifiable groups of U.S. citizns 

abroad, such as members of the ared force serving oversea, as diected selling effort. Ths view
 

is consistent with the Commssion's interpretation of Reguation,S: See Securities Act Releae No. 

6863, supra note 11, at n. 35. 

16 See Goodwin, Procter & Hoar, supra note 7, at n. 33 and accmpanyìng text. 
- 7 ­

persons.17 As a result, we believe tht Section 7(d) prohibits the use of U.S. jursdictiona

mea by a Foreign Fund in connection with a public offerig in the Unite States or to U.S. 

persons, rather th the us of U.S. jursdictiona mean per see We believe, therefore, tht 

Section 7(d) of the Act does not prohibit a Foreign Fund tht is conductig a private U.S.
 

offerig from using U.S. jurictiona mea in connection with a concurnt offshore public
 

offerig, provided tht the fud counts or quaifies all U.S. person shaholders for puroses 

of Sections 3(c)(1) or 3(c)(7) of the Act, respetively. is 

ic~JJL 

David W. Gri
 

Senior Counel 

17 See supra note 5 and accmpanying text. 

is In KBS Interntiona Ltd. (pub. avaiL. Mar. 18, 1985), we took the position that for purposes .:::;'F-" 

of determg the applicabilty of Section 7(d) of the Act, "whether an offer made by a foreign 

investment company. . . to persons puts 
 ide the United States. . . would be integrated with an offer by the foreign investment company to United States persons, would depend on whether jurisdictiona 

mea were used directly or indirectly in connection with the foreign offer:" KBS Interntiona Ltd. 

is superseded to the extent that it is inconsistent with the position taen in ths response. 
GOODWIN, PROCTER & HOAR LLP 

COUNSELLORS AT LAW
 

E:X.CHANGE PLACE
 

80STON, MASSACHUSETTS 02109-2SSI
 

Te:I.i:PHOiii: (eI7) 570-1000 

TE:LE:COP,i;R (6'" !l23-1231
 GEOFFREY Il,T. KENTON 

(617) ~nl,II"1
 

Invement Company Act
 

of 1940--Secon 7(d) 

October 5, 1998
 

Offce of Chief Counsel
 

Division of Investment Mangement 

Securities and Exchange Commsion 

450 Fift Street, N. W.
 

Washington, DC 20549 

Attention; Douglas J. Scheidt, Associate Director and General Counsel 

Ladies and Gentlemen: 

We are seeking interpretative advice on an issue arising from a recent change in U.S. 

tax law relevant to investment companies organied outside of the United States ("foreign 

funds"). This change effectively pennits certin activities that have historically been 

conducted for foreign fuds by offshore service providers to be conducted witl the Unite
 

States. We ask you to confir that the perfonnance of these activities within the United States 

by or on behalf of a foreign fund wil not adversely affect the abilty of the fud to rely on the
 

Touche Remnt doctrine undc;r Section 7(d) of the Investment Company Act of 1940, as 

amended (the "1940 Act"). 

I. BACKGROUN.
 

The .'Ten Commandments." When a foreign entity engages in a "trade or business in 

the United States," it generally subjects itself or its shareholders to U.S. taxation. 

Accordingly, a critical aspect of ta:x plang for a foreign fund is ensuring tht the U.S. 

activities of the fund and its service providers do not cause the fund to be engaged in a "trade 

or business in the United States." This is possible because the term "trade or business in the
 

United States" generally does not extend to passive investment activities. Moreover, the -' 

Internal Revenue Code of 1986, as amended (the "Code"), contains speific safe habors that
 

protect these activities from giving rise to a U.S. trade or business. 

Section 864(b)(2)(A)(ii) of the Code provides the most importt safe harbor for foreign
 

funds that Use a U.S. investment adviser. That provision states generally tht trading in
 

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GOODWIN, PROCTER & HOAR LLP 

Securities and Exchange Commission 

October 5, i 998 

Page 2 

securities tor a fud's account does not corutitute a tradi: or business in the United States. 

offce" is in the 

United States. 

Unti recently, this exception has not been available if the fund's "pricipal 


The determtion of whether a foreign fund's principal offce is located in or outside 

the United States has been made under Treasury Regulation §L.8G4-Z(c)(2)(iii) by' comparing 

the activities (other than securities tradin) that the fund conducts from a U.S. offce with the 

activities it conducts from one or more offices outside the United States. The Regulations have 

provided that if a foreign corporation perform "all or a substantial portion" of ten specific 

functions from one or more offces located outside the United States, the corporation wil not 

be considered to have itS principal offce in the United States. 

These ten functions are often referred to by industry participants as the Ten 

1 U.S. sponsors of foreign fuds have generally sought to comply with the
 Commandments. 

"Ten Commandments" by hiring trst companies and other independent contractors located in 

foreign jurisdictions to car out the requisite back offce functions. In many cases, ths has 

resulted in operating ineffciencies because u.s. fund sponsors have been unable to combine 

the back offce futions of their foreign funds with those of 
 their U.S. funds.

The Taxpayer Relief Act of 1997 eliminatc5 thc rcquire~t that a foreign fud's
 

pricipal office be outside of the United States, effectively elimting the need for foreign 

funds to comply with the Ten Commandments. This change is effective for taxable years 

beginnng after December 31 i 1997.2 

The "Ten Commandments," ate as follows: (1) conuunicating with the fund's shareholders 

(including the rumishitig of fuiancial reports); (2) communcatin with the general public; (3) soliciting sales of

the fu's own stock; (4) accepiing subsc;tiptions of new stockholders; (5) rnaintaining the fud's pricipal 

corprate records and books of accouit; (6) auditing the fund's boks of account: (7) disbursing payments of 

dividends, legal fees, a~unting fees :ud off(!ers ar diectors salares; (8) publishig or furnishing the offerig 

and redemption price of the shars of stock issued by the fund; (9) conducting meetings of the fud's shareholders 

and board of dire:i;tol'; and (10) makng redemptl0t18 of the fud's own stock. 

2 The legislative history of the Taxpayer Relief Act of 1997 indicates that Congrss recogned 

th-it the Ten Commandments served little real purpse and had negative economic consequences for the United 

States. See House Ways and Mea Commttee Reprt, CCH Fcde:ral Tax Reports Vol. 1M, Isme no. 32, p. 297 

("The Committee understands that the pricipal Qffce rule operates simply to shift certain admsttative functions 

with respet to sec:utitiell trading - and the assoclatedjobs - offhore.") Wf: bc1i~~ that the: e:oiifUlition 

requested below is c;onsillteni with the Congressional intent behid the elimination of the Ten Conuandrnetits. 

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GOODWIN, PROCTER & HOAR LLP 

Securities and Exchange Commssion 

October 5, 1998
 

Page 3
 

Section 7(4), Section 1(d) of me 1940 Act provides that, "(N)o invcstment company, 

unless organed or otherwise created under the laws on the Uiuted States . . . shall make use 

of the mails or any means or instruentality of interstate commerce, directly or indirectly, to

offer for sale, sell, or deliver after sale, in connection with a public offering, any security of 

which such company is the issuer (in the absence of an order from the. Commssion). " 

Although the language of Section 7(d) appears to broadly limit the ability of a foreign 

investment company to use jursdictional means to mae a "public offerin." there is abundant
 

evidence in the legislative history that Section 7(d) was intended only to limit the abilty of 

foreign funds to publicly offer their securities in the United States.'3 We have been unable to 

find any legislative history which suggests that Section 7(d) was intended as a restriction on 

using jurisdictional means in connection with aforeign public offering. 

Interpretations by the Commission and the Staff are consistent with the conclusion that 

Section 7(d) litnits only public offerings in the United States. In a series of no-action letters 

beginning with Touche, Remnanc &: Co. (August 27, 1984), the Staff stated that it would not 

recommend that the Commission take any enforcement action against foreign fuds for failng 

to register under the 1940 Act, provided that (i) they do not publicly offer their securites In 

the United States and (i) they limit the U.S. beneficial ownership of their securities in certain 

stated ways.4 A foreign fund meeting these requirernents is then free to conduct a foreign 

public offering and have an unlimited number or foreign shareholders without violating the 

1940 Act. The principles of Touche Remnant have been modified by the Staff in various 

subsequent letters, including most recently, Investment Funds Institute of Canada and 

3 S~i! S. Rep. No. 1775. 76th Con~css. 3d Sess. (1940) accom¡,anying S. 4108, 76th Congre.ci.
 

3d Session (1940) at 13 (MForeign investtent companes may not rcgisrer as investment compates or publicly 

offer sec;urities of which they are the issuer in the United States unless the Commission finds that these foreign 

invesunent companies can be effectively subjected to the same type of regulation as domestic investment 

companC:15. n). See also H.R. Rep. No. 2639, 76th COl1gresc, 3d Sesi;. (1940) IIccompanying H.R. 10065. 76th
 

Congress, 3d Session (1940) ëlt13; House consideration and passage of H.R. 10065, as amended, August 1, 1940,:" . 

86 Congo Rec. 9807, 9810 (1940); Senate consideration and passage of S. 4108, as amended, August 8, 1940, 86 

Congo Rec. 10069, 1004 (1940). 

4 Whether a fund's U.S. activities constirute a public offerin wil bc determined by reference to 

1933 Act principle!!, e.g. Section 4(2) and Rule ~06 or Reguation D. The composition of II funds U.S. 

shareholder base wil be judged by reference to Section 3(c)(1) and Section 3(c)(7) of the 1940 Act. 

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GOODWIN, PROCTER & HOAR LLP 

Securities clnd Exchange Commssion 

October 5, 1998
 

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Gooåwtn, Procter & Hoar.s The Commssion has endorsed the bask principles of the Touche 

Remnant doctrine set fort by the Staff, as well as these two most recent modifications.6 

n. INTEGRATION OF FOREIGN AN DOMESTIC OFFERIGS.
 

Where a foreign fund carries out its Ten Commandment functions obviously has no 

direct effect upon its abilty to comply with the two basic components of the Touche Remnant 

doctrine (i.e. no pUblic offering in the United States and a U.S. shareholder base consistent 

with Section 3(c)(1) or Section 3(c)(7)). Moreover, it is now well established that Section 7(d) 

imposes no per se prohibition on the use of U.S. jurisdictional means in connection with a 

foreign public: offering. Accordingly, the location of the Ten Commandment functions ca be 

significant for purposes of Section 7(d) only if it provides the basis for integrating a foreign 

public offering with a prívate offering in the United States. For the reasons stated below, we 

believe that it does not. 

Inte2ration Prior to ~doption of Reltlation S. To avoid integration of a funds U.S. 

private placement with its foreign public offerig, applicants requesting no-action or 

interpretive relief traditionaly represented that certin activities related to the funds' foreign 

offerings would take place outside of the United States. In general, the key representations 

appear to have been based upon Release 4708, which (until the adoption of Regulation S) 

provided the primar framework for evaluating the integration of onshore and -offshore 

5 In Invescmenr FlInd llftituie of Canoa (March 4, i 996) the staff staled thai if U.S. persons
 

become shaeholders of a foreign fund for reasons beyond the control of the fUd (or persons acting on ItS behalf, 

the fud would not be required to count those shareholders as u.s. persons under the Touche Remnant doctrne. 

In Goodwin. Procrer & Hoat (Febniry 28, 1997) the Staff stated, among other mings, that foreign funds may 

offer and sell their shares to u.s. residents in accordace with the limitations imposed by either Section 3(c)(1) or 

Section 3(c)(?) 1lder the 1940 Act an that the defintion of a U.S. person set fort in Rule 902(0) of Reguliiiion 

S may be used for purposes of deterin who is a U.S. resident beneficial owner under the touche Remnant 

doctrine. 

6 See Resale of Restricted Securities; Changes to Method of Determining Holding Period of
 

Restricted Securites under Rules 144 and 145, Release No. 33-6862 (April 23, 1990); see aLso Statement of the 

Commission Regaring Use of Internet Web Sites to Offer Securities, Solicit Tranactions, or Advertise 

Inv~tmc;nt Sc:rvic:C3 Offs)iQre. Release Noii. 33-7516, 34-39779, IA~1110, lC-2307! (March 23. 1998) 

(hereinafter referred to as the "Internet Release") at note 41.
 

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GOODWIN, PROCTER & HOAR LLP 

Securities and Exchange Commission 

October 5, 1998
 

Page 5
 

offerings under the 1933 Act.1 Uncier (hIs approach, U1e focus was on whether the foreign
 

offering was reasonably designed to preclude distribution of the securities offered abroad 

within the United States or to U.S. nationals. Thus applicants provided assurances to the
 

effect that foreigi: inve:5tors would not be !'olicited while they were present in the United 

States, that no funds from U.S. sources would be used to purchase shares in the foreign 

offering, and that the shares would be purchased by foreign investors solely for investment 

purposes aI1d not for distrbution.
 

In many cases the applicants also recited that same OJ: all of the Ten Commandments 

would be performed outside of the United States. However. it is unlikely that the Staff relied 

upon these recitals in granting no-action relief. Only one of these functions directly involves 

the offering of securidesl and even the moist testrktive no-action letters under the Touche 

Remnant doctrine focused upon the scope of U.S. activities in connection with theforeign 

offering, rather than the issuer's use of jurisdictional means per se.9 

A 1988 no-action letter, G. T. Global Financial Services. Inc. J 10 is particularly 

significant in this regard. In G. T. Global, the staff granted no-action relief under
 

circumstances in which the applicant intended to use U.S.-based brokers to offer foreign funds, 

a strategy which has generally been viewed by tax experts as a violation of the one 

conuandment that deals expressly with the otlering of securities. Although the applicant 

contemplated that brokers would be physically present in the United States and would transmit 

offers to overseas investors u~ing the mails and other facilites of interstate commerce, the 

foreign offering would be conducted in acco,;dance with restrctions modeled on Release 4708. 

We believe that G. T. Global ilustrtes that the Staff has historically resolved integration issues 

7 Release Nt!. 33..708 (JUly 9, 1964). While at least one early no-action letter under the Touche 

Remnant doctrne staed that onshore and offshore offers would be inlegrated if U.S. jurisdictional mean Were 

used directly or indirectly in connection with the offshore offer, KBS Incenitional Ltd. (March 18, 1985), the 

Staff subsequently granted no-action relief in numerous letters involving the use of U.S. jurisdictionii means in 

c.onnection with the foreign offeri2.
 

8 I.e., number (3), "~olidtin sales of the fud's own stock." Certain other Commandments
 

involve functions that may have an indirect relationsbip to the offering of securities (e.g., number (1) may involve:.. 

the communication of information that indirectly causes a shareholder to make an additional investment in the 

fud) . 

9 See KBS IntenitiofUI, footnote 5 above. 

10 G.r. Global Fin.:nâal Services, Inc. (August 2, 1988).
 

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GOODWIN, PROCTER & HOAR LLP 

Securities and Exchange Commssion 

October 5, i 998 

Page 6
 

under the Touche Remnant doctrine by reference to the Commission's own pridples under the 

1933 Act and has given little or no weight to an issuer's compliance with the Ten 

Commandments. 

~te~ration ~oiiowini the Adoption of Re~lation S. In 1990, the Commssion adopted 

Regulation S to clarify the extraterritorial application of the registration provisions of the 1933 

Act.lI Regulation S provides two "safe harbors" for specified transactions. Offers and sales 

meeting all of the conditions of the applicable safe harbor are deemed to be outside the United 

States. When Regulation S was adopted, the Comnssion also amended Regulation D to 

provide that. "(g)enerally. transactions otherwise meeting the requirements of an exemption 

wil not be integrated with simultaeous offerings being made outside the United States in 

compliance with Regulation S. ,,12 Wr; believe that compliance with Regulation S enables a 

foreign fund to avoid the integration of its U.S. and non-U.S. offerins for purposes of Section 13 7(d), just as it does for other pUrposes under the federal securities laws. 


To comply with Reguation S, certin transactions (including offers and sales by foreign 

private issuers whose securities have no substantial U.S. market interest) need satisfy only two 

conditions: that (ll) the offer or sale be made in:i offshore traction and (b) there be no 

directed sellng efforts in the United States.14 

It See Offshore Offers and Sales, Release Nos. 33.6863, 34 -27942; IC-17458 (April 24, 1990) 

(hereinafter, the "Reguation S Adopting Release"). 

12 See Note to Rule 502(a). 

13 In light of the Gdodwin, PrOCTer & Hoar letter, we understand that the Staffs view is that a 

foreign publiç offering wili not be integrated with a U.S. prìvate placement provided that the foreign offering is 

conducted in compliance wim Regulation S and me fud observes limitations upon U.S. beneficial ownership 

consistent with Section 3(c)(1) or Section 3(c)(7) under thé 1940 Aet. We are al.are that some caiision has 

arisen from certin language in the Stafrs response which implies that an offshore offering should "involve only 

lncldental U.S. jurisdictional contacts." S~~ footnote 33 of die Staff'!! reliponse in Goodwin Procter & lloar an 

the ôlccompanying text. Based upon oUr contemporaneous diSCUssions wiih ine Staff, we c.o nor believe that the 

Staff intended to establish an additional uincidental contacts" tesL. Moreover, we do nol believe that such an 

additonál test would be consistent with me purpose and intent of Section 1(d) as described above. In order to 

provide greater certainty WIder the Goodwin, Procter &: Hoar letter, wc: ask: you to i:onfirm that that lettr docii 

not adopt an "i1cidental contacts" standard. 

14 See Regulation S, Rule 903. Terms ate defied in Rule 902 under Regulation S.
 

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Securities and Exchange Commssion 

October 5, 1998
 

Page 7
 

The prohibition on d.irected sellng effons protects againt the possibilty that an Qffcr 

that is nominally made offshore wil be targeted at investors in the United States. Directed 

sellng effort are defined as "any activity underten for the purpose of, or that could 

n;a.sonably be expected to have the effect of, conditioning the market in the United States for 

any of the securities being offered in reliance on this Regulation S." Activities such as mailing 

printed material to U _So investors, conducting promotional seminars in the United States, or 

placing advertisements with radio or television stations broadcasting into th United States or 

in publications with a general circulation in the United States all constitute directed sellng 

efforts.1s 

For purposes of Regulation S, where the Ten Commandments fuctions are performed 

is not important. Rather, it is how they are performed mat is signficant. For example, 

traditional Ten Commandment analysis required that infotmation about a fund's offering of 

securities be disseminated from an offce outside of the United States.16 Under this analysis. it 

was the physical location of a Fund representative when he or she placed or answered a 

telephone call. sent offering material, or transmitted a press release that determined compliance 

with the Ten Conundments. Under Regulation S. the content of the material, to whom it is 

targeted, and where the investors áfé located, tas precedence over the physical location of
 

the Fund's representativesY 

¡he Commission's Internet Release. Technology is further complicating any analysis 

based upon a person's physical location. On March 23, 1998, the Commission published the 

Internet Release to articulate its views on the app1ii;ation of the registration obligatioI1 under 

tbe federal securities laws to certain uses of Internet Web sites, observing that infonnation 

posted on the Internet can be made readily available without regard to geographical and 

political boundiUie5. 

15 Regulation S Adopting Release at p.29. See also Rule 902(c) Under Regulation S.
 

16 This could have implicated at least thee of the Ten Commandments: #2 (communicntittg with 

the general public); #3 (solicitin sales of tbe fud's own stoclc); and #8 (publisbing or fushing the offering and 

redemption price of the shaics of stock issued by the fud). 

11 Assumig ehe investors ar not present in the Unìted States when they are solicited or when they 

place their orders, Regulation S clearly permits U.S. ftiwcial intermediarIes to orrer and sell securltles to thelr 

offshore clients from offces within the United Staes. 

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GOODWIN, PROCTER & HOAR LLP 

Securities and Exchange Commssion 

October 5, 1998
 

Page 8
 

The Commission declined ro require registration for every Internet offering accessible 

by persons physically located in the United States, adopting instead a balanced approach 

designed to regula.te only those offers that ate "targeted to persons in the United States or to 

U.S. persons." The Commission stated that when an offeror implements adequate measures to 

prevent U.S. persons from participatig in an offshore Internet offer, it would not view the 

offer as targeted a.t the United States and thus would not trat it as occurrng in the United 

States for registration purposes. 18
 

As with Regulation S generally, it is' not where the functions contemplated by the Ten 

Commandments are performed. but how they are performed that is signficant for pUt)oses of 

the Internet Release. Thus, the location of an issuer's representative when he or she placed 

information Onto a Web site is irelevant; rather it is the issuer's intent to target U.S. investorst 

as evidenced by the content of the offerin inormation, that is critical. 

m. INERPRETATION REQUESTED
 

For the reasons stated above, we ask you to contïrm our understanding that a foreign 

fund may perform the activities contemplated by the Ten Commandments in the United States 

in connection with a U.S. offering, provided that the fund has procdures in place reasonably' 

designed to ensure that such U.S. offering is private in nature. We also request your
 

concurrence that a foreign fund may perform the activities contemplated by the Ten
 

Commandments in the United States in comiection with a non-U .S. offedng, provided that any 

activities performed in connc~ion with sueh non-U .S. offering are targeted offhore. In this
 

regard we also ask you to confin that compliance with Regulation S in coimection with a non-


U.S. offering wil be suffcient to establish tht such offering is targeted offshore.
 

In order to provide greater certinty to foreign funds seeking to rely upon the Touche 

Remnant doctrine, we also ask you to confirm our general understanding that a foreign public 

offering wil ttot be integrated with a U.S~ private placement provided that the foreign offerin 

is conducted in compliance with Regula.tion S and the fund observes limitations upon U.S. 

beneficial ownership consistent with Section 3(c)(1) or Section 3(c)(1) under the 1940 Act. 1\1 

18 A significat portion of the Internet Release is dedicated to providing guidance on the scope of 

"adequte meásures" under various facts and circumstaces. 

19 Reguation S incorprates the general priniple that the safe harbors arc not avaiable with 

resl'ect to any tranaction or series Of trana.ctlons Uiat, although in technical comp1i~cc with the n:leviUt nilCl1 

"is pa of a plan or scheme to evade the registration provisions of the (1933) Act." Preliminar Note 2 to 

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GOODWIN, PROCTER & HOAR LLP 

Securities and Exchane Commssion 

October 5. 1998 

Páge 9
 

If you should have any questions concerning the: abo'\ct please; fed free to call Eliza.beth 

Shea Fries or me at (617) 570-100. 

Sineerely yours, 

cc: Elizabeth Shea Fries, Esq.
 

DOCSe\S7! 049.8 

Regulatiori S. See also Section 48 of the 1940 Act.
 

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