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The FCPA’s Impact On Raising Capital

raising capital

The 2014 article “FCPA Ripples” goes in-depth, using various case studies, to demonstrate how settlement amounts in an actual Foreign Corrupt Practices Act enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement. Numerous prior posts have done so as well (see here).

In addition to pre and post-enforcement action professional fees and expenses, market capitalization, credit ratings, M&A activity, lost or delayed business opportunities, and offensive use of the FCPA (to name just a few ripples) this post highlights how FCPA scrutiny and enforcement can also negatively impact a company’s ability to raise capital.

As highlighted in this prior post, in September 2016 hedge fund Och-Ziff resolved a parallel DOJ and SEC enforcement action by agreeing to pay $412 million. This is obviously a lot money but it pales in comparison to the $2.5 billion Och-Ziff disclosed that clients yanked in just the month after the enforcement action. (See here).

Even though Och-Ziff’s FCPA enforcement action is nearly two years old, it still is negatively impacting the company’s ability to raise capital. For instance, Och-Ziff recently disclosed:

“Prior to the settlements, many of our funds raised capital relying on the exemption from registration provided by Rule 506 of Regulation D under the Securities Act (“Rule 506”) in connection with a securities offering structured as a private placement. As a consequence of the settlements, many of our funds are currently disqualified from raising capital using Rule 506 offerings. This could negatively affect our ability to raise capital for these funds, and our ability to offer and sell fund interests to certain investors in certain U.S. states may be impaired. The inability of many of our funds to raise capital in Rule 506 offerings may also result in additional expenses. The potential negative impact of the FCPA settlements on our ability to raise or retain capital for our funds could adversely affect our business, financial condition or results of operations.”


“Effective September 23, 2013, and pursuant to a mandate under the Dodd-Frank Act, the SEC adopted amendments to Rule 506 that disqualify issuers, such as our funds, from relying on the exemption from registration provided by Rule 506 in connection with a securities offering structured as a private placement if any “covered persons” are deemed to be “bad actors.” Specifically, an issuer generally will be precluded from conducting offerings that rely on the registration exemption provided by Rule 506 if a “covered person” has been subject to a relevant criminal conviction, regulatory or court order or other disqualifying event that occurred on or after September 23, 2013. For these purposes, the “covered persons” of an issuer include directors, certain officers, various entities related to the issuer, solicitors and promoters of the issuer and 20% beneficial owners of the issuer’s voting securities. For more detail about risks relating to the FCPA settlement and the related disqualification event which prevents many of our funds from raising capital using Rule 506.”

Another way in which FCPA scrutiny and enforcement can impact a company’s ability to raise capital concerns Rule 405 of the Securities Act which states in pertinent part that an issuer is unable to avail itself of well-known seasoned issuer (WKSI) status (a designation that makes it much more efficient to raise capital) if “within the past three years, the issuer or any entity that at the time was a subsidiary of the issuer was convicted of any felony or misdemeanor described in paragraphs (i) through (iv) of Section 15(b)(4)(B) of the Securities Exchange Act of 1934.” However, pursuant to Rule 405, an issuer shall not be an ineligible issuer if the Commission determines, upon a showing of good cause, that it is not necessary under the circumstances that the issuer be considered an ineligible issuer.

In the aftermath of ADM’s $54 million FCPA enforcement action in 2013 (based on the conduct of an indirect subsidiary in Ukraine and a joint venture partner in Venezuela), ADM sought relief from the ineligible issuer provisions. As stated in ADM’s letter:

“none of the conduct described in the plea agreement or the judgment pertains to activities undertaken by ADM or its subsidiaries in connection with ADM’s or its subsidiaries’ role as issuers of securities or any related disclosure; the considerable efforts ADM has undertaken to remediate and enhance its anti-corruption training and compliance program and internal controls; and the burden that would be placed on ADM if the waiver were not granted.”

In this response letter, the SEC “determined that the Company has made a showing of good cause that the Company will not be considered an ineligible issuer by reason of the entry of the Plea Agreement.”

Incidentally, the SEC’s waiver in the ADM matter was not unusual as it routinely grants Rule 405 waivers an occurrence which has generated substantial criticism (see here for a New York Times article).

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