Raising Capital Overseas

• MORE AND MORE COMPANIES are trying to raise capital by listing their securities for sale on foreign exchanges; however, the costs of reconciling U.S. accounting standards with their foreign counterparts can be high. Therefore, it is important that companies know the questions they will face when going global.
• TO ANSWER THESE QUESTIONS, a survey was conducted of stock exchanges and regulatory authorities in 13 countries that, along with the United States, represent over 90% of the turnover and market value of the worldwide equity markets.
• APART FROM CANADA, JAPAN and Hong Kong, financial statements prepared in accordance with U.S. generally accepted accounting principles are accepted for inclusion in listing documents either as a normal rule or with reservations relating to possible supplemental disclosures.
• THE HIGH DEGREE OF ACCEPTABILITY in foreign listing documents of financial statements prepared in accordance with U.S. GAAP suggests that they achieve a more than adequate level of relevancy and reliability.

Many of his clients have never been to the country they have targeted for a business venture. “They dont know what it takes to start a business across the border and they dont know how to establish contacts,” said Sotomayor. He said his firm listens to each clients needs and develops a four-step process to ensure the investment is prudent and that the business is up and running. “We map out a strategy with each client to get them established in the market of their choice,” said Sotomayor.

The first step is to ensure a company is committed to a long-term international venture, said Sotomayor. “We help it test the waters. Starting a business overseas takes a lot of time and money, and the return on the investment (ROI) is not immediate.” Sotomayor outlines the costs and gives the client examples of what other companies have done to expand across the border. “We also do research for the client on the region or country to find out if there is a real market for the clients product.”

The second step is to provide the client with a cultural, political and economic profile of the country. Sotomayor uses a list of contacts and referral sources to perform due diligence for the client. “My contacts are the best sources for local information, such as regional zoning laws or the political climate,” said Sotomayor. He said that in some countries there are extra premiums to pay, but the ROI is very high. “I make sure my clients know how stable the currency is, and I help them price their products to compensate for any risks.”

After a client assesses the information in steps one and two, Sotomayor develops a strategy for the international venture. The strategy encompasses what the client needs to comply with customs regulations in both the United States and the target country, how the venture will be financed and how the client can begin working with foreign banks.

The last step is to implement the strategy. “The company has the capital and is ready to go out and compete,” said Sotomayor. “We help that company set up joint ventures with companies in the target country, we travel to the country with the client and meet the people who will be involved in the venture, including other CPAs and consultants.” Sotomayor calls this the romancing process. “We make sure both ends of the business understand the cultural differences and are willing to accept that business is done differently in different countries.” For example, Sotomayor said he must always remind U.S. clients that things move much slower in Latin America. “Verifying financial information takes longer in Latin America because paperwork takes longer to process and there is more red tape.”

He said CPAs should know the language, culture and business customs of a country before they consult clients wishing to do business there. Sotomayor, who was born in Ecuador and speaks fluent Spanish and Portuguese, said his firm would do business anywhere from Canada to Cape Horn. “Our firm focuses on the Latin America market because we know the languages and the cultures,” said Sotomayor.

1. Will the product or service sell abroad? Your client should determine whether there is a real demand for the product or service and whether the sales will be sufficient to generate profits. Clients should not be dazzled by the glamour of international trade. Without solid research, the financial investment could be more than the return. Market analysis is critical to justify a leap into global commerce.

2. Is this a one-shot deal, or do you intend to make a long-term commitment? For example, if a European buyer called your client to buy a particular product, that one-time transaction may be governed by the United Nations Convention on the International Sales of Goods (UNCISG) rather than the Uniform Commercial Code. Your clients legal counsel should be aware of this fact. On the other hand, if the deal is a long-term agency agreement or distributorship, bring up the following questions with your client:

3. Do you know all the “ins and outs” of negotiating an agency agreement or distributorship relationship? When a business outside the United States approaches your client to become an agent or distributor of your clients goods abroad or approaches your client to distribute theirs in the United States, your client should understand contract and employment law. The agency or distributorship agreement is a complicated document that must address terms, price, insurance, confidentiality and more. And the difference between an agency and a distributorship is important: an agent acts on behalf of the company he or she represents, while a distributor sells the product on his or her own behalf. Employment laws in the host country need attention as well. In many countries, agents and distributors are given preferential status. They cannot readily be fired by their U.S. businesses even when the contract says they can.

4. Do you research export licenses? Certain goods need an export license from the U.S. Department of Commerce. More information can be obtained from the Commerce Department International Trade Administration, the freight forwarder or your clients legal counsel. Some products may be listed on the State Department munitions list (they need not be weapons to be there). The State Department can be reached by calling 703-875-6650. Be sure your client can get a license before signing a contract and also make obtaining the license a condition of the contract.

5. Are import documents required? Your clients need to be familiar with import regulations and the documents needed to get products through customs. Consult a customs broker.

6. How do you license the transfer of information? Transferring certain information to an overseas business or to a foreign national within the United States requires an export license. Consult a freight forwarder for the basic procedure or contact a lawyer for the legal issues.

7. How do you expect to be paid? Your client needs to obtain a letter of credit from the overseas buyer, but this has its own pitfalls and should be coordinated with your clients U.S. bank and legal counsel.

8. Do you have the right insurance? More is at stake than the insurance your client will need to transport goods. He or she must consider both commercial risk insurance and political risk insurance. Both government or quasi-government agencies, such as the U.S. Import-Export Bank, and some private insurance companies cover some of these risks. (See the sources guide on international trade on page 38.)

9. How will you transport goods? A freight forwarder can assist your client in making sure goods are packaged and transported properly.

10. How do you collect on foreign debt? Your clients attorney must know about the foreign countrys court system and have contacts with attorneys in that country. The right contract clauses, such as using international arbitration to solve disputes, minimize risk. A letter of credit also can reduce risk, as can insuring against certain risks, such as using political risk insurance.
ANASTASIUS ETSTRATIADES , Esq., is a partner in the Philadelphia office of the law firm of Obermayer Rebmann Maxwell & Hippel LLP.

M any people think the worst communication breakdown occurs when people fail to understand each others words or actions. However, even worse is when people are heading toward signing an agreement, convinced they understand each other, but are in fact miles, if not light years, apart. Here is some advice that will help you avoid these kinds of language problems.

• Never assume your counterpart thinks the way you do. You and your foreign counterpart may have worked together in the same field for years, yet your business and cultural backgrounds may be vastly different. For example, a U.S. business and investment strategy most likely will be focused on short-term goals. This may not correspond with the interest of a foreign counterpart who may focus on the long-term goals of a business venture.
• Never assume your counterpart knows what he or she should know. A Russian director of a production association may not know what “internal rate of return” or “discounted cash flow” means. By the same token, a Western chief executive officer of a production association may not be familiar with certain approval procedures that are basic concepts familiar to any Russian businessperson.
• Never start discussions or negotiations before you have defined your terminology. Make sure that you both define the basic concepts the same way. Dozens of concepts such as “escrow account,” “amortization” and even “profit” are defined differently in different countries, yet they have a direct language equivalent.
• Do not expect every answer you receive to be accurate. In many cases, the answer may not exist at all or your counterpart may not know it and will be embarrassed to admit ignorance, such as when you ask for a procedure for obtaining the right of way in a communist country. This is especially true of legal questions. For example, in China, many foreign trade-related laws and regulations have not yet been fully developed. Besides, newly adopted laws are frequently amended or have already become obsolete. Often, the law will be open to interpretation and you may receive conflicting answers to a seemingly simple question.
• Do not use corporate colloquialisms in your oral and written presentations, such as “in the ballpark” or “behind the eightball.” Colloquialisms do not translate well in either direction and are meaningless in most cases. Consult with your language and communication advisers on how to make your presentations clear and effective to the foreign listener. Explain to your advisers what you want to express, have them write it in the target language and then translate it into your native language for approval. Although the translation may seem stilted to you, it is the clarity of the translation in the target language that counts.
• Do not rely on simultaneous, or real-time, interpreting to communicate effectively with your counterpart. Simultaneous interpreting is best used during conferences when attendees have written reference materials at hand, not during business negotiations. Consecutive interpreting—where a language adviser can stop a speaker in midsentence to ensure the language is correctly interpreted and clear—works best for business negations or meetings. Consecutive interpreting takes more time, but it is considerably more accurate.
• Use your own interpreter instead of one provided by the other business. Your interpreter should not be impartial—he or she should be on your side. It is worth the money to fly your interpreter from the United States. He or she will act as your cultural adviser, your interpreter and your guide. Interpreters should be both bilingual and bicultural, so they can determine whether something is culturally inappropriate, such as naming a car, to be sold in Mexico, the Nova; no va means “doesnt go” in Spanish.
• Do not rely on translation software. It simply is not up to the task of translating anything other than very simple text. For example, you will see errors such as “vice-president” interpreted as “bad president.” You may not be able to catch all the errors in a machine translation.