There is this myth that if a company is registered outside of the United States, known as being an offshore company, they are not subject to the SEC (Securities and Exchange Commission) rules and regulations. This is only true under one situation. The company cannot sell any products to U.S. citizens, and they must state on their website all U.S. citizens are excluded from participating in their programs. Otherwise, they must be in compliance with the SEC rules and regulations if they expect to take money from U.S. citizens.

Here, for example, is what the SEC says about registration obligations (Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, Investment Advisers Act of 1940, and so on) under federal securities laws to the use of Internet websites to disseminate offering and solicitation materials for offshore sales of securities and investment services. Bear in mind that the SEC’s definition of ‘securities’ is very broad, and includes many of the multilevel schemes currently apparent on the internet:

€œThe application of the U.S. securities laws depends on whether Internet offers, solicitations, or other communications are targeted to the United States. For example, those who implement measures that are reasonably designed to guard against sales or the provision of services to U.S. citizens would not be viewed as having targeted U.S. citizens through their Internet offers.

They give examples of such measures:

“(1) the website includes a prominent, meaningful disclaimer making it clear that the offer is directed only to countries other than the U.S.; (for example, the website could state that the securities or services are not being offered in the U.S. or to U.S. citizens, or could specify those jurisdictions (other than the U.S.) in which the offer is being made) and(2) the website offeror implements procedures that are reasonably designed to guard against sales to U.S. citizens in the offshore offering (for example, the offer or could ascertain the purchaser’s residence by obtaining such information as mailing addresses or telephone numbers (or area code) prior to the sale, which would allow the offeror to avoid sending or delivering securities, offering materials, services, or products to a person at a U.S. address or telephone number). These procedures are not exclusive, and other procedures may suffice. Regardless of the precautions adopted, however, the SEC would view solicitations that appear by their content to be targeted at U.S. citizens (e.g., offers that emphasize the ability to avoid U.S. income taxes) as made in the U.S.”

In the absence of clear evidence of such prominent measures having being taken, the SEC is likely simply to ASSUME that the “offering and solicitation materials for offshore sales of securities and investment services” are targeted at U.S. citizens. Night then follows day … AND being published in English does little to disclaim that they are promoting to US citizens.

The essential public character of a law requires that the law must apply to anyone in the jurisdiction where the law applies. Thus, no one can justify his conduct on the grounds that he was not aware of the law.

The US Securities and Exchange issued a legal interpretation in 1998 which makes it clear that investment offerings made via the internet by foreign issuers ARE subject to SEC regulations if they target or permit their offer to the extended to US citizens. There are also a number of other key statements in this interpretation which put these sites, their investors, their promoters, and related third parties at risk for SEC sanctions and civil and/or criminal charges.

Offshore Paid Surfs/HYIP’s NOT Exempt from SEC Regulations

The US Securities and Exchange issued a legal interpretation in 1998 which makes it clear that investment offerings made via the internet by foreign issuers ARE subject to SEC regulations if they target or permit their offer to the extended to US citizens. There are also a number of other key statements in this interpretation which put these sites, their investors, their promoters, and related third parties at risk for SEC sanctions and civil and/or criminal charges.

Here is paraphrase of the major points you need to be aware of:

  1. If a foreign/offshore company offers investment opportunities via the internet without taking reasonable efforts to insure that U.S. citizens do NOT have access to their offering, they are NOT exempt from registering that offering in the U.S.. Thus, if the company is indeed to be found to be offering an unregistered security, they will be under the jurisdiction of the US SEC, regardless of their offshore status.
  2. By ‘reasonable’ efforts, the SEC expects the site to take the following such measures, 1)a disclaimer on the site stating it prohibits US citizen participation, 2)requiring potential participants to provide proof of non-US citizenship before being allowed to invest, 3)putting into place technological measures that will prevent non-US surfers from viewing the website, etc.
  3. Sites that blatantly market their offering as one that helps U.S. citizens avoid US regulations, taxes, etc. are NOT exempt from SEC regulations.
  4. Sites that are committing any kind of investment fraud (i.e. operating a Ponzi in guise of an investment or business opportunity) are NOT exempt from SEC regulations.
  5. If sites allow their offering to be marketed, advertised, or promoted by third party websites (monitoring sites, forums, promotional sites, etc.) that do not prohibit U.S. users, they are NOT exempt from SEC regulations.
  6. Individuals and companies brokering (referring) U.S. citizens to or promoting such sites are subject to the same SEC sanctions as that of the company making the offering.
  7. U.S.-based companies or individuals that offer foreign investment opportunities that are available to U.S. citizens could be seen as deliberately attempting to circumvent U.S. regulations and are held to even MORE strict regulations than companies that are physically located offshore.

The basic thing to be aware of with this interpretation is that paid surf and HYIP programs promoting themselves as being exempt from U.S. Securities & Exchange Commission regulations due to the fact that they are located or have incorporated offshore, are not telling you the full truth. Something to ponder: Not only are they at risk for SEC shutdown, but if you are promoting these sites and collecting referral commissions, you could be personally at risk for those same sanctions. If you feel that you might be participating in such a program, we suggest that you consult an attorney or the SEC regarding the program.

You can view the full interpretation on the SEC’s website here.

Recently the U.S. Congress has taken an interest in U.S. citizens trying to use Offshore Trusts and other offshore transactions and has approved legislation and given the IRS the ability to deal with these matters:
Use of an offshore bank account, brokerage account, credit card, wire transfer, trust, offshore employee leasing or other arrangement to hide or underreport income or to claim false deductions on a federal tax return is illegal. A taxpayer involved in these schemes could be subject to payment of taxes, interest, penalties and potential criminal prosecution.

This was the top scam in the 2003 “Dirty Dozen.” A special program last year has yielded more than $170 million in taxes, interest and penalties, and the IRS and the states continue to aggressively pursue taxpayers and promoters in this area.