Last week, the Securities and Exchange Commission announced a $6.5 million settlement with Ethiopian Electric Power, which was described in the SEC’s order as “a government-owned power utility headquartered in Addis Ababa, Ethiopia”. According to the order, Ethiopian Electric Power offered and sold bonds to U.S. residents of Ethiopian origin in Washington D.C. and other major cities. The bonds were sold to help finance the construction of the Grand Ethiopian Renaissance Dam on the Abay River in Ethiopia. These sales were conducted without registration under the Securities Act of 1933. The SEC’s press release quoted Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement, as saying:
Foreign governments are welcome to raise money in the U.S. capital markets so long as they comply with the federal securities laws, including registration provisions designed to ensure that investors receive important information about prospective investments . . . .
Although the SEC’s order made no mention of offers or sales occurring in California, it did turn my thoughts to Section 25100(b) of the California Corporations Code. That statute exempts from the qualification requirements of the California Corporate Securities Law of 1968 any security issued or guaranteed a foreign government (other than Canada) with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor. The question of whether Ethiopian Electric Power may rely on this exemption itself cannot be answered without asking more questions. First, is Ethiopian Electric Power a foreign government? Second, does the United States have diplomatic relations with Ethiopian Electric Power? Third, what does it mean to “recognize” an obligation or guaranty as “valid”?
Answering the first question is difficult because the CSL does not define “foreign government”. For example, does a foreign government include government owned or controlled entities? The CSL also doesn’t define “diplomatic relations”. Perhaps this should not be surprising because even the Vienna Convention on Diplomatic Relations fails to define “diplomatic relations”, the very subject of the treaty (Article 2 simply provides that they are established by “mutual consent”).
It should be noted that California’s exemption is similar to, but not the same as, the exemption found in Section 201(2) of the Uniform Securities Act. The current version of the USA, unlike California’s statute, does not make separate provision for securities issued by Canada. Also, the USA extends the exemption to political subdivisions of foreign governments.