Offshore and Crossborder Offerings

• What is an "offshore" offering?
• How does the SEC regulate offshore offerings?
• What are permissible publicity activities for a company that is conducting an offshore offering?
• What is a "U.S. Person"?
• What circumstances indicate that an investor may be a U.S. Person?

• How is an online offshore offering different than an off-line offshore offering?
• If a foreign private issuer posts an offer on its Web site, does it need to register the securities with the SEC?
• Can the SEC bring an enforcement action for a fraudulent online offshore offering that doesn't have to be registered in the U.S.?
• How should a company design an electronic tombstone ad for offshore offerings?

• What measures can a foreign private issuer take so that it does not have to register its online offshore offering with the SEC?
• What should an offshore offering Web disclaimer say?
• Where should a foreign private issuer place a Web disclaimer on its Web site for it to be considered effective?
• Which procedures are considered "reasonably designed" to prevent sales to U.S. Persons in an online offshore offering?
• Has a foreign private issuer implemented "reasonably designed" procedures by requesting residence information from investors?
• What should a foreign private issuer do if an investor presents information indicating that it's a U.S. Person?

• When is a foreign private issuer considered to be "targeting" U.S. Persons or persons in the U.S.?
• Can a foreign private issuer e-mail offering materials to U.S. Persons?
• Is an online offer in the English language considered "targeting" U.S. Persons?

• Can a foreign private issuer conduct an online offshore offering concurrently with a private placement in the U.S.?
• What measures can a foreign private issuer use to conduct an online offshore offering concurrently with a private placement in the U.S.?
• Can a foreign private issuer link its online offshore offering materials to information about its U.S. private placement?
• How can a foreign private issuer "blacklist" U.S. Persons?
• How can a foreign private issuer "filter" U.S. Persons from accessing an online offshore offer?
• Can a foreign private issuer sell securities in a concurrent private placement to a U.S. Person without using special measures?
• Can a foreign private issuer conduct an online offshore offering concurrently with a registered offering in the U.S.?

• Can a U.S. company conduct an online offshore offering?
• Can an U.S. issuer conduct an online offshore offering concurrently with a U.S. registered offering?
• If a U.S. company conducts an online offshore offering under Regulation S, can bona fide offshore buyers resell into the U.S.?

• Can a foreign private issuer use a third party to post an online offer?
• What procedures must underwriters follow in an online offshore offering?
• What procedures should underwriters follow to solicit offshore offering business?
• Can underwriters post analyst research reports on their Web sites about online offshore offerings?

• What should a company do if a U.S. Person buys securities in an online offshore offering that is not registered with the SEC or does not have a valid U.S. exemption?

• What is a "cross-border" transaction?

• Can a foreign private issuer conduct an online cross-border transaction without complying with U.S. securities laws?
• Can a foreign private issuer make a tender, exchange or rights offer on a Web site that does not restrict U.S. Persons from viewing the offer?
• Can a foreign private issuer post a merger proxy statement on an unrestricted Web site without triggering U.S. registration requirements?
• Can companies conducting cross-border transactions use electronic delivery to meet their delivery obligations under U.S. securities laws?
  

A. Understanding Offshore Transactions

What is an "offshore" offering?

An offering that does not have to be registered with the SEC because it's not an offer or sale of a security to a U.S. Person or in the U.S. See more @ what is a "U.S. Person."

Regulation S provides companies with two safe harbors from having to register their offering with the SEC - one for offers by issuers and their underwriters and one for resales by other persons.

There are 2 conditions for these safe harbors:

How does the SEC regulate offshore offerings?

Regulation S is a safe harbor that applies the extraterritorial reach of the registration requirements of the Securities Act of 1933 - it does not require registration of offers and sales of securities made outside the U.S. in circumstances that are reasonably likely for the securities to be held outside the U.S.

Questions about the application of Regulation S can be directed to the Office of International Corporation Finance of the SEC's Division of Corporation Finance at (202) 942-2990.

What are permissible publicity activities for a company that is conducting an offshore offering?

In other words, what types of activities are not directed selling efforts? Typically, "directed selling efforts" does not include routine communications, such as regular press releases discussing financial results or major business developments.

A company has wider latitude to argue that a communication was permissible if it can show a history of similar communications - and a history of providing them online. This analysis is quite similar for determining what are "ordinary business communications" during the waiting period for a U.S. offering. See more @ what are "ordinary business communications."

Also permissible are tombstone ads under Rule 135c - and a list of other similar items that are specifically carved out of the definition of "directed selling efforts" in Rule 902(b)(2).

Note that the SEC has stated that distributing analyst research reports could constitute a violation of the prohibition on directed selling efforts - so companies may want to be careful how they are discussed on their Web sites. See more @ analyst research reports online.

Source: In Release 33-6863 (April 24, 1990), the SEC noted that routine communications generally would not be considered directed selling efforts. The SEC's statements about analyst reports was made in footnotes 57-59 and accompanying text of that release.

What is a "U.S. Person"?

U.S. residents, including persons temporarily located overseas.

Source: The precise definition of "U.S. Person" is in Rule 902(k) of Regulation S. In footnote 20 of Release 33-7516 (March 23, 1998), the SEC noted that it applies this same definition of "U.S. Person" to determine whether an offshore Internet offering needs to be registered with the SEC.

What circumstances indicate that an investor may be a U.S. Person?

Any information related to the U.S. provided by an investor - it can include:

B. SEC Regulation of Online Offshore Offerings

How is an online offshore offering different than an off-line offshore offering?

They are treated the same from a regulatory standpoint - in most cases, both online and off-line offerings fall within the SEC's guidance about when an offshore Internet offering doesn't have to be registered in the U.S.

The SEC has provided guidance that clarifies what level of online activity in the U.S. or with U.S. Persons constitutes an "offer" in the U.S. that must either be registered with the SEC or avail itself of a U.S. securities law exemption. See more @ the SEC's offshore Internet offer framework.

Source: The SEC confirmed that the fundamental U.S. regulatory framework applies in the offshore Internet offering context in Section II.B. of Release 33-7516 (March 23, 1998).

If a foreign private issuer posts an offer on its Web site, does it need to register the securities with the SEC?

It depends. The SEC has provided guidance so that it will not attempt to regulate offerings made outside of the U.S. under circumstances that make it likely that the securities will remain outside the U.S.

The guidance is based on the framework of Regulation S - offers which are not targeted to U.S. Persons are not considered "offers" of securities that must be registered with the SEC. See more @ what is "targeting" U.S. Persons.

The SEC's guidance includes precautionary measures that companies can take so that their offerings are not considered targeting U.S. Persons or in the U.S. See more @ precautionary measures.

Source: The SEC outlined its general approach to regulating offshore Internet offerings in Section III.A. of Release 33-7516 (March 23, 1998).

Can the SEC bring an enforcement action for a fraudulent online offshore offering that doesn't have to be registered in the U.S.?

Yes. The SEC's offshore Internet offering guidance relates to a company's registration obligations - it doesn't limit the SEC's ability to pursue fraud.

In other words, the SEC still may try to take action against offshore fraud - even if a fraudulent online offering was not sold or otherwise related to the U.S. or U.S. Persons.

Source: In footnote 5 of Release 33-7516 (March 23, 1998), the SEC points out how courts have recognized U.S. jurisdiction only if there is substantial conduct or effects in the U.S. However, in Section I of this Release, the SEC stressed that it has the ability to pursue fraud in virtually any online scenario.

How should a company design an electronic tombstone ad for offshore offerings?

By closely following Rule 135c - particularly because there is no SEC guidance in this area. The tombstone ad clearly must not condition the market for the company's securities in the U.S.

These limited notices can contain no more than:

C. What are Precautionary Measures for Online Offshore Offerings

What measures can a foreign private issuer take so that it does not have to register its online offshore offering with the SEC?

The SEC's guidance includes two measures that make it likely that an offering is not required to be registered with the SEC:

What should an offshore offering Web disclaimer say?

The SEC is specific about a Web disclaimer's content - it should affirmatively state either that:

Where should a foreign private issuer place a Web disclaimer on its Web site for it to be considered effective?

On the same screen as the offer itself - or on a Web page that must be viewed before an investor can access the offering materials.

It's likely that a link to a disclaimer from the offering materials is not effective - because this arguably is not on the same Web page as the offer.

One issue not squarely addressed by the SEC is the disclaimer's type size - but the guidance does require the disclaimer to be "prominent." Although "prominent" is not further interpreted, a company should ensure that its disclaimer's type size is at least as large as the offering material's size.

Source: In footnote 21 of Release 33-7516 (March 23, 1998), the SEC addressed disclaimer placement.

Which procedures are considered "reasonably designed" to prevent sales to U.S. Persons in an online offshore offering?

It's a facts and circumstances determination - but may include the following actions before a sale is made:

Has a foreign private issuer implemented "reasonably designed" procedures by requesting residence information from investors?

Not in all cases. Since its relatively easy for investors to falsify residence information or use offshore nominees, if there is any reason to be suspicious - companies may have a duty to further investigate.

A conservative practice is for a company to ensure that its underwriter places phone calls to all offerees that claim that their residency is outside the U.S. to verify their residency - before they finalize sales to those offerees.

Source: In Section III.C. of Release 33-7516 (March 23, 1998), the SEC addressed the effect of attempts by U.S. Persons to evade U.S. registration requirements.

What should a foreign private issuer do if an investor presents information indicating that it's a U.S. Person?

It should take further steps to investigate and verify that an investor is not a U.S. Person.

The scope of the follow-up investigation varies depending on the facts and circumstances - but could include obtaining copies of a passport or driver's license to confirm an investor's location and identity.

A conservative practice is for a company to ensure that its underwriter places phone calls to all offerees that claim that their residency is outside the U.S. to verify their residency - before they finalize sales to those offerees.

Note that the burden is on the foreign private issuer to investigate - not its agents, such as underwriters - although these agents can conduct further investigation on behalf of the issuer.

Source: In Section III.C. of Release 33-7516 (March 23, 1998), the SEC addressed the effect of attempts by U.S. Persons to evade U.S. registration requirements.

D. What is "Targeting" of U.S. Persons

When is a foreign private issuer considered to be "targeting" U.S. Persons or persons in the U.S.?

This is a facts and circumstances determination - but methods that constitute "targeting" typically are easy to spot, such as an offer that emphasizes avoidance of U.S. taxes for investors.

Source: The SEC addressed "targeting" in Section III.B. of Release 33-7516 (March 23, 1998).

Can a foreign private issuer e-mail offering materials to U.S. Persons?

Only after registering the offering with the SEC (or ensuring that a U.S. exemption is available) - since this clearly is targeting.

The SEC's guidance distinguishes between passive (i.e. Web site offers) and targeted communications (i.e. e-mails) - so that e-mail offers to U.S. Persons or in the U.S. are always considered "offers" in the U.S.

E-mails can be sent only after the offer has been registered with the SEC - or an exemption from U.S. registration is clearly available.

Source: The SEC notes the difference between passive and targeted communications in Section II.A. of Release 33-7516 (March 23, 1998).

Is an online offer in the English language considered "targeting" U.S. Persons?

Not necessarily, without considering additional facts - but it can make it more likely that it's considered "targeting," particularly if English is not widely spoken in the foreign private issuer's country.

Source: The SEC notes that the languages spoken in a foreign issuer's country is not dispositive by itself in footnote 22 of Release 33-7516 (March 23, 1998).

E. Foreign Issuers Conducting Concurrent Online Offshore and U.S. Private Placements

Can a foreign private issuer conduct an online offshore offering concurrently with a private placement in the U.S.?

Not unless special measures are implemented. See more @ what are special measures.

The mere posting online offering materials on a Web site constitutes "general solicitation or advertising"- thereby blowing the ability of a foreign private issuer to rely on a U.S. private placement exemption. See more @ what is general solicitation and advertising.

Source: The SEC addresses concurrent offerings in Section IV.A.2 of Release 33-7516 (March 23, 1998).

What measures can a foreign private issuer use to conduct an online offshore offering concurrently with a private placement in the U.S.?

A combination of precautionary measures for the online offshore offering and special measures for the U.S. private placement.

For the online offshore offering, a foreign private issuer can implement one or more of the following measures:

Can a foreign private issuer link its online offshore offering materials to information about its U.S. private placement?

No - this clearly constitutes impermissible general solicitation or advertising.

Online offshore offering materials should only discuss the offshore offering - except to the extent that it's required by foreign law or is permitted by the safe harbor for tombstone ads.

Source: The SEC noted that online materials for concurrent offerings should not be linked together in footnote 31 of Release 33-7516 (March 23, 1998).

How can a foreign private issuer "blacklist" U.S. Persons?

There are a variety of methods such as:

How can a foreign private issuer "filter" U.S. Persons from accessing an online offshore offer?

There are a variety of methods such as:

Can a foreign private issuer sell securities in a concurrent private placement to a U.S. Person without using special measures?

Perhaps - only if the company can show that an investor was solicited differently (e.g. off-line) compared to how the online offering is conducted.

There also may be circumstances under which a foreign private issuer may be able to sell to a U.S. Person in a private placement, such as a preexisting substantive relationship between the two parties - even if the U.S. Person actually viewed the online offshore offering materials.

Can a foreign private issuer conduct an online offshore offering concurrently with a registered offering in the U.S.?

It may be difficult - and the SEC has provided only limited guidance in this area.

Before the U.S. offering is registered, the SEC notes that the issuer should be careful to limit what it posts about the offshore offering to a Rule 135 notice. After the offering is registered with the SEC, it's unclear what can be posted about the online offshore offering beyond what is permitted in Rule 134.

Source: In Section IV.C. of Release 33-7516 (March 23, 1998), the SEC discussed how an issuer has to be careful about what it posts about an offshore offering if it also has registered an offering with the SEC.

F. U.S. Issuers Conducting Online Offshore Offerings

Can a U.S. company conduct an online offshore offering?

Perhaps - if a U.S. company takes additional precautionary measures compared to a foreign private issuer - including using a password system so that investors demonstrate that they are not U.S. Persons by providing information that verifying who they are.

The SEC requires these additional measures to ensure that the offshore offering is not a scheme to avoid SEC registration - which may be more likely for U.S. companies since arguably:

Can an U.S. issuer conduct an online offshore offering concurrently with a U.S. registered offering?

No - unless the online offering materials do not have much content so that they fall within the safe harbor exemption for a tombstone ad.

Otherwise, the online offshore offering materials condition the market and constitute gun jumping for the U.S. registered offering.

Note that the SEC staff is limiting the type of information that can be in online tombstone ads in another context - which likely would be its position in this context. See more @ online tombstone ad issues.

Source: In Section IV.C. of Release 33-7516 (March 23, 1998), the SEC discussed how Rule 135 is a safe harbor for offshore offering tombstone ads.

If a U.S. company conducts an online offshore offering under Regulation S, can bona fide offshore buyers resell into the U.S.?

Yes - so long as the resale is registered or available for an exemption, such as Rule 144A, provided that:

G. Third Party and Underwriter Obligations in Offshore Offerings

Can a foreign private issuer use a third party to post an online offer?

Yes - but the third party sits in the same shoes as the issuer. In other words, the third party must use at least the same precautionary measures as would be required for the foreign private issuer itself - and perhaps more.

Additional measures are required if a foreign private issuer - upon investigation before hiring a third-party - finds that the third-party Web site is investment-oriented with a significant number of U.S. clients or is a site on which U.S. investors could be expected to search for information about investment information.

Note that a third party can incur as much liability as the company that hires it for any of the company's violations - since the SEC believes that third-parties have a duty to ensure that any offerings that they post do not violate U.S. securities laws.

Source: The SEC addressed third-party Web services in Section III.D. of Release 33-7516 (March 23, 1998).

What procedures must underwriters follow in an online offshore offering?

They sit in the same shoes as the issuer - so they must take the same reasonable steps to avoid offers of unregistered securities in the U.S. as do the companies for whom they work.

This guidance applies to both U.S. and foreign underwriters.

Source: The SEC addressed underwriter obligations in Section IV.D. of Release 33-7516 (March 23, 1998).

What procedures should underwriters follow to solicit offshore offering business?

They should follow applicable laws in the jurisdictions they solicit - and this can be difficult since the laws vary so much, particularly Internet matters.

The NASD recently issued a notice emphasizing that underwriters need to be informed about local laws when they solicit business in other jurisdictions.

Source: The guidance regarding the need to be informed about local law is in NASD Notice to Members 00-02.

Can underwriters post analyst research reports on their Web sites about online offshore offerings?

Yes - so long as the research reports fall within a safe harbor so that they are not considered an offer.

The SEC has not formally addressed how an underwriter can ensure that it doesn't lose its research exemption if it has a "Web front" for an offering and still posts related research on its main Web site. At a minimum, underwriters should not discuss - nor link to - research from the offering materials on the Web front. See more @ broker's Web sites during an online public offering.

Source: The SEC acknowledged that underwriters could rely on the safe harbors of Rules 137-139 of the Securities Act of 1933 in footnote 38 of Release 33-7516 (March 23, 1998).

H. Consequences of U.S Person Buying Securities in Offshore Offerings

What should a company do if a U.S. Person buys securities in an online offshore offering that is not registered with the SEC or does not have a valid U.S. exemption?

Assuming the company followed the SEC's guidance, it should not have a problem because the SEC does not have an absolute "no sale" policy. Rather, the standard is whether the company's procedures were "reasonably designed."

After discovering that it inadvertently made a sale to a U.S. Person, a company should:

I. Understanding Cross-Border Transactions

What is a "cross-border" transaction? It's loosely defined as tender and exchange offers, business combinations and rights offerings involving foreign private issuers.

Before the SEC's adoption of exemptive rules, U.S. security holders were often excluded from these transactions - so the companies involved could avoid having to comply with the U.S. securities laws. The exemptive rules now encourage foreign private issuers to include U.S. security holders - who otherwise would miss the opportunity to earn a premium in these cross-border transactions.

Source: The SEC's cross-border exemptive rules were adopted in Release 33-7759 (January 24, 2000).

J. SEC Regulation of Online Cross-Border Transactions

Can a foreign private issuer conduct an online cross-border transaction without complying with U.S. securities laws?

Yes - similar to offshore offerings, so long as a company uses precautionary measures to ensure that online methods do not target the U.S. or U.S. Persons. See more @ precautionary measures.

Source: The SEC's cross-border transaction guidance in Release 33-7759 (January 24, 2000) essentially piggybacks off the SEC's precautionary measures guidance for offshore Internet offerings in Release 33-7516 (March 23, 1998) - but does provide additional guidance applicable in the cross-border context.

Can a foreign private issuer make a tender, exchange or rights offer on a Web site that does not restrict U.S. Persons from viewing the offer?

No - the Web site must be designed to ensure that U.S. Persons cannot participate.

The SEC believes that reliance on Regulation S to allow U.S. Persons to participate in offshore offerings is not appropriate for tender, exchange or rights offers posted on an unrestricted Web site. If there is any risk that the online methods will somehow encourage U.S. Person to participate - a company needs to use more stringent precautionary measures.

Source: Section II.G. of Release 33-7759 (January 24, 2000) contains this guidance.

Can a foreign private issuer post a merger proxy statement on an unrestricted Web site without triggering U.S. registration requirements?

Yes. Companies do not need to use precautionary measures to prevent U.S. Persons from accessing their merger proxy statements - it's okay if U.S. Persons access these materials because investors do not have a choice about whether they must participate if the transaction is approved by stockholders.

Note that a Web site must impose restrictions for a merger proxy statement/prospectus - since that relates to an exchange offer that involves a voluntary transaction for stockholders (i.e. stockholders can exercise appraisal rights).

The SEC distinguishes between:

Can companies conducting cross-border transactions use electronic delivery to meet their delivery obligations under U.S. securities laws?

Yes - so long as they follow the SEC's electronic delivery guidance. See more @ electronic delivery guidance.

Of course, the laws of other applicable jurisdictions might prevent a company from using electronic media to satisfy its delivery obligations.

Source: In footnote 89 and related text of Release 33-7759 (January 24, 2000), the SEC clarified that companies that have delivery obligations in cross-border transactions can follow the SEC's electronic delivery guidance.