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Regulation S

By Melvin Epstein, Robert Guazzo, and Joel Rubenstein, of Stroock & Stroock & Lavan LLP. Melvin Epstein is a partner, and Robert Guazzo and Joel Rubenstein are associates, in Stroock's Securities Practice Group.
A. Understanding Regulation S
  • What is "Regulation S"?
  • What is the general theory behind Regulation S?
  • Why did the SEC adopt Regulation S?
  • How many rules comprise Regulation S?
B. The Preliminary Notes
  • What is the importance of the Preliminary Notes?
C. Rule 901 -The General Statement
  • What is the "General Statement"?
D. Rule 902 - Definitions
  • What is Rule 902?
E. The Two General Conditions for All Regulation S Safe Harbors
  • What are the two General Conditions that Apply to the Safe Harbors?
  • What is an "Offshore Transaction"?
  • What are "Directed Selling Efforts"?
  • What specific actions are considered "Directed Selling Efforts?"
  • What activities are specifically excluded from the definition of "Directed Selling Efforts?"
F. Rule 903 - The Issuer Safe Harbor
  • What is Rule 903 - the issuer safe harbor?
  • What types of offerings may be made under Category 1?
  • Are there any additional requirements that need to be satisfied in connection with a Category 1 offering?
  • What types of offerings may be made under Category 2?
  • Are there any additional requirements that need to be satisfied in connection with a Category 2 offering?
  • What types of offerings may be made under Category 3?
  • Are there any additional requirements that need to be satisfied in connection with a Category 3 offering?
  • What other financings are governed by Rule 903 and how are their Rule 903 Categories determined?
G. Rule 904 - The Resale Safe Harbor
  • What is the resale safe harbor?
  • What are the additional Rule 904 requirements?
  • What types of securities may be sold under the resale safe harbor?
H. Rule 905 - Resale Limitations
  • What is Rule 905?
I. Miscellaneous
  • Can securities initially sold outside the United States under Regulation S be resold during the distribution compliance period?
  • Can securities offered and sold outside the United States under Regulation S be resold after the distribution compliance period?
  • What happens if an issuer or reseller of securities pursuant to Regulation S fails to comply with the applicable provisions thereof?
  • Are contemporaneous United States and offshore investments integrated?
  • How are sales of equity securities by domestic issuers under Regulation S reported?

A. Understanding Regulation S

What is "Regulation S"?

Regulation S is a series of rules that clarifies the position of the Securities and Exchange Commission (the "SEC") that securities offered and sold outside of the United States do not need to be registered with the SEC.

Regulation S explains that any offer or sale occurring inside the United States is subject to the registration requirements of Section 5 of the Securities Act of 1933 (the "Securities Act") in the absence of an exemption from these requirements. The regulation then specifies two safe harbors, an issuer safe harbor and a resale safe harbor, which provide that offers and sales made in compliance with certain requirements are deemed to have occurred outside the United States and are, therefore, exempt from the registration requirements of Section 5 of the Securities Act.

Sources: Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,661-63 (Apr. 24, 1990); see Securities Act Rules 903- 904, 17 C.F.R. §230.903-.904.

 

What is the general theory behind Regulation S?

Securities offered and sold outside the United States need not be registered with the SEC.

The United States securities laws are meant to protect United States capital markets and investors who purchase securities in United States markets, whether United States or foreign nationals.

Sources: Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,661-63, 80,665 (Apr. 24, 1990).

 

Why did the SEC adopt Regulation S?

Read literally, Section 5 of the Securities Act prohibits any person from using interstate commerce in connection with the offer or sale of a security unless a registration statement is in effect with respect to such security.

For this purpose, interstate commerce includes trade or commerce in securities between the United States and a foreign country. Thus, theoretically, securities transactions with only tenuous links to the United States could be subject to the registration requirements of the Securities Act. Historically, however, the SEC has not required these offerings to be registered.

The SEC views Section 5 of the Securities Act as a protection for United States investors, and had stated in various releases issued prior to the adoption of Regulation S that securities offered or sold outside of the United States would not be subject to the registration requirements if indicated procedures intended to ensure that the securities came to rest abroad were followed. Because interpretations of the SEC's releases were unclear, the SEC adopted Regulation S.

Source: Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 184,524, at 80,664 (Apr. 24, 1990); see 14 Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets § 9:2 (2001).

 

How many rules comprise Regulation S?

Regulation S consists of five rules plus the Preliminary Notes:

Rule 901: A General Statement

Rule 902: Definitions

Rule 903: The Issuer Safe Harbor

Rule 904: The Resale Safe Harbor

Rule 905: Resale Limitations

Source: Securities Act Rules 901-905, 17 C.F.R. §230.901-.905.

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B. The Preliminary Notes

What is the importance of the Preliminary Notes?

The Preliminary Notes set forth guiding principles that should be considered when structuring a transaction to comply with Regulation S. They provide that:

  1. Regulation S relates solely to Section 5 of the Securities Act. The application of Regulation S, however, does not limit the extraterritorial application of the antifraud or other provisions of the federal securities laws.
  2. Regulation S is not available with respect to any transaction that, although in technical compliance with the regulation, is part of a plan or scheme to evade the registration provisions of the Securities Act. In such cases, registration under the Securities Act is required.
  3. The application of Regulation S does not limit the need for compliance with the securities registration requirements or broker-dealer registration requirements of the Securities Exchange Act of 1934.
  4. Regulation S does not provide a safe harbor from applicable state security laws, and states may therefore insist on state blue-sky registration.
  5. Attempted compliance with any rule in Regulation S does not constitute an exclusive election. A person who offers or sells securities in reliance on Regulation S may also rely on any other applicable registration exemption.
  6. Regulation S is available only for offers and sales of securities outside of the United States. Securities acquired overseas, whether pursuant to Regulation S or not, may be resold in the United States only after registration or under an available registration exemption.
  7. Regulation S does not preclude access by journalists for publications with a general circulation in the United States to offshore press conferences, press releases and meetings with company press spokespersons in which an offshore offering or tender offer is discussed, provided that the information is made available to the foreign and United States press generally and is not intended to induce purchases of securities by persons in the United States or tenders of securities by United States holders.
  8. Regulation S is applicable to offers and sales of securities issued by registered closed-end investment companies and investment companies that are not registered or required to register under the Investment Company Act of 1940 (the "1940 Act"). Regulation S is not applicable to the offer and sale of securities issued by open-end investment companies, unit investment trusts registered or required to be registered under the 1940 Act, or closed-end investment companies required to be registered, but not registered, under the 1940 Act.
Source: Securities Act Regulation S, Preliminary Notes 1-8, 17 C.F.R. §230.901-.905.

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C. Rule 901 -The General Statement

What is the "General Statement"?

Rule 901 states that, for purposes of Section 5 of the Securities Act, the terms offer, offer to sell, sell, sale, and offer to buy shall be deemed to include offers and sales that occur within the United States and shall be deemed not to include offers and sales that occur outside the United States.

A facts and circumstances test is used to determine whether an offer or sale of securities occurs outside the United States. The General Statement, however, does not list the factors used in such test.

If one can demonstrate that both the offer and sale of securities occurred outside the United States, the registration requirements of Section 5 will not apply regardless of whether the conditions of the Regulation S safe harbors are met.

In general, all transactions should be structured to meet the conditions of the Regulation S safe harbors, but the General Statement can be relied upon if a safe harbor condition is not met.

Sources: Securities Act Rule 901, 17 C.F.R. §230.901; Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,665 (Apr. 24, 1990); see 14 Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets § 9:5 (2001).

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D. Rule 902 - Definitions

What is Rule 902?

Rule 902 defines various terms used in Regulation S. The terms set forth below, while not exhaustive, are particularly relevant to understanding Regulation S.

  1. Directed Selling Efforts: (see Section E below).
  2. Distribution Compliance Period: the distribution compliance period ensures that persons relying on the issuer safe harbor of Rule 903 do not engage in unregistered distribution in the United States during the offering period and during the course of subsequent offshore trading after the initial offering is completed. The period begins when the securities are first offered to persons other than distributors in reliance upon Regulation S or the date of closing of the offering, whichever is later, and continues until the end of the period of time specified in the relevant provision of Rule 903, except that:
    1. all offers and sales by a distributor of an unsold allotment or subscription shall be deemed to have been made during the distribution compliance period;
    2. in a continuous offering, the distribution compliance period shall commence upon completion of the distribution, as determined and certified by the managing underwriter or person performing similar functions;
    3. in a continuous offering of non-convertible debt securities offered and sold in identifiable tranches, the distribution compliance period for securities in a tranche shall commence upon completion of the distribution of such tranche, as determined and certified by the managing underwriter or person performing similar functions; and
    4. in a continuous offering of securities to be acquired upon the exercise of warrants, the distribution compliance period shall commence upon completion of the distribution of the warrants, as determined and certified by the managing underwriter or person performing similar functions, if requirements of Rule 903(b)(5) are satisfied.
  3. Distributor: means any underwriter, dealer, or other person who participates, pursuant to a contractual arrangement, in the distribution of the securities offered or sold in reliance on Regulation S.
  4. Offering Restrictions: means:
    1. each distributor agrees in writing:
      1. that all offers and sales of the securities prior to the expiration of the specified distribution compliance period shall be made in accordance with the provisions of Rule 903 or Rule 904, pursuant to registration requirements or pursuant to an available exemption from registration; and
      2. not to engage in hedging transactions, in connection with offers and sales of equity securities of domestic issuers, prior to the expiration of the specified distribution compliance period, unless in compliance with the Securities Act; and
    2. all offering materials and documents (other than press releases) used in connection with offers and sales of the securities prior to the expiration of the distribution compliance period must state that the securities have not been registered under the Securities Act and may not be offered or sold in the United States or to United States persons (other than distributors), unless the securities are registered under the Securities Act or exempt from the registration requirements. For offers and sales of equity securities of domestic issuers, such offering materials and documents also must state that hedging transactions involving those securities may not be conducted unless in compliance with the Securities Act. Such statements may appear in summary form:
      1. on the cover or inside cover page of any prospectus or offering circular used in connection with the offering or sale of the securities;
      2. in the underwriting section of any prospectus or offering circular used in connection with the offering or sale of the securities; and
      3. in any advertisement made or issued by the issuer, any distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoin
  5. Offshore Transaction: (see Section E below).
  6. Substantial United States Market Interest ("SUSMI"):
    1. SUSMI of an issuer's equity security means that:
      1. the aggregate United States market was the largest market for the previous year; or
      2. United States markets accounted for 20% or more of all trading the previous year and no single foreign market accounted for 55% of the prior year's trading.
    2. SUSMI of an issuer's debt security (which term includes nonparticipatory preferred stock and certain asset-backed securities) means that:
      1. at least 300 United States persons hold the debt security; or
      2. $1 billion or more of: the outstanding principal, the greater of liquidation preference or par value of the non-participatory preferred stock or the principal amount or balance of its asset backed securities, is held by United States persons; or
      3. 20% or more of: the outstanding principal, the greater of liquidation preference or par value of the non-participatory preferred stock or the principal amount or balance of its asset backed securities, is held by a United States person;
    3. SUSMI in Warrants is measured by the level of market interest in the securities to be purchased upon the exercise of the warrants.
  7. United States Person:
    1. The following are United States Persons:
      1. any natural person resident in the United States;
      2. any partnership or corporation organized or incorporated under the laws of the United States;
      3. any estate of which any executor or administrator is a United States person;
      4. any trust of which any trustee is a United States person;
      5. any agency or branch of a foreign entity located in the United States;
      6. any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a United States person;
      7. any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States;
      8. any partnership or corporation if:
        1. organized or incorporated under the laws of any foreign jurisdiction; and
        2. formed by a United States person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts
    2. The following are not United States persons:
      1. any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-United States person by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States;
      2. any estate of which any professional fiduciary acting as executor or administrator is a United States person if:
        1. an executor or administrator of the estate who is not a United States person has sole or shared investment discretion with respect to the assets of the estate; and
        2. the estate is governed by foreign law;
      3. any trust of which any professional fiduciary acting as trustee is a United States person, if a trustee who is not a United States person has sole or shared investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a United States person;
      4. an employee benefit plan established and administered in accordance with the law of a country other than the United States and customary practices and documentation of such country;
      5. any agency or branch of a United States person located outside the United States if:
        1. the agency or branch operates for valid business reasons; and
        2. the agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located; and
      6. the International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies, affiliates and pension plans, and any other similar international organizations, their agencies, affiliates and pension plans.

Source: Securities Act Rule 902, 17 C.F.R. §230.902.

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E. The Two General Conditions for All Regulation S Safe Harbors

What are the two General Conditions that Apply to the Safe Harbors?

  1. Any offer, sale or resale must be made in an offshore transaction (as described below).
  2. No directed selling efforts (as described below), may be made in the United States in connection with an offer, sale or resale under the safe harbors.
Source: Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,666 (Apr. 24, 1990).

 

What is an "Offshore Transaction"?

A transaction where no offer is made to a person in the United States and where the sale is made in one of the following ways:

  1. at the time the buy order is originated, the buyer is outside the United States, or the seller and any person acting on its behalf reasonably believe that the buyer is outside the United States;
  2. for Rule 903, the transaction is executed in, on, or through a physical trading floor of an established foreign securities exchange that is located outside the United States; or
  3. for Rule 904, the transaction is executed in, on, or through the facilities of a designated offshore securities market (e.g., the Amsterdam Stock Exchange, The Stock Exchange of Hong Kong, the London Stock Exchange and any foreign securities exchange or non-exchange market designated by the SEC) and neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States.
In general, to be considered outside of the United States, the buyer himself, rather than his agent, must be outside of the United States. This reduces evidentiary and administrative difficulties associated with the requirement.

If, however, the buyer is a corporation or an investment company, then the buyer is considered to be outside of the United States when an authorized employee places the buy order while outside the United States.

Sources: Securities Act Rule 902(h), 17 C.F.R. §230.902(h); see 14 Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets §9:8 (2001).

 

What are "Directed Selling Efforts"?

Directed selling efforts means any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the securities being offered in reliance on Regulation S.

Such activity includes placing an advertisement in a publication with a general circulation in the United States that refers to the offering of securities being made in reliance upon Regulation S.

Source: Securities Act Rule 902(c)(1), 17 C.F.R. §230.902(c)(1); Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,668 (Apr. 24, 1990).

 

What specific actions are considered "Directed Selling Efforts?"
  1. Mailing printed materials to United States investors.
  2. Conducting promotional seminars in the United States.
  3. Placing advertisements in a publication with a general circulation in the United States.
  4. Placing advertisements with radio or television stations broadcasting into the United States.
  5. Making offers directed at identifiable groups of United States citizens in a foreign country (such as members of the United States military).
Sources: Securities Act Rule 902(c)(2), 17 C.F.R. §230.902(c)(2); Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,666, 80,668 (Apr. 24, 1990).

 

What activities are specifically excluded from the definition of "Directed Selling Efforts?"
  1. Advertisements required to be published under law or regulatory rule.
  2. Communications with persons excluded from the definition of United States person.
  3. Tombstone advertisements in publications that have less than 20 percent of their circulation in the United States.
  4. Bona fide visits to real estate facilities by prospective investors.
  5. Quotations of a foreign broker-dealer distributed by a third-party system that primarily distributes such information in foreign countries, provided that (a) no security transaction can be executed through the system between foreign broker-dealers, and persons in the United States, and (b) contact with United States persons is not initiated.
  6. Proper notice, under Rule 135 of the Securities Act that an issuer intends to make a registered public offering of its securities.
  7. Providing journalists with access to issuer meetings held outside the United States, or providing written press or press-related materials released outside the United States in compliance with Rule 135e of the Securities Act.
  8. Isolated limited contact.
  9. Routine advertising unrelated to selling efforts.
  10. Customary and legal activities conducted outside of the United States
Source: Securities Act Rule 902(c)(3), 17 C.F.R. §230.902(c)(3); Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,669 (Apr. 24, 1990).

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F. Rule 903 - The Issuer Safe Harbor

What is Rule 903 - the issuer safe harbor?

Rule 903, the first Regulation S safe harbor, is available to all issuers, distributors, and their affiliates. Rule 903 specifies three categories of permissible issuer offerings and imposes different safeguards on each category to prevent securities offered abroad from flowing back into the United States. In addition, the two general conditions (offshore transactions and no directed selling efforts), apply to all three categories.

Sources: Securities Act Rule 903, 17 C.F.R. § 230.903; Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 184,524, at 80,671 (Apr. 24, 1990); see 14 Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets § 9:10 (2001).

 

What types of offerings may be made under Category 1?

Category 1 offerings consist of:

  1. offerings by foreign issuers that reasonably believe, at the commencement of the offering, that there is no SUSMI in the securities to be offered or sold or, in the case of warrants or convertible securities, the securities underlying the securities to be offered or sold;
  2. overseas directed offerings, which are either offerings by (i) foreign issuers to residents of a single country outside the United States or (ii) domestic issuers of non-convertible debt securities to residents of a single country outside the United States, if the securities are not denominated in United States dollars;
  3. offerings in which the securities are backed by full faith or credit of a foreign government; and
  4. certain employee benefit plan offerings established and administered according to the law of another country.
Source: Securities Act Rule 903(b)(1), 17 C.F.R. §230.903(b)(1).

 

Are there any additional requirements that need to be satisfied in connection with a Category 1 offering?

No, because the probability of the securities flowing back into the United States is thought to be low.

Source: Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,672 (Apr. 24, 1990).

 

What types of offerings may be made under Category 2?

Category 2 offerings consist of:

  1. equity offerings by reporting foreign issuers;
  2. debt offerings by reporting issuers; and
  3. debt offerings by non-reporting foreign issuers.
Source: Securities Act Rule 903(b)(2), 17 C.F.R. §230.903(b)(2).

 

Are there any additional requirements that need to be satisfied in connection with a Category 2 offering?

Yes. In Category 2 offerings, flowback of securities is considered more likely than in Category 1 offerings, but the presumed information and sophistication of the United States markets in these securities is thought to offset the flowback risk. The three types of Category 2 offerings must comply with the two general conditions as well as the following additional requirements:

  1. each participant in the distribution must implement offering restrictions;
  2. the offer or sale, if made prior to the expiration of a 40-day distribution compliance period, is not made to a United States person or for the account or benefit of a United States person (other than a distributor); and
  3. each distributor must notify all participants that, during the 40-day distribution compliance period, each participant is subject to the same restrictions on offers and sales that apply to the distributors.
Sources: Securities Act Rule 903(b)(2), 17 C.F.R. §230.903(b)(2); Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,675 (Apr. 24, 1990).

 

What types of offerings may be made under Category 3?

Category 3 is a residual category for offerings not covered by Category 1 or Category 2. Category 3 offerings effectively consist of:

  1. equity offerings by reporting and non-reporting domestic issuers;
  2. equity offerings by non-reporting foreign issuers with SUSMI for the class of securities being offered; and
  3. debt offerings by non-reporting domestic issuers that do not qualify for Category 1 offerings.
Source: Securities Act Rule 903(b)(3), 17 C.F.R. §230.903(b)(3).

 

Are there any additional requirements that need to be satisfied in connection with a Category 3 offering?

Yes. Because the risk of flowback of Category 3 securities into the United States is considered high, in addition to the general conditions, each participant in the Category 3 offerings must implement offering restrictions and comply with the following additional requirements:

  1. In the case of debt securities:
    1. the offer or sale, if made prior to the expiration of a 40-day distribution compliance period, is not made to a United States person or for the account or benefit of a United States person (other than a distributor); and
    2. debt securities must be issued under a temporary global security that is not exchangeable for definitive securities until the 40-day distribution compliance period expires, and for non-distributor purchasers, until certification of beneficial ownership of the securities by a non-United States person or by a United States person who purchased the securities in an exempt transaction;
  2. In the case of equity securities:
    1. the offer or sale, if made prior to the expiration of a one-year distribution compliance period, is not made to a U.S. person or for the account or benefit of a U.S. person (other than a distributor); and
    2. the offer or sale of equity securities, if made before the expiration of the one year distribution compliance period, must be made in accordance with the following conditions:
      1. the purchaser must certify that it is either a non-United States person and is not acquiring the securities for the account or benefit of any United States person, or that it is a United States person purchasing securities in an exempt transaction;
      2. the purchaser must agree: (a) that any resale will either be in accordance with Regulation S, after registration, or under a registration exemption; and (b) not to engage in hedging transactions for those securities, except in compliance with the Securities Act;
      3. securities of a domestic issuer must contain a legend stating (a) that the transfer of the security is prohibited, unless the transaction (1) complies with Regulation S, (2) is after registration, or (3) is under a registration exemption; and (b) that hedging those securities is prohibited, unless done in compliance with the Securities Act; and
      4. the issuer must be required by contract or by a provision in its bylaws, articles of incorporation, or comparable document to refuse to register any transfer of the securities that is not made either in accordance with Regulation S, after registration, or under a registration exemption.
Sources: Securities Act Rule 903(b)(3), 17 C.F.R. §230.903(b)(3); Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,679 (Apr. 24, 1990); Regulation S Amendments Adopting Release, Securities Act Release No. 7505, 1998 WL 63607 (Feb. 17, 1998).

 

What other financings are governed by Rule 903 and how are their Rule 903 Categories determined?
  1. Guaranteed Debt: the requirements of Rule 903, applicable to the offer and sale of the guarantee of the issuer's parent, must be satisfied with respect to the offer and sale of the guaranteed debt securities.
  2. Convertible Debt Securities: a convertible debt security has the same status as its underlying security.
  3. Warrants: because warrants are treated as equity under the Securities Act, warrant offerings are treated as equity offerings for Regulation S safe harbor categories.
  4. Unit Securities: in general, the most restrictive of the applicable categories will govern the unit offering. If, however, the securities making up the units may be separately traded immediately after issuance, to the extent feasible, the restrictions of the issuer safe harbor may be applied as if the securities making up the units were separately distributed. For example, if a unit consisting of both debt and equity securities is offered and sold under Category 3, the distribution compliance period for equity would apply to the debt security unless the securities making up the unit may be separately traded immediately after issuance, in which case the debt and equity securities would have their separate distribution compliance periods.
Sources: Securities Act Rule 903(b)(4), 17 C.F.R. § 230.903(b)(4); Securities Act Rule 903(b)(5), 17 C.F.R. § 230.903(b)(5); see Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,671 (Apr. 24, 1990).

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G. Rule 904 - The Resale Safe Harbor

What is the resale safe harbor?

Pursuant to Rule 904, resales by (a) any persons other than the issuer, a distributor or their respective affiliates, and (b) any officer or director of the issuer or a distributor who is an affiliate solely by virtue of holding such position, are deemed to have occurred outside the United States, if the two general conditions (offshore transactions and no directed selling efforts), plus any applicable additional resale requirements, are met.

Source: Securities Act Rule 904(a), 17 C.F.R. § 230.904(a).

 

What are the additional Rule 904 requirements?
  1. Resales by Dealers and Persons Receiving Selling Concessions: resales of securities prior to the expiration of the distribution compliance period, as described in Categories 2 and 3 of Rule 903, by a dealer or a person receiving a selling concession, fee or other remuneration in respect of securities being offered or sold, are permitted if:
    1. neither the seller nor any person acting on its behalf knows that the buyer is a United States person; and
    2. the seller, or any person acting on behalf of such seller, knows that the purchaser is a dealer or a person receiving a selling concession, fee, or other remuneration in respect of securities being sold, and the seller or the person acting on the seller's behalf sends to the purchaser a confirmation or other notice stating that the securities may be sold during the distribution compliance period only in accordance with Regulation S, pursuant to a registration statement, or pursuant to an exemption from the registration requirements of the Securities Act.
  2. Resales by Certain Affiliates: in the case of an offer or sale by an officer or director of the issuer or a distributor, who is an affiliate of the issuer or distributor solely by virtue of holding such position (and not because of his or her security holdings), no selling concession, fee, or other remuneration may be paid in connection with such offer and sale, other than the usual and customary broker's commission that would be received by a person executing such transaction as an agent. Other affiliates must comply with the requirements of the issuer safe harbor.
Sources: Securities Act Rule 904(b), 17 C.F.R. § 230.904(b); Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,681 (Apr. 24, 1990).

 

What types of securities may be sold under the resale safe harbor?

The resale safe harbor is available for all securities, whether or not acquired in an offshore transaction. For example, securities originally sold under a private placement exemption may be resold outside the United States under Rule 904 without affecting the validity of the original transaction.

Source: Securities Act Rule 904(a), 17 C.F.R. § 230.904(a); Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,666 (Apr. 24, 1990); see 14 Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets § 9:18 (2001).

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H. Rule 905 - Resale Limitations

What is Rule 905?

Rule 905 was enacted to prevent purchasers of securities issued pursuant to Regulation S, other than the issuer, distributor, or agent thereof, from illegal or improper conduct (e.g., to prevent investors from purchasing Regulation S securities with the intention of distributing them in United States markets at the end of the distribution compliance period). Rule 905 states that equity securities of domestic issuers acquired from the issuer, a distributor or their respective affiliates in a transaction subject to the conditions of Rule 901 or 903 are deemed to be restricted securities as defined in Rule 144 under the Securities Act. An offshore purchaser therefore can resell such securities only in accordance with Regulation S, pursuant to registration under the Securities Act or pursuant to an applicable exemption from the registration requirements of the Securities Act. Any restricted securities that were equity securities of a domestic issuer will continue to be restricted securities, notwithstanding that they were acquired in a resale transaction pursuant to Rule 901 or Rule 904.

Rule 905 also states that the resale of restricted securities offshore under the Rule 904 Resale Safe Harbor does not eliminate the restricted status of those securities.

Sources: Securities Act Rule 905, 17 C.F.R. § 230.905; Regulation S Amendments Adopting Release, Securities Act Release No. 7505, 1998 WL 63607 (Feb. 17, 1998); see 14 Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets § 9:21 (2001).

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I. Miscellaneous

Can securities initially sold outside the United States under Regulation S be resold during the distribution compliance period?

Yes. Securities initially sold offshore under Regulation S may be resold during the compliance period if they are sold:

  1. outside the United States under Rule 904 or Rule 901;
  2. in the United States after registration; or
  3. in the United States under Rule 144A, a safe harbor exemption, or another exemption from the registration requirements of the Securities Act.
Sources: Securities Act Regulation S, Preliminary Note 5, 17 C.F.R. §230.901, 230.904, 230.905; Securities Act Rules 901, 904, 905.

 

Can securities offered and sold outside the United States under Regulation S be resold after the distribution compliance period?

Yes. After the end of the distribution compliance period, resales are permissible under Sections 4(1) and 4(3) of the Securities Act, or another applicable exemption.

Sources: Securities Act Regulation 5, Preliminary Note 6, 17 C.F.R. §230.901-.905; Regulation S Amendments Adopting Release, Securities Act Release No. 7505, 1998 WL 63607 (Feb. 17, 1998); see 14 Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets § 9:36 (2001).

 

What happens if an issuer or reseller of securities pursuant to Regulation S fails to comply with the applicable provisions thereof?
  1. The Issuer Safe Harbor.
    1. If the issuer, a distributor, any of their respective affiliates (other than officers and directors relying on the Rule 904 Resale Safe Harbor), or any person acting on behalf of any of them, either: (a) fails to comply with the offering restrictions, or (b) engages in directed selling efforts in the United States, then the Rule 903 issuer safe harbor is unavailable to every person involved in the offering.
    2. If the issuer, a distributor, any of their respective affiliates (other than officers and directors relying on the Resale Safe Harbor), or any person acting on behalf of any of them, fails to comply with any other requirement of the issuer safe harbor, then the safe harbor is not available for any offer or sale made by the person failing to comply or its affiliates, but remains available for offers and sales by other persons.
  2. The Resale Safe Harbor.
    1. The availability of the Resale Safe Harbor generally is unaffected by the actions of the issuer, a distributor, or their respective affiliates (other than certain officers and directors relying on the Resale Safe Harbor) or agents. That is, an offer or sale of securities made in compliance with the Resale Safe Harbor remains unaffected by non-complying offers or resales made by other persons unaffiliated with, and not acting on behalf of, the seller.

Source: Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,681 (Apr. 24, 1990); see 14 Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets § 9:31 (2001).

 

Are contemporaneous United States and offshore investments integrated?

No. Regulation S permits offshore transactions to occur contemporaneously with domestic United States offerings as long as the offshore offering complies with Regulation S requirements.

Source: Regulation S Adopting Release, Securities Act Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,681 (Apr. 24, 1990).

 

How are sales of equity securities by domestic issuers under Regulation S reported?

These sales are reported on the issuer's next Form 10-Q, 10-QSB, 10-K or 10-KSB, as applicable, or, if the domestic issuer so elects, on a Form 8-K.

Source: Regulation S Amendments Adopting Release, Securities Act Release No. 7505, 1998 WL 63607 (Feb. 17, 1998).

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