Regulation S: Exemption to Securities Regulation

One of the most common ways businesses raise capital for operations is by selling securities. As an alternative to taking on debt through a loan, securities can allow businesses to attract investors, and raise the capital needed in exchange for equity in the business and share in the profits. Generally, all securities shall be registered with the Securities and Exchange Commission (the “SEC”), unless otherwise exempted from the registration requirements established by the Securities Act of 1933 (the “33 Act”).

Regulation S provides an exemption from the 33 Act. Under this provision, transactions that occur outside the United States (“US”) shall be exempted from the SEC’s registration requirements. Available for public and private security offerings, domestic and foreign issuers able to meet the exclusion requirements shall satisfy the Regulation S. Requirements for Regulation S can be divided into two categories. The first category is composed of two general conditions that shall be satisfied for the securities to qualify for the exemption.  The second category for Regulation S requires the transaction to satisfy a safe harbor provision.

The first general condition in the first category requires the offer or sale to be made in an offshore transaction. This requirement means that the seller reasonably believes the potential person buying the securities is not in the US at the time of the buy order. Non-natural persons, such as a corporation or entity, will be considered outside the US if the person authorized to place the buy order is located outside the US. The second general condition requires there have been no direct selling efforts related to the exempt securities. This requirement prohibits soliciting or conditioning the US market for the purchase of the securities offered. Further, this requirement is not only imposed on the issuer of the securities, but also distributors, the issuer’s affiliates, and any person acting on their behalf. 

Once the two general conditions are satisfied, a safe harbor must be met. Regulation S provides three separate categories for the safe harbors. Category-1 may apply to securities issued by a foreign issuer, if the foreign issuer reasonably believes that there is no substantial US market interest in the securities sold; the securities are offered as part of an overseas directed offering, including a foreign issuer in a single country in accordance with that country’s laws; securities backed by the full faith and credit of a foreign government; and securities sold to an employee of a foreign issuer in conjunction with an employee benefit plan. 

Category-2 applies to securities that do not otherwise meet the qualifications of Category-1 above, and are equity securities of a foreign issuer, debt securities of a reporting domestic issuer, or debt securities of a non-reporting foreign issuer. For Category-2 offerings, the following additional conditions apply: (i) offering restrictions must be implemented, which means all distributors must agree in writing that all offers or sales prior to a 40-day distribution compliance period will be made in accordance with Rule 903 and rule 904, and all offering materials used during the 40-day distribution period must also include a statement explaining the securities are not registered; (ii) the offer or sale, if made prior to the expiration of a 40-day distribution compliance period, is not made to a US person or for the account or benefit of a US person; and (iii) each distributor selling securities to another distributor or dealer, or person receiving selling compensation, prior to the expiration of a 40-day distribution compliance period receives a confirmation that they are subject to the same distributor restrictions as the selling distributor.

Lastly, Category-3 shall apply to securities that do not satisfy the requirements of Category-1 or Category-2. For Category-3 securities, in addition to all of the Category-2 offering requirements, the securities shall be represented by a temporary global certificate that is not exchangeable until the end of a 40-day distribution compliance period.

While raising capital for business operations can be challenging, the SEC and the 33 Act have taken steps to help businesses secure necessary. Opportunities, like Regulation S, have proven to be viable for options for security offerings, and have helped businesses achieve their goals and objectives.

Disclaimer:
The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.

Share :

Twitter
Facebook
LinkedIn
Reddit
Email

More Tips