By: Benjamin Jacob
All securities offered and sold in the United States must either be registered with the Securities and Exchange Commission or qualify for an exemption under the Securities Act of 1933 (the “Securities Act”). While exemptions for “friends and family” rounds and “high net worth individuals” are more well-known, a lesser known exemption is the Regulation S exemption available for qualifying foreign offerings made by U.S. companies.
What is a Reg S Offering?
Securities offerings validly made pursuant to Regulation S are exempt from the registration requirements of Section 5 of the Securities Act. As mentioned, Section 5 essentially states that all securities must be registered unless an exemption is available – Reg S is one of the available exemptions that apply to securities sold outside the United States.
Regulation S provides a framework of rules reflective of the U.S. Securities and Exchange Commission (SEC)’s view of its primary roles being to (a) regulate securities offerings offered and sold within the United States and (b) protect investors located within the United States from fraud. Regulation S clarifies that certain offerings made primarily for offshore investment qualify for an exemption from the registration requirements of Section 5.
Reg S accounts for two primary scenarios – first, for a U.S. company raising capital selling securities solely to foreign investors and secondly, for a U.S. investor who uses a foreign market to purchase foreign securities – both of which may occur without SEC registration.
Regulation S breakdown
Regulation S consists of 5 rules.
- The General Statement (Rule 901)
- Definitions (Rule 902)
- Issuer Safe Harbor (Rule 903)
- Resale Safe Harbor (Rule 904)
- Resale Limitations (Rule 905)
Rule 901 provides a broad and detailed statement of the SEC’s jurisdictional scope with respect to Section 5 of the Securities Act.
Rule 903 and Rule 904 allow for the issuance and resale of unregistered securities if the following conditions are met:
- Condition 1 – Offer and sale must be made within an “offshore transaction”
- Condition 2 – No “directed selling efforts” may be made within the United States
Condition 1 is met when the offer is not made to a person in the United States and the buyer is either located outside of the United States (or offeror reasonably believes this to be the case) or the purchase is made through a foreign securities exchange.
Flowback
Securities that are initially offered and sold outside of the United States (thus qualifying for the Regulation S exemption) but then are resold back into the United States must either be registered or qualify for a different non-Regulation S exemption.
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In summary, Regulation S provides a viable exemption from costly securities’ registration requirements for U.S. companies seeking to raise capital by selling its securities to foreign investors.
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