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Regulation S – Raising Money From Offshore Investors

By: Tilden Moschetti, Esq.

Regulation S allows domestic issuers to sell certain securities to non-us persons. Almost always, syndication attorneys will combine the Regulation S exemption with the Regulation D exemption to expand the possible investor base from US persons to the whole world.

What is SEC Reg S?

Definition of Reg S

Regulation S, or Reg S for short, is a set of federal securities laws issued by the Securities and Exchange Commission (SEC) that provides an exemption from the registration requirements for certain securities offerings made outside the United States. This regulation is designed to help companies raise capital from foreign investors while still complying with SEC regulations. In this article, we’ll take a closer look at Reg S, including the exemptions it offers, the eligibility requirements, and the ongoing obligations of companies using this regulation.

One of the key features of Reg S is that it applies to syndication offerings made outside the United States, regardless of the location of the issuer. This means that companies can raise capital from foreign investors without having to register the offering with the SEC. This can be a significant advantage for companies that are looking to raise capital from a global investor base.

How Reg S differs from other SEC regulations

Regulation S differs from other SEC regulations in several ways:

  1. Geographic Restrictions: Reg S applies to securities offerings made outside the United States, regardless of the location of the issuer. Other SEC regulations, such as Reg A and Reg D, apply to securities offerings made within the United States.
  2. Investor Participation: Reg S allows companies to raise capital from foreign investors without having to register the offering with the SEC. Other SEC regulations, such as Section 4(a)(2), Reg A and Reg D, have different limitations on the number and type of investors that can participate in the offering.
  3. Advertising and Solicitation: Reg S generally prohibits general solicitation and advertising for offerings within the US, as the investors are foreign and the issuer is not expected to have the same level of information about them as a domestic issuer would have. Other SEC regulations, such as Reg A and Reg D Rule 506c, do not have this restriction in most cases.
  4. Resale Restrictions: Reg S has restrictions on the resale of securities under the exemption which is intended to ensure that the securities are not sold to U.S. persons. Other SEC regulations, such as Reg A and Reg D, do not have this restriction in most cases.
  5. Ongoing Reporting: Reg S has fewer ongoing reporting requirements than other SEC regulations, such as Reg A and Reg CF.

Advantages of using Reg S

Here are some advantages of using Reg S:

  1. Global reach: Reg S allows companies to raise capital from foreign investors without having to register the offering with the SEC. This can be a significant advantage for companies that are looking to raise capital from a global investor base.
  2. Less regulatory burden: Reg S has fewer ongoing reporting requirements than other SEC regulations, such as Reg A and Reg CF, which can be less time-consuming and less expensive for companies to comply with.
  3. Flexibility: Reg S offers several exemptions, including exemptions for offshore transactions, resales of securities outside the United States, and offers and sales of securities to foreign persons. This allows companies to choose the exemption that best fits their specific needs.
  4. Resale restrictions: Reg S has restrictions on the resale of securities under the exemption which is intended to ensure that the securities are not sold to U.S. persons. This can help companies to control the distribution of their securities and manage the risk of regulatory violations.
  5. Complementary to foreign laws: Reg S is a set of federal securities laws and it is intended to complement the laws of foreign countries where the offerings are made, not replace them. This can make it easier for companies to comply with multiple regulations when raising capital from foreign investors.

Eligibility Requirements for Regulation S Offers

Criteria for companies to qualify for the exemption under Reg S

To qualify for the exemption under Reg S, companies must meet several conditions, including:

  1. Offered and sold outside the United States: The securities must be offered and sold outside the United States.
  2. Restrictions on resale: There must be restrictions on the resale of the securities, such as legends on the securities, to ensure that they are not resold in the United States.
  3. Limitations on general solicitation and advertising: General solicitation and advertising are generally prohibited for offerings relying on Reg S, as the investors are foreign and the issuer is not expected to have the same level of information about them as a domestic issuer would have.
  4. Compliance with foreign laws: The issuer must comply with any applicable foreign laws and regulations in the country where the securities are offered and sold.
  5. Resale Legend on the securities: The securities must bear a legend stating that they have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons absent registration or an exemption from registration.

Restrictions on the resale of securities under Reg S

To ensure that the securities are not resold in the United States, Reg S imposes restrictions on the resale of securities under the exemption. These restrictions include:

  1. Resale legends: The securities must bear a legend stating that they have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons absent registration or an exemption from registration.
  2. Resale restrictions: The issuer must include restrictions on the resale of the securities in the offering documents, such as a restriction on the resale of the securities for a specified period of time or until the securities have been registered under the Securities Act of 1933 or are otherwise exempt from registration.
  3. Compliance with foreign laws: The issuer must comply with any applicable foreign laws and regulations in the country where the securities are offered and sold.
  4. No general solicitation and advertising: General solicitation and advertising are generally prohibited for offerings relying on Reg S, as the investors are foreign and the issuer is not expected to have the same level of information about them as a domestic issuer would have.

It’s important to note that these restrictions are intended to ensure that the securities are not sold to U.S. persons, but they do not prevent the resale of the securities to non-U.S. persons outside the United States. Additionally, the SEC may impose additional restrictions in specific cases.

Limitations on the use of general solicitation and advertising

One of the key limitations of Reg S is that it generally prohibits the use of general solicitation and advertising for offerings relying on Reg S. This limitation is put in place to ensure that the securities are not offered to U.S. persons.

The reason behind this limitation is that Reg S offerings are intended to be offered to foreign investors, and the issuer is not expected to have the same level of information about the foreign investors as it would have about domestic investors. As a result, general solicitation and advertising are considered to increase the risk of securities being offered to U.S. persons.

It’s worth noting that Reg S does not prohibit all forms of general solicitation and advertising, but it has specific restrictions. For example, a company can advertise and solicit in a foreign country but it cannot direct any of the advertisement or solicitation to U.S. persons. Additionally, the SEC may impose additional restrictions in specific cases, and it’s recommended to consult with securities attorneys and financial advisors to understand the specific requirements of the limitations on the use of general solicitation and advertising under Reg S before making a decision.

Exemptions under Reg S

Rule 903: Exemption for offshore transactions

Rule 903 of Regulation S provides an exemption for offshore transactions, which refers to securities offerings made outside the United States, as long as the issuer and the purchaser are not located in the United States, and the securities are not sold to any U.S. person. This exemption applies to companies that want to raise capital from foreign investors without having to register the offering with the SEC.

This exemption allows companies to offer and sell securities to foreign investors without the need for SEC registration, but the securities must be offered and sold outside the United States, and the purchaser must not be a U.S. person. The issuer must also comply with any applicable foreign laws and regulations in the country where the securities are offered and sold.

This exemption is intended to be used by companies that want to raise capital from foreign investors while still complying with SEC regulations. However, it has some limitations such as general solicitation and advertising are generally prohibited, and the securities must bear a legend stating that they have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons absent registration or an exemption from registration.

Rule 904: Exemption for resales of securities outside the United States

Rule 904 of Regulation S provides an exemption for resales of securities outside the United States. This exemption applies to the resale of securities that were originally sold in compliance with Reg S, as long as the resale is made outside the United States. This exemption allows companies to resell securities that were originally sold in compliance with Reg S, to foreign investors without having to register the offering with the SEC.

This exemption applies only to resales of securities that were originally sold in compliance with Reg S, and the resale must be made outside the United States. The purchaser must not be a U.S. person, and the issuer must comply with any applicable foreign laws and regulations in the country where the securities are resold.

This exemption is intended to be used by companies that have previously raised capital from foreign investors using Reg S and want to resell the securities to foreign investors without having to register the offering with the SEC. However, it has some limitations such as general solicitation and advertising are generally prohibited, and the securities must bear a legend stating that they have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons absent registration or an exemption from registration.

Rule 905: Exemption for offers and sales of securities to foreign persons

Rule 905 of Regulation S (Reg S) provides an exemption for offers and sales of securities to foreign persons. This exemption applies to securities offerings made outside the United States, as long as the purchaser is a foreign person and the securities are not sold to any U.S. person. This exemption allows companies to offer and sell securities to foreign investors without the need for SEC registration.

This exemption applies to securities offerings made outside the United States, and the purchaser must be a foreign person, and the securities must not be sold to any U.S. person. The issuer must also comply with any applicable foreign laws and regulations in the country where the securities are offered and sold.

This exemption is intended to be used by companies that want to raise capital from foreign investors while still complying with SEC regulations. However, it has some limitations such as general solicitation and advertising are generally prohibited, and the securities must bear a legend stating that they have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons absent registration or an exemption from registration. Additionally, the issuer must comply with any applicable foreign laws and regulations in the country where the securities are offered and sold.

Ongoing Obligations

Reporting and compliance requirements for companies using Reg S

Even though companies using Reg S are not required to register their offerings with the SEC, they still have certain reporting and compliance requirements that they must meet.

  1. Form F-X: Companies using Reg S are required to file a Form F-X with the SEC, which is a form that provides information about the offering and the issuer, such as the terms of the offering and the use of proceeds.
  2. Legend: The securities must bear a legend stating that they have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons absent registration or an exemption from registration.
  3. Compliance with foreign laws: Companies using Reg S are required to comply with any applicable foreign laws and regulations in the country where the securities are offered and sold.
  4. Restrictions on resale: Companies must include restrictions on the resale of the securities in the offering documents, such as a restriction on the resale of the securities for a specified period of time or until the securities have been registered under the Securities Act of 1933 or are otherwise exempt from registration.
  5. No general solicitation and advertising: General solicitation and advertising are generally prohibited for offerings relying on Reg S, as the investors are foreign and the issuer is not expected to have the same level of information about them as a domestic issuer would have.

Penalties for non-compliance

Companies using Reg S are still required to comply with certain reporting and compliance requirements. Non-compliance with these requirements can result in penalties for the issuer.

  1. Civil penalties: The SEC can impose civil penalties for violations of the securities laws, including those related to Reg S. These penalties can include fines and disgorgement of ill-gotten gains.
  2. Cease and desist orders: The SEC can issue cease and desist orders, which prohibit the issuer from committing further violations of the securities laws.
  3. Disqualification from exemptions: The SEC can disqualify an issuer from using certain exemptions, such as Reg S, if it violates the terms of the exemption.
  4. Injunctions: The SEC can seek injunctions to prevent future violations of the securities laws.
  5. Criminal penalties: In some cases, the SEC may refer a matter to the Department of Justice for criminal prosecution, which can result in fines, imprisonment, or both for individuals and organizations.

It’s important to note that these penalties are intended to deter non-compliance with SEC regulations and protect investors, so it is crucial for companies using Reg S to understand and comply with all the requirements and restrictions of the regulation.

Conclusion

Regulation S (Reg S) is a set of federal securities laws issued by the Securities and Exchange Commission (SEC) that provides an exemption from the registration requirements for certain securities offerings made outside the United States. This can be a valuable tool for companies that want to raise capital from foreign investors while still complying with SEC regulations. Reg S offers several exemptions, including exemptions for offshore transactions, resales of securities outside the United States, and offers and sales of securities to foreign persons.

However, it’s important to note that Reg S also has some limitations and restrictions, such as the prohibition on general solicitation and advertising, resale restrictions, and limitations on the use of general solicitation and advertising. Companies must comply with certain reporting and compliance requirements, such as filing a Form F-X, include a legend on the securities, comply with any applicable foreign laws and regulations, include restrictions on the resale of the securities, and not engage in general solicitation and advertising.

It is recommended to consult with a syndication attorney and financial advisors to understand the specific requirements and potential penalties for non-compliance before deciding to use Reg S.

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