Regulation S (Reg S)

Regulation S (Reg S) team of industry experts can write your Regulation S Private Placement Memorandum (Reg S PPM), Reg S Offering Memorandum or the Reg S Prospectus.

Raising capital via Reg S is one of the most popular rules utilized worldwide.  Regulation S under the Securities Act of 1933, (the “Securities Act”) is classified as a safe harbour rule. Regulation S is often used for ‘offshore’ offerings such as when a US company is seeking foreign capital. Regulation S defines when an offering of securities would be deemed to “come to rest abroad”. This would insure that the company would not be subject to the registration obligations imposed under Section 5 of the Securities Act. The General Statement to Regulation S applies a territorial approach to Securities Act registration by providing that offers and sales subject to Section 5 include offers and sales that occur within the United States and do not include offers and sales that occur outside the United States, i.e. such as in Europe or Asia or South America. Regulation S also includes several safe harbour exemptions that address specified transactions.

Safe Harbour

Each safe harbour is subject to two general conditions (a “safe harbor” exemption is an exemption that is not the exclusive means that must be employed to fall within a more general exemption or jurisdictional limitation. By promulgating a safe harbour, the SEC is making sure that one complies with the rules for more broad exemption or limitation.):

  1. The offer or sale of the Reg S securities must transpire in an offshore transaction. This means that (i) the seller reasonably believes that the buyer of the Reg S stock or bonds is outside of the US, i.e. offshore, at the time of offer/sale or (ii) the transaction would take place at various “designated offshore securities markets.” Such offshore securities markets would include the Canadian stock exchange, pending of course that no pre-arranged deal with a buyer in the US was created prior to this. Additionally, issuers may not make any direct efforts to sell their Reg S securities in the United States, either by the issue itself, or its representative such as their broker dealer or underwriter or distributor etc.
  2. Rule 903 provides specific rules for offerings by issuers, distributors and their respective affiliates:

Category 1:

(a) securities of a “foreign issuer”, e.g. a non-US company like a UK entity or a Cayman Islands fund, for which there is no “substantial U.S. market interest”, (b) securities such as debt or equity issued by a non-US company and offered by the “foreign issuer” in “overseas directed offerings”, (c) non-convertible debt securities such as notes or bonds or global notes of a US company issuing the securities and offered in overseas that are denominated in a currency other than U.S. dollars, and (d) stocks or bonds (equity or debt) securities backed by the full faith and credit of a foreign government such as the United States.

Category 2:

(a) Reg S equity offerings, such as stocks, units, interests, etc., by reporting foreign issuers, and (b) Regulation S offerings of debt securities like notes or bonds and non-convertible, non-participating preferred stock by reporting issuers domestically or non-reporting foreign issuers outside the U.S. These Reg S securities are treated as a qualified reporting issuer, and therefore the issuer would need to have filed all required materials and reports for a minimum of 12 months prior to the offering of the Reg S securities (and prior to the actually offering as well).

In terms of Reg S restrictions for offering the securities, which must be obeyed, this would include the prohibition of resales to any US citizen during the compliance period of distribution. This would be in addition to the other numerous general rules that must be complied with as well. There is a 40-day compliance period where restrictions remain in place, after which, this would need be settled in a written agreement with each distributor and reflected in the prospectus or offering memorandum or other offering circular documents. In addition,

all confirmations issued to broker dealers, investment banks, advisory firms, underwriters, distributors and others receiving a commission once the securities are sold must be complied with as well.

  1. Reg S offerings of all other securities, including (a) equity offerings like stocks, common shares, units, interests, etc, by US issuers that must report, (b) offerings of regulating s equity securities by non-US companies that do not report even if there is a large US market for the securities and (c) reg s offerings by US companies that are not reporting issuers. All of these are subject to strong regulatory oversite.

Rule 904 for Reg S

Rule 904 for Reg S offerings provides a safe harbour for certain resale transactions of Reg S by persons other than the issuer, a distributor like a broker dealer or underwriter or advisory firm like an investment bank, any of their respective affiliates (except any officer or director of the company who is an affiliate exclusively by virtue of such position), or any person acting on their behalf. They are subject to the following conditions:

  1. All permitted sellers are subject to the general conditions.
  2. In the case of a Regulation S securities seller who is a dealer or a person receiving any remuneration, a resale cannot be knowingly made to a US citizens prior to the end of the relevant distribution compliance period. A confirmation stating the applicable securities law restrictions must be sent to any other dealer or person receiving selling compensation person.
  3. No special compensation can be paid if the seller is an officer or director of the issuer.
  4. The safe harbour is not available to “affiliates” of the Reg S issuer, except where affiliation arises solely from the status of the Regulation S seller as an officer or director. An “affiliate” is any person that controls – or in the past controlled – by or had such control with the company that issued the Reg S securities. The definition of control here means actual control, such as having 10% or more of the voting rights in the company, even though other features show one doesn’t have full control.
  5. Regulation S transactions, as seen above as well, must be undertaken by a “designated offshore securities market” in a Reg S transaction not pre-arranged with a citizen of the United States or in a transaction with a non-US purchaser (like European or Asian), also outside the US when the purchase order was undertaken.
  6. In additional to the above Reg S rules, caution and attention must be forthcoming to ensure that the transaction vis-à-vis the companies and the Reg S rules does not involve an arrangement to elude the Reg S Securities Act rules of registration, including for the purpose of washing off transfer restrictions.

Prospectus’s team can help structure your Regulation S Offering. Our seasoned professional team has many years both writing Reg S prospectus and offering documents for companies worldwide.

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Regulation S (Reg S)