Regulation S (Reg S)

Regulation S (Reg S)

Our team of experienced professionals can draft your Reg S PPM, offering memorandum, or prospectus.

Financing under the SEC’s Regulation S is one of the most prominent ways for companies to raise capital across the globe. Reg S is known as a safe harbor rule. It is usually used when American companies want to raise capital from foreign investors. Companies comply with this regulation when they want to issue securities in a foreign country. Under Reg S, they do not have to register their securities under Section 5 of the Securities Act of 1933. All sales and offers of securities issued under Reg S must be made outside the United States. In addition, Reg S requires no sales can be made to people in the US. This regulation has two safe harbor provisions, one for the issuer and one for the buyer.

Safe Harbour

The safe harbor, for both the issuer and buyer of the security, rests on two general conditions. In issuing these conditions, the SEC is assuring that the rules are complied with so that the desired exemptions can be allowed. The two conditions are as follows:

  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).

During the period of compliance, Reg S disallows any resale of securities to any US citizens. This restriction must be followed as well as many others for the process to go smoothly. These restrictions are instituted for the entire compliance period which lasts for forty days.

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 under this regulation allows for the resale of securities issued under Reg S by people or institutions other than the issuer, such as an investment bank or a broker dealer and their affiliates. Those other than the issuer who sell Reg S securities must obey the following requirements:

  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 LLC

Prospectus LLC can assist in creating an offering under Reg S. Our team, which consists of many experienced professionals, has been writing prospectuses and offering memorandums complying with Regulation S for years, and for companies across the globe. Please contact us for a consultation or anything else you may need!

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Regulation S (Reg S)

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