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Requirements to Conduct a Regulation S Offering

lawtrades Regulation S global world nyc

If you want to conduct a securities offering, regardless of the nature of that offering, your point of departure should always be Section 5 of the Securities Act. Section 5 requires that all prospective issuers of securities must register securities with the SEC before they may legally issue the securities in question. This provision is, as it sounds, quite burdensome.

The bad news is that Section 5 of the Federal Securities Act is broad in its applicability. At least theoretically, its regulations apply to offerings made inside or outside the U.S., by both U.S. and foreign issuers. In short, the SEC’s point of departure is that all securities offerings must be registered in terms of Section 5, regardless of location or of the identity if issuers.

The good news is that the Act does allow for exemptions from Section 5, however. This is where Regulation S steps in.

Regulation S allows for exemptions from Section 5 for all securities offerings made outside the U.S. by both U.S. and foreign issuers, provided that certain conditions are met. This article provides a brief overview of these conditions. For a more thorough discussion, refer to this useful summary provided by Columbia University.

Overview

Regulation S requirements can be divided into two categories. First, there are two general conditions that must be met for the securities to be eligible for exemption.

Once these are met, the regulation contains specific safe harbor provisions: there are three categories of issuer safe harbors (these may be relied upon by issuers or distributors of securities); and two categories of resale safe harbors (these may be relied upon by persons other than issuers or distributors). Each of the categories have their own associated requirements. This article will discuss only the categories related to issuer safe harbors.

General conditions

A Regulation S offering must, first and foremost, meet the following two general requirements:

The offer or sale must be made in an offshore transaction

This requirement means that the seller reasonably believes that the buyer is offshore (i.e. not in the United States) at the time of the offer/sale; or alternatively that the transaction occurs on certain “designated offshore securities markets” and is not a prearranged plan with a buyer in the U.S.

There must have been no directed selling efforts related to the exempt securities

This requirement prohibits any activities aimed at conditioning the U.S. market for the securities in question (for example, a roadshow, or marketing to persons inside the U.S). The requirement does not only prohibit directed selling efforts by the issuer. It also prohibits directed selling efforts by distributors, any of the issuer’s or distributors’ affiliates, or any person acting on their behalf.

Issuer Safe Harbor Provisions

Regulation S identifies three categories of issuer safe harbors, each associated with specific additional requirements:

Category 1

The category 1 safe harbor is associated with no additional conditions or restrictions. A regulation S offering will fall under category 1 if:

The securities are issued by a “foreign issuer” if the foreign issuer reasonably believe that there is no substantial united states market interest (SUSMI) in the securities offering.
The securities are offered in an overseas directed offering
The securities are backed by the full faith and credit of a foreign government
The securities are sold to an employee of a “foreign issuer” as part of an employee benefit plan

Category 2

Category 2 has additional conditions and restrictions that have to be met, in addition to the general conditions set out above. A Regulation S offering will fall under category 2 if the type of securities offered are
Equity or debt securities of a reporting “foreign issuer”
Debt securities of a reporting “domestic issuer”
Debt securities of a non-reporting “foreign issuer”

In these cases, the following requirements must be met to qualify for exemption:

Offering restrictions must be implemented. This means that each distributor 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 904 of Regulation S. In addition, all offering materials used for offers or sales during the 40-day distribution compliance period must include a statement that the securities are not registered.
The offer or sale, if made during the 40-day distribution compliance period, cannot be made to or for the benefit of a U.S. person
Each distributor, selling to other distributors or dealers, must send a notice to the purchaser stating the the purchaser is subject to the same restrictions for the 40 day distribution compliance period.

Category 3

Category 3 covers all securities that do not fall under category 1 or 2 (for example: debt securities of a non-reporting domestic issuer).

All the additional requirements that apply to category 2 offerings also apply to category 3 offerings. In addition, category 3 offerings face an additional requirement:

The securities must be represented by a temporary global certificate that is not exchangeable until the end of a 40-day “distribution compliance period”

If the category 3 securities in question are equity securities, there are a few additional requirements that must be met as well. More on that here.

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