REGULATION S FOR PRIVATE OFFERING EXEMPTIONS FROM REGISTRATION

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REGULATION S FOR PRIVATE OFFERING EXEMPTIONS FROM REGISTRATION

The most common exemptions from registration used in private offerings are the following:


Section 4(a)(2)

Rule 504 under Regulation D;

Rule 506(b) under Regulation D;

Rule 506(c) under Regulation D;

Rule 701;

Regulation S;

Regulation A (Reg. A+); and

Regulation Crowdfunding.


What is the Regulation S exemption (or exclusion) used in private offerings?

Regulation S under the Securities Act of 1933, as amended (the “Securities Act”) is a safe harbor from the registration requirements of the Securities and Exchange Commission (the “SEC”) for offers and sales of securities made outside of the U.S. The safe harbor applies to both sales by the issuer and resales and is contingent upon two general conditions which are as follows:


The offer or sale must be made in an offshore transaction to non-U.S. persons; and

no “directed selling efforts” may be made by the issuer, a distributor (underwriters and broker-dealers), any of their respective affiliates, or any person acting on their behalf.


What is an offshore transaction outside of the U.S. made pursuant to Regulation S?

According to Regulation S, an offshore transaction is one in which (i) the offer is not made to a person in the U.S.; and (ii) either (a) at the time the sale is originated the buyer is outside the U.S. or the seller reasonably believes the buyer is outside the U.S.; or (b) the transaction is executed on the physical trading floor of an established foreign securities exchange or for purposes of offshore resales on a designated offshore securities market and the seller is not aware that the transaction has been pre-arranged with a buyer in the U.S.


If the buyer is a natural person, they are deemed to be outside the U.S. if they are physically located outside the U.S. at the time of the sale. If the buyer is a corporation or entity, they are deemed to be outside the U.S. if, at the time of the sale, the authorized person making the sale is physically located outside the U.S.


What is a “U.S. Person” under Regulation S?

Regulation S defines a “U.S. Person” as:


Any natural person resident in the United States (as defined below);

  • Any partnership or corporation organized or incorporated under the laws of the U.S.;

  • Any estate of which any executor or administrator is a U.S. Person;

  • Any trust of which any trustee is a U.S. Person;

  • Any agency or branch of a foreign entity located in the U.S.;

  • Any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. Person;

  • Any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident of the U.S.; and

  • Any partnership or corporation if (i) organized or incorporated under the laws of any foreign jurisdiction and (ii) formed by a U.S. Person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) of Regulation D) who are not natural persons, estates or trusts.

  • Pursuant to Regulation S, “United States” means the United States of America, its territories and possessions, any State of the U.S., and the District of Columbia.

What are “directed selling efforts” in a private offering pursuant to Regulation S?

Regulation S defines “directed selling efforts” as any activity undertaken for the purpose of, or that could be reasonably be expected to have the effect of, conditioning the U.S. market for any of the securities being offered in reliance on Regulation S. Examples of this would be as follows:


  • An advertisement in a publication with a general circulation in the U.S. that refers to the Regulation S offering;

  • Direct mail;

  • Seminars;

  • Telephone solicitations, and

  • Radio and TV advertisements.


What are the benefits and downsides of using Regulation S in a private offering?

The benefits to using a Regulation S exemption (or exclusion) in a private offering are as follows:


  • Regulation S safe harbor is non-exclusive and available for private offerings of both debt and equity securities;

  • Disclosure requirements contingent upon foreign jurisdiction requirements; and

  • No filing requirement with the SEC.


The downsides to using a Regulation S exemption (or exclusion) in a private offering are as follows:


  • Private offering made pursuant to Regulation S must comply with the requirements of the applicable non-U.S. jurisdiction(s); and

  • Holding period dependent on “distribution compliance period.”

How is the “distribution compliance period” determined in a private offering under Regulation S exemption

Pursuant to Regulation S, the “distribution compliance period” begins on the later of when the securities are first offered to persons other than distributors or the date of the closing of the offering and continues until the end of the period based on categories 1 through 3 below. Following the offering, the distribution compliance period must be fulfilled in order for the securities to be brought back into the U.S.


Category 1. Besides the general requirements above, the only conditions to be met for category 1 securities are:


  • The securities are issued by a foreign issuer that reasonably believes, at the time of commencing the offering, that there is no substantial U.S. market interest in the securities sold, whether equity or debt, or underlying securities if warrants or options or other convertible securities are sold.

  • The securities are offered and sold in an overseas directed offering, including by a foreign issuer in a single country in accordance with that country’s laws;

  • The securities are offered and sold in an overseas directed offering, including non-convertible debt securities by a U.S. Issuer in a single country in accordance with that country’s laws and all elements of the debt (amount, interest, etc.) is in a non-U.S. denomination;

  • Securities are backed by the full faith and credit of a foreign government; or

  • Securities are offered and sold pursuant to an employee benefit plan established and administered in accordance with the law of a country other than the U.S. and are issued for compensation for bona fide services rendered, are nontransferable, are legended and, if necessary, a stop order is placed thereon to prevent sale in the U.S. and the offering documentation contains a statement that the securities are not registered under the Securities Act and may not be offered or sold in the U.S. unless registered or an exemption is available.

Category 2. Category 2 applies to securities that do not meet the qualifications of category 1 and are equity securities of a foreign issuer, or debt securities of a reporting U.S. or foreign issuer or debt securities of a non-reporting foreign issuer. The following additional conditions apply to category 2 securities: (a) offering restrictions must be implemented; (b) the offer or sale, if made prior to the expiration of a 40-day distribution compliance period, is not made to a U.S. person or for the account or benefit of a U.S. person; and (c) each distributor selling securities to another distributor or dealer, or person receiving selling compensation, prior to the expiration of a 40-day distribution compliance period receives a confirmation that they are subject to the same distributor restrictions as the selling distributor.


Category 3. Category 3 applies to securities that do not meet the qualifications of categories 1 or 2. All category 3 transactions must implement offering restrictions. Additional conditions are imposed depending on whether the securities being sold are debt, equity or warrants/convertible securities. Category 3 covers debt or equity by non-reporting U.S. issuers; equity offerings by U.S. reporting issuers; and equity offerings by non-reporting foreign issuers for which there is a substantial U.S. market interest. Category 3 requires a 40-day distribution compliance period for certain debt securities, six-month distribution compliance period for equity securities of reporting issuers, and a one-year period for equity securities of non-reporting issuers.

Offers and sales of Category 3 securities may be made during the distribution compliance period as long as (i) they are not made to U.S. persons or for the account or benefit of U.S. persons; (ii) the purchaser agrees to resell the securities only in accordance with Regulation S, registration or an exemption from registration and agrees not to engage in hedging transaction with regard to the securities; (iii) the securities contain a legend stating that they may only be sold in accordance with Regulation S, registration or an exemption from registration and cannot be used for hedging transaction; (iv) the Issuer is required, either by contract or a provision in its bylaws or articles, to refuse to register any transfer not made in accordance with these rules; and (v) each distributor selling securities to another distributor or dealer, or person receiving selling compensation, prior to the expiration of a 40-day distribution compliance period receives a notice that they are subject to the same distributor restrictions as the selling distributor.


The decision whether to commence a private offering, including the preparation of required disclosures and federal and state compliance, can be complicated and difficult. Business Legal Advisors, LLC has over seven years of experience assisting companies with private offerings from preparing for the private offering to the completion of a successful offering.

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