Offshore Offerings Under Regulation S.
Companies that want to go outside of their own state for an alternative source of capital but do not want to go through the registration requirements might want to consider Regulation S. Regulation S provides an exemption for offers and sales of securities, debt or equity, outside the United States, on the following general conditions:
- The offer or sale is made in an offshore transaction; and
- No directed selling efforts are made in the United States, meaning no activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for the securities offered, such as an advertisement in a publication with a general circulation in the United States.
And there’s more. A lot more. Regulation S offerings are subject to a set of additional restrictions, depending on the level of risk that securities in a particular type of transaction will flow back into the United States. For non-reporting U.S. companies issuing equity securities (Category 3), for instance:
- Offering restrictions:
- Each distributor must agree in writing that all offers and sales will be made only in accordance with applicable law (e., Regulation S, registration, or an applicable exemption) and not to engage in hedging transactions prior to the expiration of a one-year distribution compliance period that starts from the first offer to persons other than distributors or the closing date; and
- All related offering materials (other than press releases) must include statements in various places that the securities have not been registered and may not be offered or sold in the United States or to U.S. persons, unless in compliance with applicable law;
- The offer or sale, if made prior to the expiration of the distribution compliance period,
- must not be made to or for a U.S. person;
- The purchaser must certify that it is not a U.S. person and is not acquiring the securities for any U.S. person or is a U.S. person who purchased securities in an exempt transaction;
- The purchaser must agree to resell such securities only in compliance with applicable law;
- The securities must contain a legend to the effect that transfer is prohibited unless in compliance with applicable law;
- The issuer must refuse to register any transfer unless in compliance with applicable law; and
- Each distributor must send a confirmation or notice to the purchaser that the purchaser is subject to the same restrictions on offers and sales.
Overall, these restrictions are designed to make it clear to all parties involved in the Regulation S offering that the rule may not be used to circumvent the registration requirements and to prevent sham transactions where issuers or distributors “park” securities offshore with affiliates or shell entities that are actually owned by U.S. persons. Still, Regulation S offers significant advantages over the U.S. private offering exemptions in that issuers can sell securities without regard to the sophistication or number of purchasers, size of the offering, or specific disclosure requirements. It is important to remember, though, that Regulation S does not shield a transaction from the extraterritorial application of antifraud provisions, nor does it provide a safe harbor from any applicable state laws.
This post was a part of a multi-post blog series on other exemptions. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next post, we will discuss employee/advisor equity compensation under Rule 701.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258, email@example.com, or www.mcbrideattorneys.com.
 Id. §§ 230.902, .903(b)(3).
 63 Fed. Reg. 9645, 9636 (Feb. 25, 1998).