Regulation S
What is Regulation S?
Regulation S was established by the U.S. Securities and Exchange Commission ("SEC") in 1990 and was substantially amended in 1997.
It was created to facilitate investment in U.S. public companies by non- U.S. Investors. It encourages non- U.S. investment by, among other benefits, allowing for active non- U.S. trading of restricted shares, issued by the U.S. Issuer, as prescribed under SEC rule 904.
Why do Non-U.S. Investors buy Reg-S stock?
1) Discounted Purchase Price*. Investors typically buy Reg-S securities of U.S. companies at a slight discount from the primary U.S. public market. This discount compensates the buyer for the risks associated with the mandatory one-year restriction from resale of the stock to U.S. investors or thru U.S. securities markets (known as the "Distribution Compliance Period"). Issuers will also discount Reg-S stock because they have saved the registration costs and do not have the time delays associated with a US offering and SEC registration.
*The discount spread to the corresponding U.S. market price typically will disappear as the Reg-S issue approaches the end of its 12-month requirement to remain outside of the U.S. marketplace.
2) Tax advantages. Capital Gains rates in non-U.S. countries typically encourage a holding period of a minimum of one year, by taxing short-term (less than one year) gains at prohibitively high rates. Therefore, the one-year "distribution compliance period' requiring the stock to be kept out of the U.S. marketplace is typically not a concern to the non-U.S. Investor.
3) U.S. Investment. The availability of Reg-S stock issues gives the non-U.S. Investor greater choices in their purchase of stock issues in U.S. public companies.
Why do Companies Issue stock via Regulation S filings?
Accessing New Capital. The ability to access new Foreign Capital Markets and Investors is the main attraction to U.S. issuers under Regulation S.
Advertising of Offering. Issuers are allowed to advertise a Regulation S stock offering, unlike typical private 505 or 506 private placements done with U.S Investors.
Low cost, ease of Issuance. No specific information requirements for filing (unlike registered offerings or private placements such as 505 and 506) means ease of filing, low cost to Issuer. This can compare to $500,000 to $1,000,000 cost for an SEC registered offering, involving very strict, complex, time consuming SEC regulations.
In fact no special notification of any kind is required, to the S.E.C. or any other Governing Body, by a Reg S qualified Issuer. Regulation S stock issuances/transactions are reported with the quarterly '10Q'filing required by the S.E.C.
Frequently Asked Questions
Is there a restrictive Legend on the Issued certificate?
Yes, the legend placed on the issued certificate states, "Transfer of the Securities Is prohibited, other than in compliance with Regulation S, pursuant to registration under the Securities Act, or Pursuant to an available exemption from registration".
What is the current "Distribution Compliance Period" as the restriction period is now known?
There currently is a 1-year hold from purchase date, unless registered sooner by the issuer under the guidelines provided for in the Securities Act.
What are the Issuers reporting requirements for the Reg S filing?
The next regular filing (eg.10q, 10k) after Reg S issuance is required to contain relevant disclosure of Regulation S transaction(s) during the applicable reporting period.
Is it complicated to sell Reg S stock back into the U.S. markets when the holding period requirement is satisfied?
NO. After the 1 year 'distribution compliance period' is over, a stockholder can have the legend removed and a new certificate issued to him that is freely tradable in the U.S. marketplace, with U.S. buyers. It's a simple procedure that requires the certificate being surrendered to the company's transfer agent, along with a declaration requesting that the legend be removed due to compliance with the rule and the 12-month-holding period.
When I look up Regulation S on the Internet, why do I find lots of references to fraud?
During the mid-90's, there was serious abuse of the old Reg-S rules through numerous loopholes in the old law, mostly due to the discrepancy in holding periods for non U.S. (40 days) versus U.S. (2 years) purchasers of Restricted Securities. The amendments to Regulation S made in 1997, in particular the equalizing of restrictive holding periods, eliminated the loopholes and the previous widespread fraudulent application of the Regulation ended immediately thereafter.
Paraphrased rules and restrictions of Regulation S securities. **
1. Persons outside of the U.S. can immediately trade in said securities, pursuant to Rule 904 Safe Harbor Offshore transaction, as long as they do not trade with U.S. citizens over U.S. markets.
2. There is a one-year "Distribution Compliance Period" restriction from trading the Regulation S shares on U.S. markets with U.S. citizens, following the issue date of the security.
3. At the conclusion of the Distribution Compliance Period, the restrictive legend is removed from the shares in question. Once completed, the security may be traded on the U.S. markets by and with U.S. citizens.
4. Press releases and news on Regulation S securities may be issued or publicized into the United States provided:
A. That the information is directed to offshore press conferences, press releases and meetings with company press spokespersons in which an offshore offering or tender offer is discussed.
B. The information is made available to the foreign and United States press generally and not intended to induce purchases of securities by persons in the United States or tenders of securities by United States holders in the case of exchange offers.
5. The provisions of this Regulation S shall not apply to offers and sales of securities issued by:
A. Open-end investment companies or unit investment trusts registered or required to be registered or
B. Unregistered closed-end investment companies that are required to be registered under the Investment Company Act of 1940 (the 1940 Act).
**Please note that this is a partial highlight list only; contact your securities attorney for full details.
Regulation-S Primer adapted from
www.SuccessioBrokers.com
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