Foreign Securities and Regulation S
The exemptions you've studied so far apply to domestic offerings. But what about securities offered outside the United States, or foreign securities sold to U.S. investors? Regulation S and related rules address these cross-border scenarios.
Foreign Securities Sold to U.S. Institutions
- Foreign securities that are not registered with the Securities and Exchange Commission (SEC) may still be sold to qualified institutional buyers (QIBs) under Rule 144A
- These securities trade in the U.S. institutional market without full SEC registration
- This creates a pathway for foreign issuers to access U.S. capital without going through the full registration process
Exam Tip: Gotchas
- Unregistered does not mean unsaleable in the U.S. Rule 144A allows unregistered foreign securities to trade among QIBs. Retail investors, however, cannot purchase these securities.
Foreign Securities Prohibited from Sale to U.S. Investors
Not all foreign securities can be sold in the United States:
- Some may be prohibited due to regulatory restrictions or lack of compliance with U.S. securities laws
- OFAC (Office of Foreign Assets Control) sanctions prohibit transactions involving certain countries, entities, and individuals
- Broker-dealers must screen transactions to ensure compliance with OFAC restrictions
Regulation S (Offshore Offerings)
Regulation S governs offers and sales of securities outside the United States without SEC registration.
Two Safe Harbors
| Safe Harbor | Who Uses It | Requirements |
|---|---|---|
| Issuer safe harbor | Issuers selling securities abroad | Offers must be made in an "offshore transaction" with no directed selling efforts in the U.S. |
| Resale safe harbor | Resellers of offshore securities | Resales must occur outside the U.S. without directed selling efforts |
Distribution Compliance Period
Reg S securities may NOT be sold to U.S. persons during the applicable distribution compliance period:
- 40 days for most offerings
- 1 year for certain equity offerings by non-reporting issuers
The distribution compliance period exists because without it, unregistered securities could quickly flow back into the United States. The documentation and certification requirements during this period help ensure the securities have come to rest offshore.
Exam Tip: Gotchas
- Reg S does not mean "unregulated." It provides an exemption from SEC registration for offshore offerings, but the securities are still subject to restrictions on resale to U.S. persons.
- 40 days is the default distribution compliance period for most offerings. Equity offerings by non-reporting issuers have a longer 1-year period.
- "No directed selling efforts" applies to both safe harbors. Any marketing or solicitation targeting U.S. persons disqualifies the exemption.