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 the QIB resale rule
- A QIB is generally an institution that owns and invests at least $100 million in securities of unaffiliated issuers (broker-dealers qualify at $10 million). Individuals never qualify as QIBs, regardless of wealth
- 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
- A single offering may also run a Reg S offshore tranche alongside a simultaneous U.S. tranche sold to QIBs, with each tranche meeting its own conditions
Exam Tip: Gotchas
- Unregistered does not mean unsaleable in the U.S. The QIB resale rule 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
- OFAC publishes the Specially Designated Nationals (SDN) list of blocked persons. Broker-dealers must screen customers and transactions against it
- A potential SDN match is escalated to compliance to confirm whether it is a true hit or a false positive
- If a transaction involves a sanctioned party, the firm must block (freeze) the assets, reject the transaction, and report it to OFAC
- A firm may not knowingly facilitate a prohibited transaction indirectly, such as routing it through a third party or intermediary
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 |
Who Is a U.S. Person?
- A U.S. person under Reg S is defined mainly by residence, not citizenship
- A natural person resident in the U.S. is a U.S. person
- A U.S. citizen who genuinely resides abroad long-term generally is not a U.S. person for Reg S purposes, so an offshore sale to that person can still qualify
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.