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.
When Can Foreign Securities Be Sold to U.S. Institutions?
- Foreign securities that are not registered with the Securities and Exchange Commission (SEC) may still be resold 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.
Which Foreign Securities Are 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) property in which a sanctioned party has an interest, or reject a prohibited transaction that involves no blocked property, 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
What Is Regulation S (Offshore Offerings)?
Regulation S governs offers and sales of securities outside the United States without SEC registration.
What Are the Two Safe Harbors Under Regulation S?
| 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 | An eligible reseller only, not the issuer, a distributor, their affiliates, or a person acting for them (a narrow exception exists for an officer or director who is an affiliate solely by holding that position) | 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
What Are the Three Regulation S Categories?
Every issuer offering must be an offshore transaction with no directed selling efforts in the U.S. The offering's category then decides what else applies:
| Category | Which Securities | Distribution Compliance Period |
|---|---|---|
| Category 1 | Only four pathways: a foreign issuer that reasonably believes, when the offering starts, that there is no substantial U.S. market interest in the securities; an overseas directed offering into one foreign country (for a U.S. issuer, only non-convertible debt denominated in a currency other than U.S. dollars and not linked to U.S. dollars); securities backed by the full faith and credit of a foreign government; or a qualifying foreign employee benefit plan (among other conditions, plan interests cannot be transferred except by will or inheritance) | None; no conditions beyond the baseline |
| Category 2 | Not Category 1, and either equity of a reporting foreign issuer or debt of a reporting issuer or a non-reporting foreign issuer | 40 days |
| Category 3 | Everything else, such as a U.S. issuer's common stock sold to offshore investors or U.S.-dollar debt of a non-reporting U.S. issuer | Debt: 40 days. Equity: 1 year, or 6 months if the issuer is a reporting issuer |
Foreign incorporation alone does not put an offering in Category 1; the issuer must fit one of the four pathways.
What Is the Distribution Compliance Period?
The period starts on the later of the first offer to someone other than a distributor or the offering's closing. Until it ends, Categories 2 and 3 require:
- No sale to a U.S. person or for a U.S. person's account or benefit, other than a distributor. Institutional status does not change this.
- Offering restrictions: each distributor agrees in writing that offers and sales before the period ends are made only under Regulation S, registration, or an available exemption. Offering materials (other than press releases) must say the securities are unregistered and may not be offered or sold in the U.S. or to U.S. persons without registration or an exemption.
- Downstream notice: a distributor selling to another distributor, a dealer, or a person receiving a selling concession or fee sends a confirmation or notice that the buyer faces the same restrictions that apply to a distributor.
- Category 3 debt: the securities start as a temporary global security, not exchangeable for definitive securities until the 40 days end and, for non-distributors, until the beneficial owner certifies non-U.S. status (or a U.S. purchase that needed no registration).
- Category 3 equity: the purchaser certifies it is not a U.S. person and is not buying for one (or is a U.S. person who bought in a transaction that needed no registration), and agrees to resell only under Regulation S, registration, or an exemption and to hedge only in compliance with the Securities Act. A U.S. issuer's shares carry a restrictive legend.
- Dealer resales: a dealer or a person receiving a selling concession who resells under the resale safe harbor must not know the buyer is a U.S. person. If it knows the buyer is a dealer or compensated seller, it sends a notice that the securities may be sold during the period only under Regulation S, registration, or an exemption.
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.
- Category 1 has no distribution compliance period. Category 2 and Category 3 debt use 40 days. Category 3 equity uses 1 year, or 6 months for a reporting issuer.
- "No directed selling efforts" applies to both safe harbors. Any marketing or solicitation targeting U.S. persons disqualifies the exemption.
- A distributor cannot use the resale safe harbor. The resale safe harbor is for a seller other than the issuer, a distributor, their affiliates, or a person acting for them. Selling offshore does not fix this; the seller must be eligible in the first place.