Quick Answer
Regulation S sorts offshore offerings into three categories. Category 1 carries no extra conditions and no distribution compliance period; Categories 2 and 3 add offering restrictions plus a distribution compliance period, the window during which resale into the United States stays restricted, running from 40 days up to one year.
The category an offering falls into depends on the issuer and the securities, not on the size of the deal, and it determines exactly how long the resale restriction runs.
What Is a Distribution Compliance Period?
The distribution compliance period is the window during which resale into the United States is restricted. It begins when the securities are first offered to persons other than distributors, or at the offering's closing if that is later.
Exam Tip: Gotchas
- The clock does not always start at the first offer. It starts on whichever comes later, the first offer to non-distributors or the closing. The closing date governs only when the closing is the later of the two.
What Are the Three Categories?
| Category | Who It Covers | Additional Conditions | Distribution Compliance Period |
|---|---|---|---|
| 1 | Foreign issuers with no substantial U.S. market interest, overseas directed offerings, foreign-government-backed debt, and foreign employee benefit plans | None beyond the offshore-transaction and no-directed-selling-efforts tests | None |
| 2 | Equity of a reporting foreign issuer; debt of a reporting issuer or a non-reporting foreign issuer | Offering restrictions plus a distributor confirmation notice | 40 days |
| 3 | Everything not eligible for Category 1 or 2, such as equity of a domestic issuer | Offering restrictions, a confirmation notice, issuance of debt as a temporary global security that is not exchangeable for definitive securities until the compliance period ends and, for persons other than distributors, beneficial ownership is certified, and additional equity-only conditions below | 40 days for debt; 1 year for equity (6 months if the issuer is a reporting issuer) |
- Offering restrictions: a written agreement from each distributor to sell only in compliance with Regulation S, a registration, or an available exemption, plus a legend on offering materials disclosing the resale restriction. For equity of a domestic issuer, each distributor also agrees not to hedge the securities before the compliance period ends except in compliance with the Securities Act, and the offering materials must say so
What Extra Conditions Apply to Category 3 Equity?
Category 3 equity carries the most conditions of the three categories:
- The purchaser certifies one of two things: that it is not a U.S. person and is not buying for the account or benefit of any U.S. person, or that it is a U.S. person who bought the securities in a transaction that did not require registration
- The purchaser agrees to resell only under Regulation S, under a registration, or under an available exemption, and agrees not to hedge except in compliance with the Securities Act
- The securities of a domestic issuer carry a legend that says two things: transfer is restricted, and hedging the securities is barred unless it complies with the Securities Act
- The issuer agrees to refuse to register a transfer that does not comply with these conditions
Think of it this way: Category 1 involves the least U.S. investor exposure, so it earns the lightest touch. Category 3 equity of a domestic issuer sits closest to a purely domestic offering, so it earns the longest wait and the most paperwork.
Exam Tip: Gotchas
- Category 1 has no waiting period at all, while Category 3 equity can run a full year. Match the category to the compliance period rather than assuming one standard number applies across Regulation S.
- A reporting issuer's Category 3 equity gets a shorter period. Six months applies instead of one year when the issuer already files reports with the Securities and Exchange Commission (SEC).
- Regulation S and the qualified institutional buyer (QIB) private resale safe harbor do not satisfy each other's conditions. That safe harbor is a separate resale rule limited to large institutional buyers, covered in the investor-qualification unit. Meeting Regulation S's offshore-transaction test does not by itself meet the safe harbor's conditions, though one deal can use both.
What Should You Check on Exam Day?
- Match each category to its compliance period: none for Category 1, 40 days for Category 2, and 40 days or up to a year for Category 3.
- Apply the shorter six-month equity period only when the Category 3 issuer is already a reporting issuer.
- Confirm Category 3 equity carries purchaser certification, a resale agreement, a legend, and issuer refusal to register noncompliant transfers.
- Keep Regulation S separate from the QIB private resale safe harbor; satisfying one does not satisfy the other.