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Release No. 33-6863 Release No. 34-27942 Release No. IC-17458 Release No. IS-122 April 24, 1990
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 Table of Contents
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I. EXECUTIVE SUMMARY
On June 10, 1988, the Commission published for comment Regulation S, 1 which was intended to clarify the extraterritorial application of the registration requirements of the Securities Act of 1933 (the Securities Act). 2 The proposed Regulation contained both a general statement providing that the registration requirements do not apply to offers and sales that occur outside the United States, and two non-exclusive safe harbors from those requirements for specified offers and sales.
After reviewing the comments received, 3 which supported the Regulations rationale but suggested changes to increase the utility of the Regulation, the Commission published a revised Regulation S for comment on July 11, 1989. 4 While many aspects of the Regulation remained the same, some significant changes from the initial proposal were reflected in the reproposal. The primary result of the changes, giving further recognition to the doctrine of comity and the territorial approach to the application of Securities Act Section 5, and reassessing the likelihood of flowback of foreign issuers securities, was a reduction in the restrictions applicable to foreign issuers relying on the safe harbors. Generally, commenters on the Reproposing Release were strongly supportive of the reproposal, and suggested some further modifications. 5
The Commission today is adopting Regulation S. As noted above, reliance upon Securities Act Release No. 4708 6 (discussed below) and the no-action and interpretive letters relating thereto is not appropriate for offerings of securities commencing after the ninetieth day following publication of this release in the Federal Register. Offers and sales previously made in reliance upon no-action or interpretive letters are not adversely affected by the adoption of Regulation S.
As with the Proposals, the final Regulation consists of a general statement of applicability of the registration provisions (the General Statement) and two safe harbors. 7 The General Statement provides that Section 5 of the Securities Act 8 does not apply to offers or sales of securities that occur outside the United States. 9 In order for a transaction to fall within the provisions of the General Statement, both the sale and the offer relating to thinvolved in the pursuant to contract, their respective affiliates (except certain officers and directors), and persons acting on behalf of any of the foregoing (the resale safe harbor). An offer, sale or resale of securities that satisfies all conditions of the applicable safe harbor is deemed to be outside the United States within the meaning of the General Statement and thus not subject to the registration requirements of Section 5.
Two general conditions apply to the safe harbors. First, any offer or sale of securities must be made in an offshore transaction, which requires that no offers be made to persons in the United States and that either: (i) the buyer is (or the seller reasonably believes that the buyer is) offshore at the time of the origination of the buy order, or (ii) for purposes of the issuer safe harbor, the sale is made in, on or through a physical trading floor of an established foreign securities exchange, or (iii) for purposes of the resale safe harbor, the sale is made in, on or through the facilities of a designated offshore securities market, and the transaction is not pre-arranged with a buyer in the United States. Second, in no event could directed selling efforts be made in the United States in connection with an offer or sale of securities made under a safe harbor. Directed selling efforts are activities undertaken for the purpose of, or that could reasonably be expected to result in, conditioning of the market in the United States for the securities being offered. Exceptions to the general conditions are made with respect to offers and sales to specified institutions not deemed U.S. persons, notwithstanding their presence in the United States.
The issuer safe harbor distinguishes three categories of securities offerings, based upon factors such as the nationality and reporting status of the issuer and the degree of U.S. market interest in the issuers securities. The first category of offerings has been expanded from the Proposals and includes: securities offered in overseas directed offerings, securities of foreign issuers in which there is no substantial U.S. market interest, securities backed by the full faith and credit of a foreign government, and securities issued pursuant to certain employee benefit plans. The term overseas directed offerings (which replaces overseas domestic offerings from the Reproposing Release) includes an offering of a foreign issuers securities directed to any one foreign country, whether or not the issuers home country, if such offering is conducted in accordance with local laws, offering practices and documentation. It also includes certain offerings of a domestic issuers non-convertible debt securities, specified preferred stock and asset-backed securities denominated in the currency of a foreign country, which are directed to a single foreign country, and conducted in accordance with local laws, offering practices and documentation. The second category has been revised to include offerings of securities of U.S. reporting issuers and offerings of debt securities, asset-backed securities and specified preferred stock of foreign issuers with a substantial U.S. market interest. The third, residual category has been adopted substantially as reproposed.
The issuer safe harbor requires implementation of procedural safeguards, which differ for each of the three categories, to ensure that the securities offered come to rest offshore. Offerings under the first category may be made offshore under the issuer safe harbor without any restrictions beyond the general conditions. Offerings made in reliance on the other two categories are subject to additional safeguards, such as restrictions on offer and sale to or for the account or benefit of U.S. persons.
The resale safe harbor has been expanded from the Proposals to allow reliance thereon by certain officers and directors of the issuer or distributors. In such a transaction, no remuneration other than customary brokers commissions may be paid. Otherwise, the resale safe harbor is adopted substantially as reproposed. Under the resale safe harbor, dealers and others receiving selling concessions, fees or other remuneration in connection with the offering (such as sub-underwriters) must comply with requirements designed to reinforce the applicable restriction on directed selling efforts in the United States and the offshore transaction requirement. All other persons eligible to rely on the resale safe harbor need only comply with the general conditions.
The safe harbors are not exclusive and are not intended to create a presumption that any transaction failing to meet their terms is subject to Section 5. 10 Reliance on one of the safe harbors does not affect the availability of any exemption from the Securities Act registration requirements upon which a person may be able to rely.
Regulation S relates solely to the applicability of the registration requirements of Section 5 of the Securities Act. The Regulation does not limit in any way the scope or applicability of the antifraud or other provisions of the federal securities laws or provisions of state law relating to the offer and sale of securities.
In contrast to the Proposals, the Regulation as adopted applies to offers and sales of securities issued by closed-end investment companies that are registered under the Investment Company Act of 1940 11 in addition to investment companies that are not required to register under the 1940 Act. The Regulation is not applicable to offers and sales of securities issued by open-end investment companies or unit investment trusts registered or required to register or closed-end investment companies required to register, but not registered, under the 1940 Act. Comment is solicited, however, regarding whether to extend the application of the Regulation to offers and sales of securities by registered mutual funds and unit investment trusts and, if so, the method by which to accomplish such extension.
At or around the time of adoption of this Regulation, the Department of the Treasury is adopting regulations establishing new procedures applicable to foreign-targeted offerings of bearer debt obligations. Persons contemplating issuance of such obligations in reliance on this Regulation are advised to direct their attention also to the Treasury regulations. See Treas. Reg. §1.1635(c).
II. BACKGROUND AND INTRODUCTION
The registration requirements of the Securities Act literally apply to any offer or sale of a security involving interstate commerce or use of the mails, unless an exemption is available. 12 The term interstate commerce includes trade or commerce in securities or any transaction or communication relating thereto ... between any foreign country and any State, Territory or the District of Columbia.... 13 The Commission, however, historically has recognized that registration of offerings with only incidental jurisdictional contacts should not be required. 14 In Release 4708, the Commission stated that it would not take any enforcement action for failure to register securities of U.S. corporations distributed abroad solely to foreign nationals, even though the means of interstate commerce were used, if the distribution was effected in a manner that would result in the securities coming to rest abroad. 15
Numerous procedures were employed after the issuance of Release 4708 to ensure that securities sold in reliance upon the Release were sold to non-U.S. persons and came to rest abroad. These procedures frequently were the subject of no-action letters issued by the Commissions staff. 16 The staff also construed Release 4708 to permit resales abroad of securities not acquired in reliance on the Release. 17 The staff did not express any view as to when or under what circumstances securities issued pursuant to Release 4708 could be resold in the United States or to U.S. persons. Rather, the staff indicated that resales could only be made in compliance with the registration requirements of the Securities Act or an exemption therefrom. 18
The development of active international trading markets and the significant increase in offshore offerings of securities, as well as the significant participation by U.S. investors in foreign markets, present numerous questions under the U.S. securities laws. For companies raising capital abroad, a principal issue under the federal securities laws is the reach across national boundaries of the registration requirements under Section 5 of the Securities Act.
The Regulation adopted today is based on a territorial approach to Section 5 of the Securities Act. 19 The registration of securities is intended to protect the U.S. capital markets and investors purchasing in the U.S. market, whether U.S. or foreign nationals. Principles of comity 20 and the reasonable expectations of participants in the global markets justify reliance on laws applicable in jurisdictions outside the United States to define requirements for transactions effected offshore. 21 The territorial approach recognizes the primacy of the laws in which a market is located. As investors choose their markets, they choose the laws and regulations applicable in such markets.
In view of the objectives of Regulation S and the policies underlying the Securities Act, the Regulation is not available for any transaction or chain of transactions that, although in technical compliance with the rules, is part of a plan or scheme to evade the registration obligations of the Securities Act. 22 In such cases, registration under the Securities Act would be required.
Regulation S relates solely to the applicability of the registration requirements of Section 5 of the Securities Act, and does not limit the scope or extraterritorial application of the antifraud or other provisions of the federal securities laws 23 or provisions of state law relating to the offer and sale of securities. 24 The antifraud provisions have been broadly applied by the courts to protect U.S. investors and investors in U.S. markets where either significant conduct occurs within the United States (the conduct test) 25 or the conduct occurs outside the United States but has a significant effect within the United States or on the interests of U.S. investors (the effects test). 26 It is generally accepted that different considerations apply to the extraterritorial application of the antifraud provisions than to the registration provisions of the Securities Act. 27 While it may not be necessary for securities sold in a transaction that occurs outside the United States, but touching this country through conduct or effects, to be registered under United States securities laws, such conduct or effects have been held to provide a basis for jurisdiction under the antifraud provisions of the United States securities laws.
III. DISCUSSION OF REGULATION S
A.General Statement
Rule 901(a) is a general statement of the applicability of the registration provisions of the Securities Act. The General Statement provides that any offer, offer to sell, sale, or offer to buy that occurs within the United States is subject to Section 5 of the Securities Act, while any such offer or sale that occurs outside the United States is not subject to Section 5. 28 The determination as to whether a transaction is outside the United States will be based on the facts and circumstances of each case. If it can be demonstrated that an offer or sale of securities occurs outside the United States, the registration provisions of the Securities Act will not apply, regardless of whether the conditions of the safe harbor are met. For a transaction to qualify under the General Statement, both the sale and the offer pursuant to which it was made must be outside the United States.
Unlike the Proposals, the General Statement does not list the factors to be considered in determining whether an offer or sale occurs outside the United States. Commenters expressed concern with regard to various aspects of the factors listed in the Proposals. In response to the Commissions request for comment in the Reproposing Release, a number of commenters recommended that the entire list of factors be deleted from the General Statement. Since the list was included in the Proposals to provide assistance to persons relying on the General Statement to demonstrate an offer or sale was made outside the United States, it has been deleted from the Regulation in light of the commenters assessment that the list would not be helpful.
B.Safe Harbors
Rules 903 and 904 set forth non-exclusive safe harbors for extraterritorial offers, sales and resales of securities. The safe harbors include conditions to protect against indirect, unregistered, non-exempt offerings into the U.S. capital markets.
An offer or sale by an issuer, a distributor, an affiliate of either, or any person acting on behalf of any of the foregoing, that meets the applicable conditions of the issuer safe harbor (Rule 903) is outside the United States for the purposes of Rule 901. For purposes of the Regulation, the term distributor 29 includes all underwriters, dealers, 30 and other persons who are participating in a distribution of securities pursuant to contractual arrangements, such as sub-underwriters, but does not include persons participating pursuant to contract only in ancillary positions, such as fiscal agents or persons hired to perform clearing services.
Distributors and their affiliates are not prevented by the Regulation from engaging in secondary transactions in securities of the same class being distributed, provided the securities are not borrowed or replaced with shares from the offering. Once the distribution has ended and any applicable restricted period 31 specified in Rule 903 has expired, distributors that have sold their allotments will no longer have distributor status and therefore will be able to use Rule 904s resale safe harbor. So long as a distributor still holds some portion of its allotment, it will continue to be unable to rely on Rule 904 with respect to the offer and sale of the unsold allotment. 32
The resale safe harbor is available for offers and sales by all persons except an issuer, a distributor, an affiliate of either (other than specified officers and directors), and any person acting on behalf of any of the foregoing. An offer or sale that meets the applicable conditions of Rule 904 is outside the United States for the purposes of Rule 901. Unlike the reproposal, resales of securities by officers and directors who may be affiliates of the issuer or distributor, and thus would have been ineligible to use the resale safe harbor, may be made in reliance upon that safe harbor provided specified conditions are met. 33 Of course, the resale safe harbor is not available for such officers and directors if they are being used as conduits to sell securities for persons ineligible to rely upon the resale safe harbor.
1.General Conditions
Two general conditions apply to all offers, sales and resales made in reliance on the safe harbors. 34 First, such an offer or sale must be made in an offshore transaction. Second, no directed selling efforts may be made in the United States in connection with an offer or sale of securities in reliance on such safe harbors.
a. Requirement of Offshore Transaction
An offshore transaction 35 is a transaction in which no offer is made to a person in the United States and either of two additional sets of requirements is met. 36 The first alternative requires at the time the buy order is originated, that the buyer be outside the United States (or the seller and any person acting on its behalf reasonably believe that the buyer is outside the United States). 37 The second alternative covers certain transactions executed in, on or through the facilities of a designated offshore securities market 38 (unless the seller or a person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States) and certain transactions executed in, on or through the physical trading floor of an established foreign securities exchange located outside the United States.
The first alternative focuses on the location of the buyer for two reasons. First, the location of the buyer overseas clearly and objectively provides evidence of the offshore nature of the transaction. The requirement that the buyer itself, rather than its agent, be outside the United States reduces evidentiary difficulties and problems in administering the Regulation, both for regulators and private parties attempting to ensure compliance with the conditions of the safe harbor. Second, the buyers location outside the United States supports the expectation that the buyer is or should be aware that the transaction is not subject to registration under the Securities Act.
When the buyer is a corporation or partnership, if an authorized employee places the buy order while abroad, the requirement that the buyer be outside the United States will be satisfied. 39 When the buyer is an investment company, if an authorized person employed by either such company or its investment adviser places the buy order outside the United States, the requirement that the buyer be outside the United States will be satisfied.
The second alternative definition of offshore transaction provides that certain transactions executed in, on or through certain offshore securities markets are offshore transactions, without regard to the location of the person originating the buy order. In order to be considered a sale of securities in, or or through the facilities of an offshore securities market, the sale must be effected outside the United States under the auspices and supervision of such a securities market, by or through a member of such market or any other person authorized to effect such sales thereon. 40 Such execution of a transaction in a foreign marketplace provides objective evidence of the foreign locus of the transaction. 41 Moreover, buyers in such markets may be presumed to rely on the regulatory protections afforded by local law and not U.S. registration requirements.
The definition of offshore transaction has been revised in order to clarify that reliance on designated offshore securities market trading, where neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States, to satisfy the requirement was contemplated only for secondary trading under the resale safe harbor. Nevertheless, to accommodate the infrequent practice of conducting primary offerings (offerings by the issuer, a distributor, any of their respective affiliates, and any persons acting on the behalf of any of the foregoing) on the offshore physical trading floors of established foreign securities exchanges, the definition also has been revised to allow satisfaction of the offshore transaction requirement by such primary offerings. 42
For secondary trading under the resale safe harbor, the Regulation as adopted combines exchange and non-exchange markets within one term. 43 As adopted, designated offshore securities markets includes a list of seventeen foreign securities markets as well as any other organized foreign securities markets that may be designated subsequently by the Commission.
In order to qualify as a designated organized foreign securities market under the reproposal, a market had to be organized under foreign law, have an established operating history, and be overseen by a governmental or self-regulatory body to which securities transactions are reported on a regular basis. Commenters expressed concern that such factors would preclude certain organized foreign markets from qualifying. Each factor was supported by some commenters and criticized by others. As adopted, in addition to the list of foreign securities markets, the definition of designated offshore securities market refers to organized foreign markets and provides a non-exclusive list of attributes that will be considered by the Commission in designating such foreign markets. 44 The existence of all the listed attributes is not requisite to a designation and no single attribute is required. As stated in the Reproposing Release, designation of such organized foreign securities markets will be done on a case-by-case basis by the Commission 45 through the interpretive letter process. 46 The Commission will make its determination regarding designation upon consideration of all the facts pertaining to a particular market.
b. Directed Selling Efforts
A person making an offer or sale otherwise in accordance with the conditions of the issuer safe harbor will be unable to rely on the provisions of the safe harbor if any directed selling efforts are being made in the United States by an issuer, a distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing. 47 With respect to resales under Rule 904, a directed selling effort by the seller, any of its affiliates, or any person acting on behalf of either, will preclude reliance on the resale safe harbor by that seller; directed selling efforts by any other person will not affect the sellers ability to rely on the resale safe harbor.
Under the issuer safe harbor, directed selling efforts in the United States may not be made during the period the issuer, the distributors, their respective affiliates or persons acting on behalf of any of the foregoing, are offering 48 and selling the securities and, for offerings under the second and third safe harbor categories, during the restricted period as well.
Directed selling efforts are those activities that could reasonably be expected, or are intended, to condition the market with respect to the securities being offered in reliance upon the Regulation. this provision precludes, inter alia, marketing efforts in the United States designed to induce the purchase of the securities purportedly being distributed abroad. Activities such as mailing printed material to U.S. investors, 49 conducting promotional seminars in the United States, 50 or placing advertisements with radio or television stations broadcasting into the United States or in publications with a general circulation in the United States, which discuss the offering or are otherwise intended to condition, or could reasonably be expected to condition, the market for the securities purportedly being offered abroad, constitute directed selling efforts in the United States.
Publications with a general circulation in the United States, as defined in the Regulation, include all publications printed primarily for distribution in the United States, and all publications that, on average during the preceding 12 months, have had a circulation in the United States of 15,000 copies or more per issue. 51 Where a foreign publication produces a separate edition that in itself has a general circulation in the United States, only the U.S. edition will be considered a publication with a general circulation in the United States if the affiliated non-U.S. editions together do not meet the definition when the U.S. edition is disregarded. 52
The definition of directed selling efforts specifically excludes several forms of advertisements. 53 First, an advertisement will not be deemed a directed selling effort under the Regulation if publication of the advertisement is required by foreign or U.S. law or the rules or regulations of a U.S. or foreign regulatory or self-regulatory authority, such as a stock exchange, provided that the advertisement contains no more information than legally required and includes a statement to the effect that the securities have not been registered under the Securities Act and may not be offered or sold in the United States (or to a U.S. person, if the advertisement relates to an offering under the second or third issuer safe harbor categories) absent registration or an applicable exemption from the registration requirements. 54
Second, to ameliorate the effect of the Regulation on a foreign publications advertising practices where the United States accounts for a limited portion of its circulation, the definition of directed selling efforts excludes tombstone advertisements in a publication if less than 20% of its circulation, calculated by aggregating its U.S. and comparable non-U.S. editions, 55 is in the United States. To qualify, a tombstone advertisement must: (i) include a legend to the effect that the securities have not been registered under the Securities Act and may not be offered or sold in the United States (or to a U.S. person, if the advertisement relates to an offering under the second or third issuer safe harbor categories) absent registration or an applicable exemption from the registration requirements; and (ii) include no more information than: the issuers name; the amount and title of the securities being sold; a brief indication of the issuers general type of business; the price of the securities; the yield of the securities, if debt securities with a fixed (non-contingent) interest provision; the name and address of the person placing the advertisement and whether such person is participating in the distribution; the names of the managing underwriters; the dates, if any, upon which the sales commenced and concluded; whether the securities are offered by rights issued to security holders and, if so, the class of securities entitled to subscribe, the subscription ratio, the record date, the dates (if any) upon which the rights were issued and expired, and the subscription price; and any legend required by law or any foreign or U.S. regulatory or self-regulatory authority. 56
Distribution or publication in the United States of information, opinions or recommendations concerning the issuer or any class of its securities could constitute directed selling efforts, depending upon the facts and circumstances. 57 Directed selling efforts will not be deemed to exist, however, if the information, opinion or recommendation of a distributor or its affiliate with respect to a reporting issuer: 58 (i) is contained in a publication that is distributed with reasonable regularity in its normal course of business, and includes similar information, opinions or recommendations in that issue with respect to a substantial number of companies in the issuers industry or sub-industry, or contains a comprehensive list of securities recommended by such entity; (ii) is given no materially greater space or prominence in such publication than that given to securities of other issuers; and (iii) with respect to an opinion or recommendation, is no more favorable to the issuer than the opinion or recommendation published by the entity in its last issue addressing the issuer or its securities. 59 When the issuer is not a reporting issuer, the effect on the market of publication or distribution of information, opinions or recommendations about the issuer or its securities can be expected to be more significant due to the possible absence of other publicly available information about the issuer. Distributors and their affiliates should exercise even greater caution in publication or distribution of information, opinions or recommendations concerning non-reporting issuers or their securities.
An isolated, limited contact with the United States generally will not constitute directed selling efforts that result in a loss of the safe harbor for the entire offering. 60 The Regulation likewise is not intended to inhibit routine activities conducted in the United States for purposes other than inducing the purchase or sale of the securities being distributed abroad, such as routine advertising and corporate communications. 61 The dissemination of routine information of the character and content normally published by a company, and unrelated to a securities selling effort, generally would not be directed selling efforts under the Regulation. For example, press releases regarding the financial results of the issuer or the occurrence of material events with respect to the issuer generally will not be deemed to be directed selling efforts. 62
Similarly, the Regulation is not intended to limit or interfere with news stories or other bona fide journalistic activities, or otherwise hinder the flow of normal corporate news regarding foreign issuers. Access by journalists for publications with a general circulation in the United States to offshore press conferences, press releases and meetings with company press spokespersons in which an offshore offering or tender offer is discussed need not be limited where the information is made available to the foreign and U.S. press generally and is not intended to induce purchases of securities by persons in the United States or tenders of securities by U.S. holders in the case of exchange offers. A Preliminary Note to such effect has been added to the Regulation as adopted. 63
Legitimate selling activities carried out in the United States in connection with an offering of securities registered under the Securities Act or exempt from registration pursuant to the provisions of Section 3 or 4 of the Securities Act will not constitute directed selling efforts with respect to offers and sales made under Regulation S. 64
The Regulation generally will not interfere with activities conducted outside the United States, if such activities are legal and customary in the foreign jurisdiction. Such activities may relate to a foreign distribution 65 or to the ordinary course of an issuers business. In this regard, activities carried out abroad such as advertising in newspapers or magazines with no general circulation in the United States or granting interviews or conducting promotional seminars outside the United States and not targeted to the United States will not preclude reliance on the Regulations safe harbor.
The directed selling efforts definition does not preclude investigation of investment opportunities offered and sold offshore. Bona fide site visits to real estate, plants, or other facilities located in the United States and tours thereof conducted for a prospective investor by an issuer, a distributor, any of their respective affiliates, or a person acting on behalf of any of the foregoing, are not directed selling efforts. 66
As noted in the Proposals, 67 the scope of directed selling efforts under Regulation S is not coextensive with activities constituting solicitation, as that term is used in considering the need for registration as a broker-dealer under the Securities Exchange Act of 1934. 68 In a recent Release regarding the applicability of U.S. broker-dealer registration requirements to foreign entities, and adopting Exchange Act Rule 15a-6, 69 the concept of solicitation was defined by the Commission as including any affirmative effort by a broker or dealer intended to induce transactional business for the broker-dealer or its affiliates. 70 Among the examples of solicitation noted in that Release were efforts to induce a single transaction, telephone calls from a broker-dealer to a customer encouraging use of the broker-dealer to effect transactions, and transmission of information, opinions, or recommendations to particular investors in the United States, whether directed at individuals or groups. While limited activities directed at a single customer or prospective investor may be offers for purposes of Regulation S or solicitation for purposes of Rule 15a-6, they generally will not constitute directed selling efforts for purposes of the Regulation because of their confined effect.
The dissemination in the United States of a broker-dealers quotations for a security being offered and sold in reliance on the Regulation could be deemed a directed selling effort. Questions regarding this aspect of directed selling efforts typically will be decided on an individual interpretive basis. 71 Current U.S. distribution of foreign broker-dealers quotations by third-party systems, e.g., systems operated by foreign marketplaces or by private vendors, that distribute such quotations primarily in foreign countries will not be deemed directed selling efforts or an offer, provided that: (i) securities transactions cannot be executed between foreign-broker-dealers and persons in the United States through the systems; and (ii) the issuer, distributors, their respective affiliates, persons acting on behalf of any of the foregoing, foreign broker-dealers and other participants in the systems do not initiate contacts with U.S. persons or persons within the United States, beyond those contacts exempted under Rule 15a-6. 72 The direct dissemination of a foreign market makers quotations to U.S. persons or persons within the United States, such as through a private quotation system controlled by a foreign broker-dealer, will, consistent with Rule 15a-6, be viewed as both an offer and a directed selling effort under Regulation S given that such dissemination is done directly and exclusively for the purpose of inducing purchases of the securities.
2. Issuer Safe Harbor
The issuer safe harbor 73 is available for issuers, distributors, their respective affiliates, and persons acting on behalf of any of the foregoing. The issuer safe harbor distinguishes among three classes of securities, with varying procedural safeguards imposed to have the securities offered come to rest offshore. The criteria used to divide securities into three groups, such as nationality and reporting status of the issuer and the degree of U.S. market interest in the issuers securities, were chosen because they reflect the likelihood of flowback into the United States and the degree of information available to U.S. investors regarding such securities.
Commenters on the Proposals questioned the treatment of guaranteed debt securities for purposes of the three issuer safe harbor categories. Their concern arises when the guarantees and guaranteed securities would fall into different issuer safe harbor categories by virtue of the differing characteristics of the issuers. Where the securities are fully and unconditionally guaranteed by the parent of the issuer, the status of the parent will govern. 74 Thus, if a foreign subsidiary of a reporting U.S. parent company makes an offering in Europe and Asia of debt securities fully and unconditionally guaranteed by the parent, the securities will fall in the second issuer safe harbor category. In the case of full and unconditional guarantees by multiple parents of an issuer of debt securities, the status of the ultimate parent will govern. For example, if a U.S. company, which is wholly owned by a U.S. subsidiary of a foreign issuer with no substantial U.S. market interest in its debt securities, makes an offering of debt securities fully and unconditionally guaranteed by its direct and indirect parents, the securities will fall in the first category. Debt securities of any issuer fully and unconditionally backed by the full faith and credit of a foreign government, directly or by guarantee, fall into the first category. Generally, other offerings of guaranteed securities will be subject to the most restrictive of the categories applicable to the guaranteed security and any guarantees.
For purposes of applying restricted periods 75 under the issuer safe harbor, convertible securities generally are treated as the security into which they are convertible. 76 However, where the securities are not convertible before any applicable restricted period would have ended if such underlying securities had themselves been offered and sold under Rule 903, the restricted period will be determined by the convertible security. Thus, an offering of convertible debt securities by a foreign issuer with substantial U.S. market interest in its debt and equity securities would fall within the second category of the issuer safe harbor if the debt securities are not convertible for 13 months but would fall within the third issuer safe harbor category if the debt securities were convertible after 11 months.
For purposes of the determination of whether substantial U.S. market interest exists, the measurement is made both by reference to the convertible security and the underlying security. 77 If substantial U.S. market interest exists in either, there is substantial U.S. market interest in the convertible securities.
Questions also have been raised as to the status of unit securities offerings under the issuer safe harbor. For purposes of determining the applicable issuer safe harbor category within Rule 903, the units offering generally would be analyzed as if it were an offering of each security separately and the most restrictive category applicable will govern the units offering. If, however, the securities comprising the units may be separately traded immediately after issuance, to the extent feasible the restrictions of the issuer safe harbor may be applied as if the securities comprising the units were distributed in separate offerings. Where a unit comprised of both debt and equity securities is offered and sold under the third category of the issuer safe harbor, the restricted period applicable to equity will apply to the debt portion unless the securities comprising the unit may be separately traded immediately after issuance, in which case the debt and equity securities have their separate applicable restricted periods.
a. Category 1: Foreign Issuers With No Substantial U.S. Market Interest; Overseas Directed Offerings; Securities Backed by the Full Faith and Credit of a Foreign Government; Employee Benefit Plans
The first issuer safe harbor category is available for offers and sales of securities of foreign issuers 78 with no substantial U.S. market interest for their securities, 79 securities offered and sold in overseas directed offerings, 80 securities backed by the full faith and credit of a foreign government, 81 and securities offered and sold pursuant to certain employee benefit plans. Securities issued by foreign entities that do not have a substantial U.S. interest in their securities may be expected to flow back or remain in their major or home market, and are not likely to flow into the United States following an offshore offering. Flowback concerns also are limited where securities of a foreign issuer, even with a substantial U.S. market, are offered and sold in an offering directed at residents of a single foreign jurisdiction and conducted in accordance with local laws, and customary local practices and documentation. Flowback concerns are reduced where a U.S. issuers non-convertible debt securities, asset-backed securities and non-participating preferred stock denominated in a currency other than U.S. dollars are offered and sold in an offering directed at residents of a single foreign jurisdiction, and the offering is conducted in accordance with local laws, and customary local practices and documentation. 82 Securities offered and sold pursuant to employee benefit plans established and administered under foreign law are less likely to flow back into the United States where steps are taken to preclude sales to U.S. residents (other than employees on temporary assignment in the United States) and other conditions specified in the Regulation are met. 83
Offers and sales of securities included in this category may be made in reliance on the safe harbor without any limitations or restrictions other than the general conditions that the transaction be offshore and that no directed selling efforts be made in the United States. 84 Offers and sales of securities to U.S. investors who are overseas at such time will not preclude reliance on the safe harbor for securities in this category. Of course, trading of a substantial amount of such securities in the United States shortly after they had been offered offshore may indicate a plan or scheme to evade the registration provisions; where a transaction is part of such a plan or scheme, Regulation S is not available. 85
(1) Substantial U.S. Market Interest
The definition of substantial U.S. market has been revised in response to comments on the reproposal. The safe harbor incorporates a reasonable belief standard as to the existence of substantial U.S. market interest; trading is measured under the definition of substantial U.S. market interest on a country-by-country basis, rather than market-by-market; and a percentage test has been added to the debt securities criteria.
A substantial U.S. market interest 86 in a class of a foreign issuers equity securities is defined to exist where at the commencement of the offering (a) the securities exchanges and inter-dealer quotation systems 87 in the United States in the aggregate 88 constitute the single largest market for such securities in the shorter of the issuers prior fiscal year or the period since the issuers incorporation 89 or (b) 20 percent or more of the trading in the class of securities took place in, on or through the facilities of securities exchanges and inter-dealer quotation systems in the United States and less than 55 percent of such trading took place in, on or through the facilities of securities markets of a single foreign country in the shorter of the issuers prior fiscal year or the period since the issuers incorporation.
Commenters on the Reproposing Release expressed concern that defining substantial U.S. market interest by use of percentage and numerical tests would present difficulties because records of trading in an issuers equity securities may be inaccessible or incomplete. In response to those concerns, the Regulation as adopted permits an issuer to rely upon its reasonable belief as to the existence of a substantial U.S. market interest. Where a foreign or domestic market does not record all trading in a security, only the trading that is recorded (to the extent such information is available to the issuer), is otherwise known to the issuer, or can be reasonably measured or approximated need be considered. Where a substantial market for the issuers equity securities does not record trading volume, the issuer may reasonably believe there is not a substantial U.S. market interest in that class of securities where less than 20 percent of the class is held of record by persons for whom a U.S. address appears on the records of the issuer, its transfer agent, voting trustee, depositary or person performing similar functions. 90
A substantial U.S. market interest in an issuers debt securities is dependent upon the aggregation of three types of securities. In addition to traditional debt securities, outstanding non-convertible capital stock, the holders of which are entitled to a preference in payment of dividends and in distribution of assets on liquidation, dissolution or winding up of the issuer, but are not entitled to participate in residual earnings or assets of the issuer (referred to hereinafter as non-participating preferred stock), is now included in the measurement of U.S. market interest in debt. The measurement also takes account of securities of a type (referred to hereinafter as asset-backed securities) that either: (a) represents an ownership interest in a pool of discrete assets, or certificates of interest or participation in such assets (including any rights designed to assure servicing, or the receipt or timeliness of receipt by holders of such assets, or certificates of interest or participation in such assets, of amounts payable thereunder), provided that the assets are not generated or originated between the issuer of the security and its affiliates; or (b) are secured by one or more assets or certificates of interest or participation in such assets, and such securities, by their terms, provide for payments of principal and interest (if any) in relation to payments or reasonable projections of payments on assets meeting the requirements of (a) above, or certificates of interest or participations in assets meeting such requirements. Assets, as used in the description of asset-backed securities, include: securities, installment sales, accounts receivable, notes, leases or other contracts, or other assets that by their terms convert into cash over a finite period of time.
With respect to debt securities, substantial U.S. market interest is measured at the commencement of the offering and is defined as: (A) the issuers debt securities, its non-participating preferred stock and its asset-backed securities, in the aggregate, being held of record 91 by 300 or more U.S. persons; (B) $1 billion or more of the principal amount outstanding of its debt securities, the greater of liquidation preference or par value of its non-participating preferred stock, and the principal amount or principal balance of its asset-backed securities, in the aggregate, being held of record by U.S. persons; and (C) 20 percent or more of the principal amount outstanding of its debt securities, the greater of liquidation preference or par value of its non-participating preferred stock, and the principal amount or principal balance of its asset-backed securities, in the aggregate, being held of record by U.S. persons. 92
Substantial U.S. market interest in warrants is measured by the level of market interest in the securities to be purchased upon exercise of the warrants. 93 Substantial U.S. market interest in non-participating preferred stock and asset-backed securities is measured by use of the debt securities test in the definition. 94
Foreign issuers with no substantial U.S. market interest are eligible to rely on the first category of the issuer safe harbor, whether or not they are reporting under the Exchange Act, have securities listed on a U.S. exchange or quoted on NASDAQ, or sponsor an American depositary receipt (ADR) facility.
Commenters on the Reproposing Release also raised questions regarding the responsibility of the parties involved in a distribution for determining whether substantial U.S. market interest exists in the issuers securities. Absent knowledge to the contrary, distributors may rely upon the written advice of the issuer that it has a reasonable belief that no substantial U.S. market interest exists in its securities.
(2) Overseas Directed Offerings
In the reproposal, overseas domestic offerings were limited to offerings by a foreign issuer directed to its home market. The Regulation as adopted expands the concept to overseas directed offerings 95 in response to comments that such offerings do not have significantly more potential for flowback into the United States than the overseas domestic offerings included in the reproposal. Overseas directed offering includes two classes of securities offerings. The first class involves offerings of securities of foreign issuers directed to residents of a single country other than the United States made in accordance with local laws, and customary practices and documentation of that country. 96 The second class involves offerings of non-convertible debt securities, asset-backed securities and non-participating preferred stock of domestic issuers 97 directed to residents of a single foreign country in accordance with local laws, and customary practices and documentation of that country, provided that the principal and interest of the securities are denominated in a currency other than U.S. dollars and the securities are neither convertible into U.S. dollar-denominated securities nor linked to U.S. dollars in a manner that has the effect of converting the securities into U.S. dollar-denominated securities. Related currency or interest rate swap transactions that are commercial in nature will not cause securities denominated in a currency other than the U.S. dollar to be treated as if they were denominated in U.S. dollars. 98
Of particular importance in the concept of overseas directed offering is the requirement that such offerings be directed at a single country. Where the foreign issuer, a distributor, any of their respective affiliates, or a person acting on behalf of any of the foregoing, knows or is reckless in not knowing that a substantial portion of the offering will be sold or resold outside that country, the offering will not qualify as an overseas directed offering. 99
(3) Employee Benefit Plans
Offerings of securities to employees of a domestic or foreign issuer or its affiliates pursuant to an employee benefit plan established and administered in accordance with laws of a foreign country and customary practices and documentation of such country may be made under the first issuer safe harbor category, provided certain other conditions are met. 100 The other conditions are: (i) the securities are issued in compensatory circumstances for bona fide services which are rendered to the issuer or its affiliates in connection with their businesses and which are not rendered in connection with the offer and sale of securities in a capital-raising transaction; 101 (ii) the interests in the benefit plan are not transferable other than by will or the laws of descent or distribution; (iii) the issuer takes reasonable steps to preclude the offer and sale of interests in the benefit plan or securities under the benefit plan to U.S. residents other than employees on temporary assignment in the United States; and (iv) documentation used in connection with any offer pursuant to the plan contains a statement that the securities have not been registered under the Act and may not be offered or sold in the United States unless registered or an exemption from registration is available. 102
The term employee as used in the Regulation includes consultants or advisors, provided bona fide services are rendered by such persons to the issuer or its affiliates in connection with their businesses and such services are not rendered in connection with the offer or sale of securities in a capital-raising transaction. 103 Further, satisfaction by the issuer of the offshore transaction requirement will not be deemed precluded by a plan trustees open market purchases in the United States for purposes of obtaining the securities to be offered and sold to employees pursuant to such an employee benefit plan in reliance on the issuer safe harbor.
b. Category 2: Reporting Issuers; Non-Reporting Foreign Issuers Debt Securities; Non-Reporting Foreign Issuers Non-Participating Preferred Stock and Asset-Backed Securities
Securities of all domestic issuers that file reports under the Exchange Act are subject, under the second safe harbor category, 104 both to the general conditions that an offer or sale be an offshore transaction and that no directed selling efforts may be made in the United States, and to specified selling restrictions. Securities of foreign reporting issuers 105 with substantial U.S. market interest are subject to the same restrictions. The selling restrictions applicable to the second category are designed to protect against an indirect unregistered public offering in the United States during the period the market is most likely to be affected by selling efforts offshore. In the event flowback of reporting issuers securities does occur after the restricted period, the information relating to such securities publicly available under the Exchange Act generally should be sufficient to ensure investor protection.
The second category also applies to offerings of debt securities of any non-reporting foreign issuer. The inclusion of those offerings in this category reflects the view that offering restrictions applicable to the category provide adequate protection against an indirect U.S. distribution because of the generally institutional nature of the debt market and the trading characteristics of debt securities. Moreover, because debt securities are usually issued in separate classes or series, debt securities can be tracked more easily to detect use of offshore transactions to evade the registration obligation for distributions into the United States.
Reflecting public comment, certain equity securities of non-reporting foreign issuers have been moved to this category from the more restrictive third issuer safe harbor category because of the similarity of the market for these securities to the debt market. Non-participating preferred stock 106 and asset-backed securities 107 of non-reporting foreign issuers are now included in the second category. 108
Two types of selling restrictions exist for securities in the second category--transactional restrictions and offering restrictions.
(1) Transactional Restrictions 109
Transactional restrictions require that the securities sold under the safe harbor prior to the expiration of a 40-day restricted period 110 not be offered or sold to or for the benefit or account of a U.S. person. 111 Persons relying on the second issuer safe harbor category are required to ensure (by whatever means they choose) that any non-distributor to whom they sell securities is a non-U.S. person and is not purchasing for the account or benefit of a U.S. person. 112 Transactional restrictions also require a distributor selling securities to certain securities professionals to send a confirmation or notice to such purchasers advising that the purchaser is subject to the same restrictions on offers and sales that apply to a distributor. 113
(a) U.S. Person
Rule 902 (o) contains a definition of the term U.S. person. Unlike no-action letters pursuant to Release 4708, U.S. residency rather than U.S. citizenship is the principal factor in the test of a natural persons status as a U.S. person under Regulation S. 114 Thus, for example, a French citizen resident in the United States is a U.S. person. 115
Trusts and estates generally are U.S. persons for purposes of the Regulation if any trustee, executor or administrator is a U.S. person. In response to commenters concerns with respect to the competitive effects on U.S. professional fiduciaries, the definition of U.S. person has been revised so that an estate with a U.S. professional fiduciary acting as executor or administrator is not deemed a U.S. person if: an executor or administrator who is not a U.S. person has sole or shared investment discretion with respect to the estate assets, and the estate is governed by foreign law. An exclusion from the definition of U.S. person is provided for a trust with a U.S. professional fiduciary acting as trustee, provided a trustee who is not a U.S. person has sole or shared investment discretion with respect to the trust assets, and no beneficiary (and no settlor if the trust is revocable) is a U.S. person.
With respect to forms of business organization, such as corporations and partnerships, the definition codifies and elaborates on positions set forth in no-action letters. With regard to such entities, the place of incorporation or organization generally controls. 116 The status of subsidiaries and affiliated companies, which generally have separate legal identities, is determined according to the place of incorporation or organization. An entity organized under foreign law by a U.S. person principally for the purpose of investing in unregistered securities is a U.S. person unless organized and owned by accredited investors (as defined in Regulation D) who are not natural persons, estates or trusts.
A branch or agency of a foreign entity is treated as a U.S. person if it is located in the United States. Branches and agencies of U.S. banks and insurance companies located outside the United States are not treated as U.S. persons, if they: (i) operate for valid business reasons; (ii) are engaged in the banking or insurance business; and (iii) are subject to substantive local banking or insurance regulation. 117
With respect to fiduciary accounts (other than trusts and estates), the definition generally treats the person with the investment discretion as the buyer; therefore the status of that person governs. Thus, where a U.S. person has discretion to make investment decisions for the account of a non-U.S. person, the account is treated as a U.S. person. Conversely, where a non-U.S. person makes investment decisions for the account of a U.S. person, that account is not treated as a U.S. person. Several exceptions from that general principle, however, are established in the definition.
In light of the serious competitive disadvantages that might be faced by U.S. professional fiduciaries, the Commission is excepting from the definition of U.S. person U.S. professional fiduciaries acting with discretion for the accounts of persons (other than trusts and estates) who are not themselves U.S. persons. 118 Consistent with the Baer Securities Corporation letter, 119 U.S. professional fiduciaries acting with investment discretion are deemed U.S. persons for purposes of Regulation S only when they are acting for the account of U.S. persons.
Certain multinational organizations and their agencies, affiliates and pension plans are specifically excluded from the definition of U.S. person. The definition also excludes all similar multinational entities. 120 The staff interpretive letter process will be available for future questions regarding exclusion of specific multinational organizations.
The reproposal would not have permitted offers and sales to such professional fiduciaries and multinational entities to be made inside the United States. Numerous commenters objected to the fact that, contrary to the Baer letter, sales to such persons would have to comply with the offshore transaction requirement and the restriction against directed selling efforts in the United States. In response to those comments, the definition of directed selling efforts has been revised to exclude contacts with U.S. professional fiduciaries acting with investment discretion for the accounts of non-U.S. persons, in their capacities as such, and with multinational organizations excluded from the definition of U.S. person. 121 Offers and sales to such persons also are deemed to be made in offshore transactions. 122 Nevertheless, if a U.S. professional fiduciary were offered and sold securities for accounts of non-U.S. persons in reliance upon the safe harbor but placed such securities in accounts held for the benefit of U.S. persons, that fiduciary could be deemed an underwriter for purposes of the Securities Act and may have distributed unregistered securities in violation of Section 5.
(b)Measurement of the Restricted Period
The 40-day restricted period begins to run on the later of the date of the closing of the offering or the date the first offer of the securities to persons other than distributors is made. 123
In the case of a continuous offering, the Commission originally proposed that the restricted period would not commence until completion of the distribution, as determined and certified by the lead managing underwriter. Other than as discussed below, this position has been retained.
The reproposal provided that in the case of offerings of non-convertible debt securities issued in clearly distinct and identifiable tranches or issues, the 40-day restricted period would commence upon completion of the distribution of that tranche or issue, as certified by the lead managing underwriter or person performing similar functions. Public comments on the reproposal objected that a further requirement, suggested in the text of the release, that 40 days would have to pass from the sale of the tranche to the sale of another identifiable tranche, would effectively foreclose reliance on Regulation S for the conduct of medium-term note (MTN) programs 124 outside the United States. In such programs, sales of identifiable tranches may not be separated by 40 days from the sale of another such tranche. Recognizing the legitimacy of this offering technique, the Commission agrees that the commencement of a restricted period should not be delayed because of the coincidence of two independent sales in such a continuous offering within a period of 40 days. As adopted, the Regulation provides that in such continuous debt offerings, the restricted period will run from the managing underwriters certification that the distribution of an identifiable tranche of securities has been completed. Under this method, the Commission believes that continuous offerings, including MTN programs, could be conducted in accordance with Regulation S.
Commenters on the Reproposing Release also expressed concern that warrants offered pursuant to the second or third issuer safe harbor categories could never be offered or sold to U.S. persons absent registration or an available exemption from registration. 125 To address those concerns, the Regulation as adopted provides that the restricted period of the underlying securities will coincide with the restricted period for the warrants if certain procedures are followed to ensure that the underlying securities are not sold to U.S. persons except in a registered or exempt transaction. 126 The required procedures are threefold. First, the warrants must contain a legend stating that they and the underlying securities have not been registered under the Securities Act, and that the warrants may not be exercised by or on behalf of U.S. persons unless registered or an exemption from registration is available. 127 Second, the person exercising the warrant must be required either to certify that it is not a U.S. person and that the warrants are not being exercised on behalf of a U.S. person, or to provide an opinion of counsel that the securities have been registered or that an exemption from registration is available. Finally, procedures must be adopted to ensure that the warrants may not be exercised in the United States and the underlying securities may not be delivered to the United States, 128 absent registration or an available exemption from registration.
(c)ADRs and the Restricted Period
No substantive changes have been made from the reproposal with respect to ADRs. Like the reproposal, the Regulation as adopted focuses on the sale by a depositary of ADRs representing securities of the class distributed. Such sales are permitted if (1) the ADRs represent securities acquired by the depositary prior to the distribution, or (2) the depositary determines by examination of the certificate or other evidence that the security to be deposited is not subject to a restricted period and was neither borrowed nor deposited with the intention that it be replaced with securities subject to the restricted period. Whether any sales may be made prior to the expiration of a restricted period depends in part on what steps the issuer of deposited securities is willing or able to take to identify the securities it is distributing. Issuance of ADRs in exchange for underlying securities and withdrawal of deposited securities by ADR holders is not precluded by the safe harbor provisions.
A single method of identifying the securities in question is not specified because a particular method may not be consistent with applicable rules in all countries. Examples of possible methods of identifying newly distributed securities include the underlining of dates, the use of different colors for the certificates, the use of legends, the use of identified certificate numbers, and the coding of securities by the transfer agent.
(d)Confirmations
Until the expiration of the restricted period, another condition of the second issuer safe harbor category is that a distributor selling securities to a distributor, dealer, or person receiving remuneration with respect to the securities, prior to the expiration of the restricted period, send a confirmation or other notice stating that the purchaser is subject to the same restrictions on offers and sales as the distributor. 129 As in the Reproposing Release, the confirmation need only note the applicable restrictions, rather than seek to create a binding agreement to abide by the restrictions. The Regulation is conditioned on transmission, rather than receipt or delivery of the confirmation, to facilitate distributors compliance burden.
In light of the movement towards paperless markets, the phrase confirmation or other notice, accommodates paperless transactions. The other notice could include a notice given on screen rather than on paper or a notice given on the telephone, provided that the seller kept written records of notices given. In response to commenters concerns, the Commission has determined that screen notices may be given in summary form, provided all subscribers to the screen-based system are sent, prior to first use and periodically thereafter, a key that indicates what each summary notice represents and includes the full text of each notice.
(2)Offering Restrictions
Offering restrictions are procedures that must be adopted with regard to the entire offering by the issuer, distributors, their respective affiliates, and all persons acting on behalf of any of the foregoing, in order for a transaction to be in compliance with the second or third categories of the issuer safe harbor. Failure to implement the offering restrictions precludes the availability of the issuer safe harbor for all parties. 130 In effect, offering restrictions are procedures set up by such persons to ensure compliance with the transactional restrictions, particularly the restrictions on offer or sale of the securities to or for the account or benefit of U.S. persons. When the issuer, a distributor, an affiliate of either, or a person acting on behalf of any of the foregoing, is the seller of securities, that person is in a position to ensure, and should ensure, that procedures designed to discourage flowback are used with respect to the entire offering.
The offering restrictions, which are the same for both the second and third issuer safe harbor categories, have been modified from those developed in no-action letters under Release 4708. The offering restrictions require distributors, who by definition are participating in the distribution pursuant to a contractual arrangement, to contract that all their offers and sales of the securities will be made in accordance with the safe harbor (or pursuant to registration under the Securities Act or an exemption therefrom). 131
The issuer, distributors, their respective affiliates, and persons acting on behalf of any of the foregoing, must ensure that certain materials disclose that the securities have not been registered and may not be offered or sold in the United States or to a U.S. person (other than a distributor), unless registered or an exemption from registration is available. Disclosure of the restrictions must appear in any prospectus, offering circular or other document (other than a press release) used in connection with the distribution prior to the expiration of the restricted period. All advertisements relating to the securities are subject to that requirement. The disclosure may appear in summary form on prospectus cover pages and in advertisements. 132
c. Category 3: Non-Reporting U.S. Issuers; Equity Offerings by Non-Reporting Foreign Issuers With Substantial U.S. Market Interest
All securities not covered by the prior two categories fall into this residual category, which is subject to procedures intended to protect against an unregistered U.S. distribution where there is little (if any) information available to the marketplace about the issuer and its securities and there is a significant likelihood of flowback. This category includes securities of non-reporting U.S. issuers and equity securities of non-reporting foreign issuers with substantial U.S. market interest in their equity securities.
As in the case of securities of reporting issuers, offerings of securities in this category are subject to the two general conditions and to offering and transactional restrictions. Offering restrictions that must be adopted for offerings of these securities are the same as for offerings of securities of reporting issuers. In contrast to offerings in the second category, more restrictive transactional restrictions to prevent flowback are applicable.
In essence, the restrictive procedures are similar to those that evolved under the no-action letters involving Release 4708. The procedures adopted are essentially those included in the Reproposing Release. These distinguish between debt and equity securities, recognizing that debt securities are generally sold in institutional markets and that the likelihood of flowback is less than in the case of common equity. The category includes a restricted period of one year for equity securities and forty days for debt securities. Two types of a non-reporting U.S. issuers securities, which would include non-convertible, non-participating preferred stock and asset-backed securities, will be subject to the same restrictions as debt securities in the third category, including a 40-day restricted period rather than a one-year restricted period. Offerings of securities on a non-reporting foreign issuer of those two types have been added to the second issuer safe harbor category. 133
Offerings of equity securities in this category are subject to restrictions similar to those afforded no-action treatment in InfraRed Associates, Inc. 134 Prior to the expiration of the one-year restricted period, the securities may not be sold to U.S. persons or for the account or benefit of U.S. persons (other than distributors). Purchasers of the securities (other than distributors) are required to certify that they are not U.S. persons and are not acquiring the securities for the account or benefit of a U.S. person other than persons who purchased securities in transactions exempt from the registration requirements of the Securities Act. 135 Such purchasers are also required to agree only to sell the securities in accordance with the registration provisions of the Securities Act or an exemption therefrom, or in accordance with the provisions of the Regulation.
With respect to equity securities of domestic issuers, the safe harbor requires that a legend be placed on the shares stating that transfer is prohibited other than in accordance with the Regulation. The safe harbor further requires that any issuer, by contract or a provision in its bylaws, articles, charter or comparable document, refuse to register any transfer of equity securities not made in accordance with the provisions of the Regulation. Where bearer securities are being sold, or foreign law prevents an issuer from refusing to register securities transfers, use of reasonable procedures, such as a legend, will suffice to satisfy the requirement designed to prevent transfer of equity securities other than in accordance with the Regulation.
Purchasers of debt securities offered under the third issuer safe harbor category (other than distributors) are subject to different restrictions than equity purchasers under this category. Prior to the expiration of the forty-day restricted period, the securities may not be sold to U.S. persons or for the account or benefit of U.S. persons (other than distributors). The debt securities must be represented by temporary global securities not exchangeable for definitive securities until expiration of the restricted period. Upon expiration, persons exchanging their temporary global security for the definitive security are required to certify beneficial ownership by: a non-U.S. person or a U.S. person who purchased securities in a transaction that did not require registration under the Securities Act. 136
Distributors selling equity of debt securities prior to the expiration of the restricted period are required to send a confirmation or other notice to purchasers who are distributors, dealers or persons receiving remuneration in connection with the sale. The notice must state that the purchaser is subject to the same restrictions on offers and sales as the distributor. Non-distributors are not required to send such a confirmation or notice.
3. Resale Safe Harbor
Under the reproposal, the resale safe harbor was available for offers and sales by all persons other than an issuer, a distributor, their respective affiliates, and any person acting on behalf of any of the foregoing. 137 As suggested by several commenters, the Regulation as adopted also specifically allows certain officers and directors of issuers and distributors to rely upon the resale safe harbor. Officers and directors of such persons who are affiliates would otherwise be unable to rely upon the resale safe harbor. As adopted, an officer or director of an issuer or distributor is eligible to rely upon the resale safe harbor if the sole reason such officer or director may be deemed an affiliate is by virtue of position, provided no special selling compensation is paid in connection with the offers and sales by such officer or director and the general conditions (and conditions imposed upon dealers and certain securities professionals, as applicable) are satisfied. Special selling compensation includes any selling concession, fee or other remuneration, other than the usual and customary brokers commissions that would be received by persons executing such sales as agents. 138 Of course, where such officer or director is being used as a conduit to offer and sell securities in reliance on the resale safe harbor by persons ineligible to rely thereon, the resale safe harbor will not be available. 139
Persons other than: (1) dealers and persons receiving a selling concession, fee or other remuneration in respect of the securities offered or sold, which may include subunderwriters (all referred to herein as securities professionals), and (2) affiliated officers and directors eligible to rely upon the resale safe harbor, may resell any securities in reliance on this safe harbor, with no restrictions other than the general conditions that the offer and sale be made in an offshore transaction (including offers and sales in a designated offshore securities market not prearranged with a buyer in the United States) and without directed selling efforts within the United States.
Resales by securities professionals also are subject to the offshore transaction requirement and the prohibition on directed selling efforts (and the conditions applying to affiliated officers and directors, as applicable). In addition, if the securities being resold are not in the first issuer safe harbor category and the resale is made prior to the expiration of any applicable restricted period, neither the securities professional nor any person acting on its behalf may knowingly offer or sell to a U.S. person. 140 Further, if the selling securities professional or a person acting on its behalf knows the purchaser of the securities is a securities professional, the seller is required to send a confirmation or other notice of the applicable restrictions to the purchaser. 141
The resale safe harbor is available for the resale offshore of any securities, whether or not acquired in an offshore transaction under Regulation S. Resales pursuant to Rule 904 of securities originally placed privately will not affect the validity of the private placement exemption relied upon by the issuer.
4. Safe Harbor Protections
If an issuer, distributor, any of their respective affiliates (other than officers and directors relying on the resale safe harbor), or any person acting on behalf of any of the foregoing: (1) fails to comply with the offering restrictions; or (2) engages in a directed selling effort in the United States, the Rule 903 safe harbor is unavailable to any person in connection with the offering of securities. 142 If the issuer, a distributor, any of such respective affiliates, or any person acting on behalf of any of the foregoing, fails to comply with any other requirement of the issuer safe harbor, 143 the safe harbor is not available for any offer or sale in reliance thereon made by the person failing to comply, its affiliates or persons acting on their behalf. The availability of Rule 903 for other persons offers and sales of securities is unaffected.
Under the reproposal, the failure to comply with the conditions, other than the offering restrictions and the restrictions on directed selling efforts in the United States, would have precluded reliance upon the safe harbor only for non-complying offers and sales. Under Rule 903 as adopted, reliance upon the safe harbor for all offers and sales made by a non-complying person and its affiliates is precluded as an appropriate incentive to comply fully with the conditions of the safe harbor.
The availability of the Rule 904 resale safe harbor generally is unaffected by the actions of the issuer, distributor, their respective affiliates (other than certain officers and directors relying upon Rule 904), or persons acting on behalf of any of the foregoing. An offer or sale of securities made in compliance with the provisions of Rule 904 is within the safe harbor, notwithstanding non-complying offers or resales by other unaffiliated persons not acting on behalf of the seller. 144
As Preliminary Note 2 states, the Regulation is not available to any transaction or series of transactions that, although in technical compliance with the rules, is part of a plan or scheme to evade the registration provisions of the Securities Act. Thus, for example, a participant in a distribution, regardless of whether it literally takes all steps required for reliance upon the protection of the Regulation, does not have the protection of the Regulation if it knows or is reckless in not knowing that a person to whom it sells securities in reliance upon the Regulation will not comply with the requirements. Clearly, if an underwriter were told by a dealer to whom it intended to sell securities in reliance upon Rule 903 that the dealer had a customer in New York waiting for the securities, that underwriter would not be able to rely upon the protection of the Rule in connection with its sale to that dealer, even if the underwriter complied with all the Regulations requirements. The same would be true if the underwriter knew or was reckless in not knowing that the dealer to whom it intended to sell had consistently sold to U.S. residents in violation of resale restrictions in other offerings made pursuant to the safe harbor provisions of the Regulation. If, on the other hand, an underwriter sold to a dealer and the dealer sold to a customer in the United States, and the underwriter did not know and was not reckless in failing to know that the non-conforming sale would occur, the underwriter would not lose the protection of the safe harbor.
c. Interaction With Other Securities Act Provisions
1. Contemporaneous U.S. and Offshore Offerings
Offshore transactions made in compliance with Regulation S will not be integrated with registered domestic offerings or domestic offerings that satisfy the requirements for an exemption from registration under the Securities Act, even if undertaken contemporaneously. Resales of securities offered and sold in offshore transactions pursuant to Rule 144A are consistent with Rule 904. Of course, the securities sold pursuant to Rule 144A would be restricted securities.
2. Revisions to Rules
References to Release 4708 in certain rules under the Securities Act are being revised to make reference to Regulation S. Preliminary Note 7 to Regulation D 145 stated: Offers and sales of securities to foreign persons made outside the United States effected in a manner that will result in the securities coming to rest abroad generally need not be registered. A reference to Release 4708 and a discussion of its interaction with Regulation D followed that statement. That Preliminary Note is being amended to delete the reference to Release 4708, refer to this Release and affirm the principle that the Regulation may be relied upon for such offers and sales even if coincident offers and sales are made in accordance with Regulation D inside the United States.
The Note to Rule 502(a) of Regulation D 146 states that transactions meeting the requirements of an exemption generally will not be integrated with simultaneous offerings being made outside the United States in a manner that the securities come to rest abroad. That statement was followed by a reference to Release 4708. The discussion of the non-integration policy and the reference to Release 4708 are being replaced by discussion of and references to Regulation S.
D. Interaction With Trust Indenture Act
The Trust Indenture Act of 1939 (Trust Indenture Act) 147 applies generally to the offer and sale of debt securities if the means or instruments of interstate commerce or the mails are used. In such cases, the securities must be issued under an indenture which conforms to the requirements of and has been qualified under the Trust Indenture Act, unless an exemption is available. 148
The staff has granted numerous no-action letters involving offers and sales of securities otherwise than under a qualified indenture, where the securities involved were being offered and sold in reliance upon Release 4708. 149 The Commission is continuing this position with respect to offers and sales of securities made under the safe harbor provisions of Rules 903 and 904 in Regulation S. Specifically, the Commission will not take any enforcement action under the Trust Indenture Act where an offer and sale of securities is made otherwise than under a qualified indenture, if the offer and sale are made in compliance with Rule 903 or 904. 150
E. Interaction with Investment Company Act
Consistent with the proposals, the Regulation is available for offers and sales of securities of any investment company that is not registered or required to register under the 1940 Act. 151 As originally proposed, the Regulation was not applicable to offers and sales of securities issued by investment companies registered or required to register under the 1940 Act. In the Proposing Release, the Commission set forth several reasons for drawing a distinction between investment company and other securities, but solicited comment as to whether the Regulation should be revised to allow its use for offers and sales of investment company securities. 152
Several commenters expressed the view that Regulation S should be extended to offers and sales of securities issued by registered closed-end investment companies (closed-end funds). They stated that the Commissions concern regarding redemptions is not applicable to offerings by closed-end funds, which do not issue redeemable securities; that closed-end fund offerings have more in common with offerings of industrial issuers than offerings of mutual funds; that the substantive rules under the Securities Act governing the registration of offerings by closed-end funds should be similar to those governing industrial company offerings; and that offering documents for offshore sales would contain adequate disclosures due to the applicability of the antifraud provisions of the Securities Act.
As adopted, the Regulation is available with respect to offers and sales of securities issued by closed-end funds registered under the 1940 Act. Because such investment companies do not file reports under the Exchange Act, offerings of their securities generally will fall into the third category for purposes of the issuer safe harbor. 153 In addition, the Commission requests comment as to whether to extend the application of the Regulation to offers and sales of securities issued by registered mutual funds and unit investment trusts (UIT). Comment is requested with respect to whether the concerns outlined in Release 5068 and the Proposing Release continue to be significant in connection with offerings of such mutual fund and UIT securities and, if so, how they can be addressed. Because mutual funds and UITs issue redeemable securities, the concern addressed in Release 5068 regarding redemptions appears to be valid. Could the concern about redemptions be addressed adequately by relying on the antifraud provisions of the Securities Act and any disclosure requirements of the foreign country in which the securities are sold? Would application of the Regulation meet the legitimate expectations of investors and foreign regulators when U.S. mutual funds are offered and sold abroad? Comment is also specifically requested regarding whether the restrictions and procedures required by the third category of the issuer safe harbor of the Regulation are appropriate for offers and sales of investment company securities, or whether additional, fewer or different restrictions and procedures are warranted. For example, should offering documents be required to include: a description of the substantive requirements of the 1940 Act; a description of the ways in which the redemption procedures of mutual funds and UITs differ from those of similar investment vehicles subject to regulation in the country where the offer is made; and risk factor disclosure? Also, should delivery of a disclosure document be required in connection with foreign offers and sales of such mutual fund and UIT securities even if not required in the jurisdiction where the offer and sale are made? Finally, comment is requested as to whether any rules or guidelines would be appropriate for the use of advertising and sales literature in connection with offshore offers and sales of mutual fund and UIT securities under the Regulation.
IV. COST-BENEFIT ANALYSIS
It appears to the Commission that, while it is possible that some additional costs to issuers, distributors or other sellers may result from structuring a transaction in accordance with the requirements of a safe harbor or the General Statement, such costs will be outweighed by the savings of the costs of registration and the benefit derived from assurance that registration need not be undertaken. In addition, the Commission believes that the streamlined method to assure that the securities come to rest outside the United States will also reduce costs.
V. AVAILABILITY OF FINAL REGULATORY FLEXIBILITY ANALYSIS
A Final Regulatory Flexibility Analysis in accordance with the Regulatory Flexibility Act has been prepared with respect to the Regulation and the amendments to Regulation D. A summary of a corresponding Initial Regulatory Flexibility Analysis was included in the Proposing Release, and a summary of a revised corresponding Initial Regulatory Flexibility Analysis was included in the Reproposing Release. Members of the public who wish to obtain a copy of the Final Regulatory Flexibility Analysis should contact Anita Klein, Office of International Corporate Finance, Division of Corporation Finance, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
VI. SUMMARY OF INITIAL REGULATORY FLEXIBILITY ANALYSIS
An Initial Regulatory Flexibility Analysis in accordance with 5 U.S.C. 603 has been prepared concerning the proposal to extend Regulation S to registered mutual funds and UITs. This analysis notes that the proposal is intended to provide such mutual funds and UITs with the same guidance concerning extraterritorial offerings of securities that is provided by Regulation S to other issuers.
This proposal will not result in any significant increase in reporting, recordkeeping or compliance requirements. No alternatives to this proposal consistent with its objectives were found. Small entities, like any other issuers, would be entitled to the benefits of the guidance and safe harbor provided by extension of Regulation S.
A copy of the analysis may be obtained by contacting Kenneth J. Berman, Office of Disclosure and Adviser Regulation, Division of Investment Management, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
VII. PAPERWORK REDUCTION
OMB Number: 3235-0357. Expires April 19, 1993. Estimated average burden hours per response--1.0.
VIII. EFFECTIVE DATE
Regulation S and the amendments to Regulation D shall be effective immediately upon publication in the FEDERAL REGISTER, in accordance with the Administrative Procedure Act, which allows effectiveness in less than 30 days after publication for, inter alia, a substantive rule which grants or recognizes an exemption or relieves a restriction and interpretative rules and statements of policy. 5 U.S.C. §553(d)(1) and (2).
IX. STATUTORY BASIS AND TEXT OF REGULATION AND REGULATION AMENDMENTS
This Regulation and the amendments to Regulation D are being adopted pursuant to Sections 2, 3, 4, and 19 of the Securities Act of 1933.
List of Subjects in 17 CFR Part 200
Administrative practice and procedure; Authority delegations; Organization and functions.
List of Subjects in 17 CFR Part 230
Reporting and recordkeeping requirements; Securities.
TEXT OF REGULATION AND REGULATION AMENDMENTS
In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is amended as follows:
PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION REQUESTS
1.The authority citation for Part 200 Subpart A continues to read as follows:
AUTHORITY: Secs. 19, 23, 48 Stat. 85, 901, as amended; sec. 20, 49 Stat. 833; sec. 319, 53 Stat. 1173; secs 38, 211, 54 Stat. 841, 855; sec. 308, 101 Stat. 1254 (15 U.S.C. 77s, 78d-1, 78d-2, 78w, 79t, 77sss, 80a-37, 80b-11), unless otherwise noted.***
2.Section 200.30-1 is amended by adding new paragraph (j) as follows:
§200.30-1 Delegation of authority to Director of Division of Corporation Finance.
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(j) With respect to the Securities Act of 1933 (15 U.S.C. §77a et seq.) and Regulation S thereunder (§230.901 et seq. of this chapter), and in consultation with the Director of the Division of Market Regulation, to designate any foreign securities exchange or non-exchange market as a designated offshore securities market within the meaning of Rule 902(a) (§230.902(a) of this chapter).
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1.The authority citation for Part 230 is amended by adding the following citations: (Citations before *** indicate general rulemaking authority). Authority: Sec. 19, 48 Stat 815, as amended; 15 U.S.C. §77s *** Sections 230.901-230.904 and amendments to Regulation D also issued under Sections 2, 3 and 4, 15 U.S.C. §§77b, 77c, and 77d.
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2.By revising Preliminary Note 7 to Regulation D, §§230.501 through 230.508, to read as follows:
Regulation D Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933
Preliminary Notes
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7.Securities offered and sold outside the United States in accordance with Regulation S need not be registered under the Act. See Release No. 33-6863. Regulation S may be relied upon for such offers and sales even if coincident offers and sales are made in accordance with Regulation D inside the United States. Thus, for example, persons who are offered and sold securities in accordance with Regulation S would not be counted in the calculation of the number of purchasers under Regulation D. Similarly, proceeds from such sales would not be included in the aggregate offering price. The provisions of this note, however, do not apply if the issuer elects to rely solely on Regulation D for offers or sales to persons made outside the United States.
3.By revising the Note to paragraph (a) of §230.502 to read as follows:
§230.502 General conditions to be met.
(a)***
Note: The term offering is not defined in the Act or in Regulation D. If the issuer offers or sells securities for which the safe harbor rule in paragraph (a) of this §230.502 is unavailable, the determination as to whether separate sales of securities are part of the same offering (i.e. are considered integrated) depends on the particular facts and circumstances. Generally, transactions otherwise meeting the requirements of an exemption will not be integrated with simultaneous offerings being made outside the United States in compliance with Regulation S. See Release No. 33-6863.
The following factors should be considered in determining whether offers and sales should be integrated for purposes of the exemptions under Regulation D:
(a)whether the sales are part of a single plan of financing:
(b)whether the sales involve issuance of the same class of securities;
(c)whether the sales have been made at or about the same time;
(d)whether the same type of consideration is being received; and
(e)whether the sales are made for the same general purpose.
See Release 33-4552 (November 6, 1962) [27 FR 11316].
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4.By adding new Regulation S, consisting of Preliminary Notes and §230.901--§230.904, to read as follows:
REGULATION S--RULES GOVERNING OFFERS AND SALES MADE OUTSIDE THE UNITED STATES WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933.
Preliminary Notes
§230.901. General statement.
§230.902. Definitions.
§230.903. Offers or sales of securities by the issuer, a distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing; conditions relating to specific securities.
§230.904. Resales.
Preliminary Notes
1.The following rules relate solely to the application of Section 5 of the Securities Act of 1933 (the Act) [15 U.S.C. §77e] and not to antifraud or other provisions of the federal securities laws.
2.In view of the objective of these rules and the policies underlying the Act, Regulation S is not available with respect to any transaction or series of transactions that, although in technical compliance with these rules, is part of a plan or scheme to evade the registration provisions of the Act. In such cases, registration under the Act is required.
3.Nothing in these rules obviates the need for any issuer or any other person to comply with the securities registration or broker-dealer registration requirements of the Securities Exchange Act (the Exchange Act), whenever such requirements are applicable.
4.Nothing in these rules obviates the need to comply with any applicable state law relating to the offer and sale of securities.
5.Attempted compliance with any rule in Regulation S does not act as an exclusive election; a person making an offer or sale of securities may also claim the availability of any applicable exemption from the registration requirements of the Act.
6.Regulation S is available only for offers and sales of securities outside the United States. Securities acquired overseas, whether or not pursuant to Regulation S, may be resold in the United States only if they are registered under the Act or an exemption from registration is available.
7.Nothing in these rules precludes access by journalists for publications with a general circulation in the United States to offshore press conferences, press releases and meetings with company press spokespersons in which an offshore offering or tender offer is discussed, provided that the information is made available to the foreign and United States press generally and is 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.
8.The provisions of this Regulation S shall not apply to offers and sales of securities issued by open-end investment companies or unit investment trusts registered or required to be registered or closed-end investment companies required to be registered, but not registered, under the Investment Company Act of 1940 [15 U.S.C. §80a-1 et seq.] (the 1940 Act).
§230.901. General statement.
For the purposes only of Section 5 of the Act [15 U.S.C. §77e], the terms offer, offer to sell, sell, sale, and offer to buy shall be deemed to include offers and sales that occur within the United States and shall be deemed not to include offers and sales that occur outside the United States.
§230.902. Definitions.
As used in Regulation S, the following terms shall have the meanings indicated.
(a)Designated Offshore Securities Market. Designated offshore securities market means:
(1)the Eurobond market, as regulated by the Association of International Bond Dealers; the Amsterdam Stock Exchange; the Australian Stock Exchange Limited; the Bourse de Bruxelles; the Frankfurt Stock Exchange; The Stock Exchange of Hong Kong Limited; The International Stock Exchange of the United Kingdom and the Republic of Ireland, Ltd.; the Johannesburg Stock Exchange; the Bourse de Luxembourg; the Borsa Valori di Milan; the Montreal Stock Exchange; the Bourse de Paris; the Stockholm Stock Exchange; the Tokyo Stock Exchange; the Toronto Stock Exchange; the Vancouver Stock Exchange; and the Zurich Stock Exchange; and
(2)any foreign securities exchange or non-exchange market designated by the Commission. Attributes to be considered in determining whether to designate such a foreign securities market, among others, include:
(i)organization under foreign law;
(ii)association with a generally recognized community of brokers, dealers, banks, or other professional intermediaries with an established operating history;
(iii)oversight by a governmental or self-regulatory body;
(iv)oversight standards set by an existing body of law;
(v)reporting of securities transactions on a regular basis to a governmental or self-regulatory body;
(vi)a system for exchange of price quotations through common communications media; and
(vii)an organized clearance and settlement system.
(b)Directed Selling Efforts.
(1)Directed selling efforts means any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the securities being offered in reliance on this Regulat