Regulation S Exemption. Regulation S is a commonly used exemption for U.S. companies that want to sell their stock to foreign investors.
There are two key parts to the Regulation S exemption:
1. The sale of securities must be an offshore transaction; and
2. There must be no directed selling efforts that target the U.S. market.
Offshore Transactions. In order to be considered an offshore transaction, an offer cannot be made to a “U.S. person,” it must be made by a foreign issuer, and one of the following is true:
a. The purchaser is physically outside of the U.S. or the seller reasonably believes that the purchaser is physically outside the US; or
b. The transaction is executed on a foreign exchange and the seller is not aware that the transaction has been arranged with a US purchaser.
Clearly, it is not an offshore transaction if the issuer cannot target U.S. citizens abroad. Conversely, offerings may count as offshore transactions if they are made to people physically present in the U.S. who are not within Regulation S’s definition of a “U.S. person,” which include U.S. residents, U.S. companies, and U.S. trusts and estates, among others.
Directed Selling Efforts. An action does not qualify as exempt under Regulation S if any actions are taken in connection with the offering for the purpose of “conditioning” the US market for the sale of the securities.
Issuers cannot do any of the following:
1. Advertise the offering in the US, mail printed materials to US investors, have promotional seminars in the US, or make offers to US citizens.
2. However, companies can initiate selling efforts from the US if the efforts are directed abroad.
Resale Restrictions. Securities sold under Regulation S are subject to resale restrictions. There are a number of factors, but generally speaking must comply with the requirements of Regulation S. One or more of the issuer’s documents must explicitly state the transfer limitations of the securities.
Capital raises can be conducted concurrently by relying on Reg D and Reg S offerings through parallel investment vehicles. The use of a foreign company is a viable option to ensure that the offerings do not become integrated. This is also beneficial to tax exempt investors and so that foreign investors are not subjected to U.S. taxes.
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