10.5. Offshore Offerings: Regulation S

Sometimes companies wish to issue securities outside of the U.S. and have no intention of distributing them within the U.S. These issuers do not need to register their securities with the SEC, because they are eligible for a Regulation S exemption. Regulation S can be used by either U.S. or foreign companies to issue securities that will only be bought and sold in offshore transactions (which does not mean literally offshore but only outside the U.S.; that is, such sales may occur in Canada and Mexico).

No offers of these securities can be made to people living in the United States. This is true even if the people are citizens of another country but living in the U.S. Regulation S states that there can be no “directed selling efforts” in the U.S., nor toward any group of U.S. citizens abroad (e.g., U.S. servicemembers).

In addition to the above, for Regulation S to apply, at least one of the following must be true:

• At the time the buy order is originated, the buyer is outside the U.S., or the seller and any agent of the seller reasonably believe the buyer to be outside the U.S.

• In an issuer sale, the transaction is executed in an established foreign securities exchange located outside the U.S.

• In a resale, the sale is executed in a “designated offshore securities market,” which is defined to include a host of recognized foreign stock exchanges.

Remember: Securities that are exempt from U.S. registration under Regulation S can, as far as the SEC is concerned, be traded immediately on established foreign exchanges.

There is no limit on how large of an offering may be covered by a Regulation S exemption. The issuer may combine a Regulation S offering with a Rule 144A offering, as discussed later in this chapter.

Regulation S recognizes three categories of securities, and additional restrictions apply to two of these categories. Which catego