SEC Adopts Amendments to Regulation S

The U.S. Securities and Exchange Commission (the "SEC") adopted amendments (the "Amendments") in February 1998 to Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), to curb questionable transactions which had evolved during the last several years. These transactions took various forms, but were generally designed to enable the securities that were purportedly issued outside the U.S. pursuant to Regulation S to flow back to the U.S. securities markets shortly after the expiration of the then-applicable 40-day "restricted period." The amendments became effective as of April 27, 1998.

Highlights of the Amendments include:

  • Equity securities placed offshore by U.S. issuers are deemed "restricted securities" for purposes of Rule 144 under the Securities Act and, accordingly, are subject to a one-year holding period before they can be resold in the U.S. (absent availability of another exemption for the resale from the registration requirements of Section 5 of the Securities Act).
  • Offshore resales under Regulation S of U.S. equity securities that are "restricted securities" under Rule 144 will not "cleanse" those securities' restricted status for Rule 144 resale purposes.
  • The 40-day "restricted period" for equity securities sold offshore by U.S. issuers who are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act Reporting Companies"), has been lengthened to one year, and has been renamed the "distribution compliance period" ("DCP"). The DCP is the 40-day or one-year period beginning on the later of (i) the date when the securities are first offered to persons other than distributors in reliance on Regulation S or (ii) the closing date of the offering. During this period, issuers and investors must observe certain restrictions (including compliance representations and legending of the offered shares) to ensure that the securities have not been purchased with the intent to resell them into the U.S.

Regulation S: An Overview

To put the Amendments in context, we first briefly review Regulation S's operative provisions. Regulation S was adopted to provide an exemption from registration under the Securities Act for offerings and sales of securities occurring outside the U.S. The exemption was intended to help U.S. and foreign companies raise capital overseas quickly and inexpensively without having to comply with the full-blown registration process mandated under Section 5 of the Securities Act.

Regulation S provides two safe harbors from the Securities Act's registration requirements. One safe harbor is applicable to offers and sales by issuers, distributors and their respective affiliates, and the other is applicable to resales by other parties. An offer, sale or resale of securities meeting all of the requirements of the applicable Regulation S safe harbor is deemed to occur outside the U.S., and accordingly is not subject to the Securities Act's registration requirements.

The availability of either safe harbor is subject to the satisfaction of two basic conditions (in addition to other requirements): first, the offer or sale of securities must take place in an "offshore transaction," meaning that (1) the offer is not made to a person in the U.S. and (2) the buyer is (or is reasonably believed by the seller to be) outside the U.S. at the time of the sale, or the sale is made through an established foreign securities exchange, or through the facilities of a designated foreign securities market, and the transaction is not pre-arranged with a U.S. buyer. Second, no "directed selling efforts" may be made in the U.S. in connection with the transaction. "Directed selling efforts" means any activity undertaken for the purpose of, or that could be reasonably expected to result in, conditioning the U.S. market for the relevant securities (for example, advertising the offering in a widely circulated publication in the U.S.). Regulation S excludes certain types of advertisements and other activities from the definition of "directed selling efforts."

(In a related development following adoption of the Amendments, the SEC in March 1998 issued an interpretative release which, among other things, addresses whether an offering of securities made via the Internet to non-U.S. investors could be deemed to constitute "directed selling efforts" and an "offer" within the U.S. under Regulation S, thereby rendering the Regulation S exemption unavailable. The release indicates that an issuer that chooses to effect an offering in such a manner could remain eligible for the Regulation S exemption by, among other things, including prominent statements on the applicable web pages indicating that the offer is directed only outside the U.S., and by implementing meaningful precautionary procedures that are reasonably designed to guard against sales to U.S. persons. The release also states that an issuer's or underwriter's use of an Internet website to offer securities will not, by itself, prevent bona fide offshore purchasers in a Regulation S offering from reselling into the U.S. pursuant to registration or an exemption, such as Rule 144A under the Securities Act, provided that: (1) such purchasers are not part of the selling group; (2) the purchasers are not affiliated with the issuer or any member of the selling group; and (3) the issuer's or underwriter's use of the website was not undertaken as part of an arrangement with, or on behalf of, the purchasers.)

The Issuer Safe Harbor

The issuer safe harbor is available to issuers, distributors, their respective affiliates and any person acting on behalf of any of these parties. The issuer safe harbor provisions classify securities into three categories for purposes of determining whether additional conditions must be met in order to qualify an offering as exempt from registration under the issuer safe harbor. The categories (summarized in the chart at the end of this article) distinguish securities based upon (i) the issuer's jurisdiction of organization, (ii) the issuer's reporting status under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (iii) the degree of "U.S. market interest" in the class of securities being offered or sold.

The Resale Safe Harbor

The resale safe harbor applies to resales by persons other than parties eligible to utilize the issuer safe harbor. In general, to claim the resale harbor, these parties are required to comply with the "offshore transaction" and "no directed selling efforts" requirements discussed above. In addition, dealers are prohibited from knowingly selling Regulation S securities to U.S. purchasers during the applicable DCP; where a purchaser is also a dealer, the selling dealer must notify the purchaser that the purchaser is subject to the same resale restrictions as the seller; and the selling concession or other fee payable when the offer or sale is made by certain affiliates is limited to a customary broker's commission.

The Amendments

A summary of the Amendments follows:

Affected Transactions. The Amendments apply to offerings of equity securities by U.S. issuers. In its release adopting the Amendments, the SEC states that it has decided not to extend the new requirements set forth in the Amendments to offerings by foreign private issuers in light of the fact that the abusive practices noted above have occurred in connection with offshore financings by U.S., not foreign, issuers. The SEC notes in the adopting release that it will monitor offshore offering practices and will consider extending the new restrictions to foreign issuers if abuses occur.

Deemed "Restricted Security" Status Under Rule 144. The Amendments provide that equity securities sold by U.S. issuers pursuant to Regulation S are deemed to be "restricted securities" under Rule 144. As a result, these securities will be subject to a one-year holding period before they can be resold in the U.S. (See the November 1997 issue of Mergers and Acquisitions for an update on Rule 144 developments.)

Distribution Compliance Period. The former "restricted period" has been renamed the "Distribution Compliance Period," in order to avoid confusion with the Rule 144 restricted period. With respect to stock issued by domestic Exchange Act Reporting Companies, the result is that during the first year following purchase, the securities are subject to Regulation S's distribution restrictions, and during the second year (and thereafter for purchasers affiliated with the issuer), the securities are subject to the volume and other resale restrictions under Rule 144. In addition, the DCP for equity securities of domestic Exchange Act Reporting Companies has been extended from 40 days to one year.

Additional Offering Restrictions. The Amendments impose additional requirements in connection with equity offerings by domestic Exchange Act Reporting Companies: each purchaser must certify that it will resell the shares (and engage in hedging transactions) only in compliance with the registration provisions of the Securities Act or exemptions therefrom, or in accordance with Regulation S; the issuer is required to legend the offered shares to give notice to subsequent buyers of the applicable resale restrictions; and the issuer is required to refuse to register any transfer of the shares unless it is made in accordance with the Securities Act's registration provisions, an exemption therefrom or Regulation S.

Resale Safe Harbor. The Amendments also affect the resale safe harbor. Prior to adoption of the Amendments, the view was widely held that resales into the U.S. would effectively "cleanse" the securities for Rule 144 purposes so that they could be freely resold thereafter. However, under the Amendments, the securities will remain "restricted" under Rule 144 until the expiration of the two-year period specified in Rule 144(k) (in the case of non-affiliate purchasers), even if resold in accordance with the Regulation S resale safe harbor.

Reporting of Regulation S Transactions. Since 1996, the SEC has required issuers to report sales of equity securities under Regulation S on Form 8-K within 15 days of the relevant sale. The 8-K filing requirement will continue until January 1, 1999. Thereafter, issuers will be required to report these transactions in a quarterly report on Form 10-Q or an annual report on Form 10-K, as applicable.

Impact of the Amendments

The Amendments are designed to ensure that securities issued in Regulation S offerings will come to rest with non-U.S. purchasers. However, since stock issued by U.S. companies will be subject as a result of the Amendments to the same Rule 144 resale requirements as apply with respect to other private equity offerings, in practice issuers will have a smaller incentive to use the Regulation S exemption. The primary advantage offered by Regulation S following the Amendments is that it continues to provide a bright-line test for determining the availability of an exemption from the registration requirements of the Securities Act for offerings effected outside the U.S. This exemption remains available regardless of the size of the offering, the manner of solicitation (as long as no "directed selling efforts" are employed) or the level of sophistication of the offerees. Provided that the offering can be structured to comply with applicable foreign securities laws, Regulation S is expected to continue to serve as a means by which many issuers may raise large amounts of capital without the cost and delays of registration under the Securities Act.

Regulation S Issuer Safe Harbor Summary


Type of Securities:



  • Securities issued by a foreign issuer that reasonably believes that no substantial U.S. market interest1 exists in the class of securities sold in the offering.
  • Securities offered and sold in an "overseas directed offering."2
  • Securities backed by full faith and credit of a foreign government.
  • Securities offered or sold pursuant to an employee benefit plan established under non-U.S. law.

(1) Offering effected as an "offshore transaction."

(2) No "directed selling efforts."


Securities that are not eligible for Category 1 and that are:

  • Equity securities of foreign 1934 Act Reporting Companies; or
  • Debt securities of (i) U.S. and foreign 1934 Act Reporting Companies, and (ii) foreign non-reporting companies.

(1) All Category 1 requirements.

(2) "Offering restrictions"3 apply.

(3) No offers or sales to (or for the account of) any U.S. person (other than a distributor) during 40-day DCP.


Securities not eligible for Category 1 or Category 2, that is:

  • Equity securities of U.S. Exchange Act Reporting Companies; and
  • Debt and equity securities of U.S. non-reporting companies.

Debt Offerings:

(1) All Category 1 and Category 2 requirements.

(2) Temporary global security representing the securities which is not exchangeable for the securities until end of 40-day DCP.

Equity Offerings:

(1) All Category 1 and Category 2 requirements.

(2) One-year DCP.

(3) Purchaser certifies that it is not (and is not buying for account of) a U.S. person.

(4) Purchaser agrees to resell the securities only pursuant to registration under the Securities Act or an exemption therefrom.

(5) U.S. issuers must legend securities.

(6) Issuer is required (by contract or charter document provisions) to refuse to register any transfer that violates Regulation S.

1 "Substantial U.S. market interest" is based upon, among other things, whether U.S. stock exchanges or electronic quotation systems constitute the largest market or a significant market for the securities, the number of "U.S. persons" holding the securities and the percentage of trading which takes place in the U.S., and (in the case of debt securities) the principal amount, in dollar and percentage terms, held by U.S. persons.

2 That is, (1) an offering of securities by a foreign issuer directed into a single country other than the U.S. to residents of that country, in accordance with local law and practices, or (2) offerings by U.S. issuers of certain types of non-convertible debt securities that are denominated in a non-U.S. currency in a single country overseas.

3 "Offering restrictions" consist of (1) the written agreement of each "distributor" (the underwriter, dealer or other person who by contractual arrangement participates in the distribution of the securities) that during the applicable DCP it will not offer or sell the securities in the U.S. except pursuant to registration under the Securities Act or an exemption therefrom, or engage in hedging transactions with regard to the securities except in compliance with the Securities Act and (2) the inclusion in all offering materials (except press releases) of a legend stating that the securities have not been registered under the Securities Act and may not be offered or sold in the U.S. or to U.S. persons without registration or pursuant to an exemption.

Because of the generality of this newsletter, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.