Offshore Offers and Sales

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229, 230, and 249

[Release No. 33-7392; 34-38315; File No. S7-8-97 International Series

Release No. 1056]

RIN 3235-AG34

Offshore Offers and Sales

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (the ``Commission'') is

publishing for comment proposed amendments to the Regulation S safe

harbor procedures. The proposed amendments relate to offshore sales of

equity securities of U.S. issuers, and foreign issuers where the

principal market for the securities is in the United States. The

proposals are designed to stop abusive practices in connection with

offerings of equity securities purportedly made in reliance on

Regulation S.

DATES: Comments should be received on or before April 29, 1997.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,

N.W., Stop 6-9, Washington, D.C. 20549. Comment letters also may be

submitted electronically to the following electronic mail address:

[email protected]. Comment letters should refer to File No. S7-8-

97; this file number should be included in the subject line if

electronic mail is used. All comment letters received will be available

for public inspection and copying in the Commission's public reference

room, 450 Fifth Street, N.W., Washington, D.C. 20549. Electronically

submitted comment letters will be posted on the Commission's Internet

Web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Paul M. Dudek, Luise M. Welby, or

Walter G. Van Dorn, Jr., Office of International Corporate Finance,

Division of Corporation Finance, at (202) 942-2990.

SUPPLEMENTARY INFORMATION: The Commission is proposing to revise Rule

903 1 of Regulation S,2 the issuer safe harbor under the

Securities Act of 1933 3 for offshore offerings of securities, to

address abusive practices under the rule. The changes would apply to

offshore sales of equity securities of domestic issuers, and of foreign

issuers where the principal market for those securities is in the

United States.4 Further, the Commission proposes amendments to

Rule 144(a)(3) 5 and a new Rule 905 to deem these equity

securities to be ``restricted securities,'' as defined in Rule 144

under the Securities Act.6 New Rule 905 also would make clear that

offshore resales under Rule 904 of restricted equity securities of

covered issuers will not affect the status of these securities as

restricted securities after the resale.7 In addition, the

Commission is proposing to eliminate the current requirement that

reporting issuers disclose Regulation S sales of equity securities on a

Form 8-K within 15 days of the transaction. In light of the longer

restricted period proposed today, issuers would report these sales on a

Form 10-Q on the same basis that issuers report their other

unregistered sales of equity securities. Finally, the Commission is

proposing additional technical and clarifying revisions to Regulation

S, in part to make the rule more concise and understandable.

---------------------------------------------------------------------------

\1\ 17 CFR 230.903.

\2\ 17 CFR 230.901-230.904 and Preliminary Notes.

\3\ 15 U.S.C. 77a et seq. (the ``Securities Act'').

\4\ See Proposed Rule 902(h) for the proposed definition of

``principal market in the United States.''

\5\ 17 CFR 230.144(a)(3).

\6\ Proposed Rule 905.

\7\ Id.

---------------------------------------------------------------------------

I. Executive Summary

The Commission constantly seeks to reduce burdens on capital

formation as long as the deregulatory measures do not harm investor

protection. When adopting safe harbors and other deregulatory measures,

the Commission will include protections designed to minimize the risk

that those measures will be abused. If abuses nevertheless occur, the

Commission will make the necessary adjustments to prevent further abuse

while, to the extent possible, preserving the original goals of the

reform. Today, the Commission is proposing amendments to Regulation S

to prevent continued abuse of the rule.

In 1990, the Commission adopted Regulation S to clarify the

extraterritorial application of the registration requirements of the

Securities Act. In the interests of both comity and the

internationalization of the world's securities markets, the Commission

believed that the registration provisions under U.S. law should not

apply where the offshore placements were truly offshore. Instead, the

laws of the foreign jurisdiction regulating the public offerings of

securities would serve to protect investors in that market. Regulation

S permits both foreign and domestic issuers to avail themselves of the

safe harbors when conducting offshore placements of their securities.

Since the adoption of Regulation S in 1990, the Commission has

become aware of uses of Regulation S that the rule not only did not

contemplate, but in fact expressly prohibited. Some issuers, affiliates

and others involved in the distribution process are using Regulation S

as a guise for distributing securities into the U.S. markets without

the protections of registration under Section 5 of the Securities Act.

In June 1995, the Commission issued an interpretive release that listed

certain problematic practices under Regulation S and requested comment

on whether the Regulation should be amended to limit its vulnerability

to abuse.8

---------------------------------------------------------------------------

\8\ Securities Act Release No. 7190 (June 27, 1995) [60 FR 35663

(July 10, 1995)] (the ``Interpretive Release'').

---------------------------------------------------------------------------

As a result of the continuation of certain of these abusive

practices and in response to the comment letters received on the

Interpretive Release, the Commission is proposing to stop these abusive

practices by amending Regulation S for placements of equity securities

by domestic companies. In addition, although abusive practices

involving the equity securities of foreign issuers are not as evident

as with domestic issuers, there is equal potential for abuse where the

principal trading market for those securities is in the United States.

Therefore, the Commission also is proposing to amend the safe harbor

procedures for placements of equity securities of foreign issuers where

the principal market for those securities is in the United States. In

general, the ``principal market'' would be in the United States if more

than half of the trading in that security takes place in the United

States.9

---------------------------------------------------------------------------

\9\ See infra Section III.E.1. for a further discussion of the

proposed definition of ``principal market in the United States.''

---------------------------------------------------------------------------

These Regulation S proposals would:

classify these equity securities placed offshore under

Regulation S as ``restricted securities'' within the meaning of Rule

144;

align the Regulation S restricted period for these

equity securities with the Rule 144 holding periods by lengthening

from 40 days

[[Page 9259]]

(currently applicable to reporting issuers) or one year (currently

applicable to non-reporting issuers) to two years the period during

which persons relying on the Regulation S safe harbor may not sell

these equity securities to U.S. persons (unless pursuant to

registration or an exemption);

impose certification, legending and other requirements

now only applicable to sales of equity securities by non-reporting

issuers;

require purchasers of these securities to agree not to

engage in hedging transactions with regard to such securities unless

such transactions are in compliance with the Securities Act;

prohibit the use of promissory notes as payment for

these securities; and

make clear that offshore resales under Rule 901 or 904

of equity securities of these issuers that are ``restricted

securities,'' as defined in Rule 144, will not affect the restricted

status of those securities.

The combination of these proposed amendments should prevent the

sale of equity securities offshore under Regulation S in transactions

that effectively result in unregistered distributions of the securities

into the U.S. markets.

II. Background

Regulation S contains a general statement that the registration

requirements of Section 5 of the Securities Act do not apply to offers

or sales of securities that occur outside the United States, and two

non-exclusive safe harbors. The first safe harbor applies to offers and

sales by issuers, persons involved in the distribution process pursuant

to contract (``distributors''), their affiliates, and any person acting

for those persons (``issuer safe harbor'').\10\ The other safe harbor

applies to offshore resales by persons other than the issuer,

distributors, their affiliates (except certain officers and directors)

and persons acting for them (the ``offshore resale safe harbor'').\11\

The rule considers an offer or sale of securities that satisfies all

conditions of the applicable safe harbor to be outside the United

States and thus not subject to the registration requirements of Section

5. Regulation S does not provide a safe harbor for resales back into

the United States of any securities sold or resold offshore, whether

under Regulation S or otherwise.

---------------------------------------------------------------------------

\10\ Rule 903 of Regulation S [17 CFR 230.903].

\11\ Rule 904 of Regulation S [17 CFR 230.904].

---------------------------------------------------------------------------

The issuer safe harbor distinguishes three categories of securities

offerings. The categories are based upon factors such as the

jurisdiction of incorporation of the company whose securities are being

sold under Regulation S, the company's reporting status under the

Securities Exchange Act of 1934,\12\ and the degree of U.S. market

interest in the issuer's securities. ``Category 1'' offerings generally

encompass debt and equity offerings by foreign reporting and non-

reporting issuers when there is no ``substantial U.S. market interest''

\13\ in the security to be offered. ``Category 2'' offerings now

encompass, among other things, offshore offerings of debt and equity

securities of any domestic reporting issuer, debt and equity securities

of any foreign reporting issuer where there is a ``substantial U.S.

market interest,'' as well as the debt securities of any foreign non-

reporting issuer where there is a ``substantial U.S. market interest.''

``Category 3'' offerings are subject to the greatest restrictions and

include offshore offerings of debt and equity securities by any

domestic non-reporting issuer, as well as equity securities of any

foreign non-reporting issuer where there is a ``substantial U.S. market

interest.''

---------------------------------------------------------------------------

\12\ 15 U.S.C. 78a et seq. (the ``Exchange Act'').

\13\ See Rule 902(n) of Regulation S for the definition of

``substantial U.S. market interest'' [17 CFR 230.902(n)].

---------------------------------------------------------------------------

All offerings under the Regulation S safe harbors are subject to

two general conditions: the offer and sale must be made in an offshore

transaction,\14\ and the offering must not involve directed selling

efforts in the United States.\15\ Offers and sales made in reliance on

the Category 2 and Category 3 issuer safe harbors are subject to

additional restrictions that the Commission anticipated would assure

that the securities came to rest offshore. These restrictions include a

40-day or one-year restricted period \16\ during which persons entitled

to rely on the Rule 903 safe harbor (that is, the issuer, a

distributor, or any of their respective affiliates or any person acting

on their behalf) cannot sell the Regulation S securities to a U.S.

person \17\ or to a person acting for the account of a U.S. person

(other than a distributor), and still rely on the safe harbor.\18\ The

purpose of the restricted period is to ensure that persons relying on

the safe harbor are not engaged in an unregistered, non-exempt

distribution into the U.S. capital markets.\19\

---------------------------------------------------------------------------

\14\ Rule 903(a) of Regulation S [17 CFR 230.903(a)]. See Rule

902(i) of Regulation S for the definition of ``offshore

transaction'' [17 CFR 230.902(i)].

\15\ Rule 903(b) of Regulation S [17 CFR 230.903(b)].

\16\ For debt securities issued under either Category 2 or

Category 3, the restricted period is 40 days. The restricted period

for equity securities sold under Category 3 is one year, instead of

the shorter 40-day period under Category 2.

\17\ ``U.S. person'' is defined under Rule 902(o) of Regulation

S [17 CFR 230.902(o)].

\18\ In addition to the restricted period, ``Category 2'' and

``Category 3'' offerings also must comply with certain ``offering

restrictions,'' and the requirement that distributors give certain

notices when selling securities to other distributors prior to the

expiration of the restricted period. See Rule 902(h) of Regulation S

[17 CFR 230.902(h)]. In addition, offerings of equity securities

under Category 3 are subject to certification, legending and other

requirements that are not imposed on Category 2 offerings. See Rule

903(c)(2) for Category 2 offerings [17 CFR 230.903(c)(2)] and Rule

903(c)(3) for Category 3 offerings [17 CFR 230.903(c)(3)].

\19\ See Securities Act Release No. 6863 (Apr. 24, 1990) [55 FR

18306] (the ``Adopting Release'') at Section III.B.

---------------------------------------------------------------------------

The Commission based many of the safe harbor procedures

incorporated into Regulation S on procedures that market participants

already had developed and were the subject of no-action letters issued

by the Commission's staff before the adoption of Regulation S. \20\

Before 1990, offshore transactions largely involved substantial global

offerings of the debt or equity securities of foreign issuers, or the

debt securities of domestic issuers in the Euromarkets. Since the

adoption of Regulation S, these types of offshore offerings have not

resulted in widespread problematic practices.

---------------------------------------------------------------------------

\20\ See, e.g., InfraRed Associates, Inc. (Sept. 13, 1985);

Proctor & Gamble Co. (Feb. 21, 1985); Fairchild Camera and

Instrument International Finance N.V. (Dec. 15, 1976); Raymond

International Inc. (June 28, 1976); Pan-American World Airways, Inc.

(June 30, 1975); The Singer Company (Sept. 3, 1974).

---------------------------------------------------------------------------

The Commission's primary area of concern has been the use of

Regulation S for sales of equity securities by domestic issuers, the

area in which market participants had not developed established

procedures before the adoption of Regulation S. Some U.S. issuers

appear to have used the Regulation S issuer safe harbor to effect

unregistered distributions of their equity securities into the United

States.\21\

---------------------------------------------------------------------------

\21\ See, e.g., ``Pirates' Play?'', Barron's, at 17 (Jan. 7,

1997); ``Storm Brewing Offshore?'', Barron's, at 12 (Sept. 16,

1996); ``Easy Money--How Foreign Investors Profit at the Expense of

Americans,'' Barron's, at 31 (Apr. 29, 1996); ``Rule Permitting

Offshore Stock Sales Yields Deals that Spark SEC Concerns,'' Wall

St. J., at C1 (Apr. 26, 1994); ``Foreign Stock Sales: Don't Get

Blindsided,'' Worth, at 37 (Mar. 1994).

---------------------------------------------------------------------------

In response, the Commission has taken enforcement action against

persons who sought to evade the registration requirements of the

Securities Act through purported Regulation S offerings that were in

effect U.S. distributions of securities.\22\ In addition, on June 27,

1995, the Commission issued the Interpretive Release to state its views

concerning these abusive practices under Regulation S. The Interpretive

Release

[[Page 9260]]

described a number of abusive practices in offerings purportedly made

under Regulation S and stated that such abusive practices ran afoul of

the ``scheme-to-evade'' prohibition in Preliminary Note 2 of Regulation

S,\23\ would not be covered by the safe harbors, and would not be found

to be an offer and sale outside the United States for purposes of the

general statement under Rule 901.\24\

---------------------------------------------------------------------------

\22\ See In re: Candies, Inc., et al., Securities Act Release

No. 7263 (Feb. 21, 1996); SEC v. Softpoint, Inc., et al., Litigation

Release No. 14480 (Apr. 27, 1995). See also U.S. v Sung and Feher,

Litigation Release No. 14500 (May 15, 1995).

\23\ Preliminary Note 2 to Regulation S specifically states

that:

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.

\24\ Interpretive Release, supra note 8, at Section II.

---------------------------------------------------------------------------

The Interpretive Release also asked for comments whether the

Commission should amend Regulation S to impose additional restrictions

on the use of the safe harbors to impede attempts to use the Regulation

to evade the registration requirements of the Securities Act. The

Commission received 36 comment letters in response to the Interpretive

Release.\25\ There was no consensus among commenters whether Regulation

S should be amended and, if so, what restrictions should be imposed.

---------------------------------------------------------------------------

\25\ These comment letters, together with a Summary of Comments

prepared by Commission staff, are available for inspection and

copying in the Commission's Public Reference Room, 450 Fifth Street,

N.W., Washington, D.C. 20549. Persons seeking these materials should

make reference to File No. S7-20-95.

---------------------------------------------------------------------------

As a complement to these initiatives, the Commission also has

taken, and is currently undertaking, several other actions. To deter

abusive Regulation S practices while providing important information to

the markets, the Commission recently adopted amendments to the Exchange

Act periodic reporting forms for domestic issuers to require disclosure

of unregistered equity offerings, including a current report on Form 8-

K filing requirement to disclose sales made under Regulation S.\26\ At

the same time, by adopting amendments to Rule 3-05 of Regulation S-X,

which relaxed the financial statement requirements for acquired

businesses, the Commission took another step to remove unnecessary

barriers to registered offerings that may cause companies to conduct

unregistered offshore offerings.\27\ The Commission today also is

issuing three companion releases that should help alleviate concerns

that the more restrictive Regulation S procedures will cut off access

to capital on a cost-effective basis for smaller companies. These

releases (i) adopt amendments to the Rule 144 safe harbor governing

resales of restricted securities to shorten the holding period

requirements, (ii) propose further revisions to Rule 144 to simplify

the rule, and (iii) propose allowing delayed pricing in registered

securities offerings conducted by smaller issuers so they would have

more flexibility in timing registered offerings. \28\

---------------------------------------------------------------------------

\26\ Exchange Act Release No. 37801 (Oct. 10, 1996) [61 FR 54506

(Oct. 18, 1996)]. Sales of equity securities by domestic issuers

under Regulation S are required to be reported on Form 8-K within 15

days of occurrence. All other unregistered sales of equity

securities by domestic issuers (e.g., private placements) must be

reported quarterly in the issuer's Form 10-Q and in its Form 10-K

(for the last fiscal quarter).

\27\ Securities Act Release No. 7355 (Oct. 10, 1996) [61 FR

54509 (Oct. 18, 1996)].

\28\ Securities Act Release Nos. 7390, 7391, and 7393.

---------------------------------------------------------------------------

The increasing internationalization of global securities markets,

the growing use of the Internet for securities transactions, the

further integration of the European and other markets through common

currencies and regulatory treatments, and other recent and ongoing

developments in the securities markets may make it appropriate for the

Commission to re-address many facets of the territorial approach to the

Securities Act that has been adopted under Regulation S. These issues

arise apart from the abusive practices addressed in today's proposals.

However, the Commission encourages commenters to discuss these and

other matters in order to permit the Commission to evaluate whether to

propose revisions to Regulation S to reflect these developments.

III. Proposed Amendments to Issuer Safe Harbor

A. Continue Safe Harbor Protection for Equity Sales

The Commission does not believe at this time that the abuses

identified to date warrant precluding domestic reporting issuers from

making equity offerings under Regulation S, particularly since many

smaller issuers access foreign sources of capital to satisfy their

financing requirements. Indeed, some of the abusive practices, such as

hedging transactions, are engaged in by purchasers, and not necessarily

with the knowledge or acquiescence of the issuer. Rather than make the

Regulation S safe harbor unavailable for such offerings, the proposals

are designed to curtail the abusive practices that have developed,

while retaining for U.S. issuers the flexibility to make an offshore

offering with the certainty provided by a safe harbor. Nevertheless,

would it be more appropriate to end the safe harbor entirely for

offshore offerings of equity securities of domestic reporting issuers,

domestic non-reporting issuers, and foreign issuers where the principal

market for their equity securities is in the United States?

B. Impose New Restrictions on Equity Offerings of Domestic Issuers and

of Foreign Issuers Where the Principal Market for the Securities is in

the United States

In light of the continuing abuses, the Commission proposes

requiring compliance with the more rigorous procedures under Category

3, including a longer restricted period, for all offshore offerings of

equity securities of domestic companies, and of foreign companies where

the principal market for the securities is in the United States. There

are five new requirements that the proposed amendments would impose on

offerings of these securities by moving those offerings from Category 2

to Category 3:

1. Longer Restricted Period

The restricted period for equity securities of domestic reporting

issuers, and of foreign reporting issuers whose principal market is in

the United States, would be lengthened from 40 days to two years; the

restricted period for equity securities of domestic non-reporting

issuers, and of foreign non-reporting issuers where the principal

market for the securities is in the United States, would be lengthened

from one year to two years. In order to qualify for the Regulation S

safe harbor for offers and sales made during the restricted period,

issuers, distributors, and their affiliates must comply with the

documentation requirements discussed below and any such offers and

sales during this period may not be made to a U.S. person (except

pursuant to registration or an exemption). Rule 903 would be further

amended to clarify that registered offers and sales, or offers and

sales to a U.S. person made pursuant to an exemption such as Rule 144

or 144A, are permitted in the initial distribution and during the

restricted period.

As described below, the Commission is proposing that covered equity

securities be defined as ``restricted securities'' under Rule 144. The

new two-year restricted period under the issuer safe harbor would track

the time period during which the securities would be subject to resale

restrictions as ``restricted securities'' under Rule 144.

The Commission adopted the current 40-day restricted period during

which the selling restrictions are applicable to protect against an

indirect unregistered

[[Page 9261]]

public offering in the United States. The practices of some companies,

distributors and their affiliates, however, demonstrate that the

current 40-day restricted period is far too short to achieve this goal.

In some instances, they appear to have orchestrated resales in the

United States following the restricted period as part of the

distribution process.

Before the adoption of Regulation S, market participants generally

used a 90-day period for offshore offerings of U.S. debt securities and

a one-year period for offshore offerings of equity securities of

domestic non-reporting issuers.29 When the Commission initially

proposed a 90-day restricted period for offshore offerings of both debt

and equity securities of domestic reporting issuers, many commenters

advocated a shorter 40-day restricted period. These commenters stated

that the shorter period would be sufficient to protect against use of

an offshore offering to make an indirect offering into the United

States.30 In the Commission's view, however, experience has not

borne out the commenters' beliefs in the area of domestic equity

securities. Also, the same potential for abuse exists with foreign

equity securities if the principal market for the securities is in the

United States.

---------------------------------------------------------------------------

\29\ See Securities Act Release No. 6779 (June 10, 1988)[53 FR

22661 (June 17, 1988)], which proposed Regulation S (the ``Proposing

Release''), at nn.10 and 11 for a discussion of the time periods

that were used by market participants prior to the adoption of

Regulation S.

\30\ See Securities Act Release No. 6838 (July 11, 1989)[54 FR

30063 (July 18, 1989)], which reproposed Regulation S, at Section

II.C.2.b. (the ``Reproposing Release'').

---------------------------------------------------------------------------

2. Purchaser Certifications

The new procedures would require purchasers of these new Category 3

equity securities 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,

or that they are U.S. persons who purchased securities in a transaction

that did not require registration under the Securities Act. This

certification procedure should help protect against some of the sham

transactions noted in the Interpretive Release where issuers or

distributors ``park'' securities offshore with affiliates or shell

entities that are actually owned by U.S. persons.

3. Purchaser and Distributor Agreements

The new procedures would require purchasers of securities to agree

to resell the securities only in accordance with the registration or

exemptive provisions of the Securities Act, or in accordance with

Regulation S. Imposing this agreement on purchasers of the covered

equity securities should help ensure that purchasers are aware of the

resale restrictions applicable to the securities, particularly

considering the Commission's proposal to classify these securities as

restricted securities.31

---------------------------------------------------------------------------

\31\ Of course, issuers and distributors could not accept at

face value certifications and agreements by purchasers and disclaim

responsibility for investigation and consideration of relevant facts

pertinent to the establishment of the Regulation S safe harbor. See

Re: Lee Petillon, Adm. Proc. File 3-2393 (Nov. 30. 1972) (initial

decision); Re: The Crowell-Collier Publishing Company, Securities

Act Release No. 3825 (Aug. 12, 1957); Regulation D Revisions,

Securities Act Release No. 6759 (Mar. 3, 1988) [53 FR 7870 (Mar. 10,

1988)] at Section B.

---------------------------------------------------------------------------

In addition, under a new requirement proposed to be added to the

current Category 3 purchaser agreement requirement,32 purchasers

of Category 3 equity securities would be required to agree not to

engage in hedging transactions except in compliance with the

registration or exemptive provisions of the Securities Act.33 The

proposals also would require distributors to agree to the same

restrictions on hedging until the expiration of the restricted

period,34 and that all offering materials and documents used in

the offering of these securities would be required, until the

expiration of the restricted period, to include a statement that

hedging transactions involving those securities may not be conducted

except in compliance with the Securities Act.35

---------------------------------------------------------------------------

\32\ This Category 3 purchaser agreement requirement currently

is applicable only to sales of equity securities by non-reporting

issuers. See Rule 903(c)(3)(iii)(B)(2) of Regulation S [17 CFR

230.903(c)(3)(iii)(B)(2)].

\33\ Since the Commission also proposes that these securities

will be deemed ``restricted securities,'' Commission guidance under

Rule 144 with regard to hedging transactions (such as short sales,

and purchases and sales of put and call options) would be applicable

to these securities sold under Regulation S. See Securities Act

Release No. 7391.

\34\ Under the ``offering restrictions,'' as defined in Rule

902(h) of Regulation S, distributors are required to agree that all

offers and sales prior to the expiration of the restricted period

will be made either in accordance with Regulation S, pursuant to a

registration of the securities under the Securities Act, or pursuant

to an available exemption from registration. The proposals would

expand the agreement requirement to include the proposed hedging

agreement where the securities to be offered and sold are equity

securities of domestic issuers, or of foreign issuers where the

principal market for the security is in the United States. See Rule

902(h) of Regulation S [17 CFR 230.902(h)].

\35\ Currently, the ``offering restrictions'' require certain

statements to be included in all offering materials and documents

(other than press releases) used in connection with offers and sales

of certain securities prior to the expiration of the applicable

restricted period. The required statements would include this

additional statement regarding hedging where the securities to be

offered and sold are equity securities of domestic issuers, or of

foreign issuers where the principal market for the security is in

the United States.

---------------------------------------------------------------------------

4. Legended Certificates

The proposals would require all covered issuers of equity

securities to place a legend on the securities sold offshore. This

legend would advise that transfer of such securities is prohibited

other than in accordance with the Securities Act. Currently, the

required legend for sales of equity securities of domestic non-

reporting issuers is required to state that transfers of securities are

prohibited except ``in accordance with the provisions of this

Regulation S.'' 36 The Commission proposes amending the current

legend requirement to make clear that the rule permits transfers made

in accordance with the provisions under the Securities Act.

---------------------------------------------------------------------------

\36\ Rule 903(c)(3)(iii)(B)(3) of Regulation S [17 CFR

230.903(c)(3)(iii)(B)(3)].

---------------------------------------------------------------------------

The legend requirement would provide notice to any subsequent

purchasers of the resale restrictions applicable to the securities. The

Commission understands that legending equity securities of domestic

reporting issuers until the expiration of the current 40-day restricted

period is a common practice under Regulation S. The Commission thus

believes that the addition of an express legending requirement should

not impose a different or new burden. In addition, the Commission

proposes amending the current legend requirement to state that hedging

transactions may not be conducted except in compliance with the

Securities Act.

Regulation S does not require, and the Commission is not proposing,

that the legend contain specific language to describe these

restrictions. Issuers and distributors should prepare such legends in a

form that conveys to holders the restricted nature of the securities

and that they can only be resold under Regulation S, pursuant to

registration under the Act, or under an exemption. Nor is the legend

requirement intended to require that securities sold under Category 3

be in certificated form. Issuers whose securities are in uncertificated

form may satisfy the legend requirement by any means reasonably

designed to put holders and subsequent purchasers on notice of the

applicable resale restrictions. The Commission requests comment

whether, if covered securities are in uncertificated form, certain

forms of notice would be adequate to inform holders and subsequent

purchasers of the resale restrictions. Should securities covered by the

Category 3 safe harbor be required to be in certificated form? Are

there alternative means of notice that

[[Page 9262]]

can be used for both certificated and uncertificated securities?

5. Stop Transfer Instructions

The proposals would require an issuer, by contract or a provision

in its bylaws, articles, charter or comparable document, to refuse to

register any transfer of securities unless made in accordance with the

registration or exemptive provisions of the Securities Act, or in

accordance with Regulation S. This requirement would impose on issuers

a policing role similar to that which is often imposed in connection

with unregistered private placements. Such a role would appear

appropriate considering the abuses in this area.

Currently, the stop transfer instruction for sales of equity

securities of domestic non-reporting issuers is required to state that

the issuer will refuse to register any transfer of securities ``not

made in accordance with the provisions of this Regulation S.'' 37

As with the legend requirement, the Commission proposes amending the

current stop transfer instruction requirement to make clear that the

rule permits transfers made in accordance with the provisions under the

Securities Act.

---------------------------------------------------------------------------

\37\ Rule 903(c)(3)(iii)(B)(4) of Regulation S [17 CFR

230.903(c)(3)(iii)(B)(4)].

---------------------------------------------------------------------------

6. Request for Comment on New Requirements

Should some or all of the new requirements, including the longer

restricted period, not be applied as proposed to offerings of equity

securities of domestic issuers, and of foreign issuers where the

principal market for the securities is in the United States? If so,

which ones and why? For example, is legending equity securities of

either domestic issuers or foreign issuers feasible in foreign markets?

Are there other alternatives available that would achieve the same

purpose? In addition to, or in lieu of, the specific documentation

requirements of Category 3, should issuers be subject to an express

general duty to take reasonable steps to ensure that purchasers do not

resell the securities in violation of the Act, similar to that imposed

by Regulation D? 38 Should satisfaction of any or all of the

current specific documentation requirements of Category 3 be deemed to

satisfy this express general duty?

---------------------------------------------------------------------------

\38\ Securities Act Rule 502(d)[17 CFR 230.502(d)].

---------------------------------------------------------------------------

Should the reporting status of the issuer matter, and if so, how?

Should it matter whether those issuers also have a trading market for

their equity securities in the United States, and if so, in what

respect? Should certain classes of reporting issuers, such as those

eligible for Form S-3 or F-3, be excluded from any or all of these

restrictions?

Conversely, are any or all of these requirements so burdensome,

either alone or with the proposals to prohibit the use of promissory

notes and to classify these securities as restricted securities under

Rule 144, that companies would effectively be foreclosed from relying

on the Regulation S safe harbor for offshore offerings of equity

securities? Would any or all of these proposed changes, either alone or

with the reporting requirement for recent sales of equity securities

under Regulation S (in the case of reporting companies), obviate the

need for the longer restricted period? Should the restricted period be

shorter than two years (e.g., the current 40 days, 90 days, 180 days,

270 days or one year)? Would the classification of these securities as

restricted securities within the meaning of Rule 144 eliminate the need

for any restricted period?

7. Elimination of Form 8-K Filing Requirement

At the time the Commission adopted the existing Form 8-K 15-day

reporting requirement, the Commission stated that if it extended the

restricted period for sales of equity securities under Regulation S, it

would consider revising the reporting requirement. As the Commission is

now proposing to lengthen the restricted period for Regulation S sales,

the Commission has determined to propose revising Item 701 of

Regulation S-K and the relevant forms to require issuers to report

Regulation S sales of equity securities only on a quarterly basis as

presently required for other unregistered sales of equity securities.

Comment is requested whether requiring only quarterly reporting of

Regulation S sales will provide sufficiently timely disclosure if the

covered equity securities are deemed ``restricted securities'' and thus

not subject to resales under Rule 144 until at least one year after

sale. Should the current Form 8-K filing requirement be continued

because such securities may be resold in unlimited amounts either

offshore or in the United States pursuant to Rule 144A (or another

exemption)?

C. Revise Category 3 To Prohibit Payments With Promissory Notes for

Domestic Equity Securities, and Foreign Equity Securities Where the

Principal Market for the Securities is in the United States

In some sales purportedly made in reliance on Regulation S, the

offshore purchaser has used a promissory note payable after the end of

the restricted period to pay all or a portion of the purchase price of

the securities. In some cases the notes are secured only by the

Regulation S securities; in other cases the notes are unsecured. Some

notes provide recourse to the buyer if the note is not repaid; others

do not. The purchasers have resold the securities into the U.S. markets

upon expiration of the 40-day restricted period and used the proceeds

of the resale to repay the note. Under such an arrangement, the issuer

and purchaser clearly expect a U.S. resale to provide the funds

necessary to repay the note; in economic substance, the issuer is

raising funds from the U.S. public markets. As noted in the

Interpretive Release, this practice is inconsistent with an offshore

distribution.

The proposals would revise the Category 3 safe harbor to make clear

that the safe harbor is unavailable for transactions for equity

securities of a domestic company, and for a foreign company where the

principal market for the securities is in the United States, in which a

purchaser delivers a promissory note as payment for some or all of the

purchase price, or enters into an installment purchase contract

relating to the sale. Comment is requested whether there should be any

exceptions from the proposed prohibition to accommodate established

international offering practices. Commenters favoring such exceptions

are asked to describe the established practices and explain why they

would not be likely to result in unregistered distributions of

securities in the United States. Should there be a distinction between

full and non-recourse promissory notes?

For example, could the Commission restrict the use of promissory

notes without completely prohibiting their use by applying the Rule 144

standard for tolling 39 to permit promissory notes to be used

under Regulation S as long as the promissory note or similar obligation

or contract is by its terms required to be discharged by payment in

full prior to resale of the securities by the obligor and satisfies the

following conditions: the promissory note, obligation or contract must

provide for

[[Page 9263]]

full recourse against the purchaser of the securities, and must be

secured by collateral (other than the securities purchased) having a

fair market value at least equal to the purchase price of the

securities purchased? 40 Given that the Commission proposes to

classify these equity securities as ``restricted securities'' within

the meaning of Rule 144, and that the holding period under Rule 144 is

tolled unless promissory notes meet the above conditions, is it even

necessary to amend Regulation S at all with regard to the use of

promissory notes?

---------------------------------------------------------------------------

\39\ Rule 144(d)(2) [17 CFR 230.144(d)(2)].

\40\ These conditions are similar to those found under Rule 144

governing the computation of the Rule 144 holding period in the

context of payment with promissory notes. See Rule 144(d)(2) [17 CFR

230.144(d)(2)].

---------------------------------------------------------------------------

The Commission understands that some abusive Regulation S offerings

have involved non-cash payments to the issuer other than promissory

notes. Examples include the purported sale of equity securities under

Regulation S in exchange for services rendered or in exchange for

cancellation of a supposed pre-existing debt owed by the issuer to the

offshore purchaser. The Commission requests comment on whether the

Regulation S safe harbor should be available for offshore offerings of

equity securities of domestic companies, and of covered foreign

companies, only when cash is paid and received in the offering. Would

such a requirement restrict the use of Regulation S for bona fide

exchange offers? Should exchange offers be accommodated under the

Regulation S safe harbor only if the securities being acquired have a

readily ascertainable market value or have been outstanding for some

time? Would such a requirement unnecessarily restrict the use of

Regulation S for mergers and other business combination transactions?

D. Classify Domestic Equity Securities, and Foreign Equity Securities

Where the Principal Market for the Securities is in the United States,

as ``Restricted Securities''

Regulation S does not provide any safe harbor protection for

resales by purchasers of securities placed offshore under Regulation S

back into the United States. Preliminary Note 6 to Regulation S

specifically states that:

Securities acquired overseas, whether or not pursuant to

Regulation S, may be resold in the United States only if they are

registered under the [Securities] Act or an exemption from

registration is available.

In the absence of guidance from the Commission or the staff,41

some market participants appear to view the expiration of the

restricted periods under Regulation S (applicable to issuers and other

distribution participants entitled to rely on the Rule 903 safe harbor)

as providing a safe harbor for U.S. resales by purchasers of Regulation

S securities, particularly equity securities of domestic reporting

issuers. This view is not correct. Instead, such purchasers must

determine whether an exemption for resales into the United States is

available.

---------------------------------------------------------------------------

\41\ The Adopting Release did not provide further guidance in

this area, other than to state in a footnote that, upon the

expiration of any restricted period, the Commission would view

securities sold under Regulation S (other than unsold allotments) as

unrestricted. Adopting Release, supra note 18, at n.110. Since the

adoption of Regulation S, the Commission's staff has received

numerous inquiries on whether and when securities that have been

sold under Regulation S may be freely resold in the United States

without registration under the Securities Act. Regardless of the

issuer's compliance with Regulation S when it sold the securities

offshore, persons who would be considered underwriters under Section

2(11) of the Securities Act are not permitted to make unregistered

public resales of these securities in the United States in reliance

on the Section 4(1) exemption from registration. As the Commission

stated in the Interpretive Release, supra note 8, at n.17:

Public resales in the United States by persons that would be

deemed underwriters under Section 2(11) of the Securities Act [15

U.S.C. 77b(11)] would not be permissible absent registration or an

exemption from registration. Footnote 110 of the Adopting Release,

which addresses the restricted periods, should not be read to

provide otherwise.

---------------------------------------------------------------------------

Because some of the abusive practices under Regulation S have

involved activities by persons other than issuers, distributors and

their affiliates (that is, investors who purchased in Regulation S

offerings with a view to distributing those securities into the U.S.

markets at the end of the 40-day restricted period), the Commission

believes that it is appropriate to clarify the legal obligations of

purchasers of securities under Regulation S. Consequently, the

Commission is proposing new Rule 905, and amendments to Rule 144(a)(3),

to classify equity securities of domestic issuers (both reporting and

non-reporting) placed offshore under Regulation S as ``restricted

securities'' within the meaning of Rule 144. The Commission is also

proposing to so classify as ``restricted securities'' equity securities

of foreign issuers (both reporting and non-reporting) where the

principal market is in the United States. While the Commission is not

aware of widespread abuses involving these foreign issuers, the

potential for abuse does exist since these securities are more likely

to be resold into their principal market.

By expressly defining these Regulation S securities as falling

within the definition of ``restricted securities'' under the Rule 144

resale safe harbor, purchasers of those securities are provided with

clear guidance regarding when and how those securities may be resold in

the United States without registration under the Securities Act.42

Given the concurrent adoption of shortened holding periods under Rule

144, the Commission believes that it is appropriate to harmonize the

resale restrictions for all securities sold without the benefit of

registration with the Commission. For purposes of resale prohibitions,

an unregistered sale offshore would be treated no differently than a

private sale domestically; the burdens and benefits would be equalized.

Nevertheless, are there reasons why securities sold offshore should be

treated differently? Instead of applying the Rule 144 holding period,

should a shorter holding period apply (for example, one year or six

months)? To further integrate the requirements in this area, should the

Commission craft a single regulation that would contain both the

requirements applicable to offshore and to domestic unregistered

offerings (for example, combine Regulation S and Regulation D)?

---------------------------------------------------------------------------

\42\ They are also put on notice that resales outside the Rule

144 safe harbor must be evaluated independently against the

statutory underwriter concepts embodied in Section 2(11), regardless

of the issuer's compliance with Regulation S.

---------------------------------------------------------------------------

Currently, equity securities offered and sold to non-U.S. resident

employees of the issuer through an employee benefit plan governed by

non-U.S. law are Category 1 transactions and thus are not subject to a

40-day restricted period regardless of the domicile of the issuer or

U.S. market interest in its securities. Under proposed Rule 905,

however, those equity securities when issued by domestic or covered

foreign issuers would be restricted within the meaning of Rule 144.

Comment is requested whether this type of equity security should be

excluded from the ``restricted security'' classification. If so,

commenters are requested to address why, if such securities were not

deemed restricted, problematic practices would not develop with respect

to such plans and securities.

E. Application of Proposed Changes

1. Foreign Companies Where the Principal Market for the Securities is

in the United States

Although abusive practices under Regulation S have not been as

evident in offerings by foreign issuers, the Commission is concerned

that the economic incentives for indirect distributions and resales

into the United States are the same for equity offerings

[[Page 9264]]

of both domestic companies, and foreign companies where the principal

market for the securities is in the United States (that is, the

majority of the trading occurs here). Therefore, the proposed

Regulation S changes would treat both similarly for each requirement.

Nonetheless, is there an appropriate basis to distinguish between the

two for any or all of the conditions of the proposed amendments to the

safe harbors, including the ``restricted securities'' classification?

As noted above, the Commission proposes defining ``principal market

in the United States'' for a security as when more than 50 percent of

all trading in such class of securities took place in, on or through

the facilities of securities exchanges and inter-dealer quotation

systems in the United States in the shorter of the issuer's prior

fiscal year or the period since the issuer's incorporation. Should the

percentage be greater than 50 percent (for example, 75%) or lower (for

example, 10%, 25% or 35%), so long as the United States is the largest

market? Should it matter for purposes of this definition where the

security is traded (for example, New York Stock Exchange, American

Stock Exchange, Nasdaq-NMS, any of the regional exchanges, the OTC

Bulletin Board, the ``pink sheets,'' or any private trading system such

as Instinet) and whether such market is relatively liquid or active?

Commenters should explain the reasons for any distinctions between or

among trading markets or mechanisms for trading.

Other possible alternatives under consideration include applying

the restrictions to (i) all foreign issuers, (ii) only foreign

reporting issuers, (iii) only foreign reporting issuers with a

``substantial U.S. market interest'' (as currently defined in

Regulation S) in the class of equity securities to be offered offshore;

or (iv) only foreign reporting issuers whose only equity market is in

the United States. Should a different test other than trading market be

used, such as percentage (e.g., 10%, 25% or 50%) of U.S. resident

ownership of the company's outstanding equity securities? Should the

Commission use similar percentage thresholds based on an ``Average

Daily Trading Volume'' test, like that recently adopted in Regulation M

43 for purposes of defining ``principal market in the United

States?'' If so, what percentage (10%, 25% or 50% of U.S. Average Daily

Trading Volume as compared to total worldwide Average Daily Trading

Volume), and what measurement period (three, six or 12 months, or some

other period) should be used?

---------------------------------------------------------------------------

\43\ Securities Act Release No. 7375 (Dec. 20, 1996) [62 FR 520

(Jan. 3, 1997)].

---------------------------------------------------------------------------

2. Equity Securities

As proposed, the procedures and restrictions under Category 3 and

the ``restricted securities'' classification would apply only to

offerings of equity securities. Rule 405 of Regulation C under the

Securities Act defines the term ``equity security'' to include stock,

securities convertible or exchangeable into stock, warrants, options,

rights to purchase stock, and other types of equity related

securities.44 The Commission does not propose to apply the new

restrictions to offerings of debt securities, since the nature of the

trading markets for debt securities appear not to have facilitated

abusive practices that result in a distribution of these securities

into U.S. markets.

---------------------------------------------------------------------------

\44\ 17 CFR 230.405. Under the proposed changes, non-

participating preferred stock and asset-backed securities would

continue to be treated in the same manner as debt securities for

purposes of the Regulation S safe harbors and the restricted

security classification. See Rule 903(c)(4) [17 CFR 230.903(c)(4)],

proposed to be redesignated as Rule 902(a).

---------------------------------------------------------------------------

Comment is requested concerning whether any or all of the

restrictions proposed for equity securities also should be applied to

offerings of debt securities, and if so, whether such applicability

should depend on the status of the issuer (for example, whether the

issuer is foreign or domestic, reporting or non-reporting, Form S-3 or

F-3 eligible)? Should it matter whether there is a trading market for

any security (whether debt or equity) of the issuer in the United

States, and if so, what security is traded? Are there circumstances

where any such debt offering would be likely to result in an

unregistered U.S. distribution? If the restrictions cover offerings of

debt securities, should they be limited to certain types of debt

securities, such as debt securities where the amount due is tied to the

price of the issuer's common equity securities, or debt securities that

are listed for trading on a U.S. securities exchange?

The Commission is aware that many Regulation S abuses have involved

the use of convertible or exchangeable securities or warrants.45

Many companies, however, legitimately offer under Regulation S either

convertible or exchangeable debt securities, or warrants for common

stock as a unit with other securities, to lower their costs of capital.

Comment is requested as to whether all convertible or exchangeable

securities or warrants of domestic issuers, and of foreign issuers

where the principal market for the underlying equity securities is in

the United States, should be subject to the proposed Category 3

restrictions and the ``restricted securities'' classification, as

proposed. Are there certain types of convertible or exchangeable

securities or warrants where there is minimal likelihood that such

offerings will result in an unregistered U.S. distribution of either

the convertible or exchangeable securities or warrants, or the equity

securities underlying the convertible or exchangeable securities or

warrants, and, therefore, the proposed restrictions may not be

necessary?

---------------------------------------------------------------------------

\45\ See ``Pirates' Play?'', supra note 21.

---------------------------------------------------------------------------

Should it matter if the convertible or exchangeable debt security

is not convertible or exchangeable for some period of time after the

offering (for example, six months, one year, two years, three years)?

Should they be excluded if, at the time of issuance, the securities had

an effective conversion or exercise premium over a specified amount

(for example, five percent, 10 percent, 20 percent, or more)? 46

If a specified conversion or exercise premium approach is used, should

it matter whether such conversion or exercise rate is allowed to float

in relation to the market price of the underlying security, or is set

at some future point in time based upon a formula known when the

security was issued? Does it matter whether the issuer of the

convertible or exchangeable security or warrant, or the issuer of the

underlying equity security, is a reporting company, and if so, how?

Although many of the larger capitalization domestic companies issue

convertible securities and warrants under Regulation S, does the Form

S-3 eligibility of these companies render any carve out for their

securities unnecessary? Commenters are asked to provide information on

the likelihood that convertible or exchangeable securities or warrants

containing particular conversion, exchange or exercise terms will be

sold offshore under Regulation S under circumstances that are not

likely to result in an unregistered distribution of equity securities

in the United States.

---------------------------------------------------------------------------

\46\ The Commission has imposed similar standards under the Rule

144A resale safe harbor. See Rule 144A(d)(3)(i) [17 CFR

230.144A(d)(3)(i)]. See also Securities Act Release No. 6862 (Apr.

23, 1990) at nn.25 and 26 for a discussion of how the conversion or

exercise premium is determined for purposes of Rule 144A. Comment is

requested whether the same methods of calculations should apply

under any proposed changes to Regulation S.

---------------------------------------------------------------------------

[[Page 9265]]

F. Other Possible Restrictions

1. Hedging

As discussed in the companion proposing release for Rule 144, the

Commission is concerned that some hedging activity may undermine the

safeguards against indirect distributions provided by Regulation S and

Rule 144. If a purchaser shifts the economic risk of a transaction

through short sales, swaps, or derivative securities transactions, for

example, the Commission is concerned that the purchaser may not have a

bona fide investment intent. This is especially true in the Regulation

S area, where the Commission looks for indicia that a transaction is

truly ``offshore.''

In the Interpretive Release, the Commission warned that a

transaction may not be viewed as offshore if there is evidence that a

substantial portion of the economic risk is left in or returned to the

U.S. market during the restricted period. Based on discussions with

market participants, there is reason to believe that hedging during the

Regulation S restricted periods is still occurring.

The Commission is addressing this concern in two ways. First, the

proposed changes include purchaser and distributor agreements and

legends warning against inappropriate hedging, as discussed above.

Second, by treating equity securities purchased from domestic and

covered foreign companies as ``restricted'' for purposes of resale, the

Commission is imposing the holding period requirement of Rule 144.

Maintaining a hedge for one or two years, as opposed to 40 days, is

more costly and may be impossible for many of the illiquid securities

sold in abusive cases.

The companion proposing release for Rule 144 does not specifically

prohibit hedging during the holding period, but asks a series of

questions designed to determine whether certain types of hedging are

inconsistent with the spirit of Rule 144. Should the Commission go

beyond its Rule 144 approach and simply preclude any or all hedging

activity during the Regulation S restricted period? Should it matter

whether the hedging occurs offshore? Should specific hedging provisions

apply to equity securities only? Should the size of the issuer be

determinative (for example, permit more hedging with issuers eligible

to file Form S-3 or F-3)? As with convertible securities, should it

matter whether a derivative security is ``out of the money'' by a

specified amount? Should there be a cap on the amount that could be

hedged within the safe harbor? For example, should all or some hedging

be permitted as long as the purchaser retains a majority or a

substantial amount of economic risk?

2. Discounts

As evidenced by the offering practices described in the

Interpretive Release, securities sold offshore at a discount from the

U.S. market price are likely to be resold in the United States at the

earliest possible date in order for the purchaser to realize a profit.

In the Interpretive Release, the Commission requested comment as to

whether it should limit the use of the safe harbor under Regulation S

for offerings of common stock of domestic issuers to those sold at the

market price or with a specified minimal discount.

The Commission is not proposing to amend Regulation S to require

that sales of equity securities of reporting companies under Regulation

S be made at a specified minimum price or to otherwise impose

requirements or restrictions that are tied to the offering price of

securities.47 Although many of the abusive practices under

Regulation S appear to involve significant discounts, the Commission

believes there are other means to curtail such practices without

mandating that safe harbor sales take place at a specific price or

within a range of prices.

---------------------------------------------------------------------------

\47\ The Commission's view as expressed in the Interpretive

Release, however, remains applicable: neither the general statement

under Rule 901 nor the safe harbors are intended to cover offshore

offerings of such securities where the fees or discounts indicate

that the transaction was intended to create a parking scheme or

other scheme where the securities were merely being held offshore

temporarily to evade the registration requirements of the Securities

Act.

---------------------------------------------------------------------------

The Commission again requests comment on whether certain discounted

offers (particularly by domestic reporting companies) should be

excluded from the Regulation S safe harbor. Commenters addressing

whether discounted sales should be accorded different treatment also

should address how such discount should be measured (especially in the

case of illiquid securities that trade infrequently, and convertible

and exchangeable securities where other factors (such as interest rate

and maturity) will affect the offering price of a security) and at what

level of discount, if any, such different treatment should apply.

IV. Offshore Resales of Restricted and Affiliate Securities

The Commission is concerned that the more stringent requirements

proposed for offshore offerings could lead to the development of

abusive practices under the Rule 904 offshore resale safe harbor. Such

practices could involve the private placement of equity securities in

the United States by an issuer, the resale of those securities to a

foreign purchaser under Rule 904, and the attempted resale of those

securities back into the U.S. public markets without apparent

restrictions. Without express guidance from the Commission, these

holders of restricted equity securities (whether obtained under

Regulation S, Regulation D, Rule 144A, or any other exemption from

registration pursuant to which restricted status is designated) could

mistakenly believe that a resale of securities to a foreign purchaser

under Rule 904 results in such securities no longer being restricted

securities.

In the Interpretive Release, the Commission stated that the

offshore resale safe harbor under Rule 904 cannot be used for ``washing

off'' resale restrictions, such as the holding period requirement for

restricted securities in Rule 144. The Commission is proposing in new

Rule 905 to make explicit that when restricted equity securities of any

domestic issuer, or of a foreign issuer where the principal market for

the equity securities is in the United States, are resold offshore

under Regulation S, such securities will retain their status as

restricted securities after the resale. Thus, subsequent resales of

these securities by the offshore purchaser back into the United States

may only take place pursuant to registration under the Securities Act,

or a Securities Act exemption (for example, resales in accordance with

the provisions of either Rule 144A or Rule 144).

Proposed Rule 905 would codify the Commission's view that resale

restrictions applicable to equity securities of domestic issuers and

foreign issuers where the principal market for the equity securities is

in the United States will follow the securities in the hands of each

subsequent transferee. Any purchaser of such restricted securities

(including the initial sellers of such restricted securities who

replace them with a repurchase of the same or fungible restricted

securities) would be considered to have restricted securities. On the

other hand, sellers of such restricted securities who replace them with

a repurchase of fungible but unrestricted securities would not be

considered to have restricted securities.48

---------------------------------------------------------------------------

\48\ This interpretation clarifies and supercedes the

Commission's previous interpretation regarding ``prearranged''

repurchases of restricted securities set forth in the Interpretive

Release, supra note 8.

---------------------------------------------------------------------------

Comment is requested on whether the proposed rule, either alone or

with the

[[Page 9266]]

Commission's other proposed and recently adopted initiatives, is

sufficient to deter the improper use of the Rule 904 safe harbor.

Should other types of restricted securities (such as debt securities)

also expressly be considered restricted securities after a Regulation S

resale, and if so, which ones? Should the applicability depend on the

status of the issuer (for example, whether the issuer is foreign or

domestic, reporting or non-reporting, Form S-3 or F-3 eligible)? Should

it matter the extent to which there is a trading market for the

security in the United States, and if so, how?

Should the proposed preservation of resale restrictions apply to

resales of equity securities of (i) all foreign issuers, (ii) only

foreign reporting issuers, (iii) only foreign reporting issuers with a

``substantial U.S. market interest'' (as currently defined in

Regulation S) in the class of equity securities to be resold offshore;

or (iv) only foreign reporting issuers whose only equity market is in

the United States? Should some restricted equity securities of domestic

or foreign issuers be excluded from this aspect of proposed Rule 905,

such as certain types of convertible or exchangeable securities or

warrants, and if so, which ones?

When restricted securities proposed to be covered by the new rule

are resold under Rule 904 on a ``designated offshore securities

market'' as defined under Regulation S, 49 is it practical for

such securities to be identified to the subsequent purchaser as

restricted securities under the U.S. federal securities laws (whether

through legending or otherwise)? Commenters are requested to address

the practical effect of offshore hedging activity involving these

securities as well.

---------------------------------------------------------------------------

\49\ See Rule 902(a) of Regulation S [17 CFR 230.902(a)] for the

definition of ``designated offshore securities market.''

---------------------------------------------------------------------------

Any officer or director of the issuer who is an affiliate solely by

virtue of holding such position may sell unrestricted securities

offshore pursuant to Rule 904 without those securities becoming

restricted securities, even if the sales exceed the volume limitations

of Rule 144(e) (offshore resales of restricted securities pursuant to

Regulation S are not subject to the volume limitations of Rule 144(e)).

Any other affiliates, however, who decide to sell securities offshore

are required to conduct such offerings under either Rule 901 or Rule

903, not Rule 904. Thus, if the securities to be sold are restricted or

unrestricted equity securities of a domestic issuer, or of a covered

foreign issuer, such securities will be considered restricted

securities in the hands of any offshore purchaser, and may not be

resold into the United States absent registration or a valid exemption.

50 Comment is requested whether this disparate treatment of

different types of affiliates is appropriate. Should all unrestricted

affiliate shares sold offshore be deemed restricted unless the offshore

sales comply with Rule 144?

---------------------------------------------------------------------------

\50\ If these affiliates sell the securities offshore in

compliance with the appropriate provisions applicable to affiliate

or restricted shares under Rule 144, then those securities will be

unrestricted in the hands of the offshore purchaser. In calculating

the amount of securities that have been resold pursuant to Rule 144

for the purposes of the volume limitations of Rule 144(e), the staff

has taken the position that restricted securities resold offshore

pursuant to Regulation S need not be included--similar to the

treatment of other non-Rule 144 exempt resales, such as those made

pursuant to Rule 144A. The Commission is proposing an amendment to

Rule 144(e)(vii) to codify that position.

---------------------------------------------------------------------------

Alternatively, should the Rule 904 offshore resale safe harbor

simply be made unavailable for restricted equity securities of domestic

issuers and covered foreign issuers? Should the Commission make the

Rule 904 safe harbor unavailable for all equity securities sold by any

affiliate of the issuer? If the Rule 904 offshore resale safe harbor is

not available, these securities would be able to be resold offshore

under the general statement of Rule 901, but no safe harbor provisions

under Regulation S would apply to such resale.

Proposed Rule 905 does not apply to other types of securities, such

as debt securities of domestic issuers and equity securities of foreign

issuers where the principal market for the equity securities is not in

the United States. The Commission requests comment as to whether Rule

905 should apply to debt securities of domestic issuers, equity

securities of foreign issuers where the principal market for the equity

securities is not in the United States, or other types of securities or

other types of issuers. Does the nature of offshore trading markets in

various types of securities make it impracticable for such securities

to remain restricted in the hands of offshore purchasers? Is there less

need for concern in this area inasmuch as the likelihood of an

unregistered distribution of such securities in the United States is

diminished? Comment is requested on current practices in this area and

the need for Commission guidance.

V. Technical and Clarifying Revisions

The Commission proposes mainly non-substantive technical and

clarifying revisions to Regulation S to make the rule more concise and

understandable. The principal changes include:

Revising the captions of the three sections of the Rule

903 issuer safe harbor to refer to them as commonly known: ``Category

1,'' ``Category 2'' and ``Category 3'';

Revising the Rule 903 issuer safe harbors to state clearly

for each category what procedures are to be followed and what

securities are eligible for each category;

Combining some definitions within Rule 902, the definition

section of Regulation S, or moving certain definitions to the Rule 903

safe harbor to make the rule easier to read and understand;

If the same terms are already defined elsewhere in the

Commission's rules and regulations, deleting those definitions from

Rule 902 and adding cross references to the definitions contained

elsewhere; and

Generally editing the language in the rule to make it more

understandable.

Comment is requested on each of the proposed changes. Are there any

other clarifying or technical changes that the Commission could make to

Regulation S to make the rule more readable and understandable?

VI. Request for Comments

Any interested persons wishing to submit written comments on the

proposed revisions are requested to do so by submitting them in

triplicate to Jonathan G. Katz, Secretary, U.S. Securities and Exchange

Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Comment

letters also may be submitted electronically to the following

electronic mail address: [email protected]. Comments are requested

on the impact of the proposals on issuers, investors, and others.

Comments should specifically address any possible effects on investor

protection, capital formation or market efficiency resulting from the

proposals. The Commission also requests comment on whether the proposed

rules, if adopted, would have an adverse impact on competition that is

neither necessary nor appropriate in furthering the purposes of the

Exchange Act. Comments will be considered by the Commission in

complying with its responsibilities under Section 23(a) \51\ of the

Exchange Act. Comment letters should refer to File No. S7-8-97; this

file number should be included in the subject line if electronic mail

is used. All comment letters received will be available for public

inspection and copying in the Commission's Public

[[Page 9267]]

Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.

Electronically submitted comment letters will be posted on the

Commission's Internet Web site (http://www.sec.gov).

---------------------------------------------------------------------------

\51\ 15 U.S.C. 78w(a).

---------------------------------------------------------------------------

VII. Cost-Benefit Analysis

To assist the Commission in its evaluation of the costs and

benefits that may result from the proposals, commenters are requested

to provide views and empirical data relating to any costs and benefits

associated with these proposals. The proposed amendments to Regulation

S would impose restrictions on purchasers of equity securities of

domestic issuers, and of foreign issuers where the principal market for

the securities is in the United States. For example, issuers could not

accept promissory notes as payment for the securities, and purchasers

may have to wait a longer period of time before they could publicly

resell the securities into the United States. Also, the new requirement

that purchasers of certain types of equity securities sold under

Regulation S provide certification of compliance with the Securities

Act may impose additional recordkeeping burdens on issuers attempting

to maintain records of such compliance. These restrictions may make it

more difficult or costly for some issuers to raise funds through the

sales of equity securities. At the same time, the Commission believes

that such restrictions are necessary to deter abusive practices that

may have defrauded investors of millions of dollars. The Commission

believes that deterring abusive market practices will protect investors

and, in the long run, promote capital formation and efficient,

competitive markets.

The proposed amendments to Item 701 of Regulation S-K, Item 701 of

Regulation S-B and Forms 8-K, 10-Q, 10-QSB, 10-K and 10-KSB relax the

existing requirements to report unregistered sales of equity

securities. As such, the Commission believes that these amendments

would decrease reporting, recordkeeping and compliance burdens, while,

at the same time, continuing to provide investors with sufficient

information regarding changes in outstanding securities of public

companies.

The Commission invites commenters to submit empirical data that

will help it assess the costs and benefits of its proposals. The

Commission also encourages commenters to suggest alternative ways of

deterring the abusive practices cited in this release. It would be most

helpful if commenters would state the reasons that a proposed

alternative is preferable to the Commission's proposals and why the

proposed alternative is more cost-effective. If possible, commenters

should submit data that support their views.

Despite the possible increase in cost to issuers resulting from

proposed new requirements such as purchaser certifications and

purchaser and distributor agreements, the Commission does not believe

that the proposed amendments would result in a major increase in costs

or prices for investors, issuers, individual industries or consumers.

The Commission believes that the proposed amendments relaxing the

existing requirements to report unregistered sales of equity securities

would serve to reduce issuer costs. Likewise, the Commission does not

believe that the proposed amendments would have an adverse effect on

competition, employment, investment, productivity, innovation, market

efficiency, or capital formation. In fact, the Commission believes that

the proposed amendments will promote capital formation and efficient,

competitive markets by enhancing investors' confidence in the integrity

of the securities markets. However, the Commission requests comment on

these preliminary views. The Commission encourages commenters to

provide empirical data or other facts to support their views.

Because some of the abusive practices under Regulation S have

involved activities by persons other than issuers, distributors and

their affiliates (that is, investors who purchased in Regulation S

offerings with a view to distributing those securities into the U.S.

markets at the end of the 40-day restricted period), the Commission

believes that it is appropriate to clarify the legal obligations of

purchasers of securities under Regulation S. By expressly defining

these Regulation S securities as falling within the definition of

``restricted securities'' under the Rule 144 resale safe harbor,

purchasers of those securities are provided with clear guidance

regarding when and how those securities may be resold in the United

States without violating the registration requirements of the

Securities Act.52 Given the concurrent adoption of shortened

holding periods under Rule 144, as well as the ability of some

purchasers in Regulation S placements to demand registration rights,

the Commission does not believe that this classification will be unduly

burdensome for purchasers in those offerings. To the extent that a

purchaser chooses to resell the securities under the Rule 144 safe

harbor, the Commission also does not believe that the requirement to

file a Form 144 under certain circumstances will be unduly burdensome,

particularly in light of the benefit of obtaining safe harbor

protection for the resale.

---------------------------------------------------------------------------

\52\ They are also put on notice that resales outside the Rule

144 safe harbor must be evaluated independently against the

statutory underwriter concepts embodied in Section 2(11), regardless

of the issuer's compliance with Regulation S.

---------------------------------------------------------------------------

The proposed amendments to Regulation S could reduce the annual

amount of unregistered equity securities initially sold by issuers and

the annual amount resold by the initial purchasers of those securities.

The Commission requests comments on the likelihood of these effects and

their size in terms of annual dollar amounts. In particular, are the

proposed amendments likely to have a $100,000,000 or larger annual

effect on the securities markets or the economy? If possible,

commenters should provide empirical data or other facts to support

their views.

VIII. Summary of Initial Regulatory Flexibility Analysis

The Commission has prepared an Initial Regulatory Flexibility

Analysis (``IRFA''), pursuant to the requirements of the Regulatory

Flexibility Act,53 regarding the proposals. The proposed

amendments to Regulation S are intended to stop abusive practices under

Regulation S where issuers with a market for their securities in the

United States conduct offshore placements of their securities pursuant

to Regulation S that are in essence indirect distributions of these

securities into the U.S. markets without the protections of

registration under the Securities Act. Over the last several months,

the Commission staff has met with numerous participants in the market

for Regulation S securities. Based on the anecdotal information

obtained through these discussions, it appears that many small

businesses currently use Regulation S with respect to equity sales.

However, there appears to be no significant alternative to the current

proposals that would impose less burdens on small entities, yet

forestall further abuse under Regulation S.

---------------------------------------------------------------------------

\53\ 5 U.S.C. 603.

---------------------------------------------------------------------------

The proposed amendments to Item 701 of Regulation S-K, Item 701 of

Regulation S-B and Forms 8-K, 10-Q, 10-QSB, 10-K and 10-KSB would relax

the existing requirements to report unregistered sales of equity

securities. These amendments would decrease reporting, recordkeeping

and compliance burdens, while, at the same time, continuing to provide

investors with sufficient information regarding

[[Page 9268]]

changes in outstanding securities of public companies.

There are new reporting, recordkeeping or other compliance

requirements proposed as part of the proposed Regulation S rules. The

Commission proposes to lengthen the restricted period during which

persons relying on the Regulation S safe harbor may not publicly resell

these equity securities (absent registration) to U.S. persons from 40

days or one year to two years. In addition, since covered equity

securities placed offshore pursuant to Regulation S would be classified

as ``restricted securities'' within the meaning of Rule 144, purchasers

of these securities may choose to resell under the Rule 144 safe

harbor, and therefore would be required to comply with the conditions

of that safe harbor, including the Rule 144 holding periods. These

proposals may reduce incentives to conduct equity placements under

Regulation S due to a perceived reduction in the liquidity of the

securities absent registration under the Securities Act or a valid

exemption.

The Regulation S proposals also would impose on reporting issuers

certification, legending and other requirements currently only

applicable to sales of equity securities by non-reporting issuers. The

purpose of these requirements is to assure that the participants in the

distribution and the purchasers are aware of the restricted nature of

these securities. These proposals would expand the current purchaser

and distributor agreement requirements to require that they agree not

to engage in hedging transactions with regard to such securities unless

the transactions are in compliance with the Securities Act, and would

make sure that participants in the offering are aware of and comply

with these restrictions. In addition, promissory notes would be

prohibited for use as payment for these securities. These last two

proposals are intended to address abusive transactions involving

hedging transactions and the use of promissory notes that from a

practical perspective result in indirect distributions of securities

into the U.S. markets without the protections of registration.54

Although these additional purchaser requirements could increase

recordkeeping and compliance burdens, in almost all instances,

purchasers of securities sold pursuant to Regulation S would be non-

U.S. persons. Any such additional purchaser requirements could have an

indirect impact on U.S. small businesses.

---------------------------------------------------------------------------

\54\ See notes 21 and 22 and accompanying text, supra, for a

discussion of the abusive transactions.

---------------------------------------------------------------------------

Lastly, the Regulation S proposals would make clear that offshore

resales under Rule 904 of equity securities of these issuers that are

``restricted securities,'' as defined in Rule 144, will not affect the

restricted status of those securities. Consequently, holders of

restricted securities could not attempt to remove the restrictions by

selling the securities offshore.

All of these requirements are imposed on domestic issuers, and

foreign issuers with the principal market for the equity securities in

the United States, regardless of size. As proposed, small businesses

would be able to obtain the protections of the proposed safe harbors on

the same basis as larger companies. The Commission considered yet

rejected alternatives applicable to small businesses, as the Commission

believes that distinctions between companies based on size would negate

the beneficial effects of the proposed safeguards. The Commission seeks

comment on these views. Commenters are encouraged to suggest

alternatives that would be appropriate and beneficial to small

businesses, and data to support any alternative approach.

The IRFA notes that the proposed amendments to Regulation S, if

adopted, would affect persons that are small entities, as defined by

the Commission's rules. The term ``small business,'' as used in

reference to a registrant for purposes of the Regulatory Flexibility

Act, is defined by Rule 157 55 under the Securities Act as an

issuer that, on the last day of its most recent fiscal year, had total

assets of $5 million or less and is engaged or proposing to engage in

small business financing. An issuer is considered to be engaged in

small business financing if it is conducting or proposes to conduct an

offering of securities which does not exceed the $5 million dollar

limitation prescribed by Section 3(b) of the Securities Act. When used

with reference to an issuer other than an investment company, the term

also is defined in Rule 0-10 56 of the Exchange Act as an issuer

that, on the last day of its most recent fiscal year, had total assets

of $5 million or less. When used with respect to an investment company,

the term is defined under Rule 0-10 as an investment company with net

assets of $50 million or less as of the end of its most recent fiscal

year.

---------------------------------------------------------------------------

\55\ 17 CFR 230.157.

\56\ 17 CFR 240.0-10.

---------------------------------------------------------------------------

Small entities meeting these definitions would be able to rely on

the Regulation S safe harbors on the same basis as larger entities. The

Commission is aware of approximately 1,019 Exchange Act reporting

companies that currently satisfy the definition of ``small business''

under Rule 0-10. There is no reliable way of determining, however, how

many non-reporting companies would be subject to the rule or how many

small businesses may become subject to Commission registration and

reporting obligations in the future. The Commission solicits comments

regarding how to estimate the number of non-reporting issuers that may

be affected by the proposed changes, together with data or assumptions

to support such an approach.

The Commission estimates that over 500 Exchange Act reporting

companies conduct over 750 sales pursuant to Regulation S per year and

therefore would be affected by the proposals. The Commission further

estimates that up to 160 of such reporting companies would meet the

Regulatory Flexibility Act definition of small businesses. The total

number of companies conducting Regulation S sales--including companies

that are not Exchange Act reporting companies--undoubtedly would exceed

the above numbers. Because no data are available as to non-reporting

companies' sales due to the absence of any filings with the Commission

regarding such sales, the exact number is impossible to determine. It

is important to note that the Commission only recently began receiving

data from reporting issuers regarding their placements of equity

securities pursuant to Regulation S,57 and therefore, does not

have long-term data that would assist it in determining how many small

businesses may actually rely on the Regulation S safe harbors, or may

otherwise be impacted by the rule proposals. The Commission solicits

comments regarding how to estimate the number of small businesses that

may be affected by the proposed changes together with data or

assumptions to support such an approach.

---------------------------------------------------------------------------

\57\ Since November 18, 1996, sales of equity securities by

domestic issuers under Regulation S are required to be reported on

Form 8-K within 15 days of occurrence. This reporting requirement

does not apply to any issuer who is not subject to the periodic

reporting requirements under the Exchange Act, and in general does

not apply to foreign issuers. See Exchange Act Release No. 37801,

supra note 26.

---------------------------------------------------------------------------

The proposed changes to Item 701 of Regulation S-B and Forms 8-K,

10-QSB and 10-KSB also would affect persons that are small businesses,

as defined by the Commission's rules. The Commission expects, however,

that the proposed changes would decrease

[[Page 9269]]

reporting, recordkeeping and compliance burdens. The Commission

estimates that up to 160 reporting companies qualifying as small

businesses would be relieved of the burden of filing up to 300

additional Forms 8-K per year, thereby reducing the total annual record

keeping burden by 1,500 hours. The analysis also indicates that there

are no current federal rules that duplicate, overlap or conflict with

the revised disclosure provisions.

While the Regulation S proposals may affect the ability of some

small entities to access offshore capital, these restrictions should be

sufficient to end the abusive practices under Regulation S, and

forestall any further abuse, while not foreclosing the offshore market

entirely for unregistered offshore offerings of equity securities. In

addition, the concurrent adoption of shortened holding periods under

Rule 144, coupled with the proposal to allow delayed pricing by smaller

issuers in registered offerings, should help offset any adverse effect

on small entities. No alternatives to the proposed rules consistent

with their objectives and the Commission's statutory authority were

found.

Comments are encouraged on any aspect of this analysis. A copy of

the analysis may be obtained by contacting Walter G. Van Dorn, Jr.,

Office of International Corporate Finance, Division of Corporation

Finance, Mail Stop 3-9, 450 Fifth Street, N.W., Washington, D.C. 20549.

IX. Paperwork Reduction Act

The staff has consulted with the Office of Management and Budget

(the ``OMB'') and has submitted the proposals for review in accordance

with the Paperwork Reduction Act of 1995 (the ``Act''). 58 Under

the proposed amendments to Regulation S, if adopted, equity securities

of domestic issuers, and of foreign issuers where the principal market

for the equity securities is in the United States, that are issued

offshore pursuant to Regulation S would be deemed ``restricted

securities'' as defined in Rule 144 under the Securities Act.

Consequently, purchasers of these securities in the offshore placement,

and any subsequent purchasers, may choose to resell these securities

into the U.S. markets pursuant to the conditions of the Rule 144 safe

harbor for resales of restricted securities. Such conditions may

include filing with the Commission a notice of proposed sale on Form

144, containing information about the issuer of the securities, the

seller, the securities to be sold and the proposed manner of sale.

---------------------------------------------------------------------------

\58\ 44 U.S.C. 3501 et seq.

---------------------------------------------------------------------------

Prior to November 18, 1996, issuers of equity securities under

Regulation S were not explicitly required to disclose such issuances in

Commission filings. Since then, domestic reporting issuers of equity

securities under Regulation S are required to file a Current Report on

Form 8-K within 15 days of occurrence. 59 The Commission estimates

that approximately 500 domestic issuers reporting under the Exchange

Act conduct approximately 750 offshore offerings of equity securities

pursuant to Regulation S each year. The Commission is not able to

estimate the number of Regulation S sales by non-reporting companies.

Assuming an average of two purchasers in each of these sales, and

assuming that approximately one-half of such purchasers will choose to

resell the securities under Rule 144, the Commission estimates

approximately 750 additional filings on Form 144 on a yearly basis.

Based on past Commission experience with Form 144 filings, the

Commission estimates the total annual reporting and recordkeeping

burden that will result from the collection of information to be two

hours per respondent, and 1,500 hours in the aggregate on a yearly

basis. Under the proposed amendments to Item 701 of Regulation S-K,

Item 701 of Regulation S-B and Forms 8-K, 10-Q, 10-QSB, 10-K and 10-

KSB, if adopted, the existing requirements to report unregistered sales

of equity securities would be relaxed by delaying when the unregistered

sale would have to be reported. Thus, the Commission believes that the

proposed amendments would decrease reporting, recordkeeping and

compliance burdens.

---------------------------------------------------------------------------

\59\ This reporting requirement does not apply to any issuer who

is not subject to the periodic reporting requirements under the

Exchange Act, and in general does not apply to foreign issuers. See

Exchange Act Release No. 37801, supra note 26.

---------------------------------------------------------------------------

In addition, the proposed changes include the requirement that

purchasers of certain types of equity securities sold under Regulation

S certify that they are not U.S. persons and are not acquiring the

securities for the account or benefit of a U.S. person, or that they

are U.S. persons who purchased securities in a transaction that did not

require registration under the Securities Act. This certification

requirement also could result in a corresponding increase in

recordkeeping burden on the part of issuers attempting to keep records

of such certifications. The amendments also require distributors and

certain purchasers of Regulation S equity securities to enter into

agreements not to engage in hedging transactions with regard to those

securities unless such transactions are in compliance with the

Securities Act. This requirement too could result in an increase in

recordkeeping burden on the part of issuers or distributors attempting

to keep records of these purchase agreements. Additionally, the

proposals would necessitate revised stop transfer instructions that

would require an issuer, by contract or a provision in its bylaws,

articles, charter or comparable document, to refuse to register any

transfer of securities unless made in accordance with the registration

or exemptive provisions of the Securities Act, or in accordance with

Regulation S. The creation and safekeeping of the necessary

documentation for such stop transfer instructions would increase

issuers' recordkeeping and compliance burdens.

The Commission solicits comment on (i) whether the proposed changes

in collection of information are necessary, (ii) the accuracy of the

Commission's estimate of the burden of the proposed changes to the

collection of information, (iii) the quality, utility and clarity of

the information to be collected, and (iv) whether the burden of

collection of information on those who are to respond, including

through the use of automated collection techniques or other forms of

information technology, may be minimized.

Persons desiring to submit comments on the collection of

information requirements should direct them to the Office of Management

and Budget, Attention: Desk Officer for the Securities and Exchange

Commission, Office of Information and Regulatory Affairs, Washington,

D.C. 20503, and should also send a copy of their comments to Jonathan

G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth

Street, N.W., Washington, D.C. 20549, with reference to File No. S7-8-

97. The OMB is required to make a decision concerning the collection of

information between 30 and 60 days after publication, so a comment to

OMB is best assured of having its full effect if OMB receives it within

30 days of publication.

X. Statutory Bases

The amendments to Regulation S are being proposed pursuant to

Sections 5 and 19 of the Securities Act, as amended, and the amendments

to Rule 144 are being proposed pursuant to sections 2(11), 4, 5 and 19

of the

[[Page 9270]]

Securities Act, as amended. 60 The amendments to Item 701 of

Regulation S-B and of Regulation S-K and to Form 8-K, Form 10-QSB, Form

10-Q, Form 10-KSB, and Form 10-K are being proposed pursuant to

sections 3(b), 4A, 12, 13, 14, 15, 16 and 23 of the Securities Exchange

Act.

---------------------------------------------------------------------------

\60\ 15 U.S.C. 77d, 77e and 77s.

---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 228, 229, 230, and 249

Reporting and recordkeeping requirements, Securities.

Text of the Proposals

In accordance with the foregoing, Title 17, Chapter II of the Code

of Federal Regulations is proposed to be amended as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

1. The authority citation for Part 228 continues to read as

follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,

77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,

78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-

11, unless otherwise noted.

Sec. 228.701 [Amended]

2. By amending paragraph (e) of Sec. 228.701 by removing the words

``Form 8-K,'' and ``249.308,''.

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES

ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND

CONSERVATION ACT OF 1975--REGULATION S-K

3. The authority citation for Part 229 continues to read in part as

follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,

77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn,

77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n,

79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.

* * * * *

Sec. 229.701 [Amended]

4. By amending paragraph (e) of Sec. 229.701 by removing the words

``Form 8-K,'' and ``249.308,''.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

5. The authority citation for Part 230 continues to read in part as

follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,

78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 78t, 80a-8, 80a-29, 80a-30,

and 80a-37, unless otherwise noted.

* * * * *

6. Section 230.144 is amended by revising paragraphs (a)(3) and

(e)(3)(vii) to read as follows:

Sec. 230.144 Persons deemed not to be engaged in a distribution and

therefore not underwriters.

* * * * *

(a) * * *

(3) The term restricted securities means:

(i) Securities acquired directly or indirectly from the issuer, or

from an affiliate of the issuer, in a transaction or chain of

transactions not involving any public offering;

(ii) Securities acquired from the issuer that are subject to the

resale limitations of Sec. 230.502(d) under Regulation D or

Sec. 230.701(c);

(iii) Securities acquired in a transaction or chain of transactions

meeting the requirements of Sec. 230.144A;

(iv) Securities acquired from the issuer in a transaction subject

to the conditions of Regulation CE (Sec. 230.1001); and

(v) Equity securities of domestic issuers, and of foreign issuers

where the principal market for such securities is in the United States

(as defined in Sec. 230.902(h)), acquired in a transaction or chain of

transactions subject to the conditions of Sec. 230.901 or Sec. 230.903

under Regulation S (Sec. 230.901 through Sec. 230.905 and Preliminary

Notes).

* * * * *

(e) * * *

(3) * * *

(vii) The following sales of securities need not be included in

determining the amount of securities sold in reliance upon this

section: securities sold pursuant to an effective registration

statement under the Act; securities sold pursuant to an exemption

provided by Regulation A (Sec. 230.251 through Sec. 230.263) under the

Act; securities sold in a transaction exempt pursuant to Section 4 of

the Act (15 U.S.C. 77(e)) and not involving any public offering; and

securities sold offshore pursuant to Regulation S (Sec. 230.901 through

Sec. 230.905, and Preliminary Notes) under the Act.

* * * * *

7. Section 230.902 is revised to read as follows:

Sec. 230.902. Definitions.

As used in Regulation S, the following terms shall have the

meanings indicated.

(a) Debt securities. ``Debt securities'' of an issuer will be

defined to include any security other than an equity security as

defined in Sec. 230.405, as well as the following:

(1) Non-participatory preferred stock, which is defined as 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;

or

(2) Asset-backed securities, which are defined as the securities of

a type that either:

(i) 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

(ii) Is secured by one or more assets or certificates of interest

or participation in such assets, and the 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 paragraph (a)(2)(i) of this section, or certificates of

interest or participations in assets meeting such requirements.

(3) For purposes of paragraph (a)(2) of this section, the term

``assets'' means 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.

(b) Designated offshore securities market. ``Designated offshore

securities market'' means:

(1) The Eurobond market, as regulated by the Association of

International Bond Dealers; the Alberta Stock Exchange; the Amsterdam

Stock Exchange; the Australian Stock Exchange Limited; the Bermuda

Stock Exchange; the Bourse de Bruxelles; the Copenhagen Stock Exchange;

the Frankfurt Stock Exchange; the Helsinki Stock Exchange; The Stock

Exchange of Hong Kong Limited; the Irish Stock Exchange; the Istanbul

Stock Exchange; the Johannesburg Stock Exchange; the London Stock

Exchange; the Bourse de Luxembourg; the Mexico Stock Exchange; the

Borsa Valori di Milan; the Montreal Stock Exchange; the Oslo 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

[[Page 9271]]

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.

(c) 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 Regulation S (Sec. 230.901

through Sec. 230.905, and Preliminary Notes). Such activity includes

placement of an advertisement in a publication ``with a general

circulation in the United States'' that refers to the offering of

securities being made in reliance upon this Regulation S.

(2) Publication ``with a general circulation in the United

States'':

(i) Is defined as any publication that is printed primarily for

distribution in the United States, or has had, during the preceding

twelve months, an average circulation in the United States of 15,000 or

more copies per issue; and

(ii) Only the U.S. edition of any publication printing a separate

U.S. edition will be deemed a publication ``with a general circulation

in the United States'' if such publication, without consideration of

its U.S. edition, would not meet the requirements of paragraph

(c)(2)(i) of this section; and the U.S. edition itself meets the

requirements of paragraph (c)(2)(i) of this section.

(3) The following are not ``directed selling efforts'':

(i) Placement of an advertisement required to be published under

United States or foreign law, or under rules or regulations of a United

States or foreign regulatory or self-regulatory authority, provided 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 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 Category 2 or 3 in Sec. 230.903) absent registration or

an applicable exemption from the registration requirements;

(ii) Contact with persons excluded from the definition of ``U.S.

person'' pursuant to paragraph (l)(2)(vi) of this section or persons

holding accounts excluded from the definition of ``U.S. person''

pursuant to paragraph (l)(2)(i) of this section, solely in their

capacities as holders of such accounts;

(iii) A tombstone advertisement in any publication with a general

circulation in the United States, provided:

(A) The publication has less than 20% of its circulation,

calculated by aggregating the circulation of its U.S. and comparable

non-U.S. editions, in the United States;

(B) Such advertisement contains a legend to the effect that the

securities have not been registered under the 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 Category 2 or 3 in

Sec. 230.903) absent registration or an applicable exemption from the

registration requirements; and

(C) Such advertisement contains no more information than:

(1) The issuer's name;

(2) The amount and title of the securities being sold;

(3) A brief indication of the issuer's general type of business;

(4) The price of the securities;

(5) The yield of the securities, if debt securities with a fixed

(non-contingent) interest provision;

(6) The name and address of the person placing the advertisement,

and whether such person is participating in the distribution;

(7) The names of the managing underwriters;

(8) The dates, if any, upon which the sales commenced and

concluded;

(9) Whether the securities are offered or were offered by rights

issued to security holders and, if so, the class of securities that are

entitled or were 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

(10) Any legend required by law or any foreign or U.S. regulatory

or self-regulatory authority;

(iv) Bona fide 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;

(v) Distribution in the United States of a foreign broker-dealer's

quotations by a third-party system that distributes such quotations

primarily in foreign countries if:

(A) Securities transactions cannot be executed between foreign

broker-dealers and persons in the United States through the system; and

(B) The issuer, distributors, their respective affiliates, persons

acting on behalf of any of the foregoing, foreign broker-dealers and

other participants in the system do not initiate contacts with U.S.

persons or persons within the United States, beyond those contacts

exempted under Sec. 240.15a-6 of this chapter; and

(vi) Publication by an issuer of a notice in accordance with

Sec. 230.135 or Sec. 230.135c.

(d) Distributor. ``Distributor'' means any underwriter, dealer, or

other person who participates, pursuant to a contractual arrangement,

in the distribution of the securities offered or sold in reliance on

this Regulation S (Sec. 230.901 through Sec. 230.905, and Preliminary

Notes).

(e) Domestic issuer. ``Domestic issuer'' means any issuer other

than a foreign issuer (as defined in Sec. 230.405).

(f) Offering restrictions. ``Offering restrictions'' means:

(1) Each distributor agrees in writing:

(i) That all offers and sales of the securities prior to the

expiration of the restricted period specified in Category 2 or 3 in

Sec. 230.903, as applicable, shall be made only in accordance with the

provisions of Sec. 230.903 or Sec. 230.904; pursuant to registration of

the securities under the Act; or pursuant to an available exemption

from the registration requirements of the Act; and

(ii) For offers and sales of equity securities of domestic issuers,

and of foreign issuers where the principal market for those securities

is in the United States, not to engage in hedging transactions with

regard to such securities prior to the expiration of the restricted

period specified in Category 2 or 3 in Sec. 230.903, as applicable,

unless in compliance with the Act; and

(2) All offering materials and documents (other than press

releases) used in connection with offers and sales of the securities

prior to the expiration of the restricted period specified in Category

2 or 3 in Sec. 230.903, as applicable, shall include statements to the

effect that the securities have not been registered under the Act and

may not be offered or sold in the United States or to U.S. persons

(other than distributors) unless the securities are registered under

the Act, or an exemption from the registration

[[Page 9272]]

requirements of the Act is available. For offers and sales of equity

securities of domestic issuers, and of foreign issuers where the

principal market for those securities is in the United States, such

offering materials and documents also must state that hedging

transactions involving those securities may not be conducted unless in

compliance with the Act. Such statements shall appear:

(i) On the cover or inside cover page of any prospectus or offering

circular used in connection with the offer or sale of the securities;

(ii) In the underwriting section of any prospectus or offering

circular used in connection with the offer or sale of the securities;

and

(iii) In any advertisement made or issued by the issuer, any

distributor, any of their respective affiliates, or any person acting

on behalf of any of the foregoing. Such statements may appear in

summary form on prospectus cover pages and in advertisements.

(g) Offshore transaction.

(1) An offer or sale of securities is made in an ``offshore

transaction'' if:

(i) The offer is not made to a person in the United States; and

(ii) Either:

(A) At the time the buy order is originated, the buyer is outside

the United States, or the seller and any person acting on its behalf

reasonably believe that the buyer is outside the United States; or

(B) For purposes of:

(1) Sec. 230.903, the transaction is executed in, on or through a

physical trading floor of an established foreign securities exchange

that is located outside the United States; or

(2) Sec. 230.904, the transaction is executed in, on or through the

facilities of a designated offshore securities market described in

paragraph (a) of this section, and 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.

(2) Notwithstanding paragraph (g)(1) of this section, offers and

sales of securities specifically targeted at identifiable groups of

U.S. citizens abroad, such as members of the U.S. armed forces serving

overseas, shall not be deemed to be made in ``offshore transactions.''

(3) Notwithstanding paragraph (g)(1) of this section, offers and

sales of securities to persons excluded from the definition of ``U.S.

person'' pursuant to paragraph (l)(2)(vi) of this section or persons

holding accounts excluded from the definition of ``U.S. person''

pursuant to paragraph (l)(2)(i) of this section, solely in their

capacities as holders of such accounts, shall be deemed to be made in

``offshore transactions.''

(h) Principal market in the United States. With respect to a class

of equity securities, a foreign issuer has its ``Principal market in

the United States'' if more than 50 percent of all trading in such

class of securities took place in, on or through the facilities of

securities exchanges and inter-dealer quotation systems in the United

States in the shorter of the issuer's prior fiscal year or the period

since the issuer's incorporation.

(i) Reporting issuer. ``Reporting issuer'' means an issuer other

than an investment company registered or required to register under the

1940 Act that:

(1) Has a class of securities registered pursuant to Section 12(b)

or 12(g) of the Exchange Act (15 U.S.C. 78l(b) or 78l(g)) or is

required to file reports pursuant to Section 15(d) of the Exchange Act

(15 U.S.C. 78o(d)); and

(2) Has filed all the material required to be filed pursuant to

Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d))

for a period of at least twelve months immediately preceding the offer

or sale of securities made in reliance upon this Regulation S

(Sec. 230.901 through Sec. 230.905, and Preliminary Notes) (or for such

shorter period that the issuer was required to file such material).

(j) Restricted period. ``Restricted period'' means a period that

commences on the later of the date upon which the securities were first

offered to persons other than distributors in reliance upon this

Regulation S or the date of closing of the offering, and expires a

specified period of time thereafter; provided, however, that all offers

and sales by a distributor of an unsold allotment or subscription shall

be deemed to be made during the restricted period; provided, further,

that in a continuous offering, the restricted period shall commence

upon completion of the distribution, as determined and certified by the

managing underwriter or person performing similar functions; provided,

further, that in a continuous offering of non-convertible debt

securities offered and sold in identifiable tranches, the restricted

period for securities in a tranche shall commence upon completion of

the distribution of such tranche, as determined and certified by the

managing underwriter or person performing similar functions; provided,

further, that in a continuous offering of securities to be acquired

upon the exercise of warrants, the restricted period shall commence

upon completion of the distribution of the warrants, as determined and

certified by the managing underwriter or person performing similar

functions, if requirements of Sec. 230.903(b)(5) are satisfied.

(k) Substantial U.S. market interest.

(1) ``Substantial U.S. market interest'' with respect to a class of

an issuer's equity securities means:

(i) The securities exchanges and inter-dealer quotation systems in

the United States in the aggregate constituted the single largest

market for such class of securities in the shorter of the issuer's

prior fiscal year or the period since the issuer's incorporation; or

(ii) 20 percent or more of all trading in such 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

issuer's prior fiscal year or the period since the issuer's

incorporation.

(2) ``Substantial U.S. market interest'' with respect to an

issuer's debt securities means:

(i) Its debt securities, in the aggregate, are held of record by

300 or more U.S. persons;

(ii) $1 billion or more of: the principal amount outstanding of its

debt securities, the greater of liquidation preference or par value of

its securities described in Sec. 230.902(a)(1), and the principal

amount or principal balance of its securities described in

Sec. 230.902(a)(2), in the aggregate, is held of record by U.S.

persons; and

(iii) 20 percent or more of: the principal amount outstanding of

its debt securities, the greater of liquidation preference or par value

of its securities described in Sec. 230.902(a)(1), and the principal

amount or principal balance of its securities described in

Sec. 230.902(a)(2), in the aggregate, is held of record by U.S.

persons.

(3) Notwithstanding paragraph (k)(2) of this section, substantial

U.S. market interest with respect to an issuer's debt securities is

calculated without reference to securities that qualify for the

exemption provided by Section 3(a)(3) of the Act (15 U.S.C. 77c(a)(3)).

(l) U.S. person.

(1) ``U.S. person'' means:

(i) Any natural person resident in the United States;

(ii) Any partnership or corporation organized or incorporated under

the laws of the United States;

(iii) Any estate of which any executor or administrator is a U.S.

person;

(iv) Any trust of which any trustee is a U.S. person;

(v) Any agency or branch of a foreign entity located in the United

States;

[[Page 9273]]

(vi) Any non-discretionary account or similar account (other than

an estate or trust) held by a dealer or other fiduciary for the benefit

or account of a U.S. person;

(vii) Any discretionary account or similar account (other than an

estate or trust) held by a dealer or other fiduciary organized,

incorporated, or (if an individual) resident in the United States; and

(viii) Any partnership or corporation if:

(A) Organized or incorporated under the laws of any foreign

jurisdiction; and

(B) Formed by a U.S. person principally for the purpose of

investing in securities not registered under the Act, unless it is

organized or incorporated, and owned, by accredited investors (as

defined in Sec. 230.501(a)) who are not natural persons, estates or

trusts.

(2) The following are not ``U.S. persons'':

(i) Any discretionary account or similar account (other than an

estate or trust) held for the benefit or account of a non-U.S. person

by a dealer or other professional fiduciary organized, incorporated, or

(if an individual) resident in the United States;

(ii) Any estate of which any professional fiduciary acting as

executor or administrator is a U.S. person if:

(A) An executor or administrator of the estate who is not a U.S.

person has sole or shared investment discretion with respect to the

assets of the estate; and

(B) The estate is governed by foreign law;

(iii) Any trust of which any professional fiduciary acting as

trustee is a U.S. person if a trustee who is not a U.S. person has sole

or shared investment discretion with respect to the trust assets, and

no beneficiary of the trust (and no settlor if the trust is revocable)

is a U.S. person;

(iv) An employee benefit plan established and administered in

accordance with the law of a country other than the United States and

customary practices and documentation of such country;

(v) Any agency or branch of a U.S. person located outside the

United States if:

(A) The agency or branch operates for valid business reasons; and

(B) The agency or branch is engaged in the business of insurance or

banking and is subject to substantive insurance or banking regulation,

respectively, in the jurisdiction where located; and

(vi) The International Monetary Fund, the International Bank for

Reconstruction and Development, the Inter-American Development Bank,

the Asian Development Bank, the African Development Bank, the United

Nations, and their agencies, affiliates and pension plans, and any

other similar international organizations, their agencies, affiliates

and pension plans.

(m) United States. ``United States'' means the United States of

America, its territories and possessions, any State of the United

States, and the District of Columbia.

8. Section 230.903 is revised to read as follows:

Sec. 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.

(a) An offer or sale of securities by the issuer, a distributor,

any of their respective affiliates, or any person acting on behalf of

any of the foregoing, shall be deemed to occur outside the United

States within the meaning of Sec. 230.901 if the offer or sale shall be

made in an offshore transaction, and no directed selling efforts shall

be made in the United States by the issuer, a distributor, any of their

respective affiliates, or any person acting on behalf of any of the

foregoing.

(b) Additional conditions.

(1) Category 1. Securities in this category may be offered and sold

without any conditions other than those set forth in Sec. 230.903(a) of

this section. The securities eligible for this category are:

(i) The issuer is a foreign issuer that reasonably believes at the

commencement of the offering that:

(A) There is no substantial U.S. market interest in the class of

securities to be offered or sold (if equity securities are offered or

sold);

(B) There is no substantial U.S. market interest in its debt

securities (if debt securities are offered or sold);

(C) There is no substantial U.S. market interest in the securities

to be purchased upon exercise (if warrants are offered or sold); and

(D) There is no substantial U.S. market interest in either the

convertible securities or the underlying securities (if convertible

securities are offered or sold);

(ii) The securities are offered and sold in an overseas directed

offering, which means:

(A) An offering of securities of a foreign issuer that is directed

into a single country other than the United States to the residents

thereof and that is made in accordance with the local laws and

customary practices and documentation of such country; or

(B) An offering of non-convertible debt securities of a domestic

issuer that is directed into a single country other than the United

States to the residents thereof and that is made in accordance with the

local laws and customary practices and documentation of such country,

provided that the principal and interest of the securities (or par

value, as applicable) are denominated in a currency other than U.S.

dollars and such securities are neither convertible into U.S. dollar-

denominated securities nor linked to U.S. dollars (other than through

related currency or interest rate swap transactions that are commercial

in nature) in a manner that in effect converts the securities to U.S.

dollar-denominated securities.

(iii) The securities are backed by the full faith and credit of a

foreign government; or

(iv) The securities are offered and sold to employees of the issuer

or its affiliates pursuant to an employee benefit plan established and

administered in accordance with the law of a country other than the

United States, and customary practices and documentation of such

country, provided that:

(A) The securities are issued in compensatory circumstances for

bona fide services rendered to the issuer or its affiliates in

connection with their businesses and such services are not rendered in

connection with the offer and sale of securities in a capital-raising

transaction;

(B) Any interests in the plan are not transferable other than by

will or the laws of descent or distribution;

(C) The issuer takes reasonable steps to preclude the offer and

sale of interests in the plan or securities under the plan to U.S.

residents other than employees on temporary assignment in the United

States; and

(D) 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.

(2) Category 2. Securities in this category may be offered and sold

provided that:

(i) The following conditions are met:

(A) The conditions set forth in Sec. 230.903(a) are met;

(B) Offering restrictions are implemented;

(C) The offer or sale, if made prior to the expiration of a 40-day

restricted period, is not made to a U.S. person or for the account or

benefit of a U.S. person (other than a distributor), unless

[[Page 9274]]

made pursuant to registration or an exemption therefrom under the Act;

and

(D) Each distributor selling securities to a distributor, a dealer,

as defined in section 2(12) of the Act (15 U.S.C. 77b(12)), or a person

receiving a selling concession, fee or other remuneration in respect of

the securities sold, prior to the expiration of a 40-day restricted

period, sends a confirmation or other notice to the purchaser stating

that the purchaser is subject to the same restrictions on offers and

sales that apply to a distributor; and

(ii) The securities are equity securities of reporting foreign

issuers unless the principal market for those securities is in the

United States, or the securities are debt securities of a reporting

issuer or of a foreign issuer.

(3) Category 3. Securities that are not eligible for Category 1 or

2 (paragraphs (b) (1) or (2)) in this section may be offered or sold

provided that the following conditions are met:

(i) The conditions set forth in Sec. 230.903(a) are met;

(ii) Offering restrictions are implemented;

(iii) In the case of debt securities:

(A) The offer or sale, if made prior to the expiration of a 40-day

restricted period, is not made to a U.S. person or for the account or

benefit of a U.S. person (other than a distributor), unless made

pursuant to registration or an exemption therefrom under the Act; and

(B) The securities are represented upon issuance by a temporary

global security which is not exchangeable for definitive securities

until the expiration of the 40-day restricted period and, for persons

other than distributors, until certification of beneficial ownership of

the securities by a non-U.S. person or a U.S. person who purchased

securities in a transaction that did not require registration under the

Act;

(iv) In the case of equity securities, if made prior to the

expiration of a two-year restricted period with respect to domestic

issuers and foreign issuers where the principal market for the

securities is in the United States, and a one-year restricted period

with respect to other issuers:

(A) The offer or sale is not made to a U.S. person or for the

account or benefit of a U.S. person (other than a distributor), unless

made pursuant to registration or an exemption therefrom under the Act;

and

(B) The offer or sale is made pursuant to the following conditions:

(1) The purchaser of the securities (other than a distributor)

certifies that it is not a U.S. person and is not acquiring the

securities for the account or benefit of any U.S. person or is a U.S.

person who purchased securities in a transaction that did not require

registration under the Act;

(2) The purchaser of the securities agrees to resell such

securities only in accordance with the provisions of this Regulation S

(Sec. 230.901 through Sec. 230.905, and Preliminary Notes), pursuant to

registration under the Act, or pursuant to an available exemption from

registration; and agrees not to engage in hedging transactions with

regard to such securities unless in compliance with the Act;

(3) The securities of a domestic issuer, or of a foreign issuer

where the principal market for the securities is in the United States,

contain a legend to the effect that transfer is prohibited except in

accordance with the provisions of this Regulation S, pursuant to

registration under the Act, or pursuant to an available exemption from

registration; and that hedging transactions involving those securities

may not be conducted unless in compliance with the Act;

(4) The issuer is required, either by contract or a provision in

its bylaws, articles, charter or comparable document, to refuse to

register any transfer of the securities not made in accordance with the

provisions of this Regulation S, pursuant to registration under the

Act, or pursuant to an available exemption from registration; provided,

however, that if the securities are in bearer form or foreign law

prevents the issuer of the securities from refusing to register

securities transfers, other reasonable procedures (such as a legend

described in paragraph (b)(3)(iv)(B)(3) of this section) are

implemented to prevent any transfer of the securities not made in

accordance with the provisions of this Regulation S; and

(5) If the issuer is a domestic issuer, or a foreign issuer and the

principal market for the equity securities is in the United States, no

promissory note or other executory obligation may be received as

payment for the securities, nor may an installment purchase contract be

entered into; and

(v) Each distributor selling securities to a distributor, a dealer

(as defined in section 2(12) of the Act (15 U.S.C. 77b(12)), or a

person receiving a selling concession, fee or other remuneration, prior

to the expiration of a 40-day restricted period in the case of debt

securities, or a two-year restricted period in the case of equity

securities, sends a confirmation or other notice to the purchaser

stating that the purchaser is subject to the same restrictions on

offers and sales that apply to a distributor.

(4) Guaranteed securities. Notwithstanding paragraphs (b)(1)

through (b)(3) of this section, in offerings of debt securities fully

and unconditionally guaranteed as to principal and interest by the

parent of the issuer of the debt securities, only the requirements of

paragraph (b) of this section that are applicable to the offer and sale

of the guarantee need be satisfied with respect to the offer and sale

of the guaranteed debt securities.

(5) Warrants. An offer or sale of warrants under Category 2 or 3

(paragraphs (b) (2) or (3)) of this section also must comply with the

following requirements:

(i) Each warrant must bear a legend stating that the warrant and

the securities to be issued upon its exercise have not been registered

under the Act and that the warrant may not be exercised by or on behalf

of any U.S. person unless registered under the Act or an exemption from

such registration is available;

(ii) Each person exercising a warrant is required to give:

(A) Written certification that it is not a U.S. person and the

warrant is not being exercised on behalf of a U.S. person; or

(B) A written opinion of counsel to the effect that the warrant and

the securities delivered upon exercise thereof have been registered

under the Act or are exempt from registration thereunder; and

(iii) Procedures are implemented to ensure that the warrant may not

be exercised within the United States, and that the securities may not

be delivered within the United States upon exercise, other than in

offerings deemed to meet the definition of ``offshore transaction''

pursuant to Sec. 230.902(g), unless registered under the Act or an

exemption from such registration is available.

9. Section 230.904 is revised to read as follows:

Sec. 230.904. Offshore resales.

(a) An offer or sale of securities by any person other than the

issuer, a distributor, any of their respective affiliates (except any

officer or director who is an affiliate solely by virtue of holding

such position), or any person acting on behalf of any of the foregoing,

shall be deemed to occur outside the United States within the meaning

of Sec. 230.901 if the offer or sale are made in an offshore

transaction, and no directed selling efforts are made in the United

States by the seller, an affiliate, or any person acting on their

behalf.

(b) Additional conditions. In addition to the conditions set forth

in paragraph

[[Page 9275]]

(a) of this section, the following requirements must be satisfied:

(1) Resales by dealers and persons receiving selling concessions.

In the case of an offer or sale of securities of any issuer prior to

the expiration of the restricted period specified in Category 2 or 3

(paragraphs (b) (2) or (3)) of Sec. 230.903, as applicable, by a

dealer, as defined in Section 2(12) of the Act (15 U.S.C. 77b(12)), or

a person receiving a selling concession, fee or other remuneration in

respect of the securities offered or sold:

(i) Neither the seller nor any person acting on his behalf knows

that the offeree or buyer of the securities is a U.S. person; and

(ii) If the seller or any person acting on the seller's behalf

knows that the purchaser is a dealer, as defined in Section 2(12) of

the Act (15 U.S.C. 77b(12)), or is a person receiving a selling

concession, fee or other remuneration in respect of the securities

sold, the seller or a person acting on the seller's behalf sends to the

purchaser a confirmation or other notice stating that the securities

may be offered and sold during the restricted period only: in

accordance with the provisions of this Regulation S (Sec. 230.901

through Sec. 230.905, and Preliminary Notes); pursuant to registration

of the securities under the Act; or pursuant to an available exemption

from the registration requirements of the Act.

(2) Resales by certain affiliates. In the case of an offer or sale

of securities of any issuer by an officer or director of the issuer or

a distributor, who is an affiliate of the issuer or distributor solely

by virtue of holding such position, no selling concession, fee or other

remuneration is paid in connection with such offer or sale other than

the usual and customary broker's commission that would be received by a

person executing such transaction as agent.

10. By adding Sec. 230.905 to read as follows:

Sec. 230.905 Resale limitations.

Equity securities of domestic issuers, and of foreign issuers where

the principal market for such securities is in the United States,

acquired from the issuer, a distributor, or any of their respective

affiliates in an offshore transaction subject to the conditions of

Sec. 230.901 or Sec. 230.903 are deemed to be ``restricted securities''

as defined in Sec. 230.144. Resales of any of such restricted

securities by the offshore purchaser must be made in accordance with

this Regulation S (Sec. 230.901 through Sec. 230.905, and Preliminary

Notes), the registration requirements of the Act or an exemption

therefrom. Any ``restricted securities'' as defined in

Sec. 230.144(a)(3) that are equity securities of domestic issuers, and

of foreign issuers where the principal market for the securities is in

the United States, will continue to be deemed to be restricted

securities, notwithstanding that they were acquired in a resale

transaction made pursuant to Sec. 230.901 or Sec. 230.904.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

11. The authority citation for Part 249 continues to read in part

as follows:

Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;

* * * * *

12. By amending Form 8-K (referenced in Sec. 249.308) by removing

the last sentence of General Instruction B.1. and Item 9.

13. By amending Form 10-Q (referenced in Sec. 249.308a) by revising

paragraph (c) of Item 2 of Part II prior to the Instruction to read as

follows:

Note: Form 10-Q does not and these amendments will not appear in

the Code of Federal Regulations

Form 10-Q

* * * * *

Part II

Item 2. Changes in Securities.

* * * * *

(c) Furnish the information required by Item 701 of Regulation S-K

(Sec. 229.701 of this chapter) as to all equity securities of the

registrant sold by the registrant during the period covered by the

report that were not registered under the Securities Act.

* * * * *

14. By amending Form 10-QSB (referenced in Sec. 249.308b) by

revising paragraph (c) to Item 2 of Part II prior to the Instruction to

read as follows:

Note: Form 10-QSB does not and these amendments will not appear

in the Code of Federal Regulations

Form 10-QSB

* * * * *

Part II

* * * * *

Item 2. Changes in Securities.

* * * * *

(c) Furnish the information required by Item 701 of Regulation S-B

(Sec. 228.701 of this chapter) as to all equity securities of the

registrant sold by the registrant during the period covered by the

report that were not registered under the Securities Act.

* * * * *

15. By amending Form 10-K (referenced in Sec. 249.310) by revising

Item 5 of Part II to read as follows:

Note: Form 10-K does not and these amendments will not appear in

the Code of Federal Regulations

Form 10-K

* * * * *

Part II

* * * * *

Item 5. Market for Registrant's Common Equity and Related

Stockholder Matters.

Furnish the information required by Item 201 of Regulation S-K

(Sec. 229.201 of this chapter) and Item 701 of Regulation S-K

(Sec. 229.701 of this chapter) as to all equity securities of the

registrant sold by the registrant during the period covered by the

report that were not registered under the Securities Act. Provided that

if the Item 701 information previously has been included in a Quarterly

Report on Form 10-Q or 10-QSB (Sec. 249.308a or 249.308b of this

chapter) it need not be furnished.

* * * * *

16. By amending Form 10-KSB (referenced in Sec. 249.310b) by

revising Item 5 of Part II to read as follows:

Note: Form 10-K does not and these amendments will not appear in

the Code of Federal Regulations

Form 10-KSB

* * * * *

Part II

* * * * *

Item 5. Market for Common Equity and Related Stockholder Matters.

Furnish the information required by Item 201 of Regulation S-B and

Item 701 of Regulation S-B as to all equity securities of the

registrant sold by the registrant during the period covered by the

report that were not registered under the Securities Act. Provided that

if the Item 701 information previously has been included in a Quarterly

Report on Form 10-Q or 10-QSB it need not be furnished.

* * * * *

Dated: February 20, 1997.

By the Commission.

Margaret H. McFarland,

Deputy Secretary

[FR Doc. 97-4668 Filed 2-27-97; 8:45 am]

BILLING CODE 8010-01-P