Offshore Offers and Sales
Federal RegisterFeb 25, 1998
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SUMMARY: The Securities and Exchange Commission is adopting amendments
to the Regulation S safe harbor procedures for offshore sales of equity
securities of U.S. issuers and the reporting requirements applicable to
those transactions. The amendments are designed to stop abusive
practices in connection with offerings of equity securities purportedly
made in reliance on Regulation S.
EFFECTIVE DATES: April 27, 1998 except Secs. 249.308, 249.308a,
249.308b, 249.310 and 249.310b (the amendments to Forms 8-K, 10-Q, 10-
QSB, 10-K and 10-KSB) will become effective on January 1, 1999.
FOR FURTHER INFORMATION CONTACT: Felicia H. Kung, Office of
International Corporate Finance, Division of Corporation Finance, at
(202) 942-2990.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the
``Commission'') is adopting amendments to 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 that
have developed. The amendments apply to the offshore sales of equity
securities of domestic issuers. The Commission is also adopting
amendments to Rule 144(a)(3)\4\ and a new Rule 905\5\ that classify
these equity securities as ``restricted securities,'' as defined in
Rule 144 under the Securities Act. In addition, Rule 905 makes clear
that offshore resales under Rule 904\6\ of restricted equity securities
of domestic issuers will not alter the status of these securities as
restricted securities after the resale. The Commission also is
replacing the current requirement that reporting issuers file a Form 8-
K to disclose Regulation S sales of equity securities within 15 days of
the transaction with a requirement that these sales be reported on
Forms 10-Q, 10-QSB, 10-K or 10-KSB, as appropriate. In addition to
these changes, the Commission is adopting other technical amendments to
Regulation S to make the rule clearer and more concise.
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\1\ 17 CFR 230.903.
\2\ 17 CFR 230.901-230.905 and Preliminary Notes.
\3\ 15 U.S.C. 77a et seq.
\4\ 17 CFR 230.144(a)(3).
\5\ 17 CFR 230.905.
\6\ 17 CFR 230.904.
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I. Executive Summary
The Commission adopted Regulation S in 1990 as a safe harbor from
the registration requirements of the Securities Act for offshore offers
and sales of securities. Although the regulation has proved successful
for many types of offerings, abuses in connection with sales of
domestic equity securities have been common.
Regulation S has been used as a means of perpetrating fraudulent
and manipulative schemes, especially schemes involving the securities
of thinly capitalized or ``microcap'' companies. These types of
securities are particularly vulnerable to fraud and manipulation
because little information about them is available to investors.
The Commission is seeking to enhance investor protection with
respect to microcap securities through various initiatives, including
amendments to Regulation S. The changes to the regulation adopted today
should prevent further abuses of this rule, but also allow continued
reliance on Regulation S in legitimate offshore offerings.
The Regulation S amendments adopted today are as follows:
Equity securities placed offshore by domestic issuers
under Regulation S will be classified as ``restricted securities''
within the meaning of Rule 144, so that resales without registration or
an exemption from registration will be restricted; \7\
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\7\ Rule 905, which classifies these securities as
``restricted,'' will not be applied retroactively. See infra Section
III.C.3.
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To avoid confusion between the holding period for
``restricted securities'' under Rule 144 and the ``restricted period''
under Regulation S, the term ``restricted period'' will be renamed the
``distribution compliance period'';
The distribution compliance period for these securities
will be lengthened from 40 days to one year;
Certification, legending and other requirements, which
currently are applicable only to sales of equity securities by non-
reporting issuers, will be imposed on these equity securities;
As a means to alert purchasers of these equity securities
to potential restrictions on hedging their positions in these
securities, purchasers will be required to agree that their hedging
transactions with respect to such securities will be conducted in
compliance with the Securities Act, such as Rule 144 thereunder; and
Offshore resales under Rule 901 \8\ or 904 of equity
securities of domestic issuers that are ``restricted securities,'' as
defined in Rule 144, will not affect the restricted status of these
securities.
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\8\ 17 CFR 230.901.
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The amendments are substantially as proposed with some important
differences. To avoid undue interference with offshore offering
practices of foreign companies, the amendments will apply to the equity
securities of U.S. issuers, but not to the equity securities of foreign
issuers. The distribution compliance period applicable to issuers and
distributors under Rule 903 will be extended to one year, rather than
the proposed two years, to align Regulation S more precisely with the
Rule 144 resale restrictions. In addition, promissory notes will not be
prohibited in Regulation S transactions; rather, the notes must satisfy
certain conditions set forth in Rule 144 before the purchaser can
resell pursuant to that rule. These conditions should ensure that
promissory notes are not used as a means to distribute securities into
the United States. This refined approach will still forestall abuses
related to the use of promissory notes in Regulation S transactions.
Finally, the change from Form 8-K reporting to quarterly reporting will
be delayed to allow the Commission staff to monitor developments under
the amended rule.
II. Background of Proposals and Commenters' Concerns
The Commission has acted to stem abuses of Regulation S by issuers,
affiliates and others involved in the distribution process who were
using Regulation S as a guise for distributing securities into the U.S.
markets without the protections to investors of registration of the
securities under the Securities Act. The Commission first stated its
position about these abuses in a June 1995 interpretive release that
described certain problematic practices under Regulation S.\9\ The
Commission also has instituted enforcement proceedings against
participants in abusive Regulation S transactions.\10\
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\9\ Securities Act Release No. 7190 (June 27, 1995) [60 FR 35663
(July 10, 1995)] (the ``Interpretive Release'').
\10\ See SEC v. Schiffer, Litigation Release No, 15435 (Aug. 7,
1997); In re GFL Ultra Fund Ltd., Securities Act Release No. 7423
(June 18, 1997); SEC v. PanWorld Minerals Int'l, Inc., Litigation
Release No. 15380 (June 2, 1997); SEC v. Members Service Corp.,
Litigation Release No. 15371 (May 22, 1997); SEC v. Rosenfeld,
Litigation Release No. 15274 (Mar. 5, 1997); United States v. Sung
and Feher, Litigation Release No. 14901 (May 6, 1996); In re
Candie's Inc., Securities Act Release No. 7263 (Feb. 21, 1996); SEC
v. Scorpion Technologies, Inc., Litigation Release No. 14814 (Feb.
9, 1996); SEC v. Sarivola; Litigation Release No. 14704 (Oct. 31,
1995); SEC v. EnvirOmint Holdings, Inc., Litigation Release No.
14683 (Oct. 6, 1995); SEC v. Softpoint, Inc., Litigation Release No.
14480 (Apr. 27, 1995); SEC v. Rehtorik, Litigation Release No. 13975
(Feb. 23, 1994); SEC v. Westdon Holding & Inv., Inc., Litigation
Release No. 13263 (June 5, 1992).
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[[Page 9633]]
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 on February 20, 1997, proposed new
restrictions to Regulation S to stop these abusive practices for
placements of equity securities by domestic companies.\11\ In addition,
the Commission proposed to make these restrictions apply to foreign
companies where the principal trading market for their securities is in
the United States because of concerns that abusive practices might
develop in the future. The Commission proposed to classify these equity
securities of domestic and foreign companies placed offshore under
Regulation S as ``restricted securities'' within the meaning of Rule
144, and to revise the applicable offering restrictions to ensure that
these equity securities could not be sold or resold to U.S. persons
(unless pursuant to registration or an exemption).\12\
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\11\ Securities Act Release No. 7392 (Feb. 20, 1997) [62 FR 9258
(Feb. 28, 1997)] (the ``Proposing Release'').
\12\ The Commission proposed to revise the offering restrictions
imposed by Regulation S by: (1) Aligning the Regulation S restricted
period for these equity securities with the Rule 144 holding periods
by lengthening the restricted period from 40 days or one year, as
applicable, to two years; (2) by imposing certification, legending
and other requirements; (3) by requiring purchasers of these
securities to agree not to engage in hedging transactions unless the
transactions comply with the Securities Act; (4) by prohibiting the
use of promissory notes to pay for these securities; and (5) by
clarifying that offshore resales of equity securities that are
``restricted securities,'' as defined in Rule 144, will not ``wash
off'' the restricted status of these securities.
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The comments on the proposals were mixed.\13\ A number of
commenters supported the proposed amendments as necessary and
appropriate to curb abusive practices and to facilitate legitimate
offshore capital raising by U.S. companies. Others believed the
proposals would severely restrict the ability of U.S. companies to
access alternative offshore sources of capital. Several commenters
objected to the extension of the revisions in the rule to foreign
private issuers that have their principal market in the United States.
These commenters urged that the application of the new resale
restrictions, including the legending and stop transfer requirements,
would be inconsistent with the requirements of offshore trading markets
and public offering practices.
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\13\ The 47 comment letters received are available for
inspection and copying in the Commission's public reference room.
Refer to file number S7-8-97. The twelve comment letters that were
submitted via electronic mail may be viewed at the Commission's web
site: http://www.sec.gov.
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III. Amendments Adopted Today
A. Scope of the Amendments
1. Will Not Apply to Foreign Issuers for Which the United States Is the
Principal Market
Although abusive practices under Regulation S have not been evident
in offerings by foreign issuers, the Commission was concerned that
abusive practices might develop in the future since the economic
incentives for indirect distributions and resales into the United
States are the same for equity offerings of both domestic companies and
foreign companies where the principal market for their securities is in
the United States.\14\ Therefore, the Commission proposed that the
Regulation S changes would treat these offerings similarly both with
respect to the new Regulation S requirements, as well as the
``restricted securities'' classification under Rule 144.
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\14\ The Commission proposed defining ``principal market in the
United States'' for a security as when more than 50% 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. This
definition differs from the ``substantial U.S. market interest''
test that is used to determine whether a foreign issuer qualifies
for less restrictive treatment under Category 1 of Rule 903. See
Proposing Release at Section II.
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The commenters strongly opposed this approach. They pointed out
that subjecting foreign issuer securities to these restrictions was
unnecessary in light of the absence of abuses with respect to those
securities. They also asserted that there should be no presumption that
a foreign issuer offering securities overseas is doing so to avoid the
registration and disclosure requirements of the U.S. federal securities
laws, even when it has a substantial trading market for its securities
in the United States. Moreover, in the view of some these commenters,
there is no reason to assume that indirect unregistered distributions
into the United States will occur when these foreign issuers'
securities are sold offshore.
The commenters also noted that if equity securities issued by these
foreign companies are deemed restricted securities, the issuers in
essence would be applying to their offshore offerings many of the
standard practices used in U.S. private placements. The certification
and purchaser agreement requirements would impose a significant burden
on foreign issuers that wish to conduct public offerings in their home
jurisdictions. In addition, many foreign stock exchanges will not
permit trading of legended securities. The commenters asserted that the
legending and stop transfer restrictions, as well as to a lesser extent
the disclosure and certification requirements that would be imposed by
the rule, would impede both public offerings and trading in those
securities on offshore public markets that do not accept legended stock
for trading.\15\ As a result, the classification of foreign equity
securities as ``restricted'' could create a strong disincentive for
foreign companies to list their securities on U.S. markets.
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\15\ A number of commenters also noted that the 50% threshold
for determining the principal market as being in the United States
that was proposed by the Commission was too low and would make the
restrictions applicable to a large number of foreign issuers. One
commenter noted that even if the standard were 100% of the reported
trading volume, 10% of the foreign companies listed in the United
States are traded solely in the United States and would be subject
to the new requirements. See generally, ``U.S. Investors Look Across
the Atlantic,'' The Washington Post, Aug. 31, 1997, at H2 (because
of U.S. investor interest in foreign stocks, the New York Stock
Exchange may be the principal market for many leading European
companies).
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While the Commission remains concerned with the potential for
abuse, it has determined not to extend, at this time, the new
requirements to the securities of foreign private issuers, regardless
of the relative size of their U.S. markets to their worldwide
trading.\16\ The Commission agrees that absent a showing of abuse,
imposing significant new restrictions on the offshore offering
practices of foreign companies is not warranted. However, the
Commission will monitor practices in this area, and will revisit the
issue if abuses occur. Meanwhile, purchasers of these securities are
reminded that Regulation S does not provide a safe harbor for resales
of securities into the United States, and any resales must be made
pursuant to a registration statement or an exemption from the
Securities Act. Regardless of the foreign issuer's compliance with the
Regulation
[[Page 9634]]
S requirements, purchasers cannot purchase securities and resell them
into the United States under circumstances in which they would be
deemed statutory underwriters unless they register those resales.\17\
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\16\ The Commission currently is considering other alternatives
to prevent fraudulent practices that may occur in connection with
the securities of foreign issuers. See Securities Exchange Act
Release No. 34-39670 (Feb. 17, 1998).
\17\ See Interpretive Release at n. 17; Proposing Release at n.
41.
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2. Will Apply to Public Offerings
Several commenters expressed the view that the proposed
restrictions, including the designation of equity securities issued
under Regulation S as restricted securities, were inconsistent with
offshore public offering practices and the requirements of foreign
trading markets. These commenters urged the Commission to adopt a
distinction based on whether there was or will be a public trading
market for the securities offshore following the offer, or whether the
offering was subject to a foreign regulatory scheme governing public
offerings.
Since most of the concerns in this respect were raised with regard
to the extension of the requirements to foreign private issuers, those
concerns are substantially addressed by the Commission's decision to
limit the applicability of the new restrictions to domestic issuers. As
discussed below,\18\ the Commission believes that offering practices
can be adopted to allow the new restrictions to be applied in the
context of a public offering by domestic issuers, including share
acquisitions. The existence of an offshore trading market would not
eliminate the potential for abuse; for example, an offering could be
made at a discount to purchasers offshore who may engage in an illegal
distribution back into the United States. The Commission also is
concerned that otherwise limited distributions to a small group of
offshore investors easily could be structured as underwritten public
offerings to avoid any additional restrictions on resales by those
investors back into the United States. Accordingly, the amendments do
not incorporate a distinction based upon whether a public trading
market for the securities exists offshore, or whether the securities
were issued in a public offering.
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\18\ See infra Section III. C. 1.
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3. Will Apply to All Equity Securities of Domestic Companies, including
Convertible Securities
Consistent with the proposal, the new procedures and restrictions
and the ``restricted securities'' classification will 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.\19\ The Commission is not applying the new restrictions to
offerings of straight debt securities because the nature of the trading
markets for debt securities appears not to have facilitated similar
abusive practices. However, the new restrictions will apply to
offerings of convertible debt securities because Regulation S abuses
have involved the use of convertible or exchangeable securities and
warrants.\20\
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\19\ 17 CFR 230.405. Under the amendments adopted today, 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 902(a)[17 CFR 230.902(a)],
(formally Rule 903(c)(4)).
\20\ See ``Pirates' Play?'', BARRON'S Jan. 7, 1997, at 17.
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Commenters addressing the issue of whether the restrictions should
apply to convertible securities urged the Commission to adopt the
approach incorporated into Rule 144A. Under that approach, a
convertible security is not treated as the same class as the underlying
equity security if it has a conversion premium exceeding a specified
percentage threshold over the market price of the underlying securities
at the time of issuance.\21\ If this approach were used in Regulation
S, convertible securities with a sufficient conversion premium would
not be subject to the new restrictions applicable to equity.
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\21\ See Rule 144A(d)(3)(i) [17 CFR 230.144A(d)(3)(i)]. See also
Securities Act Release No. 6862 (Apr. 23, 1990) [55 FR 17933 (April
30, 1990)] at nn.25 and 26 for a discussion of how the conversion or
exercise premium is determined for purposes of Rule 144A.
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The new rules and restrictions will apply to all equity securities
of U.S. issuers, including exchangeable or convertible securities and
warrants, without regard to the conversion or exercise premium or other
factors. It is clear that these securities can and have been used in
abusive transactions. The potential for abuse exists whenever a
domestic issuer can create offshore, in a transaction not subject to
the registration provisions of the U.S. securities laws, pools of
equity securities that appear to be immediately tradeable back into the
United States because of their unrestricted status. The Commission is
reluctant to specify a conversion premium and thus possibly be viewed
as condoning abusive practices in securities set above that threshold.
In any event, given the volatility of the markets for the types of
small capitalization companies in which the Commission has witnessed
abuses, it would be difficult to set an appropriate threshold for all
types of issuers. Finally, as discussed below, even with application of
the new restrictions to convertible securities, the Commission does not
believe that Regulation S will eliminate the use of these securities as
a means to lower a U.S. issuer's cost of capital. Many issuers do not
need to rely on Regulation S with respect to their sales of convertible
securities because they can use Form S-3 to register the securities.
4. Will Apply to Securities in Employee Benefit Plans
Equity securities offered and sold to non-U.S. resident employees
through an employee benefit plan governed by foreign law have not been
subject to a distribution compliance period regardless of the domicile
of the issuer or U.S. market interest in its securities. Since new Rule
905 would extend to all equity securities of domestic issuers, however,
the proposals would classify those equity securities as restricted
securities within the meaning of Rule 144 when issued to the employee.
Several commenters believed that it was inappropriate to require
non-U.S. resident employees to accept restricted securities pursuant to
their employee benefit plans. To the extent reporting U.S. issuers
believe it is necessary to give their non-U.S. resident employees
immediate access to the U.S. public markets in order to sell the
security, Form S-8, which is effective immediately upon filing, is
available to permit the issuer to register the securities on a
streamlined basis. Consequently, the Commission has determined to apply
Rule 905 to these securities as proposed.
B. Distribution Compliance Periods
As explained in greater detail in the Proposing Release,\22\ the
issuer safe harbor distinguishes three categories of securities
offerings, based upon factors such as the jurisdiction of incorporation
of the company whose securities are being sold, the company's reporting
status under the Securities Exchange Act of 1934 (``Exchange
Act''),\23\ and the degree of U.S. market interest in the issuer's
securities.\24\ The Commission proposed shifting U.S. reporting
companies to ``Category 3'' and
[[Page 9635]]
lengthening the distribution compliance period applicable to domestic
equity securities. The effect of the proposals would have been to
lengthen the distribution compliance period for U.S. reporting
companies from 40 days to two years. Issuers previously subject to
Category 3 for their equity offerings--non-reporting domestic issuers
and foreign issuers with a significant U.S. market interest for their
securities--would have had their distribution compliance period
extended from one to two years. During this period, issuers,
distributors, and their affiliates would have been required to comply
with the documentation and disclosure requirements imposed by Rule 903,
and any offers and sales during this period could not be made to a U.S.
person and still qualify for the safe harbor. In response to concerns
raised by commenters, the Commission is adopting a modified version of
these proposals.
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\22\ See Proposing Release at Section II.
\23\ 15 U.S.C. 78a et seq.
\24\ See discussion at nn. 13-16 of the Proposing Release.
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In addition, to further avoid confusion between the requirements
applicable to issuers and distributors as a condition to perfecting
their Rule 903 safe harbor and the Rule 144 safe harbor applicable to
resales of the securities into the United States by the purchasers of
those securities, the restricted period has been renamed the
``distribution compliance period.'' This should clarify that the
availability of the safe harbor to the issuer and distributors has no
bearing on whether purchasers of Regulation S securities may be acting
as statutory underwriters if they purchase with a view to reselling
into the U.S. markets.
1. Extension of the Distribution Compliance Period
A distribution compliance period is required for Category 2 and
Category 3 offerings under the issuer safe harbors because there is a
greater likelihood that the securities will flow back into the United
States. The purpose of the distribution compliance period is to ensure
that during the offering period and the subsequent aftermarket trading
that takes place offshore, the persons relying on the safe harbor--
issuers, distributors and their affiliates--are not engaged in an
unregistered, non-exempt distribution into the United States capital
markets.\25\ In addition to the prohibition against selling to U.S.
persons during the distribution compliance period, these persons are
subject to special requirements designed to provide assurance that the
securities will come to rest offshore.
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\25\ See Securities Act Release No. 6863 (Apr. 24, 1990)[55 FR
18306 (May 2, 1990)] the ``Adopting Release'') at Section III.B.
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The Commission proposed the two-year distribution compliance period
to make the restrictions on issuers and distributors consistent with
the Rule 144 holding periods applicable to purchasers of the Regulation
S securities under new Rule 905 and the amendments to Rule 144. The
commenters generally agreed that the current 40-day distribution
compliance period was insufficient to protect against use of an
offshore offering to make an indirect offering into the United States,
at least with respect to equity securities of domestic issuers. Some
commenters argued, however, that the two-year period was not necessary
and that a 90-day period, like that originally proposed when Regulation
S was first formulated, would be sufficient.\26\
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\26\ The longer distribution compliance periods also extend the
time during which the issuer and distributors could not engage in
directed selling efforts in the United States. See Adopting Release
at Sectio`n III.B.1.b One commenter expressed concern that the two-
year distribution compliance period places an unworkable ``black-
out'' restriction on publication of research regarding the issuer's
securities.
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Consideration was given to eliminating the distribution compliance
period altogether, on the premise that since the equity securities
issued under Regulation S could not be sold back into the U.S. markets
for a period of two years unless sold in a manner consistent with the
Rule 144 requirements, the additional requirements of the distribution
compliance period were unnecessary. However, the documentation,
disclosure and certification requirements linked to the distribution
compliance period, as well as the prohibition against offers and sales
to a U.S. person during the distribution compliance period, provide
important additional protections and assurance that, at least from the
perspective of the distribution participants, the securities have come
to rest offshore. Extending those requirements for a period of time
after the closing of the offering is necessary, particularly with
respect to distributors of those securities who may immediately make a
market for the securities offshore. The purposes of the protections
would be defeated if the requirements are applied only to the initial
purchasers.
The Commission has decided to extend the distribution compliance
period substantially beyond 40 days to one year. The expiration of the
one-year period will coincide with the period when limited resales may
begin under Rule 144. At that point, the distribution compliance period
is unnecessary. A two-year distribution compliance period, as
originally proposed, could be confusing to apply because the
distribution compliance period under Regulation S would cover a longer
period than the holding period under Rule 144.
2. Offering Restrictions
Category 2 and Category 3 of Rule 903 require that ``offering
restrictions'' \27\ be implemented during the distribution compliance
period. For offerings classified as Category 3, these offering
restrictions include agreements by distributors that the securities
will only be sold in accordance with the Securities Act or Regulation
S, and a requirement for disclosure in all offering materials to the
same effect. The amendments adopted today do not affect these
requirements other than to:
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\27\ The term ``offering restrictions,'' as amended, is defined
in Rule 902(g) [17 CFR 230.902(g)].
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Lengthen the period during which they must be implemented,
as a result of the lengthening of the distribution compliance period;
and
Require that additional language be provided in the
mandated agreements and on the securities themselves, so that
purchasers have notice that hedging transactions not in compliance with
the Securities Act are prohibited.
3. Purchaser Agreements and Certifications
Category 3 imposes additional requirements not included in Category
2 relating to purchaser certifications and agreements. Those
requirements will be imposed on equity offerings of domestic reporting
companies for the first time under the amendments. In addition, the
issuer and distributors will be subject to the additional requirements
for a longer period, as a result of the longer distribution compliance
period.
In keeping with a more restrictive approach to the types of
Regulation S offerings where the Commission has observed the greatest
potential for abuse, the Commission is adopting amendments that will
require purchasers of equity securities in Category 3 offerings to
agree to resell the securities, or to engage in hedging transactions,
only in accordance with the registration or exemptive provisions of the
Securities Act, or in accordance with Regulation S.\28\ This agreement
by
[[Page 9636]]
purchasers of the covered equity securities should help ensure that
purchasers have notice of the resale restrictions applicable to the
securities.
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\28\ Issuers, however, would be free to require purchasers to
agree not to engage in any hedging transactions, even if the
transaction would be consistent with the Securities Act. The
amendments do not impose any new restrictions on hedging practices.
The Commission is considering proposed restrictions on hedging under
Rule 144 that, if adopted, would be in addition to those currently
applicable to restricted securities transactions under that rule.
See Securities Act Release No. 7391 (Feb. 20, 1997) [62 FR 9246
(Feb. 28, 1997)] (``Rule 144 Proposing Release'') (discusses current
and proposed restrictions on hedging restricted securities).
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Purchasers of domestic equity securities of reporting companies
also will now be required to certify that they are not U.S. persons and
are not acquiring the securities for the account or benefit of a U.S.
person, 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 make it clear to all parties
involved in the Regulation S offering that the rule may not be used to
circumvent the registration requirements of the Securities Act. This
should prevent some of the ``sham'' transactions described in the
Interpretive Release where issuers or distributors ``park'' securities
offshore with affiliates or shell entities that are actually owned by
U.S. persons.
4. Legending and Stop Transfer Requirements
Under the amendments, Category 3 will now require all domestic
issuers of equity securities to place a legend on the securities sold
offshore under Regulation S. This legend will advise that transfer of
such securities is prohibited other than in accordance with Regulation
S, pursuant to registration under the Securities Act, or pursuant to an
available exemption from registration. The legend requirement will
provide notice to any subsequent purchasers of the resale restrictions
applicable to the securities. Legending equity securities of domestic
reporting issuers until the expiration of the current 40-day
distribution compliance period appears to be a common practice under
Regulation S. The extension of the express legending requirement to
reporting companies, when limited to domestic issuers, should not
impose a different or new burden. In addition, as proposed, the current
legending requirement is being amended, so that purchasers are aware
that hedging transactions may not be conducted except in compliance
with the Securities Act.
Category 3 also requires 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 imposes on issuers a
monitoring role similar to that which is often imposed in connection
with unregistered private placements. In light of the abuses in this
area, domestic reporting issuers should be held more accountable for
compliance in these offerings.
Commenters were concerned that these procedures--which have existed
under Category 3 since before the adoption of Regulation S \29\ and now
are merely being extended to a broader class of issuers--are
inconsistent with public offering practices and that imposing these
requirements will prevent the issuer from engaging in offshore public
offerings or listings. Since these concerns were raised principally
with respect to foreign issuers, they have been addressed by the
decision not to extend Category 3 to reporting foreign issuers that
have their principal market in the United States.\30\ With respect to
domestic issuers, although these requirements will not be complied with
easily in an offshore public offering, the need to develop mechanisms
to prevent abuse is clear. Absent measures like those required in
Category 3, the Commission is concerned that abusive practices will
continue.\31\ Domestic reporting companies that find it too cumbersome
to take advantage of the Regulation S safe harbor when conducting a
public offering would simply register under the Securities Act or
resort to other exempt offerings.
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\29\ See e.g., InfraRed Associates, Inc., SEC No-Action Letter
(Sept. 13, 1985).
\30\ The Category 3 requirements, other than legending, already
apply to equity offerings by non-reporting foreign issuers where
there is a substantial U.S. market interest in the security. The
amendments do not affect this aspect of Rule 903.
\31\ As the Commission noted in the Proposing Release:
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 which puts holders and subsequent purchasers on notice of the
applicable resale restrictions.
Proposing Release at Section III.B.4. Depending on the
circumstances, the following alternatives, among others, may be
sufficient to put holders on notice and prevent a public
distribution into the United States: Notices of the restrictions to
investors on the confirmation or allotment telex, use of global
securities held in a depository, and restrictions on trading in the
United States through the use of restricted CUSIP numbers.
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C. New Rule 905--Restricted Securities
Because some of the abusive practices under Regulation S have
involved activities by persons other than issuers, distributors and
their affiliates (investors who purchase Regulation S securities with a
view to distributing those securities into the U.S. markets at the end
of the 40-day distribution compliance period), the Commission believes
that it is appropriate to clarify the legal obligations of purchasers
of securities under Regulation S. The Commission proposed new Rule 905,
and amendments to Rule 144(a)(3), to classify covered equity securities
(of both reporting and non-reporting issuers) placed offshore under
Regulation S as ``restricted securities'' within the meaning of Rule
144. 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.
Several commenters believed that subjecting offshore purchasers of
Regulation S securities to the Rule 144 holding periods would impair
liquidity in those securities to such an extent that the safe harbor
would no longer provide an alternative source of capital for U.S.
companies. Instead, U.S. issuers would either have to register the
offering or rely on a separate exemption, such as Regulation D or
Section 4(2) under the Securities Act for private offerings.
1. Advantages of Regulation S
Notwithstanding the concerns raised by commenters, the Commission
believes Regulation S will continue to offer significant advantages
over the private offering exemptions. U.S. issuers can sell securities
offshore without regard to the sophistication or number of purchasers
in the offering or the size of the offering. Similarly, unlike Rules
505 and 506 of Regulation D, Regulation S does not contain specific
information requirements. In addition, Regulation S permits issuers and
distributors to advertise an offering offshore (consistent with the
prohibition against directed selling efforts and the offshore
transaction requirements) in a manner that would not be consistent with
the prohibition against general solicitation in a private placement in
the United States. Like the private offering exemptions, Regulation S
will continue to afford U.S. issuers a means to sell
[[Page 9637]]
securities without the potential delay and ``market overhang'' caused
by registering equity securities under the Securities Act.
Purchasers will continue to have several sources of liquidity in
addition to reliance on Rule 144. Offshore purchasers can continue to
rely upon the Rule 904 safe harbor for offshore resales. They can also
resell in the United States pursuant to exemptions other than Rule 144,
including Rule 144A. Finally, and perhaps most importantly, it is
possible that purchasers in Regulation S offerings could insist upon
registration rights as do purchasers in private placements under
Section 4(2) or Regulation D as a means of obtaining liquidity in the
U.S. markets.\32\ Particularly in the case of reporting companies, a
Regulation S offering coupled with on demand registration rights
provides an issuer with ready access to foreign capital while according
purchasers access to U.S. markets for liquidity.\33\
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\32\ Form S-3 [17 CFR 239.13] is generally available for these
types of resale registration statements, even for companies that do
not meet the public float requirement for primary offerings under
Form S-3, if the securities are listed on a U.S. securities exchange
or quoted in the Nasdaq Stock Market.
\33\ The Commission proposed to amend Rule 903 to make clear
that registered or exempt sales to U.S. persons during the
distribution compliance period would not impair reliance on
Regulation S. Language instead has been added to Preliminary Note 5
to make clear that registered offers and sales to U.S. persons, or
offers and sales made pursuant to an exemption such as Rule 144A,
are permitted during the distribution compliance period without
jeopardizing the issuer's reliance on Regulation S for the offshore
offers and sales.
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2. Resales of Restricted Securities
Rule 905 also addresses the resale of restricted securities under
Rule 904. Rule 905 clarifies that the resale of restricted securities
offshore under Rule 904 does not ``wash off'' the restricted status of
those securities to allow them to be freely resold into the United
States by the purchaser. Several commenters argued that it was
impossible to keep track of the restricted status of securities trading
in offshore securities markets. With the widespread adoption of
uncertificated securities and rules of offshore markets that prohibit
the listing of legended securities, these commenters observed that the
approach simply was not practicable.
By not extending Rule 905 to securities of foreign private issuers,
the principal concerns of the commenters in this respect should be
addressed.\34\ Although some commenters have expressed concern that the
certification and legending requirements may hinder free trading on
offshore securities markets, without these requirements the potential
for easy evasion of Rule 144's resale limitations for domestic equity
securities is high. Absent the mandatory certification and legending
requirements, the purchaser would not be on notice that it is subject
to any restrictions on the resale of those securities into the United
States.\35\ It is possible that some markets can accommodate such
securities, or may adapt to accommodate them in the future.
Consequently, the Commission is adopting Rule 905 as proposed for
domestic equity securities.
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\34\ For example, because of its limited scope there should be
no basis for a concern that Rule 905 could restrict the ability of a
foreign security that was privately placed in the United States to
be sold back into its home market offshore in a Rule 904 or Rule
144A transaction.
\35\ The Commission is adopting the proposed amendment to Rule
144(e)(3)(vii) that codifies the Commission staff's informal
position that restricted securities resold offshore pursuant to
Regulation S need not be included in the amount of securities that
have been resold pursuant to Rule 144 for the purposes of the volume
limitations of Rule 144(e).
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3. Retroactive Application of Rule 905
Rule 905 will not be applied retroactively to classify domestic
equity securities previously sold under Regulation S as restricted
securities under Rule 144. However, the provision of Rule 905 that
codifies the Commission's interpretive position that resales offshore
do not ``wash off'' restrictions will apply to offerings taking place
before the effective date. This position was stated in the Interpretive
Release and reiterated in the Regulation S Proposing Release.
D. Promissory Notes
Under the proposal, Regulation S would have prohibited the use of
promissory notes or other executory obligations as payment for domestic
equity securities. The proposal was designed to address abuses where
the offshore purchaser used a promissory note to pay all or a portion
of the purchase price of the securities. In some cases, the notes were
secured only by the Regulation S securities; in other cases, the notes
were unsecured. Some notes provided recourse to the buyer if the note
was not repaid; others did not. Purchasers have resold the securities
into the U.S. markets upon expiration of the 40-day distribution
compliance 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.
Rather than exclude such transactions from the coverage of the safe
harbor, some commenters recommended that the Commission adopt the
alternative approach suggested in the Proposing Release--that is, to
toll the holding period under Rule 144 until certain conditions are
satisfied, similar to the tolling approach taken under Rule 144 with
respect to promissory notes and other similar obligations. The
Commission has decided to adopt this approach because it is persuaded
that this approach will address concerns about the use of promissory
notes to raise funds in the U.S. markets, since the securities
purchased pursuant to Regulation S will be fully paid for before the
securities can be resold into the U.S. markets pursuant to Rule 144. In
that case, the resale of the securities into the U.S. markets under
Rule 144 would not be used to raise funds to repay the promissory note.
Under the approach adopted, promissory notes or similar obligations or
contracts can be accepted as payment to purchase domestic equity
securities under Regulation S. The holding period will not begin to run
for the purchaser, however, unless the following conditions are
satisfied: The promissory note, obligation or contract provides for
full recourse against the purchaser of the securities, and is secured
by collateral (other than the securities purchased) having a fair
market value at least equal to the purchase price of the securities
purchased. In addition, after the holding period requirement has been
satisfied, the promissory note, obligation or contract must be paid in
full before the resale of the securities under Rule 144. This ensures
that the funds obtained through the Rule 144 resales will not be used
to pay off the promissory note.
E. Reporting of Regulation S Transactions
As a result of amendments adopted by the Commission in October
1996,\36\ 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). At the time the Commission adopted the Form 8-K 15-day
reporting requirement, the Commission stated that if it extended the
distribution compliance period for sales of equity securities under
[[Page 9638]]
Regulation S, it would consider revising the reporting requirement.
---------------------------------------------------------------------------
\36\ Exchange Act Release No. 37801 (Oct. 10, 1996) [61 FR 54506
(Oct. 18, 1996)].
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The commenters generally favored dropping the Form 8-K requirement,
although some thought that the Form 8-K report was important to stop
abuses, and provided timely notice to shareholders and the markets of a
material development concerning the issuer. Since equity securities
sold under Regulation S will now be deemed restricted securities and
thus cannot enter the U.S. public markets any faster than securities
issued in an exempt private placement, the benefits of expedited Form
8-K reporting is minimal. Accordingly, the Form 8-K filing requirement
is being eliminated, and these sales will be reported on Forms 10-Q,
10-QSB, 10-K or 10-KSB, as applicable.\37\
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\37\ The Commission is not, however, amending Item 701 of
Regulation S-K [17 CFR 229.701] and Regulation S-B [17 CFR 228.701]
to remove the reference to Form 8-K as proposed. To the extent an
issuer chooses voluntarily to report an unregistered sale of
securities on Form 8-K, in addition to Forms 10-Q, 10-QSB, 10-K or
10-KSB, the information required by Item 701 must be provided.
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The Commission has determined to delay the effectiveness of this
amendment, however, to allow the Commission staff to monitor closely
developments under the amended Regulation S safe harbor procedures
during a transition period. Accordingly, the Form 8-K report will not
be required for any Regulation S sales occurring after January 1, 1999.
Following the October 1996 adoption of the Form 8-K reporting
requirement, the Commission staff received inquiries regarding the need
to report on Form 8-K unregistered sales of equity securities by U.S.
companies to their non-U.S. resident employees pursuant to employee
benefit plans. To the extent that the sales qualify for Category 1
treatment under Rule 903 of Regulation S, issuers may report the sales
on an aggregated basis on the Form 10-Q, rather than on a current basis
on Form 8-K, prior to January 1, 1999.
F. Technical and Clarifying Revisions
As proposed, the Commission is adopting 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 harbor 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, and moving certain definitions to the Rule 903
safe harbor to make the rule easier to read and understand;
Updating the list of ``designated offshore securities
markets'' in Rule 902;
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.
IV. Certain Findings
Section 23(a) of the Exchange Act \38\ requires the Commission to
consider any anti-competitive effects of any rules it adopts thereunder
and the reasons for its determination that any burden on competition
imposed by such rules is necessary or appropriate to further the
purposes of the Exchange Act. Furthermore, Section 2 \39\ of the
Securities Act and Section 3 \40\ of the Exchange Act, as amended by
the National Securities Markets Improvement Act of 1996,\41\ provide
that whenever the Commission is engaged in rulemaking and is required
to consider or determine whether an action is necessary or appropriate
in the public interest, the Commission also shall consider, in addition
to the protection of investors, whether the action will promote
efficiency, competition, and capital formation.
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\38\ 15 U.S.C. 78w(a).
\39\ 15 U.S.C. 77b.
\40\ 15 U.S.C. 78c.
\41\ Pub. L. 104-290, Section 106, 110 Stat. 3416 (1996).
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The Commission has considered the amendments discussed in this
release in light of the comments received in response to the Proposing
Release and the standards in Section 23(a) of the Exchange Act.\42\ The
Commission adopted Regulation S in 1990 to provide a safe harbor from
the registration requirements of the Securities Act for offshore offers
and sales of securities. Since the adoption of Regulation S, the
Commission has become aware of abuses of this rule in connection with
sales of domestic equity securities. The Commission is adopting the
amendments to prevent further abuses of this rule.
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\42\ The finding required by Section 23(a) of the Exchange Act
only relates to amendments under the Exchange Act, such as
amendments to Forms 8-K and 10-Q, and not to amendments under the
Securities Act. In general, the Exchange Act amendments, by easing
the Form 8-K reporting requirements, should not affect competition.
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In compliance with Section 2 of the Securities Act, which requires
the Commission to consider whether the action will promote competition,
it is important to note that the amendments will impose certain burdens
on purchasers of equity securities issued by domestic companies, as
well as on the issuers themselves, that may place domestic issuers at a
competitive disadvantage in raising funds through Regulation S
transactions as compared to foreign issuers. For example, purchasers of
domestic equity securities sold pursuant to Regulation S may have to
wait a longer period of time before they can publicly resell the
securities into the United States. In addition, these purchasers will
have to provide certification that they are not U.S. persons that may
result in additional recordkeeping burdens on issuers and distributors
who must maintain records of this compliance. Of course, any U.S. law
applicable only to U.S. issuers will have some competitive effect on
domestic issuers compared to foreign issuers. However, the Commission
believes that such restrictions are necessary to deter abuses of the
rule. Because abusive practices under Regulation S primarily have
involved domestic companies, the Commission believes that it is not
necessary at this time to apply additional restrictions on sales of
equity securities by foreign issuers.
Although the amendments will impose certain burdens on both
purchasers and issuers of equity securities issued by domestic
companies, the Commission anticipates that the overall effect of the
amendments will be to enhance efficient capital formation. By deterring
abusive market practices, the amendments will protect investors and
promote capital formation by enhancing investors' confidence in the
integrity of Regulation S offerings.
The Commission is adopting amendments to relax the requirements to
report unregistered sales of equity securities made pursuant to
Regulation S. Such sales will now be reported on a delayed basis on
Forms 10-Q, 10-QSB, 10-K and 10-KSB, rather than Form 8-K. However,
investors will continue to have sufficient information regarding
changes in outstanding securities of public companies. These amendments
could decrease Form 8-K filing burdens for some reporting issuers,
although the new requirements to report unregistered equity sales on a
quarterly basis could result in an offsetting increase in reporting.
[[Page 9639]]
Nonetheless, the Commission believes the amendments will promote
efficiency and capital formation, and will not unnecessarily burden
competition.
V. Cost-Benefit Analysis
The Commission adopted Regulation S to enhance access to offshore
securities markets for both foreign and domestic issuers. Regulation S
provides a safe harbor from the registration requirements of the
Securities Act for offshore offers and sales of securities. In spite of
the overall success of this rule, Regulation S has been abused with
respect to sales of equity securities by domestic issuers. Abuses have
occurred in which these securities have inappropriately been
distributed back into the United States after the Regulation S
transaction in violation of U.S. laws and regulations. As a result of
these abuses, fraudulent schemes involving millions of dollars have
been perpetrated through the use of Regulation S.
The amendments to Regulation S will prevent further abusive
practices under this rule, and will protect investors and promote
capital formation by enhancing the integrity of the securities markets.
At the same time, the amendments will permit continued reliance on
Regulation S for legitimate offshore offerings.
The amendments will impose restrictions on purchasers of equity
securities of U.S. issuers, as well as on the issuers themselves, that
may make it more costly for such issuers to raise funds through
Regulation S placements. For instance, some purchasers may now have to
wait a longer period of time before they can publicly resell the
securities into the United States. In addition, the amendments will
require purchasers of domestic equity securities sold under Regulation
S to provide certification that they are not U.S. persons. This may
impose additional recordkeeping burdens on issuers and distributors
that must maintain records of such compliance, which could make
Regulation S sales of their equity securities more costly for these
issuers. However, the Commission believes that these restrictions are
needed to prevent abusive practices that have occurred under Regulation
S. By deterring abusive market practices, the amendments will protect
investors and promote capital formation by enhancing investors'
confidence in the integrity of the securities markets.
Based on a review by Commission staff of Form 8-Ks filed by issuers
to report equity sales made under Regulation S, the Commission
estimates that approximately 500 Exchange Act reporting companies
conduct approximately 550 sales pursuant to Regulation S each year and
that over $5 billion in equity sales will be affected by the
amendments. The total number of companies affected by the amendments is
not known because non-reporting companies are not required to file Form
8-K and the Form 8-K reporting requirement only applies to sales of
equity securities under Regulation S.
Although the new requirements, such as the purchaser certifications
and purchaser and distributor agreements, may increase costs to
issuers, the Commission believes that the increase will be negligible.
According to an informal survey taken by Commission staff of attorneys
in private practice whose clients could be expected to rely on these
safe harbors, domestic issuers that sell equity securities under
Regulation S already comply with the certification and legending
requirements of Category 3 as a matter of common practice. No new costs
will be imposed on domestic issuers as a result of formally extending
the Category 3 requirements to sales of equity securities by domestic
issuers. The new requirements with respect to hedging transactions
under Regulation S are expected to have a negligible impact on costs
because the amendments will only require issuers to add an additional
sentence with respect to hedging on the securities, and in the
purchaser agreements. Private practitioners surveyed by the Commission
staff have indicated that the increased costs as a result of the
amendments with respect to hedging are insignificant.
The amendments to Forms 8-K, 10-Q, 10-QSB, 10-K and 10-KSB relax
the requirements to report unregistered sales of equity securities by
delaying the reporting of the unregistered sale. The sufficiency of the
information provided to investors about unregistered offerings made by
public companies should not be affected. However, the Commission
believes the reduction in burdens and costs will be negligible. As a
result of these amendments, information on unregistered offerings
(include private placements and Regulation S offerings) during a given
time period will now be available to investors in one filing.
The Commission is amending Regulation S to clarify the legal
obligations of purchasers of securities under that rule. Some of the
abuses under Regulation S have involved activities by persons other
than issuers, distributors and their affiliates--investors who
purchased with a view to distributing the securities into the U.S.
markets at the end of the distribution compliance period. The
Commission is attempting to address this abuse by defining these
securities as ``restricted securities'' under the Rule 144 resale safe
harbor. However, the Commission does not believe that this
classification will be unduly burdensome for purchasers in Regulation S
offerings. The holding periods under Rule 144 were shortened \43\ at
the same time that the Regulation S amendments were proposed, and some
purchasers of securities sold under Regulation S may be able to demand
registration rights. If a purchaser decides to resell the securities
under the Rule 144 safe harbor, the Commission does not believe that
the requirement to file a Form 144 under those circumstances will be
unduly burdensome, especially given the benefits of resale under that
safe harbor. The Commission estimates that this amendment will result
in approximately 750 additional filings on Form 144 per year, and an
increase of approximately 1,500 hours per year in total annual
reporting and recordkeeping burdens.\44\ The Commission estimates that
the total increase in costs as a result of this amendment will be
approximately $45,000 per year.\45\
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\43\ Securities Act Release No. 7390 (Feb. 20, 1997) [62 FR 9242
(Feb. 28, 1997)]
\44\ See Proposing Release at Section IX.
\45\ This estimate assumes that each Form 144 filing requires
two hours of preparation at a cost of $60 per filing.
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Restricted shares normally must be sold at a discount relative to
the price of shares that are freely tradable in the public markets. The
size of that price discount reflects, at least in part, the
compensation buyers of shares receive for giving up the ability to
readily sell the shares immediately in the public market. The size of
the price discount is affected by a variety of factors including how
long the restricted shares must be held before they can be sold in the
public markets. Discounts are likely to increase with the length of the
distribution compliance period. Therefore, the Commission expects
discounts on Regulation S securities to increase as a result of the
increase in the minimum distribution compliance period from 40 days to
one year. However, it is difficult to determine how large that increase
is likely to be, and no commenters provided any empirical data in this
regard. The Commission's Office of Economic Analysis' study of recent
sales of Regulation S shares indicates that they were sold at an
average discount of approximately 22%. Studies that have measured price
discounts of shares subject to the longer Rule 144 restricted periods
found that the discounts
[[Page 9640]]
averaged about 20% in the 1980-1987 period according to one study, and
34% in the 1981-1988 period according to another study.\46\ The average
price discount of more recent sales of shares subject to Rule 144 may
be smaller because the restricted periods were shortened by one
year.\47\
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\46\ See Michael Hertzel and Richard L. Smith, Market Discounts
and Shareholder Gains for Placing Equity Privately, J. OF FIN., June
1993; William L. Silver, Discounts on Restricted Stock: The Impact
of Illiquidity on Stock Prices, FIN. ANALYSTS J., July-Aug. 1991.
\47\ See Securities Act Release No. 7390, supra note 43.
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VI. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with the Regulatory Flexibility Act \48\ with
respect to the amendments.
---------------------------------------------------------------------------
\48\ 5 U.S.C. 604.
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A. The Need for and Objectives of the Amendments to Regulation S
The amendments to Regulation S are designed to stop abuses under
Regulation S in which domestic issuers conduct offshore placements of
their securities under Regulation S that result in indirect
distributions of these securities into the U.S. markets without the
protection of registration under the Securities Act.
B. Summary of Significant Issues Raised by the Public Comments
The Commission requested comment with respect to the Initial
Regulatory Flexibility Analysis (``IRFA'') prepared in connection with
the Proposing Release, but did not receive any comments that
specifically addressed the IRFA.
C. Description and Estimate of the Number of Small Entities That the
Amendments Will Affect
These amendments will affect persons that are small entities, as
defined by the Commission's rules, but only in the same manner as
larger entities. The Commission is aware of approximately 1100 Exchange
Act reporting companies that currently satisfy the definition of
``small business'' under Rule 0-10 \49\ of the Exchange Act. While the
Commission sought comment on the number of non-reporting issuers that
may be affected by the proposed changes, commenters did not provide any
additional data on such number. However, there is no reliable way of
determining how many non-reporting companies may be subject to
Regulation S. Furthermore, there is no reliable way of determining how
many small businesses may become subject to the Commission's
registration and reporting obligations in the future.
---------------------------------------------------------------------------
\49\ 17 CFR 240.0-10.
---------------------------------------------------------------------------
Based on a review by Commission staff of a sample of the Form 8-Ks
filed with the Commission to report Regulation S equity sales,\50\
approximately 500 Exchange Act reporting companies conduct
approximately 550 sales pursuant to Regulation S each year, and will be
affected by the amendments. The Commission estimates that over 160 of
these reporting companies would meet the Regulatory Flexibility Act
definition of small business. However, the Commission has only been
receiving data regarding offshore placements of equity securities under
Regulation S since November 18, 1996, and does not have any long-term
data that would enable the Commission to develop precise estimates of
the number of small businesses that may actually rely on Regulation S,
or that may otherwise be affected by the amendments. Commenters did not
provide any additional quantitative data in that regard. In addition,
the Form 8-K reporting requirement only applies to sales of equity
securities by domestic reporting issuers, and does not apply at all to
non-reporting companies. As a result, the total number of small
entities that conduct sales under Regulation S will exceed the numbers
referenced above.
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\50\ 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 generally does
not apply to foreign issuers. See Exchange Act Release No. 37801,
supra note 36.
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D. Description of the Projected Reporting, Recordkeeping and Other
Compliance Requirements of the Amendments
Regulation S is being amended to include new reporting,
recordkeeping and other compliance requirements. In general, compliance
with the new reporting and other compliance requirements will require
the professional skills of attorneys and paralegals specializing in
securities or corporate law. The Commission is lengthening the
distribution compliance period during which persons relying on the
Regulation S safe harbor may not sell to U.S. persons and must
institute certain precautionary measures against such sales. The
Commission also is classifying these securities as ``restricted
securities'' within the meaning of Rule 144. As a result, purchasers of
these securities may resell these securities under the Rule 144 safe
harbor, and would be required to comply with the conditions of that
safe harbor, including the Rule 144 holding periods. These amendments
may reduce incentives to conduct equity placements under Regulation S
due to a perceived reduction in the liquidity of these securities
absent registration under the Securities Act or a valid exemption.
The amendments will impose on reporting domestic issuers
certification, legending and other requirements that previously only
applied to sales of equity securities by non-reporting issuers. These
requirements are intended to assure that participants in the
distribution, as well as the purchasers, are aware of the restricted
nature of these securities. The amendments will expand the current
purchaser and distributor agreement requirements to require that
purchasers and distributors agree not to engage in hedging transactions
with respect to these securities unless the transaction complies with
the Securities Act,\51\ and will ensure that participants in the
Regulation S offerings are aware of and comply with these restrictions.
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\51\ No new restrictions on hedging practices are being imposed
as a result of the amendments. See supra note 28.
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Because equity securities of domestic issuers placed under
Regulation S will be treated as ``restricted securities'' under Rule
144, the holding period will be tolled for securities purchased with a
promissory note unless certain conditions under Rule 144 are satisfied.
These amendments are designed to address abuses involving hedging
transactions and the use of promissory notes that result in indirect
distributions of securities into the U.S. markets without the
protection of registration. These additional purchaser requirements
could increase recordkeeping and compliance burdens. However, they are
expected to have an indirect impact on small U.S. businesses because,
in most cases, the purchasers of securities sold under Regulation S
would be non-U.S. persons.
The new amendments to Regulation S also will clarify that offshore
resales under Rule 904 of equity securities of domestic issuers that
are ``restricted securities,'' as defined in Rule 144, will not affect
the restricted status of those securities. These changes clarify the
requirement that holders of restricted securities may not remove the
restrictions by selling the securities offshore.
[[Page 9641]]
The amendments to Forms 8-K, 10-Q, 10-QSB, 10-K and 10-KSB will
relax the requirements to report unregistered sales of equity
securities by delaying the reporting of the unregistered sale. However,
the sufficiency of the information provided to investors regarding
changes in outstanding securities of public companies should not be
affected. The amendments to Forms 8-K, 10-QSB and 10-KSB will affect
small entities, as defined by the Commission's rules. The Commission
expects that the amendments will reduce Form 8-K filing burdens for
some reporting companies that qualify as small businesses. However, as
a result of the requirement to report unregistered sales of equity
securities on Forms 10-Q, 10-QSB, 10-K and 10-KSB, there will be an
offsetting increase in reporting with no net effect on overall
reporting burden.
E. Description of Steps Taken To Minimize Effect on Small Entities and
Consideration of Alternative Approaches
All of the amendments are being imposed on all domestic issuers.
Small businesses will be able to obtain the protections of Regulation S
on the same basis as larger entities. The Commission considered and
rejected several alternatives to the amendments applicable to small
businesses because it believes that the alternative approaches would
not be consistent with the Commission's statutory mandate of investor
protection. One alternative would be to establish differing compliance
or reporting requirements or timetables that take into account the
resources available to small entities. This alternative would not be
consistent with the intent of the amendments to forestall abusive
practices under Regulation S, especially because some of the abuses
have involved the securities of small issuers.
Another alternative would be to clarify, consolidate or simplify
the amendments with respect to small businesses. It would be difficult
to further clarify, consolidate or simplify the amendments and
concurrently prevent abuses under Regulation S. The Commission believes
the amendments impose the minimum requirements necessary to prevent
further abuses under Regulation S.
In addition to these alternatives, the Commission has considered
establishing separate requirements for small businesses that are based
on performance rather than design standards. However, in the context of
providing a safe harbor from the Commission's registration requirements
for offshore offerings, the adoption of performance standards would be
inconsistent with the Commission's statutory mandate to require full
and fair disclosure of material information to investors, in compliance
with the federal securities laws, and would not provide the kind of
legal certainty that practitioners seek in a safe harbor rule.
Finally, the Commission has considered exempting small businesses
from coverage of the amendments. However, the amendments are intended
to address abusive practices that have occurred under Regulation S,
including abuses that have involved the securities of small issuers,
such that further distinctions between companies based on size would
not be appropriate.
The Commission believes that by adopting the amendments, it is
balancing its objective of preventing abuses under Regulation S with
its statutory mandate of maximizing investor protection in a manner
that is more appropriate than other alternatives.
Although the amendments to Regulation S may affect the ability of
some small businesses to access offshore capital, the amendments should
be sufficient to curb abusive practices under Regulation S without
entirely foreclosing the offshore market for unregistered offshore
offerings of equity securities by domestic issuers. Moreover, the
recent adoption of shortened holding periods under Rule 144 should help
reduce any negative effect on small businesses.
VII. Paperwork Reduction Act
As set forth in the Proposing Release, the amendments to Regulation
S could affect changes to collections of information within the meaning
of the Paperwork Reduction Act of 1995 (``PRA'').\52\ As a result of
these amendments, equity securities of domestic issuers that are issued
offshore under Regulation S will be deemed ``restricted securities'' as
defined in Rule 144 under the Securities Act. Purchasers of these
securities, and any subsequent purchasers, could resell these
securities into the U.S. markets according to the conditions of Rule
144. These conditions include the requirement that these purchasers
file a notice of proposed sale on Form 144 that discloses information
about the issuer of the securities, the seller, the securities to be
sold and the proposed manner of sale. In addition, the amendments to
Forms 8-K, 10-Q, 10-QSB, 10-K and 10-KSB will relax the reporting
requirements pertaining to unregistered sales of equity securities by
delaying the reporting of the unregistered sale. Regulation S issuers
will no longer have the burden of filing Form 8-K to report
unregistered sales of equity securities. However, as a result of the
requirement to report unregistered sales of equity securities on Forms
10-Q, 10-QSB, 10-K and 10-KSB, there will be an offsetting increase in
reporting burden, with no net effect on the reporting burden relating
to these Forms.
---------------------------------------------------------------------------
\52\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
Under the proposed amendments, reporting foreign issuers with their
primary market in the United States would have been subject to
additional collections of information. Several commenters objected to
this aspect of the proposals. As a result, the amendments as adopted do
not apply to these foreign issuers, and the overall paperwork burden is
somewhat reduced.
Regulation S provides a safe harbor from registration that is
available on a voluntary basis to issuers and other parties. However,
if an issuer or other person chooses to rely on the Regulation S safe
harbor, it is required to provide the applicable collections of
information. To the extent the required collections of information are
filed with the Commission, such as Form 144 and the Exchange Act
periodic reports, they will not be kept confidential.
The collection of information requirements affected by the
amendments were submitted to OMB for review and were approved by OMB,
which assigned the following control numbers: Form 144, control number
3235-0101; Form 8-K, control number 3235-0060; Form 10-K, control
number 3235-0063; Form 10-Q, control number 3235-0070; Form 10-QSB,
control number 3235-0416; and Form 10-KSB, control number 3235-0420.
The collection of information requirements are in accordance with
Section 3507 \53\ of the PRA. An agency may not conduct or sponsor, and
a person is not required to respond to, a collection of information
unless the agency displays a valid OMB control number. The descriptions
and estimated burdens for the collection of information requirements
were set forth in the Proposing Release.
---------------------------------------------------------------------------
\53\ 44 U.S.C. 3507.
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VIII. Statutory Bases
The amendments to Regulation S are adopted pursuant to Sections 5
and 19 of the Securities Act, as amended, and the amendments to Rule
144 are adopted pursuant to sections 2(a)(11), 4, 5 and 19 of the
Securities Act, as
[[Page 9642]]
amended.\1\ The amendments to Forms 8-K, 10-QSB, 10-Q, 10-KSB, and 10-K
are adopted pursuant to sections 3(b), 4A, 12, 13, 15, and 23 of the
Securities Exchange Act.\2\
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\1\ 15 U.S.C. 77b(a)(11), 77d, 77e and 77s.
\2\ 15 U.S.C. 78c(b), 78d-1, 78l, 78m, 78o and 78v.
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List of Subjects in 17 CFR Parts 230 and 249
Reporting and recordkeeping requirements, Securities.
Text of the Amendments
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. 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), 79t, 80a-8, 80a-24, 80a-29,
80a-30, and 80a-37, unless otherwise noted.
* * * * *
2. 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 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. 77d) 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.
* * * * *
3. Preliminary Note 5 to Regulation S (Sec. 230.901 through
Sec. 230.905) is amended by adding a sentence at the end of the note to
read as follows:
Regulation S--Rules Governing Offers and Sales Made Outside the United
States Without Registration Under the Securities Act of 1933
Preliminary Notes
* * * * *
5. * * * The availability of the Regulation S safe harbor to
offers and sales that occur outside of the United States will not be
affected by the subsequent offer and sale of these securities into
the United States or to U.S. persons during the distribution
compliance period, as long as the subsequent offer and sale are made
pursuant to registration or an exemption therefrom under the Act.
* * * * *
4. 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 is defined to
mean 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;
and
(2) Asset-backed securities, which are securities of a type that
either:
(i) Represent 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) Are 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.
(iii) 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 International
Securities Market Association; 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 European Association of Securities Dealers Automated
Quotation; 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 Stock Exchange of Singapore Ltd.;
the Stockholm Stock Exchange; the Tokyo Stock Exchange; the Toronto
Stock Exchange; the Vancouver Stock Exchange; the Warsaw Stock Exchange
and the Zurich Stock Exchange; and
(2) Any foreign securities exchange or non-exchange market
designated by the Commission. Attributes to be considered in
determining whether to designate an offshore 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;
[[Page 9643]]
(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 placing 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) Will encompass only the U.S. edition of any publication
printing a separate U.S. edition if the publication, without
considering its U.S. edition, would not constitute a publication with a
general circulation in the United States.
(3) The following are not ``directed selling efforts'':
(i) Placing an advertisement required to be published under U.S. or
foreign law, or under rules or regulations of a U.S. 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 (paragraph (b)(2) or (b)(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 (k)(2)(vi) of this section or persons
holding accounts excluded from the definition of ``U.S. person''
pursuant to paragraph (k)(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 (paragraph
(b)(2) or (b)(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.
(vii) Providing any journalist with access to press conferences
held outside of the United States, to meetings with the issuer or
selling security holder representatives conducted outside the United
States, or to written press-related materials released outside the
United States, at or in which a present or proposed offering of
securities is discussed, if the requirements of Sec. 230.135e are
satisfied.
(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/Foreign issuer. ``Domestic issuer'' means any
issuer other than a ``foreign government'' or ``foreign private
issuer'' (both as defined in Sec. 230.405). ``Foreign issuer'' means
any issuer other than a ``domestic issuer.''
(f) Distribution compliance period. ``Distribution compliance
period'' means a period that begins when the securities were first
offered to persons other than distributors in reliance upon this
Regulation S (Sec. 230.901 through Sec. 230.905, and Preliminary Notes)
or the date of closing of the offering, whichever is later, and
continues until the end of the period of time specified in the relevant
provision of Sec. 230.903, except that:
(1) All offers and sales by a distributor of an unsold allotment or
subscription shall be deemed to be made during the distribution
compliance period;
(2) In a continuous offering, the distribution compliance period
shall commence upon completion of the distribution, as determined and
certified by the managing underwriter or person performing similar
functions;
(3) In a continuous offering of non-convertible debt securities
offered and sold in identifiable tranches, the distribution compliance
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; and
(4) That in a continuous offering of securities to be acquired upon
the exercise of warrants, the distribution compliance 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.
[[Page 9644]]
(g) 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 distribution compliance period specified in Category
2 or 3 (paragraph (b)(2) or (b)(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,
not to engage in hedging transactions with regard to such securities
prior to the expiration of the distribution compliance period specified
in Category 2 or 3 (paragraph (b)(2) or (b)(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 distribution compliance period specified
in Category 2 or 3 (paragraph (b)(2) or (b)(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 requirements of the Act is available. For offers
and sales of equity securities of domestic issuers, 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.
(h) 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) Section 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) Section 230.904, the transaction is executed in, on or through
the facilities of a designated offshore securities market described in
paragraph (b) 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 (h)(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 (h)(1) of this section, offers and
sales of securities to persons excluded from the definition of ``U.S.
person'' pursuant to paragraph (k)(2)(vi) of this section or persons
holding accounts excluded from the definition of ``U.S. person''
pursuant to paragraph (k)(2)(i) of this section, solely in their
capacities as holders of such accounts, shall be deemed to be made in
``offshore transactions.''
(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) 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 (as
that term is defined in Sec. 240.12g5-1 of this chapter and used for
purposes of paragraph (j)(2) of this section) 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 (j)(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)).
(k) 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;
(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
[[Page 9645]]
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.
(l) 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.
5. 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:
(1) The offer or sale is made in an offshore transaction;
(2) No directed selling efforts are 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; and
(3) The conditions of paragraph (b) of this section, as applicable,
are satisfied.
(b) Additional Conditions. (1) Category 1. No conditions other than
those set forth in Sec. 230.903(a) apply to securities in this
category. Securities are eligible for this category if:
(i) The securities are issued by 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 or 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. The following conditions apply to securities that
are not eligible for Category 1 (paragraph (b)(1)) of this section and
that are equity securities of a reporting foreign issuer, or debt
securities of a reporting issuer or of a non-reporting foreign issuer.
(i) Offering restrictions are implemented;
(ii) The offer or sale, if made prior to the expiration of a 40-day
distribution compliance period, is not made to a U.S. person or for the
account or benefit of a U.S. person (other than a distributor); and
(iii) Each distributor selling securities to a distributor, a
dealer, as defined in section 2(a)(12) of the Act (15 U.S.C.
77b(a)(12)), or a person receiving a
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selling concession, fee or other remuneration in respect of the
securities sold, prior to the expiration of a 40-day distribution
compliance 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.
(3) Category 3. The following conditions apply to securities that
are not eligible for Category 1 or 2 (paragraph (b)(1) or (b)(2)) of
this section:
(i) Offering restrictions are implemented;
(ii) In the case of debt securities:
(A) The offer or sale, if made prior to the expiration of a 40-day
distribution compliance period, is not made to a U.S. person or for the
account or benefit of a U.S. person (other than a distributor); 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 distribution compliance 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;
(iii) In the case of equity securities:
(A) The offer or sale, if made prior to the expiration of a one-
year distribution compliance period, is not made to a U.S. person or
for the account or benefit of a U.S. person (other than a distributor);
and
(B) The offer or sale, if made prior to the expiration of a one-
year distribution compliance period, 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 contain a legend to the
effect that transfer is prohibited except 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 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 (Sec. 230.901 through Sec. 230.905, and
Preliminary Notes), 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)(iii)(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
(iv) Each distributor selling securities to a distributor, a dealer
(as defined in section 2(a)(12) of the Act (15 U.S.C. 77b(a)(12)), or a
person receiving a selling concession, fee or other remuneration, prior
to the expiration of a 40-day distribution compliance period in the
case of debt securities, or a one-year distribution compliance 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 must 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
(paragraph (b)(2) or (b)(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(h), unless registered under the Act or an
exemption from such registration is available.
6. 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:
(1) The offer or sale are made in an offshore transaction;
(2) No directed selling efforts are made in the United States by
the seller, an affiliate, or any person acting on their behalf; and
(3) The conditions of paragraph (b) of this section, if applicable,
are satisfied.
(b) Additional conditions. (1) Resales by dealers and persons
receiving selling concessions. In the case of an offer or sale of
securities prior to the expiration of the distribution compliance
period specified in Category 2 or 3 (paragraph (b)(2) or (b)(3)) of
Sec. 230.903, as applicable, by a dealer, as defined in Section
2(a)(12) of the Act (15 U.S.C. 77b(a)(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 its 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(a)(12) of
the Act (15 U.S.C. 77b(a)(12)), or is a person receiving a selling
concession, fee or other remuneration in respect of the securities
[[Page 9647]]
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 distribution compliance 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 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.
7. By adding Sec. 230.905 to read as follows:
Sec. 230.905 Resale limitations.
Equity securities of domestic issuers acquired from the issuer, a
distributor, or any of their respective affiliates in a 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, that are equity securities of a domestic issuer 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
8. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
9. By amending Form 8-K (referenced in Sec. 249.308) by removing
the last sentence of General Instruction B.1. and Item 9.
(Note: The text of Form 8-K does not, and this amendment will not,
appear in the Code of Federal Regulations.)
10. 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: The text of 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 and Use of Proceeds.
* * * * *
(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.
* * * * *
11. 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: The text of 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 and Use of Proceeds.
* * * * *
(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.
* * * * *
12. By amending Form 10-K (referenced in Sec. 249.310) by revising
paragraph (a) of Item 5 of Part II to read as follows:
(Note: The text of 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.
(a) 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. 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),
however, it need not be furnished.
* * * * *
13. By amending Form 10-KSB (referenced in Sec. 249.310b) by
revising paragraph (a) of Item 5 of Part II to read as follows:
(Note: The text of Form 10-KSB 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.
(a) 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. If the Item
701 information previously has been included in a Quarterly Report on
Form 10-Q or 10-QSB, however, it need not be furnished.
Dated: February 17, 1998.
* * * * *
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4458 Filed 2-24-98; 8:45 am]
BILLING CODE 8010-01-U
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