Regulation S, a part of the Securities Act of 1933, allows companies in the US and non-US companies to raise capital outside of the US without compromising compliance with the requirements of the Securities and Exchange Commission (SEC). The United States Congress established this act in response to the 1929 stock market crash that caused the Great Depression. Today, Regulation S continues to play a fundamental role in United States securities regulation.
What is Regulation S?
Regulation S regulates the offering, sale, and delivery of US and non-US company securities outside of the United States without registration under the Securities Act of 1933. Regulation S is available only for offers and sales of securities outside the United States. Regulation S is generally intended to facilitate two capital-raising scenarios: (i) a U.S. company that issues securities only to foreigners; and (ii) a U.S. investor who enters a foreign market to buy foreign securities. In essence, Regulation S permits these types of transactions, among others, to occur without SEC registration.
Issuers can integrate other methods to raise capital in conjunction with a Reg S offering. Companies often utilize Regulation D, Rule 506c in addition to Regulation S. No net worth or annual income requirements exist for investors based outside of the US under Regulation S.
Both Regulation S and Regulation D allow any investors living abroad to make investments in a US company or vice versa. Despite their similarities, each Regulation has a separate set of requirements for accredited investors before investing.
Requirements for Regulation S
Regulation S’s primary goal is ensuring that buyers can obtain complete and accurate information before paying a significant amount of money for securities. Unlike other state blue sky laws that require merit reviews for issuers, Regulation S requires disclosure documentation. In theory, anyone can sell securities assuming maintained integrity and disclosure of any past “bad actor” incidents. Aside from disclosure documentation, Regulation S also requires that a company submit a registration statement with a prospectus, detailed information about all securities for sale, information about the company and its business matters, and audited financial statements. A company, together with the individuals connected to its registration statement, is liable for falsely disclosed statements within any documents. Due diligence is vital to ensure all issuers are honest and provide complete information. Performing due diligence consequently boosts investor confidence encouraging greater participation.
Exemptions to Regulation S
Registration with the Securities and Exchange Commission (SEC) is not required for administering Regulation S offerings. Certain exemptions exist under Regulation S, and the SEC rules out registration of securities in "small amounts."
Exemptions to Regulation S are private offerings to a specific type or a limited number of persons/institutions; offerings limited in size; intrastate Offerings; and securities of municipal, state, and federal governments.
Rule 144, as promulgated by the SEC, allows businesses to publicly resell restricted and controlled securities without registration under certain limited circumstances. This rule also highlights the minimum length of time a company can hold securities. One can file under Rule 144 with the SEC as long as requirements are fulfilled.
Limitations for the number of securities sold for three consecutive months are:
- 1% of stock outstanding
- Average weekly reported volume of trading in securities on all national securities exchanges for the preceding four weeks
- Average weekly volume of trading of securities reported through the consolidated transactions reporting system--NASDAQ
Issuers cannot sell more than 5,000 shares with an aggregate sales price of no more than $50,000. Once a number of securities sold exceed limitations within three months, an issuer must submit a notice of resale to the SEC.
Rule 144 frees issuers from restrictions after a year. In cases of mergers, buyouts, or takeovers, issuers can sell restricted and controlled securities again, as long as they wait until said merger, buyout, or takeover ends with the completion of a new Form 144.
How to Register
Those who do not qualify for any Regulation S exemptions can still offer, sell, and deliver securities. These individuals must file a registration statement with the SEC. Although registration is required, many prefer registering offers and sales. When an issuer registers a buyer's securities sale, the buyer must resell securities to either file a registration statement or find an available exemption. Issuers must fulfill all relevant forms for registration of securities. As part of a registration statement, a prospectus is a document where an issuer advertises his or her securities to potential investors. When documents display duplicate information, an issuer can consolidate these files into an "integrated disclosure system."
Regulation S also requires the submission of complete information about any securities for sale, details regarding an issuer’s management, and financial statements that must be audited and certified by independent accountants.
After filing registration statements with the SEC, one can expect these files to become public. All requirements, along with attachments in a registration statement, are available on the SEC's Electronic Data Gathering, Analysis, and Retrieval system, EDGAR, platform.
An evaluation of a registration statement confirms whether all information disclosed is in compliance with Regulation S guidelines. Issuers cannot provide inaccurate information or lie on a registration statement and prospectus. If all information in a disclosure document is correct and adheres to SEC rules, one can often expect approval.