[Federal Register Volume 62, Number 40 (Friday, February 28, 1997)]
[Proposed Rules]
[Pages 9258-9275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4668]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229, 230, and 249
[Release No. 33-7392; 34-38315; File No. S7-8-97 International Series
Release No. 1056]
RIN 3235-AG34
Offshore Offers and Sales
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is
publishing for comment proposed amendments to the Regulation S safe
harbor procedures. The proposed amendments relate to offshore sales of
equity securities of U.S. issuers, and foreign issuers where the
principal market for the securities is in the United States. The
proposals are designed to stop abusive practices in connection with
offerings of equity securities purportedly made in reliance on
Regulation S.
DATES: Comments should be received on or before April 29, 1997.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Stop 6-9, Washington, D.C. 20549. Comment letters also may be
submitted electronically to the following electronic mail address:
rule-comments@sec.gov. Comment letters should refer to File No. S7-8-
97; this file number should be included in the subject line if
electronic mail is used. All comment letters received will be available
for public inspection and copying in the Commission's public reference
room, 450 Fifth Street, N.W., Washington, D.C. 20549. Electronically
submitted comment letters will be posted on the Commission's Internet
Web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Paul M. Dudek, Luise M. Welby, or
Walter G. Van Dorn, Jr., Office of International Corporate Finance,
Division of Corporation Finance, at (202) 942-2990.
SUPPLEMENTARY INFORMATION: The Commission is proposing to revise Rule
903 1 of Regulation S,2 the issuer safe harbor under the
Securities Act of 1933 3 for offshore offerings of securities, to
address abusive practices under the rule. The changes would apply to
offshore sales of equity securities of domestic issuers, and of foreign
issuers where the principal market for those securities is in the
United States.4 Further, the Commission proposes amendments to
Rule 144(a)(3) 5 and a new Rule 905 to deem these equity
securities to be ``restricted securities,'' as defined in Rule 144
under the Securities Act.6 New Rule 905 also would make clear that
offshore resales under Rule 904 of restricted equity securities of
covered issuers will not affect the status of these securities as
restricted securities after the resale.7 In addition, the
Commission is proposing to eliminate the current requirement that
reporting issuers disclose Regulation S sales of equity securities on a
Form 8-K within 15 days of the transaction. In light of the longer
restricted period proposed today, issuers would report these sales on a
Form 10-Q on the same basis that issuers report their other
unregistered sales of equity securities. Finally, the Commission is
proposing additional technical and clarifying revisions to Regulation
S, in part to make the rule more concise and understandable.
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\1\ 17 CFR 230.903.
\2\ 17 CFR 230.901-230.904 and Preliminary Notes.
\3\ 15 U.S.C. 77a et seq. (the ``Securities Act'').
\4\ See Proposed Rule 902(h) for the proposed definition of
``principal market in the United States.''
\5\ 17 CFR 230.144(a)(3).
\6\ Proposed Rule 905.
\7\ Id.
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I. Executive Summary
The Commission constantly seeks to reduce burdens on capital
formation as long as the deregulatory measures do not harm investor
protection. When adopting safe harbors and other deregulatory measures,
the Commission will include protections designed to minimize the risk
that those measures will be abused. If abuses nevertheless occur, the
Commission will make the necessary adjustments to prevent further abuse
while, to the extent possible, preserving the original goals of the
reform. Today, the Commission is proposing amendments to Regulation S
to prevent continued abuse of the rule.
In 1990, the Commission adopted Regulation S to clarify the
extraterritorial application of the registration requirements of the
Securities Act. In the interests of both comity and the
internationalization of the world's securities markets, the Commission
believed that the registration provisions under U.S. law should not
apply where the offshore placements were truly offshore. Instead, the
laws of the foreign jurisdiction regulating the public offerings of
securities would serve to protect investors in that market. Regulation
S permits both foreign and domestic issuers to avail themselves of the
safe harbors when conducting offshore placements of their securities.
Since the adoption of Regulation S in 1990, the Commission has
become aware of uses of Regulation S that the rule not only did not
contemplate, but in fact expressly prohibited. Some issuers, affiliates
and others involved in the distribution process are using Regulation S
as a guise for distributing securities into the U.S. markets without
the protections of registration under Section 5 of the Securities Act.
In June 1995, the Commission issued an interpretive release that listed
certain problematic practices under Regulation S and requested comment
on whether the Regulation should be amended to limit its vulnerability
to abuse.8
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\8\ Securities Act Release No. 7190 (June 27, 1995) [60 FR 35663
(July 10, 1995)] (the ``Interpretive Release'').
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As a result of the continuation of certain of these abusive
practices and in response to the comment letters received on the
Interpretive Release, the Commission is proposing to stop these abusive
practices by amending Regulation S for placements of equity securities
by domestic companies. In addition, although abusive practices
involving the equity securities of foreign issuers are not as evident
as with domestic issuers, there is equal potential for abuse where the
principal trading market for those securities is in the United States.
Therefore, the Commission also is proposing to amend the safe harbor
procedures for placements of equity securities of foreign issuers where
the principal market for those securities is in the United States. In
general, the ``principal market'' would be in the United States if more
than half of the trading in that security takes place in the United
States.9
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\9\ See infra Section III.E.1. for a further discussion of the
proposed definition of ``principal market in the United States.''
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These Regulation S proposals would:
classify these equity securities placed offshore under
Regulation S as ``restricted securities'' within the meaning of Rule
144;
align the Regulation S restricted period for these
equity securities with the Rule 144 holding periods by lengthening
from 40 days
[[Page 9259]]
(currently applicable to reporting issuers) or one year (currently
applicable to non-reporting issuers) to two years the period during
which persons relying on the Regulation S safe harbor may not sell
these equity securities to U.S. persons (unless pursuant to
registration or an exemption);
impose certification, legending and other requirements
now only applicable to sales of equity securities by non-reporting
issuers;
require purchasers of these securities to agree not to
engage in hedging transactions with regard to such securities unless
such transactions are in compliance with the Securities Act;
prohibit the use of promissory notes as payment for
these securities; and
make clear that offshore resales under Rule 901 or 904
of equity securities of these issuers that are ``restricted
securities,'' as defined in Rule 144, will not affect the restricted
status of those securities.
The combination of these proposed amendments should prevent the
sale of equity securities offshore under Regulation S in transactions
that effectively result in unregistered distributions of the securities
into the U.S. markets.
II. Background
Regulation S contains a general statement that the registration
requirements of Section 5 of the Securities Act do not apply to offers
or sales of securities that occur outside the United States, and two
non-exclusive safe harbors. The first safe harbor applies to offers and
sales by issuers, persons involved in the distribution process pursuant
to contract (``distributors''), their affiliates, and any person acting
for those persons (``issuer safe harbor'').\10\ The other safe harbor
applies to offshore resales by persons other than the issuer,
distributors, their affiliates (except certain officers and directors)
and persons acting for them (the ``offshore resale safe harbor'').\11\
The rule considers an offer or sale of securities that satisfies all
conditions of the applicable safe harbor to be outside the United
States and thus not subject to the registration requirements of Section
5. Regulation S does not provide a safe harbor for resales back into
the United States of any securities sold or resold offshore, whether
under Regulation S or otherwise.
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\10\ Rule 903 of Regulation S [17 CFR 230.903].
\11\ Rule 904 of Regulation S [17 CFR 230.904].
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The issuer safe harbor distinguishes three categories of securities
offerings. The categories are based upon factors such as the
jurisdiction of incorporation of the company whose securities are being
sold under Regulation S, the company's reporting status under the
Securities Exchange Act of 1934,\12\ and the degree of U.S. market
interest in the issuer's securities. ``Category 1'' offerings generally
encompass debt and equity offerings by foreign reporting and non-
reporting issuers when there is no ``substantial U.S. market interest''
\13\ in the security to be offered. ``Category 2'' offerings now
encompass, among other things, offshore offerings of debt and equity
securities of any domestic reporting issuer, debt and equity securities
of any foreign reporting issuer where there is a ``substantial U.S.
market interest,'' as well as the debt securities of any foreign non-
reporting issuer where there is a ``substantial U.S. market interest.''
``Category 3'' offerings are subject to the greatest restrictions and
include offshore offerings of debt and equity securities by any
domestic non-reporting issuer, as well as equity securities of any
foreign non-reporting issuer where there is a ``substantial U.S. market
interest.''
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\12\ 15 U.S.C. 78a et seq. (the ``Exchange Act'').
\13\ See Rule 902(n) of Regulation S for the definition of
``substantial U.S. market interest'' [17 CFR 230.902(n)].
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All offerings under the Regulation S safe harbors are subject to
two general conditions: the offer and sale must be made in an offshore
transaction,\14\ and the offering must not involve directed selling
efforts in the United States.\15\ Offers and sales made in reliance on
the Category 2 and Category 3 issuer safe harbors are subject to
additional restrictions that the Commission anticipated would assure
that the securities came to rest offshore. These restrictions include a
40-day or one-year restricted period \16\ during which persons entitled
to rely on the Rule 903 safe harbor (that is, the issuer, a
distributor, or any of their respective affiliates or any person acting
on their behalf) cannot sell the Regulation S securities to a U.S.
person \17\ or to a person acting for the account of a U.S. person
(other than a distributor), and still rely on the safe harbor.\18\ The
purpose of the restricted period is to ensure that persons relying on
the safe harbor are not engaged in an unregistered, non-exempt
distribution into the U.S. capital markets.\19\
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\14\ Rule 903(a) of Regulation S [17 CFR 230.903(a)]. See Rule
902(i) of Regulation S for the definition of ``offshore
transaction'' [17 CFR 230.902(i)].
\15\ Rule 903(b) of Regulation S [17 CFR 230.903(b)].
\16\ For debt securities issued under either Category 2 or
Category 3, the restricted period is 40 days. The restricted period
for equity securities sold under Category 3 is one year, instead of
the shorter 40-day period under Category 2.
\17\ ``U.S. person'' is defined under Rule 902(o) of Regulation
S [17 CFR 230.902(o)].
\18\ In addition to the restricted period, ``Category 2'' and
``Category 3'' offerings also must comply with certain ``offering
restrictions,'' and the requirement that distributors give certain
notices when selling securities to other distributors prior to the
expiration of the restricted period. See Rule 902(h) of Regulation S
[17 CFR 230.902(h)]. In addition, offerings of equity securities
under Category 3 are subject to certification, legending and other
requirements that are not imposed on Category 2 offerings. See Rule
903(c)(2) for Category 2 offerings [17 CFR 230.903(c)(2)] and Rule
903(c)(3) for Category 3 offerings [17 CFR 230.903(c)(3)].
\19\ See Securities Act Release No. 6863 (Apr. 24, 1990) [55 FR
18306] (the ``Adopting Release'') at Section III.B.
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The Commission based many of the safe harbor procedures
incorporated into Regulation S on procedures that market participants
already had developed and were the subject of no-action letters issued
by the Commission's staff before the adoption of Regulation S. \20\
Before 1990, offshore transactions largely involved substantial global
offerings of the debt or equity securities of foreign issuers, or the
debt securities of domestic issuers in the Euromarkets. Since the
adoption of Regulation S, these types of offshore offerings have not
resulted in widespread problematic practices.
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\20\ See, e.g., InfraRed Associates, Inc. (Sept. 13, 1985);
Proctor & Gamble Co. (Feb. 21, 1985); Fairchild Camera and
Instrument International Finance N.V. (Dec. 15, 1976); Raymond
International Inc. (June 28, 1976); Pan-American World Airways, Inc.
(June 30, 1975); The Singer Company (Sept. 3, 1974).
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The Commission's primary area of concern has been the use of
Regulation S for sales of equity securities by domestic issuers, the
area in which market participants had not developed established
procedures before the adoption of Regulation S. Some U.S. issuers
appear to have used the Regulation S issuer safe harbor to effect
unregistered distributions of their equity securities into the United
States.\21\
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\21\ See, e.g., ``Pirates' Play?'', Barron's, at 17 (Jan. 7,
1997); ``Storm Brewing Offshore?'', Barron's, at 12 (Sept. 16,
1996); ``Easy Money--How Foreign Investors Profit at the Expense of
Americans,'' Barron's, at 31 (Apr. 29, 1996); ``Rule Permitting
Offshore Stock Sales Yields Deals that Spark SEC Concerns,'' Wall
St. J., at C1 (Apr. 26, 1994); ``Foreign Stock Sales: Don't Get
Blindsided,'' Worth, at 37 (Mar. 1994).
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In response, the Commission has taken enforcement action against
persons who sought to evade the registration requirements of the
Securities Act through purported Regulation S offerings that were in
effect U.S. distributions of securities.\22\ In addition, on June 27,
1995, the Commission issued the Interpretive Release to state its views
concerning these abusive practices under Regulation S. The Interpretive
Release
[[Page 9260]]
described a number of abusive practices in offerings purportedly made
under Regulation S and stated that such abusive practices ran afoul of
the ``scheme-to-evade'' prohibition in Preliminary Note 2 of Regulation
S,\23\ would not be covered by the safe harbors, and would not be found
to be an offer and sale outside the United States for purposes of the
general statement under Rule 901.\24\
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\22\ See In re: Candies, Inc., et al., Securities Act Release
No. 7263 (Feb. 21, 1996); SEC v. Softpoint, Inc., et al., Litigation
Release No. 14480 (Apr. 27, 1995). See also U.S. v Sung and Feher,
Litigation Release No. 14500 (May 15, 1995).
\23\ Preliminary Note 2 to Regulation S specifically states
that:
In view of the objective of these rules and the policies
underlying the Act, Regulation S is not available with respect to
any transaction or series of transactions that, although in
technical compliance with these rules, is part of a plan or scheme
to evade the registration provisions of the Act. In such cases,
registration under the Act is required.
\24\ Interpretive Release, supra note 8, at Section II.
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The Interpretive Release also asked for comments whether the
Commission should amend Regulation S to impose additional restrictions
on the use of the safe harbors to impede attempts to use the Regulation
to evade the registration requirements of the Securities Act. The
Commission received 36 comment letters in response to the Interpretive
Release.\25\ There was no consensus among commenters whether Regulation
S should be amended and, if so, what restrictions should be imposed.
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\25\ These comment letters, together with a Summary of Comments
prepared by Commission staff, are available for inspection and
copying in the Commission's Public Reference Room, 450 Fifth Street,
N.W., Washington, D.C. 20549. Persons seeking these materials should
make reference to File No. S7-20-95.
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As a complement to these initiatives, the Commission also has
taken, and is currently undertaking, several other actions. To deter
abusive Regulation S practices while providing important information to
the markets, the Commission recently adopted amendments to the Exchange
Act periodic reporting forms for domestic issuers to require disclosure
of unregistered equity offerings, including a current report on Form 8-
K filing requirement to disclose sales made under Regulation S.\26\ At
the same time, by adopting amendments to Rule 3-05 of Regulation S-X,
which relaxed the financial statement requirements for acquired
businesses, the Commission took another step to remove unnecessary
barriers to registered offerings that may cause companies to conduct
unregistered offshore offerings.\27\ The Commission today also is
issuing three companion releases that should help alleviate concerns
that the more restrictive Regulation S procedures will cut off access
to capital on a cost-effective basis for smaller companies. These
releases (i) adopt amendments to the Rule 144 safe harbor governing
resales of restricted securities to shorten the holding period
requirements, (ii) propose further revisions to Rule 144 to simplify
the rule, and (iii) propose allowing delayed pricing in registered
securities offerings conducted by smaller issuers so they would have
more flexibility in timing registered offerings. \28\
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\26\ Exchange Act Release No. 37801 (Oct. 10, 1996) [61 FR 54506
(Oct. 18, 1996)]. Sales of equity securities by domestic issuers
under Regulation S are required to be reported on Form 8-K within 15
days of occurrence. All other unregistered sales of equity
securities by domestic issuers (e.g., private placements) must be
reported quarterly in the issuer's Form 10-Q and in its Form 10-K
(for the last fiscal quarter).
\27\ Securities Act Release No. 7355 (Oct. 10, 1996) [61 FR
54509 (Oct. 18, 1996)].
\28\ Securities Act Release Nos. 7390, 7391, and 7393.
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The increasing internationalization of global securities markets,
the growing use of the Internet for securities transactions, the
further integration of the European and other markets through common
currencies and regulatory treatments, and other recent and ongoing
developments in the securities markets may make it appropriate for the
Commission to re-address many facets of the territorial approach to the
Securities Act that has been adopted under Regulation S. These issues
arise apart from the abusive practices addressed in today's proposals.
However, the Commission encourages commenters to discuss these and
other matters in order to permit the Commission to evaluate whether to
propose revisions to Regulation S to reflect these developments.
III. Proposed Amendments to Issuer Safe Harbor
A. Continue Safe Harbor Protection for Equity Sales
The Commission does not believe at this time that the abuses
identified to date warrant precluding domestic reporting issuers from
making equity offerings under Regulation S, particularly since many
smaller issuers access foreign sources of capital to satisfy their
financing requirements. Indeed, some of the abusive practices, such as
hedging transactions, are engaged in by purchasers, and not necessarily
with the knowledge or acquiescence of the issuer. Rather than make the
Regulation S safe harbor unavailable for such offerings, the proposals
are designed to curtail the abusive practices that have developed,
while retaining for U.S. issuers the flexibility to make an offshore
offering with the certainty provided by a safe harbor. Nevertheless,
would it be more appropriate to end the safe harbor entirely for
offshore offerings of equity securities of domestic reporting issuers,
domestic non-reporting issuers, and foreign issuers where the principal
market for their equity securities is in the United States?
B. Impose New Restrictions on Equity Offerings of Domestic Issuers and
of Foreign Issuers Where the Principal Market for the Securities is in
the United States
In light of the continuing abuses, the Commission proposes
requiring compliance with the more rigorous procedures under Category
3, including a longer restricted period, for all offshore offerings of
equity securities of domestic companies, and of foreign companies where
the principal market for the securities is in the United States. There
are five new requirements that the proposed amendments would impose on
offerings of these securities by moving those offerings from Category 2
to Category 3:
1. Longer Restricted Period
The restricted period for equity securities of domestic reporting
issuers, and of foreign reporting issuers whose principal market is in
the United States, would be lengthened from 40 days to two years; the
restricted period for equity securities of domestic non-reporting
issuers, and of foreign non-reporting issuers where the principal
market for the securities is in the United States, would be lengthened
from one year to two years. In order to qualify for the Regulation S
safe harbor for offers and sales made during the restricted period,
issuers, distributors, and their affiliates must comply with the
documentation requirements discussed below and any such offers and
sales during this period may not be made to a U.S. person (except
pursuant to registration or an exemption). Rule 903 would be further
amended to clarify that registered offers and sales, or offers and
sales to a U.S. person made pursuant to an exemption such as Rule 144
or 144A, are permitted in the initial distribution and during the
restricted period.
As described below, the Commission is proposing that covered equity
securities be defined as ``restricted securities'' under Rule 144. The
new two-year restricted period under the issuer safe harbor would track
the time period during which the securities would be subject to resale
restrictions as ``restricted securities'' under Rule 144.
The Commission adopted the current 40-day restricted period during
which the selling restrictions are applicable to protect against an
indirect unregistered
[[Page 9261]]
public offering in the United States. The practices of some companies,
distributors and their affiliates, however, demonstrate that the
current 40-day restricted period is far too short to achieve this goal.
In some instances, they appear to have orchestrated resales in the
United States following the restricted period as part of the
distribution process.
Before the adoption of Regulation S, market participants generally
used a 90-day period for offshore offerings of U.S. debt securities and
a one-year period for offshore offerings of equity securities of
domestic non-reporting issuers.29 When the Commission initially
proposed a 90-day restricted period for offshore offerings of both debt
and equity securities of domestic reporting issuers, many commenters
advocated a shorter 40-day restricted period. These commenters stated
that the shorter period would be sufficient to protect against use of
an offshore offering to make an indirect offering into the United
States.30 In the Commission's view, however, experience has not
borne out the commenters' beliefs in the area of domestic equity
securities. Also, the same potential for abuse exists with foreign
equity securities if the principal market for the securities is in the
United States.
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\29\ See Securities Act Release No. 6779 (June 10, 1988)[53 FR
22661 (June 17, 1988)], which proposed Regulation S (the ``Proposing
Release''), at nn.10 and 11 for a discussion of the time periods
that were used by market participants prior to the adoption of
Regulation S.
\30\ See Securities Act Release No. 6838 (July 11, 1989)[54 FR
30063 (July 18, 1989)], which reproposed Regulation S, at Section
II.C.2.b. (the ``Reproposing Release'').
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2. Purchaser Certifications
The new procedures would require purchasers of these new Category 3
equity securities to certify that they are not U.S. persons and are not
acquiring the securities for the account or benefit of a U.S. person,
or that they are U.S. persons who purchased securities in a transaction
that did not require registration under the Securities Act. This
certification procedure should help protect against some of the sham
transactions noted in the Interpretive Release where issuers or
distributors ``park'' securities offshore with affiliates or shell
entities that are actually owned by U.S. persons.
3. Purchaser and Distributor Agreements
The new procedures would require purchasers of securities to agree
to resell the securities only in accordance with the registration or
exemptive provisions of the Securities Act, or in accordance with
Regulation S. Imposing this agreement on purchasers of the covered
equity securities should help ensure that purchasers are aware of the
resale restrictions applicable to the securities, particularly
considering the Commission's proposal to classify these securities as
restricted securities.31
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\31\ Of course, issuers and distributors could not accept at
face value certifications and agreements by purchasers and disclaim
responsibility for investigation and consideration of relevant facts
pertinent to the establishment of the Regulation S safe harbor. See
Re: Lee Petillon, Adm. Proc. File 3-2393 (Nov. 30. 1972) (initial
decision); Re: The Crowell-Collier Publishing Company, Securities
Act Release No. 3825 (Aug. 12, 1957); Regulation D Revisions,
Securities Act Release No. 6759 (Mar. 3, 1988) [53 FR 7870 (Mar. 10,
1988)] at Section B.
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In addition, under a new requirement proposed to be added to the
current Category 3 purchaser agreement requirement,32 purchasers
of Category 3 equity securities would be required to agree not to
engage in hedging transactions except in compliance with the
registration or exemptive provisions of the Securities Act.33 The
proposals also would require distributors to agree to the same
restrictions on hedging until the expiration of the restricted
period,34 and that all offering materials and documents used in
the offering of these securities would be required, until the
expiration of the restricted period, to include a statement that
hedging transactions involving those securities may not be conducted
except in compliance with the Securities Act.35
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\32\ This Category 3 purchaser agreement requirement currently
is applicable only to sales of equity securities by non-reporting
issuers. See Rule 903(c)(3)(iii)(B)(2) of Regulation S [17 CFR
230.903(c)(3)(iii)(B)(2)].
\33\ Since the Commission also proposes that these securities
will be deemed ``restricted securities,'' Commission guidance under
Rule 144 with regard to hedging transactions (such as short sales,
and purchases and sales of put and call options) would be applicable
to these securities sold under Regulation S. See Securities Act
Release No. 7391.
\34\ Under the ``offering restrictions,'' as defined in Rule
902(h) of Regulation S, distributors are required to agree that all
offers and sales prior to the expiration of the restricted period
will be made either in accordance with Regulation S, pursuant to a
registration of the securities under the Securities Act, or pursuant
to an available exemption from registration. The proposals would
expand the agreement requirement to include the proposed hedging
agreement where the securities to be offered and sold are equity
securities of domestic issuers, or of foreign issuers where the
principal market for the security is in the United States. See Rule
902(h) of Regulation S [17 CFR 230.902(h)].
\35\ Currently, the ``offering restrictions'' require certain
statements to be included in all offering materials and documents
(other than press releases) used in connection with offers and sales
of certain securities prior to the expiration of the applicable
restricted period. The required statements would include this
additional statement regarding hedging where the securities to be
offered and sold are equity securities of domestic issuers, or of
foreign issuers where the principal market for the security is in
the United States.
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4. Legended Certificates
The proposals would require all covered issuers of equity
securities to place a legend on the securities sold offshore. This
legend would advise that transfer of such securities is prohibited
other than in accordance with the Securities Act. Currently, the
required legend for sales of equity securities of domestic non-
reporting issuers is required to state that transfers of securities are
prohibited except ``in accordance with the provisions of this
Regulation S.'' 36 The Commission proposes amending the current
legend requirement to make clear that the rule permits transfers made
in accordance with the provisions under the Securities Act.
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\36\ Rule 903(c)(3)(iii)(B)(3) of Regulation S [17 CFR
230.903(c)(3)(iii)(B)(3)].
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The legend requirement would provide notice to any subsequent
purchasers of the resale restrictions applicable to the securities. The
Commission understands that legending equity securities of domestic
reporting issuers until the expiration of the current 40-day restricted
period is a common practice under Regulation S. The Commission thus
believes that the addition of an express legending requirement should
not impose a different or new burden. In addition, the Commission
proposes amending the current legend requirement to state that hedging
transactions may not be conducted except in compliance with the
Securities Act.
Regulation S does not require, and the Commission is not proposing,
that the legend contain specific language to describe these
restrictions. Issuers and distributors should prepare such legends in a
form that conveys to holders the restricted nature of the securities
and that they can only be resold under Regulation S, pursuant to
registration under the Act, or under an exemption. Nor is the legend
requirement intended to require that securities sold under Category 3
be in certificated form. Issuers whose securities are in uncertificated
form may satisfy the legend requirement by any means reasonably
designed to put holders and subsequent purchasers on notice of the
applicable resale restrictions. The Commission requests comment
whether, if covered securities are in uncertificated form, certain
forms of notice would be adequate to inform holders and subsequent
purchasers of the resale restrictions. Should securities covered by the
Category 3 safe harbor be required to be in certificated form? Are
there alternative means of notice that
[[Page 9262]]
can be used for both certificated and uncertificated securities?
5. Stop Transfer Instructions
The proposals would require an issuer, by contract or a provision
in its bylaws, articles, charter or comparable document, to refuse to
register any transfer of securities unless made in accordance with the
registration or exemptive provisions of the Securities Act, or in
accordance with Regulation S. This requirement would impose on issuers
a policing role similar to that which is often imposed in connection
with unregistered private placements. Such a role would appear
appropriate considering the abuses in this area.
Currently, the stop transfer instruction for sales of equity
securities of domestic non-reporting issuers is required to state that
the issuer will refuse to register any transfer of securities ``not
made in accordance with the provisions of this Regulation S.'' 37
As with the legend requirement, the Commission proposes amending the
current stop transfer instruction requirement to make clear that the
rule permits transfers made in accordance with the provisions under the
Securities Act.
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\37\ Rule 903(c)(3)(iii)(B)(4) of Regulation S [17 CFR
230.903(c)(3)(iii)(B)(4)].
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6. Request for Comment on New Requirements
Should some or all of the new requirements, including the longer
restricted period, not be applied as proposed to offerings of equity
securities of domestic issuers, and of foreign issuers where the
principal market for the securities is in the United States? If so,
which ones and why? For example, is legending equity securities of
either domestic issuers or foreign issuers feasible in foreign markets?
Are there other alternatives available that would achieve the same
purpose? In addition to, or in lieu of, the specific documentation
requirements of Category 3, should issuers be subject to an express
general duty to take reasonable steps to ensure that purchasers do not
resell the securities in violation of the Act, similar to that imposed
by Regulation D? 38 Should satisfaction of any or all of the
current specific documentation requirements of Category 3 be deemed to
satisfy this express general duty?
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\38\ Securities Act Rule 502(d)[17 CFR 230.502(d)].
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Should the reporting status of the issuer matter, and if so, how?
Should it matter whether those issuers also have a trading market for
their equity securities in the United States, and if so, in what
respect? Should certain classes of reporting issuers, such as those
eligible for Form S-3 or F-3, be excluded from any or all of these
restrictions?
Conversely, are any or all of these requirements so burdensome,
either alone or with the proposals to prohibit the use of promissory
notes and to classify these securities as restricted securities under
Rule 144, that companies would effectively be foreclosed from relying
on the Regulation S safe harbor for offshore offerings of equity
securities? Would any or all of these proposed changes, either alone or
with the reporting requirement for recent sales of equity securities
under Regulation S (in the case of reporting companies), obviate the
need for the longer restricted period? Should the restricted period be
shorter than two years (e.g., the current 40 days, 90 days, 180 days,
270 days or one year)? Would the classification of these securities as
restricted securities within the meaning of Rule 144 eliminate the need
for any restricted period?
7. Elimination of Form 8-K Filing Requirement
At the time the Commission adopted the existing Form 8-K 15-day
reporting requirement, the Commission stated that if it extended the
restricted period for sales of equity securities under Regulation S, it
would consider revising the reporting requirement. As the Commission is
now proposing to lengthen the restricted period for Regulation S sales,
the Commission has determined to propose revising Item 701 of
Regulation S-K and the relevant forms to require issuers to report
Regulation S sales of equity securities only on a quarterly basis as
presently required for other unregistered sales of equity securities.
Comment is requested whether requiring only quarterly reporting of
Regulation S sales will provide sufficiently timely disclosure if the
covered equity securities are deemed ``restricted securities'' and thus
not subject to resales under Rule 144 until at least one year after
sale. Should the current Form 8-K filing requirement be continued
because such securities may be resold in unlimited amounts either
offshore or in the United States pursuant to Rule 144A (or another
exemption)?
C. Revise Category 3 To Prohibit Payments With Promissory Notes for
Domestic Equity Securities, and Foreign Equity Securities Where the
Principal Market for the Securities is in the United States
In some sales purportedly made in reliance on Regulation S, the
offshore purchaser has used a promissory note payable after the end of
the restricted period to pay all or a portion of the purchase price of
the securities. In some cases the notes are secured only by the
Regulation S securities; in other cases the notes are unsecured. Some
notes provide recourse to the buyer if the note is not repaid; others
do not. The purchasers have resold the securities into the U.S. markets
upon expiration of the 40-day restricted period and used the proceeds
of the resale to repay the note. Under such an arrangement, the issuer
and purchaser clearly expect a U.S. resale to provide the funds
necessary to repay the note; in economic substance, the issuer is
raising funds from the U.S. public markets. As noted in the
Interpretive Release, this practice is inconsistent with an offshore
distribution.
The proposals would revise the Category 3 safe harbor to make clear
that the safe harbor is unavailable for transactions for equity
securities of a domestic company, and for a foreign company where the
principal market for the securities is in the United States, in which a
purchaser delivers a promissory note as payment for some or all of the
purchase price, or enters into an installment purchase contract
relating to the sale. Comment is requested whether there should be any
exceptions from the proposed prohibition to accommodate established
international offering practices. Commenters favoring such exceptions
are asked to describe the established practices and explain why they
would not be likely to result in unregistered distributions of
securities in the United States. Should there be a distinction between
full and non-recourse promissory notes?
For example, could the Commission restrict the use of promissory
notes without completely prohibiting their use by applying the Rule 144
standard for tolling 39 to permit promissory notes to be used
under Regulation S as long as the promissory note or similar obligation
or contract is by its terms required to be discharged by payment in
full prior to resale of the securities by the obligor and satisfies the
following conditions: the promissory note, obligation or contract must
provide for
[[Page 9263]]
full recourse against the purchaser of the securities, and must be
secured by collateral (other than the securities purchased) having a
fair market value at least equal to the purchase price of the
securities purchased? 40 Given that the Commission proposes to
classify these equity securities as ``restricted securities'' within
the meaning of Rule 144, and that the holding period under Rule 144 is
tolled unless promissory notes meet the above conditions, is it even
necessary to amend Regulation S at all with regard to the use of
promissory notes?
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\39\ Rule 144(d)(2) [17 CFR 230.144(d)(2)].
\40\ These conditions are similar to those found under Rule 144
governing the computation of the Rule 144 holding period in the
context of payment with promissory notes. See Rule 144(d)(2) [17 CFR
230.144(d)(2)].
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The Commission understands that some abusive Regulation S offerings
have involved non-cash payments to the issuer other than promissory
notes. Examples include the purported sale of equity securities under
Regulation S in exchange for services rendered or in exchange for
cancellation of a supposed pre-existing debt owed by the issuer to the
offshore purchaser. The Commission requests comment on whether the
Regulation S safe harbor should be available for offshore offerings of
equity securities of domestic companies, and of covered foreign
companies, only when cash is paid and received in the offering. Would
such a requirement restrict the use of Regulation S for bona fide
exchange offers? Should exchange offers be accommodated under the
Regulation S safe harbor only if the securities being acquired have a
readily ascertainable market value or have been outstanding for some
time? Would such a requirement unnecessarily restrict the use of
Regulation S for mergers and other business combination transactions?
D. Classify Domestic Equity Securities, and Foreign Equity Securities
Where the Principal Market for the Securities is in the United States,
as ``Restricted Securities''
Regulation S does not provide any safe harbor protection for
resales by purchasers of securities placed offshore under Regulation S
back into the United States. Preliminary Note 6 to Regulation S
specifically states that:
Securities acquired overseas, whether or not pursuant to
Regulation S, may be resold in the United States only if they are
registered under the [Securities] Act or an exemption from
registration is available.
In the absence of guidance from the Commission or the staff,41
some market participants appear to view the expiration of the
restricted periods under Regulation S (applicable to issuers and other
distribution participants entitled to rely on the Rule 903 safe harbor)
as providing a safe harbor for U.S. resales by purchasers of Regulation
S securities, particularly equity securities of domestic reporting
issuers. This view is not correct. Instead, such purchasers must
determine whether an exemption for resales into the United States is
available.
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\41\ The Adopting Release did not provide further guidance in
this area, other than to state in a footnote that, upon the
expiration of any restricted period, the Commission would view
securities sold under Regulation S (other than unsold allotments) as
unrestricted. Adopting Release, supra note 18, at n.110. Since the
adoption of Regulation S, the Commission's staff has received
numerous inquiries on whether and when securities that have been
sold under Regulation S may be freely resold in the United States
without registration under the Securities Act. Regardless of the
issuer's compliance with Regulation S when it sold the securities
offshore, persons who would be considered underwriters under Section
2(11) of the Securities Act are not permitted to make unregistered
public resales of these securities in the United States in reliance
on the Section 4(1) exemption from registration. As the Commission
stated in the Interpretive Release, supra note 8, at n.17:
Public resales in the United States by persons that would be
deemed underwriters under Section 2(11) of the Securities Act [15
U.S.C. 77b(11)] would not be permissible absent registration or an
exemption from registration. Footnote 110 of the Adopting Release,
which addresses the restricted periods, should not be read to
provide otherwise.
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Because some of the abusive practices under Regulation S have
involved activities by persons other than issuers, distributors and
their affiliates (that is, investors who purchased in Regulation S
offerings with a view to distributing those securities into the U.S.
markets at the end of the 40-day restricted period), the Commission
believes that it is appropriate to clarify the legal obligations of
purchasers of securities under Regulation S. Consequently, the
Commission is proposing new Rule 905, and amendments to Rule 144(a)(3),
to classify equity securities of domestic issuers (both reporting and
non-reporting) placed offshore under Regulation S as ``restricted
securities'' within the meaning of Rule 144. The Commission is also
proposing to so classify as ``restricted securities'' equity securities
of foreign issuers (both reporting and non-reporting) where the
principal market is in the United States. While the Commission is not
aware of widespread abuses involving these foreign issuers, the
potential for abuse does exist since these securities are more likely
to be resold into their principal market.
By expressly defining these Regulation S securities as falling
within the definition of ``restricted securities'' under the Rule 144
resale safe harbor, purchasers of those securities are provided with
clear guidance regarding when and how those securities may be resold in
the United States without registration under the Securities Act.42
Given the concurrent adoption of shortened holding periods under Rule
144, the Commission believes that it is appropriate to harmonize the
resale restrictions for all securities sold without the benefit of
registration with the Commission. For purposes of resale prohibitions,
an unregistered sale offshore would be treated no differently than a
private sale domestically; the burdens and benefits would be equalized.
Nevertheless, are there reasons why securities sold offshore should be
treated differently? Instead of applying the Rule 144 holding period,
should a shorter holding period apply (for example, one year or six
months)? To further integrate the requirements in this area, should the
Commission craft a single regulation that would contain both the
requirements applicable to offshore and to domestic unregistered
offerings (for example, combine Regulation S and Regulation D)?
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\42\ They are also put on notice that resales outside the Rule
144 safe harbor must be evaluated independently against the
statutory underwriter concepts embodied in Section 2(11), regardless
of the issuer's compliance with Regulation S.
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Currently, equity securities offered and sold to non-U.S. resident
employees of the issuer through an employee benefit plan governed by
non-U.S. law are Category 1 transactions and thus are not subject to a
40-day restricted period regardless of the domicile of the issuer or
U.S. market interest in its securities. Under proposed Rule 905,
however, those equity securities when issued by domestic or covered
foreign issuers would be restricted within the meaning of Rule 144.
Comment is requested whether this type of equity security should be
excluded from the ``restricted security'' classification. If so,
commenters are requested to address why, if such securities were not
deemed restricted, problematic practices would not develop with respect
to such plans and securities.
E. Application of Proposed Changes
1. Foreign Companies Where the Principal Market for the Securities is
in the United States
Although abusive practices under Regulation S have not been as
evident in offerings by foreign issuers, the Commission is concerned
that the economic incentives for indirect distributions and resales
into the United States are the same for equity offerings
[[Page 9264]]
of both domestic companies, and foreign companies where the principal
market for the securities is in the United States (that is, the
majority of the trading occurs here). Therefore, the proposed
Regulation S changes would treat both similarly for each requirement.
Nonetheless, is there an appropriate basis to distinguish between the
two for any or all of the conditions of the proposed amendments to the
safe harbors, including the ``restricted securities'' classification?
As noted above, the Commission proposes defining ``principal market
in the United States'' for a security as when more than 50 percent of
all trading in such class of securities took place in, on or through
the facilities of securities exchanges and inter-dealer quotation
systems in the United States in the shorter of the issuer's prior
fiscal year or the period since the issuer's incorporation. Should the
percentage be greater than 50 percent (for example, 75%) or lower (for
example, 10%, 25% or 35%), so long as the United States is the largest
market? Should it matter for purposes of this definition where the
security is traded (for example, New York Stock Exchange, American
Stock Exchange, Nasdaq-NMS, any of the regional exchanges, the OTC
Bulletin Board, the ``pink sheets,'' or any private trading system such
as Instinet) and whether such market is relatively liquid or active?
Commenters should explain the reasons for any distinctions between or
among trading markets or mechanisms for trading.
Other possible alternatives under consideration include applying
the restrictions to (i) all foreign issuers, (ii) only foreign
reporting issuers, (iii) only foreign reporting issuers with a
``substantial U.S. market interest'' (as currently defined in
Regulation S) in the class of equity securities to be offered offshore;
or (iv) only foreign reporting issuers whose only equity market is in
the United States. Should a different test other than trading market be
used, such as percentage (e.g., 10%, 25% or 50%) of U.S. resident
ownership of the company's outstanding equity securities? Should the
Commission use similar percentage thresholds based on an ``Average
Daily Trading Volume'' test, like that recently adopted in Regulation M
43 for purposes of defining ``principal market in the United
States?'' If so, what percentage (10%, 25% or 50% of U.S. Average Daily
Trading Volume as compared to total worldwide Average Daily Trading
Volume), and what measurement period (three, six or 12 months, or some
other period) should be used?
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\43\ Securities Act Release No. 7375 (Dec. 20, 1996) [62 FR 520
(Jan. 3, 1997)].
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2. Equity Securities
As proposed, the procedures and restrictions under Category 3 and
the ``restricted securities'' classification would apply only to
offerings of equity securities. Rule 405 of Regulation C under the
Securities Act defines the term ``equity security'' to include stock,
securities convertible or exchangeable into stock, warrants, options,
rights to purchase stock, and other types of equity related
securities.44 The Commission does not propose to apply the new
restrictions to offerings of debt securities, since the nature of the
trading markets for debt securities appear not to have facilitated
abusive practices that result in a distribution of these securities
into U.S. markets.
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\44\ 17 CFR 230.405. Under the proposed changes, non-
participating preferred stock and asset-backed securities would
continue to be treated in the same manner as debt securities for
purposes of the Regulation S safe harbors and the restricted
security classification. See Rule 903(c)(4) [17 CFR 230.903(c)(4)],
proposed to be redesignated as Rule 902(a).
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Comment is requested concerning whether any or all of the
restrictions proposed for equity securities also should be applied to
offerings of debt securities, and if so, whether such applicability
should depend on the status of the issuer (for example, whether the
issuer is foreign or domestic, reporting or non-reporting, Form S-3 or
F-3 eligible)? Should it matter whether there is a trading market for
any security (whether debt or equity) of the issuer in the United
States, and if so, what security is traded? Are there circumstances
where any such debt offering would be likely to result in an
unregistered U.S. distribution? If the restrictions cover offerings of
debt securities, should they be limited to certain types of debt
securities, such as debt securities where the amount due is tied to the
price of the issuer's common equity securities, or debt securities that
are listed for trading on a U.S. securities exchange?
The Commission is aware that many Regulation S abuses have involved
the use of convertible or exchangeable securities or warrants.45
Many companies, however, legitimately offer under Regulation S either
convertible or exchangeable debt securities, or warrants for common
stock as a unit with other securities, to lower their costs of capital.
Comment is requested as to whether all convertible or exchangeable
securities or warrants of domestic issuers, and of foreign issuers
where the principal market for the underlying equity securities is in
the United States, should be subject to the proposed Category 3
restrictions and the ``restricted securities'' classification, as
proposed. Are there certain types of convertible or exchangeable
securities or warrants where there is minimal likelihood that such
offerings will result in an unregistered U.S. distribution of either
the convertible or exchangeable securities or warrants, or the equity
securities underlying the convertible or exchangeable securities or
warrants, and, therefore, the proposed restrictions may not be
necessary?
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\45\ See ``Pirates' Play?'', supra note 21.
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Should it matter if the convertible or exchangeable debt security
is not convertible or exchangeable for some period of time after the
offering (for example, six months, one year, two years, three years)?
Should they be excluded if, at the time of issuance, the securities had
an effective conversion or exercise premium over a specified amount
(for example, five percent, 10 percent, 20 percent, or more)? 46
If a specified conversion or exercise premium approach is used, should
it matter whether such conversion or exercise rate is allowed to float
in relation to the market price of the underlying security, or is set
at some future point in time based upon a formula known when the
security was issued? Does it matter whether the issuer of the
convertible or exchangeable security or warrant, or the issuer of the
underlying equity security, is a reporting company, and if so, how?
Although many of the larger capitalization domestic companies issue
convertible securities and warrants under Regulation S, does the Form
S-3 eligibility of these companies render any carve out for their
securities unnecessary? Commenters are asked to provide information on
the likelihood that convertible or exchangeable securities or warrants
containing particular conversion, exchange or exercise terms will be
sold offshore under Regulation S under circumstances that are not
likely to result in an unregistered distribution of equity securities
in the United States.
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\46\ The Commission has imposed similar standards under the Rule
144A resale safe harbor. See Rule 144A(d)(3)(i) [17 CFR
230.144A(d)(3)(i)]. See also Securities Act Release No. 6862 (Apr.
23, 1990) at nn.25 and 26 for a discussion of how the conversion or
exercise premium is determined for purposes of Rule 144A. Comment is
requested whether the same methods of calculations should apply
under any proposed changes to Regulation S.
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[[Page 9265]]
F. Other Possible Restrictions
1. Hedging
As discussed in the companion proposing release for Rule 144, the
Commission is concerned that some hedging activity may undermine the
safeguards against indirect distributions provided by Regulation S and
Rule 144. If a purchaser shifts the economic risk of a transaction
through short sales, swaps, or derivative securities transactions, for
example, the Commission is concerned that the purchaser may not have a
bona fide investment intent. This is especially true in the Regulation
S area, where the Commission looks for indicia that a transaction is
truly ``offshore.''
In the Interpretive Release, the Commission warned that a
transaction may not be viewed as offshore if there is evidence that a
substantial portion of the economic risk is left in or returned to the
U.S. market during the restricted period. Based on discussions with
market participants, there is reason to believe that hedging during the
Regulation S restricted periods is still occurring.
The Commission is addressing this concern in two ways. First, the
proposed changes include purchaser and distributor agreements and
legends warning against inappropriate hedging, as discussed above.
Second, by treating equity securities purchased from domestic and
covered foreign companies as ``restricted'' for purposes of resale, the
Commission is imposing the holding period requirement of Rule 144.
Maintaining a hedge for one or two years, as opposed to 40 days, is
more costly and may be impossible for many of the illiquid securities
sold in abusive cases.
The companion proposing release for Rule 144 does not specifically
prohibit hedging during the holding period, but asks a series of
questions designed to determine whether certain types of hedging are
inconsistent with the spirit of Rule 144. Should the Commission go
beyond its Rule 144 approach and simply preclude any or all hedging
activity during the Regulation S restricted period? Should it matter
whether the hedging occurs offshore? Should specific hedging provisions
apply to equity securities only? Should the size of the issuer be
determinative (for example, permit more hedging with issuers eligible
to file Form S-3 or F-3)? As with convertible securities, should it
matter whether a derivative security is ``out of the money'' by a
specified amount? Should there be a cap on the amount that could be
hedged within the safe harbor? For example, should all or some hedging
be permitted as long as the purchaser retains a majority or a
substantial amount of economic risk?
2. Discounts
As evidenced by the offering practices described in the
Interpretive Release, securities sold offshore at a discount from the
U.S. market price are likely to be resold in the United States at the
earliest possible date in order for the purchaser to realize a profit.
In the Interpretive Release, the Commission requested comment as to
whether it should limit the use of the safe harbor under Regulation S
for offerings of common stock of domestic issuers to those sold at the
market price or with a specified minimal discount.
The Commission is not proposing to amend Regulation S to require
that sales of equity securities of reporting companies under Regulation
S be made at a specified minimum price or to otherwise impose
requirements or restrictions that are tied to the offering price of
securities.47 Although many of the abusive practices under
Regulation S appear to involve significant discounts, the Commission
believes there are other means to curtail such practices without
mandating that safe harbor sales take place at a specific price or
within a range of prices.
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\47\ The Commission's view as expressed in the Interpretive
Release, however, remains applicable: neither the general statement
under Rule 901 nor the safe harbors are intended to cover offshore
offerings of such securities where the fees or discounts indicate
that the transaction was intended to create a parking scheme or
other scheme where the securities were merely being held offshore
temporarily to evade the registration requirements of the Securities
Act.
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The Commission again requests comment on whether certain discounted
offers (particularly by domestic reporting companies) should be
excluded from the Regulation S safe harbor. Commenters addressing
whether discounted sales should be accorded different treatment also
should address how such discount should be measured (especially in the
case of illiquid securities that trade infrequently, and convertible
and exchangeable securities where other factors (such as interest rate
and maturity) will affect the offering price of a security) and at what
level of discount, if any, such different treatment should apply.
IV. Offshore Resales of Restricted and Affiliate Securities
The Commission is concerned that the more stringent requirements
proposed for offshore offerings could lead to the development of
abusive practices under the Rule 904 offshore resale safe harbor. Such
practices could involve the private placement of equity securities in
the United States by an issuer, the resale of those securities to a
foreign purchaser under Rule 904, and the attempted resale of those
securities back into the U.S. public markets without apparent
restrictions. Without express guidance from the Commission, these
holders of restricted equity securities (whether obtained under
Regulation S, Regulation D, Rule 144A, or any other exemption from
registration pursuant to which restricted status is designated) could
mistakenly believe that a resale of securities to a foreign purchaser
under Rule 904 results in such securities no longer being restricted
securities.
In the Interpretive Release, the Commission stated that the
offshore resale safe harbor under Rule 904 cannot be used for ``washing
off'' resale restrictions, such as the holding period requirement for
restricted securities in Rule 144. The Commission is proposing in new
Rule 905 to make explicit that when restricted equity securities of any
domestic issuer, or of a foreign issuer where the principal market for
the equity securities is in the United States, are resold offshore
under Regulation S, such securities will retain their status as
restricted securities after the resale. Thus, subsequent resales of
these securities by the offshore purchaser back into the United States
may only take place pursuant to registration under the Securities Act,
or a Securities Act exemption (for example, resales in accordance with
the provisions of either Rule 144A or Rule 144).
Proposed Rule 905 would codify the Commission's view that resale
restrictions applicable to equity securities of domestic issuers and
foreign issuers where the principal market for the equity securities is
in the United States will follow the securities in the hands of each
subsequent transferee. Any purchaser of such restricted securities
(including the initial sellers of such restricted securities who
replace them with a repurchase of the same or fungible restricted
securities) would be considered to have restricted securities. On the
other hand, sellers of such restricted securities who replace them with
a repurchase of fungible but unrestricted securities would not be
considered to have restricted securities.48
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\48\ This interpretation clarifies and supercedes the
Commission's previous interpretation regarding ``prearranged''
repurchases of restricted securities set forth in the Interpretive
Release, supra note 8.
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Comment is requested on whether the proposed rule, either alone or
with the
[[Page 9266]]
Commission's other proposed and recently adopted initiatives, is
sufficient to deter the improper use of the Rule 904 safe harbor.
Should other types of restricted securities (such as debt securities)
also expressly be considered restricted securities after a Regulation S
resale, and if so, which ones? Should the applicability depend on the
status of the issuer (for example, whether the issuer is foreign or
domestic, reporting or non-reporting, Form S-3 or F-3 eligible)? Should
it matter the extent to which there is a trading market for the
security in the United States, and if so, how?
Should the proposed preservation of resale restrictions apply to
resales of equity securities of (i) all foreign issuers, (ii) only
foreign reporting issuers, (iii) only foreign reporting issuers with a
``substantial U.S. market interest'' (as currently defined in
Regulation S) in the class of equity securities to be resold offshore;
or (iv) only foreign reporting issuers whose only equity market is in
the United States? Should some restricted equity securities of domestic
or foreign issuers be excluded from this aspect of proposed Rule 905,
such as certain types of convertible or exchangeable securities or
warrants, and if so, which ones?
When restricted securities proposed to be covered by the new rule
are resold under Rule 904 on a ``designated offshore securities
market'' as defined under Regulation S, 49 is it practical for
such securities to be identified to the subsequent purchaser as
restricted securities under the U.S. federal securities laws (whether
through legending or otherwise)? Commenters are requested to address
the practical effect of offshore hedging activity involving these
securities as well.
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\49\ See Rule 902(a) of Regulation S [17 CFR 230.902(a)] for the
definition of ``designated offshore securities market.''
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Any officer or director of the issuer who is an affiliate solely by
virtue of holding such position may sell unrestricted securities
offshore pursuant to Rule 904 without those securities becoming
restricted securities, even if the sales exceed the volume limitations
of Rule 144(e) (offshore resales of restricted securities pursuant to
Regulation S are not subject to the volume limitations of Rule 144(e)).
Any other affiliates, however, who decide to sell securities offshore
are required to conduct such offerings under either Rule 901 or Rule
903, not Rule 904. Thus, if the securities to be sold are restricted or
unrestricted equity securities of a domestic issuer, or of a covered
foreign issuer, such securities will be considered restricted
securities in the hands of any offshore purchaser, and may not be
resold into the United States absent registration or a valid exemption.
50 Comment is requested whether this disparate treatment of
different types of affiliates is appropriate. Should all unrestricted
affiliate shares sold offshore be deemed restricted unless the offshore
sales comply with Rule 144?
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\50\ If these affiliates sell the securities offshore in
compliance with the appropriate provisions applicable to affiliate
or restricted shares under Rule 144, then those securities will be
unrestricted in the hands of the offshore purchaser. In calculating
the amount of securities that have been resold pursuant to Rule 144
for the purposes of the volume limitations of Rule 144(e), the staff
has taken the position that restricted securities resold offshore
pursuant to Regulation S need not be included--similar to the
treatment of other non-Rule 144 exempt resales, such as those made
pursuant to Rule 144A. The Commission is proposing an amendment to
Rule 144(e)(vii) to codify that position.
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Alternatively, should the Rule 904 offshore resale safe harbor
simply be made unavailable for restricted equity securities of domestic
issuers and covered foreign issuers? Should the Commission make the
Rule 904 safe harbor unavailable for all equity securities sold by any
affiliate of the issuer? If the Rule 904 offshore resale safe harbor is
not available, these securities would be able to be resold offshore
under the general statement of Rule 901, but no safe harbor provisions
under Regulation S would apply to such resale.
Proposed Rule 905 does not apply to other types of securities, such
as debt securities of domestic issuers and equity securities of foreign
issuers where the principal market for the equity securities is not in
the United States. The Commission requests comment as to whether Rule
905 should apply to debt securities of domestic issuers, equity
securities of foreign issuers where the principal market for the equity
securities is not in the United States, or other types of securities or
other types of issuers. Does the nature of offshore trading markets in
various types of securities make it impracticable for such securities
to remain restricted in the hands of offshore purchasers? Is there less
need for concern in this area inasmuch as the likelihood of an
unregistered distribution of such securities in the United States is
diminished? Comment is requested on current practices in this area and
the need for Commission guidance.
V. Technical and Clarifying Revisions
The Commission proposes mainly non-substantive technical and
clarifying revisions to Regulation S to make the rule more concise and
understandable. The principal changes include:
Revising the captions of the three sections of the Rule
903 issuer safe harbor to refer to them as commonly known: ``Category
1,'' ``Category 2'' and ``Category 3'';
Revising the Rule 903 issuer safe harbors to state clearly
for each category what procedures are to be followed and what
securities are eligible for each category;
Combining some definitions within Rule 902, the definition
section of Regulation S, or moving certain definitions to the Rule 903
safe harbor to make the rule easier to read and understand;
If the same terms are already defined elsewhere in the
Commission's rules and regulations, deleting those definitions from
Rule 902 and adding cross references to the definitions contained
elsewhere; and
Generally editing the language in the rule to make it more
understandable.
Comment is requested on each of the proposed changes. Are there any
other clarifying or technical changes that the Commission could make to
Regulation S to make the rule more readable and understandable?
VI. Request for Comments
Any interested persons wishing to submit written comments on the
proposed revisions are requested to do so by submitting them in
triplicate to Jonathan G. Katz, Secretary, U.S. Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Comment
letters also may be submitted electronically to the following
electronic mail address: rule-comments@sec.gov. Comments are requested
on the impact of the proposals on issuers, investors, and others.
Comments should specifically address any possible effects on investor
protection, capital formation or market efficiency resulting from the
proposals. The Commission also requests comment on whether the proposed
rules, if adopted, would have an adverse impact on competition that is
neither necessary nor appropriate in furthering the purposes of the
Exchange Act. Comments will be considered by the Commission in
complying with its responsibilities under Section 23(a) \51\ of the
Exchange Act. Comment letters should refer to File No. S7-8-97; this
file number should be included in the subject line if electronic mail
is used. All comment letters received will be available for public
inspection and copying in the Commission's Public
[[Page 9267]]
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.
Electronically submitted comment letters will be posted on the
Commission's Internet Web site (http://www.sec.gov).
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\51\ 15 U.S.C. 78w(a).
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VII. Cost-Benefit Analysis
To assist the Commission in its evaluation of the costs and
benefits that may result from the proposals, commenters are requested
to provide views and empirical data relating to any costs and benefits
associated with these proposals. The proposed amendments to Regulation
S would impose restrictions on purchasers of equity securities of
domestic issuers, and of foreign issuers where the principal market for
the securities is in the United States. For example, issuers could not
accept promissory notes as payment for the securities, and purchasers
may have to wait a longer period of time before they could publicly
resell the securities into the United States. Also, the new requirement
that purchasers of certain types of equity securities sold under
Regulation S provide certification of compliance with the Securities
Act may impose additional recordkeeping burdens on issuers attempting
to maintain records of such compliance. These restrictions may make it
more difficult or costly for some issuers to raise funds through the
sales of equity securities. At the same time, the Commission believes
that such restrictions are necessary to deter abusive practices that
may have defrauded investors of millions of dollars. The Commission
believes that deterring abusive market practices will protect investors
and, in the long run, promote capital formation and efficient,
competitive markets.
The proposed amendments to Item 701 of Regulation S-K, Item 701 of
Regulation S-B and Forms 8-K, 10-Q, 10-QSB, 10-K and 10-KSB relax the
existing requirements to report unregistered sales of equity
securities. As such, the Commission believes that these amendments
would decrease reporting, recordkeeping and compliance burdens, while,
at the same time, continuing to provide investors with sufficient
information regarding changes in outstanding securities of public
companies.
The Commission invites commenters to submit empirical data that
will help it assess the costs and benefits of its proposals. The
Commission also encourages commenters to suggest alternative ways of
deterring the abusive practices cited in this release. It would be most
helpful if commenters would state the reasons that a proposed
alternative is preferable to the Commission's proposals and why the
proposed alternative is more cost-effective. If possible, commenters
should submit data that support their views.
Despite the possible increase in cost to issuers resulting from
proposed new requirements such as purchaser certifications and
purchaser and distributor agreements, the Commission does not believe
that the proposed amendments would result in a major increase in costs
or prices for investors, issuers, individual industries or consumers.
The Commission believes that the proposed amendments relaxing the
existing requirements to report unregistered sales of equity securities
would serve to reduce issuer costs. Likewise, the Commission does not
believe that the proposed amendments would have an adverse effect on
competition, employment, investment, productivity, innovation, market
efficiency, or capital formation. In fact, the Commission believes that
the proposed amendments will promote capital formation and efficient,
competitive markets by enhancing investors' confidence in the integrity
of the securities markets. However, the Commission requests comment on
these preliminary views. The Commission encourages commenters to
provide empirical data or other facts to support their views.
Because some of the abusive practices under Regulation S have
involved activities by persons other than issuers, distributors and
their affiliates (that is, investors who purchased in Regulation S
offerings with a view to distributing those securities into the U.S.
markets at the end of the 40-day restricted period), the Commission
believes that it is appropriate to clarify the legal obligations of
purchasers of securities under Regulation S. By expressly defining
these Regulation S securities as falling within the definition of
``restricted securities'' under the Rule 144 resale safe harbor,
purchasers of those securities are provided with clear guidance
regarding when and how those securities may be resold in the United
States without violating the registration requirements of the
Securities Act.52 Given the concurrent adoption of shortened
holding periods under Rule 144, as well as the ability of some
purchasers in Regulation S placements to demand registration rights,
the Commission does not believe that this classification will be unduly
burdensome for purchasers in those offerings. To the extent that a
purchaser chooses to resell the securities under the Rule 144 safe
harbor, the Commission also does not believe that the requirement to
file a Form 144 under certain circumstances will be unduly burdensome,
particularly in light of the benefit of obtaining safe harbor
protection for the resale.
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\52\ They are also put on notice that resales outside the Rule
144 safe harbor must be evaluated independently against the
statutory underwriter concepts embodied in Section 2(11), regardless
of the issuer's compliance with Regulation S.
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The proposed amendments to Regulation S could reduce the annual
amount of unregistered equity securities initially sold by issuers and
the annual amount resold by the initial purchasers of those securities.
The Commission requests comments on the likelihood of these effects and
their size in terms of annual dollar amounts. In particular, are the
proposed amendments likely to have a $100,000,000 or larger annual
effect on the securities markets or the economy? If possible,
commenters should provide empirical data or other facts to support
their views.
VIII. Summary of Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA''), pursuant to the requirements of the Regulatory
Flexibility Act,53 regarding the proposals. The proposed
amendments to Regulation S are intended to stop abusive practices under
Regulation S where issuers with a market for their securities in the
United States conduct offshore placements of their securities pursuant
to Regulation S that are in essence indirect distributions of these
securities into the U.S. markets without the protections of
registration under the Securities Act. Over the last several months,
the Commission staff has met with numerous participants in the market
for Regulation S securities. Based on the anecdotal information
obtained through these discussions, it appears that many small
businesses currently use Regulation S with respect to equity sales.
However, there appears to be no significant alternative to the current
proposals that would impose less burdens on small entities, yet
forestall further abuse under Regulation S.
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\53\ 5 U.S.C. 603.
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The proposed amendments to Item 701 of Regulation S-K, Item 701 of
Regulation S-B and Forms 8-K, 10-Q, 10-QSB, 10-K and 10-KSB would relax
the existing requirements to report unregistered sales of equity
securities. These amendments would decrease reporting, recordkeeping
and compliance burdens, while, at the same time, continuing to provide
investors with sufficient information regarding
[[Page 9268]]
changes in outstanding securities of public companies.
There are new reporting, recordkeeping or other compliance
requirements proposed as part of the proposed Regulation S rules. The
Commission proposes to lengthen the restricted period during which
persons relying on the Regulation S safe harbor may not publicly resell
these equity securities (absent registration) to U.S. persons from 40
days or one year to two years. In addition, since covered equity
securities placed offshore pursuant to Regulation S would be classified
as ``restricted securities'' within the meaning of Rule 144, purchasers
of these securities may choose to resell under the Rule 144 safe
harbor, and therefore would be required to comply with the conditions
of that safe harbor, including the Rule 144 holding periods. These
proposals may reduce incentives to conduct equity placements under
Regulation S due to a perceived reduction in the liquidity of the
securities absent registration under the Securities Act or a valid
exemption.
The Regulation S proposals also would impose on reporting issuers
certification, legending and other requirements currently only
applicable to sales of equity securities by non-reporting issuers. The
purpose of these requirements is to assure that the participants in the
distribution and the purchasers are aware of the restricted nature of
these securities. These proposals would expand the current purchaser
and distributor agreement requirements to require that they agree not
to engage in hedging transactions with regard to such securities unless
the transactions are in compliance with the Securities Act, and would
make sure that participants in the offering are aware of and comply
with these restrictions. In addition, promissory notes would be
prohibited for use as payment for these securities. These last two
proposals are intended to address abusive transactions involving
hedging transactions and the use of promissory notes that from a
practical perspective result in indirect distributions of securities
into the U.S. markets without the protections of registration.54
Although these additional purchaser requirements could increase
recordkeeping and compliance burdens, in almost all instances,
purchasers of securities sold pursuant to Regulation S would be non-
U.S. persons. Any such additional purchaser requirements could have an
indirect impact on U.S. small businesses.
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\54\ See notes 21 and 22 and accompanying text, supra, for a
discussion of the abusive transactions.
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Lastly, the Regulation S proposals would make clear that offshore
resales under Rule 904 of equity securities of these issuers that are
``restricted securities,'' as defined in Rule 144, will not affect the
restricted status of those securities. Consequently, holders of
restricted securities could not attempt to remove the restrictions by
selling the securities offshore.
All of these requirements are imposed on domestic issuers, and
foreign issuers with the principal market for the equity securities in
the United States, regardless of size. As proposed, small businesses
would be able to obtain the protections of the proposed safe harbors on
the same basis as larger companies. The Commission considered yet
rejected alternatives applicable to small businesses, as the Commission
believes that distinctions between companies based on size would negate
the beneficial effects of the proposed safeguards. The Commission seeks
comment on these views. Commenters are encouraged to suggest
alternatives that would be appropriate and beneficial to small
businesses, and data to support any alternative approach.
The IRFA notes that the proposed amendments to Regulation S, if
adopted, would affect persons that are small entities, as defined by
the Commission's rules. The term ``small business,'' as used in
reference to a registrant for purposes of the Regulatory Flexibility
Act, is defined by Rule 157 55 under the Securities Act as an
issuer that, on the last day of its most recent fiscal year, had total
assets of $5 million or less and is engaged or proposing to engage in
small business financing. An issuer is considered to be engaged in
small business financing if it is conducting or proposes to conduct an
offering of securities which does not exceed the $5 million dollar
limitation prescribed by Section 3(b) of the Securities Act. When used
with reference to an issuer other than an investment company, the term
also is defined in Rule 0-10 56 of the Exchange Act as an issuer
that, on the last day of its most recent fiscal year, had total assets
of $5 million or less. When used with respect to an investment company,
the term is defined under Rule 0-10 as an investment company with net
assets of $50 million or less as of the end of its most recent fiscal
year.
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\55\ 17 CFR 230.157.
\56\ 17 CFR 240.0-10.
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Small entities meeting these definitions would be able to rely on
the Regulation S safe harbors on the same basis as larger entities. The
Commission is aware of approximately 1,019 Exchange Act reporting
companies that currently satisfy the definition of ``small business''
under Rule 0-10. There is no reliable way of determining, however, how
many non-reporting companies would be subject to the rule or how many
small businesses may become subject to Commission registration and
reporting obligations in the future. The Commission solicits comments
regarding how to estimate the number of non-reporting issuers that may
be affected by the proposed changes, together with data or assumptions
to support such an approach.
The Commission estimates that over 500 Exchange Act reporting
companies conduct over 750 sales pursuant to Regulation S per year and
therefore would be affected by the proposals. The Commission further
estimates that up to 160 of such reporting companies would meet the
Regulatory Flexibility Act definition of small businesses. The total
number of companies conducting Regulation S sales--including companies
that are not Exchange Act reporting companies--undoubtedly would exceed
the above numbers. Because no data are available as to non-reporting
companies' sales due to the absence of any filings with the Commission
regarding such sales, the exact number is impossible to determine. It
is important to note that the Commission only recently began receiving
data from reporting issuers regarding their placements of equity
securities pursuant to Regulation S,57 and therefore, does not
have long-term data that would assist it in determining how many small
businesses may actually rely on the Regulation S safe harbors, or may
otherwise be impacted by the rule proposals. The Commission solicits
comments regarding how to estimate the number of small businesses that
may be affected by the proposed changes together with data or
assumptions to support such an approach.
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\57\ Since November 18, 1996, sales of equity securities by
domestic issuers under Regulation S are required to be reported on
Form 8-K within 15 days of occurrence. This reporting requirement
does not apply to any issuer who is not subject to the periodic
reporting requirements under the Exchange Act, and in general does
not apply to foreign issuers. See Exchange Act Release No. 37801,
supra note 26.
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The proposed changes to Item 701 of Regulation S-B and Forms 8-K,
10-QSB and 10-KSB also would affect persons that are small businesses,
as defined by the Commission's rules. The Commission expects, however,
that the proposed changes would decrease
[[Page 9269]]
reporting, recordkeeping and compliance burdens. The Commission
estimates that up to 160 reporting companies qualifying as small
businesses would be relieved of the burden of filing up to 300
additional Forms 8-K per year, thereby reducing the total annual record
keeping burden by 1,500 hours. The analysis also indicates that there
are no current federal rules that duplicate, overlap or conflict with
the revised disclosure provisions.
While the Regulation S proposals may affect the ability of some
small entities to access offshore capital, these restrictions should be
sufficient to end the abusive practices under Regulation S, and
forestall any further abuse, while not foreclosing the offshore market
entirely for unregistered offshore offerings of equity securities. In
addition, the concurrent adoption of shortened holding periods under
Rule 144, coupled with the proposal to allow delayed pricing by smaller
issuers in registered offerings, should help offset any adverse effect
on small entities. No alternatives to the proposed rules consistent
with their objectives and the Commission's statutory authority were
found.
Comments are encouraged on any aspect of this analysis. A copy of
the analysis may be obtained by contacting Walter G. Van Dorn, Jr.,
Office of International Corporate Finance, Division of Corporation
Finance, Mail Stop 3-9, 450 Fifth Street, N.W., Washington, D.C. 20549.
IX. Paperwork Reduction Act
The staff has consulted with the Office of Management and Budget
(the ``OMB'') and has submitted the proposals for review in accordance
with the Paperwork Reduction Act of 1995 (the ``Act''). 58 Under
the proposed amendments to Regulation S, if adopted, equity securities
of domestic issuers, and of foreign issuers where the principal market
for the equity securities is in the United States, that are issued
offshore pursuant to Regulation S would be deemed ``restricted
securities'' as defined in Rule 144 under the Securities Act.
Consequently, purchasers of these securities in the offshore placement,
and any subsequent purchasers, may choose to resell these securities
into the U.S. markets pursuant to the conditions of the Rule 144 safe
harbor for resales of restricted securities. Such conditions may
include filing with the Commission a notice of proposed sale on Form
144, containing information about the issuer of the securities, the
seller, the securities to be sold and the proposed manner of sale.
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\58\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
Prior to November 18, 1996, issuers of equity securities under
Regulation S were not explicitly required to disclose such issuances in
Commission filings. Since then, domestic reporting issuers of equity
securities under Regulation S are required to file a Current Report on
Form 8-K within 15 days of occurrence. 59 The Commission estimates
that approximately 500 domestic issuers reporting under the Exchange
Act conduct approximately 750 offshore offerings of equity securities
pursuant to Regulation S each year. The Commission is not able to
estimate the number of Regulation S sales by non-reporting companies.
Assuming an average of two purchasers in each of these sales, and
assuming that approximately one-half of such purchasers will choose to
resell the securities under Rule 144, the Commission estimates
approximately 750 additional filings on Form 144 on a yearly basis.
Based on past Commission experience with Form 144 filings, the
Commission estimates the total annual reporting and recordkeeping
burden that will result from the collection of information to be two
hours per respondent, and 1,500 hours in the aggregate on a yearly
basis. Under the proposed amendments to Item 701 of Regulation S-K,
Item 701 of Regulation S-B and Forms 8-K, 10-Q, 10-QSB, 10-K and 10-
KSB, if adopted, the existing requirements to report unregistered sales
of equity securities would be relaxed by delaying when the unregistered
sale would have to be reported. Thus, the Commission believes that the
proposed amendments would decrease reporting, recordkeeping and
compliance burdens.
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\59\ This reporting requirement does not apply to any issuer who
is not subject to the periodic reporting requirements under the
Exchange Act, and in general does not apply to foreign issuers. See
Exchange Act Release No. 37801, supra note 26.
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In addition, the proposed changes include the requirement that
purchasers of certain types of equity securities sold under Regulation
S certify that they are not U.S. persons and are not acquiring the
securities for the account or benefit of a U.S. person, or that they
are U.S. persons who purchased securities in a transaction that did not
require registration under the Securities Act. This certification
requirement also could result in a corresponding increase in
recordkeeping burden on the part of issuers attempting to keep records
of such certifications. The amendments also require distributors and
certain purchasers of Regulation S equity securities to enter into
agreements not to engage in hedging transactions with regard to those
securities unless such transactions are in compliance with the
Securities Act. This requirement too could result in an increase in
recordkeeping burden on the part of issuers or distributors attempting
to keep records of these purchase agreements. Additionally, the
proposals would necessitate revised stop transfer instructions that
would require an issuer, by contract or a provision in its bylaws,
articles, charter or comparable document, to refuse to register any
transfer of securities unless made in accordance with the registration
or exemptive provisions of the Securities Act, or in accordance with
Regulation S. The creation and safekeeping of the necessary
documentation for such stop transfer instructions would increase
issuers' recordkeeping and compliance burdens.
The Commission solicits comment on (i) whether the proposed changes
in collection of information are necessary, (ii) the accuracy of the
Commission's estimate of the burden of the proposed changes to the
collection of information, (iii) the quality, utility and clarity of
the information to be collected, and (iv) whether the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology, may be minimized.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
D.C. 20503, and should also send a copy of their comments to Jonathan
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, with reference to File No. S7-8-
97. The OMB is required to make a decision concerning the collection of
information between 30 and 60 days after publication, so a comment to
OMB is best assured of having its full effect if OMB receives it within
30 days of publication.
X. Statutory Bases
The amendments to Regulation S are being proposed pursuant to
Sections 5 and 19 of the Securities Act, as amended, and the amendments
to Rule 144 are being proposed pursuant to sections 2(11), 4, 5 and 19
of the
[[Page 9270]]
Securities Act, as amended. 60 The amendments to Item 701 of
Regulation S-B and of Regulation S-K and to Form 8-K, Form 10-QSB, Form
10-Q, Form 10-KSB, and Form 10-K are being proposed pursuant to
sections 3(b), 4A, 12, 13, 14, 15, 16 and 23 of the Securities Exchange
Act.
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\60\ 15 U.S.C. 77d, 77e and 77s.
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List of Subjects in 17 CFR Parts 228, 229, 230, and 249
Reporting and recordkeeping requirements, Securities.
Text of the Proposals
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
1. The authority citation for Part 228 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,
78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.
Sec. 228.701 [Amended]
2. By amending paragraph (e) of Sec. 228.701 by removing the words
``Form 8-K,'' and ``249.308,''.
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
3. The authority citation for Part 229 continues to read in part as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn,
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n,
79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
* * * * *
Sec. 229.701 [Amended]
4. By amending paragraph (e) of Sec. 229.701 by removing the words
``Form 8-K,'' and ``249.308,''.
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
5. The authority citation for Part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 78t, 80a-8, 80a-29, 80a-30,
and 80a-37, unless otherwise noted.
* * * * *
6. Section 230.144 is amended by revising paragraphs (a)(3) and
(e)(3)(vii) to read as follows:
Sec. 230.144 Persons deemed not to be engaged in a distribution and
therefore not underwriters.
* * * * *
(a) * * *
(3) The term restricted securities means:
(i) Securities acquired directly or indirectly from the issuer, or
from an affiliate of the issuer, in a transaction or chain of
transactions not involving any public offering;
(ii) Securities acquired from the issuer that are subject to the
resale limitations of Sec. 230.502(d) under Regulation D or
Sec. 230.701(c);
(iii) Securities acquired in a transaction or chain of transactions
meeting the requirements of Sec. 230.144A;
(iv) Securities acquired from the issuer in a transaction subject
to the conditions of Regulation CE (Sec. 230.1001); and
(v) Equity securities of domestic issuers, and of foreign issuers
where the principal market for such securities is in the United States
(as defined in Sec. 230.902(h)), acquired in a transaction or chain of
transactions subject to the conditions of Sec. 230.901 or Sec. 230.903
under Regulation S (Sec. 230.901 through Sec. 230.905 and Preliminary
Notes).
* * * * *
(e) * * *
(3) * * *
(vii) The following sales of securities need not be included in
determining the amount of securities sold in reliance upon this
section: securities sold pursuant to an effective registration
statement under the Act; securities sold pursuant to an exemption
provided by Regulation A (Sec. 230.251 through Sec. 230.263) under the
Act; securities sold in a transaction exempt pursuant to Section 4 of
the Act (15 U.S.C. 77(e)) and not involving any public offering; and
securities sold offshore pursuant to Regulation S (Sec. 230.901 through
Sec. 230.905, and Preliminary Notes) under the Act.
* * * * *
7. Section 230.902 is revised to read as follows:
Sec. 230.902. Definitions.
As used in Regulation S, the following terms shall have the
meanings indicated.
(a) Debt securities. ``Debt securities'' of an issuer will be
defined to include any security other than an equity security as
defined in Sec. 230.405, as well as the following:
(1) Non-participatory preferred stock, which is defined as non-
convertible capital stock, the holders of which are entitled to a
preference in payment of dividends and in distribution of assets on
liquidation, dissolution, or winding up of the issuer, but are not
entitled to participate in residual earnings or assets of the issuer;
or
(2) Asset-backed securities, which are defined as the securities of
a type that either:
(i) Represents an ownership interest in a pool of discrete assets,
or certificates of interest or participation in such assets (including
any rights designed to assure servicing, or the receipt or timeliness
of receipt by holders of such assets, or certificates of interest or
participation in such assets, of amounts payable thereunder), provided
that the assets are not generated or originated between the issuer of
the security and its affiliates; or
(ii) Is secured by one or more assets or certificates of interest
or participation in such assets, and the securities, by their terms,
provide for payments of principal and interest (if any) in relation to
payments or reasonable projections of payments on assets meeting the
requirements of paragraph (a)(2)(i) of this section, or certificates of
interest or participations in assets meeting such requirements.
(3) For purposes of paragraph (a)(2) of this section, the term
``assets'' means securities, installment sales, accounts receivable,
notes, leases or other contracts, or other assets that by their terms
convert into cash over a finite period of time.
(b) Designated offshore securities market. ``Designated offshore
securities market'' means:
(1) The Eurobond market, as regulated by the Association of
International Bond Dealers; the Alberta Stock Exchange; the Amsterdam
Stock Exchange; the Australian Stock Exchange Limited; the Bermuda
Stock Exchange; the Bourse de Bruxelles; the Copenhagen Stock Exchange;
the Frankfurt Stock Exchange; the Helsinki Stock Exchange; The Stock
Exchange of Hong Kong Limited; the Irish Stock Exchange; the Istanbul
Stock Exchange; the Johannesburg Stock Exchange; the London Stock
Exchange; the Bourse de Luxembourg; the Mexico Stock Exchange; the
Borsa Valori di Milan; the Montreal Stock Exchange; the Oslo Stock
Exchange; the Bourse de Paris; the Stockholm Stock Exchange; the Tokyo
Stock Exchange; the Toronto Stock Exchange; the Vancouver Stock
Exchange; and the Zurich Stock Exchange; and
(2) Any foreign securities exchange or non-exchange market
designated by the
[[Page 9271]]
Commission. Attributes to be considered in determining whether to
designate such a foreign securities market, among others, include:
(i) Organization under foreign law;
(ii) Association with a generally recognized community of brokers,
dealers, banks, or other professional intermediaries with an
established operating history;
(iii) Oversight by a governmental or self-regulatory body;
(iv) Oversight standards set by an existing body of law;
(v) Reporting of securities transactions on a regular basis to a
governmental or self-regulatory body;
(vi) A system for exchange of price quotations through common
communications media; and
(vii) An organized clearance and settlement system.
(c) Directed selling efforts.
(1) ``Directed selling efforts'' means any activity undertaken for
the purpose of, or that could reasonably be expected to have the effect
of, conditioning the market in the United States for any of the
securities being offered in reliance on this Regulation S (Sec. 230.901
through Sec. 230.905, and Preliminary Notes). Such activity includes
placement of an advertisement in a publication ``with a general
circulation in the United States'' that refers to the offering of
securities being made in reliance upon this Regulation S.
(2) Publication ``with a general circulation in the United
States'':
(i) Is defined as any publication that is printed primarily for
distribution in the United States, or has had, during the preceding
twelve months, an average circulation in the United States of 15,000 or
more copies per issue; and
(ii) Only the U.S. edition of any publication printing a separate
U.S. edition will be deemed a publication ``with a general circulation
in the United States'' if such publication, without consideration of
its U.S. edition, would not meet the requirements of paragraph
(c)(2)(i) of this section; and the U.S. edition itself meets the
requirements of paragraph (c)(2)(i) of this section.
(3) The following are not ``directed selling efforts'':
(i) Placement of an advertisement required to be published under
United States or foreign law, or under rules or regulations of a United
States or foreign regulatory or self-regulatory authority, provided the
advertisement contains no more information than legally required and
includes a statement to the effect that the securities have not been
registered under the Act and may not be offered or sold in the United
States (or to a U.S. person, if the advertisement relates to an
offering under Category 2 or 3 in Sec. 230.903) absent registration or
an applicable exemption from the registration requirements;
(ii) Contact with persons excluded from the definition of ``U.S.
person'' pursuant to paragraph (l)(2)(vi) of this section or persons
holding accounts excluded from the definition of ``U.S. person''
pursuant to paragraph (l)(2)(i) of this section, solely in their
capacities as holders of such accounts;
(iii) A tombstone advertisement in any publication with a general
circulation in the United States, provided:
(A) The publication has less than 20% of its circulation,
calculated by aggregating the circulation of its U.S. and comparable
non-U.S. editions, in the United States;
(B) Such advertisement contains a legend to the effect that the
securities have not been registered under the Act and may not be
offered or sold in the United States (or to a U.S. person, if the
advertisement relates to an offering under Category 2 or 3 in
Sec. 230.903) absent registration or an applicable exemption from the
registration requirements; and
(C) Such advertisement contains no more information than:
(1) The issuer's name;
(2) The amount and title of the securities being sold;
(3) A brief indication of the issuer's general type of business;
(4) The price of the securities;
(5) The yield of the securities, if debt securities with a fixed
(non-contingent) interest provision;
(6) The name and address of the person placing the advertisement,
and whether such person is participating in the distribution;
(7) The names of the managing underwriters;
(8) The dates, if any, upon which the sales commenced and
concluded;
(9) Whether the securities are offered or were offered by rights
issued to security holders and, if so, the class of securities that are
entitled or were entitled to subscribe, the subscription ratio, the
record date, the dates (if any) upon which the rights were issued and
expired, and the subscription price; and
(10) Any legend required by law or any foreign or U.S. regulatory
or self-regulatory authority;
(iv) Bona fide visits to real estate, plants or other facilities
located in the United States and tours thereof conducted for a
prospective investor by an issuer, a distributor, any of their
respective affiliates or a person acting on behalf of any of the
foregoing;
(v) Distribution in the United States of a foreign broker-dealer's
quotations by a third-party system that distributes such quotations
primarily in foreign countries if:
(A) Securities transactions cannot be executed between foreign
broker-dealers and persons in the United States through the system; and
(B) The issuer, distributors, their respective affiliates, persons
acting on behalf of any of the foregoing, foreign broker-dealers and
other participants in the system do not initiate contacts with U.S.
persons or persons within the United States, beyond those contacts
exempted under Sec. 240.15a-6 of this chapter; and
(vi) Publication by an issuer of a notice in accordance with
Sec. 230.135 or Sec. 230.135c.
(d) Distributor. ``Distributor'' means any underwriter, dealer, or
other person who participates, pursuant to a contractual arrangement,
in the distribution of the securities offered or sold in reliance on
this Regulation S (Sec. 230.901 through Sec. 230.905, and Preliminary
Notes).
(e) Domestic issuer. ``Domestic issuer'' means any issuer other
than a foreign issuer (as defined in Sec. 230.405).
(f) Offering restrictions. ``Offering restrictions'' means:
(1) Each distributor agrees in writing:
(i) That all offers and sales of the securities prior to the
expiration of the restricted period specified in Category 2 or 3 in
Sec. 230.903, as applicable, shall be made only in accordance with the
provisions of Sec. 230.903 or Sec. 230.904; pursuant to registration of
the securities under the Act; or pursuant to an available exemption
from the registration requirements of the Act; and
(ii) For offers and sales of equity securities of domestic issuers,
and of foreign issuers where the principal market for those securities
is in the United States, not to engage in hedging transactions with
regard to such securities prior to the expiration of the restricted
period specified in Category 2 or 3 in Sec. 230.903, as applicable,
unless in compliance with the Act; and
(2) All offering materials and documents (other than press
releases) used in connection with offers and sales of the securities
prior to the expiration of the restricted period specified in Category
2 or 3 in Sec. 230.903, as applicable, shall include statements to the
effect that the securities have not been registered under the Act and
may not be offered or sold in the United States or to U.S. persons
(other than distributors) unless the securities are registered under
the Act, or an exemption from the registration
[[Page 9272]]
requirements of the Act is available. For offers and sales of equity
securities of domestic issuers, and of foreign issuers where the
principal market for those securities is in the United States, such
offering materials and documents also must state that hedging
transactions involving those securities may not be conducted unless in
compliance with the Act. Such statements shall appear:
(i) On the cover or inside cover page of any prospectus or offering
circular used in connection with the offer or sale of the securities;
(ii) In the underwriting section of any prospectus or offering
circular used in connection with the offer or sale of the securities;
and
(iii) In any advertisement made or issued by the issuer, any
distributor, any of their respective affiliates, or any person acting
on behalf of any of the foregoing. Such statements may appear in
summary form on prospectus cover pages and in advertisements.
(g) Offshore transaction.
(1) An offer or sale of securities is made in an ``offshore
transaction'' if:
(i) The offer is not made to a person in the United States; and
(ii) Either:
(A) At the time the buy order is originated, the buyer is outside
the United States, or the seller and any person acting on its behalf
reasonably believe that the buyer is outside the United States; or
(B) For purposes of:
(1) Sec. 230.903, the transaction is executed in, on or through a
physical trading floor of an established foreign securities exchange
that is located outside the United States; or
(2) Sec. 230.904, the transaction is executed in, on or through the
facilities of a designated offshore securities market described in
paragraph (a) of this section, and neither the seller nor any person
acting on its behalf knows that the transaction has been pre-arranged
with a buyer in the United States.
(2) Notwithstanding paragraph (g)(1) of this section, offers and
sales of securities specifically targeted at identifiable groups of
U.S. citizens abroad, such as members of the U.S. armed forces serving
overseas, shall not be deemed to be made in ``offshore transactions.''
(3) Notwithstanding paragraph (g)(1) of this section, offers and
sales of securities to persons excluded from the definition of ``U.S.
person'' pursuant to paragraph (l)(2)(vi) of this section or persons
holding accounts excluded from the definition of ``U.S. person''
pursuant to paragraph (l)(2)(i) of this section, solely in their
capacities as holders of such accounts, shall be deemed to be made in
``offshore transactions.''
(h) Principal market in the United States. With respect to a class
of equity securities, a foreign issuer has its ``Principal market in
the United States'' if more than 50 percent of all trading in such
class of securities took place in, on or through the facilities of
securities exchanges and inter-dealer quotation systems in the United
States in the shorter of the issuer's prior fiscal year or the period
since the issuer's incorporation.
(i) Reporting issuer. ``Reporting issuer'' means an issuer other
than an investment company registered or required to register under the
1940 Act that:
(1) Has a class of securities registered pursuant to Section 12(b)
or 12(g) of the Exchange Act (15 U.S.C. 78l(b) or 78l(g)) or is
required to file reports pursuant to Section 15(d) of the Exchange Act
(15 U.S.C. 78o(d)); and
(2) Has filed all the material required to be filed pursuant to
Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d))
for a period of at least twelve months immediately preceding the offer
or sale of securities made in reliance upon this Regulation S
(Sec. 230.901 through Sec. 230.905, and Preliminary Notes) (or for such
shorter period that the issuer was required to file such material).
(j) Restricted period. ``Restricted period'' means a period that
commences on the later of the date upon which the securities were first
offered to persons other than distributors in reliance upon this
Regulation S or the date of closing of the offering, and expires a
specified period of time thereafter; provided, however, that all offers
and sales by a distributor of an unsold allotment or subscription shall
be deemed to be made during the restricted period; provided, further,
that in a continuous offering, the restricted period shall commence
upon completion of the distribution, as determined and certified by the
managing underwriter or person performing similar functions; provided,
further, that in a continuous offering of non-convertible debt
securities offered and sold in identifiable tranches, the restricted
period for securities in a tranche shall commence upon completion of
the distribution of such tranche, as determined and certified by the
managing underwriter or person performing similar functions; provided,
further, that in a continuous offering of securities to be acquired
upon the exercise of warrants, the restricted period shall commence
upon completion of the distribution of the warrants, as determined and
certified by the managing underwriter or person performing similar
functions, if requirements of Sec. 230.903(b)(5) are satisfied.
(k) Substantial U.S. market interest.
(1) ``Substantial U.S. market interest'' with respect to a class of
an issuer's equity securities means:
(i) The securities exchanges and inter-dealer quotation systems in
the United States in the aggregate constituted the single largest
market for such class of securities in the shorter of the issuer's
prior fiscal year or the period since the issuer's incorporation; or
(ii) 20 percent or more of all trading in such class of securities
took place in, on or through the facilities of securities exchanges and
inter-dealer quotation systems in the United States and less than 55
percent of such trading took place in, on or through the facilities of
securities markets of a single foreign country in the shorter of the
issuer's prior fiscal year or the period since the issuer's
incorporation.
(2) ``Substantial U.S. market interest'' with respect to an
issuer's debt securities means:
(i) Its debt securities, in the aggregate, are held of record by
300 or more U.S. persons;
(ii) $1 billion or more of: the principal amount outstanding of its
debt securities, the greater of liquidation preference or par value of
its securities described in Sec. 230.902(a)(1), and the principal
amount or principal balance of its securities described in
Sec. 230.902(a)(2), in the aggregate, is held of record by U.S.
persons; and
(iii) 20 percent or more of: the principal amount outstanding of
its debt securities, the greater of liquidation preference or par value
of its securities described in Sec. 230.902(a)(1), and the principal
amount or principal balance of its securities described in
Sec. 230.902(a)(2), in the aggregate, is held of record by U.S.
persons.
(3) Notwithstanding paragraph (k)(2) of this section, substantial
U.S. market interest with respect to an issuer's debt securities is
calculated without reference to securities that qualify for the
exemption provided by Section 3(a)(3) of the Act (15 U.S.C. 77c(a)(3)).
(l) U.S. person.
(1) ``U.S. person'' means:
(i) Any natural person resident in the United States;
(ii) Any partnership or corporation organized or incorporated under
the laws of the United States;
(iii) Any estate of which any executor or administrator is a U.S.
person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in the United
States;
[[Page 9273]]
(vi) Any non-discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary for the benefit
or account of a U.S. person;
(vii) Any discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary organized,
incorporated, or (if an individual) resident in the United States; and
(viii) Any partnership or corporation if:
(A) Organized or incorporated under the laws of any foreign
jurisdiction; and
(B) Formed by a U.S. person principally for the purpose of
investing in securities not registered under the Act, unless it is
organized or incorporated, and owned, by accredited investors (as
defined in Sec. 230.501(a)) who are not natural persons, estates or
trusts.
(2) The following are not ``U.S. persons'':
(i) Any discretionary account or similar account (other than an
estate or trust) held for the benefit or account of a non-U.S. person
by a dealer or other professional fiduciary organized, incorporated, or
(if an individual) resident in the United States;
(ii) Any estate of which any professional fiduciary acting as
executor or administrator is a U.S. person if:
(A) An executor or administrator of the estate who is not a U.S.
person has sole or shared investment discretion with respect to the
assets of the estate; and
(B) The estate is governed by foreign law;
(iii) Any trust of which any professional fiduciary acting as
trustee is a U.S. person if a trustee who is not a U.S. person has sole
or shared investment discretion with respect to the trust assets, and
no beneficiary of the trust (and no settlor if the trust is revocable)
is a U.S. person;
(iv) An employee benefit plan established and administered in
accordance with the law of a country other than the United States and
customary practices and documentation of such country;
(v) Any agency or branch of a U.S. person located outside the
United States if:
(A) The agency or branch operates for valid business reasons; and
(B) The agency or branch is engaged in the business of insurance or
banking and is subject to substantive insurance or banking regulation,
respectively, in the jurisdiction where located; and
(vi) The International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the United
Nations, and their agencies, affiliates and pension plans, and any
other similar international organizations, their agencies, affiliates
and pension plans.
(m) United States. ``United States'' means the United States of
America, its territories and possessions, any State of the United
States, and the District of Columbia.
8. Section 230.903 is revised to read as follows:
Sec. 230.903. Offers or sales of securities by the issuer, a
distributor, any of their respective affiliates, or any person acting
on behalf of any of the foregoing; conditions relating to specific
securities.
(a) An offer or sale of securities by the issuer, a distributor,
any of their respective affiliates, or any person acting on behalf of
any of the foregoing, shall be deemed to occur outside the United
States within the meaning of Sec. 230.901 if the offer or sale shall be
made in an offshore transaction, and no directed selling efforts shall
be made in the United States by the issuer, a distributor, any of their
respective affiliates, or any person acting on behalf of any of the
foregoing.
(b) Additional conditions.
(1) Category 1. Securities in this category may be offered and sold
without any conditions other than those set forth in Sec. 230.903(a) of
this section. The securities eligible for this category are:
(i) The issuer is a foreign issuer that reasonably believes at the
commencement of the offering that:
(A) There is no substantial U.S. market interest in the class of
securities to be offered or sold (if equity securities are offered or
sold);
(B) There is no substantial U.S. market interest in its debt
securities (if debt securities are offered or sold);
(C) There is no substantial U.S. market interest in the securities
to be purchased upon exercise (if warrants are offered or sold); and
(D) There is no substantial U.S. market interest in either the
convertible securities or the underlying securities (if convertible
securities are offered or sold);
(ii) The securities are offered and sold in an overseas directed
offering, which means:
(A) An offering of securities of a foreign issuer that is directed
into a single country other than the United States to the residents
thereof and that is made in accordance with the local laws and
customary practices and documentation of such country; or
(B) An offering of non-convertible debt securities of a domestic
issuer that is directed into a single country other than the United
States to the residents thereof and that is made in accordance with the
local laws and customary practices and documentation of such country,
provided that the principal and interest of the securities (or par
value, as applicable) are denominated in a currency other than U.S.
dollars and such securities are neither convertible into U.S. dollar-
denominated securities nor linked to U.S. dollars (other than through
related currency or interest rate swap transactions that are commercial
in nature) in a manner that in effect converts the securities to U.S.
dollar-denominated securities.
(iii) The securities are backed by the full faith and credit of a
foreign government; or
(iv) The securities are offered and sold to employees of the issuer
or its affiliates pursuant to an employee benefit plan established and
administered in accordance with the law of a country other than the
United States, and customary practices and documentation of such
country, provided that:
(A) The securities are issued in compensatory circumstances for
bona fide services rendered to the issuer or its affiliates in
connection with their businesses and such services are not rendered in
connection with the offer and sale of securities in a capital-raising
transaction;
(B) Any interests in the plan are not transferable other than by
will or the laws of descent or distribution;
(C) The issuer takes reasonable steps to preclude the offer and
sale of interests in the plan or securities under the plan to U.S.
residents other than employees on temporary assignment in the United
States; and
(D) Documentation used in connection with any offer pursuant to the
plan contains a statement that the securities have not been registered
under the Act and may not be offered or sold in the United States
unless registered or an exemption from registration is available.
(2) Category 2. Securities in this category may be offered and sold
provided that:
(i) The following conditions are met:
(A) The conditions set forth in Sec. 230.903(a) are met;
(B) Offering restrictions are implemented;
(C) The offer or sale, if made prior to the expiration of a 40-day
restricted period, is not made to a U.S. person or for the account or
benefit of a U.S. person (other than a distributor), unless
[[Page 9274]]
made pursuant to registration or an exemption therefrom under the Act;
and
(D) Each distributor selling securities to a distributor, a dealer,
as defined in section 2(12) of the Act (15 U.S.C. 77b(12)), or a person
receiving a selling concession, fee or other remuneration in respect of
the securities sold, prior to the expiration of a 40-day restricted
period, sends a confirmation or other notice to the purchaser stating
that the purchaser is subject to the same restrictions on offers and
sales that apply to a distributor; and
(ii) The securities are equity securities of reporting foreign
issuers unless the principal market for those securities is in the
United States, or the securities are debt securities of a reporting
issuer or of a foreign issuer.
(3) Category 3. Securities that are not eligible for Category 1 or
2 (paragraphs (b) (1) or (2)) in this section may be offered or sold
provided that the following conditions are met:
(i) The conditions set forth in Sec. 230.903(a) are met;
(ii) Offering restrictions are implemented;
(iii) In the case of debt securities:
(A) The offer or sale, if made prior to the expiration of a 40-day
restricted period, is not made to a U.S. person or for the account or
benefit of a U.S. person (other than a distributor), unless made
pursuant to registration or an exemption therefrom under the Act; and
(B) The securities are represented upon issuance by a temporary
global security which is not exchangeable for definitive securities
until the expiration of the 40-day restricted period and, for persons
other than distributors, until certification of beneficial ownership of
the securities by a non-U.S. person or a U.S. person who purchased
securities in a transaction that did not require registration under the
Act;
(iv) In the case of equity securities, if made prior to the
expiration of a two-year restricted period with respect to domestic
issuers and foreign issuers where the principal market for the
securities is in the United States, and a one-year restricted period
with respect to other issuers:
(A) The offer or sale is not made to a U.S. person or for the
account or benefit of a U.S. person (other than a distributor), unless
made pursuant to registration or an exemption therefrom under the Act;
and
(B) The offer or sale is made pursuant to the following conditions:
(1) The purchaser of the securities (other than a distributor)
certifies that it is not a U.S. person and is not acquiring the
securities for the account or benefit of any U.S. person or is a U.S.
person who purchased securities in a transaction that did not require
registration under the Act;
(2) The purchaser of the securities agrees to resell such
securities only in accordance with the provisions of this Regulation S
(Sec. 230.901 through Sec. 230.905, and Preliminary Notes), pursuant to
registration under the Act, or pursuant to an available exemption from
registration; and agrees not to engage in hedging transactions with
regard to such securities unless in compliance with the Act;
(3) The securities of a domestic issuer, or of a foreign issuer
where the principal market for the securities is in the United States,
contain a legend to the effect that transfer is prohibited except in
accordance with the provisions of this Regulation S, pursuant to
registration under the Act, or pursuant to an available exemption from
registration; and that hedging transactions involving those securities
may not be conducted unless in compliance with the Act;
(4) The issuer is required, either by contract or a provision in
its bylaws, articles, charter or comparable document, to refuse to
register any transfer of the securities not made in accordance with the
provisions of this Regulation S, pursuant to registration under the
Act, or pursuant to an available exemption from registration; provided,
however, that if the securities are in bearer form or foreign law
prevents the issuer of the securities from refusing to register
securities transfers, other reasonable procedures (such as a legend
described in paragraph (b)(3)(iv)(B)(3) of this section) are
implemented to prevent any transfer of the securities not made in
accordance with the provisions of this Regulation S; and
(5) If the issuer is a domestic issuer, or a foreign issuer and the
principal market for the equity securities is in the United States, no
promissory note or other executory obligation may be received as
payment for the securities, nor may an installment purchase contract be
entered into; and
(v) Each distributor selling securities to a distributor, a dealer
(as defined in section 2(12) of the Act (15 U.S.C. 77b(12)), or a
person receiving a selling concession, fee or other remuneration, prior
to the expiration of a 40-day restricted period in the case of debt
securities, or a two-year restricted period in the case of equity
securities, sends a confirmation or other notice to the purchaser
stating that the purchaser is subject to the same restrictions on
offers and sales that apply to a distributor.
(4) Guaranteed securities. Notwithstanding paragraphs (b)(1)
through (b)(3) of this section, in offerings of debt securities fully
and unconditionally guaranteed as to principal and interest by the
parent of the issuer of the debt securities, only the requirements of
paragraph (b) of this section that are applicable to the offer and sale
of the guarantee need be satisfied with respect to the offer and sale
of the guaranteed debt securities.
(5) Warrants. An offer or sale of warrants under Category 2 or 3
(paragraphs (b) (2) or (3)) of this section also must comply with the
following requirements:
(i) Each warrant must bear a legend stating that the warrant and
the securities to be issued upon its exercise have not been registered
under the Act and that the warrant may not be exercised by or on behalf
of any U.S. person unless registered under the Act or an exemption from
such registration is available;
(ii) Each person exercising a warrant is required to give:
(A) Written certification that it is not a U.S. person and the
warrant is not being exercised on behalf of a U.S. person; or
(B) A written opinion of counsel to the effect that the warrant and
the securities delivered upon exercise thereof have been registered
under the Act or are exempt from registration thereunder; and
(iii) Procedures are implemented to ensure that the warrant may not
be exercised within the United States, and that the securities may not
be delivered within the United States upon exercise, other than in
offerings deemed to meet the definition of ``offshore transaction''
pursuant to Sec. 230.902(g), unless registered under the Act or an
exemption from such registration is available.
9. Section 230.904 is revised to read as follows:
Sec. 230.904. Offshore resales.
(a) An offer or sale of securities by any person other than the
issuer, a distributor, any of their respective affiliates (except any
officer or director who is an affiliate solely by virtue of holding
such position), or any person acting on behalf of any of the foregoing,
shall be deemed to occur outside the United States within the meaning
of Sec. 230.901 if the offer or sale are made in an offshore
transaction, and no directed selling efforts are made in the United
States by the seller, an affiliate, or any person acting on their
behalf.
(b) Additional conditions. In addition to the conditions set forth
in paragraph
[[Page 9275]]
(a) of this section, the following requirements must be satisfied:
(1) Resales by dealers and persons receiving selling concessions.
In the case of an offer or sale of securities of any issuer prior to
the expiration of the restricted period specified in Category 2 or 3
(paragraphs (b) (2) or (3)) of Sec. 230.903, as applicable, by a
dealer, as defined in Section 2(12) of the Act (15 U.S.C. 77b(12)), or
a person receiving a selling concession, fee or other remuneration in
respect of the securities offered or sold:
(i) Neither the seller nor any person acting on his behalf knows
that the offeree or buyer of the securities is a U.S. person; and
(ii) If the seller or any person acting on the seller's behalf
knows that the purchaser is a dealer, as defined in Section 2(12) of
the Act (15 U.S.C. 77b(12)), or is a person receiving a selling
concession, fee or other remuneration in respect of the securities
sold, the seller or a person acting on the seller's behalf sends to the
purchaser a confirmation or other notice stating that the securities
may be offered and sold during the restricted period only: in
accordance with the provisions of this Regulation S (Sec. 230.901
through Sec. 230.905, and Preliminary Notes); pursuant to registration
of the securities under the Act; or pursuant to an available exemption
from the registration requirements of the Act.
(2) Resales by certain affiliates. In the case of an offer or sale
of securities of any issuer by an officer or director of the issuer or
a distributor, who is an affiliate of the issuer or distributor solely
by virtue of holding such position, no selling concession, fee or other
remuneration is paid in connection with such offer or sale other than
the usual and customary broker's commission that would be received by a
person executing such transaction as agent.
10. By adding Sec. 230.905 to read as follows:
Sec. 230.905 Resale limitations.
Equity securities of domestic issuers, and of foreign issuers where
the principal market for such securities is in the United States,
acquired from the issuer, a distributor, or any of their respective
affiliates in an offshore transaction subject to the conditions of
Sec. 230.901 or Sec. 230.903 are deemed to be ``restricted securities''
as defined in Sec. 230.144. Resales of any of such restricted
securities by the offshore purchaser must be made in accordance with
this Regulation S (Sec. 230.901 through Sec. 230.905, and Preliminary
Notes), the registration requirements of the Act or an exemption
therefrom. Any ``restricted securities'' as defined in
Sec. 230.144(a)(3) that are equity securities of domestic issuers, and
of foreign issuers where the principal market for the securities is in
the United States, will continue to be deemed to be restricted
securities, notwithstanding that they were acquired in a resale
transaction made pursuant to Sec. 230.901 or Sec. 230.904.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
11. The authority citation for Part 249 continues to read in part
as follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
12. By amending Form 8-K (referenced in Sec. 249.308) by removing
the last sentence of General Instruction B.1. and Item 9.
13. By amending Form 10-Q (referenced in Sec. 249.308a) by revising
paragraph (c) of Item 2 of Part II prior to the Instruction to read as
follows:
Note: Form 10-Q does not and these amendments will not appear in
the Code of Federal Regulations
Form 10-Q
* * * * *
Part II
Item 2. Changes in Securities.
* * * * *
(c) Furnish the information required by Item 701 of Regulation S-K
(Sec. 229.701 of this chapter) as to all equity securities of the
registrant sold by the registrant during the period covered by the
report that were not registered under the Securities Act.
* * * * *
14. By amending Form 10-QSB (referenced in Sec. 249.308b) by
revising paragraph (c) to Item 2 of Part II prior to the Instruction to
read as follows:
Note: Form 10-QSB does not and these amendments will not appear
in the Code of Federal Regulations
Form 10-QSB
* * * * *
Part II
* * * * *
Item 2. Changes in Securities.
* * * * *
(c) Furnish the information required by Item 701 of Regulation S-B
(Sec. 228.701 of this chapter) as to all equity securities of the
registrant sold by the registrant during the period covered by the
report that were not registered under the Securities Act.
* * * * *
15. By amending Form 10-K (referenced in Sec. 249.310) by revising
Item 5 of Part II to read as follows:
Note: Form 10-K does not and these amendments will not appear in
the Code of Federal Regulations
Form 10-K
* * * * *
Part II
* * * * *
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Furnish the information required by Item 201 of Regulation S-K
(Sec. 229.201 of this chapter) and Item 701 of Regulation S-K
(Sec. 229.701 of this chapter) as to all equity securities of the
registrant sold by the registrant during the period covered by the
report that were not registered under the Securities Act. Provided that
if the Item 701 information previously has been included in a Quarterly
Report on Form 10-Q or 10-QSB (Sec. 249.308a or 249.308b of this
chapter) it need not be furnished.
* * * * *
16. By amending Form 10-KSB (referenced in Sec. 249.310b) by
revising Item 5 of Part II to read as follows:
Note: Form 10-K does not and these amendments will not appear in
the Code of Federal Regulations
Form 10-KSB
* * * * *
Part II
* * * * *
Item 5. Market for Common Equity and Related Stockholder Matters.
Furnish the information required by Item 201 of Regulation S-B and
Item 701 of Regulation S-B as to all equity securities of the
registrant sold by the registrant during the period covered by the
report that were not registered under the Securities Act. Provided that
if the Item 701 information previously has been included in a Quarterly
Report on Form 10-Q or 10-QSB it need not be furnished.
* * * * *
Dated: February 20, 1997.
By the Commission.
Margaret H. McFarland,
Deputy Secretary
[FR Doc. 97-4668 Filed 2-27-97; 8:45 am]
BILLING CODE 8010-01-P
