There are Three Issuer Safe Harbor Categories under Regulation S
The Regulation S issuer safe harbor contains three categories of offerings, depending on the nationality and reporting status of the Issuer, and whether or not there is substantial US market interest in the securities.
The three categories represent increasing protections to make sure that the securities offered in a Regulation S offering are not part of an unregistered distribution of securities in the United States.
Regulation S Safe Harbor Category 1
The first Issuer Safe Harbor under Regulation S contains the least restrictive conditions and is for offerings of securities of Foreign Companies:
- with no substantial US market interest in these foreign securities,
- securities offered and sold in “overseas directed offerings,”
- securities backed by the full faith and credit of a foreign government, and
- securities offered and sold pursuant to certain employee benefit plans.
For offerings in Category 1, there are no requirements other than the Regulation S General Conditions. Category 1 Regulation S securities are not the subject of legal opinions by US securities attorneys.
Regulation S Safe Harbor Category 2
The second Issuer Safe Harbor under Regulation S applies to offerings that are not eligible for Category 1. These would include the following:
- equity securities of a reporting foreign company; or
- debt securities of a reporting foreign or US Issuer or a non-reporting foreign company.
In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a US Person or for the account or benefit of a US Person (other than a distributor) for a period of 40 days.
Category 2 Regulation S securities are rarely the subject of legal opinions by US securities attorneys. Today it would be very difficult to find a brokerage firm which would accept for deposit any restricted securities using the 40 day holding period. Most, if not all, of such brokers were based offshore and have since been shut down. Nevertheless, when some think if Reg S, they assume the holding period is only 40 days. Even in the heyday of offshore brokerages, this was only true for stock of “reporting” foreign companies, since debt securities would need to be converted into stock anyway in order for deposit and trading.
Regulation S Safe Harbor Category 3
The third Regulation S Issuer Safe Harbor contains the most restrictive conditions and applies to all securities not eligible for Categories 1 and 2. This includes the following:
- equity securities of a reporting US Issuer;
- any securities of a non-reporting US Issuer; and
- equity securities of a non-reporting foreign company that has a substantial US market interest in its equity securities.
Category 3 encompasses nearly all Regulation S securities which are the subject of legal opinions drafted by US securities attorneys. In practice, the holding period requirements of Reg S Category 3 are similar to Rule 144 for OTCMarkets or OTC Bulletin Board public companies.
Other Offering Restrictions Under Regulation S for Sales to US Persons under Category 3
In addition to the Regulation S General Conditions, certain other offering restrictions apply and no offer or sale may be made to a US Person or for the account or benefit of a US Person (other than a distributor) for the following periods:
Equity securities of Non-Reporting Issuers: One Year. This is the same as a Non-Reporting OTC Markets Pink Sheet or Voluntary SEC Filer under Rule 144.
Equity securities of Reporting Issuers: Six Months. This is the same as a Mandatory SEC Filer like an OTCQB or OTCBB stock under Rule 144.
Debt Securities: 40 Days. In practice, this is of no consequence, because in order for the US Shareholder to deposit and sell stock under Reg S Category 3, “Debt Securities” are converted into “Equity Securities” so the respective Six Months or One Year holding periods will still apply.
Securities Attorneys for Selling Regulation S Stock
As a practical matter, all securities sold pursuant to the registration exemption under Regulation S will undergo scrutiny from brokerage compliance officers when the shareholder attempts to clear stock for resale.
Unless the typical Six Months or One Year holding periods are met, it is highly unlikely that US Shareholders will be able to deposit any Reg S stock, regardless of the public’s impression that the holding period is “only 40 days.” Once those holding periods are met, it may also be possible to obtain a Rule 144 legal opinion even though the original private offering was done under Regulation S. If the stock is greater than two years old, it may also be possible for a Section 4(a)(1) opinion to be drafted.
It is important to provide an experienced securities attorney like Matt Stout with all documentation showing the origin and history of the Reg S shares when seeking a legal opinion to clear Regulation S stock.
Regulation S Shareholders can contact securities lawyer Matt Stout at email@example.com or (410) 429-7076 to discuss the Regulation S General Conditions and Safe Harbors at no cost.