Using Rule 144A and Regulation S
Using Rule 144A with Regulation S is a combination that permits issuers to raise large amounts of capital using the same assets for each exemption. Rule 144A has become the principal safe harbor on which non-U.S. companies rely when accessing the U.S. capital markets. Rule 144A covers private re-sales for interests worth at least $500,000 to qualified institutional buyers (QIBs).
Rule 144A should not be confused with Rule 144, which permits unregistered re-sales of restricted and controlled securities to accredited investors. Rule 144A covers private re-sales for interests worth at least $500,000 to qualified institutional buyers (QIBs).
S was enacted by the SEC to permit offers of securities outside of the U.S. without registration. Rule 144A and Regulation S can be used as separate exemptions for the same time period using the same assets.
A Rule 506 offering coupled with a Regulation S offering offer the same advantages.
Under Regulation S, an issuer may make an offering within the U.S. to a QIB or to anyone outside the U.S. This enables broker-dealers to make initial purchasers of securities and sell them to large institutional buyers both inside and outside the U.S. -- whether or not the non-U.S. investors qualify as QIBs.
144A was implemented in order to induce foreign companies to sell securities in the US capital markets.
Practice tip: Most issuers should document either: a) a combined Rule 144A/Regulation S offerings or b) a combined Rule 506/Regulation S offering. The SEC and FINRA deem sales outside of the U.S to be regulated --whether they are or are not -- under the laws of a given foreign jurisdiction. This gives issuers distinct advantages under Regulation S.
All types of debt securities may be offered under Rule 144A and Regulation S, including convertible debt securities, debentures that convert into common stock, and structured notes linked to an underlying asset.
Safe Harbors under Regulation S
The availability of both the issuer safe harbor and the resale safe harbor is available when the offer or sale is made in an offshore transaction and when there has been no “directed selling efforts” by the issuer, a distributor, any affiliates, or any person acting on their behalf.
A buyer is generally deemed to be outside the United States if the buyer is physically located outside the United States. If the buyer is a corporation or investment company, the buyer is deemed to be outside the United States when an authorized agent places the buy order while physically situated outside the United States.
Offers and sales of securities made to persons excluded from the definition of “U.S. person” -- even if physically present in the United States -- are deemed to be made offshore.
Directed Selling Efforts
The issuer safe harbor is available to issuers, distributors, affiliates and any persons acting on their behalf as long as they make no directed selling efforts within the United States or to U.S. persons. “Directed selling efforts” is defined by Rule 902(c) as “any activity undertaken for the purpose of, or that could be reasonably expected to result in, conditioning the U.S. market for the relevant securities.”
The following activities constitute “directed selling efforts” which include advertising in publications with a general circulation in the United States; mailing printed materials to U.S. investors; conducting promotional seminars in the United States; and placing advertisements with radio or television stations that broadcast in the United States.
Offerings made in reliance on Rule 903 are subject to additional restrictions that are calibrated to the level of risk that the securities will flow back into the United States. Rule 903 sets forth three categories of transactions, to be discussed in a future issue of Exempt Offerings Reporter.