Can a U.S. Person Buy Regulation S Securities?

Companies raise capital by issuing securities, a process that typically requires registration with the U.S. Securities and Exchange Commission (SEC). This registration ensures investors receive comprehensive information about the offering. However, navigating the global financial landscape often involves transactions that extend beyond U.S. borders. The SEC recognized the need to facilitate these international offerings without imposing U.S. registration requirements where they are not primarily intended to apply. This led to the creation of Regulation S, a rule designed to provide an exemption from registration for certain offshore securities offerings.

Basics of Regulation S

Regulation S (17 CFR § 230.901) clarifies the territorial reach of Section 5 of the Securities Act of 1933, which mandates registration for securities offered or sold in the United States. Its purpose is to allow issuers to sell securities outside the United States without triggering the U.S. registration process. This exemption applies when offers and sales occur “outside the United States.” The rule aims to facilitate capital raising in international markets while preventing unregistered securities from improperly entering the U.S. financial system.

Regulation S outlines specific conditions that, if met, deem a transaction to have occurred outside the U.S. and thus exempt from registration. It includes a general statement (Rule 901) and provides two main “safe harbors”: an issuer safe harbor (Rule 903) and a resale safe harbor (Rule 904). These safe harbors offer specific guidelines for transactions, and compliance with them ensures the offerings are considered offshore. The framework of Regulation S categorizes offerings to determine the level of restrictions necessary to prevent securities from flowing back into the U.S. market.

Defining a U.S. Person

Understanding the definition of a “U.S. person” is central to Regulation S, as the rule primarily concerns offers and sales to non-U.S. persons outside the United States. This definition, found in 17 CFR § 230.902, extends beyond simple citizenship or residency. It encompasses any natural person residing in the United States.

The definition also includes entities organized or incorporated under the laws of the United States, such as partnerships or corporations. Estates where any executor or administrator is a U.S. person fall within this classification. Similarly, any trust with a U.S. person as a trustee is considered a U.S. person. Any agency or branch of a foreign entity located in the United States is also defined as a U.S. person. This broad definition ensures that various forms of U.S. presence are captured under the regulation.

The definition further extends to certain financial accounts. Any non-discretionary account held for the benefit or account of a U.S. person is included. Discretionary accounts held by a dealer or other fiduciary for the benefit of a U.S. person also qualify. A partnership or corporation formed by a U.S. person principally for the purpose of investing in unregistered securities is also a U.S. person, unless exceptions apply for accredited investors.

Restrictions on U.S. Persons

Regulation S imposes conditions to ensure that offerings remain genuinely offshore and do not circumvent U.S. registration requirements. A condition is that the offer and sale must be made in an “offshore transaction.” This means no offer can be made to a person in the United States, and the buyer must either be outside the U.S. or the transaction must be executed on an established foreign securities exchange. The intent is to prevent the securities from being directed at persons within the U.S.

Another restriction involves “no directed selling efforts” in the U.S. This prohibits any activity that could reasonably be expected to condition the U.S. market for the securities being offered. Examples include general solicitation or advertising in the U.S. This condition applies to the issuer, distributors, and their affiliates.

The “distribution compliance period” is a specific timeframe during which resales into the U.S. or to U.S. persons are restricted. For equity securities of domestic issuers, this period is one year; for debt securities, it is 40 days. During this period, specific legends and certifications are required to prevent securities from flowing back into the U.S. market without registration. The purpose of this period is to ensure that the securities “come to rest” offshore, meaning they are genuinely absorbed by the international market.

Acquiring Regulation S Securities

While direct participation by U.S. persons in initial Regulation S offerings is prohibited, there are scenarios where U.S. persons may legitimately acquire these securities. A common pathway is through secondary market purchases after the distribution compliance period has expired. Once this period concludes and the securities have genuinely come to rest offshore, they may be resold without restriction to U.S. persons or in the U.S., provided other U.S. registration exemptions are available.

Securities acquired in a Regulation S transaction, particularly equity securities of domestic issuers, are classified as “restricted securities” under Rule 144 of the Securities Act. This classification means that subsequent resales in the U.S. must comply with Rule 144’s conditions, which include holding periods and other requirements designed to ensure orderly and transparent markets. For example, Rule 144 permits the public resale of restricted securities after a certain holding period, which is six months for reporting companies or one year for non-reporting companies.

A U.S. person might also acquire Regulation S securities from a non-U.S. person through a private transaction that qualifies for another U.S. registration exemption, such as Rule 144A or Section 4(a)(2). Rule 144A allows for the resale of restricted securities to Qualified Institutional Buyers (QIBs). Section 4(a)(2) provides an exemption for private placements not involving a public offering to sophisticated investors. These acquisitions are distinct from the original Regulation S offering itself, relying on separate U.S. exemptions for their legality.