Post by Sapphire Capital on Aug 1, 2008 20:38:17 GMT 4
link: www.iflr.com/?Page=17&ISS=23981&SID=689260
The following is taken from a Supplemental of IFLR:
International Financial Law Review
SUPPLEMENT - Securities offerings and listings in the US: an overview for non-US issuers (2007 update)
Chapter 5: Key exemptions from Securities Act registration
General
As discussed above, the process of registering a securities transaction generally requires a foreign private issuer to meet specific disclosure and financial statement requirements and to undergo the SEC review process. By contrast, unregistered transactions are typically less complex and time-consuming to execute. Many foreign private issuers accordingly choose to structure securities offerings in the US to take advantage of available exemptions from registration.
Practice point
Unregistered transactions do not require the filing of a registration statement and generally do not turn the issuer into a reporting company that is required to file annual reports with the SEC. A key attraction of these transactions for a foreign private issuer is that it can include its financial statements under local Gaap (or IFRS) and need not provide a reconciliation to US Gaap. The time and expense involved in a US Gaap reconciliation can be a significant concern for a foreign private issuer that is seeking to access the US capital markets.
Regulation S – offshore offerings
Regulation S sets out the conditions under which an offering outside the US may be made without registration under the Securities Act. It provides a safe harbour exemption for offers and sales by issuers, and a resale exemption. Under Regulation S, unregistered offers and sales may generally be made if:
the offer or sale is made in an "offshore transaction"; and
there are no "directed selling efforts" in the US.[162]
We refer to these as the Regulation S General Conditions.
An offshore transaction is defined as an offer which is not made to a person in the US, and either:
at the time the buy order is originated, the buyer is outside the US or the seller (and any person acting on the seller's behalf) reasonably believes that the buyer is outside of the US;
for purposes of the issuer safe harbour, the transaction is executed in, on or through the physical trading floor of an established foreign securities exchange located outside of the US; or
for purposes of the resale safe harbour, the transaction is executed in, on or through the facilities of a designated offshore securities market and neither the seller (nor any person acting on the seller's behalf) knows that the transaction has been prearranged with a buyer in the US.[163]
Directed selling efforts is broadly defined to include any activities that have, or can reasonably be expected to have, the effect of conditioning the market in the US for the securities being offered in reliance on Regulation S.[164] Prohibited efforts include mailing offering materials into the US; conducting promotional seminars in the US; granting interviews about the offering in the US (including by telephone); or placing advertisements with radio or television stations broadcasting in the US.[165] Importantly, legitimate selling activities in the US in connection with concurrent US offerings – whether registered or private – do not constitute directed selling efforts.[166]
Practice point
A foreign private issuer may be required to furnish a copy of an offering memorandum relating to a Regulation S offering on Form 6-K (if, for example, it files that offering memorandum with a stock exchange on which its securities are listed, and the exchange makes the offering memorandum public). This will generally not constitute directed selling efforts.[167]
Practice point
The safe harbours of Regulation S are not exclusive and parties may use any other applicable exemptions provided by the Securities Act.[168] Regulation S only applies to the registration requirements of the Securities Act and does not limit the applicability of the US federal anti-fraud laws or any state laws relating to securities offerings.[169] As a consequence, a Regulation S transaction may be exempt from registration under the Securities Act but – at least in theory – could still trigger anti-fraud liability in the US.[170]
(i) The issuer safe harbour
Securities Act Rule 903 provides a safe harbour for issuers, distributors (that is, 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 Regulation S),[171] their respective affiliates, and persons acting on their behalf. The particular requirements for the safe harbour depend on the "category" applicable to the transaction.
(a) Category 1
This category has no requirements other than the Regulation S General Conditions, and is available for:[172]
securities offered by foreign issuers[173] who reasonably believe at the commencement of the offering that there is no "substantial US market interest"[174] in the securities offered;
securities offered and sold in an "overseas directed offering";[175]
securities backed by the full faith and credit of a foreign government; or
securities offered and sold pursuant to certain employee benefit plans established and administered under the laws of a foreign country.
Practice point
Even if Category 1 is available, market practice for debt offerings is often to follow Category 2 restrictions where there is a concurrent Rule 144A offering.
(b) Category 2
The second category involves securities that are not eligible for Category 1 and that are either (i) equity securities[176] of a foreign issuer that is a reporting company under the Exchange Act or (ii) debt securities[177] of reporting issuers (domestic or foreign) and non-reporting foreign issuers.[178] Issuers in this category may take advantage of the safe harbour if the following conditions are met along with the Regulation S General Conditions:
Certain "offering restrictions"[179] must be adopted,[180] including:
- each distributor must agree in writing that all offers and sales during a 40-day distribution compliance period may be made only in accordance with safe harbours under Regulation S, pursuant to registration under the Securities Act or an exemption from registration; and
- prospectuses, advertisements, and all other offering materials and documents (other than press releases) used in connection with offers and sales during the distribution compliance period must disclose that the securities are not registered under the Securities Act and cannot be sold in the US or to US persons (other than distributors) unless so registered or an exemption from registration is available.[181]
- During the 40-day distribution compliance period, offers and sales of the security cannot be made to a US person other than a distributor[182] (although exempt sales, such as to QIBs pursuant to Rule 144A, may be made).[183]
- Any distributor selling securities to another distributor, dealer, or person receiving a selling commission must deliver, during the 40-day distribution compliance period, a confirmation or notice to the purchaser stating that the purchaser is subject to the same resale restrictions as the distributor.[184]
The 40-day distribution compliance period begins on the later of the date of the closing or the date on which securities were first offered to persons other than distributors (generally, the pricing date).[185]
(c) Category 3
The third category is a catch-all and has the most restrictive conditions. It includes all securities that are not eligible for Category 1 or 2, such as any securities of a non-reporting domestic US issuer, equity securities of a reporting domestic US issuer and equity securities of a non-reporting foreign issuer (with substantial US market interest in the equity securities of that issuer).[186] In addition to the Regulation S General Conditions, an issuer must also meet the following conditions:
Each of the offering restrictions described above for Category 2 must be met,[187] except that a one-year distribution compliance period applies to offerings of equity securities[188] and a 40-day distribution compliance period applies to offerings of debt securities.[189]
During the applicable distribution compliance period, offers or sales cannot be made to a US person other than a distributor[190] (although exempt sales, such as to QIBs pursuant to Rule 144A, may be made) and, in the case of equity securities:
- the purchaser (other than a distributor) must certify that it is not a US person;
- the purchaser must agree to resell the securities only in accordance with Regulation S, pursuant to registration under the Securities Act or an exemption from registration; and
- certain other restrictions must be satisfied, including a prohibition against corporate registration of transfers not made in accordance with Regulation S.[191]
Debt securities generally must be represented upon issuance by a temporary global security not exchangeable for definitive securities until the expiration of the 40-day distribution compliance period and, for persons other than distributors, until certification of beneficial ownership by a non-US person.[192]
Any distributor selling the securities to another distributor, dealer, or person receiving a selling commission must deliver, during the applicable distribution compliance period, a notice or confirmation to the purchaser stating that the purchaser is subject to the same resale restrictions as the distributor.[193]
Practice point
Equity securities issued by a domestic US issuer (whether reporting or non-reporting) pursuant to Regulation S are considered restricted securities[194] subject to limitations on resale, and remain restricted securities even after an exempt resale pursuant to Regulation S.[195] As a practical matter, the required certifications and other restrictions have limited the use of Regulation S for exempt sales of equity securities by domestic US issuers.
(ii) The resale safe harbour
Securities Act Rule 904 provides a safe harbour for offshore resales by persons other than issuers, distributors, their affiliates, and persons acting on their behalf. Resales of securities by these persons are subject only to the Regulation S General Conditions.[196]
The resale safe harbour may also be relied upon by dealers and persons receiving selling concessions, except that the following additional conditions apply if the securities being resold are of the type included within the Category 2 or Category 3 safe harbour and the resale is within the distribution compliance period imposed with respect to those securities:
the seller and any person acting on behalf of the seller must not knowingly offer or sell the securities to a US person; and
if the purchaser of the securities is also a securities professional, then the seller must deliver a confirmation or other notice stating that the securities may be offered and sold during the distribution compliance period only in accordance with Regulation S, pursuant to registration under the Securities Act or an exemption from registration.[197]
The resale safe harbour may also be relied upon by certain officers and directors who are affiliates of the issuer or a distributor, provided that the Regulation S General Conditions are met and no remuneration is paid other than customary broker's commissions.[198]
(iii) Violation of safe harbour conditions
The consequences of a breach of the conditions for use of Regulation S could be dire, since this would potentially allow buyers of the securities to rescind their purchases.[199] If an issuer, distributor, any of their respective affiliates, or any person acting on their behalf fails to comply with the Regulation S General Conditions, then the issuer safe harbour will not be available to any person in connection with the offer or sale of the securities. However, if any of these persons fails to comply with any of the other issuer safe harbour requirements (in other words, other than the Regulation S General Conditions), then only the party who fails to comply (as well as its agents and affiliates) will be unable to rely on the issuer safe harbour exemption. In that case, the fact that there may have been a breach on the part of the issuer, distributor, their affiliates, or agents (other than certain officers or directors relying on the resale exemption) does not generally negate a resale safe harbour exemption for an unaffiliated person.[200]
Section 4(2) private placements
Section 4(2) of the Securities Act exempts "transactions by an issuer not involving any public offering." The term public offering is not defined in the Securities Act and the scope of the Section 4(2) exemption has largely evolved through case law, SEC pronouncements and market practice. It is hence not possible to map the borders of Section 4(2) precisely.
The core issue is whether the persons to whom securities are offered need the protection of the Securities Act – that is, whether they are sufficiently sophisticated so as to be able to fend for themselves.[201] In determining whether a transaction is a public offering, relevant factors include the number of offerees and their relationship to each other and the issuer, the number of securities being offered, the size of the offering and the manner in which the offering is conducted.[202] All of the surrounding circumstances must be considered in this analysis.[203]
Practice point
Section 4(2) is only available for offers and sales by an issuer; resales of securities acquired from an issuer require a separate exemption (such as Rule 144A, discussed below).
Private placements under Section 4(2) typically involve, among other things:
a non-public offering (that is, an offering without any form of general solicitation or advertising);
to a limited number of offerees;
who are buying for investment and not with a view to distribution; and
who are sophisticated investors and have been provided with or have access to information about the issuer.[204]
In addition, the securities issued in a private placement generally include restrictions on resales by the purchasers (such as through the use of stop-transfer orders, restrictive legends and the like).[205]
Regulation D private placements
(i) Background
Largely in response to the difficulties experienced by practitioners in interpreting the availability of Section 4(2), the SEC adopted Regulation D to provide a clearly defined non-exclusive safe harbour from registration for offers and sales of securities by issuers.
Regulation D differentiates transactions based on the size of the offerings and the types of investors to whom securities are being offered. Regulation D draws a core distinction between "accredited investors" and other, non-sophisticated investors. Accredited investors include:[206]
banks, savings and loan associations, and similar institutions;
insurance companies, investment companies, small business investment companies and certain employee benefit plans;
private business development companies;
certain tax-exempt organizations;
corporations with assets over $5 million;
directors, executive officers, and persons holding similar positions with or in the issuer;
natural persons with a net worth (alone or with that person's spouse) exceeding $1 million;
natural persons with individual income in excess of $200,000 per year or, with that person's spouse, in excess of $300,000 per year;
certain trusts with assets in excess of $5 million; and
any entity owned entirely by such persons.
(ii) Regulation D general conditions
Regulation D provides certain general conditions (the Regulation D General Conditions), including:
Integration:[207] All sales that are part of the same Regulation D offering must meet all of the terms and conditions of Regulation D. However, offers and sales made more than six months before or after the completion of a Regulation D offering will generally not be considered part of the same Regulation D offering.
Information requirements: Regulation D's information requirements depend on the type of transaction and the type of participants in the transaction. The issuer must provide any purchaser that is not an accredited investor with extensive information regarding the issuer. If the issuer is not an Exchange Act reporting company, that information includes non-financial and financial information substantially equivalent to that which it would have been required to provide in a registration statement under the Securities Act (for example, Form F-1 in the case of a first-time foreign registrant).[208] For a foreign private issuer that is a reporting company, it may provide its most recent annual report on Form 20-F.[209] The issuer must also make available to each purchaser the opportunity to ask questions about the offering or the issuer.[210]
Practice point
Regulation D's information requirements effectively mean that financial information provided by a foreign private issuer to a non-accredited investor must either be prepared in accordance with US Gaap or reconciled to US Gaap. This has limited the usefulness of Regulation D for those foreign private issuers that do not prepare US Gaap or US Gaap-reconciled financial statements.
Limitation on offering:[211] Neither the issuer nor anyone acting on its behalf may use any "general solicitation" or "general advertising" to offer or sell the securities.
Limitation on resale:[212] Securities acquired in a Regulation D transaction are restricted securities that cannot freely be resold absent registration or an exemption from registration. The issuer must take reasonable care to make sure that purchasers would not be deemed to be statutory underwriters (that is, engaged in a distribution of the securities), which is typically satisfied by requiring purchaser representations about investment intent, restrictive legends on certificates, and restrictions on transfer.
Form D:[213] The issuer must file a notice to the SEC on Form D no later than 15 days after the first sale of securities.
(iii) Rule 504 – offers and sales not exceeding $1 million
Rule 504 provides an exemption from registration for limited offerings and sales of securities not exceeding $1 million in any 12-month period.[214] Issuers subject to the reporting requirements of the Exchange Act and investment companies, among others, may not use this exemption.[215] All of the Regulation D General Conditions apply to Rule 504 transactions, other than Regulation D's information requirements.[216]
(iv) Rule 505 – offers and sales not exceeding $5 million
Rule 505 contains an exemption for limited offerings and sales of securities not exceeding $5 million in a 12-month period.[217] An unlimited number of accredited investors (subject to the limitations on general solicitation and general advertising mentioned above) and up to 35 non-accredited investors may purchase securities in a Rule 505 offering.[218] All of the Regulation D General Conditions apply to Rule 505 transactions, except that Regulation D's information requirements do not apply to any purchasers that are accredited investors.[219]
(v) Rule 506 – unlimited offering amounts
Rule 506 closely resembles Rule 505 except that the offering amount is notlimited. Like Rule 505, an unlimited number of accredited investors (subject to the limitations on general solicitation and general advertising) and up to 35 non-accredited investors may purchase securities[220] and all of the Regulation D General Conditions apply, except for Regulation D's information requirements in the case of accredited investors.[221] In addition, each purchaser of the securities other than an accredited investor must demonstrate to the issuer's reasonable belief that the purchaser, "either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment."[222] Issuers and their placement agents typically satisfy this requirement by having potential investors complete "investor questionnaires" demonstrating their accredited status or their sophistication.
(vi) Rule 508 – deviations from Regulation D
Under Rule 508, a person may establish the existence of an exemption under Regulation D with respect to any purchaser even if the person failed to meet one or more of the requirements of Regulation D. In this case, the person must show that:
the failure to comply did not pertain to a term, condition, or requirement directly intended to protect the purchaser;
the failure to comply was "insignificant to the offering as a whole;" and
the person made a good faith and reasonable attempt to comply with the relevant requirements of Regulation D.
Resales of privately placed securities
Both Section 4(2) and Regulation D apply only to transactions by issuers,[223] and neither provides an exemption for resales. Purchasers who wish to resell securities acquired in a private placement must look to certain resale exemptions – in particular, the exemptions provided by Rule 144A, "Section 4(1-1/2)" or Rule 144 under the Securities Act.
(i) Rule 144A resales to QIBs
Although market participants often refer to Rule 144A offerings, as a technical matter Rule 144A transactions involve two steps: sales to underwriters (or directly to institutional initial purchasers) under Section 4(2) or Regulation S, followed by resales to QIBs under Rule 144A. As a result, Rule 144A transactions follow various limitations not found directly in Rule 144A itself (such as restrictions on publicity) as well as the explicit requirements of Rule 144A.
Practice point
Securities purchased under Rule 144A are deemed "restricted securities" and can only be resold pursuant to Rule 144A or another exemption (including the Regulation S resale safe harbour described above).[224]
(a) Definition of QIB
A QIB is defined to include any of the following entities acting for its own account or the account of other QIBs, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the QIB:[225]
US-regulated insurance companies;
investment companies registered under the Investment Company Act;
small business investment companies licensed by the US Small Business Administration;
certain employee benefit plans;
certain trusts;
certain tax-exempt organizations and corporations;
certain registered investment advisers;
certain registered broker-dealers; and
US banks and savings and loan associations, and non-US banks, savings and loan associations, and equivalent institutions.
(b) Rule 144A requirements
The requirements for a valid Rule 144A transaction include the following:
Sales to QIBs:[226] the securities must be offered and sold only to QIBs or to a person who the seller (and any person acting on its behalf) "reasonably believes" is a QIB;
Notice to buyers:[227] the seller (and any person acting on its behalf) must take "reasonable steps" to ensure that the buyer is aware that the seller is relying on Rule144A (generally by so noting in the offering memorandum, or in the trade confirmation in the case of an undocumented offering);
Fungibility:[228] the securities must not be, when issued, of the same class as securities listed on a US national securities exchange or quoted on Nasdaq (or, in the case of convertible or exchangeable securities, have an effective conversion premium of 10% or more); and
Information delivery:[229] if the issuer is a reporting company under the Exchange Act or is exempt from reporting under Rule 12g3-2(b), a seller wishing to resell the securities is not obligated to furnish the purchaser with information concerning the issuer. However, if the issuer is not a reporting company and is not exempt under Rule 12g3-2(b), a holder or the purchaser must have the right to obtain from seller or issuer, upon request, certain minimal "reasonably current" information concerning the business of the issuer and its financial statements.
(c) A/B exchange offers
Rule 144A has also become particularly popular for global offerings of debt securities, in part because of a line of SEC "no-action" letters that permits issuers who have sold debt securities to QIBs pursuant to Rule 144A subsequently to register an exchange offer of identical securities for the Rule 144A securities.[230] This procedure allows QIBs, subject to limited exceptions, to obtain freely tradable registered securities in exchange for the restricted, legended securities they obtained in the Rule 144A offering. Because the exchange offer will go through the SEC registration process, most issuers and underwriters seek to conform the original Rule 144A offering memorandum as closely as possible to the requirements of a full registration statement (including US Gaap reconciliation).
The availability of this exchange procedure allows issuers and underwriters to complete transactions quickly under Rule 144A to take advantage of market conditions, but with the expectation that the issuer will promptly register an exchange of identical securities. Asa result, purchasers generally do not require the "liquidity discount" they would otherwise demand if the securities were to remain private. In addition to promising public registration under the Securities Act, the issuer also typically agrees to file periodic reports with the SEC under the Exchange Act, thereby enhancing public information and liquidity.
(ii) "Section 4 (1-1/2)" resales
Market practice has developed the so-called "Section 4 (1-1/2)" exemption for resales of privately placed securities.[231] (Section 4 (1-1/2) does not actually appear in the Securities Act and is instead the name given to the practice of certain resales of private securities.) Under this exemption, securities that are initially privately placed may be resold if the resales essentially comply with the requirements for the original Section 4(2) private placement.
Typical restrictions in a Section 4 (1-1/2) transaction include that resales may only be made:
on a non-public basis;
to sophisticated investors who could have participated in the original private placement and who are buying for investment and not with a view to distribution; and
subject to limitations on onward resales (such as letters of representation from purchasers or appropriate "no registration" opinions of counsel).
(iii) Rule 144
Rule 144 provides conditions under which non-affiliates of an issuer may resell "restricted securities" to the public without registration under the Securities Act, and affiliates of the issuer may resell restricted or unrestricted securities without registration.[232]
Restricted securities include:[233]
securities acquired directly or indirectly from an issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving a public offering;
securities acquired from the issuer that are subject to the resale limitations of Regulation D;
securities acquired in a Rule 144A transaction; and
equity securities of domestic US issuers acquired in Regulation S transactions.
An affiliate of an issuer for these purposes is a person that, directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer.[234]
It is important to note that Rule 144 treats resales by affiliates and non-affiliates differently. An affiliate's re-sales of any securities of an issuer, whether restricted or not, are subject to Rule 144, while only resales of restricted securities by non-affiliates are brought within the Rule.
Rule 144 requires:
• One-year minimum holding period for restricted securities:[235] restricted securities must be held for a minimum of one year from the date of purchase from the issuer or an affiliate of the issuer before any Rule 144 resale (unrestricted securities held by an affiliate are not subject to the one-year holding period);
Sales of restricted securities after one-year minimum holding period: after the one-year minimum holding period has expired, limited resales of restricted securities by affiliates and non-affiliates may be made if:
- Information:[236] either the issuer is an Exchange Act reporting company that has been subject to reporting requirements for 90 days prior to the sale and has filed all required reports in the 12 months prior to the sale, or certain other information about the issuer must be publicly available;
- Volume limitations:[237] The amount of securities sold, together with all sales of restricted or other securities of the same class for the account of such person within the preceding three months, must not exceed the greater of (i) 1% of the shares or other units of the class outstanding; or (ii) the average weekly reported trading volume on US national securities exchanges or on Nasdaq during the prior four weeks;
- Manner of sale:[238] securities must be resold in unsolicited brokers' transactions; and
- Notice of sale:[239] if more than 500 shares or $10,000 worth of securities are resold in any three-month period, the seller must file a notice on Form 144 with the SEC.
Sales of restricted securities after two years:[240] non-affiliates of the issuer may freely resell restricted securities once two years have passed from the date the securities were acquired from an issuer or an affiliate of an issuer (affiliates remain subject to the volume and other limitations set out above).[241]
Sales of unrestricted securities by affiliates before or after two years: As noted above, sales of unrestricted securities by affiliates are not subject to the one-year minimum holding period. However, these sales are subject to the volume and other limitations set out above.
Rule 802 – securities issuances in connection with cross-border exchange offers and business combinations
(i) General
Securities Act Rule 802 provides an exemption from registration for offers and sales in any exchange offer or business combination involving the acquisition of securities of a foreign private issuer. Rule 802 does not impose a dollar limitation on the value of securities sold to US investors in an exempt transaction, and both domestic US and foreign private issuers may rely on Rule 802.[242] Rule 802 provides an exemption only for the issuer of securities and not for affiliates of the issuer or any person who seeks to resell the securities.[243] Accordingly, resales of securities acquired under Rule 802 must either be registered or structured to take advantage of an available exemption from registration.
(ii) Requirements of Rule 802
The requirements of Rule 802 are as follows:
Limitation on US ownership:[244] US holders of securities must hold 10% or less of the class of securities that is the subject of the exchange offer or business combination. However, if there are no US shareholders, Rule 802 is not available.[245]
Calculation of 10% limit: A US holder is defined as a person resident in the US.[246] In determining whether or not a holder is a US resident, a bidder must look through the record ownership of securities held by brokers, dealers, banks and other nominees located in the US, the target company's jurisdiction of incorporation, and the jurisdiction that is the primary trading market of the target securities.[247] This is not a determination of ultimate beneficial ownership; instead, only the first line of ownership behind the broker or nominee must be established. If, after "reasonable inquiry," a bidder is unable to obtain information about the amount of securities held by US residents, it may assume that the customers are residents of the jurisdiction in which the nominee has its principal place of business.[248] The calculation date is 30 days prior to the commencement of the exchange offer or the solicitation for a business combination.[249] However, the calculation excludes securities held by persons owning more than 10% of the class of securities sought in the exchange offer or business combination, as well as securities held by the bidder.[250]
Equal treatment of US holders; "Blue Sky":[251] The bidder must permit US holders of securities to participate in the exchange offer or business combination on terms at least as favourable as those offered to other holders, but is not required to extend the offering into any US state that would require registration or qualification of the transaction.
Informational documents in the US: If the bidder publishes or otherwise disseminates an informational document to security holders in connection with the exchange offering or business combination, it must furnish an English-language translation of that document to the SEC under cover of Form CB by the first business day after publication or dissemination, and must also file a consent to service of process on Form F-X.[252] It must disseminate any informational document to US security holders, in English, on a comparable basis to that provided to security holders in the home jurisdiction.[253] In addition, if the bidder disseminates information by publication in its home jurisdiction, it must publish the information in a manner reasonably calculated to inform US security holders of the offer.[254]
Legends:[255] Any US offering documentation must contain a legend regarding the non-US nature of the transaction and the bidder's disclosure practices, and must state that investors may have difficulty in enforcing rights against the bidder and its officers and directors.
Restricted securities:[256] The securities acquired in a Rule 802 transaction will be restricted securities to the same extent and proportion as the target securities sought in the exchange offer and business combination (in other words, restricted securities will yield restricted securities, and unrestricted securities will yield unrestricted securities).
Not an Investment Company:[257] Rule 802 does not apply to an exchange offer or a business combination by an investment company within the meaning of the Investment Company Act that is registered or required to be registered under that Act (other than a registered closed-end investment company).
Rule 801 – rights offerings
(i) General
Securities Act Rule 801 provides an exemption from registration for certain rights offerings by foreign private issuers. A rights offering is defined for these purposes as the sale for cash of equity securities in which existing securities holders of a particular class (including holders of ADRs) are granted the right to purchase additional securities of that class, and the number of additional securities the holders may purchase is in proportion to the amount of securities they hold on the record date of the offering.[258]
Like Rule 802, Rule 801 does not impose a dollar limitation on the value of securities sold to US investors in an exempt transaction, but unlike Rule 802 only foreign private issuers may rely on Rule 801.[259] Rule 801 provides an exemption only for the issuer of securities and not for affiliates of the issuer or any person who seeks to resell the securities.[260] Accordingly, resales of securities acquired pursuant to Rule 801 must be registered or exempt from registration.
(ii) Requirements of Rule 801
The requirements of Rule 801 are as follows:
Limitation on US ownership: US securities holders must hold 10% or less of the class of securities that is the subject of the rights offering.[261] The calculation is done in the same manner as the calculation under Rule 802 exemption, except that the date of calculation is the record date of the rights offering.[262] As for Rule 802, if there are no US shareholders, Rule 801 is not available.[263]
Equal treatment of US security holders:[264] The bidder must permit US security holders to participate in the rights offering on terms at least as favourable as those offered to other holders, but is not required to extend the offering into any US state that would require registration or qualification of the transaction.
Informational documents in the US: If the issuer publishes or otherwise disseminates an informational document to security holders in connection with the rights offering, it must furnish an English-language translation of that document to the SEC under cover of Form CB by the first business day after publication or dissemination, and must also file a consent to service of process on Form F-X.[265] It must disseminate any informational document to US security holders, in English, on a comparable basis to that provided to security holders in the home jurisdiction.[266] In addition, if the issuer disseminates by publication in its home jurisdiction, it must publish the information in a manner reasonably calculated to inform US security holders of the offer.[267]
Eligibility of securities:[268] The securities offered in the rights offering must be equity securities of the same class as the securities held by offerees in the US (directly or through ADRs).
Limitations on transfer:[269] The terms of the rights must prohibit transfers by US security holders except in accordance with Regulation S.
Legends:[270] Any US offering documentation must contain a legend regarding the non-US nature of the transaction and the issuer's disclosure practices, and must state that investors may have difficulty in enforcing rights against the issuer and its officers and directors.
Rule 701 – compensatory benefit plans
Rule 701 under the Securities Act provides an exemption from registration for offers and sales of securities pursuant to certain compensatory benefit plans.[271]
(i) Eligible issuers
Rule 701 is available to any issuer that is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, and that is not an investment company registered or required to be registered under the Investment Company Act.[272] This includes foreign private issuers that have never listed their securities in the US or offered them to the public in the US, or that benefit from the exemption from Exchange Act registration provided by Exchange Act Rule 12g3-2(b). If an issuer becomes subject to Exchange Act reporting after it has made offers in compliance with Rule 701 (for example, by conducting a public offering) it may nevertheless rely on Rule 701 to sell securities previously offered to the persons to whom the offers were made.[273] In addition, a reporting issuer may rely on Rule 701 to the extent it guarantees the payment of a subsidiary's securities that are sold under Rule 701.[274]
Rule 701 is only available to the issuer of securities, and not to any of its affiliates.[275] It may also not be used for capital-raising transactions.[276]
(ii) Eligible transactions
Rule 701 exempts offers and sales of securities issued under a written compensatory benefit plan (or written compensation contract) established by the issuer, parent of the issuer, majority-owned subsidiary, or majority-owned subsidiary of the issuer's parent.[277] A compensatory benefit plan for these purposes means any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan.[278]
(iii) Eligible plans and participants
The plan must be limited to employees, directors, general partners, trustees (where the issuer is a business trust), officers, consultants and advisers, and family members[279] of those persons who acquire the securities by gift or a domestic relations order.[280] Offers and sales may be made to former employees, directors, general partners, trustees, officers consultants and advisers only if those persons were employed by or provided services to the issuer at the time the securities were offered.[281]
Certain additional requirements apply to consultants and advisers. In particular, Rule 701 is only available to consultants and advisers if:[282]
they are natural persons;
they provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parent; and
the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer's securities.
(iv) Amounts that may be offered and sold
Any amount of securities may be offered under Rule 701.[283] Sales, however, are limited. In particular, under Rule 701, the aggregate sales price or amount of securities sold in reliance on Rule 701 during any consecutive 12-month period must not exceed the greatest of the following:[284]
$1 million;
15% of the total assets of the issuer, measured at the issuer's most recent balance sheet date (or of the issuer's parent if the issuer is a wholly-owned subsidiary and the securities represent obligations that the parent fully and unconditionally guarantees); or
15% of the outstanding amount of the class of securities being offered and sold in reliance on Rule 701, measured at the issuer's most recent balance sheet date.
The term aggregate sales price means the sum of all cash, property, notes, cancellation of debt or any other consideration (including the value of the employee's services) received by the issuer for the sale of its securities.[285] The aggregate sales price is calculated on the date of sale.[286]
(v) Disclosure requirements
An issuer must deliver a copy of the plan to investors.[287] In addition, if the aggregate sales price or amount of securities issued under Rule 701 exceeds $5 million within any 12-month period, Rule 701 requires the issuer to provide each purchaser with certain information within a reasonable period of time before the date of sale, including:[288]
if the plan is subject to the US Employee Retirement Income Security Act of 1974 (ERISA), a copy of the ERISA summary plan description;
if the plan is not subject to ERISA, a summary of the plan's material terms;
risk factors related to the securities being offered and the issuer; and
certain financial statements (as of a date no more than 180 days before the sale of securities), which must either be prepared in accordance with US Gaap or reconciled to US Gaap.[289]
The requirement for US Gaap or US Gaap-reconciled financial statements might pose significant challenges for non-US issuers seeking to rely on Rule 701, at least to the extent large volumes of securities will be sold. Those issuers are, by definition, not SEC reporting companies, and may not be able to prepare US Gaap or US Gaap-reconciled financial statements without significant effort and expense.
Note that issuances under Rule 701 remain subject to the anti-fraud provisions of the US federal securities laws. An issuer should consider whether disclosure in addition to that specified above is appropriate (such as MD&A or a developed business description).
(vi) No integration
Securities offerings under Rule 701 are not subject to integration with any other offers or sales by the issuer (including other unregistered offerings).[290]
(vii) Resale limitations
Securities issued under Rule 701 are deemed to be restricted securities within the meaning of Rule 144 under the Securities Act.[291] The Rule 701 exemption is only available to the issuer and does not cover the resale of the securities by any other person. Resales must accordingly either be registered under the Securities Act or be structured to take advantage of an exemption from registration.[292] However, if the issuer becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, securities issued under Rule 701 may be resold 90 days thereafter: [293]
by non-affiliates without any restrictions other than the requirement imposed by Rule 144 for sale in brokers' transactions; and
by affiliates pursuant to Rule 144 without observing the normal holding period requirement for restricted securities.
Any certificated securities issued under Rule 701 should contain a legend stating that the securities have not been registered under the Securities Act and may not be sold or transferred in the absence of registration or an exemption from registration.
(viii) Certain blue sky issues
Issuances of securities under Rule 701 are not exempt from the securities laws of the various US states (known as the "blue sky" laws). Accordingly, issuers need to determine the blue sky requirements in the states where US offerees under the plan are resident.
Restrictions on publicity in connection with unregistered transactions
As discussed above, "directed selling efforts" or "general solicitation or general advertising" in the US can destroy the availability of the relevant exemption from registration. In addition, publicity about an unregistered transaction can amount to an illegal offer of securities. Accordingly, publicity about a planned or pending unregistered transaction is subject to certain limitations.
In particular, a foreign private issuer may:
continue to advertise products and services and to issue press releases regarding factual business and financial developments in accordance with past practice;[294]
distribute a preliminary and final offering memorandum to certain investors;
if available, make a limited notice within the US under Rule 135c under the Securities Act; and
conduct certain press activities outside the US under Rule 135e.
(i) Factual business and financial developments
As noted above, in registered transactions the SEC permits issuers to continue to advertise products and services and to issue press releases regarding factual business and financial developments in accordance with past practice, despite the limitations on gun jumping. These activities are also permissible in connection with unregistered transactions.
(ii) Rule 135c
Rule 135c provides a safe harbour that permits a company to deliver notice in the US that it proposes to make, is making or has made an unregistered offering of securities. As discussed above, all offers and sales of securities in the US must be registered or exempt from registration, and the terms offer and sale are construed broadly. Rule 135c clarifies that a notice distributed in the US by an issuer subject to the reporting requirements of the Exchange Act or exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act will not be deemed to be an offer for sale of a security if the following conditions are met:
the notice is not used for purposes of conditioning the market in the US;[295]
the notice states that the securities offered have not been or will not be registered under the Securities Act and may not be offered absent registration or an exemption from registration;[296] and
the notice contains only limited information, including:[297]
- the name of the issuer;
- the title, amount and basic terms of the securities being offered;
- the amount of the offering, if any, being made by selling shareholders;
- the time of the offering; and
- a brief statement of the manner and purpose of the offering, without naming the underwriters.
Rule 135c notices also will not constitute "general solicitation" or "directed selling efforts".[298]
Under Rule 135c, the notice may take the form of a news release or a written communication directed to security holders or employees, or other public statements.[299] The notice itself must be sent to the SEC under cover of Form 8-K, Form 6-K, or in accordance with the provisions of Rule 12g3-2(b), as applicable.[300]
(iii) Rule 135e
As noted above, Rule 135e provides a safe harbour for offshore press activity. This safe harbour is available for unregistered as well as registered transactions. Like notices under Rule 135c, offshore press activity meeting Rule 135e does not constitute general solicitation or directed selling efforts.[301]
(iv) Research reports
Research reports potentially raise concerns about directed selling efforts and general solicitation. For this reason (and because of liability concerns), many underwriters refuse to allow research to be distributed in the US in connection with Rule 144A or Regulation S offerings.
Rule 138 is, however, available for unregistered transactions. In particular, if the conditions of the rule are otherwise met, publication of research by a broker-dealer will not be considered to be an offer or a general solicitation in connection with a Rule 144A transaction. Likewise such publication will not be seen as prohibited directed selling efforts in connection with a Regulation S transaction.
Similarly, if the other conditions of Rule 139 are met, research may be published during Rule 144A or Regulation S offerings without fear of being treated as a general solicitation or directed selling effort.
--------------------------------------------------------------------------------
Endnotes
[162]
1933 Act Rule 903 (offers and sales by an issuer or distributor); 1933 Act Rule 904 (offshore resales).
[163]
1933 Act Rule 902(h).
[164]
1933 Act Rule 902(c)(1).
[165]
1933 Act Rule 902(c)
[166]
Offshore Offers and Sales, Securities Act Release 6863, Exchange Act Release 27942, Investment Company Act Release 17458, [1989-1990 Transfer Binder] Fed Sec L Rep (CCH) ¶ 84,524, at 80,661 (April 24 1990) [Regulation S Adopting Release]. More generally, the Regulation S Adopting Release makes clear that offshore transaction in compliance with Regulation S will not be integrated with concurrent registered or private offerings in the US. Id. ¶ 84,524, at 80,681 - 82.
[167]
See Coral Gold Corporation, SEC No-Action Letter, [1991 Transfer Binder] Fed Sec L Rep (CCH) ¶ 79,707, at 78,229 (available February 19 1991).
[168]
Regulation S, Preliminary Note 5.
[169]
Id. Preliminary Note 1.
[170]
In addition, Regulation S is not available with respect to any transaction or series of transactions that, although in technical compliance with Regulation S, is part of a plan or scheme to avoid the registration requirements of the Securities Act. Id. Preliminary Note 2.
[171]
1933 Act Rule 902(d).
[172]
1933 Act Rule 903(b)(1).
[173]
A foreign issuer is any foreign government or foreign private issuer. 1933 Act Rule 902(e).
[174]
Substantial US market interest is defined in 1933 Act Rule 902(j).
[175]
Overseas directed offering is defined in 1933 Act Rule 903(b)(ii).
[176]
The term equity securities is defined in 1933 Act Rule 405, and includes debt securities convertible into equity securities.
[177]
The term debt securities is defined as all securities that are not equity securities, and includes non-participating preferred stock and asset-backed securities. 1933 Act Rule 902(a).
[178]
1933 Act Rule 903(b)(2).
[179]
The term offering restrictions is defined in 1933 Act Rule 902(g).
[180]
1933 Act Rule 903 (b)(2)(i).
[181]
1933 Act Rule 902(g).
[182]
1933 Act Rule 903(b)(2)(ii).
[183]
Regulation S Adopting Release, ¶ 84,524 at 80,681 - 82.
[184]
1933 Act Rule 903(b)(2)(iii).
[185]
1933 Act Rule 902(f).
[186]
1933 Act Rule 903(b)(3).
[187]
1933 Act Rule 903(b)(3)(i).
[188]
1933 Act Rule 903(b)(3)(iii).
[189]
1933 Act Rule 903(b)(3)(ii).
[190]
1933 Act Rule 903(b)(3)(ii)(A) and (iii)(A).
[191]
1933 Act Rule 903(b)(3)(iii)(B).
[192]
1933 Act Rule 903(b)(3)(ii)(B).
[193]
1933 Act Rule 903(b)(3)(iv).
[194]
The term restricted securities is defined in 1933 Act Rule 144(a)(3).
[195]
1933 Act Rule 905.
[196]
1933 Act Rule 904(a).
[197]
1933 Act Rule 904(b)(1).
[198]
1933 Act Rule 904(b)(2).
[199]
1933 Act Section 12(a).
[200]
Regulation S Adopting Release, ¶ 84,524 at 80,681.
[201]
SEC v Ralston Purina Co, 346 US 119, 125 (1953) (the applicability of the private placement exemption "should turn on whether the particular class of persons affected needs the protection" of the Securities Act; an offering to those "who are shown to be able to fend for themselves" is a private placement).
[202]
See, for example, Securities Act Release 285, 1935 SEC LEXIS 485 (January 24 1935) (SEC General Counsel specifies four criteria to determine when a transaction qualifies as public offering: (i) the number of offerees and their relationship to each other and to the issuer; (ii) the number of units offered; (iii) the size of the offering; and (iv) the manner of the offering).
[203]
Securities Act Release 4552 (November 6 1962), 1962 Lexis 166 (all the surrounding circumstances must be considered "including such factors as the relationship between the offerees and the issuer, the nature, scope, size, type and manner of the offering").
[204]
Certain courts have held that this information must be comparable to the information investors would have received in a public offering. See, for example, Doran v Petroleum Mgmt Corp, 545 F2d 893, 903 (5th Cir 1977).
[205]
Securities sold under Section 4(2) are "restricted securities" that may not be freely resold to the public. 1933 Act Rule 144(a)(3).
[206]
1933 Act Rule 501(a).
[207]
1933 Act Rule 502(a).
[208]
1933 Act Rule 502(b)(2)(i).
[209]
1933 Act Rule 502(b)(2)(ii)(D).
[210]
1933 Act Rule 502(b)(2)(v).
[211]
1933 Act Rule 502(c).
[212]
1933 Act Rule 502(d).
[213]
1933 Act Rule 503.
[214]
1933 Act Rule 504(b)(2).
[215]
1933 Act Rule 504(a).
[216]
1933 Act Rules 504(b)(1); 502(b)(1).
[217]
1933 Act Rules 505(b)(2)(i).
[218]
1933 Act Rules 505(b)(2)(ii); 501(e)(1)(iv).
[219]
1933 Act Rules 505(b)(1); 502(b)(1).
[220]
1933 Act Rule 506(b)(2)(i).
[221]
1933 Act Rules 506(b)(1); 502(b)(1).
[222]
1933 Act Rule 506(b)(2)(ii). Purchaser representative is defined in Rule 501(h).
[223]
1933 Act Section 4(2); Regulation D, Preliminary Note 4.
[224]
Rule 144A, Preliminary Note 6.
[225]
Rule 144A(a)(1).
[226]
Rule 144A(d)(1).
[227]
Rule 144A(d)(2).
[228]
Rule 144A(d)(3).
[229]
Rule 144A(d)(4).
[230]
Exxon Capital Holdings Corp, SEC No-Action Letter, 1988 SEC No-Act. LEXIS 682 (available May 13 1988); Shearman & Sterling, SEC No-Action Letter, [1993 Transfer Binder] Fed Sec L Rep (CCH) ¶ 76,704, at 78,039 (available July 2 1993); Morgan Stanley & Co Inc, SEC No-Action Letter, [1991-1992 Transfer Binder] Fed Sec L Rep (CCH) ¶ 76,018, at 78,884 (available June 5 1991).
[231]
See generally "The Section '4(11/2)' Phenomenon: Private Resales of 'Restricted' Securities," 34 The Business Lawyer 1961 (July 1979).
[232]
Rule 144(b).
[233]
Rule 144(a)(3).
[234]
Rule 144(a)(1).
[235]
Rule 144(d).
[236]
Rule 144(c).
[237]
Rule 144(e).
[238]
Rule 144(f).
[239]
Rule 144(h).
[240]
Rule 144(k).
[241]
Id. Affiliate is broadly defined to include any person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an issuer. 1933 Act Rule 405.
[242]
Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings, Securities Act Release 7759, Exchange Act Release 42,054, Trust Indenture Act Release 2378, International Series Release 1208, [1999-2000 Transfer Binder] Fed Sec L Rep (CCH) ¶ 86,214, at 82,536, 82,550 (October 22 1999) [Cross-Border Release].
[243]
General Notes to 1933 Act Rules 800, 801 and 802, Note 6.
[244]
1933 Act Rule 802(a)(1). The 10% limitation does not apply in the case of an exchange offer or business combination commenced during the pendency of a prior exchange offer. 1933 Act Rule 802(a)(1). Certain presumptions about the level of US ownership are available in the case of a hostile exchange offer. See 1933 Act Rule 802(c).
[245]
SEC Division of Corporation Finance, Manual of Publicly Available Telephone Interpretations, 3rd Supplement (July 2001), Section II.C, Question 1 (www.sec.gov/interps/telephone/phonesupplement3.htm) [Telephone Interpretations].
[246]
1933 Act Rule 800(h).
[247]
1933 Act Rule 800(h)(3).
[248]
1933 Act Rule 800(h)(4).
[249]
1933 Act Rule 800(h)(1).
[250]
1933 Act Rule 802(h)(2)
[251]
1933 Act Rule 802(a)(2).
[252]
1933 Act Rule 802(a)(3)(i).
[253]
1933 Act Rule 802(a)(3)(ii).
[254]
1933 Act Rule 802(a)(3)(iii).
[255]
1933 Act Rule 802(b).
[256]
General Notes to Securities Act Rules 800, 801 and 802, Note 8.
[257]
Id. Note 9.
[258]
1933 Act Rule 800(g).
[259]
Cross-Border Release, ¶ 86,214, at 82,550.
[260]
General Notes to Securities Act Rules 800, 801 and 802, Note 6.
[261]
1933 Act Rule 801(a)(2).
[262]
1933 Act Rule 800(h).
[263]
Telephone Interpretations, Section II.C, Question 1.
[264]
1933 Act Rule 801(a)(3).
[265]
1933 Act Rule 801(a)(4)(i).
[266]
1933 Act Rule 801(a)(4)(ii).
[267]
1933 Act Rule 801(a)(4)(iii).
[268]
1933 Act Rule 801(a)(5).
[269]
1933 Act Rule 801(a)(6).
[270]
1933 Act Rule 801(b).
[271]
1933 Act Rule 701(a).
[272]
1933 Act Rule 701(b)(1).
[273]
1933 Act Rule 701(b)(2).
[274]
1933 Act Rule 701(b)(3).
[275]
Rule 701, Preliminary Note 4.
[276]
Rule 701, Preliminary Note 5.
[277]
1933 Act Rule 701(c).
[278]
1933 Act Rule 701(c)(2).
[279]
The term family member is defined in Rule 701(b)(c)(3).
[280]
1933 Act Rule 701(c).
[281]
Id.
[282]
1933 Act Rule 701(c)(1).
[283]
1933 Act Rule 701(d)(1).
[284]
1933 Act Rule 701(d)(2).
[285]
1933 Act Rule 701(d)(3)(i).
[286]
1933 Act Rule 701(d)(3)(ii).
[287]
1933 Act Rule 701(e).
[288]
Id.
[289]
In particular, the financial statements are those required by Part F/S of Form 1-A under 1933 Act Regulation A. 1933 Act Rule 701(e)(4). Part F/S requirements include the following (which need only be audited to the extent the issuer prepares audited financial statements for other purposes):
the issuer's balance sheet;
a statement of the issuer's income, cash flow and security holders' equity for the two most recent fiscal years and any interim period;
financial statements of significant acquired entities or entities proposed to be acquired, if any; and
pro forma financial information in the event of any recent significant acquisitions.
[290]
1933 Act Rule 701(f).
[291]
1933 Act Rule 701(g)(1).
[292]
1933 Act Rule 701(g)(2).
[293]
1933 Act Rule 701(g)(3).
[294]
Use of Electronic Media Release, ¶ 86,304, at 83,384.
[295]
1933 Act Rule 135c(a)(1).
[296]
1933 Act Rule 135c(a)(2).
[297]
1933 Act Rule 135c(a)(3).
[298]
1933 Act Rules 502(c), 902(c)(3)(vi).
[299]
1933 Act Rule 135c(b).
[300]
1933 Act Rule 135c(d).
[301]
1933 Act Rules 502(c), 902(c)(3)(vii).
© 2008 Euromoney Institutional Investor PLC.
The following is taken from a Supplemental of IFLR:
International Financial Law Review
SUPPLEMENT - Securities offerings and listings in the US: an overview for non-US issuers (2007 update)
Chapter 5: Key exemptions from Securities Act registration
General
As discussed above, the process of registering a securities transaction generally requires a foreign private issuer to meet specific disclosure and financial statement requirements and to undergo the SEC review process. By contrast, unregistered transactions are typically less complex and time-consuming to execute. Many foreign private issuers accordingly choose to structure securities offerings in the US to take advantage of available exemptions from registration.
Practice point
Unregistered transactions do not require the filing of a registration statement and generally do not turn the issuer into a reporting company that is required to file annual reports with the SEC. A key attraction of these transactions for a foreign private issuer is that it can include its financial statements under local Gaap (or IFRS) and need not provide a reconciliation to US Gaap. The time and expense involved in a US Gaap reconciliation can be a significant concern for a foreign private issuer that is seeking to access the US capital markets.
Regulation S – offshore offerings
Regulation S sets out the conditions under which an offering outside the US may be made without registration under the Securities Act. It provides a safe harbour exemption for offers and sales by issuers, and a resale exemption. Under Regulation S, unregistered offers and sales may generally be made if:
the offer or sale is made in an "offshore transaction"; and
there are no "directed selling efforts" in the US.[162]
We refer to these as the Regulation S General Conditions.
An offshore transaction is defined as an offer which is not made to a person in the US, and either:
at the time the buy order is originated, the buyer is outside the US or the seller (and any person acting on the seller's behalf) reasonably believes that the buyer is outside of the US;
for purposes of the issuer safe harbour, the transaction is executed in, on or through the physical trading floor of an established foreign securities exchange located outside of the US; or
for purposes of the resale safe harbour, the transaction is executed in, on or through the facilities of a designated offshore securities market and neither the seller (nor any person acting on the seller's behalf) knows that the transaction has been prearranged with a buyer in the US.[163]
Directed selling efforts is broadly defined to include any activities that have, or can reasonably be expected to have, the effect of conditioning the market in the US for the securities being offered in reliance on Regulation S.[164] Prohibited efforts include mailing offering materials into the US; conducting promotional seminars in the US; granting interviews about the offering in the US (including by telephone); or placing advertisements with radio or television stations broadcasting in the US.[165] Importantly, legitimate selling activities in the US in connection with concurrent US offerings – whether registered or private – do not constitute directed selling efforts.[166]
Practice point
A foreign private issuer may be required to furnish a copy of an offering memorandum relating to a Regulation S offering on Form 6-K (if, for example, it files that offering memorandum with a stock exchange on which its securities are listed, and the exchange makes the offering memorandum public). This will generally not constitute directed selling efforts.[167]
Practice point
The safe harbours of Regulation S are not exclusive and parties may use any other applicable exemptions provided by the Securities Act.[168] Regulation S only applies to the registration requirements of the Securities Act and does not limit the applicability of the US federal anti-fraud laws or any state laws relating to securities offerings.[169] As a consequence, a Regulation S transaction may be exempt from registration under the Securities Act but – at least in theory – could still trigger anti-fraud liability in the US.[170]
(i) The issuer safe harbour
Securities Act Rule 903 provides a safe harbour for issuers, distributors (that is, 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 Regulation S),[171] their respective affiliates, and persons acting on their behalf. The particular requirements for the safe harbour depend on the "category" applicable to the transaction.
(a) Category 1
This category has no requirements other than the Regulation S General Conditions, and is available for:[172]
securities offered by foreign issuers[173] who reasonably believe at the commencement of the offering that there is no "substantial US market interest"[174] in the securities offered;
securities offered and sold in an "overseas directed offering";[175]
securities backed by the full faith and credit of a foreign government; or
securities offered and sold pursuant to certain employee benefit plans established and administered under the laws of a foreign country.
Practice point
Even if Category 1 is available, market practice for debt offerings is often to follow Category 2 restrictions where there is a concurrent Rule 144A offering.
(b) Category 2
The second category involves securities that are not eligible for Category 1 and that are either (i) equity securities[176] of a foreign issuer that is a reporting company under the Exchange Act or (ii) debt securities[177] of reporting issuers (domestic or foreign) and non-reporting foreign issuers.[178] Issuers in this category may take advantage of the safe harbour if the following conditions are met along with the Regulation S General Conditions:
Certain "offering restrictions"[179] must be adopted,[180] including:
- each distributor must agree in writing that all offers and sales during a 40-day distribution compliance period may be made only in accordance with safe harbours under Regulation S, pursuant to registration under the Securities Act or an exemption from registration; and
- prospectuses, advertisements, and all other offering materials and documents (other than press releases) used in connection with offers and sales during the distribution compliance period must disclose that the securities are not registered under the Securities Act and cannot be sold in the US or to US persons (other than distributors) unless so registered or an exemption from registration is available.[181]
- During the 40-day distribution compliance period, offers and sales of the security cannot be made to a US person other than a distributor[182] (although exempt sales, such as to QIBs pursuant to Rule 144A, may be made).[183]
- Any distributor selling securities to another distributor, dealer, or person receiving a selling commission must deliver, during the 40-day distribution compliance period, a confirmation or notice to the purchaser stating that the purchaser is subject to the same resale restrictions as the distributor.[184]
The 40-day distribution compliance period begins on the later of the date of the closing or the date on which securities were first offered to persons other than distributors (generally, the pricing date).[185]
(c) Category 3
The third category is a catch-all and has the most restrictive conditions. It includes all securities that are not eligible for Category 1 or 2, such as any securities of a non-reporting domestic US issuer, equity securities of a reporting domestic US issuer and equity securities of a non-reporting foreign issuer (with substantial US market interest in the equity securities of that issuer).[186] In addition to the Regulation S General Conditions, an issuer must also meet the following conditions:
Each of the offering restrictions described above for Category 2 must be met,[187] except that a one-year distribution compliance period applies to offerings of equity securities[188] and a 40-day distribution compliance period applies to offerings of debt securities.[189]
During the applicable distribution compliance period, offers or sales cannot be made to a US person other than a distributor[190] (although exempt sales, such as to QIBs pursuant to Rule 144A, may be made) and, in the case of equity securities:
- the purchaser (other than a distributor) must certify that it is not a US person;
- the purchaser must agree to resell the securities only in accordance with Regulation S, pursuant to registration under the Securities Act or an exemption from registration; and
- certain other restrictions must be satisfied, including a prohibition against corporate registration of transfers not made in accordance with Regulation S.[191]
Debt securities generally must be represented upon issuance by a temporary global security not exchangeable for definitive securities until the expiration of the 40-day distribution compliance period and, for persons other than distributors, until certification of beneficial ownership by a non-US person.[192]
Any distributor selling the securities to another distributor, dealer, or person receiving a selling commission must deliver, during the applicable distribution compliance period, a notice or confirmation to the purchaser stating that the purchaser is subject to the same resale restrictions as the distributor.[193]
Practice point
Equity securities issued by a domestic US issuer (whether reporting or non-reporting) pursuant to Regulation S are considered restricted securities[194] subject to limitations on resale, and remain restricted securities even after an exempt resale pursuant to Regulation S.[195] As a practical matter, the required certifications and other restrictions have limited the use of Regulation S for exempt sales of equity securities by domestic US issuers.
(ii) The resale safe harbour
Securities Act Rule 904 provides a safe harbour for offshore resales by persons other than issuers, distributors, their affiliates, and persons acting on their behalf. Resales of securities by these persons are subject only to the Regulation S General Conditions.[196]
The resale safe harbour may also be relied upon by dealers and persons receiving selling concessions, except that the following additional conditions apply if the securities being resold are of the type included within the Category 2 or Category 3 safe harbour and the resale is within the distribution compliance period imposed with respect to those securities:
the seller and any person acting on behalf of the seller must not knowingly offer or sell the securities to a US person; and
if the purchaser of the securities is also a securities professional, then the seller must deliver a confirmation or other notice stating that the securities may be offered and sold during the distribution compliance period only in accordance with Regulation S, pursuant to registration under the Securities Act or an exemption from registration.[197]
The resale safe harbour may also be relied upon by certain officers and directors who are affiliates of the issuer or a distributor, provided that the Regulation S General Conditions are met and no remuneration is paid other than customary broker's commissions.[198]
(iii) Violation of safe harbour conditions
The consequences of a breach of the conditions for use of Regulation S could be dire, since this would potentially allow buyers of the securities to rescind their purchases.[199] If an issuer, distributor, any of their respective affiliates, or any person acting on their behalf fails to comply with the Regulation S General Conditions, then the issuer safe harbour will not be available to any person in connection with the offer or sale of the securities. However, if any of these persons fails to comply with any of the other issuer safe harbour requirements (in other words, other than the Regulation S General Conditions), then only the party who fails to comply (as well as its agents and affiliates) will be unable to rely on the issuer safe harbour exemption. In that case, the fact that there may have been a breach on the part of the issuer, distributor, their affiliates, or agents (other than certain officers or directors relying on the resale exemption) does not generally negate a resale safe harbour exemption for an unaffiliated person.[200]
Section 4(2) private placements
Section 4(2) of the Securities Act exempts "transactions by an issuer not involving any public offering." The term public offering is not defined in the Securities Act and the scope of the Section 4(2) exemption has largely evolved through case law, SEC pronouncements and market practice. It is hence not possible to map the borders of Section 4(2) precisely.
The core issue is whether the persons to whom securities are offered need the protection of the Securities Act – that is, whether they are sufficiently sophisticated so as to be able to fend for themselves.[201] In determining whether a transaction is a public offering, relevant factors include the number of offerees and their relationship to each other and the issuer, the number of securities being offered, the size of the offering and the manner in which the offering is conducted.[202] All of the surrounding circumstances must be considered in this analysis.[203]
Practice point
Section 4(2) is only available for offers and sales by an issuer; resales of securities acquired from an issuer require a separate exemption (such as Rule 144A, discussed below).
Private placements under Section 4(2) typically involve, among other things:
a non-public offering (that is, an offering without any form of general solicitation or advertising);
to a limited number of offerees;
who are buying for investment and not with a view to distribution; and
who are sophisticated investors and have been provided with or have access to information about the issuer.[204]
In addition, the securities issued in a private placement generally include restrictions on resales by the purchasers (such as through the use of stop-transfer orders, restrictive legends and the like).[205]
Regulation D private placements
(i) Background
Largely in response to the difficulties experienced by practitioners in interpreting the availability of Section 4(2), the SEC adopted Regulation D to provide a clearly defined non-exclusive safe harbour from registration for offers and sales of securities by issuers.
Regulation D differentiates transactions based on the size of the offerings and the types of investors to whom securities are being offered. Regulation D draws a core distinction between "accredited investors" and other, non-sophisticated investors. Accredited investors include:[206]
banks, savings and loan associations, and similar institutions;
insurance companies, investment companies, small business investment companies and certain employee benefit plans;
private business development companies;
certain tax-exempt organizations;
corporations with assets over $5 million;
directors, executive officers, and persons holding similar positions with or in the issuer;
natural persons with a net worth (alone or with that person's spouse) exceeding $1 million;
natural persons with individual income in excess of $200,000 per year or, with that person's spouse, in excess of $300,000 per year;
certain trusts with assets in excess of $5 million; and
any entity owned entirely by such persons.
(ii) Regulation D general conditions
Regulation D provides certain general conditions (the Regulation D General Conditions), including:
Integration:[207] All sales that are part of the same Regulation D offering must meet all of the terms and conditions of Regulation D. However, offers and sales made more than six months before or after the completion of a Regulation D offering will generally not be considered part of the same Regulation D offering.
Information requirements: Regulation D's information requirements depend on the type of transaction and the type of participants in the transaction. The issuer must provide any purchaser that is not an accredited investor with extensive information regarding the issuer. If the issuer is not an Exchange Act reporting company, that information includes non-financial and financial information substantially equivalent to that which it would have been required to provide in a registration statement under the Securities Act (for example, Form F-1 in the case of a first-time foreign registrant).[208] For a foreign private issuer that is a reporting company, it may provide its most recent annual report on Form 20-F.[209] The issuer must also make available to each purchaser the opportunity to ask questions about the offering or the issuer.[210]
Practice point
Regulation D's information requirements effectively mean that financial information provided by a foreign private issuer to a non-accredited investor must either be prepared in accordance with US Gaap or reconciled to US Gaap. This has limited the usefulness of Regulation D for those foreign private issuers that do not prepare US Gaap or US Gaap-reconciled financial statements.
Limitation on offering:[211] Neither the issuer nor anyone acting on its behalf may use any "general solicitation" or "general advertising" to offer or sell the securities.
Limitation on resale:[212] Securities acquired in a Regulation D transaction are restricted securities that cannot freely be resold absent registration or an exemption from registration. The issuer must take reasonable care to make sure that purchasers would not be deemed to be statutory underwriters (that is, engaged in a distribution of the securities), which is typically satisfied by requiring purchaser representations about investment intent, restrictive legends on certificates, and restrictions on transfer.
Form D:[213] The issuer must file a notice to the SEC on Form D no later than 15 days after the first sale of securities.
(iii) Rule 504 – offers and sales not exceeding $1 million
Rule 504 provides an exemption from registration for limited offerings and sales of securities not exceeding $1 million in any 12-month period.[214] Issuers subject to the reporting requirements of the Exchange Act and investment companies, among others, may not use this exemption.[215] All of the Regulation D General Conditions apply to Rule 504 transactions, other than Regulation D's information requirements.[216]
(iv) Rule 505 – offers and sales not exceeding $5 million
Rule 505 contains an exemption for limited offerings and sales of securities not exceeding $5 million in a 12-month period.[217] An unlimited number of accredited investors (subject to the limitations on general solicitation and general advertising mentioned above) and up to 35 non-accredited investors may purchase securities in a Rule 505 offering.[218] All of the Regulation D General Conditions apply to Rule 505 transactions, except that Regulation D's information requirements do not apply to any purchasers that are accredited investors.[219]
(v) Rule 506 – unlimited offering amounts
Rule 506 closely resembles Rule 505 except that the offering amount is notlimited. Like Rule 505, an unlimited number of accredited investors (subject to the limitations on general solicitation and general advertising) and up to 35 non-accredited investors may purchase securities[220] and all of the Regulation D General Conditions apply, except for Regulation D's information requirements in the case of accredited investors.[221] In addition, each purchaser of the securities other than an accredited investor must demonstrate to the issuer's reasonable belief that the purchaser, "either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment."[222] Issuers and their placement agents typically satisfy this requirement by having potential investors complete "investor questionnaires" demonstrating their accredited status or their sophistication.
(vi) Rule 508 – deviations from Regulation D
Under Rule 508, a person may establish the existence of an exemption under Regulation D with respect to any purchaser even if the person failed to meet one or more of the requirements of Regulation D. In this case, the person must show that:
the failure to comply did not pertain to a term, condition, or requirement directly intended to protect the purchaser;
the failure to comply was "insignificant to the offering as a whole;" and
the person made a good faith and reasonable attempt to comply with the relevant requirements of Regulation D.
Resales of privately placed securities
Both Section 4(2) and Regulation D apply only to transactions by issuers,[223] and neither provides an exemption for resales. Purchasers who wish to resell securities acquired in a private placement must look to certain resale exemptions – in particular, the exemptions provided by Rule 144A, "Section 4(1-1/2)" or Rule 144 under the Securities Act.
(i) Rule 144A resales to QIBs
Although market participants often refer to Rule 144A offerings, as a technical matter Rule 144A transactions involve two steps: sales to underwriters (or directly to institutional initial purchasers) under Section 4(2) or Regulation S, followed by resales to QIBs under Rule 144A. As a result, Rule 144A transactions follow various limitations not found directly in Rule 144A itself (such as restrictions on publicity) as well as the explicit requirements of Rule 144A.
Practice point
Securities purchased under Rule 144A are deemed "restricted securities" and can only be resold pursuant to Rule 144A or another exemption (including the Regulation S resale safe harbour described above).[224]
(a) Definition of QIB
A QIB is defined to include any of the following entities acting for its own account or the account of other QIBs, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the QIB:[225]
US-regulated insurance companies;
investment companies registered under the Investment Company Act;
small business investment companies licensed by the US Small Business Administration;
certain employee benefit plans;
certain trusts;
certain tax-exempt organizations and corporations;
certain registered investment advisers;
certain registered broker-dealers; and
US banks and savings and loan associations, and non-US banks, savings and loan associations, and equivalent institutions.
(b) Rule 144A requirements
The requirements for a valid Rule 144A transaction include the following:
Sales to QIBs:[226] the securities must be offered and sold only to QIBs or to a person who the seller (and any person acting on its behalf) "reasonably believes" is a QIB;
Notice to buyers:[227] the seller (and any person acting on its behalf) must take "reasonable steps" to ensure that the buyer is aware that the seller is relying on Rule144A (generally by so noting in the offering memorandum, or in the trade confirmation in the case of an undocumented offering);
Fungibility:[228] the securities must not be, when issued, of the same class as securities listed on a US national securities exchange or quoted on Nasdaq (or, in the case of convertible or exchangeable securities, have an effective conversion premium of 10% or more); and
Information delivery:[229] if the issuer is a reporting company under the Exchange Act or is exempt from reporting under Rule 12g3-2(b), a seller wishing to resell the securities is not obligated to furnish the purchaser with information concerning the issuer. However, if the issuer is not a reporting company and is not exempt under Rule 12g3-2(b), a holder or the purchaser must have the right to obtain from seller or issuer, upon request, certain minimal "reasonably current" information concerning the business of the issuer and its financial statements.
(c) A/B exchange offers
Rule 144A has also become particularly popular for global offerings of debt securities, in part because of a line of SEC "no-action" letters that permits issuers who have sold debt securities to QIBs pursuant to Rule 144A subsequently to register an exchange offer of identical securities for the Rule 144A securities.[230] This procedure allows QIBs, subject to limited exceptions, to obtain freely tradable registered securities in exchange for the restricted, legended securities they obtained in the Rule 144A offering. Because the exchange offer will go through the SEC registration process, most issuers and underwriters seek to conform the original Rule 144A offering memorandum as closely as possible to the requirements of a full registration statement (including US Gaap reconciliation).
The availability of this exchange procedure allows issuers and underwriters to complete transactions quickly under Rule 144A to take advantage of market conditions, but with the expectation that the issuer will promptly register an exchange of identical securities. Asa result, purchasers generally do not require the "liquidity discount" they would otherwise demand if the securities were to remain private. In addition to promising public registration under the Securities Act, the issuer also typically agrees to file periodic reports with the SEC under the Exchange Act, thereby enhancing public information and liquidity.
(ii) "Section 4 (1-1/2)" resales
Market practice has developed the so-called "Section 4 (1-1/2)" exemption for resales of privately placed securities.[231] (Section 4 (1-1/2) does not actually appear in the Securities Act and is instead the name given to the practice of certain resales of private securities.) Under this exemption, securities that are initially privately placed may be resold if the resales essentially comply with the requirements for the original Section 4(2) private placement.
Typical restrictions in a Section 4 (1-1/2) transaction include that resales may only be made:
on a non-public basis;
to sophisticated investors who could have participated in the original private placement and who are buying for investment and not with a view to distribution; and
subject to limitations on onward resales (such as letters of representation from purchasers or appropriate "no registration" opinions of counsel).
(iii) Rule 144
Rule 144 provides conditions under which non-affiliates of an issuer may resell "restricted securities" to the public without registration under the Securities Act, and affiliates of the issuer may resell restricted or unrestricted securities without registration.[232]
Restricted securities include:[233]
securities acquired directly or indirectly from an issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving a public offering;
securities acquired from the issuer that are subject to the resale limitations of Regulation D;
securities acquired in a Rule 144A transaction; and
equity securities of domestic US issuers acquired in Regulation S transactions.
An affiliate of an issuer for these purposes is a person that, directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer.[234]
It is important to note that Rule 144 treats resales by affiliates and non-affiliates differently. An affiliate's re-sales of any securities of an issuer, whether restricted or not, are subject to Rule 144, while only resales of restricted securities by non-affiliates are brought within the Rule.
Rule 144 requires:
• One-year minimum holding period for restricted securities:[235] restricted securities must be held for a minimum of one year from the date of purchase from the issuer or an affiliate of the issuer before any Rule 144 resale (unrestricted securities held by an affiliate are not subject to the one-year holding period);
Sales of restricted securities after one-year minimum holding period: after the one-year minimum holding period has expired, limited resales of restricted securities by affiliates and non-affiliates may be made if:
- Information:[236] either the issuer is an Exchange Act reporting company that has been subject to reporting requirements for 90 days prior to the sale and has filed all required reports in the 12 months prior to the sale, or certain other information about the issuer must be publicly available;
- Volume limitations:[237] The amount of securities sold, together with all sales of restricted or other securities of the same class for the account of such person within the preceding three months, must not exceed the greater of (i) 1% of the shares or other units of the class outstanding; or (ii) the average weekly reported trading volume on US national securities exchanges or on Nasdaq during the prior four weeks;
- Manner of sale:[238] securities must be resold in unsolicited brokers' transactions; and
- Notice of sale:[239] if more than 500 shares or $10,000 worth of securities are resold in any three-month period, the seller must file a notice on Form 144 with the SEC.
Sales of restricted securities after two years:[240] non-affiliates of the issuer may freely resell restricted securities once two years have passed from the date the securities were acquired from an issuer or an affiliate of an issuer (affiliates remain subject to the volume and other limitations set out above).[241]
Sales of unrestricted securities by affiliates before or after two years: As noted above, sales of unrestricted securities by affiliates are not subject to the one-year minimum holding period. However, these sales are subject to the volume and other limitations set out above.
Rule 802 – securities issuances in connection with cross-border exchange offers and business combinations
(i) General
Securities Act Rule 802 provides an exemption from registration for offers and sales in any exchange offer or business combination involving the acquisition of securities of a foreign private issuer. Rule 802 does not impose a dollar limitation on the value of securities sold to US investors in an exempt transaction, and both domestic US and foreign private issuers may rely on Rule 802.[242] Rule 802 provides an exemption only for the issuer of securities and not for affiliates of the issuer or any person who seeks to resell the securities.[243] Accordingly, resales of securities acquired under Rule 802 must either be registered or structured to take advantage of an available exemption from registration.
(ii) Requirements of Rule 802
The requirements of Rule 802 are as follows:
Limitation on US ownership:[244] US holders of securities must hold 10% or less of the class of securities that is the subject of the exchange offer or business combination. However, if there are no US shareholders, Rule 802 is not available.[245]
Calculation of 10% limit: A US holder is defined as a person resident in the US.[246] In determining whether or not a holder is a US resident, a bidder must look through the record ownership of securities held by brokers, dealers, banks and other nominees located in the US, the target company's jurisdiction of incorporation, and the jurisdiction that is the primary trading market of the target securities.[247] This is not a determination of ultimate beneficial ownership; instead, only the first line of ownership behind the broker or nominee must be established. If, after "reasonable inquiry," a bidder is unable to obtain information about the amount of securities held by US residents, it may assume that the customers are residents of the jurisdiction in which the nominee has its principal place of business.[248] The calculation date is 30 days prior to the commencement of the exchange offer or the solicitation for a business combination.[249] However, the calculation excludes securities held by persons owning more than 10% of the class of securities sought in the exchange offer or business combination, as well as securities held by the bidder.[250]
Equal treatment of US holders; "Blue Sky":[251] The bidder must permit US holders of securities to participate in the exchange offer or business combination on terms at least as favourable as those offered to other holders, but is not required to extend the offering into any US state that would require registration or qualification of the transaction.
Informational documents in the US: If the bidder publishes or otherwise disseminates an informational document to security holders in connection with the exchange offering or business combination, it must furnish an English-language translation of that document to the SEC under cover of Form CB by the first business day after publication or dissemination, and must also file a consent to service of process on Form F-X.[252] It must disseminate any informational document to US security holders, in English, on a comparable basis to that provided to security holders in the home jurisdiction.[253] In addition, if the bidder disseminates information by publication in its home jurisdiction, it must publish the information in a manner reasonably calculated to inform US security holders of the offer.[254]
Legends:[255] Any US offering documentation must contain a legend regarding the non-US nature of the transaction and the bidder's disclosure practices, and must state that investors may have difficulty in enforcing rights against the bidder and its officers and directors.
Restricted securities:[256] The securities acquired in a Rule 802 transaction will be restricted securities to the same extent and proportion as the target securities sought in the exchange offer and business combination (in other words, restricted securities will yield restricted securities, and unrestricted securities will yield unrestricted securities).
Not an Investment Company:[257] Rule 802 does not apply to an exchange offer or a business combination by an investment company within the meaning of the Investment Company Act that is registered or required to be registered under that Act (other than a registered closed-end investment company).
Rule 801 – rights offerings
(i) General
Securities Act Rule 801 provides an exemption from registration for certain rights offerings by foreign private issuers. A rights offering is defined for these purposes as the sale for cash of equity securities in which existing securities holders of a particular class (including holders of ADRs) are granted the right to purchase additional securities of that class, and the number of additional securities the holders may purchase is in proportion to the amount of securities they hold on the record date of the offering.[258]
Like Rule 802, Rule 801 does not impose a dollar limitation on the value of securities sold to US investors in an exempt transaction, but unlike Rule 802 only foreign private issuers may rely on Rule 801.[259] Rule 801 provides an exemption only for the issuer of securities and not for affiliates of the issuer or any person who seeks to resell the securities.[260] Accordingly, resales of securities acquired pursuant to Rule 801 must be registered or exempt from registration.
(ii) Requirements of Rule 801
The requirements of Rule 801 are as follows:
Limitation on US ownership: US securities holders must hold 10% or less of the class of securities that is the subject of the rights offering.[261] The calculation is done in the same manner as the calculation under Rule 802 exemption, except that the date of calculation is the record date of the rights offering.[262] As for Rule 802, if there are no US shareholders, Rule 801 is not available.[263]
Equal treatment of US security holders:[264] The bidder must permit US security holders to participate in the rights offering on terms at least as favourable as those offered to other holders, but is not required to extend the offering into any US state that would require registration or qualification of the transaction.
Informational documents in the US: If the issuer publishes or otherwise disseminates an informational document to security holders in connection with the rights offering, it must furnish an English-language translation of that document to the SEC under cover of Form CB by the first business day after publication or dissemination, and must also file a consent to service of process on Form F-X.[265] It must disseminate any informational document to US security holders, in English, on a comparable basis to that provided to security holders in the home jurisdiction.[266] In addition, if the issuer disseminates by publication in its home jurisdiction, it must publish the information in a manner reasonably calculated to inform US security holders of the offer.[267]
Eligibility of securities:[268] The securities offered in the rights offering must be equity securities of the same class as the securities held by offerees in the US (directly or through ADRs).
Limitations on transfer:[269] The terms of the rights must prohibit transfers by US security holders except in accordance with Regulation S.
Legends:[270] Any US offering documentation must contain a legend regarding the non-US nature of the transaction and the issuer's disclosure practices, and must state that investors may have difficulty in enforcing rights against the issuer and its officers and directors.
Rule 701 – compensatory benefit plans
Rule 701 under the Securities Act provides an exemption from registration for offers and sales of securities pursuant to certain compensatory benefit plans.[271]
(i) Eligible issuers
Rule 701 is available to any issuer that is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, and that is not an investment company registered or required to be registered under the Investment Company Act.[272] This includes foreign private issuers that have never listed their securities in the US or offered them to the public in the US, or that benefit from the exemption from Exchange Act registration provided by Exchange Act Rule 12g3-2(b). If an issuer becomes subject to Exchange Act reporting after it has made offers in compliance with Rule 701 (for example, by conducting a public offering) it may nevertheless rely on Rule 701 to sell securities previously offered to the persons to whom the offers were made.[273] In addition, a reporting issuer may rely on Rule 701 to the extent it guarantees the payment of a subsidiary's securities that are sold under Rule 701.[274]
Rule 701 is only available to the issuer of securities, and not to any of its affiliates.[275] It may also not be used for capital-raising transactions.[276]
(ii) Eligible transactions
Rule 701 exempts offers and sales of securities issued under a written compensatory benefit plan (or written compensation contract) established by the issuer, parent of the issuer, majority-owned subsidiary, or majority-owned subsidiary of the issuer's parent.[277] A compensatory benefit plan for these purposes means any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan.[278]
(iii) Eligible plans and participants
The plan must be limited to employees, directors, general partners, trustees (where the issuer is a business trust), officers, consultants and advisers, and family members[279] of those persons who acquire the securities by gift or a domestic relations order.[280] Offers and sales may be made to former employees, directors, general partners, trustees, officers consultants and advisers only if those persons were employed by or provided services to the issuer at the time the securities were offered.[281]
Certain additional requirements apply to consultants and advisers. In particular, Rule 701 is only available to consultants and advisers if:[282]
they are natural persons;
they provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parent; and
the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer's securities.
(iv) Amounts that may be offered and sold
Any amount of securities may be offered under Rule 701.[283] Sales, however, are limited. In particular, under Rule 701, the aggregate sales price or amount of securities sold in reliance on Rule 701 during any consecutive 12-month period must not exceed the greatest of the following:[284]
$1 million;
15% of the total assets of the issuer, measured at the issuer's most recent balance sheet date (or of the issuer's parent if the issuer is a wholly-owned subsidiary and the securities represent obligations that the parent fully and unconditionally guarantees); or
15% of the outstanding amount of the class of securities being offered and sold in reliance on Rule 701, measured at the issuer's most recent balance sheet date.
The term aggregate sales price means the sum of all cash, property, notes, cancellation of debt or any other consideration (including the value of the employee's services) received by the issuer for the sale of its securities.[285] The aggregate sales price is calculated on the date of sale.[286]
(v) Disclosure requirements
An issuer must deliver a copy of the plan to investors.[287] In addition, if the aggregate sales price or amount of securities issued under Rule 701 exceeds $5 million within any 12-month period, Rule 701 requires the issuer to provide each purchaser with certain information within a reasonable period of time before the date of sale, including:[288]
if the plan is subject to the US Employee Retirement Income Security Act of 1974 (ERISA), a copy of the ERISA summary plan description;
if the plan is not subject to ERISA, a summary of the plan's material terms;
risk factors related to the securities being offered and the issuer; and
certain financial statements (as of a date no more than 180 days before the sale of securities), which must either be prepared in accordance with US Gaap or reconciled to US Gaap.[289]
The requirement for US Gaap or US Gaap-reconciled financial statements might pose significant challenges for non-US issuers seeking to rely on Rule 701, at least to the extent large volumes of securities will be sold. Those issuers are, by definition, not SEC reporting companies, and may not be able to prepare US Gaap or US Gaap-reconciled financial statements without significant effort and expense.
Note that issuances under Rule 701 remain subject to the anti-fraud provisions of the US federal securities laws. An issuer should consider whether disclosure in addition to that specified above is appropriate (such as MD&A or a developed business description).
(vi) No integration
Securities offerings under Rule 701 are not subject to integration with any other offers or sales by the issuer (including other unregistered offerings).[290]
(vii) Resale limitations
Securities issued under Rule 701 are deemed to be restricted securities within the meaning of Rule 144 under the Securities Act.[291] The Rule 701 exemption is only available to the issuer and does not cover the resale of the securities by any other person. Resales must accordingly either be registered under the Securities Act or be structured to take advantage of an exemption from registration.[292] However, if the issuer becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, securities issued under Rule 701 may be resold 90 days thereafter: [293]
by non-affiliates without any restrictions other than the requirement imposed by Rule 144 for sale in brokers' transactions; and
by affiliates pursuant to Rule 144 without observing the normal holding period requirement for restricted securities.
Any certificated securities issued under Rule 701 should contain a legend stating that the securities have not been registered under the Securities Act and may not be sold or transferred in the absence of registration or an exemption from registration.
(viii) Certain blue sky issues
Issuances of securities under Rule 701 are not exempt from the securities laws of the various US states (known as the "blue sky" laws). Accordingly, issuers need to determine the blue sky requirements in the states where US offerees under the plan are resident.
Restrictions on publicity in connection with unregistered transactions
As discussed above, "directed selling efforts" or "general solicitation or general advertising" in the US can destroy the availability of the relevant exemption from registration. In addition, publicity about an unregistered transaction can amount to an illegal offer of securities. Accordingly, publicity about a planned or pending unregistered transaction is subject to certain limitations.
In particular, a foreign private issuer may:
continue to advertise products and services and to issue press releases regarding factual business and financial developments in accordance with past practice;[294]
distribute a preliminary and final offering memorandum to certain investors;
if available, make a limited notice within the US under Rule 135c under the Securities Act; and
conduct certain press activities outside the US under Rule 135e.
(i) Factual business and financial developments
As noted above, in registered transactions the SEC permits issuers to continue to advertise products and services and to issue press releases regarding factual business and financial developments in accordance with past practice, despite the limitations on gun jumping. These activities are also permissible in connection with unregistered transactions.
(ii) Rule 135c
Rule 135c provides a safe harbour that permits a company to deliver notice in the US that it proposes to make, is making or has made an unregistered offering of securities. As discussed above, all offers and sales of securities in the US must be registered or exempt from registration, and the terms offer and sale are construed broadly. Rule 135c clarifies that a notice distributed in the US by an issuer subject to the reporting requirements of the Exchange Act or exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act will not be deemed to be an offer for sale of a security if the following conditions are met:
the notice is not used for purposes of conditioning the market in the US;[295]
the notice states that the securities offered have not been or will not be registered under the Securities Act and may not be offered absent registration or an exemption from registration;[296] and
the notice contains only limited information, including:[297]
- the name of the issuer;
- the title, amount and basic terms of the securities being offered;
- the amount of the offering, if any, being made by selling shareholders;
- the time of the offering; and
- a brief statement of the manner and purpose of the offering, without naming the underwriters.
Rule 135c notices also will not constitute "general solicitation" or "directed selling efforts".[298]
Under Rule 135c, the notice may take the form of a news release or a written communication directed to security holders or employees, or other public statements.[299] The notice itself must be sent to the SEC under cover of Form 8-K, Form 6-K, or in accordance with the provisions of Rule 12g3-2(b), as applicable.[300]
(iii) Rule 135e
As noted above, Rule 135e provides a safe harbour for offshore press activity. This safe harbour is available for unregistered as well as registered transactions. Like notices under Rule 135c, offshore press activity meeting Rule 135e does not constitute general solicitation or directed selling efforts.[301]
(iv) Research reports
Research reports potentially raise concerns about directed selling efforts and general solicitation. For this reason (and because of liability concerns), many underwriters refuse to allow research to be distributed in the US in connection with Rule 144A or Regulation S offerings.
Rule 138 is, however, available for unregistered transactions. In particular, if the conditions of the rule are otherwise met, publication of research by a broker-dealer will not be considered to be an offer or a general solicitation in connection with a Rule 144A transaction. Likewise such publication will not be seen as prohibited directed selling efforts in connection with a Regulation S transaction.
Similarly, if the other conditions of Rule 139 are met, research may be published during Rule 144A or Regulation S offerings without fear of being treated as a general solicitation or directed selling effort.
--------------------------------------------------------------------------------
Endnotes
[162]
1933 Act Rule 903 (offers and sales by an issuer or distributor); 1933 Act Rule 904 (offshore resales).
[163]
1933 Act Rule 902(h).
[164]
1933 Act Rule 902(c)(1).
[165]
1933 Act Rule 902(c)
[166]
Offshore Offers and Sales, Securities Act Release 6863, Exchange Act Release 27942, Investment Company Act Release 17458, [1989-1990 Transfer Binder] Fed Sec L Rep (CCH) ¶ 84,524, at 80,661 (April 24 1990) [Regulation S Adopting Release]. More generally, the Regulation S Adopting Release makes clear that offshore transaction in compliance with Regulation S will not be integrated with concurrent registered or private offerings in the US. Id. ¶ 84,524, at 80,681 - 82.
[167]
See Coral Gold Corporation, SEC No-Action Letter, [1991 Transfer Binder] Fed Sec L Rep (CCH) ¶ 79,707, at 78,229 (available February 19 1991).
[168]
Regulation S, Preliminary Note 5.
[169]
Id. Preliminary Note 1.
[170]
In addition, Regulation S is not available with respect to any transaction or series of transactions that, although in technical compliance with Regulation S, is part of a plan or scheme to avoid the registration requirements of the Securities Act. Id. Preliminary Note 2.
[171]
1933 Act Rule 902(d).
[172]
1933 Act Rule 903(b)(1).
[173]
A foreign issuer is any foreign government or foreign private issuer. 1933 Act Rule 902(e).
[174]
Substantial US market interest is defined in 1933 Act Rule 902(j).
[175]
Overseas directed offering is defined in 1933 Act Rule 903(b)(ii).
[176]
The term equity securities is defined in 1933 Act Rule 405, and includes debt securities convertible into equity securities.
[177]
The term debt securities is defined as all securities that are not equity securities, and includes non-participating preferred stock and asset-backed securities. 1933 Act Rule 902(a).
[178]
1933 Act Rule 903(b)(2).
[179]
The term offering restrictions is defined in 1933 Act Rule 902(g).
[180]
1933 Act Rule 903 (b)(2)(i).
[181]
1933 Act Rule 902(g).
[182]
1933 Act Rule 903(b)(2)(ii).
[183]
Regulation S Adopting Release, ¶ 84,524 at 80,681 - 82.
[184]
1933 Act Rule 903(b)(2)(iii).
[185]
1933 Act Rule 902(f).
[186]
1933 Act Rule 903(b)(3).
[187]
1933 Act Rule 903(b)(3)(i).
[188]
1933 Act Rule 903(b)(3)(iii).
[189]
1933 Act Rule 903(b)(3)(ii).
[190]
1933 Act Rule 903(b)(3)(ii)(A) and (iii)(A).
[191]
1933 Act Rule 903(b)(3)(iii)(B).
[192]
1933 Act Rule 903(b)(3)(ii)(B).
[193]
1933 Act Rule 903(b)(3)(iv).
[194]
The term restricted securities is defined in 1933 Act Rule 144(a)(3).
[195]
1933 Act Rule 905.
[196]
1933 Act Rule 904(a).
[197]
1933 Act Rule 904(b)(1).
[198]
1933 Act Rule 904(b)(2).
[199]
1933 Act Section 12(a).
[200]
Regulation S Adopting Release, ¶ 84,524 at 80,681.
[201]
SEC v Ralston Purina Co, 346 US 119, 125 (1953) (the applicability of the private placement exemption "should turn on whether the particular class of persons affected needs the protection" of the Securities Act; an offering to those "who are shown to be able to fend for themselves" is a private placement).
[202]
See, for example, Securities Act Release 285, 1935 SEC LEXIS 485 (January 24 1935) (SEC General Counsel specifies four criteria to determine when a transaction qualifies as public offering: (i) the number of offerees and their relationship to each other and to the issuer; (ii) the number of units offered; (iii) the size of the offering; and (iv) the manner of the offering).
[203]
Securities Act Release 4552 (November 6 1962), 1962 Lexis 166 (all the surrounding circumstances must be considered "including such factors as the relationship between the offerees and the issuer, the nature, scope, size, type and manner of the offering").
[204]
Certain courts have held that this information must be comparable to the information investors would have received in a public offering. See, for example, Doran v Petroleum Mgmt Corp, 545 F2d 893, 903 (5th Cir 1977).
[205]
Securities sold under Section 4(2) are "restricted securities" that may not be freely resold to the public. 1933 Act Rule 144(a)(3).
[206]
1933 Act Rule 501(a).
[207]
1933 Act Rule 502(a).
[208]
1933 Act Rule 502(b)(2)(i).
[209]
1933 Act Rule 502(b)(2)(ii)(D).
[210]
1933 Act Rule 502(b)(2)(v).
[211]
1933 Act Rule 502(c).
[212]
1933 Act Rule 502(d).
[213]
1933 Act Rule 503.
[214]
1933 Act Rule 504(b)(2).
[215]
1933 Act Rule 504(a).
[216]
1933 Act Rules 504(b)(1); 502(b)(1).
[217]
1933 Act Rules 505(b)(2)(i).
[218]
1933 Act Rules 505(b)(2)(ii); 501(e)(1)(iv).
[219]
1933 Act Rules 505(b)(1); 502(b)(1).
[220]
1933 Act Rule 506(b)(2)(i).
[221]
1933 Act Rules 506(b)(1); 502(b)(1).
[222]
1933 Act Rule 506(b)(2)(ii). Purchaser representative is defined in Rule 501(h).
[223]
1933 Act Section 4(2); Regulation D, Preliminary Note 4.
[224]
Rule 144A, Preliminary Note 6.
[225]
Rule 144A(a)(1).
[226]
Rule 144A(d)(1).
[227]
Rule 144A(d)(2).
[228]
Rule 144A(d)(3).
[229]
Rule 144A(d)(4).
[230]
Exxon Capital Holdings Corp, SEC No-Action Letter, 1988 SEC No-Act. LEXIS 682 (available May 13 1988); Shearman & Sterling, SEC No-Action Letter, [1993 Transfer Binder] Fed Sec L Rep (CCH) ¶ 76,704, at 78,039 (available July 2 1993); Morgan Stanley & Co Inc, SEC No-Action Letter, [1991-1992 Transfer Binder] Fed Sec L Rep (CCH) ¶ 76,018, at 78,884 (available June 5 1991).
[231]
See generally "The Section '4(11/2)' Phenomenon: Private Resales of 'Restricted' Securities," 34 The Business Lawyer 1961 (July 1979).
[232]
Rule 144(b).
[233]
Rule 144(a)(3).
[234]
Rule 144(a)(1).
[235]
Rule 144(d).
[236]
Rule 144(c).
[237]
Rule 144(e).
[238]
Rule 144(f).
[239]
Rule 144(h).
[240]
Rule 144(k).
[241]
Id. Affiliate is broadly defined to include any person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an issuer. 1933 Act Rule 405.
[242]
Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings, Securities Act Release 7759, Exchange Act Release 42,054, Trust Indenture Act Release 2378, International Series Release 1208, [1999-2000 Transfer Binder] Fed Sec L Rep (CCH) ¶ 86,214, at 82,536, 82,550 (October 22 1999) [Cross-Border Release].
[243]
General Notes to 1933 Act Rules 800, 801 and 802, Note 6.
[244]
1933 Act Rule 802(a)(1). The 10% limitation does not apply in the case of an exchange offer or business combination commenced during the pendency of a prior exchange offer. 1933 Act Rule 802(a)(1). Certain presumptions about the level of US ownership are available in the case of a hostile exchange offer. See 1933 Act Rule 802(c).
[245]
SEC Division of Corporation Finance, Manual of Publicly Available Telephone Interpretations, 3rd Supplement (July 2001), Section II.C, Question 1 (www.sec.gov/interps/telephone/phonesupplement3.htm) [Telephone Interpretations].
[246]
1933 Act Rule 800(h).
[247]
1933 Act Rule 800(h)(3).
[248]
1933 Act Rule 800(h)(4).
[249]
1933 Act Rule 800(h)(1).
[250]
1933 Act Rule 802(h)(2)
[251]
1933 Act Rule 802(a)(2).
[252]
1933 Act Rule 802(a)(3)(i).
[253]
1933 Act Rule 802(a)(3)(ii).
[254]
1933 Act Rule 802(a)(3)(iii).
[255]
1933 Act Rule 802(b).
[256]
General Notes to Securities Act Rules 800, 801 and 802, Note 8.
[257]
Id. Note 9.
[258]
1933 Act Rule 800(g).
[259]
Cross-Border Release, ¶ 86,214, at 82,550.
[260]
General Notes to Securities Act Rules 800, 801 and 802, Note 6.
[261]
1933 Act Rule 801(a)(2).
[262]
1933 Act Rule 800(h).
[263]
Telephone Interpretations, Section II.C, Question 1.
[264]
1933 Act Rule 801(a)(3).
[265]
1933 Act Rule 801(a)(4)(i).
[266]
1933 Act Rule 801(a)(4)(ii).
[267]
1933 Act Rule 801(a)(4)(iii).
[268]
1933 Act Rule 801(a)(5).
[269]
1933 Act Rule 801(a)(6).
[270]
1933 Act Rule 801(b).
[271]
1933 Act Rule 701(a).
[272]
1933 Act Rule 701(b)(1).
[273]
1933 Act Rule 701(b)(2).
[274]
1933 Act Rule 701(b)(3).
[275]
Rule 701, Preliminary Note 4.
[276]
Rule 701, Preliminary Note 5.
[277]
1933 Act Rule 701(c).
[278]
1933 Act Rule 701(c)(2).
[279]
The term family member is defined in Rule 701(b)(c)(3).
[280]
1933 Act Rule 701(c).
[281]
Id.
[282]
1933 Act Rule 701(c)(1).
[283]
1933 Act Rule 701(d)(1).
[284]
1933 Act Rule 701(d)(2).
[285]
1933 Act Rule 701(d)(3)(i).
[286]
1933 Act Rule 701(d)(3)(ii).
[287]
1933 Act Rule 701(e).
[288]
Id.
[289]
In particular, the financial statements are those required by Part F/S of Form 1-A under 1933 Act Regulation A. 1933 Act Rule 701(e)(4). Part F/S requirements include the following (which need only be audited to the extent the issuer prepares audited financial statements for other purposes):
the issuer's balance sheet;
a statement of the issuer's income, cash flow and security holders' equity for the two most recent fiscal years and any interim period;
financial statements of significant acquired entities or entities proposed to be acquired, if any; and
pro forma financial information in the event of any recent significant acquisitions.
[290]
1933 Act Rule 701(f).
[291]
1933 Act Rule 701(g)(1).
[292]
1933 Act Rule 701(g)(2).
[293]
1933 Act Rule 701(g)(3).
[294]
Use of Electronic Media Release, ¶ 86,304, at 83,384.
[295]
1933 Act Rule 135c(a)(1).
[296]
1933 Act Rule 135c(a)(2).
[297]
1933 Act Rule 135c(a)(3).
[298]
1933 Act Rules 502(c), 902(c)(3)(vi).
[299]
1933 Act Rule 135c(b).
[300]
1933 Act Rule 135c(d).
[301]
1933 Act Rules 502(c), 902(c)(3)(vii).
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