Topics in Finance: Securities Regulation
Assignment 15 - Regulation S (Exemptions for Extraterritorial Offerings)

Regulation S
  • Jurisdictional reach of § 5
  • def'n of "interstate commerce" - § 2(a)(7)
  • SEC "come to rest" position (Release 4708)
  • Regulation S [Rules 901-905] - safe harbor for foreign offerings / territoriality principle - Rule 901
  • Definitions - Rule 902
  • "designated offshore securities market"
  • "directed selling efforts" -
  • "Distribution compliance period"
  • "offering restrictions"
  • "offshore transaction"
  • foreign issuer
  • selling where there is no "substantial market interest" - Rule 903(b)(1)
  • selling in "overseas directed offering" - Rule 903(b)(1)
  • selling foreign country debt - Rule 903(b)(1)
  • non-reporting foreign company selling debt - Rule 903(b)(2)
  • reporting US issuer
  • selling debt in "overseas directed offering" - Rule 903(b)(1)
  • selling debt or equity in "offshore transaction" - Rule 903(b)(2)
  • non-reporting US issuer
  • selling debt in "overseas directed offering" - Rule 903(b)(1)
  • selling debt using 40-day temporary global security - Rule 903(b)(3)
  • selling equity with one-year restricted period - Rule 903(b)(3)
  • Resale conditions
  • securities in Reg S offering become "restricted securities" - Rule 905
  • resales by participating dealers - Rule 904(b)(1)
  • resales by affiliates - Rule 904(b)(2)

PROBLEMS
1. Electro Motors Corp. (a California corporation) is a start-up company with plans to develop and sell electric cars. It does not have any public investors and is not a reporting company under the Exchange Act. It is looking for financing. Identify any problems with the following.
  • debt offering in "overseas directed offering" - Rule 903(b)(1)
  • debt offering by reporting U.S. issuer - Rule 903(b)(2)
  • debt offering subject to offering restrictions using 40-day temporary global security - Rule 903(b)(3)
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  1. Electro Motors will sell readily-negotiable bearer bonds denominated in U.S. dollars in Europe (so-called "Eurobonds"), principally in stock exchanges in car-crazy Germany and Italy.
  2. Electro Motors will sell its Eurobonds only in Germany on the Frankfurt Stock Exchange.
  3. Electro Motors will denominate its non-convertible bond offering in German marks and sell them only on the Frankfurt Stock Exchange, though to make the offering more marketable there will be no restrictions on resales.

2. Dulces, Inc. (a Delaware corporation) designs and sells women's footwear worldwide. Its common stock is traded on Nasdaq, and Dulces is a reporting company under the Exchange Act. Any problems with the following? See In re Candie’s, Inc. , Securities Act Release No. 7263 (Feb. 21, 1996).
  • debt offering in "overseas directed offering" - Rule 903(b)(1)
  • debt or equity offering in "offshore transaction" - Rule 903(b)(2)
  • equity offering subject to offering restrictions and one-year distribution compliance period and selling restrictions - Rule 903(b)(3)
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  1. Dulces will issue new shares of common stock at a 40% discount to mysterious Swiss investors for unsecured promissory notes on which no interest will accrue for 51 days. After a 40-day restricted period, the Swiss purchasers can resell the shares on U.S. trading markets -- and use the proceeds from these resales to pay Dulces.
  2. Dulces will issue new shares of common stock that will be deposited with a Swiss bank, which will then issue Global Depositary Receipts representing Dulces shares. These GDRs (denominated in U.S. dollars) will be sold to European investors and traded on the major European stock exchanges.
  3. Dulces will issue bonds denominated in Deutsche marks to institutional investors in Germany. There will be no restrictions on resales into the United States.

Securities Regulation Page 1

Assignment 15 – Regulation S