Misconceptions About Regulation S

Continuing our last post on Regulation S, then are still a few things that should be known to issuers looking to explore this method of raising capital. Perhaps most importantly, “nobody in the US should be able to know that you are doing a Reg S offering,” said Sara Hanks, CEO and co-founder of CrowdCheck. This means that issuers should geofence any offering site, preventing people with US IP addresses from accessing the offering and viewing its terms. Unlike the other JOBS Act exemptions that permit general solicitation in the US, Reg S does not. 


Why Do Companies Use Reg S?


Despite the challenges of raising money under Regulation S, many companies still find it the best option for them. This is because the rules offer several benefits that can be very helpful for businesses. One of the biggest advantages is that it enables issuers to raise money from foreign investors. It also does not limit issuers to how much they can raise, unlike Reg A+ or RegCF.


What Are the Drawbacks of Using Reg S?


Despite the many advantages that come with using Regulation S, there are also several risks that businesses need to be aware of. One of the biggest dangers is that companies can inadvertently violate the rules if they are not careful. This can lead to significant penalties, including fines and other penalties. As a result, businesses need to make sure they understand all of the requirements before they begin raising money under Regulation S. Another risk is that companies may have difficulty finding investors who are willing to invest in their business. This is because the pool of potential investors is much smaller than it is for other types of securities offerings. As a result, companies may need to offer more attractive terms to entice potential investors. 


Those are not the only factors that would be a challenge for potential Reg S issuers. “The only reason to add Reg S is if you think you are going to exceed the $75 million [limit for Reg A+] and you think there are people overseas who would be interested in investing. We rarely see the $75 million exceeded. But the problem is Reg S only tells you how to comply with US rules, it does not tell you how to comply with anybody else’s rules. Most developed countries have rules that limit the extent you can offer securities to less sophisticated people. Reg S tells you how to comply with US rules but it doesn’t tell you how to comply with French or German rules so you would still have to learn those rules in whatever country you are making the offering in,” said Hanks.


Did Reg A+ Replace Reg S?


While some people may think otherwise, Regulation A+ did not replace Regulation S. Regulation A+ is an alternative securities offering process that was expanded by the JOBS Act of 2012. Unlike Regulation S, which only allows companies to raise money from foreign investors, Regulation A+ allows businesses to raise money from both foreign and domestic investors. Additionally, Regulation A+ has many requirements that are not imposed on Regulation S offerings. For example, companies that use Regulation A+ must file a disclosure statement with the SEC and provide ongoing reporting after their offering. Additionally, only companies that are qualified by the SEC can use Regulation A+. As a result, Regulation A+ is generally considered a more complex process than Regulation S in terms of compliance. However, companies that use Reg A+ can raise capital from a large number of accredited and nonaccredited investors within the US and market the offering to them, which enhances the visibility of that offering.

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