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.

Regulation S: What is it and How is it Used?

Created to help companies raise money from foreign investors, Regulation S has been successful for some companies, while others have fallen into trouble by not following the regulations closely. Because of the uncertainty surrounding RegS for many issuers, Sara Hanks, CEO and co-founder of CrowdCheck, sheds some light on the subject.


What is Regulation S?


Regulation S is an offering type that companies can utilize to raise capital from investors outside of the US. According to Hanks, as Eurobonds grew in popularity throughout the 1970s and 80s, the circumstances that required an offering made primarily overseas to register with the SEC were unclear. “Section 5 of the Securities Act says that if you make a public offering of securities you have to register with the SEC, but it does not say in the United States. Of course, in 1933 they really weren’t thinking about cross-border deals. As the Eurobond market developed, where large companies were selling debt securities, there was a series of requests for interpretation as to the extent that something overseas needed to comply with US rules,” said Hanks when talking about the emergence of Reg S.  As cross-border markets developed, whether someone is or is not in the US really was brought into question. Over the next few decades, no-action letters began piling up and the SEC decided there needed to be a rule to give guidance as to what it means to not be making an offering in the US.


One of the key requirements is that companies only offer their securities to investors who are outside of the United States. This ensures that American investors are not being misled about the investment. Those using Reg S can raise more than the $75 million allowed with a Reg A+ raise.


What Challenges do Companies Face Using Reg S? 


The Key advantage of Regulation S is that it allows companies to tap into a larger pool of potential investors. “The primary use case of Reg S is a very large offering by a US or foreign company being made outside the United States. It was always intended for large transactions being made by large companies to sophisticated investors,” said Hanks. However, she notes that in the crowdfunding space, many issuers are still conducting a Reg S offering incorrectly. “They ignore the fact that the transaction has three separate categories and all of these are based on the likelihood of the transaction actually being made in the United States or the securities coming back to the United States,” said Hanks.


Accordingly to Hanks, the easiest use case is a foreign company selling under its own rules. An intermediate use case would be an SEC-registered company. An important consideration is the likelihood that the company would be using Reg S to get around the SEC’s registration rules and how much harm the securities would cause if they ended up in the US. But, for companies in the crowdfunding space that are not reporting companies, the rules are much more strict. Unfortunately, many of these companies are ignoring the rules that apply to non-reporting US companies, which is a significant problem.


For companies looking to use Regulation S, it’s important that they understand the offering and SEC’s requirements, otherwise, it could lead them into hot water.

What is Regulation S?

It is essential to be familiar with the different regulations that govern how companies can raise capital in today’s business world. One important rule is Regulation S. This article will give you a basic overview of Regulation S, how it affects businesses, and how companies can use it to raise capital.


What is Regulation S?


Regulation S is a set of rules that govern security offerings to offshore investors. It is an attempt by the SEC to clarify its role in regulating securities offerings sold by US companies outside the United States. The regulation allows companies to offer and sell securities without registering the offering with the SEC, as long as the securities are only offered and sold outside of the United States. This excludes investors within the US from participating in the offerings. If an offering is for foreign and domestic investors, it would not fall under Reg S exemptions because it would have to be registered with the SEC.


Benefits of Reg S


Regulation S is an important securities regulation because it allows companies to offer and sell securities offshore without registering with the SEC. This is important because it enables companies to raise money from investors worldwide, and it also protects investors because it ensures that all offerings are made lawfully. At the same time, it enables companies to have a greater reach for their security offerings, as they can now globally raise money from investors all over the world.


As it was designed, Reg S was always intended for large transactions made by large companies to sophisticated investors. The primary use case of Reg S is still the Euro bond or an extensive offering by a U.S. or foreign company that is made outside the United States. Because Reg S can be used for such a large-scale offering by large corporations, companies will always continue to use it as an option when they need to raise funds globally.


The Pitfalls of Regulation S


The problem is many companies do Reg S offerings incorrectly in this particular space of crowdfunding. Many think all they need to do is sell to somebody outside of the United States, but they ignore that Reg S has three separate categories. These categories are based on the likelihood of the transaction being made in the U.S. or the securities returning to the U.S. The most effortless use case of Reg S is a foreign company selling securities under their own rules. An intermediate use is a reporting company registered with the SEC. For startups, the rules of non-reporting U.S. companies are stricter, but many businesses are not complying with these rules.

How Can Companies Keep Their Offering Out of the US?


No offer sold under Reg S should be advertised or be made known in the U.S. To this effect, companies should Geo-fence any offering site so individuals with U.S. IP Addresses can not see what you are offering. However, if you have Geo-fenced your offer and implemented the proper protections to ensure a US investor cannot invest, and someone found their way around it, it’s not on you. Companies do not need to police the internet, but they should ensure that their Reg S offerings are only available internationally with Geo-fencing. 


While Reg S does not have as wide of a use case as Reg A or Reg D, Reg S is helpful if you feel you will exceed the $75 million of Reg A and can capitalize on international investors. However, companies must be aware that Reg S only tells how to comply with the U.S. rules, not another countries regulation. With most countries having restrictions on making offerings to less sophisticated investors, you want to ensure you meet all these standards if raising capital internationally. 


The Regulation S exemption was implemented to help companies raise capital from non-US investors without SEC registration. It has its benefits, but it is not always accessible or appropriate for every company.