Introduction: Regulation S vs Rule 144
Regulation S and Rule 144 are pivotal components of the United States securities law framework, each facilitating different aspects of the capital markets, particularly in the context of private offerings and the sale of securities to non-U.S. investors. Understanding the nuances between these two regulations is essential for issuers, investors, and intermediaries navigating the private capital markets.
Regulation S
Regulation S provides a safe harbor that exempts securities offerings from the registration requirements of Section 5 of the Securities Act of 1933, as long as the offering is conducted outside the United States. Most people are not aware that is particular regulation was named after Sara Hanks when she was at the SEC. This regulation is designed to facilitate the sale of securities to non-U.S. residents in offshore transactions, without the stringent disclosures and registration processes required for public offerings in the U.S.
Key Features of Regulation S:
- Offshore Transactions: Regulation S applies only to offers and sales of securities that occur outside the U.S. and to non-U.S. persons. The issuer must ensure that the offering cannot be deemed to have been made to a person in the United States. The offering must be gated and block all U.S. persons, one other major factor is that a company must follow local securities laws to make sure they are compliant when offering their securities in offshore markets.
- Category System: Regulation S categorizes offerings to determine the level of restrictions required to prevent the securities from flowing back into the U.S. market. These categories help in defining the resale limitations and distribution compliance period for the securities.
- No Directed Selling Efforts: Issuers and distributors must not engage in any directed selling efforts within the United States, ensuring the offering is genuinely foreign and not targeting U.S. investors indirectly.
Rule 144
Purpose and Application: Rule 144 provides a safe harbor for the public resale of restricted and controlled securities in the U.S. market, without requiring SEC registration. This rule is crucial for investors looking to sell their holdings of restricted securities (typically acquired through private placements or as compensation) and for affiliates of the issuer who hold control securities. This very common with RegD 506b and 506c offerings.
Key Features:
- Holding Period: Sellers must adhere to a specific holding period before restricted securities can be sold on the public market—six months for securities of a reporting company and one year for a non-reporting company.
- Volume Limitations: There are limits on the volume of securities that can be sold within a three-month period, which helps prevent market manipulation and protect investors.
- Manner of Sale and Information Requirements: Rule 144 imposes conditions on how sales can be made and requires that adequate current information about the issuer is publicly available.
Differences Between Regulation S and Rule 144
- Geographical Focus: Regulation S deals exclusively with offers and sales of securities conducted outside the United States to non-U.S. persons. In contrast, Rule 144 applies to the resale of restricted and controlled securities within the U.S. market.
- Targeted Securities and Sellers: Regulation S can be applied by issuers, distributors, or their affiliates for initial sales to non-U.S. persons. Rule 144 is used by shareholders (both affiliates and non-affiliates) who seek to sell their restricted or controlled securities in the U.S. market.
- Conditions and Restrictions: While both set forth conditions to prevent the improper flow of securities, Regulation S focuses on ensuring that the securities are offered and sold outside the U.S. without directed selling efforts to U.S. persons. Rule 144 establishes criteria related to holding periods, volume limitations, and disclosure to facilitate the safe resale of securities in the U.S.
- Purpose: The fundamental purpose of Regulation S is to exempt international securities transactions from U.S. registration requirements, promoting global capital formation. Rule 144, however, aims to provide liquidity for holders of restricted and controlled securities by enabling a pathway to public resale under certain conditions.
Regulation S and Rule 144 address different needs within the securities market, reflecting the SEC’s efforts to accommodate the complexities of global capital flows while protecting investors. Regulation S facilitates the international offering of securities by U.S. and foreign issuers, whereas Rule 144 allows investors to sell restricted and controlled securities in the U.S. Understanding these regulations is crucial for conducting compliant securities transactions, whether operating within the U.S. or on a global scale.
It’s always important when using either of these regulations to speak to your securities lawyer to ensure your company is using the regulations compliantly.