9258 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

1 17 CFR 230.903.

2 17 CFR 230.901–230.904 and Preliminary Notes.

3 15 U.S.C. 77a et seq. (the ‘‘Securities Act’’).

4See Proposed Rule 902(h) for the proposed

definition of ‘‘principal market in the United

States.’’

5 17 CFR 230.144(a)(3).

6Proposed Rule 905.

7 Id.

8Securities Act Release No. 7190 (June 27, 1995)

[60 FR 35663 (July 10, 1995)] (the ‘‘Interpretive

Release’’).

9See infra Section III.E.1. for a further discussion

of the proposed definition of ‘‘principal market in

the United States.’’

obligation was discharged in full or the

last installment paid.

By the Commission.

Dated: February 20, 1997.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–4667 Filed 2–27–97; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 228, 229, 230, and 249

[Release No. 33–7392; 34–38315; File No.

S7–8–97 International Series Release No.

1056]

RIN 3235–AG34

Offshore Offers and Sales

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rules.

SUMMARY: The Securities and Exchange

Commission (the ‘‘Commission’’) is

publishing for comment proposed

amendments to the Regulation S safe

harbor procedures. The proposed

amendments relate to offshore sales of

equity securities of U.S. issuers, and

foreign issuers where the principal

market for the securities is in the United

States. The proposals are designed to

stop abusive practices in connection

with offerings of equity securities

purportedly made in reliance on

Regulation S.

DATES: Comments should be received on

or before April 29, 1997.

ADDRESSES: Comments should be

submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Stop 6–9, Washington, D.C. 20549.

Comment letters also may be submitted

electronically to the following electronic

mail address: rule-comments@sec.gov.

Comment letters should refer to File No.

S7–8–97; this file number should be

included in the subject line if electronic

mail is used. All comment letters

received will be available for public

inspection and copying in the

Commission’s public reference room,

450 Fifth Street, N.W., Washington, D.C.

20549. Electronically submitted

comment letters will be posted on the

Commission’s Internet Web site (http://

www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Paul

M. Dudek, Luise M. Welby, or Walter G.

Van Dorn, Jr., Office of International

Corporate Finance, Division of

Corporation Finance, at (202) 942–2990.

SUPPLEMENTARY INFORMATION: The

Commission is proposing to revise Rule

903 1 of Regulation S,2 the issuer safe

harbor under the Securities Act of 1933 3

for offshore offerings of securities, to

address abusive practices under the

rule. The changes would apply to

offshore sales of equity securities of

domestic issuers, and of foreign issuers

where the principal market for those

securities is in the United States.4

Further, the Commission proposes

amendments to Rule 144(a)(3) 5 and a

new Rule 905 to deem these equity

securities to be ‘‘restricted securities,’’

as defined in Rule 144 under the

Securities Act.6 New Rule 905 also

would make clear that offshore resales

under Rule 904 of restricted equity

securities of covered issuers will not

affect the status of these securities as

restricted securities after the resale.7 In

addition, the Commission is proposing

to eliminate the current requirement

that reporting issuers disclose

Regulation S sales of equity securities

on a Form 8–K within 15 days of the

transaction. In light of the longer

restricted period proposed today,

issuers would report these sales on a

Form 10–Q on the same basis that

issuers report their other unregistered

sales of equity securities. Finally, the

Commission is proposing additional

technical and clarifying revisions to

Regulation S, in part to make the rule

more concise and understandable.

I. Executive Summary

The Commission constantly seeks to

reduce burdens on capital formation as

long as the deregulatory measures do

not harm investor protection. When

adopting safe harbors and other

deregulatory measures, the Commission

will include protections designed to

minimize the risk that those measures

will be abused. If abuses nevertheless

occur, the Commission will make the

necessary adjustments to prevent further

abuse while, to the extent possible,

preserving the original goals of the

reform. Today, the Commission is

proposing amendments to Regulation S

to prevent continued abuse of the rule.

In 1990, the Commission adopted

Regulation S to clarify the

extraterritorial application of the

registration requirements of the

Securities Act. In the interests of both

comity and the internationalization of

the world’s securities markets, the

Commission believed that the

registration provisions under U.S. law

should not apply where the offshore

placements were truly offshore. Instead,

the laws of the foreign jurisdiction

regulating the public offerings of

securities would serve to protect

investors in that market. Regulation S

permits both foreign and domestic

issuers to avail themselves of the safe

harbors when conducting offshore

placements of their securities.

Since the adoption of Regulation S in

1990, the Commission has become

aware of uses of Regulation S that the

rule not only did not contemplate, but

in fact expressly prohibited. Some

issuers, affiliates and others involved in

the distribution process are using

Regulation S as a guise for distributing

securities into the U.S. markets without

the protections of registration under

Section 5 of the Securities Act. In June

1995, the Commission issued an

interpretive release that listed certain

problematic practices under Regulation

S and requested comment on whether

the Regulation should be amended to

limit its vulnerability to abuse.8

As a result of the continuation of

certain of these abusive practices and in

response to the comment letters

received on the Interpretive Release, the

Commission is proposing to stop these

abusive practices by amending

Regulation S for placements of equity

securities by domestic companies. In

addition, although abusive practices

involving the equity securities of foreign

issuers are not as evident as with

domestic issuers, there is equal

potential for abuse where the principal

trading market for those securities is in

the United States. Therefore, the

Commission also is proposing to amend

the safe harbor procedures for

placements of equity securities of

foreign issuers where the principal

market for those securities is in the

United States. In general, the ‘‘principal

market’’ would be in the United States

if more than half of the trading in that

security takes place in the United

States.9

These Regulation S proposals would:

• classify these equity securities placed

offshore under Regulation S as ‘‘restricted

securities’’ within the meaning of Rule 144;

• align the Regulation S restricted period

for these equity securities with the Rule 144

holding periods by lengthening from 40 days
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9259

10Rule 903 of Regulation S [17 CFR 230.903].

11Rule 904 of Regulation S [17 CFR 230.904].

12 15 U.S.C. 78a et seq. (the ‘‘Exchange Act’’).

13See Rule 902(n) of Regulation S for the

definition of ‘‘substantial U.S. market interest’’ [17

CFR 230.902(n)].

14Rule 903(a) of Regulation S [17 CFR

230.903(a)]. See Rule 902(i) of Regulation S for the

definition of ‘‘offshore transaction’’ [17 CFR

230.902(i)].

15Rule 903(b) of Regulation S [17 CFR

230.903(b)].

16For debt securities issued under either Category

2 or Category 3, the restricted period is 40 days. The

restricted period for equity securities sold under

Category 3 is one year, instead of the shorter 40-day

period under Category 2.

17 ‘‘U.S. person’’ is defined under Rule 902(o) of

Regulation S [17 CFR 230.902(o)].

18 In addition to the restricted period, ‘‘Category

2’’ and ‘‘Category 3’’ offerings also must comply

with certain ‘‘offering restrictions,’’ and the

requirement that distributors give certain notices

when selling securities to other distributors prior to

the expiration of the restricted period. See Rule

902(h) of Regulation S [17 CFR 230.902(h)]. In

addition, offerings of equity securities under

Category 3 are subject to certification, legending

and other requirements that are not imposed on

Category 2 offerings. See Rule 903(c)(2) for Category

2 offerings [17 CFR 230.903(c)(2)] and Rule

903(c)(3) for Category 3 offerings [17 CFR

230.903(c)(3)].

19See Securities Act Release No. 6863 (Apr. 24,

1990) [55 FR 18306] (the ‘‘Adopting Release’’) at

Section III.B.

20See, e.g., InfraRed Associates, Inc. (Sept. 13,

1985); Proctor & Gamble Co. (Feb. 21, 1985);

Fairchild Camera and Instrument International

Finance N.V. (Dec. 15, 1976); Raymond

International Inc. (June 28, 1976); Pan-American

World Airways, Inc. (June 30, 1975); The Singer

Company (Sept. 3, 1974).

21See, e.g., ‘‘Pirates’ Play?’’, Barron’s, at 17 (Jan.

7, 1997); ‘‘Storm Brewing Offshore?’’, Barron’s, at

12 (Sept. 16, 1996); ‘‘Easy Money—How Foreign

Investors Profit at the Expense of Americans,’’

Barron’s, at 31 (Apr. 29, 1996); ‘‘Rule Permitting

Offshore Stock Sales Yields Deals that Spark SEC

Concerns,’’ Wall St. J., at C1 (Apr. 26, 1994);

‘‘Foreign Stock Sales: Don’t Get Blindsided,’’

Worth, at 37 (Mar. 1994).

22See In re: Candies, Inc., et al., Securities Act

Release No. 7263 (Feb. 21, 1996); SEC v. Softpoint,

Inc., et al., Litigation Release No. 14480 (Apr. 27,

1995). See also U.S. v Sung and Feher, Litigation

Release No. 14500 (May 15, 1995).

(currently applicable to reporting issuers) or

one year (currently applicable to nonreporting issuers) to two years the period

during which persons relying on the

Regulation S safe harbor may not sell these

equity securities to U.S. persons (unless

pursuant to registration or an exemption);

• impose certification, legending and other

requirements now only applicable to sales of

equity securities by non-reporting issuers;

• require purchasers of these securities to

agree not to engage in hedging transactions

with regard to such securities unless such

transactions are in compliance with the

Securities Act;

• prohibit the use of promissory notes as

payment for these securities; and

• make clear that offshore resales under

Rule 901 or 904 of equity securities of these

issuers that are ‘‘restricted securities,’’ as

defined in Rule 144, will not affect the

restricted status of those securities.

The combination of these proposed

amendments should prevent the sale of

equity securities offshore under

Regulation S in transactions that

effectively result in unregistered

distributions of the securities into the

U.S. markets.

II. Background

Regulation S contains a general

statement that the registration

requirements of Section 5 of the

Securities Act do not apply to offers or

sales of securities that occur outside the

United States, and two non-exclusive

safe harbors. The first safe harbor

applies to offers and sales by issuers,

persons involved in the distribution

process pursuant to contract

(‘‘distributors’’), their affiliates, and any

person acting for those persons (‘‘issuer

safe harbor’’).10 The other safe harbor

applies to offshore resales by persons

other than the issuer, distributors, their

affiliates (except certain officers and

directors) and persons acting for them

(the ‘‘offshore resale safe harbor’’).11

The rule considers an offer or sale of

securities that satisfies all conditions of

the applicable safe harbor to be outside

the United States and thus not subject

to the registration requirements of

Section 5. Regulation S does not provide

a safe harbor for resales back into the

United States of any securities sold or

resold offshore, whether under

Regulation S or otherwise.

The issuer safe harbor distinguishes

three categories of securities offerings.

The categories are based upon factors

such as the jurisdiction of incorporation

of the company whose securities are

being sold under Regulation S, the

company’s reporting status under the

Securities Exchange Act of 1934,12 and

the degree of U.S. market interest in the

issuer’s securities. ‘‘Category 1’’

offerings generally encompass debt and

equity offerings by foreign reporting and

non-reporting issuers when there is no

‘‘substantial U.S. market interest’’ 13 in

the security to be offered. ‘‘Category 2’’

offerings now encompass, among other

things, offshore offerings of debt and

equity securities of any domestic

reporting issuer, debt and equity

securities of any foreign reporting issuer

where there is a ‘‘substantial U.S.

market interest,’’ as well as the debt

securities of any foreign non-reporting

issuer where there is a ‘‘substantial U.S.

market interest.’’ ‘‘Category 3’’ offerings

are subject to the greatest restrictions

and include offshore offerings of debt

and equity securities by any domestic

non-reporting issuer, as well as equity

securities of any foreign non-reporting

issuer where there is a ‘‘substantial U.S.

market interest.’’

All offerings under the Regulation S

safe harbors are subject to two general

conditions: the offer and sale must be

made in an offshore transaction,14 and

the offering must not involve directed

selling efforts in the United States.15

Offers and sales made in reliance on the

Category 2 and Category 3 issuer safe

harbors are subject to additional

restrictions that the Commission

anticipated would assure that the

securities came to rest offshore. These

restrictions include a 40-day or one-year

restricted period 16 during which

persons entitled to rely on the Rule 903

safe harbor (that is, the issuer, a

distributor, or any of their respective

affiliates or any person acting on their

behalf) cannot sell the Regulation S

securities to a U.S. person 17 or to a

person acting for the account of a U.S.

person (other than a distributor), and

still rely on the safe harbor.18 The

purpose of the restricted period is to

ensure that persons relying on the safe

harbor are not engaged in an

unregistered, non-exempt distribution

into the U.S. capital markets.19

The Commission based many of the

safe harbor procedures incorporated

into Regulation S on procedures that

market participants already had

developed and were the subject of noaction letters issued by the

Commission’s staff before the adoption

of Regulation S. 20 Before 1990, offshore

transactions largely involved substantial

global offerings of the debt or equity

securities of foreign issuers, or the debt

securities of domestic issuers in the

Euromarkets. Since the adoption of

Regulation S, these types of offshore

offerings have not resulted in

widespread problematic practices.

The Commission’s primary area of

concern has been the use of Regulation

S for sales of equity securities by

domestic issuers, the area in which

market participants had not developed

established procedures before the

adoption of Regulation S. Some U.S.

issuers appear to have used the

Regulation S issuer safe harbor to effect

unregistered distributions of their equity

securities into the United States.21

In response, the Commission has

taken enforcement action against

persons who sought to evade the

registration requirements of the

Securities Act through purported

Regulation S offerings that were in effect

U.S. distributions of securities.22 In

addition, on June 27, 1995, the

Commission issued the Interpretive

Release to state its views concerning

these abusive practices under

Regulation S. The Interpretive Release
9260 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

23Preliminary Note 2 to Regulation S specifically

states that:

In view of the objective of these rules and the

policies underlying the Act, Regulation S is not

available with respect to any transaction or series

of transactions that, although in technical

compliance with these rules, is part of a plan or

scheme to evade the registration provisions of the

Act. In such cases, registration under the Act is

required.

24 Interpretive Release, supra note 8, at Section II.

25These comment letters, together with a

Summary of Comments prepared by Commission

staff, are available for inspection and copying in the

Commission’s Public Reference Room, 450 Fifth

Street, N.W., Washington, D.C. 20549. Persons

seeking these materials should make reference to

File No. S7–20–95.

26Exchange Act Release No. 37801 (Oct. 10, 1996)

[61 FR 54506 (Oct. 18, 1996)]. Sales of equity

securities by domestic issuers under Regulation S

are required to be reported on Form 8–K within 15

days of occurrence. All other unregistered sales of

equity securities by domestic issuers (e.g., private

placements) must be reported quarterly in the

issuer’s Form 10–Q and in its Form 10–K (for the

last fiscal quarter).

27Securities Act Release No. 7355 (Oct. 10, 1996)

[61 FR 54509 (Oct. 18, 1996)].

28Securities Act Release Nos. 7390, 7391, and

7393.

described a number of abusive practices

in offerings purportedly made under

Regulation S and stated that such

abusive practices ran afoul of the

‘‘scheme-to-evade’’ prohibition in

Preliminary Note 2 of Regulation S,23

would not be covered by the safe

harbors, and would not be found to be

an offer and sale outside the United

States for purposes of the general

statement under Rule 901.24

The Interpretive Release also asked

for comments whether the Commission

should amend Regulation S to impose

additional restrictions on the use of the

safe harbors to impede attempts to use

the Regulation to evade the registration

requirements of the Securities Act. The

Commission received 36 comment

letters in response to the Interpretive

Release.25 There was no consensus

among commenters whether Regulation

S should be amended and, if so, what

restrictions should be imposed.

As a complement to these initiatives,

the Commission also has taken, and is

currently undertaking, several other

actions. To deter abusive Regulation S

practices while providing important

information to the markets, the

Commission recently adopted

amendments to the Exchange Act

periodic reporting forms for domestic

issuers to require disclosure of

unregistered equity offerings, including

a current report on Form 8–K filing

requirement to disclose sales made

under Regulation S.26 At the same time,

by adopting amendments to Rule 3–05

of Regulation S–X, which relaxed the

financial statement requirements for

acquired businesses, the Commission

took another step to remove

unnecessary barriers to registered

offerings that may cause companies to

conduct unregistered offshore

offerings.27 The Commission today also

is issuing three companion releases that

should help alleviate concerns that the

more restrictive Regulation S

procedures will cut off access to capital

on a cost-effective basis for smaller

companies. These releases (i) adopt

amendments to the Rule 144 safe harbor

governing resales of restricted securities

to shorten the holding period

requirements, (ii) propose further

revisions to Rule 144 to simplify the

rule, and (iii) propose allowing delayed

pricing in registered securities offerings

conducted by smaller issuers so they

would have more flexibility in timing

registered offerings. 28

The increasing internationalization of

global securities markets, the growing

use of the Internet for securities

transactions, the further integration of

the European and other markets through

common currencies and regulatory

treatments, and other recent and

ongoing developments in the securities

markets may make it appropriate for the

Commission to re-address many facets

of the territorial approach to the

Securities Act that has been adopted

under Regulation S. These issues arise

apart from the abusive practices

addressed in today’s proposals.

However, the Commission encourages

commenters to discuss these and other

matters in order to permit the

Commission to evaluate whether to

propose revisions to Regulation S to

reflect these developments.

III. Proposed Amendments to Issuer

Safe Harbor

A. Continue Safe Harbor Protection for

Equity Sales

The Commission does not believe at

this time that the abuses identified to

date warrant precluding domestic

reporting issuers from making equity

offerings under Regulation S,

particularly since many smaller issuers

access foreign sources of capital to

satisfy their financing requirements.

Indeed, some of the abusive practices,

such as hedging transactions, are

engaged in by purchasers, and not

necessarily with the knowledge or

acquiescence of the issuer. Rather than

make the Regulation S safe harbor

unavailable for such offerings, the

proposals are designed to curtail the

abusive practices that have developed,

while retaining for U.S. issuers the

flexibility to make an offshore offering

with the certainty provided by a safe

harbor. Nevertheless, would it be more

appropriate to end the safe harbor

entirely for offshore offerings of equity

securities of domestic reporting issuers,

domestic non-reporting issuers, and

foreign issuers where the principal

market for their equity securities is in

the United States?

B. Impose New Restrictions on Equity

Offerings of Domestic Issuers and of

Foreign Issuers Where the Principal

Market for the Securities is in the United

States

In light of the continuing abuses, the

Commission proposes requiring

compliance with the more rigorous

procedures under Category 3, including

a longer restricted period, for all

offshore offerings of equity securities of

domestic companies, and of foreign

companies where the principal market

for the securities is in the United States.

There are five new requirements that the

proposed amendments would impose

on offerings of these securities by

moving those offerings from Category 2

to Category 3:

1. Longer Restricted Period

The restricted period for equity

securities of domestic reporting issuers,

and of foreign reporting issuers whose

principal market is in the United States,

would be lengthened from 40 days to

two years; the restricted period for

equity securities of domestic nonreporting issuers, and of foreign nonreporting issuers where the principal

market for the securities is in the United

States, would be lengthened from one

year to two years. In order to qualify for

the Regulation S safe harbor for offers

and sales made during the restricted

period, issuers, distributors, and their

affiliates must comply with the

documentation requirements discussed

below and any such offers and sales

during this period may not be made to

a U.S. person (except pursuant to

registration or an exemption). Rule 903

would be further amended to clarify that

registered offers and sales, or offers and

sales to a U.S. person made pursuant to

an exemption such as Rule 144 or 144A,

are permitted in the initial distribution

and during the restricted period.

As described below, the Commission

is proposing that covered equity

securities be defined as ‘‘restricted

securities’’ under Rule 144. The new

two-year restricted period under the

issuer safe harbor would track the time

period during which the securities

would be subject to resale restrictions as

‘‘restricted securities’’ under Rule 144.

The Commission adopted the current

40-day restricted period during which

the selling restrictions are applicable to

protect against an indirect unregistered
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9261

29See Securities Act Release No. 6779 (June 10,

1988)[53 FR 22661 (June 17, 1988)], which

proposed Regulation S (the ‘‘Proposing Release’’), at

nn.10 and 11 for a discussion of the time periods

that were used by market participants prior to the

adoption of Regulation S.

30See Securities Act Release No. 6838 (July 11,

1989)[54 FR 30063 (July 18, 1989)], which

reproposed Regulation S, at Section II.C.2.b. (the

‘‘Reproposing Release’’).

31Of course, issuers and distributors could not

accept at face value certifications and agreements

by purchasers and disclaim responsibility for

investigation and consideration of relevant facts

pertinent to the establishment of the Regulation S

safe harbor. See Re: Lee Petillon, Adm. Proc. File

3–2393 (Nov. 30. 1972) (initial decision); Re: The

Crowell-Collier Publishing Company, Securities Act

Release No. 3825 (Aug. 12, 1957); Regulation D

Revisions, Securities Act Release No. 6759 (Mar. 3,

1988) [53 FR 7870 (Mar. 10, 1988)] at Section B.

32This Category 3 purchaser agreement

requirement currently is applicable only to sales of

equity securities by non-reporting issuers. See Rule

903(c)(3)(iii)(B)(2) of Regulation S [17 CFR

230.903(c)(3)(iii)(B)(2)].

33Since the Commission also proposes that these

securities will be deemed ‘‘restricted securities,’’

Commission guidance under Rule 144 with regard

to hedging transactions (such as short sales, and

purchases and sales of put and call options) would

be applicable to these securities sold under

Regulation S. See Securities Act Release No. 7391.

34Under the ‘‘offering restrictions,’’ as defined in

Rule 902(h) of Regulation S, distributors are

required to agree that all offers and sales prior to

the expiration of the restricted period will be made

either in accordance with Regulation S, pursuant to

a registration of the securities under the Securities

Act, or pursuant to an available exemption from

registration. The proposals would expand the

agreement requirement to include the proposed

hedging agreement where the securities to be

offered and sold are equity securities of domestic

issuers, or of foreign issuers where the principal

market for the security is in the United States. See

Rule 902(h) of Regulation S [17 CFR 230.902(h)].

35Currently, the ‘‘offering restrictions’’ require

certain statements to be included in all offering

materials and documents (other than press releases)

used in connection with offers and sales of certain

securities prior to the expiration of the applicable

restricted period. The required statements would

include this additional statement regarding hedging

where the securities to be offered and sold are

equity securities of domestic issuers, or of foreign

issuers where the principal market for the security

is in the United States.

36Rule 903(c)(3)(iii)(B)(3) of Regulation S [17 CFR

230.903(c)(3)(iii)(B)(3)].

public offering in the United States. The

practices of some companies,

distributors and their affiliates,

however, demonstrate that the current

40-day restricted period is far too short

to achieve this goal. In some instances,

they appear to have orchestrated resales

in the United States following the

restricted period as part of the

distribution process.

Before the adoption of Regulation S,

market participants generally used a 90-

day period for offshore offerings of U.S.

debt securities and a one-year period for

offshore offerings of equity securities of

domestic non-reporting issuers.29 When

the Commission initially proposed a 90-

day restricted period for offshore

offerings of both debt and equity

securities of domestic reporting issuers,

many commenters advocated a shorter

40-day restricted period. These

commenters stated that the shorter

period would be sufficient to protect

against use of an offshore offering to

make an indirect offering into the

United States.30 In the Commission’s

view, however, experience has not

borne out the commenters’ beliefs in the

area of domestic equity securities. Also,

the same potential for abuse exists with

foreign equity securities if the principal

market for the securities is in the United

States.

2. Purchaser Certifications

The new procedures would require

purchasers of these new Category 3

equity securities to certify that they are

not U.S. persons and are not acquiring

the securities for the account or benefit

of a U.S. person, or that they are U.S.

persons who purchased securities in a

transaction that did not require

registration under the Securities Act.

This certification procedure should help

protect against some of the sham

transactions noted in the Interpretive

Release where issuers or distributors

‘‘park’’ securities offshore with affiliates

or shell entities that are actually owned

by U.S. persons.

3. Purchaser and Distributor Agreements

The new procedures would require

purchasers of securities to agree to resell

the securities only in accordance with

the registration or exemptive provisions

of the Securities Act, or in accordance

with Regulation S. Imposing this

agreement on purchasers of the covered

equity securities should help ensure

that purchasers are aware of the resale

restrictions applicable to the securities,

particularly considering the

Commission’s proposal to classify these

securities as restricted securities.31

In addition, under a new requirement

proposed to be added to the current

Category 3 purchaser agreement

requirement,32 purchasers of Category 3

equity securities would be required to

agree not to engage in hedging

transactions except in compliance with

the registration or exemptive provisions

of the Securities Act.33 The proposals

also would require distributors to agree

to the same restrictions on hedging until

the expiration of the restricted period,34

and that all offering materials and

documents used in the offering of these

securities would be required, until the

expiration of the restricted period, to

include a statement that hedging

transactions involving those securities

may not be conducted except in

compliance with the Securities Act.35

4. Legended Certificates

The proposals would require all

covered issuers of equity securities to

place a legend on the securities sold

offshore. This legend would advise that

transfer of such securities is prohibited

other than in accordance with the

Securities Act. Currently, the required

legend for sales of equity securities of

domestic non-reporting issuers is

required to state that transfers of

securities are prohibited except ‘‘in

accordance with the provisions of this

Regulation S.’’ 36 The Commission

proposes amending the current legend

requirement to make clear that the rule

permits transfers made in accordance

with the provisions under the Securities

Act.

The legend requirement would

provide notice to any subsequent

purchasers of the resale restrictions

applicable to the securities. The

Commission understands that legending

equity securities of domestic reporting

issuers until the expiration of the

current 40-day restricted period is a

common practice under Regulation S.

The Commission thus believes that the

addition of an express legending

requirement should not impose a

different or new burden. In addition, the

Commission proposes amending the

current legend requirement to state that

hedging transactions may not be

conducted except in compliance with

the Securities Act.

Regulation S does not require, and the

Commission is not proposing, that the

legend contain specific language to

describe these restrictions. Issuers and

distributors should prepare such

legends in a form that conveys to

holders the restricted nature of the

securities and that they can only be

resold under Regulation S, pursuant to

registration under the Act, or under an

exemption. Nor is the legend

requirement intended to require that

securities sold under Category 3 be in

certificated form. Issuers whose

securities are in uncertificated form may

satisfy the legend requirement by any

means reasonably designed to put

holders and subsequent purchasers on

notice of the applicable resale

restrictions. The Commission requests

comment whether, if covered securities

are in uncertificated form, certain forms

of notice would be adequate to inform

holders and subsequent purchasers of

the resale restrictions. Should securities

covered by the Category 3 safe harbor be

required to be in certificated form? Are

there alternative means of notice that
9262 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

37Rule 903(c)(3)(iii)(B)(4) of Regulation S [17 CFR

230.903(c)(3)(iii)(B)(4)].

38Securities Act Rule 502(d)[17 CFR 230.502(d)]. 39Rule 144(d)(2) [17 CFR 230.144(d)(2)].

can be used for both certificated and

uncertificated securities?

5. Stop Transfer Instructions

The proposals would require an

issuer, by contract or a provision in its

bylaws, articles, charter or comparable

document, to refuse to register any

transfer of securities unless made in

accordance with the registration or

exemptive provisions of the Securities

Act, or in accordance with Regulation S.

This requirement would impose on

issuers a policing role similar to that

which is often imposed in connection

with unregistered private placements.

Such a role would appear appropriate

considering the abuses in this area.

Currently, the stop transfer

instruction for sales of equity securities

of domestic non-reporting issuers is

required to state that the issuer will

refuse to register any transfer of

securities ‘‘not made in accordance with

the provisions of this Regulation S.’’ 37

As with the legend requirement, the

Commission proposes amending the

current stop transfer instruction

requirement to make clear that the rule

permits transfers made in accordance

with the provisions under the Securities

Act.

6. Request for Comment on New

Requirements

Should some or all of the new

requirements, including the longer

restricted period, not be applied as

proposed to offerings of equity

securities of domestic issuers, and of

foreign issuers where the principal

market for the securities is in the United

States? If so, which ones and why? For

example, is legending equity securities

of either domestic issuers or foreign

issuers feasible in foreign markets? Are

there other alternatives available that

would achieve the same purpose? In

addition to, or in lieu of, the specific

documentation requirements of

Category 3, should issuers be subject to

an express general duty to take

reasonable steps to ensure that

purchasers do not resell the securities in

violation of the Act, similar to that

imposed by Regulation D? 38 Should

satisfaction of any or all of the current

specific documentation requirements of

Category 3 be deemed to satisfy this

express general duty?

Should the reporting status of the

issuer matter, and if so, how? Should it

matter whether those issuers also have

a trading market for their equity

securities in the United States, and if so,

in what respect? Should certain classes

of reporting issuers, such as those

eligible for Form S–3 or F–3, be

excluded from any or all of these

restrictions?

Conversely, are any or all of these

requirements so burdensome, either

alone or with the proposals to prohibit

the use of promissory notes and to

classify these securities as restricted

securities under Rule 144, that

companies would effectively be

foreclosed from relying on the

Regulation S safe harbor for offshore

offerings of equity securities? Would

any or all of these proposed changes,

either alone or with the reporting

requirement for recent sales of equity

securities under Regulation S (in the

case of reporting companies), obviate

the need for the longer restricted

period? Should the restricted period be

shorter than two years (e.g., the current

40 days, 90 days, 180 days, 270 days or

one year)? Would the classification of

these securities as restricted securities

within the meaning of Rule 144

eliminate the need for any restricted

period?

7. Elimination of Form 8–K Filing

Requirement

At the time the Commission adopted

the existing Form 8–K 15-day reporting

requirement, the Commission stated that

if it extended the restricted period for

sales of equity securities under

Regulation S, it would consider revising

the reporting requirement. As the

Commission is now proposing to

lengthen the restricted period for

Regulation S sales, the Commission has

determined to propose revising Item 701

of Regulation S–K and the relevant

forms to require issuers to report

Regulation S sales of equity securities

only on a quarterly basis as presently

required for other unregistered sales of

equity securities. Comment is requested

whether requiring only quarterly

reporting of Regulation S sales will

provide sufficiently timely disclosure if

the covered equity securities are

deemed ‘‘restricted securities’’ and thus

not subject to resales under Rule 144

until at least one year after sale. Should

the current Form 8–K filing requirement

be continued because such securities

may be resold in unlimited amounts

either offshore or in the United States

pursuant to Rule 144A (or another

exemption)?

C. Revise Category 3 To Prohibit

Payments With Promissory Notes for

Domestic Equity Securities, and Foreign

Equity Securities Where the Principal

Market for the Securities is in the United

States

In some sales purportedly made in

reliance on Regulation S, the offshore

purchaser has used a promissory note

payable after the end of the restricted

period to pay all or a portion of the

purchase price of the securities. In some

cases the notes are secured only by the

Regulation S securities; in other cases

the notes are unsecured. Some notes

provide recourse to the buyer if the note

is not repaid; others do not. The

purchasers have resold the securities

into the U.S. markets upon expiration of

the 40-day restricted period and used

the proceeds of the resale to repay the

note. Under such an arrangement, the

issuer and purchaser clearly expect a

U.S. resale to provide the funds

necessary to repay the note; in economic

substance, the issuer is raising funds

from the U.S. public markets. As noted

in the Interpretive Release, this practice

is inconsistent with an offshore

distribution.

The proposals would revise the

Category 3 safe harbor to make clear that

the safe harbor is unavailable for

transactions for equity securities of a

domestic company, and for a foreign

company where the principal market for

the securities is in the United States, in

which a purchaser delivers a promissory

note as payment for some or all of the

purchase price, or enters into an

installment purchase contract relating to

the sale. Comment is requested whether

there should be any exceptions from the

proposed prohibition to accommodate

established international offering

practices. Commenters favoring such

exceptions are asked to describe the

established practices and explain why

they would not be likely to result in

unregistered distributions of securities

in the United States. Should there be a

distinction between full and nonrecourse promissory notes?

For example, could the Commission

restrict the use of promissory notes

without completely prohibiting their

use by applying the Rule 144 standard

for tolling 39 to permit promissory notes

to be used under Regulation S as long

as the promissory note or similar

obligation or contract is by its terms

required to be discharged by payment in

full prior to resale of the securities by

the obligor and satisfies the following

conditions: the promissory note,

obligation or contract must provide for
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9263

40These conditions are similar to those found

under Rule 144 governing the computation of the

Rule 144 holding period in the context of payment

with promissory notes. See Rule 144(d)(2) [17 CFR

230.144(d)(2)].

41The Adopting Release did not provide further

guidance in this area, other than to state in a

footnote that, upon the expiration of any restricted

period, the Commission would view securities sold

under Regulation S (other than unsold allotments)

as unrestricted. Adopting Release, supra note 18, at

n.110. Since the adoption of Regulation S, the

Commission’s staff has received numerous inquiries

on whether and when securities that have been sold

under Regulation S may be freely resold in the

United States without registration under the

Securities Act. Regardless of the issuer’s

compliance with Regulation S when it sold the

securities offshore, persons who would be

considered underwriters under Section 2(11) of the

Securities Act are not permitted to make

unregistered public resales of these securities in the

United States in reliance on the Section 4(1)

exemption from registration. As the Commission

stated in the Interpretive Release, supra note 8, at

n.17:

Public resales in the United States by persons that

would be deemed underwriters under Section 2(11)

of the Securities Act [15 U.S.C. 77b(11)] would not

be permissible absent registration or an exemption

from registration. Footnote 110 of the Adopting

Release, which addresses the restricted periods,

should not be read to provide otherwise.

42They are also put on notice that resales outside

the Rule 144 safe harbor must be evaluated

independently against the statutory underwriter

concepts embodied in Section 2(11), regardless of

the issuer’s compliance with Regulation S.

full recourse against the purchaser of

the securities, and must be secured by

collateral (other than the securities

purchased) having a fair market value at

least equal to the purchase price of the

securities purchased? 40 Given that the

Commission proposes to classify these

equity securities as ‘‘restricted

securities’’ within the meaning of Rule

144, and that the holding period under

Rule 144 is tolled unless promissory

notes meet the above conditions, is it

even necessary to amend Regulation S at

all with regard to the use of promissory

notes?

The Commission understands that

some abusive Regulation S offerings

have involved non-cash payments to the

issuer other than promissory notes.

Examples include the purported sale of

equity securities under Regulation S in

exchange for services rendered or in

exchange for cancellation of a supposed

pre-existing debt owed by the issuer to

the offshore purchaser. The Commission

requests comment on whether the

Regulation S safe harbor should be

available for offshore offerings of equity

securities of domestic companies, and of

covered foreign companies, only when

cash is paid and received in the offering.

Would such a requirement restrict the

use of Regulation S for bona fide

exchange offers? Should exchange offers

be accommodated under the Regulation

S safe harbor only if the securities being

acquired have a readily ascertainable

market value or have been outstanding

for some time? Would such a

requirement unnecessarily restrict the

use of Regulation S for mergers and

other business combination

transactions?

D. Classify Domestic Equity Securities,

and Foreign Equity Securities Where the

Principal Market for the Securities is in

the United States, as ‘‘Restricted

Securities’’

Regulation S does not provide any

safe harbor protection for resales by

purchasers of securities placed offshore

under Regulation S back into the United

States. Preliminary Note 6 to Regulation

S specifically states that:

Securities acquired overseas, whether or

not pursuant to Regulation S, may be resold

in the United States only if they are

registered under the [Securities] Act or an

exemption from registration is available.

In the absence of guidance from the

Commission or the staff,41 some market

participants appear to view the

expiration of the restricted periods

under Regulation S (applicable to

issuers and other distribution

participants entitled to rely on the Rule

903 safe harbor) as providing a safe

harbor for U.S. resales by purchasers of

Regulation S securities, particularly

equity securities of domestic reporting

issuers. This view is not correct.

Instead, such purchasers must

determine whether an exemption for

resales into the United States is

available.

Because some of the abusive practices

under Regulation S have involved

activities by persons other than issuers,

distributors and their affiliates (that is,

investors who purchased in Regulation

S offerings with a view to distributing

those securities into the U.S. markets at

the end of the 40-day restricted period),

the Commission believes that it is

appropriate to clarify the legal

obligations of purchasers of securities

under Regulation S. Consequently, the

Commission is proposing new Rule 905,

and amendments to Rule 144(a)(3), to

classify equity securities of domestic

issuers (both reporting and nonreporting) placed offshore under

Regulation S as ‘‘restricted securities’’

within the meaning of Rule 144. The

Commission is also proposing to so

classify as ‘‘restricted securities’’ equity

securities of foreign issuers (both

reporting and non-reporting) where the

principal market is in the United States.

While the Commission is not aware of

widespread abuses involving these

foreign issuers, the potential for abuse

does exist since these securities are

more likely to be resold into their

principal market.

By expressly defining these

Regulation S securities as falling within

the definition of ‘‘restricted securities’’

under the Rule 144 resale safe harbor,

purchasers of those securities are

provided with clear guidance regarding

when and how those securities may be

resold in the United States without

registration under the Securities Act.42

Given the concurrent adoption of

shortened holding periods under Rule

144, the Commission believes that it is

appropriate to harmonize the resale

restrictions for all securities sold

without the benefit of registration with

the Commission. For purposes of resale

prohibitions, an unregistered sale

offshore would be treated no differently

than a private sale domestically; the

burdens and benefits would be

equalized. Nevertheless, are there

reasons why securities sold offshore

should be treated differently? Instead of

applying the Rule 144 holding period,

should a shorter holding period apply

(for example, one year or six months)?

To further integrate the requirements in

this area, should the Commission craft

a single regulation that would contain

both the requirements applicable to

offshore and to domestic unregistered

offerings (for example, combine

Regulation S and Regulation D)?

Currently, equity securities offered

and sold to non-U.S. resident employees

of the issuer through an employee

benefit plan governed by non-U.S. law

are Category 1 transactions and thus are

not subject to a 40-day restricted period

regardless of the domicile of the issuer

or U.S. market interest in its securities.

Under proposed Rule 905, however,

those equity securities when issued by

domestic or covered foreign issuers

would be restricted within the meaning

of Rule 144. Comment is requested

whether this type of equity security

should be excluded from the ‘‘restricted

security’’ classification. If so,

commenters are requested to address

why, if such securities were not deemed

restricted, problematic practices would

not develop with respect to such plans

and securities.

E. Application of Proposed Changes

1. Foreign Companies Where the

Principal Market for the Securities is in

the United States

Although abusive practices under

Regulation S have not been as evident

in offerings by foreign issuers, the

Commission is concerned that the

economic incentives for indirect

distributions and resales into the United

States are the same for equity offerings
9264 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

43Securities Act Release No. 7375 (Dec. 20, 1996)

[62 FR 520 (Jan. 3, 1997)].

44 17 CFR 230.405. Under the proposed changes,

non-participating preferred stock and asset-backed

securities would continue to be treated in the same

manner as debt securities for purposes of the

Regulation S safe harbors and the restricted security

classification. See Rule 903(c)(4) [17 CFR

230.903(c)(4)], proposed to be redesignated as Rule

902(a).

45See ‘‘Pirates’ Play?’’, supra note 21.

46The Commission has imposed similar standards

under the Rule 144A resale safe harbor. See Rule

144A(d)(3)(i) [17 CFR 230.144A(d)(3)(i)]. See also

Securities Act Release No. 6862 (Apr. 23, 1990) at

nn.25 and 26 for a discussion of how the conversion

or exercise premium is determined for purposes of

Rule 144A. Comment is requested whether the same

methods of calculations should apply under any

proposed changes to Regulation S.

of both domestic companies, and foreign

companies where the principal market

for the securities is in the United States

(that is, the majority of the trading

occurs here). Therefore, the proposed

Regulation S changes would treat both

similarly for each requirement.

Nonetheless, is there an appropriate

basis to distinguish between the two for

any or all of the conditions of the

proposed amendments to the safe

harbors, including the ‘‘restricted

securities’’ classification?

As noted above, the Commission

proposes defining ‘‘principal market in

the United States’’ for a security as

when more than 50 percent of all

trading in such class of securities took

place in, on or through the facilities of

securities exchanges and inter-dealer

quotation systems in the United States

in the shorter of the issuer’s prior fiscal

year or the period since the issuer’s

incorporation. Should the percentage be

greater than 50 percent (for example,

75%) or lower (for example, 10%, 25%

or 35%), so long as the United States is

the largest market? Should it matter for

purposes of this definition where the

security is traded (for example, New

York Stock Exchange, American Stock

Exchange, Nasdaq-NMS, any of the

regional exchanges, the OTC Bulletin

Board, the ‘‘pink sheets,’’ or any private

trading system such as Instinet) and

whether such market is relatively liquid

or active? Commenters should explain

the reasons for any distinctions between

or among trading markets or

mechanisms for trading.

Other possible alternatives under

consideration include applying the

restrictions to (i) all foreign issuers, (ii)

only foreign reporting issuers, (iii) only

foreign reporting issuers with a

‘‘substantial U.S. market interest’’ (as

currently defined in Regulation S) in the

class of equity securities to be offered

offshore; or (iv) only foreign reporting

issuers whose only equity market is in

the United States. Should a different test

other than trading market be used, such

as percentage (e.g., 10%, 25% or 50%)

of U.S. resident ownership of the

company’s outstanding equity

securities? Should the Commission use

similar percentage thresholds based on

an ‘‘Average Daily Trading Volume’’

test, like that recently adopted in

Regulation M 43 for purposes of defining

‘‘principal market in the United States?’’

If so, what percentage (10%, 25% or

50% of U.S. Average Daily Trading

Volume as compared to total worldwide

Average Daily Trading Volume), and

what measurement period (three, six or

12 months, or some other period)

should be used?

2. Equity Securities

As proposed, the procedures and

restrictions under Category 3 and the

‘‘restricted securities’’ classification

would apply only to offerings of equity

securities. Rule 405 of Regulation C

under the Securities Act defines the

term ‘‘equity security’’ to include stock,

securities convertible or exchangeable

into stock, warrants, options, rights to

purchase stock, and other types of

equity related securities.44 The

Commission does not propose to apply

the new restrictions to offerings of debt

securities, since the nature of the

trading markets for debt securities

appear not to have facilitated abusive

practices that result in a distribution of

these securities into U.S. markets.

Comment is requested concerning

whether any or all of the restrictions

proposed for equity securities also

should be applied to offerings of debt

securities, and if so, whether such

applicability should depend on the

status of the issuer (for example,

whether the issuer is foreign or

domestic, reporting or non-reporting,

Form S–3 or F–3 eligible)? Should it

matter whether there is a trading market

for any security (whether debt or equity)

of the issuer in the United States, and

if so, what security is traded? Are there

circumstances where any such debt

offering would be likely to result in an

unregistered U.S. distribution? If the

restrictions cover offerings of debt

securities, should they be limited to

certain types of debt securities, such as

debt securities where the amount due is

tied to the price of the issuer’s common

equity securities, or debt securities that

are listed for trading on a U.S. securities

exchange?

The Commission is aware that many

Regulation S abuses have involved the

use of convertible or exchangeable

securities or warrants.45 Many

companies, however, legitimately offer

under Regulation S either convertible or

exchangeable debt securities, or

warrants for common stock as a unit

with other securities, to lower their

costs of capital. Comment is requested

as to whether all convertible or

exchangeable securities or warrants of

domestic issuers, and of foreign issuers

where the principal market for the

underlying equity securities is in the

United States, should be subject to the

proposed Category 3 restrictions and the

‘‘restricted securities’’ classification, as

proposed. Are there certain types of

convertible or exchangeable securities

or warrants where there is minimal

likelihood that such offerings will result

in an unregistered U.S. distribution of

either the convertible or exchangeable

securities or warrants, or the equity

securities underlying the convertible or

exchangeable securities or warrants,

and, therefore, the proposed restrictions

may not be necessary?

Should it matter if the convertible or

exchangeable debt security is not

convertible or exchangeable for some

period of time after the offering (for

example, six months, one year, two

years, three years)? Should they be

excluded if, at the time of issuance, the

securities had an effective conversion or

exercise premium over a specified

amount (for example, five percent, 10

percent, 20 percent, or more)? 46 If a

specified conversion or exercise

premium approach is used, should it

matter whether such conversion or

exercise rate is allowed to float in

relation to the market price of the

underlying security, or is set at some

future point in time based upon a

formula known when the security was

issued? Does it matter whether the

issuer of the convertible or

exchangeable security or warrant, or the

issuer of the underlying equity security,

is a reporting company, and if so, how?

Although many of the larger

capitalization domestic companies issue

convertible securities and warrants

under Regulation S, does the Form S–

3 eligibility of these companies render

any carve out for their securities

unnecessary? Commenters are asked to

provide information on the likelihood

that convertible or exchangeable

securities or warrants containing

particular conversion, exchange or

exercise terms will be sold offshore

under Regulation S under circumstances

that are not likely to result in an

unregistered distribution of equity

securities in the United States.
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9265

47The Commission’s view as expressed in the

Interpretive Release, however, remains applicable:

neither the general statement under Rule 901 nor

the safe harbors are intended to cover offshore

offerings of such securities where the fees or

discounts indicate that the transaction was

intended to create a parking scheme or other

scheme where the securities were merely being held

offshore temporarily to evade the registration

requirements of the Securities Act.

48This interpretation clarifies and supercedes the

Commission’s previous interpretation regarding

‘‘prearranged’’ repurchases of restricted securities

set forth in the Interpretive Release, supra note 8.

F. Other Possible Restrictions

1. Hedging

As discussed in the companion

proposing release for Rule 144, the

Commission is concerned that some

hedging activity may undermine the

safeguards against indirect distributions

provided by Regulation S and Rule 144.

If a purchaser shifts the economic risk

of a transaction through short sales,

swaps, or derivative securities

transactions, for example, the

Commission is concerned that the

purchaser may not have a bona fide

investment intent. This is especially

true in the Regulation S area, where the

Commission looks for indicia that a

transaction is truly ‘‘offshore.’’

In the Interpretive Release, the

Commission warned that a transaction

may not be viewed as offshore if there

is evidence that a substantial portion of

the economic risk is left in or returned

to the U.S. market during the restricted

period. Based on discussions with

market participants, there is reason to

believe that hedging during the

Regulation S restricted periods is still

occurring.

The Commission is addressing this

concern in two ways. First, the

proposed changes include purchaser

and distributor agreements and legends

warning against inappropriate hedging,

as discussed above. Second, by treating

equity securities purchased from

domestic and covered foreign

companies as ‘‘restricted’’ for purposes

of resale, the Commission is imposing

the holding period requirement of Rule

144. Maintaining a hedge for one or two

years, as opposed to 40 days, is more

costly and may be impossible for many

of the illiquid securities sold in abusive

cases.

The companion proposing release for

Rule 144 does not specifically prohibit

hedging during the holding period, but

asks a series of questions designed to

determine whether certain types of

hedging are inconsistent with the spirit

of Rule 144. Should the Commission go

beyond its Rule 144 approach and

simply preclude any or all hedging

activity during the Regulation S

restricted period? Should it matter

whether the hedging occurs offshore?

Should specific hedging provisions

apply to equity securities only? Should

the size of the issuer be determinative

(for example, permit more hedging with

issuers eligible to file Form S–3 or F–

3)? As with convertible securities,

should it matter whether a derivative

security is ‘‘out of the money’’ by a

specified amount? Should there be a cap

on the amount that could be hedged

within the safe harbor? For example,

should all or some hedging be permitted

as long as the purchaser retains a

majority or a substantial amount of

economic risk?

2. Discounts

As evidenced by the offering practices

described in the Interpretive Release,

securities sold offshore at a discount

from the U.S. market price are likely to

be resold in the United States at the

earliest possible date in order for the

purchaser to realize a profit. In the

Interpretive Release, the Commission

requested comment as to whether it

should limit the use of the safe harbor

under Regulation S for offerings of

common stock of domestic issuers to

those sold at the market price or with a

specified minimal discount.

The Commission is not proposing to

amend Regulation S to require that sales

of equity securities of reporting

companies under Regulation S be made

at a specified minimum price or to

otherwise impose requirements or

restrictions that are tied to the offering

price of securities.47 Although many of

the abusive practices under Regulation

S appear to involve significant

discounts, the Commission believes

there are other means to curtail such

practices without mandating that safe

harbor sales take place at a specific

price or within a range of prices.

The Commission again requests

comment on whether certain discounted

offers (particularly by domestic

reporting companies) should be

excluded from the Regulation S safe

harbor. Commenters addressing whether

discounted sales should be accorded

different treatment also should address

how such discount should be measured

(especially in the case of illiquid

securities that trade infrequently, and

convertible and exchangeable securities

where other factors (such as interest rate

and maturity) will affect the offering

price of a security) and at what level of

discount, if any, such different

treatment should apply.

IV. Offshore Resales of Restricted and

Affiliate Securities

The Commission is concerned that the

more stringent requirements proposed

for offshore offerings could lead to the

development of abusive practices under

the Rule 904 offshore resale safe harbor.

Such practices could involve the private

placement of equity securities in the

United States by an issuer, the resale of

those securities to a foreign purchaser

under Rule 904, and the attempted

resale of those securities back into the

U.S. public markets without apparent

restrictions. Without express guidance

from the Commission, these holders of

restricted equity securities (whether

obtained under Regulation S, Regulation

D, Rule 144A, or any other exemption

from registration pursuant to which

restricted status is designated) could

mistakenly believe that a resale of

securities to a foreign purchaser under

Rule 904 results in such securities no

longer being restricted securities.

In the Interpretive Release, the

Commission stated that the offshore

resale safe harbor under Rule 904

cannot be used for ‘‘washing off’’ resale

restrictions, such as the holding period

requirement for restricted securities in

Rule 144. The Commission is proposing

in new Rule 905 to make explicit that

when restricted equity securities of any

domestic issuer, or of a foreign issuer

where the principal market for the

equity securities is in the United States,

are resold offshore under Regulation S,

such securities will retain their status as

restricted securities after the resale.

Thus, subsequent resales of these

securities by the offshore purchaser

back into the United States may only

take place pursuant to registration under

the Securities Act, or a Securities Act

exemption (for example, resales in

accordance with the provisions of either

Rule 144A or Rule 144).

Proposed Rule 905 would codify the

Commission’s view that resale

restrictions applicable to equity

securities of domestic issuers and

foreign issuers where the principal

market for the equity securities is in the

United States will follow the securities

in the hands of each subsequent

transferee. Any purchaser of such

restricted securities (including the

initial sellers of such restricted

securities who replace them with a

repurchase of the same or fungible

restricted securities) would be

considered to have restricted securities.

On the other hand, sellers of such

restricted securities who replace them

with a repurchase of fungible but

unrestricted securities would not be

considered to have restricted

securities.48

Comment is requested on whether the

proposed rule, either alone or with the
9266 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

49See Rule 902(a) of Regulation S [17 CFR

230.902(a)] for the definition of ‘‘designated

offshore securities market.’’

50 If these affiliates sell the securities offshore in

compliance with the appropriate provisions

applicable to affiliate or restricted shares under

Rule 144, then those securities will be unrestricted

in the hands of the offshore purchaser. In

calculating the amount of securities that have been

resold pursuant to Rule 144 for the purposes of the

volume limitations of Rule 144(e), the staff has

taken the position that restricted securities resold

offshore pursuant to Regulation S need not be

included—similar to the treatment of other nonRule 144 exempt resales, such as those made

pursuant to Rule 144A. The Commission is

proposing an amendment to Rule 144(e)(vii) to

codify that position. 51 15 U.S.C. 78w(a).

Commission’s other proposed and

recently adopted initiatives, is sufficient

to deter the improper use of the Rule

904 safe harbor. Should other types of

restricted securities (such as debt

securities) also expressly be considered

restricted securities after a Regulation S

resale, and if so, which ones? Should

the applicability depend on the status of

the issuer (for example, whether the

issuer is foreign or domestic, reporting

or non-reporting, Form S–3 or F–3

eligible)? Should it matter the extent to

which there is a trading market for the

security in the United States, and if so,

how?

Should the proposed preservation of

resale restrictions apply to resales of

equity securities of (i) all foreign issuers,

(ii) only foreign reporting issuers, (iii)

only foreign reporting issuers with a

‘‘substantial U.S. market interest’’ (as

currently defined in Regulation S) in the

class of equity securities to be resold

offshore; or (iv) only foreign reporting

issuers whose only equity market is in

the United States? Should some

restricted equity securities of domestic

or foreign issuers be excluded from this

aspect of proposed Rule 905, such as

certain types of convertible or

exchangeable securities or warrants, and

if so, which ones?

When restricted securities proposed

to be covered by the new rule are resold

under Rule 904 on a ‘‘designated

offshore securities market’’ as defined

under Regulation S, 49 is it practical for

such securities to be identified to the

subsequent purchaser as restricted

securities under the U.S. federal

securities laws (whether through

legending or otherwise)? Commenters

are requested to address the practical

effect of offshore hedging activity

involving these securities as well.

Any officer or director of the issuer

who is an affiliate solely by virtue of

holding such position may sell

unrestricted securities offshore pursuant

to Rule 904 without those securities

becoming restricted securities, even if

the sales exceed the volume limitations

of Rule 144(e) (offshore resales of

restricted securities pursuant to

Regulation S are not subject to the

volume limitations of Rule 144(e)). Any

other affiliates, however, who decide to

sell securities offshore are required to

conduct such offerings under either

Rule 901 or Rule 903, not Rule 904.

Thus, if the securities to be sold are

restricted or unrestricted equity

securities of a domestic issuer, or of a

covered foreign issuer, such securities

will be considered restricted securities

in the hands of any offshore purchaser,

and may not be resold into the United

States absent registration or a valid

exemption. 50 Comment is requested

whether this disparate treatment of

different types of affiliates is

appropriate. Should all unrestricted

affiliate shares sold offshore be deemed

restricted unless the offshore sales

comply with Rule 144?

Alternatively, should the Rule 904

offshore resale safe harbor simply be

made unavailable for restricted equity

securities of domestic issuers and

covered foreign issuers? Should the

Commission make the Rule 904 safe

harbor unavailable for all equity

securities sold by any affiliate of the

issuer? If the Rule 904 offshore resale

safe harbor is not available, these

securities would be able to be resold

offshore under the general statement of

Rule 901, but no safe harbor provisions

under Regulation S would apply to such

resale.

Proposed Rule 905 does not apply to

other types of securities, such as debt

securities of domestic issuers and equity

securities of foreign issuers where the

principal market for the equity

securities is not in the United States.

The Commission requests comment as

to whether Rule 905 should apply to

debt securities of domestic issuers,

equity securities of foreign issuers

where the principal market for the

equity securities is not in the United

States, or other types of securities or

other types of issuers. Does the nature

of offshore trading markets in various

types of securities make it impracticable

for such securities to remain restricted

in the hands of offshore purchasers? Is

there less need for concern in this area

inasmuch as the likelihood of an

unregistered distribution of such

securities in the United States is

diminished? Comment is requested on

current practices in this area and the

need for Commission guidance.

V. Technical and Clarifying Revisions

The Commission proposes mainly

non-substantive technical and clarifying

revisions to Regulation S to make the

rule more concise and understandable.

The principal changes include:

• Revising the captions of the three

sections of the Rule 903 issuer safe

harbor to refer to them as commonly

known: ‘‘Category 1,’’ ‘‘Category 2’’ and

‘‘Category 3’’;

• Revising the Rule 903 issuer safe

harbors to state clearly for each category

what procedures are to be followed and

what securities are eligible for each

category;

• Combining some definitions within

Rule 902, the definition section of

Regulation S, or moving certain

definitions to the Rule 903 safe harbor

to make the rule easier to read and

understand;

• If the same terms are already

defined elsewhere in the Commission’s

rules and regulations, deleting those

definitions from Rule 902 and adding

cross references to the definitions

contained elsewhere; and

• Generally editing the language in

the rule to make it more understandable.

Comment is requested on each of the

proposed changes. Are there any other

clarifying or technical changes that the

Commission could make to Regulation S

to make the rule more readable and

understandable?

VI. Request for Comments

Any interested persons wishing to

submit written comments on the

proposed revisions are requested to do

so by submitting them in triplicate to

Jonathan G. Katz, Secretary, U.S.

Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C.

20549. Comment letters also may be

submitted electronically to the

following electronic mail address: rulecomments@sec.gov. Comments are

requested on the impact of the proposals

on issuers, investors, and others.

Comments should specifically address

any possible effects on investor

protection, capital formation or market

efficiency resulting from the proposals.

The Commission also requests comment

on whether the proposed rules, if

adopted, would have an adverse impact

on competition that is neither necessary

nor appropriate in furthering the

purposes of the Exchange Act.

Comments will be considered by the

Commission in complying with its

responsibilities under Section 23(a) 51 of

the Exchange Act. Comment letters

should refer to File No. S7–8–97; this

file number should be included in the

subject line if electronic mail is used.

All comment letters received will be

available for public inspection and

copying in the Commission’s Public
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9267

52They are also put on notice that resales outside

the Rule 144 safe harbor must be evaluated

independently against the statutory underwriter

concepts embodied in Section 2(11), regardless of

the issuer’s compliance with Regulation S. 53 5 U.S.C. 603.

Reference Room, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Electronically

submitted comment letters will be

posted on the Commission’s Internet

Web site (http://www.sec.gov).

VII. Cost-Benefit Analysis

To assist the Commission in its

evaluation of the costs and benefits that

may result from the proposals,

commenters are requested to provide

views and empirical data relating to any

costs and benefits associated with these

proposals. The proposed amendments to

Regulation S would impose restrictions

on purchasers of equity securities of

domestic issuers, and of foreign issuers

where the principal market for the

securities is in the United States. For

example, issuers could not accept

promissory notes as payment for the

securities, and purchasers may have to

wait a longer period of time before they

could publicly resell the securities into

the United States. Also, the new

requirement that purchasers of certain

types of equity securities sold under

Regulation S provide certification of

compliance with the Securities Act may

impose additional recordkeeping

burdens on issuers attempting to

maintain records of such compliance.

These restrictions may make it more

difficult or costly for some issuers to

raise funds through the sales of equity

securities. At the same time, the

Commission believes that such

restrictions are necessary to deter

abusive practices that may have

defrauded investors of millions of

dollars. The Commission believes that

deterring abusive market practices will

protect investors and, in the long run,

promote capital formation and efficient,

competitive markets.

The proposed amendments to Item

701 of Regulation S–K, Item 701 of

Regulation S–B and Forms 8–K, 10–Q,

10–QSB, 10–K and 10–KSB relax the

existing requirements to report

unregistered sales of equity securities.

As such, the Commission believes that

these amendments would decrease

reporting, recordkeeping and

compliance burdens, while, at the same

time, continuing to provide investors

with sufficient information regarding

changes in outstanding securities of

public companies.

The Commission invites commenters

to submit empirical data that will help

it assess the costs and benefits of its

proposals. The Commission also

encourages commenters to suggest

alternative ways of deterring the abusive

practices cited in this release. It would

be most helpful if commenters would

state the reasons that a proposed

alternative is preferable to the

Commission’s proposals and why the

proposed alternative is more costeffective. If possible, commenters

should submit data that support their

views.

Despite the possible increase in cost

to issuers resulting from proposed new

requirements such as purchaser

certifications and purchaser and

distributor agreements, the Commission

does not believe that the proposed

amendments would result in a major

increase in costs or prices for investors,

issuers, individual industries or

consumers. The Commission believes

that the proposed amendments relaxing

the existing requirements to report

unregistered sales of equity securities

would serve to reduce issuer costs.

Likewise, the Commission does not

believe that the proposed amendments

would have an adverse effect on

competition, employment, investment,

productivity, innovation, market

efficiency, or capital formation. In fact,

the Commission believes that the

proposed amendments will promote

capital formation and efficient,

competitive markets by enhancing

investors’ confidence in the integrity of

the securities markets. However, the

Commission requests comment on these

preliminary views. The Commission

encourages commenters to provide

empirical data or other facts to support

their views.

Because some of the abusive practices

under Regulation S have involved

activities by persons other than issuers,

distributors and their affiliates (that is,

investors who purchased in Regulation

S offerings with a view to distributing

those securities into the U.S. markets at

the end of the 40-day restricted period),

the Commission believes that it is

appropriate to clarify the legal

obligations of purchasers of securities

under Regulation S. By expressly

defining these Regulation S securities as

falling within the definition of

‘‘restricted securities’’ under the Rule

144 resale safe harbor, purchasers of

those securities are provided with clear

guidance regarding when and how those

securities may be resold in the United

States without violating the registration

requirements of the Securities Act.52

Given the concurrent adoption of

shortened holding periods under Rule

144, as well as the ability of some

purchasers in Regulation S placements

to demand registration rights, the

Commission does not believe that this

classification will be unduly

burdensome for purchasers in those

offerings. To the extent that a purchaser

chooses to resell the securities under the

Rule 144 safe harbor, the Commission

also does not believe that the

requirement to file a Form 144 under

certain circumstances will be unduly

burdensome, particularly in light of the

benefit of obtaining safe harbor

protection for the resale.

The proposed amendments to

Regulation S could reduce the annual

amount of unregistered equity securities

initially sold by issuers and the annual

amount resold by the initial purchasers

of those securities. The Commission

requests comments on the likelihood of

these effects and their size in terms of

annual dollar amounts. In particular, are

the proposed amendments likely to have

a $100,000,000 or larger annual effect on

the securities markets or the economy?

If possible, commenters should provide

empirical data or other facts to support

their views.

VIII. Summary of Initial Regulatory

Flexibility Analysis

The Commission has prepared an

Initial Regulatory Flexibility Analysis

(‘‘IRFA’’), pursuant to the requirements

of the Regulatory Flexibility Act,53

regarding the proposals. The proposed

amendments to Regulation S are

intended to stop abusive practices under

Regulation S where issuers with a

market for their securities in the United

States conduct offshore placements of

their securities pursuant to Regulation S

that are in essence indirect distributions

of these securities into the U.S. markets

without the protections of registration

under the Securities Act. Over the last

several months, the Commission staff

has met with numerous participants in

the market for Regulation S securities.

Based on the anecdotal information

obtained through these discussions, it

appears that many small businesses

currently use Regulation S with respect

to equity sales. However, there appears

to be no significant alternative to the

current proposals that would impose

less burdens on small entities, yet

forestall further abuse under Regulation

S.

The proposed amendments to Item

701 of Regulation S–K, Item 701 of

Regulation S–B and Forms 8–K, 10–Q,

10–QSB, 10–K and 10–KSB would relax

the existing requirements to report

unregistered sales of equity securities.

These amendments would decrease

reporting, recordkeeping and

compliance burdens, while, at the same

time, continuing to provide investors

with sufficient information regarding
9268 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

54See notes 21 and 22 and accompanying text,

supra, for a discussion of the abusive transactions.

55 17 CFR 230.157.

56 17 CFR 240.0–10.

57Since November 18, 1996, sales of equity

securities by domestic issuers under Regulation S

are required to be reported on Form 8–K within 15

days of occurrence. This reporting requirement does

not apply to any issuer who is not subject to the

periodic reporting requirements under the

Exchange Act, and in general does not apply to

foreign issuers. See Exchange Act Release No.

37801, supra note 26.

changes in outstanding securities of

public companies.

There are new reporting,

recordkeeping or other compliance

requirements proposed as part of the

proposed Regulation S rules. The

Commission proposes to lengthen the

restricted period during which persons

relying on the Regulation S safe harbor

may not publicly resell these equity

securities (absent registration) to U.S.

persons from 40 days or one year to two

years. In addition, since covered equity

securities placed offshore pursuant to

Regulation S would be classified as

‘‘restricted securities’’ within the

meaning of Rule 144, purchasers of

these securities may choose to resell

under the Rule 144 safe harbor, and

therefore would be required to comply

with the conditions of that safe harbor,

including the Rule 144 holding periods.

These proposals may reduce incentives

to conduct equity placements under

Regulation S due to a perceived

reduction in the liquidity of the

securities absent registration under the

Securities Act or a valid exemption.

The Regulation S proposals also

would impose on reporting issuers

certification, legending and other

requirements currently only applicable

to sales of equity securities by nonreporting issuers. The purpose of these

requirements is to assure that the

participants in the distribution and the

purchasers are aware of the restricted

nature of these securities. These

proposals would expand the current

purchaser and distributor agreement

requirements to require that they agree

not to engage in hedging transactions

with regard to such securities unless the

transactions are in compliance with the

Securities Act, and would make sure

that participants in the offering are

aware of and comply with these

restrictions. In addition, promissory

notes would be prohibited for use as

payment for these securities. These last

two proposals are intended to address

abusive transactions involving hedging

transactions and the use of promissory

notes that from a practical perspective

result in indirect distributions of

securities into the U.S. markets without

the protections of registration.54

Although these additional purchaser

requirements could increase

recordkeeping and compliance burdens,

in almost all instances, purchasers of

securities sold pursuant to Regulation S

would be non-U.S. persons. Any such

additional purchaser requirements

could have an indirect impact on U.S.

small businesses.

Lastly, the Regulation S proposals

would make clear that offshore resales

under Rule 904 of equity securities of

these issuers that are ‘‘restricted

securities,’’ as defined in Rule 144, will

not affect the restricted status of those

securities. Consequently, holders of

restricted securities could not attempt to

remove the restrictions by selling the

securities offshore.

All of these requirements are imposed

on domestic issuers, and foreign issuers

with the principal market for the equity

securities in the United States,

regardless of size. As proposed, small

businesses would be able to obtain the

protections of the proposed safe harbors

on the same basis as larger companies.

The Commission considered yet rejected

alternatives applicable to small

businesses, as the Commission believes

that distinctions between companies

based on size would negate the

beneficial effects of the proposed

safeguards. The Commission seeks

comment on these views. Commenters

are encouraged to suggest alternatives

that would be appropriate and

beneficial to small businesses, and data

to support any alternative approach.

The IRFA notes that the proposed

amendments to Regulation S, if adopted,

would affect persons that are small

entities, as defined by the Commission’s

rules. The term ‘‘small business,’’ as

used in reference to a registrant for

purposes of the Regulatory Flexibility

Act, is defined by Rule 157 55 under the

Securities Act as an issuer that, on the

last day of its most recent fiscal year,

had total assets of $5 million or less and

is engaged or proposing to engage in

small business financing. An issuer is

considered to be engaged in small

business financing if it is conducting or

proposes to conduct an offering of

securities which does not exceed the $5

million dollar limitation prescribed by

Section 3(b) of the Securities Act. When

used with reference to an issuer other

than an investment company, the term

also is defined in Rule 0–10 56 of the

Exchange Act as an issuer that, on the

last day of its most recent fiscal year,

had total assets of $5 million or less.

When used with respect to an

investment company, the term is

defined under Rule 0–10 as an

investment company with net assets of

$50 million or less as of the end of its

most recent fiscal year.

Small entities meeting these

definitions would be able to rely on the

Regulation S safe harbors on the same

basis as larger entities. The Commission

is aware of approximately 1,019

Exchange Act reporting companies that

currently satisfy the definition of ‘‘small

business’’ under Rule 0–10. There is no

reliable way of determining, however,

how many non-reporting companies

would be subject to the rule or how

many small businesses may become

subject to Commission registration and

reporting obligations in the future. The

Commission solicits comments

regarding how to estimate the number of

non-reporting issuers that may be

affected by the proposed changes,

together with data or assumptions to

support such an approach.

The Commission estimates that over

500 Exchange Act reporting companies

conduct over 750 sales pursuant to

Regulation S per year and therefore

would be affected by the proposals. The

Commission further estimates that up to

160 of such reporting companies would

meet the Regulatory Flexibility Act

definition of small businesses. The total

number of companies conducting

Regulation S sales—including

companies that are not Exchange Act

reporting companies—undoubtedly

would exceed the above numbers.

Because no data are available as to nonreporting companies’ sales due to the

absence of any filings with the

Commission regarding such sales, the

exact number is impossible to

determine. It is important to note that

the Commission only recently began

receiving data from reporting issuers

regarding their placements of equity

securities pursuant to Regulation S,57

and therefore, does not have long-term

data that would assist it in determining

how many small businesses may

actually rely on the Regulation S safe

harbors, or may otherwise be impacted

by the rule proposals. The Commission

solicits comments regarding how to

estimate the number of small businesses

that may be affected by the proposed

changes together with data or

assumptions to support such an

approach.

The proposed changes to Item 701 of

Regulation S–B and Forms 8–K, 10–QSB

and 10–KSB also would affect persons

that are small businesses, as defined by

the Commission’s rules. The

Commission expects, however, that the

proposed changes would decrease
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9269

58 44 U.S.C. 3501 et seq.

59This reporting requirement does not apply to

any issuer who is not subject to the periodic

reporting requirements under the Exchange Act,

and in general does not apply to foreign issuers. See

Exchange Act Release No. 37801, supra note 26.

reporting, recordkeeping and

compliance burdens. The Commission

estimates that up to 160 reporting

companies qualifying as small

businesses would be relieved of the

burden of filing up to 300 additional

Forms 8–K per year, thereby reducing

the total annual record keeping burden

by 1,500 hours. The analysis also

indicates that there are no current

federal rules that duplicate, overlap or

conflict with the revised disclosure

provisions.

While the Regulation S proposals may

affect the ability of some small entities

to access offshore capital, these

restrictions should be sufficient to end

the abusive practices under Regulation

S, and forestall any further abuse, while

not foreclosing the offshore market

entirely for unregistered offshore

offerings of equity securities. In

addition, the concurrent adoption of

shortened holding periods under Rule

144, coupled with the proposal to allow

delayed pricing by smaller issuers in

registered offerings, should help offset

any adverse effect on small entities. No

alternatives to the proposed rules

consistent with their objectives and the

Commission’s statutory authority were

found.

Comments are encouraged on any

aspect of this analysis. A copy of the

analysis may be obtained by contacting

Walter G. Van Dorn, Jr., Office of

International Corporate Finance,

Division of Corporation Finance, Mail

Stop 3–9, 450 Fifth Street, N.W.,

Washington, D.C. 20549.

IX. Paperwork Reduction Act

The staff has consulted with the

Office of Management and Budget (the

‘‘OMB’’) and has submitted the

proposals for review in accordance with

the Paperwork Reduction Act of 1995

(the ‘‘Act’’). 58 Under the proposed

amendments to Regulation S, if adopted,

equity securities of domestic issuers,

and of foreign issuers where the

principal market for the equity

securities is in the United States, that

are issued offshore pursuant to

Regulation S would be deemed

‘‘restricted securities’’ as defined in

Rule 144 under the Securities Act.

Consequently, purchasers of these

securities in the offshore placement, and

any subsequent purchasers, may choose

to resell these securities into the U.S.

markets pursuant to the conditions of

the Rule 144 safe harbor for resales of

restricted securities. Such conditions

may include filing with the Commission

a notice of proposed sale on Form 144,

containing information about the issuer

of the securities, the seller, the

securities to be sold and the proposed

manner of sale.

Prior to November 18, 1996, issuers of

equity securities under Regulation S

were not explicitly required to disclose

such issuances in Commission filings.

Since then, domestic reporting issuers

of equity securities under Regulation S

are required to file a Current Report on

Form 8–K within 15 days of

occurrence. 59 The Commission

estimates that approximately 500

domestic issuers reporting under the

Exchange Act conduct approximately

750 offshore offerings of equity

securities pursuant to Regulation S each

year. The Commission is not able to

estimate the number of Regulation S

sales by non-reporting companies.

Assuming an average of two purchasers

in each of these sales, and assuming that

approximately one-half of such

purchasers will choose to resell the

securities under Rule 144, the

Commission estimates approximately

750 additional filings on Form 144 on

a yearly basis. Based on past

Commission experience with Form 144

filings, the Commission estimates the

total annual reporting and

recordkeeping burden that will result

from the collection of information to be

two hours per respondent, and 1,500

hours in the aggregate on a yearly basis.

Under the proposed amendments to

Item 701 of Regulation S–K, Item 701 of

Regulation S–B and Forms 8–K, 10–Q,

10–QSB, 10–K and 10–KSB, if adopted,

the existing requirements to report

unregistered sales of equity securities

would be relaxed by delaying when the

unregistered sale would have to be

reported. Thus, the Commission

believes that the proposed amendments

would decrease reporting,

recordkeeping and compliance burdens.

In addition, the proposed changes

include the requirement that purchasers

of certain types of equity securities sold

under Regulation S certify that they are

not U.S. persons and are not acquiring

the securities for the account or benefit

of a U.S. person, or that they are U.S.

persons who purchased securities in a

transaction that did not require

registration under the Securities Act.

This certification requirement also

could result in a corresponding increase

in recordkeeping burden on the part of

issuers attempting to keep records of

such certifications. The amendments

also require distributors and certain

purchasers of Regulation S equity

securities to enter into agreements not to

engage in hedging transactions with

regard to those securities unless such

transactions are in compliance with the

Securities Act. This requirement too

could result in an increase in

recordkeeping burden on the part of

issuers or distributors attempting to

keep records of these purchase

agreements. Additionally, the proposals

would necessitate revised stop transfer

instructions that would require an

issuer, by contract or a provision in its

bylaws, articles, charter or comparable

document, to refuse to register any

transfer of securities unless made in

accordance with the registration or

exemptive provisions of the Securities

Act, or in accordance with Regulation S.

The creation and safekeeping of the

necessary documentation for such stop

transfer instructions would increase

issuers’ recordkeeping and compliance

burdens.

The Commission solicits comment on

(i) whether the proposed changes in

collection of information are necessary,

(ii) the accuracy of the Commission’s

estimate of the burden of the proposed

changes to the collection of information,

(iii) the quality, utility and clarity of the

information to be collected, and (iv)

whether the burden of collection of

information on those who are to

respond, including through the use of

automated collection techniques or

other forms of information technology,

may be minimized.

Persons desiring to submit comments

on the collection of information

requirements should direct them to the

Office of Management and Budget,

Attention: Desk Officer for the

Securities and Exchange Commission,

Office of Information and Regulatory

Affairs, Washington, D.C. 20503, and

should also send a copy of their

comments to Jonathan G. Katz,

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549, with reference

to File No. S7–8–97. The OMB is

required to make a decision concerning

the collection of information between 30

and 60 days after publication, so a

comment to OMB is best assured of

having its full effect if OMB receives it

within 30 days of publication.

X. Statutory Bases

The amendments to Regulation S are

being proposed pursuant to Sections 5

and 19 of the Securities Act, as

amended, and the amendments to Rule

144 are being proposed pursuant to

sections 2(11), 4, 5 and 19 of the
9270 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

60 15 U.S.C. 77d, 77e and 77s.

Securities Act, as amended. 60 The

amendments to Item 701 of Regulation

S-B and of Regulation S-K and to Form

8–K, Form 10–QSB, Form 10–Q, Form

10–KSB, and Form 10–K are being

proposed pursuant to sections 3(b), 4A,

12, 13, 14, 15, 16 and 23 of the

Securities Exchange Act.

List of Subjects in 17 CFR Parts 228,

229, 230, and 249

Reporting and recordkeeping

requirements, Securities.

Text of the Proposals

In accordance with the foregoing,

Title 17, Chapter II of the Code of

Federal Regulations is proposed to be

amended as follows:

PART 228—INTEGRATED

DISCLOSURE SYSTEM FOR SMALL

BUSINESS ISSUERS

1. The authority citation for Part 228

continues to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,

77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee,

77ggg, 77hhh, 77jjj, 77nnn, 77sss, 78l, 78m,

78n, 78o, 78w, 78ll, 80a–8, 80a–29, 80a–30,

80a–37, 80b–11, unless otherwise noted.

§ 228.701 [Amended]

2. By amending paragraph (e) of

§ 228.701 by removing the words ‘‘Form

8–K,’’ and ‘‘249.308,’’.

PART 229—STANDARD

INSTRUCTIONS FOR FILING FORMS

UNDER SECURITIES ACT OF 1933,

SECURITIES EXCHANGE ACT OF 1934

AND ENERGY POLICY AND

CONSERVATION ACT OF 1975—

REGULATION S–K

3. The authority citation for Part 229

continues to read in part as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,

77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee,

77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c,

78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e,

79n, 79t, 80a–8, 80a–29, 80a–30, 80a–37,

80b–11, unless otherwise noted.

* * * * *

§ 229.701 [Amended]

4. By amending paragraph (e) of

§ 229.701 by removing the words ‘‘Form

8–K,’’ and ‘‘249.308,’’.

PART 230—GENERAL RULES AND

REGULATIONS, SECURITIES ACT OF

1933

5. The authority citation for Part 230

continues to read in part as follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j,

77s, 77sss, 78c, 78d, 78l, 78m, 78n, 78o, 78w,

78ll(d), 78t, 80a–8, 80a–29, 80a–30, and 80a–

37, unless otherwise noted.

* * * * *

6. Section 230.144 is amended by

revising paragraphs (a)(3) and (e)(3)(vii)

to read as follows:

§ 230.144 Persons deemed not to be

engaged in a distribution and therefore not

underwriters.

* * * * *

(a) * * *

(3) The term restricted securities

means:

(i) Securities acquired directly or

indirectly from the issuer, or from an

affiliate of the issuer, in a transaction or

chain of transactions not involving any

public offering; (ii) Securities acquired from the issuer

that are subject to the resale limitations

of § 230.502(d) under Regulation D or

§ 230.701(c);

(iii) Securities acquired in a

transaction or chain of transactions

meeting the requirements of § 230.144A;

(iv) Securities acquired from the

issuer in a transaction subject to the

conditions of Regulation CE

(§ 230.1001); and

(v) Equity securities of domestic

issuers, and of foreign issuers where the

principal market for such securities is in

the United States (as defined in

§ 230.902(h)), acquired in a transaction

or chain of transactions subject to the

conditions of § 230.901 or § 230.903

under Regulation S (§ 230.901 through

§ 230.905 and Preliminary Notes).

* * * * *

(e) * * *

(3) * * *

(vii) The following sales of securities

need not be included in determining the

amount of securities sold in reliance

upon this section: securities sold

pursuant to an effective registration

statement under the Act; securities sold

pursuant to an exemption provided by

Regulation A (§ 230.251 through

§ 230.263) under the Act; securities sold

in a transaction exempt pursuant to

Section 4 of the Act (15 U.S.C. 77(e))

and not involving any public offering;

and securities sold offshore pursuant to

Regulation S (§ 230.901 through

§ 230.905, and Preliminary Notes) under

the Act.

* * * * *

7. Section 230.902 is revised to read

as follows:

§ 230.902. Definitions.

As used in Regulation S, the following

terms shall have the meanings

indicated.

(a) Debt securities. ‘‘Debt securities’’

of an issuer will be defined to include

any security other than an equity

security as defined in § 230.405, as well

as the following:

(1) Non-participatory preferred stock,

which is defined as non-convertible

capital stock, the holders of which are

entitled to a preference in payment of

dividends and in distribution of assets

on liquidation, dissolution, or winding

up of the issuer, but are not entitled to

participate in residual earnings or assets

of the issuer; or

(2) Asset-backed securities, which are

defined as the securities of a type that

either:

(i) Represents an ownership interest

in a pool of discrete assets, or

certificates of interest or participation in

such assets (including any rights

designed to assure servicing, or the

receipt or timeliness of receipt by

holders of such assets, or certificates of

interest or participation in such assets,

of amounts payable thereunder),

provided that the assets are not

generated or originated between the

issuer of the security and its affiliates;

or

(ii) Is secured by one or more assets

or certificates of interest or participation

in such assets, and the securities, by

their terms, provide for payments of

principal and interest (if any) in relation

to payments or reasonable projections of

payments on assets meeting the

requirements of paragraph (a)(2)(i) of

this section, or certificates of interest or

participations in assets meeting such

requirements.

(3) For purposes of paragraph (a)(2) of

this section, the term ‘‘assets’’ means

securities, installment sales, accounts

receivable, notes, leases or other

contracts, or other assets that by their

terms convert into cash over a finite

period of time.

(b) Designated offshore securities

market. ‘‘Designated offshore securities

market’’ means:

(1) The Eurobond market, as regulated

by the Association of International Bond

Dealers; the Alberta Stock Exchange; the

Amsterdam Stock Exchange; the

Australian Stock Exchange Limited; the

Bermuda Stock Exchange; the Bourse de

Bruxelles; the Copenhagen Stock

Exchange; the Frankfurt Stock

Exchange; the Helsinki Stock Exchange;

The Stock Exchange of Hong Kong

Limited; the Irish Stock Exchange; the

Istanbul Stock Exchange; the

Johannesburg Stock Exchange; the

London Stock Exchange; the Bourse de

Luxembourg; the Mexico Stock

Exchange; the Borsa Valori di Milan; the

Montreal Stock Exchange; the Oslo

Stock Exchange; the Bourse de Paris; the

Stockholm Stock Exchange; the Tokyo

Stock Exchange; the Toronto Stock

Exchange; the Vancouver Stock

Exchange; and the Zurich Stock

Exchange; and

(2) Any foreign securities exchange or

non-exchange market designated by the
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Commission. Attributes to be

considered in determining whether to

designate such a foreign securities

market, among others, include:

(i) Organization under foreign law;

(ii) Association with a generally

recognized community of brokers,

dealers, banks, or other professional

intermediaries with an established

operating history;

(iii) Oversight by a governmental or

self-regulatory body;

(iv) Oversight standards set by an

existing body of law;

(v) Reporting of securities transactions

on a regular basis to a governmental or

self-regulatory body;

(vi) A system for exchange of price

quotations through common

communications media; and

(vii) An organized clearance and

settlement system.

(c) Directed selling efforts.

(1) ‘‘Directed selling efforts’’ means

any activity undertaken for the purpose

of, or that could reasonably be expected

to have the effect of, conditioning the

market in the United States for any of

the securities being offered in reliance

on this Regulation S (§ 230.901 through

§ 230.905, and Preliminary Notes). Such

activity includes placement of an

advertisement in a publication ‘‘with a

general circulation in the United States’’

that refers to the offering of securities

being made in reliance upon this

Regulation S.

(2) Publication ‘‘with a general

circulation in the United States’’:

(i) Is defined as any publication that

is printed primarily for distribution in

the United States, or has had, during the

preceding twelve months, an average

circulation in the United States of

15,000 or more copies per issue; and

(ii) Only the U.S. edition of any

publication printing a separate U.S.

edition will be deemed a publication

‘‘with a general circulation in the

United States’’ if such publication,

without consideration of its U.S.

edition, would not meet the

requirements of paragraph (c)(2)(i) of

this section; and the U.S. edition itself

meets the requirements of paragraph

(c)(2)(i) of this section.

(3) The following are not ‘‘directed

selling efforts’’:

(i) Placement of an advertisement

required to be published under United

States or foreign law, or under rules or

regulations of a United States or foreign

regulatory or self-regulatory authority,

provided the advertisement contains no

more information than legally required

and includes a statement to the effect

that the securities have not been

registered under the Act and may not be

offered or sold in the United States (or

to a U.S. person, if the advertisement

relates to an offering under Category 2

or 3 in § 230.903) absent registration or

an applicable exemption from the

registration requirements;

(ii) Contact with persons excluded

from the definition of ‘‘U.S. person’’

pursuant to paragraph (l)(2)(vi) of this

section or persons holding accounts

excluded from the definition of ‘‘U.S.

person’’ pursuant to paragraph (l)(2)(i)

of this section, solely in their capacities

as holders of such accounts;

(iii) A tombstone advertisement in

any publication with a general

circulation in the United States,

provided:

(A) The publication has less than 20%

of its circulation, calculated by

aggregating the circulation of its U.S.

and comparable non-U.S. editions, in

the United States;

(B) Such advertisement contains a

legend to the effect that the securities

have not been registered under the Act

and may not be offered or sold in the

United States (or to a U.S. person, if the

advertisement relates to an offering

under Category 2 or 3 in § 230.903)

absent registration or an applicable

exemption from the registration

requirements; and

(C) Such advertisement contains no

more information than:

(1) The issuer’s name;

(2) The amount and title of the

securities being sold;

(3) A brief indication of the issuer’s

general type of business;

(4) The price of the securities;

(5) The yield of the securities, if debt

securities with a fixed (non-contingent)

interest provision;

(6) The name and address of the

person placing the advertisement, and

whether such person is participating in

the distribution;

(7) The names of the managing

underwriters;

(8) The dates, if any, upon which the

sales commenced and concluded;

(9) Whether the securities are offered

or were offered by rights issued to

security holders and, if so, the class of

securities that are entitled or were

entitled to subscribe, the subscription

ratio, the record date, the dates (if any)

upon which the rights were issued and

expired, and the subscription price; and

(10) Any legend required by law or

any foreign or U.S. regulatory or selfregulatory authority;

(iv) Bona fide visits to real estate,

plants or other facilities located in the

United States and tours thereof

conducted for a prospective investor by

an issuer, a distributor, any of their

respective affiliates or a person acting

on behalf of any of the foregoing;

(v) Distribution in the United States of

a foreign broker-dealer’s quotations by a

third-party system that distributes such

quotations primarily in foreign

countries if:

(A) Securities transactions cannot be

executed between foreign broker-dealers

and persons in the United States

through the system; and

(B) The issuer, distributors, their

respective affiliates, persons acting on

behalf of any of the foregoing, foreign

broker-dealers and other participants in

the system do not initiate contacts with

U.S. persons or persons within the

United States, beyond those contacts

exempted under § 240.15a–6 of this

chapter; and

(vi) Publication by an issuer of a

notice in accordance with § 230.135 or

§ 230.135c.

(d) Distributor. ‘‘Distributor’’ means

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 this Regulation S

(§ 230.901 through § 230.905, and

Preliminary Notes).

(e) Domestic issuer. ‘‘Domestic issuer’’

means any issuer other than a foreign

issuer (as defined in § 230.405).

(f) Offering restrictions. ‘‘Offering

restrictions’’ means:

(1) Each distributor agrees in writing:

(i) That all offers and sales of the

securities prior to the expiration of the

restricted period specified in Category 2

or 3 in § 230.903, as applicable, shall be

made only in accordance with the

provisions of § 230.903 or § 230.904;

pursuant to registration of the securities

under the Act; or pursuant to an

available exemption from the

registration requirements of the Act; and

(ii) For offers and sales of equity

securities of domestic issuers, and of

foreign issuers where the principal

market for those securities is in the

United States, not to engage in hedging

transactions with regard to such

securities prior to the expiration of the

restricted period specified in Category 2

or 3 in § 230.903, as applicable, unless

in compliance with the Act; and

(2) All offering materials and

documents (other than press releases)

used in connection with offers and sales

of the securities prior to the expiration

of the restricted period specified in

Category 2 or 3 in § 230.903, as

applicable, shall include statements to

the effect that the securities have not

been registered under the Act and may

not be offered or sold in the United

States or to U.S. persons (other than

distributors) unless the securities are

registered under the Act, or an

exemption from the registration
9272 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

requirements of the Act is available. For

offers and sales of equity securities of

domestic issuers, and of foreign issuers

where the principal market for those

securities is in the United States, such

offering materials and documents also

must state that hedging transactions

involving those securities may not be

conducted unless in compliance with

the Act. Such statements shall appear:

(i) On the cover or inside cover page

of any prospectus or offering circular

used in connection with the offer or sale

of the securities;

(ii) In the underwriting section of any

prospectus or offering circular used in

connection with the offer or sale of the

securities; and

(iii) In any advertisement made or

issued by the issuer, any distributor, any

of their respective affiliates, or any

person acting on behalf of any of the

foregoing. Such statements may appear

in summary form on prospectus cover

pages and in advertisements.

(g) Offshore transaction.

(1) An offer or sale of securities is

made in an ‘‘offshore transaction’’ if:

(i) The offer is not made to a person

in the United States; and

(ii) Either:

(A) At the time the buy order is

originated, the buyer is outside the

United States, or the seller and any

person acting on its behalf reasonably

believe that the buyer is outside the

United States; or

(B) For purposes of:

(1) § 230.903, the transaction is

executed in, on or through a physical

trading floor of an established foreign

securities exchange that is located

outside the United States; or

(2) § 230.904, the transaction is

executed in, on or through the facilities

of a designated offshore securities

market described in paragraph (a) of this

section, and neither the seller nor any

person acting on its behalf knows that

the transaction has been pre-arranged

with a buyer in the United States.

(2) Notwithstanding paragraph (g)(1)

of this section, offers and sales of

securities specifically targeted at

identifiable groups of U.S. citizens

abroad, such as members of the U.S.

armed forces serving overseas, shall not

be deemed to be made in ‘‘offshore

transactions.’’

(3) Notwithstanding paragraph (g)(1)

of this section, offers and sales of

securities to persons excluded from the

definition of ‘‘U.S. person’’ pursuant to

paragraph (l)(2)(vi) of this section or

persons holding accounts excluded from

the definition of ‘‘U.S. person’’ pursuant

to paragraph (l)(2)(i) of this section,

solely in their capacities as holders of

such accounts, shall be deemed to be

made in ‘‘offshore transactions.’’

(h) Principal market in the United

States. With respect to a class of equity

securities, a foreign issuer has its

‘‘Principal market in the United States’’

if more than 50 percent of all trading in

such class of securities took place in, on

or through the facilities of securities

exchanges and inter-dealer quotation

systems in the United States in the

shorter of the issuer’s prior fiscal year or

the period since the issuer’s

incorporation.

(i) Reporting issuer. ‘‘Reporting

issuer’’ means an issuer other than an

investment company registered or

required to register under the 1940 Act

that:

(1) Has a class of securities registered

pursuant to Section 12(b) or 12(g) of the

Exchange Act (15 U.S.C. 78l(b) or 78l(g))

or is required to file reports pursuant to

Section 15(d) of the Exchange Act (15

U.S.C. 78o(d)); and

(2) Has filed all the material required

to be filed pursuant to Section 13(a) or

15(d) of the Exchange Act (15 U.S.C.

78m(a) or 78o(d)) for a period of at least

twelve months immediately preceding

the offer or sale of securities made in

reliance upon this Regulation S

(§ 230.901 through § 230.905, and

Preliminary Notes) (or for such shorter

period that the issuer was required to

file such material).

(j) Restricted period. ‘‘Restricted

period’’ means a period that commences

on the later of the date upon which the

securities were first offered to persons

other than distributors in reliance upon

this Regulation S or the date of closing

of the offering, and expires a specified

period of time thereafter; provided,

however, that all offers and sales by a

distributor of an unsold allotment or

subscription shall be deemed to be

made during the restricted period;

provided, further, that in a continuous

offering, the restricted period shall

commence upon completion of the

distribution, as determined and certified

by the managing underwriter or person

performing similar functions; provided,

further, that in a continuous offering of

non-convertible debt securities offered

and sold in identifiable tranches, the

restricted period for securities in a

tranche shall commence upon

completion of the distribution of such

tranche, as determined and certified by

the managing underwriter or person

performing similar functions; provided,

further, that in a continuous offering of

securities to be acquired upon the

exercise of warrants, the restricted

period shall commence upon

completion of the distribution of the

warrants, as determined and certified by

the managing underwriter or person

performing similar functions, if

requirements of § 230.903(b)(5) are

satisfied.

(k) Substantial U.S. market interest.

(1) ‘‘Substantial U.S. market interest’’

with respect to a class of an issuer’s

equity securities means:

(i) The securities exchanges and interdealer quotation systems in the United

States in the aggregate constituted the

single largest market for such class of

securities in the shorter of the issuer’s

prior fiscal year or the period since the

issuer’s incorporation; or

(ii) 20 percent or more of all trading

in such class of securities took place in,

on or through the facilities of securities

exchanges and inter-dealer quotation

systems in the United States and less

than 55 percent of such trading took

place in, on or through the facilities of

securities markets of a single foreign

country in the shorter of the issuer’s

prior fiscal year or the period since the

issuer’s incorporation.

(2) ‘‘Substantial U.S. market interest’’

with respect to an issuer’s debt

securities means:

(i) Its debt securities, in the aggregate,

are held of record by 300 or more U.S.

persons;

(ii) $1 billion or more of: the principal

amount outstanding of its debt

securities, the greater of liquidation

preference or par value of its securities

described in § 230.902(a)(1), and the

principal amount or principal balance of

its securities described in

§ 230.902(a)(2), in the aggregate, is held

of record by U.S. persons; and

(iii) 20 percent or more of: the

principal amount outstanding of its debt

securities, the greater of liquidation

preference or par value of its securities

described in § 230.902(a)(1), and the

principal amount or principal balance of

its securities described in

§ 230.902(a)(2), in the aggregate, is held

of record by U.S. persons.

(3) Notwithstanding paragraph (k)(2)

of this section, substantial U.S. market

interest with respect to an issuer’s debt

securities is calculated without

reference to securities that qualify for

the exemption provided by Section

3(a)(3) of the Act (15 U.S.C. 77c(a)(3)).

(l) U.S. person.

(1) ‘‘U.S. person’’ means:

(i) Any natural person resident in the

United States;

(ii) Any partnership or corporation

organized or incorporated under the

laws of the United States;

(iii) Any estate of which any executor

or administrator is a U.S. person;

(iv) Any trust of which any trustee is

a U.S. person;

(v) Any agency or branch of a foreign

entity located in the United States;
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9273

(vi) Any non-discretionary account or

similar account (other than an estate or

trust) held by a dealer or other fiduciary

for the benefit or account of a U.S.

person;

(vii) Any discretionary account or

similar account (other than an estate or

trust) held by a dealer or other fiduciary

organized, incorporated, or (if an

individual) resident in the United

States; and

(viii) Any partnership or corporation

if:

(A) Organized or incorporated under

the laws of any foreign jurisdiction; and

(B) Formed by a U.S. person

principally for the purpose of investing

in securities not registered under the

Act, unless it is organized or

incorporated, and owned, by accredited

investors (as defined in § 230.501(a))

who are not natural persons, estates or

trusts.

(2) The following are not ‘‘U.S.

persons’’:

(i) Any discretionary account or

similar account (other than an estate or

trust) held for the benefit or account of

a non-U.S. person by a dealer or other

professional fiduciary organized,

incorporated, or (if an individual)

resident in the United States;

(ii) Any estate of which any

professional fiduciary acting as executor

or administrator is a U.S. person if:

(A) An executor or administrator of

the estate who is not a U.S. person has

sole or shared investment discretion

with respect to the assets of the estate;

and

(B) The estate is governed by foreign

law;

(iii) Any trust of which any

professional fiduciary acting as trustee

is a U.S. person if a trustee who is not

a U.S. person has sole or shared

investment discretion with respect to

the trust assets, and no beneficiary of

the trust (and no settlor if the trust is

revocable) is a U.S. person;

(iv) An employee benefit plan

established and administered in

accordance with the law of a country

other than the United States and

customary practices and documentation

of such country;

(v) Any agency or branch of a U.S.

person located outside the United States

if:

(A) The agency or branch operates for

valid business reasons; and

(B) The agency or branch is engaged

in the business of insurance or banking

and is subject to substantive insurance

or banking regulation, respectively, in

the jurisdiction where located; and

(vi) The International Monetary Fund,

the International Bank for

Reconstruction and Development, the

Inter-American Development Bank, the

Asian Development Bank, the African

Development Bank, the United Nations,

and their agencies, affiliates and

pension plans, and any other similar

international organizations, their

agencies, affiliates and pension plans.

(m) United States. ‘‘United States’’

means the United States of America, its

territories and possessions, any State of

the United States, and the District of

Columbia.

8. Section 230.903 is revised to read

as follows:

§ 230.903. Offers or sales of securities by

the issuer, a distributor, any of their

respective affiliates, or any person acting

on behalf of any of the foregoing;

conditions relating to specific securities.

(a) An offer or sale of securities by the

issuer, a distributor, any of their

respective affiliates, or any person

acting on behalf of any of the foregoing,

shall be deemed to occur outside the

United States within the meaning of

§ 230.901 if the offer or sale shall be

made in an offshore transaction, and no

directed selling efforts shall be made in

the United States by the issuer, a

distributor, any of their respective

affiliates, or any person acting on behalf

of any of the foregoing.

(b) Additional conditions.

(1) Category 1. Securities in this

category may be offered and sold

without any conditions other than those

set forth in § 230.903(a) of this section.

The securities eligible for this category

are:

(i) The issuer is a foreign issuer that

reasonably believes at the

commencement of the offering that:

(A) There is no substantial U.S.

market interest in the class of securities

to be offered or sold (if equity securities

are offered or sold);

(B) There is no substantial U.S.

market interest in its debt securities (if

debt securities are offered or sold);

(C) There is no substantial U.S.

market interest in the securities to be

purchased upon exercise (if warrants are

offered or sold); and

(D) There is no substantial U.S.

market interest in either the convertible

securities or the underlying securities (if

convertible securities are offered or

sold);

(ii) The securities are offered and sold

in an overseas directed offering, which

means:

(A) An offering of securities of a

foreign issuer that is directed into a

single country other than the United

States to the residents thereof and that

is made in accordance with the local

laws and customary practices and

documentation of such country; or

(B) An offering of non-convertible

debt securities of a domestic issuer that

is directed into a single country other

than the United States to the residents

thereof and that is made in accordance

with the local laws and customary

practices and documentation of such

country, provided that the principal and

interest of the securities (or par value,

as applicable) are denominated in a

currency other than U.S. dollars and

such securities are neither convertible

into U.S. dollar-denominated securities

nor linked to U.S. dollars (other than

through related currency or interest rate

swap transactions that are commercial

in nature) in a manner that in effect

converts the securities to U.S. dollardenominated securities.

(iii) The securities are backed by the

full faith and credit of a foreign

government; or

(iv) The securities are offered and sold

to employees of the issuer or its

affiliates pursuant to an employee

benefit plan established and

administered in accordance with the

law of a country other than the United

States, and customary practices and

documentation of such country,

provided that:

(A) The securities are issued in

compensatory circumstances for bona

fide services rendered to the issuer or its

affiliates in connection with their

businesses and such services are not

rendered in connection with the offer

and sale of securities in a capital-raising

transaction;

(B) Any interests in the plan are not

transferable other than by will or the

laws of descent or distribution;

(C) The issuer takes reasonable steps

to preclude the offer and sale of

interests in the plan or securities under

the plan to U.S. residents other than

employees on temporary assignment in

the United States; and

(D) Documentation used in

connection with any offer pursuant to

the plan contains a statement that the

securities have not been registered

under the Act and may not be offered or

sold in the United States unless

registered or an exemption from

registration is available.

(2) Category 2. Securities in this

category may be offered and sold

provided that:

(i) The following conditions are met:

(A) The conditions set forth in

§ 230.903(a) are met;

(B) Offering restrictions are

implemented;

(C) The offer or sale, if made prior to

the expiration of a 40-day restricted

period, is not made to a U.S. person or

for the account or benefit of a U.S.

person (other than a distributor), unless
9274 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules

made pursuant to registration or an

exemption therefrom under the Act; and

(D) Each distributor selling securities

to a distributor, a dealer, as defined in

section 2(12) of the Act (15 U.S.C.

77b(12)), or a person receiving a selling

concession, fee or other remuneration in

respect of the securities sold, prior to

the expiration of a 40-day restricted

period, sends a confirmation or other

notice to the purchaser stating that the

purchaser is subject to the same

restrictions on offers and sales that

apply to a distributor; and

(ii) The securities are equity securities

of reporting foreign issuers unless the

principal market for those securities is

in the United States, or the securities are

debt securities of a reporting issuer or of

a foreign issuer.

(3) Category 3. Securities that are not

eligible for Category 1 or 2 (paragraphs

(b) (1) or (2)) in this section may be

offered or sold provided that the

following conditions are met:

(i) The conditions set forth in

§ 230.903(a) are met;

(ii) Offering restrictions are

implemented;

(iii) In the case of debt securities:

(A) The offer or sale, if made prior to

the expiration of a 40-day restricted

period, is not made to a U.S. person or

for the account or benefit of a U.S.

person (other than a distributor), unless

made pursuant to registration or an

exemption therefrom under the Act; and

(B) The securities are represented

upon issuance by a temporary global

security which is not exchangeable for

definitive securities until the expiration

of the 40-day restricted period and, for

persons other than distributors, until

certification of beneficial ownership of

the securities by a non-U.S. person or a

U.S. person who purchased securities in

a transaction that did not require

registration under the Act;

(iv) In the case of equity securities, if

made prior to the expiration of a twoyear restricted period with respect to

domestic issuers and foreign issuers

where the principal market for the

securities is in the United States, and a

one-year restricted period with respect

to other issuers:

(A) The offer or sale is not made to a

U.S. person or for the account or benefit

of a U.S. person (other than a

distributor), unless made pursuant to

registration or an exemption therefrom

under the Act; and

(B) The offer or sale is made pursuant

to the following conditions:

(1) The purchaser of the securities

(other than a distributor) certifies that it

is not a U.S. person and is not acquiring

the securities for the account or benefit

of any U.S. person or is a U.S. person

who purchased securities in a

transaction that did not require

registration under the Act;

(2) The purchaser of the securities

agrees to resell such securities only in

accordance with the provisions of this

Regulation S (§ 230.901 through

§ 230.905, and Preliminary Notes),

pursuant to registration under the Act,

or pursuant to an available exemption

from registration; and agrees not to

engage in hedging transactions with

regard to such securities unless in

compliance with the Act;

(3) The securities of a domestic issuer,

or of a foreign issuer where the

principal market for the securities is in

the United States, contain a legend to

the effect that transfer is prohibited

except in accordance with the

provisions of this Regulation S,

pursuant to registration under the Act,

or pursuant to an available exemption

from registration; and that hedging

transactions involving those securities

may not be conducted unless in

compliance with the Act;

(4) The issuer is required, either by

contract or a provision in its bylaws,

articles, charter or comparable

document, to refuse to register any

transfer of the securities not made in

accordance with the provisions of this

Regulation S, pursuant to registration

under the Act, or pursuant to an

available exemption from registration;

provided, however, that if the securities

are in bearer form or foreign law

prevents the issuer of the securities from

refusing to register securities transfers,

other reasonable procedures (such as a

legend described in paragraph

(b)(3)(iv)(B)(3) of this section) are

implemented to prevent any transfer of

the securities not made in accordance

with the provisions of this Regulation S;

and

(5) If the issuer is a domestic issuer,

or a foreign issuer and the principal

market for the equity securities is in the

United States, no promissory note or

other executory obligation may be

received as payment for the securities,

nor may an installment purchase

contract be entered into; and

(v) Each distributor selling securities

to a distributor, a dealer (as defined in

section 2(12) of the Act (15 U.S.C.

77b(12)), or a person receiving a selling

concession, fee or other remuneration,

prior to the expiration of a 40-day

restricted period in the case of debt

securities, or a two-year restricted

period in the case of equity securities,

sends a confirmation or other notice to

the purchaser stating that the purchaser

is subject to the same restrictions on

offers and sales that apply to a

distributor.

(4) Guaranteed securities.

Notwithstanding paragraphs (b)(1)

through (b)(3) of this section, in

offerings of debt securities fully and

unconditionally guaranteed as to

principal and interest by the parent of

the issuer of the debt securities, only the

requirements of paragraph (b) of this

section that are applicable to the offer

and sale of the guarantee need be

satisfied with respect to the offer and

sale of the guaranteed debt securities.

(5) Warrants. An offer or sale of

warrants under Category 2 or 3

(paragraphs (b) (2) or (3)) of this section

also must comply with the following

requirements:

(i) Each warrant must bear a legend

stating that the warrant and the

securities to be issued upon its exercise

have not been registered under the Act

and that the warrant may not be

exercised by or on behalf of any U.S.

person unless registered under the Act

or an exemption from such registration

is available;

(ii) Each person exercising a warrant

is required to give:

(A) Written certification that it is not

a U.S. person and the warrant is not

being exercised on behalf of a U.S.

person; or

(B) A written opinion of counsel to

the effect that the warrant and the

securities delivered upon exercise

thereof have been registered under the

Act or are exempt from registration

thereunder; and

(iii) Procedures are implemented to

ensure that the warrant may not be

exercised within the United States, and

that the securities may not be delivered

within the United States upon exercise,

other than in offerings deemed to meet

the definition of ‘‘offshore transaction’’

pursuant to § 230.902(g), unless

registered under the Act or an

exemption from such registration is

available.

9. Section 230.904 is revised to read

as follows:

§ 230.904. Offshore resales.

(a) An offer or sale of securities by any

person other than the issuer, a

distributor, any of their respective

affiliates (except any officer or director

who is an affiliate solely by virtue of

holding such position), or any person

acting on behalf of any of the foregoing,

shall be deemed to occur outside the

United States within the meaning of

§ 230.901 if the offer or sale are made in

an offshore transaction, and no directed

selling efforts are made in the United

States by the seller, an affiliate, or any

person acting on their behalf.

(b) Additional conditions. In addition

to the conditions set forth in paragraph
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Proposed Rules 9275

(a) of this section, the following

requirements must be satisfied:

(1) Resales by dealers and persons

receiving selling concessions. In the case

of an offer or sale of securities of any

issuer prior to the expiration of the

restricted period specified in Category 2

or 3 (paragraphs (b) (2) or (3)) of

§ 230.903, as applicable, by a dealer, as

defined in Section 2(12) of the Act (15

U.S.C. 77b(12)), or a person receiving a

selling concession, fee or other

remuneration in respect of the securities

offered or sold:

(i) Neither the seller nor any person

acting on his behalf knows that the

offeree or buyer of the securities is a

U.S. person; and

(ii) If the seller or any person acting

on the seller’s behalf knows that the

purchaser is a dealer, as defined in

Section 2(12) of the Act (15 U.S.C.

77b(12)), or is a person receiving a

selling concession, fee or other

remuneration in respect of the securities

sold, the seller or a person acting on the

seller’s behalf sends to the purchaser a

confirmation or other notice stating that

the securities may be offered and sold

during the restricted period only: in

accordance with the provisions of this

Regulation S (§ 230.901 through

§ 230.905, and Preliminary Notes);

pursuant to registration of the securities

under the Act; or pursuant to an

available exemption from the

registration requirements of the Act.

(2) Resales by certain affiliates. In the

case of an offer or sale of securities of

any issuer by an officer or director of the

issuer or a distributor, who is an affiliate

of the issuer or distributor solely by

virtue of holding such position, no

selling concession, fee or other

remuneration is paid in connection with

such offer or sale other than the usual

and customary broker’s commission that

would be received by a person

executing such transaction as agent.

10. By adding § 230.905 to read as

follows:

§ 230.905 Resale limitations.

Equity securities of domestic issuers,

and of foreign issuers where the

principal market for such securities is in

the United States, acquired from the

issuer, a distributor, or any of their

respective affiliates in an offshore

transaction subject to the conditions of

§ 230.901 or § 230.903 are deemed to be

‘‘restricted securities’’ as defined in

§ 230.144. Resales of any of such

restricted securities by the offshore

purchaser must be made in accordance

with this Regulation S (§ 230.901

through § 230.905, and Preliminary

Notes), the registration requirements of

the Act or an exemption therefrom. Any

‘‘restricted securities’’ as defined in

§ 230.144(a)(3) that are equity securities

of domestic issuers, and of foreign

issuers where the principal market for

the securities is in the United States,

will continue to be deemed to be

restricted securities, notwithstanding

that they were acquired in a resale

transaction made pursuant to § 230.901

or § 230.904.

PART 249—FORMS, SECURITIES

EXCHANGE ACT OF 1934

11. The authority citation for Part 249

continues to read in part as follows:

Authority: 15 U.S.C. 78a, et seq., unless

otherwise noted;

* * * * *

12. By amending Form 8–K

(referenced in § 249.308) by removing

the last sentence of General Instruction

B.1. and Item 9.

13. By amending Form 10–Q

(referenced in § 249.308a) by revising

paragraph (c) of Item 2 of Part II prior

to the Instruction to read as follows:

Note: Form 10–Q does not and these

amendments will not appear in the Code of

Federal Regulations

Form 10–Q

* * * * *

Part II

Item 2. Changes in Securities.

* * * * *

(c) Furnish the information required

by Item 701 of Regulation S–K

(§ 229.701 of this chapter) as to all

equity securities of the registrant sold by

the registrant during the period covered

by the report that were not registered

under the Securities Act.

* * * * *

14. By amending Form 10–QSB

(referenced in § 249.308b) by revising

paragraph (c) to Item 2 of Part II prior

to the Instruction to read as follows:

Note: Form 10–QSB does not and these

amendments will not appear in the Code of

Federal Regulations

Form 10–QSB

* * * * *

Part II

* * * * *

Item 2. Changes in Securities.

* * * * *

(c) Furnish the information required

by Item 701 of Regulation S–B

(§ 228.701 of this chapter) as to all

equity securities of the registrant sold by

the registrant during the period covered

by the report that were not registered

under the Securities Act.

* * * * *

15. By amending Form 10–K

(referenced in § 249.310) by revising

Item 5 of Part II to read as follows:

Note: Form 10–K does not and these

amendments will not appear in the Code of

Federal Regulations

Form 10–K

* * * * *

Part II

* * * * *

Item 5. Market for Registrant’s

Common Equity and Related

Stockholder Matters.

Furnish the information required by

Item 201 of Regulation S–K (§ 229.201 of

this chapter) and Item 701 of Regulation

S–K (§ 229.701 of this chapter) as to all

equity securities of the registrant sold by

the registrant during the period covered

by the report that were not registered

under the Securities Act. Provided that

if the Item 701 information previously

has been included in a Quarterly Report

on Form 10–Q or 10–QSB (§ 249.308a or

249.308b of this chapter) it need not be

furnished.

* * * * *

16. By amending Form 10–KSB

(referenced in § 249.310b) by revising

Item 5 of Part II to read as follows:

Note: Form 10–K does not and these

amendments will not appear in the Code of

Federal Regulations

Form 10–KSB

* * * * *

Part II

* * * * *

Item 5. Market for Common Equity

and Related Stockholder Matters.

Furnish the information required by

Item 201 of Regulation S–B and Item

701 of Regulation S–B as to all equity

securities of the registrant sold by the

registrant during the period covered by

the report that were not registered under

the Securities Act. Provided that if the

Item 701 information previously has

been included in a Quarterly Report on

Form 10–Q or 10–QSB it need not be

furnished.

* * * * *

Dated: February 20, 1997.

By the Commission.

Margaret H. McFarland,

Deputy Secretary

[FR Doc. 97–4668 Filed 2–27–97; 8:45 am]

BILLING CODE 8010–01–P