[Federal Register Volume 62, Number 40 (Friday, February 28, 1997)]
[Proposed Rules]
[Pages 9258-9275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4668]


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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.

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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: 
<a href="/cdn-cgi/l/email-protection#82f0f7eee7afe1edefefe7ecf6f1c2f1e7e1ace5edf4"><span class="__cf_email__" data-cfemail="fb898e979ed6989496969e958f88bb889e98d59c948d">[email protected]</span></a>. 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 <SUP>1 of Regulation S,<SUP>2 the issuer safe harbor under the 
Securities Act of 1933 <SUP>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.<SUP>4 Further, the Commission proposes amendments to 
Rule 144(a)(3) <SUP>5 and a new Rule 905 to deem these equity 
securities to be ``restricted securities,'' as defined in Rule 144 
under the Securities Act.<SUP>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.<SUP>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.
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    \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'').
    \4\ See Proposed Rule 902(h) for the proposed definition of 
``principal market in the United States.''
    \5\ 17 CFR 230.144(a)(3).
    \6\ Proposed Rule 905.
    \7\ Id.
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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.<SUP>8
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    \8\ Securities Act Release No. 7190 (June 27, 1995) [60 FR 35663 
(July 10, 1995)] (the ``Interpretive Release'').
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    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.<SUP>9
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    \9\ See infra Section III.E.1. for a further discussion of the 
proposed definition of ``principal market in the United States.''
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    These Regulation S proposals would:

    <bullet> classify these equity securities placed offshore under 
Regulation S as ``restricted securities'' within the meaning of Rule 
144;
    <bullet> align the Regulation S restricted period for these 
equity securities with the Rule 144 holding periods by lengthening 
from 40 days

[[Page 9259]]

(currently applicable to reporting issuers) or one year (currently 
applicable to non-reporting 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);
    <bullet> impose certification, legending and other requirements 
now only applicable to sales of equity securities by non-reporting 
issuers;
    <bullet> 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;
    <bullet> prohibit the use of promissory notes as payment for 
these securities; and
    <bullet> 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.
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    \10\ Rule 903 of Regulation S [17 CFR 230.903].
    \11\ Rule 904 of Regulation S [17 CFR 230.904].
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    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.''
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    \12\ 15 U.S.C. 78a et seq. (the ``Exchange Act'').
    \13\ See Rule 902(n) of Regulation S for the definition of 
``substantial U.S. market interest'' [17 CFR 230.902(n)].
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    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\
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    \14\ Rule 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)].
    \15\ Rule 903(b) of Regulation S [17 CFR 230.903(b)].
    \16\ For 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)].
    \19\ See Securities Act Release No. 6863 (Apr. 24, 1990) [55 FR 
18306] (the ``Adopting Release'') at Section III.B.
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    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 no-action 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.
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    \20\ See, 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).
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    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\
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    \21\ See, 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).
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    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

[[Page 9260]]

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\
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    \22\ See 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).
    \23\ Preliminary 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.
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    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.
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    \25\ These 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.
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    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\
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    \26\ Exchange 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).
    \27\ Securities Act Release No. 7355 (Oct. 10, 1996) [61 FR 
54509 (Oct. 18, 1996)].
    \28\ Securities Act Release Nos. 7390, 7391, and 7393.
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    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 non-reporting 
issuers, and of foreign non-reporting 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

[[Page 9261]]

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.<SUP>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.<SUP>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.
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    \29\ See 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.
    \30\ See 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'').
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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.<SUP>31
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    \31\ Of 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.
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    In addition, under a new requirement proposed to be added to the 
current Category 3 purchaser agreement requirement,<SUP>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.<SUP>33 The 
proposals also would require distributors to agree to the same 
restrictions on hedging until the expiration of the restricted 
period,<SUP>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.<SUP>35
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    \32\ This 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)].
    \33\ Since 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.
    \34\ Under 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)].
    \35\ Currently, 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.
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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.'' <SUP>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.
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    \36\ Rule 903(c)(3)(iii)(B)(3) of Regulation S [17 CFR 
230.903(c)(3)(iii)(B)(3)].
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    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

[[Page 9262]]

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.'' <SUP>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.
---------------------------------------------------------------------------

    \37\ Rule 903(c)(3)(iii)(B)(4) of Regulation S [17 CFR 
230.903(c)(3)(iii)(B)(4)].
---------------------------------------------------------------------------

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? <SUP>38 Should satisfaction of any or all of the 
current specific documentation requirements of Category 3 be deemed to 
satisfy this express general duty?
---------------------------------------------------------------------------

    \38\ Securities Act Rule 502(d)[17 CFR 230.502(d)].
---------------------------------------------------------------------------

    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 non-recourse 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 <SUP>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

[[Page 9263]]

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? <SUP>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?
---------------------------------------------------------------------------

    \39\ Rule 144(d)(2) [17 CFR 230.144(d)(2)].
    \40\ These 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)].
---------------------------------------------------------------------------

    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,<SUP>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.
---------------------------------------------------------------------------

    \41\ The 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.
---------------------------------------------------------------------------

    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 
non-reporting) 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.<SUP>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)?
---------------------------------------------------------------------------

    \42\ They 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.
---------------------------------------------------------------------------

    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

[[Page 9264]]

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 
<SUP>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?
---------------------------------------------------------------------------

    \43\ Securities Act Release No. 7375 (Dec. 20, 1996) [62 FR 520 
(Jan. 3, 1997)].
---------------------------------------------------------------------------

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.<SUP>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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.<SUP>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?
---------------------------------------------------------------------------

    \45\ See ``Pirates' Play?'', supra note 21.
---------------------------------------------------------------------------

    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)? <SUP>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.
---------------------------------------------------------------------------

    \46\ The 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.

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[[Page 9265]]

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.<SUP>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.
---------------------------------------------------------------------------

    \47\ The 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.
---------------------------------------------------------------------------

    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.<SUP>48
---------------------------------------------------------------------------

    \48\ This interpretation clarifies and supercedes the 
Commission's previous interpretation regarding ``prearranged'' 
repurchases of restricted securities set forth in the Interpretive 
Release, supra note 8.
---------------------------------------------------------------------------

    Comment is requested on whether the proposed rule, either alone or 
with the

[[Page 9266]]

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, <SUP>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.
---------------------------------------------------------------------------

    \49\ See Rule 902(a) of Regulation S [17 CFR 230.902(a)] for the 
definition of ``designated offshore securities market.''
---------------------------------------------------------------------------

    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. 
<SUP>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?
---------------------------------------------------------------------------

    \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 non-Rule 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.
---------------------------------------------------------------------------

    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:
    <bullet> 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'';
    <bullet> 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;
    <bullet> 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;
    <bullet> 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
    <bullet> 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: <a href="/cdn-cgi/l/email-protection#97e5e2fbf2baf4f8fafaf2f9e3e4d7e4f2f4b9f0f8e1"><span class="__cf_email__" data-cfemail="fc8e899099d19f9391919992888fbc8f999fd29b938a">[email protected]</span></a>. 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

[[Page 9267]]

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).
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78w(a).
---------------------------------------------------------------------------

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 cost-effective. 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.<SUP>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.
---------------------------------------------------------------------------

    \52\ They 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.
---------------------------------------------------------------------------

    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,<SUP>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.
---------------------------------------------------------------------------

    \53\ 5 U.S.C. 603.
---------------------------------------------------------------------------

    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

[[Page 9268]]

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 non-reporting 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.<SUP>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.
---------------------------------------------------------------------------

    \54\ See notes 21 and 22 and accompanying text, supra, for a 
discussion of the abusive transactions.
---------------------------------------------------------------------------

    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 <SUP>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 <SUP>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.
---------------------------------------------------------------------------

    \55\ 17 CFR 230.157.
    \56\ 17 CFR 240.0-10.
---------------------------------------------------------------------------

    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 non-reporting 
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,<SUP>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.
---------------------------------------------------------------------------

    \57\ Since 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.
---------------------------------------------------------------------------

    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

[[Page 9269]]

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''). <SUP>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.
---------------------------------------------------------------------------

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

    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. <SUP>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.
---------------------------------------------------------------------------

    \59\ 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.
---------------------------------------------------------------------------

    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

[[Page 9270]]

Securities Act, as amended. <SUP>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.
---------------------------------------------------------------------------

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

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.

Sec. 228.701  [Amended]

    2. By amending paragraph (e) of Sec. 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.
* * * * *


Sec. 229.701  [Amended]

    4. By amending paragraph (e) of Sec. 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:


Sec. 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 Sec. 230.502(d) under Regulation D or 
Sec. 230.701(c);
    (iii) Securities acquired in a transaction or chain of transactions 
meeting the requirements of Sec. 230.144A;
    (iv) Securities acquired from the issuer in a transaction subject 
to the conditions of Regulation CE (Sec. 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 Sec. 230.902(h)), acquired in a transaction or chain of 
transactions subject to the conditions of Sec. 230.901 or Sec. 230.903 
under Regulation S (Sec. 230.901 through Sec. 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 (Sec. 230.251 through Sec. 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 (Sec. 230.901 through 
Sec. 230.905, and Preliminary Notes) under the Act.
* * * * *
    7. Section 230.902 is revised to read as follows:


Sec. 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 Sec. 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

[[Page 9271]]

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 (Sec. 230.901 
through Sec. 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 Sec. 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 
Sec. 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 self-regulatory 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 Sec. 240.15a-6 of this chapter; and
    (vi) Publication by an issuer of a notice in accordance with 
Sec. 230.135 or Sec. 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 (Sec. 230.901 through Sec. 230.905, and Preliminary 
Notes).
    (e) Domestic issuer. ``Domestic issuer'' means any issuer other 
than a foreign issuer (as defined in Sec. 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 
Sec. 230.903, as applicable, shall be made only in accordance with the 
provisions of Sec. 230.903 or Sec. 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 Sec. 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 Sec. 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

[[Page 9272]]

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) Sec. 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) Sec. 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 
(Sec. 230.901 through Sec. 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 Sec. 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 inter-dealer 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 Sec. 230.902(a)(1), and the principal 
amount or principal balance of its securities described in 
Sec. 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 Sec. 230.902(a)(1), and the principal 
amount or principal balance of its securities described in 
Sec. 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;

[[Page 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 Sec. 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:


Sec. 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 Sec. 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 Sec. 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. 
dollar-denominated 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 Sec. 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

[[Page 9274]]

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 Sec. 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 two-year 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 
(Sec. 230.901 through Sec. 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 Sec. 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:


Sec. 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 Sec. 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

[[Page 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 Sec. 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 (Sec. 230.901 
through Sec. 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 Sec. 230.905 to read as follows:


Sec. 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 
Sec. 230.901 or Sec. 230.903 are deemed to be ``restricted securities'' 
as defined in Sec. 230.144. Resales of any of such restricted 
securities by the offshore purchaser must be made in accordance with 
this Regulation S (Sec. 230.901 through Sec. 230.905, and Preliminary 
Notes), the registration requirements of the Act or an exemption 
therefrom. Any ``restricted securities'' as defined in 
Sec. 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 Sec. 230.901 or Sec. 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 Sec. 249.308) by removing 
the last sentence of General Instruction B.1. and Item 9.
    13. By amending Form 10-Q (referenced in Sec. 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 
(Sec. 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 Sec. 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 
(Sec. 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 Sec. 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 
(Sec. 229.201 of this chapter) and Item 701 of Regulation S-K 
(Sec. 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 (Sec. 249.308a or 249.308b of this 
chapter) it need not be furnished.
* * * * *
    16. By amending Form 10-KSB (referenced in Sec. 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


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