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Rhode Island Legal Blog

Friday, May 25, 2018

Securities Sales: When Do You Have to Register a Transaction?

SEC Registration Exemptions Under Regulation S

Following the stock market collapse of 1929, Congress tightened restrictions on businesses’ activities related to the sale of securities. A key provision of the Securities Act of 1933 is the requirement that, with few exceptions, securities issuers must register securities transfers with the SEC. Now, seven decades later, the strict registration requirements of the Securities Act continue to apply.

An exception to securities registration requirements is Regulation S which allows securities issuers to solicit and sell to investors outside of the U.S. without registering the sale with the SEC. But how does the SEC determine when a securities sale qualifies as occurring fully outside of the U.S.? And how do securities issuers ensure they are in compliance with the Securities Act when choosing not to register a securities sale under Regulation S?

Compliance with Regulation S is not always black and white. There are various scenarios that require a more nuanced understanding of the law:

  • Did the securities solicitation and sale occur “outside the U.S.” as defined by the SEC? Often, questions arise regarding the buyer’s knowledge of the investment opportunity while still in the U.S., and whether prior knowledge of the investment opportunity constitutes “solicitation”. An attorney can determine whether both the sale and the original solicitation occurred on foreign soil.

  • The SEC dictates that a resale “cannot be knowingly made to a ‘U.S. Person’ prior to the end of the relevant distribution compliance period.” The SEC also states that, in instances in which a party outside the U.S. acts on behalf of a party located in the U.S., the party outside the U.S. may be acting as an agent or attorney-in-fact. An attorney can determine whether Regulation S applies to the parties in question and whether an agent/client relationship exists, and can determine the length of the relevant distribution compliance period.

  • Can a student or other individual who is residing in the U.S. temporarily be approached regarding a securities sale under Regulation S? The SEC provides extensive guidance regarding how and when Regulation S applies to non-resident aliens, lawful permanent residents and holders of specific visas. A lawyer can determine when securities issuers can sell to parties holding various visas and in which circumstances.

To conduct securities sales under Regulation S, issuers must be familiar not only with the issues discussed above but also, often, with the regulation’s dictates regarding EB-5/Investor visas, safe harbors and resale safe harbors, regional regulations and a host of other issues. A quick scan or even an in-depth study of Regulation S and other components of U.S. security laws is most often insufficient to ensure that security transactions are fully within applicable laws. To ensure complete compliance when conducting securities sales under Regulation S, contact a securities law attorney in your area.


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