United States: SEC Staff Issues Guidance Regarding 144A And Regulation S

On December 8, 2016, the staff of the Securities and Exchange Commission (SEC) issued new Compliance and Disclosure Interpretations (C&DIs) to provide guidance regarding status of qualified institutional buyers (QIBs) under Rule 144A of the Securities Act of 1933, as amended (Securities Act). Rule 144A provides a safe harbor exemption from the registration requirements of Section 5 of the Securities Act of 1933, as amended (Securities Act) for certain offers and sales of qualifying securities by persons other than the issuer of the securities. Specifically, the exemption applies to resales of securities to QIBs. The C&DIs released on December 8, 2016 also provided guidance relating to offerings made in reliance on Regulation S, which provides a safe harbor from the registration requirements of Section 5 of the Securities Act for certain offshore transactions where no directed selling efforts are being made in the United States.

Calculating $100 Million Threshold under Rule 144A

Rule 144A(a)(1)(i) defines a QIB by listing several types of entities that, acting for their own account or the accounts of other QIBs, own and invest on a discretionary basis at least $100 million in securities of non-affiliate issuers in the aggregate. In its latest C&DIs, the SEC staff clarifies what securities are included for the purposes of calculating the $100 million threshold.

According to the SEC staff, when calculating the $100 million threshold under Rule 144A(a)(i), an entity may include:

  • securities that the issuer has purchased and continued to hold on margin (so long as they are not subject to a repurchase agreement) (C&DI 138.05); and
  • securities that the entity owns but has loaned out to borrowers (C&DI 138.06);

However, when calculating the $100 million threshold under Rule 144A(a)(i), an entity may not include:

  • securities that it has borrowed (C&DI 138.07); or
  • short positions in securities that it has established (C&DI 138.08).

Also, for an investment company that is not registered under the Investment Company Act of 1940, it may not aggregate investments by other funds that may be part of the non-registered investment company's family of funds in the manner described under Rule 144A(a)(1)(iv). According to the SEC staff, only registered investment companies may use the aggregation method permitted under Rule 144A(1)(iv). (C&DI 138.09)

Finally, when determining its status as a QIB under Rule 144A, Rule 144A(a)(1)(v) provides that an entity will be deemed a QIB if all of its equity owners are QIBs. According to the SEC Staff, when the entity is a limited partnership, the limited partners are the equity owners. The general partner does not need to be considered in determining whether a limited partnership is a QIB so long as the QIB is not also a limited partner. (C&DI 138.10)

Regulation S

Regulation S, which was promulgated under the Securities Act, provides a safe harbor for certain types of public and private offerings by both U.S. and foreign issuers that are made outside of the U.S. so that they are not required to be registered under Section 5 of the Securities Act. In general, in order to rely on Regulation S, offers and sales must be made in an "offshore transaction" and there cannot be any "directed selling efforts" with respect to the securities (e.g., activities that could be expected to condition the market in the U.S. for any of the securities being offered in an offering relying on the Regulation S safe harbor).

Definition of U.S. Person

Whether the Regulation S conditions are met depends in part on the definition of "U.S. persons," which is defined in Rule 902(k)(1) of Regulation S. Any natural person resident in the United States is a U.S. person according to Rule 902(k)(1)(i) of Regulation S. In C&DI 276.01, the SEC staff clarified that a person that has permanent resident status in the U.S. (a so-called Green Card holder) is presumed to be a U.S. resident for purposes of Regulation S. However, if a person is not a Green Card holder, the SEC staff indicates that an issuer must decide what criteria it will use to determine residency and apply such factors consistently without changing them to achieve a desired result. Examples of such factors would include, according to the SEC staff, tax residency, nationality, mailing address, physical presence, the location of a significant portion of an individual's financial and legal relationships, or immigration status.

The European Union May be a "Single Country" for Purposes of Category 1 Transactions

Rule 903 of Regulation S distinguishes among three categories of transactions based on the type of securities being offered, whether the issuer is domestic or foreign, whether the issuer is a reporting issuer under the Securities Exchange Act of 1934, as amended, and whether there is "substantial U.S. market interest" in the securities being offered. Category 1 transactions are those where the securities being offered are least likely to enter the U.S. The only restrictions here are that the transaction is made in an "offshore transaction" and that there are no "directed selling efforts" in the U.S. One type of offering that is eligible to qualify as a Category 1 transaction is "[a]n offering of securities of a foreign issuer that is directed into a single country other than the United States to the residents thereof that is made in accordance with the local laws and customary practices and documentation of such country." See Rule 903(b)(1)(ii)(A) of Regulation S.

The SEC staff confirmed that an issuer may rely on Rule 903(b)(1)(ii) of Regulation S for an offering of securities in more than one country that is part of the European Union (C&DI 277.02). As the SEC Staff pointed out in C&DI 277.02, Regulation S was adopted before the integration of the capital markets within the European Union. Given the level of integration resulting from the application of EU-wide laws and regulations relating to prospectuses, transparency, trading and other matters, the SEC Staff takes the position that issuers may rely on Rule 903(b)(1)(ii) to the extent that the local laws and customary practices and documentation are those of the European Union (as opposed to those of a single country within the European Union).

Also, for the reasons discussed above, the SEC staff confirmed that an issuer may rely on Rule 903(b)(1)(iv)—which allows certain securities offered to employees to be considered Category 1 transactions under Regulation S—for an offering of securities to employees if the laws, customary practices and documentation are those of the European Union rather just a "single" country other than the U.S. (C&DI 277.03).

Relying on Category 2 Guidance for Category 3 Transactions

The SEC staff confirmed that issuers conducting Category 3 transactions can rely on Category 2 guidance to establish that an offer and sale is not made to a U.S. person or for the account or benefit of a U.S. person (C&DI 277.04). In adopting Regulation S, the SEC stated that persons relying on the second issuer safe harbor (now referred to as Category 2) must "ensure (by whatever means they choose) that any non-distributor to whom they sell securities is a non-U.S. person and is not purchasing for the account or benefit of a U.S. person." In Securities Act Release No. 6863 (April 24, 1990), the SEC noted that the "safe harbor protection would not be available where offers and sales were made nominally to non-U.S. persons to evade the restrictions." In C&DI 277.04, the SEC Staff confirmed the applicability of this guidance to Category 3 transactions.

Electronic Certifications and Agreements Permitted

Regulation S requires certain certifications and agreements to be made in order to comply with its conditions. For instance, a Category 3 transaction requires that the purchaser make certain certifications and make certain agreements with respect to the reselling of the offered securities. Also, an offer or sale of warrants under Category 2 or 3 transactions requires each person exercising a warrant to give certain written certifications with respect to such person's status as a U.S. person. The SEC Staff confirmed that such certifications and agreements can be made electronically (C&DI 277.05). Any electronic procedures used by issuers and distributors to obtain such certifications and agreements may be implemented by third parties. Furthermore, according to the SEC staff, issuers and distributors may rely on electronic procedures to the same extent and in the same manner as when certifications and agreements are obtained in paper.

Applicability of Rule 903(b)(4) when Parent of Issuer is Guarantor of Debt Securities

Rule 903(b)(4) of Regulation S provides that 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 Rule 903(b) that apply to the offer and sale of the guarantee must be satisfied with respect to the offer and sale of the guaranteed debt securities. The SEC staff clarified that Rule 903(b)(4) also applies to offerings of debt securities that are guaranteed by subsidiaries of a parent company guarantor or parent company issuer (C&DI 277.06).  Accordingly, when the parent company is the issuer (or co-issuer) of debt securities and one or more subsidiaries is a guarantor or when the parent company is a guarantor and there are one or more subsidiaries that are also guarantors, as long as the payment obligation of the parent company is full and unconditional, then, in each case, Rule 903(b)(4) applies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions