How to raise money with a Foreign Stock Offering

Are you interested in raising capital for your existing or new business without the advertising and solicitation restrictions imposed by Regulation D? You need to know about launching a Foreign Stock Offering. A Foreign Stock Offering is a private placement offering which utilizes Regulation S, a seldom-used federal law that allows raising capital in foreign countries without the need to go through the costly and time-consuming federal securities registration process.

The Regulation S Offering (Reg. S) is an exemption designed by the SEC for companies seeking to raise capital from investors located OUTSIDE of the United States. Regulation S under the Securities Act of 1933, as amended (the "Securities Act") is a safe harbour rule that defines when an offering of securities would be considered an "offshore transaction" so as not to be subject to the registration obligations imposed under Section 5 of the Securities Act.

In addition to the savings in time and money, a Foreign Stock Offering can often be more effective than an exempt private placement offering in the United States. Unlike the restrictions imposed by Regulation D, a U.S. company or any person acting on its behalf seeking to raise capital utilizing Regulation S exemption MAY:

• Offer or sell its securities using any form of "general solicitation" or "general advertising" as long as it is not directed into the U.S.
• Use foreign investor direct mailing lists
• Pay finders fees for referring non-U.S. accredited investors (need not be "broker-dealers")
• Place tombstone ads describing the offering in magazines and newspapers circulated in foreign countries so as long as the advertisement/solicitation are not directed into the U.S.

Regulation S only exempts the issuer from the registration requirements. It does not exempt the issuer from anti-fraud provisions. The SEC has broad jurisdiction powers. They take the position that if fraudulent conduct occurs inside the United States or has an effect within the United States, they can take action against the issuer even if the securities are sold abroad.

If you are considering raising money offshore using Regulation S, you need to know the following:

There are two main requirements in using Regulation S. The first is the offer and sale of the securities must be in legitimate offshore transactions. You may not offer or sell any securities to a U.S. citizen or resident even if that person purchases the securities abroad. Also, the sale must not be done for the purpose of secretly selling the securities to a U.S. investor. The second requirement is that there cannot be any directed selling efforts in the United States. Generally, this means you cannot advertise the offering in a publication where the circulation crosses over to the U.S.

Regulation S provides two exemptions or safe harbors from U.S. securities registrations: an exemption for the initial sale and another exemption for the resale of securities after they are held for a period of time -- normally one year.

An important advantage of using Regulation S is you are able to advertise in the foreign markets in newspapers and other publications.  You are allowed to hold seminars, road shows and engage in other general solicitation. Make sure you are complying with the foreign countries' securities laws.

Although the use of the internet to raise capital in a private offering is still considered prohibited by the SEC, there are alternative ways to drive foreign (non-U.S.) investors to your company's website without violating any rules.

Also, Foreign Stock Offerings (Reg S) are not integrated with Section 5 public offerings or Reg. D Private Placement Offerings. Reg D offering documents contain rules which apply to U.S. transactions. But Reg S offering documents contain rules which apply to foreign transactions only. Therefore, you can conduct simultaneous Private Placement Stock Offerings (Reg. D for U.S. investors) and a Foreign Direct Stock Offering (Reg. S for non-U.S. investors) without jeopardizing either exemption. Also, Reg S (non-U.S.) investors are treated the same way as accredited investors for the purpose of determining compliance with the 35 non-accredited investor limitation outlined in Reg D U.S. private placements.

Next time you are faced with difficulties in raising capital in the U.S., think about going "global" with a Foreign Stock Offering.