Rule 905 of Regulation S
Rule 905 provides that equity securities of domestic issuers acquired from the issuer, distributor, or any of their respective affiliates in a transaction subject to the safe harbour rules discussed above are deemed to be restricted securities, and resales by any offshore purchaser must be made pursuant to Regulation S or another exemption from Securities Act registration.
The following definitions are integral to an understanding of Regulation S.
1. “U.S. Person”: For individuals, based largely on residence, rather than nationality. Entities have residence largely based upon where they are formed, with the exception of identifiable branches of entities, which may themselves be treated as the equivalent of separate organizations. Accredited investors can form an offshore entity that will be treated as a non-U.S. Person for this purpose. Detailed rules govern trusts and estates, and other professional fiduciaries, which are designed to mitigate disadvantages to U.S. professional fiduciaries by ensuing that, subject to certain conditions, offers to them for the account of non-U.S. Persons will not trigger Securities Act registration, despite the making of an offer to the fiduciary in the United States.
2. “Substantial U.S. Market Interest” or “SUSMI”: present with respect to a class of equity securities if (i) U.S. securities exchanges and NASDAQ in the aggregate constituted the single largest market for such class of securities in the issuer’s prior fiscal year, or (ii) 20% or more of trading in the class of equity securities during such period occurred in such U.S. markets and less than 55% of trading in such securities took place during that period through the facilities of the securities markets or a single foreign country. Separate SUSMI rules apply in the case of debt securities.
3. A “foreign issuer” is a foreign organized entity other than such an entity that has more than 50 percent of its voting securities being held by U.S. residents and either (i) the business of the company is administered principally in the U.S., (ii) 50 percent or more of its directors or executive officers are U.S. residents or (iii) more than 50% of its assets are located in the United States.
4. “Overseas Directed Offering”: An offering by a foreign issuer “directed into a single country other than the United States to the residents thereof … in accordance with the local laws and customary practices and documentation of such country….”
5. “Offering Restrictions”: Offering restrictions require each distributor to agree in writing that all offers and sales of the securities prior to the expiration of the distribution compliance period (A) shall be made only (i) in accordance with the provisions of the applicable safe harbours, (ii) pursuant to registration of the securities under the Securities Act, or (iii) pursuant to an available exemption from the registration requirements of the Securities Act and (B) for offers and sales of equity securities of domestic issuers not to engage in certain prohibited hedging transactions prior to the end of the distribution compliance period. The offering restrictions also require that 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 distribution compliance period must include statements to the effect that the securities have not been registered under the Securities Act and may notbe offered or sold in the United States or to U.S. Persons (other than distributors) unless the securities are registered under the Securities Act or an exemption from the registration requirements of the Securities Act is available, and, in the case of equity offerings by domestic issuers, statements concerning the hedging prohibition. Such statements should 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 a summary form on prospectus cover pages and in advertisements.
Broker-dealers must ensure that they are not unlawfully effecting distributions of Canadian securities in the United States in violation of Regulation S and other U.S. securities law requirements. This may result, for example, from purchases of small cap issues by foreign accounts from the issuer, a promoter or affiliated entities ostensibly using Regulation S or some other purported exemption for resale into the United States for the purpose of effecting a distribution. Such transactions may be found to violate the registration requirements of the Securities Act and have severe consequences.
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