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What are Regulation S and Regulation D?

Is the Reg D offering intended for investors residing in the United States and the Reg S offering intended for investors (e.g. people from China) outside the United States? If an EB-5 offering is registered under Reg D, does it mean that it will only sell to investors in the United States? Is an F-1 student (from China) considered an investor in the United States?

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    Michael G Homeier

    Securities Attorney
    Answered on

    An offering of securities of a U.S. issuer must be registered with the SEC, unless an exemption from registration is available. The Regulation D exemption allows for an unregistered offering that complies with all the requirements of the Regulation. One of the requirements is that the offering be private, that is, not offered to the public and thus having no public advertising or solicitation. This is referred to as "Reg D Rule 506(b)" for the rule under Reg D that provides this exemption. The investors who are targeted may reside in any country (the United States, China, Brazil, India, wherever), but again cannot be publicly solicited and there can be no public advertising anywhere, whether in the United States or in a foreign country. Another Reg D avenue changes the "no public advertising allowed" and permits the issuer to advertise and solicit publicly, meaning via the internet, television, radio, print, and in-person marketing. This is referred to as "Reg D Rule 506(c)." Again, the investors may be in any country, and may now be solicited publicly; however, the issuer must take additional steps to verify that all investors who actually subscribe are accredited investors. Verification must be done when the investor subscribes, which means it cannot be done afterwards. This means an issuer cannot fall into compliance with Reg D through Rule 506(c) without having conducted the verification - even if, had the verification been done, the investor is in fact actually accredited and that would have been verified through the verification process been done. An issuer who fails to undertake verification at the time of investment cannot fix this problem later. So, Reg D Rule 506(c) has the advantage of allowing public advertising to investors in any country, but adds the requirement of timely verification. There are independent third-party accredited investor verification companies that perform verification so the issuer does not need to do this itself, but still meets the requirement of the rule. This is a new change to the law, and no doubt in large part because it is new, most issuers stay using Rule 506(b) (no public advertising) rather than Rule 506(c) (public advertising if verification); however, I can report that an increasing number of the over 400 EB-5 projects on which my firm has worked are now increasingly using 506(c). The Regulation S exemption is intended to exempt offerings made exclusively to foreign investors, and its wording uses the expression "non-US persons." This status is mostly (but not entirely) geographically based, meaning if a person is physically in the United States, he or she is considered a U.S. person even if they are not a permanent resident or citizen, and are also a U.S. person if they are lawfully in the United States under another visa. Reg S permits sales only to non-U.S. persons, and to support this reasoning, the second requirement of Reg S is that there be no "conditioning of the US market" (essentially meaning there is no advertising in or solicitation inside the United States). Many securities law firms routinely structure offerings to be conducted so as to claim both the Reg D and Reg S exemptions for all investors physically located outside the United States. That way, if one exemption or the other is lost, there is a fall-back exemption to rely on rather than facing a situation of having conducted an unexempt offering that was not registered - which would cause serious issues. Care must be exercised to avoid a conflict inherent in this two-exemption strategy where the type of Reg D exemption claimed is that provided by Rule 506(c), which again is the newer rule that permits public advertising. Remember, Reg S prohibits public advertising in the United States, so an offering under 506(c) cannot be publicly advertised in the United States, meaning the advertising must not be accessible in the United States. In real life, it can be difficult to publicly advertise outside the United States in such a way that no U.S. person can access or receive the advertising. While difficult, it is not impossible, but if not done right, there is the possibility that the Reg S exemption could be lost. In such case, the 506(c) exemption requirements must be strictly complied with, or again the conclusion would be a loss of both exemptions with no fallback, leaving the offering as unexempt and unregistered, hence vulnerable to SEC enforcement action. Issuers claiming both D and S target non-U.S. investors. If they additionally target some potential investors located in the United States, such as children in college or working in the United States under other visas, a companion offering is used to sell the same investment but only claiming the Reg D exemption - because Reg S would by its terms not be available to U.S. persons.

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    Vaughan de Kirby

    Immigration Attorney
    Answered on

    These are very astute questions. Reg. D covers any transaction that takes place in the United States. If the sale and execution of the documents take place in the United States, the investor must be accredited. Accredited requires an individual to have an annual income over the last two years of $200,000 - a couple $300,000 or $1,000,000 in assets. As an F-1 student you can be a non-resident as you are on a temporary stay. However, if you sign the offering documents in the United States, it falls under Reg. D. Reg. S requires that the entire transaction takes place in a foreign jurisdiction. Your investment immigration attorney should be able to properly advise you on these issues.

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