Regulation S

Regulation S (Reg S) is an SEC safe harbour providing that Securities Act registration requirements do not apply to offers and sales of securities made outside the United States to persons who are not US persons. Promulgated in 1990 under the Securities Act 1933, Reg S is based on the territorial principle: US securities law governs offerings in the US market, but the US regulatory perimeter does not extend to purely offshore transactions.

In security token offerings, Reg S is routinely combined with Regulation D (for the US component) to structure a single global raise: US accredited investors purchase under Reg D Rule 506(c); non-US investors in designated offshore jurisdictions purchase under Reg S, without the need to register the offering with the SEC.

General Conditions

For Reg S to apply, two general conditions must be satisfied:

1. Offshore transaction: The offer is made to a person outside the US, and the buyer is located outside the US at the time of the buy order.
2. No directed selling efforts: No selling efforts are made in the US — including US-targeted advertising, road shows in the US, or conditioning the US market for the securities.

These conditions must be met regardless of which Reg S category applies.

Category 1, 2, and 3

The SEC imposes additional distribution compliance requirements based on the risk that offshore securities could flow back into the US market, categorised by issuer type and the extent to which a US market for the securities exists:

Category 1 (lowest restriction): Foreign issuers with no substantial US market interest and foreign government issuers. No additional resale restrictions beyond the general conditions. Securities may be sold freely in offshore transactions immediately.

Category 2: Reporting US issuers and foreign issuers whose securities have a substantial US market interest (for equity securities). A 40-day distribution compliance period applies during which securities may not be sold to US persons or for the account of US persons. Distributors must send notice to purchasers that they cannot resell to US persons during the restricted period.

Category 3 (most restrictive): Non-reporting US issuers. A one-year distribution compliance period applies for equity securities (40 days for debt securities). Purchasers must certify they are non-US persons, securities must bear a Reg S legend, and hedging through US securities markets is prohibited.

Distribution Compliance Period

The distribution compliance period is the period following the offering during which Reg S securities may not be resold to US persons. In security token architectures, this restriction is enforced by programming it into the token’s smart contract as a jurisdictional transfer restriction: transfers to addresses associated with US persons (as determined by the identity registry) are blocked until the compliance period has elapsed.

US Person Definition

Reg S Rule 902(k) defines “US person” broadly, including: any natural person resident in the US; any partnership or corporation organised or incorporated under US law; any estate or trust whose administrator or trustee is a US person; and certain other entities with US connections. Non-US persons who are US tax residents may also be treated as US persons for securities law purposes. The broad definition requires careful KYC documentation to support Reg S reliance.

Integration Risk

If a Reg S offering and a concurrent US domestic offering are found to be integrated — part of a single plan of financing — the Reg S safe harbour may be lost, treating the entire offering as a US offering requiring registration. The SEC’s integration analysis considers factors including whether the offerings are part of the same plan of financing, whether they involve the same class of securities, whether they are made at the same time, whether the same type of consideration is received, and whether they are made for the same general purpose.

Safe harbour provisions under Rule 502(a) and recently updated SEC integration guidance provide mechanisms to avoid integration where the US and offshore offerings are genuinely separate.

Cross-Border STO Structure

A typical cross-border STO using Reg D + Reg S operates as follows: The issuer creates two token tranches (or a single token class with two distinct CUSIP/ISIN equivalents). US accredited investors receive Reg D tokens subject to the applicable lock-up. Offshore investors receive Reg S tokens subject to the distribution compliance period. After their respective restricted periods, both tranches may be combined into a single freely tradable class — subject to exchange or ATS listing requirements.

Related entries: Regulation D, Regulation A+, Accredited Investor, Security Token Offering (STO)

Primary source: SEC Regulation S