Regulation S (Reg S)

The offering must be an offshore transaction. This means:

• No directed selling efforts can be made in the United States.
• The offer must originate from outside the U.S.
• The buyer must be outside the U.S. at the time of the buy order. This prevents the rule from being used to circumvent U.S. domestic registration.

Reg S divides issuers and offerings into two categories with different resale restrictions:

• Category 1: For issuers with no substantial U.S. market interest in their securities. No resale restrictions apply.
• Category 2: For reporting foreign issuers and non-reporting foreign issuers. A 40-day distribution compliance period restricts resales to U.S. persons or for the account of U.S. persons.
• Category 3: For U.S. issuers and reporting foreign private issuers. Has a one-year restricted period and requires additional legending and certification.

A cornerstone condition. The issuer, distributor, or their affiliates cannot engage in any activity that could be seen as conditioning the U.S. market. This includes:

• Placing ads in U.S. media.
• Holding promotional seminars in the U.S.
• Making unsolicited calls to U.S. residents. Marketing must be genuinely targeted and effective only outside the United States.

In crypto, Reg S is used for security token offerings (STOs) to non-U.S. investors. Key considerations include:

• Ensuring geographic blocking of IP addresses from the U.S. on sale platforms.
• Implementing KYC/AML checks to verify non-U.S. investor status.
• Applying restrictive legends to token contracts or documentation.
• Structuring the sale to clearly fall under Category 2 or 3, typically with a lock-up period for tokens sold to non-U.S. persons.

Reg S and Regulation D are the two primary exemptions used for crypto securities offerings, but they target different investors:

• Regulation S: For non-U.S. investors only. No limit on the number of investors, but strict geographic rules.
• Regulation D (Rule 506c): For accredited investors within the U.S. Requires verification of investor accreditation status and limits general solicitation to pre-verified investors. Issuers often run parallel offerings under both regulations to access global capital.

The safe harbor is not automatic; it requires active compliance. Key risks include:

• Integration Risk: If a concurrent U.S. offering (e.g., under Reg D) is not properly structured, the SEC may integrate them, voiding the exemption.
• Resale Violations: Tokens sold under Reg S may be locked (e.g., for 40 days or 1 year). Premature resale into the U.S. market can jeopardize the exemption.
• Substantial U.S. Market Interest (SUSMI): If a token develops significant U.S. holder concentration, future Reg S offerings may be challenged.

This category applies to foreign issuers for which there is no substantial U.S. market interest in the class of securities being offered. It imposes the fewest restrictions.

• Key Conditions: The issuer must be a foreign entity not reporting to the SEC, and the securities must be offered in an offshore transaction with no directed selling efforts in the U.S.
• Example: A German company with no U.S. operations or investor base conducts a private placement exclusively in Europe.

This category covers foreign issuers, both those that report to the SEC and those that do not, where there is a substantial U.S. market interest in the securities.

• Key Conditions: Requires a 40-day distribution compliance period during which offers and sales to U.S. persons are prohibited. Securities must bear a Reg S legend restricting transfer.
• Example: A Canadian mining company listed on the TSX, with significant U.S. shareholder interest, issues new shares to non-U.S. investors.

This is the most restrictive category, applying to U.S. domestic issuers and foreign governments issuing debt securities.

• Key Conditions: Imposes a 40-day distribution compliance period for debt and a one-year compliance period for equity. Requires purchaser certification of non-U.S. person status and a contractual agreement not to resell to U.S. persons during the compliance period.
• Example: A Delaware-incorporated tech startup conducts a Regulation S offering of convertible notes to investors in Asia.

A fundamental pillar of Reg S is that the offer and sale must be an offshore transaction.

• Definition: No offer is made to a person in the United States, and either:
  • The buyer is outside the U.S. at the time of the buy order, or
  • The transaction is executed on a designated offshore securities market (e.g., certain foreign exchanges).
• Purpose: Ensures the securities offering is genuinely extraterritorial and not indirectly targeting the U.S. market.

Issuers and distributors are prohibited from engaging in directed selling efforts in the United States.

• Definition: Any activity that could reasonably be expected to condition the U.S. market for the offered securities. This includes placing ads in U.S. media, holding promotional seminars in the U.S., or conducting unsolicited calls to U.S. residents.
• Permitted Activity: General advertising that is not targeted, such as a global press release or information on a password-protected website for non-U.S. persons.

To prevent immediate flowback into the U.S., Reg S imposes a distribution compliance period (or "restricted period") during which resale to U.S. persons is prohibited.

• Duration: Varies by issuer category (e.g., 40 days for Category 2, 1 year for Category 3 equity).
• Mechanisms: Securities are restricted securities during this period. They must bear a legend, and transfer agents are instructed not to register transfers not in compliance with Reg S.
• Hedging Restrictions: During this period, hedging transactions with U.S. persons are also prohibited.

Regulation S creates a legal exemption for offerings that occur in an "offshore transaction" with no "directed selling efforts" in the United States. For token projects, this means the entire marketing, sale, and distribution process must be intentionally structured to target only non-U.S. investors. Key conditions include:

• Offshore Transaction: The buyer must be outside the U.S. at the time the buy order is originated.
• No Directed Selling: No general solicitation or advertising aimed at the U.S. market.
• Implementation: Often involves geo-blocking IP addresses, rigorous KYC/AML checks to verify investor location, and contractual restrictions on resale to U.S. persons.

Reg S defines three categories of offerings with varying restrictions, primarily based on the perceived level of U.S. market interest and the issuer's reporting status.

• Category 1: For issuers with no "substantial U.S. market interest." Minimal resale restrictions.
• Category 2: For reporting issuers (e.g., SEC-registered foreign companies) and non-reporting foreign issuers. Tokens are subject to a 40-day distribution compliance period where they cannot be offered/sold to U.S. persons.
• Category 3: For non-reporting U.S. issuers. This is common for many U.S.-based blockchain startups. It imposes the strictest rules: a 40-day distribution compliance period and a subsequent one-year "restricted period" where tokens cannot be resold to U.S. persons or on a U.S. exchange.

To comply with Category 2 or 3, projects implement technical and contractual lock-ups. This often involves issuing tokens with transfer restrictions encoded at the smart contract level. For example, a token contract may enforce a one-year lock for Reg S purchasers, preventing on-chain transfers to any address not whitelisted as a non-U.S. person. These restrictions are critical for maintaining the safe harbor and preventing the tokens from flowing back into the U.S. market prematurely, which could be deemed an unregistered domestic offering.

While Reg S is for non-U.S. investors, Regulation D provides exemptions for private placements to accredited investors within the United States. A typical token sale (e.g., an ICO or SAFT) is often split into two parallel offerings:

• A Reg D 506(c) offering to verified accredited U.S. investors (allowing general solicitation).
• A Reg S offering to non-U.S. persons outside the United States. This dual-structure allows projects to access global capital while attempting to comply with U.S. securities laws. The tokens from each offering are typically subject to different lock-up periods.

The SEC actively monitors for violations of Reg S conditions. Key risks for digital asset issuers include:

• Inadequate KYC/AML: Failure to properly verify investor nationality can invalidate the safe harbor.
• Restricted Token Flowback: If tokens sold under Reg S are quickly resold into the U.S. market (e.g., on a secondary exchange), the SEC may deem the original offering non-compliant.
• Marketing Missteps: Conducting roadshows, publishing materials, or engaging influencers that reach a U.S. audience can constitute "directed selling efforts." Enforcement actions can result in rescission offers, fines, and sanctions.

A decentralized protocol based in the U.S. plans a token generation event (TGE) for its governance token. To fund development, it conducts a pre-launch sale:

1. For U.S. Investors: Uses a SAFT (Simple Agreement for Future Tokens) under Reg D 506(c), sold only to accredited investors. Tokens are locked post-TGE for 12 months.
2. For International Investors: Uses a Purchase Agreement under Reg S, Category 3. Investors are vetted via KYC to confirm non-U.S. status. Tokens are distributed at TGE but are contractually and technically locked from transfer to U.S. persons or exchanges for one year. This structure demonstrates the practical application of Reg S in a common blockchain fundraising model.

Regulation S establishes two categories of offerings with distinct restrictions to prevent flowback into the U.S. market.

• Category 1: For offerings in countries with no substantial U.S. market interest. Minimal restrictions apply.
• Category 2: For offerings in countries where a substantial U.S. market interest exists. Requires a 40-day distribution compliance period for debt and a one-year period for equity, during which securities cannot be offered or sold to U.S. persons.
• Category 3: For offerings by domestic issuers not reporting with the SEC. Has the most stringent restrictions, including a one-year distribution compliance period and specific offering and transactional requirements.

To qualify for the exemption, an offering must meet two fundamental conditions.

• Offshore Transaction: All offers and sales must occur outside the United States. The buyer must be outside the U.S. at the time of the buy order, or the transaction must be executed on a designated offshore securities exchange.
• No Directed Selling Efforts: The issuer, distributor, or their affiliates cannot engage in any activity that could be seen as 'directed selling efforts' in the United States. This includes placing advertisements in U.S. media or conducting roadshows targeted at U.S. investors.

Reg S is a common framework for initial coin offerings (ICOs) and token generation events (TGEs) targeting non-U.S. investors.

• Issuers implement geographic blocks (e.g., IP address filtering) and require investor attestations of non-U.S. residency.
• Tokens sold under Reg S are typically subject to a lock-up period (e.g., 40 days or 1 year) where they cannot be transferred to U.S. persons or onto U.S.-based exchanges.
• The SEC has taken enforcement actions against projects that failed to prevent flowback, treating the initial unregistered sales to U.S. persons as violations.

While both are exemptions from SEC registration, Reg S and Reg D serve fundamentally different purposes and investor bases.

• Regulation S: For offerings outside the United States to non-U.S. persons. No limit on the number of investors or their accreditation status.
• Regulation D (e.g., Rule 506(b/c)): For offerings within the United States to accredited investors (and a limited number of sophisticated non-accredited investors under Rule 506(b)). Involves filing a Form D with the SEC.
• A combined Reg D / Reg S offering is a common structure to raise capital from both U.S. accredited investors and a global investor pool simultaneously.

The exemption is not a one-time event; issuers and distributors must prevent the illegal 'flowback' of securities into the United States.

• Legending: Securities certificates or on-chain metadata must bear a legend stating they were sold under Reg S and cannot be sold in the U.S. or to U.S. persons until the compliance period ends.
• Stop Transfer Instructions: Issuers must instruct their transfer agent (or implement smart contract logic) to refuse transfers that would violate the conditions.
• Due Diligence: Distributors must perform reasonable checks to ensure buyers are not U.S. persons acting as conduits. Failure can result in the loss of the safe harbor and SEC enforcement.