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   Section 5 of the Securities Act of 1933 – the so called “registration requirement” – makes it unlawful to use the U.S. mails or the instrumentalities of U.S. interstate commerce to offer or sell any security unless such offer or sale is registered with the Securities and Exchange Commission (the "SEC") or is exempt from registration. The term “instrumentalities of U.S. interstate commerce” has been broadly construed to include limited or incidental contact with the United States.

   However, the SEC has historically taken the position that the registration requirement should not apply to offerings made outside the territorial boundaries of the United States where the securities are likely to come to rest abroad. Regulation S, which was promulgated in 1990, codified this position. Regulation S can essentially be viewed as a jurisdictional limitation on the SEC's exercise of its powers, based on the premise that transactions occurring offshore to non-U.S. persons do not need SEC oversight as long as protections are put in place to ensure that the underlying securities do not flow back into the United States.

   Regulation S can be used in different ways by different types of issuers. Regulation S affords foreign issuers a straight line test for confirming that their offshore offerings are not subject to U.S. registration. It also gives U.S. public companies a means of quickly tapping offshore capital markets without incurring the expense and delay associated with a registration statement.

   Less well known, Regulation S can also be used by private U.S. issuers as a means of raising capital outside of the United States. Unlike the so-called "private placement" exemptions under the Securities Act (e.g., Regulation D and Section 4(2)), Regulation S contains no limits on the number of persons to whom securities may be offered or sold, nor does it contain any requirements as to the wealth or financial sophistication of the offerees.

   Accordingly, where otherwise complying with applicable local law, it is possible for a private U.S. issuer to sell equity securities offshore in a “public” manner (although it must be careful to limit the number of investors in the offering so as not to become an involuntary reporting company under the Securities Exchange Act of 1934).

   JPCA specializes in these “quasi-public” offerings and works with local counsel (to ensure compliance with offshore law) and to assure a valid Regulation S exemption.

Regulation S contains three main substantive rules.

The first (Rule 901) sets forth the general principal that offerings occurring "outside the United States" will not be deemed to be "offers or sales" for purposes of Section 5 of the Securities Act.

The other two rules (Rule 903 and 904) are two separate "safe harbors." Where the criteria of the applicable safe harbor are satisfied, the given offering will be deemed to have been made "outside the United States" for purposes of Rule 901.

Rule 903 is the more stringent of the two safe harbors and is the one that must be relied on by issuers, distributors, and their respective affiliates. Rule 904, a less stringent safe harbor, is available for resale's by other persons.

Both safe harbors have two “general conditions” that must be met.

• First, the applicable offer or sale must be made in an "offshore transaction." For a private U.S. issuer, this generally means that (i) no “offer” may be made to any person physically located in the United States, and (ii) each purchaser of securities must be outside the United States at the time of the decision to purchase the security.
  
  
• The second general condition is that no "directed selling efforts" be made in the United States. "Directed selling efforts" generally means any activity that could reasonably be expected to condition the U.S. market for the securities being offered.

   Equity securities of a private U.S. issuer would automatically constitute Category 3 securities and therefore would be subject to the most onerous additional conditions.

These conditions include:

• Obtaining the written agreement of each "distributor" in the offering, if any, to agree to certain resale limitations during a one-year “distribution compliance period.”
  
  
• Placing certain statements and legends on the materials and documents circulated in connection with the offering.
  
  
• Not selling any of the securities to a " U.S. person" (as defined in Regulation S) during the distribution compliance period.
  
  
•  Acquiring a certification from each purchaser of the securities that such purchaser is not a U.S. person and is not purchasing the securities for the benefit of any U.S. person.
  
  
• Requiring the issuer to contractually agree not to register any transfer of the securities not made in accordance with the registration or exemptive provisions of the Securities Act, or Regulation S.

   An additional rule (Rule 905) provides that securities issued in reliance on Regulation S are deemed "restricted securities" under the Securities Act and, thus, are not freely saleable absent a valid exemption.