SEWARD & KISSEL One Battery Park Plaza New York, New York 10004 April 29, 1997 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, N.W., Stop 6-9 Washington, D.C. 20549 Re: Request for Comment on Proposed Amendments to Regulation S File No. S7-8-97 ------------------------------- Dear Mr. Katz: This letter is submitted in response to the request of the Securities and Exchange Commission (the "Commission") for comment [NOTE: Release Nos. 33-7392; 34-38315; International Series Release No. 1056 (February 28, 1997) (the "Release").] on proposed amendments to Regulation S under the Securities Act of 1933, as amended (the "Securities Act"). Seward & Kissel represents clients that purchase Regulation S securities as part of their overall, long-term investment strategy. The views we express in this letter, however, are our own and do not necessarily reflect those of our clients. We commend the Commission's efforts to address what we recognize have become, in certain instances, abuses of the offshore transaction safe harbors. While we believe the proposed rules provide generally useful and beneficial revisions to Regulation S, in certain instances we believe that the proposed rules should be modified to retain the viability of Regulation S. Accordingly, we submit the following comments and urge the Commission to consider them before adopting the proposed rules. Introduction Regulation S places obligations on issuers, their affiliates and distributors. It does not place obligations on buyers of Regulation S securities. To date, buyers of Regulation S securities have had no explicit guidance as to when they may resell Regulation S securities into the U.S. public markets, other than the 40-day restricted period contained in Regulation S. Meanwhile, the Commission has "tested the waters" through a series of unofficial speeches and other pronouncements and its "Problematic Practices Under Regulation S" Release No. 33-7190, which detailed a series of acts, almost all of them applicable to issuers their affiliates and distributors, which could constitute abuses of Regulation S. This form of "testing the waters" left many buyers of Regulation S securities unsure as to what they could, and could not do with Regulation S securities that they had purchased in bona fide offshore public offerings. It is only right, therefore, that offshore buyers of Regulation S securities be given explicit parameters for whether and when they may sell Regulation S securities, and whether and when they may hedge their positions in the interim. The proposed amendments to Rule 903(b) under the Securities Act, however, eviscerate Regulation S by both classifying Regulation S securities as "restricted securities" and prohibiting the hedging of Regulation S securities. By contrast, under present interpretations, hedging of restricted securities under Rule 144 in perfectly permissible. Evidently, the Commission is concerned that buyers of Regulation S securities have requisite investment intent. This is a great change from the situation that prevailed when Regulation S was adopted when the Commission was concerned that distributions of unregistered securities come to rest abroad no matter the intent of the original offshore buyers of those securities. Holding Period Regulation S currently contains holding periods during which issuers, distributors and their affiliates who are relying on certain Regulation S safe harbors may not sell Regulation S securities to a U.S. person or anyone acting for the account of a U.S. person. Under the proposed amendments, the holding period for equity securities of domestic reporting issuers and foreign reporting issuers whose principal market is in the United States would be lengthened from 40 days to two years, while the holding period for equity securities of foreign non-reporting issuers whose principal market is in the United States would be lengthened from one year to two years. Immediately reselling Regulation S securities in the U.S. public markets after the 40-day restricted period may result, in essence, in the distribution of unregistered securities into the United States that should otherwise have been registered. While the lengthening of the holding period will curb such abuses, we believe that a two year period goes well beyond the period necessary to insure both that investors in Regulation S securities have a legitimate investment intent and that a distribution of Regulation S securities has come to rest abroad. In a similar context, for example, the regulatory scheme of Section 16 of the Securities Exchange Act of 1934 requires only that insiders hold their securities for a six-month period. This period was designed to, among other things, ensure that insiders who invest in their companies are doing so with an eye toward long-term investing rather than short-term profit. In the words of the Seventh Circuit, "Section 16(b) was designed to prevent speculation in corporate securities by 'insiders' . . . Conversely, Congress sought to avoid unduly discouraging bona fide long-term contributions to corporate capital." Bershad v. McDonough, 428 F.2d 693, 696 (7th Cir. 1970). In the case of Regulation S securities, a holding period of two years will eliminate the present market for such securities. As a result, the numerous small capitalization issuers who use Regulation S will be unable to use what has become a flexible, non-burdensome procedure for raising much- needed capital. We believe a six-month holding period, on the other hand, will achieve the goal of curbing abuses of Regulation S by insuring that purchasers of Regulation S securities, like statutory insiders under Section 16 of the Exchange Act, have requisite investment intent. A six-month period will also ensure that securities come to rest with offshore investors before they are resold in the aftermarket. A six-month holding period will produce this benefit while retaining the viability of Regulation S for the small capitalization issuers who need it to remain competitive. Classification as Restricted Securities The proposed amendments to Rule 905 will classify all Regulation S securities as "restricted securities" under Rule 144 of the Securities Act. Therefore, any purchaser of a Regulation S security would have to comply with the applicable one or two year holding period under Rule 144 before reselling the securities to any United States person. The Commission has requested comment on whether a shorter holding period should apply to such resales. Rule 144's holding period is objective. It does not depend on a person's intent is purchasing and holding restricted securities. Offshore buyers need an objective standard for determining when they may resell Regulation S securities. However, placing such significant resale restrictions on Regulation S securities will make Regulation S securities less attractive investments. It will reduce their liquidity and therefore increase the risk of investing in them. Prior to the adoption of Regulation S, the trend in offshore offerings was to shorten contractually imposed limitations on resale into the United States from two years to one year to nine months. We believe that a six-month holding period applicable to purchasers is sufficient time to assure that an offering of regulation S securities has come to rest outside the United States. Restrictions on Hedging The Commission urges that restrictions on hedging apply to Regulation S securities. If this approach is adopted, no hedging of Regulation S securities will be allowed during the one or two year holding period required by Rule 144. The Commission has requested comment on these proposed restrictions on hedging. There should be no restrictions placed on hedging of Regulation S securities by the purchasers of such securities so long as the hedging of privately placed restricted securities under Rule 144 is permitted. Offshore buyers need explicit guidance as to what sort of hedging is permitted and what is prohibited. Commission interpretations to date under Rule 144 provide ample guidance on that point. See, e.g., Securities Act Release No. 6862 (April 23, 1990) and Securities Act Release No. 6099, Questions (80) and (81) (August 2, 1979). Hedging is not per se abusive. Hedging is a normal part of an institutional investor's normal investment activities. We believe the Commission incorrectly views such hedging transactions as speculative in nature rather than a legitimate means to reduce the risk of investment. Purchasers of Regulation S securities should be allowed the same flexibility to protect the value of their investment as other investors. Many purchasers of Regulation S securities manage the assets of clients and would violate their duties to their clients if they did not attempt to reduce the risks of their investments. Limiting their ability to manage the risks of investing in Regulation S securities would reduce significantly the attractiveness of such investments and hence the viability of offering securities through this procedure. A six-month holding period with the sort of hedging activities presently allowed by Rule 144 would provide ample protection against the distribution of unregistered securities into the U.S. public markets while allowing offshore investors to engage in non-abusive hedging activities. * * * We appreciate the opportunity to comment on the proposed amendments to Regulation S. If you have any questions regarding this letter please contact the undersigned at the telephone numbers indicated below. Very truly yours, Gary J. Wolfe, Partner Seward & Kissel One Battery Park Plaza New York, NY 10004 wolfe@sewkis.com (212) 574-1223 01315001.AB8