April 29, 1997
By Federal Express and Electronic Mail
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549
Re: Offshore Offers and Sales; Proposed Rules
File No. S7-8-9________________________
Ladies and Gentlemen:
The Committee on Securities Regulation of the Business Law Section of the New York State Bar Association appreciates the opportunity to comment on Release Nos. 33-7392 and 34-38315 and International Series Release No. 1056, dated February 20, 1997. The Release proposes certain amendments to Regulation S under the Securities Act of 1933 (the "Securities Act") and related changes designed to stop abusive practices in connection with offerings of equity securities purportedly made in reliance on Regulation S. In particular, the Release proposes (i) to classify certain equity securities placed offshore in reliance on Regulation S as "restricted securities" within the meaning of Rule 144, and to apply the Rule 144 holding periods to such equity securities; (ii) to impose certification, legending and other requirements now only applicable to sales of equity securities by non-reporting issuers; (iii) to require purchasers of such equity securities to agree to refrain from hedging transactions with regard to such securities except in compliance with the Securities Act; (iv) to prohibit the use of promissory notes as payment for these securities; and (v) to establish that resales of restricted securities under Regulation S do not affect the restricted status of such securities.
The Committee on Securities Regulation is composed of members of the New York Bar, a principal part of whose practice is in securities regulation. The Committee includes lawyers in private practice and in corporation law departments. A draft of this letter was circulated for comment among our
members and the views expressed herein are generally consistent with those of a majority of our members who reviewed the letter in draft form. The views set forth in this letter, however, are those of the Committee and do not necessarily reflect the views of the organizations with which our members are associated, the New York State Bar Association or its Business Law Section.
In summary, while we accept the Commission's conclusion that remedial action is warranted to prevent abuses of Regulation S for sales of equity securities by domestic issuers, we suggest below some circumstances where the proposed new restrictions should not be applied to domestic issuers. We believe, however, that the extension of these new restrictions to foreign issuers is inappropriate, is not justified by the record of foreign issuers availing themselves of Regulation S, and represents a fundamental and unfortunate reversal in the trend toward internationalization that the Commission has been pursuing for many years. We believe that any abuses in connection with equity offerings by foreign issuers, if indeed such abuses occur, can be adequately addressed through enforcement action under existing rules. To the extent that the Commission nevertheless deems it appropriate to extend the proposals to foreign issuers with a "principal market in the United States" for their equity securities, we would advocate a much higher threshold than 50% (e.g., 80% or 90%) for purposes of applying the proposed new restrictions. Further, we suggest that the measurement period for determining principal trading market status be reduced from one year to ninety days, in order to reduce the administrative burden required to collect and analyze the requisite trading data for making such determination, and to reflect current markets . Our more detailed comments are set forth below.
Continue Safe Harbor Protection for Equities. The Committee strongly supports your view that a complete elimination of the safe harbor for equity offerings by domestic reporting issuers under Regulation S is unwarranted. The proposed increased restrictions will inhibit abuses while preserving some (albeit limited) financing flexibility for domestic issuers with bona fide offshore markets for their equity securities.
Continue Safe Harbor Protection for Debt Securities without New Restrictions. We strongly support the Commission's decision not to apply the new restrictions proposed in the Release to offerings of debt securities. We agree that trading markets for debt securities have not facilitated abusive practices relating to Regulation S.
New Restrictions on Domestic Equity Issuers. As the Release notes, the effect of the proposed amendments is to treat covered equity securities offered and sold pursuant to Regulation S as "restricted securities" within the meaning of Rule 144. This significantly lengthens the current restricted period for
such securities (for reporting issuers, from 40 days to two years, and for non-reporting issuers, from one year to two years). Some of our members observe that 40 days of equity risk is already considered quite lengthy by many measures, and may well be strong indicia of a bona fide offshore transaction. The Committee nevertheless accepts that some changes -- including an increased restricted period, the legending of securities (although this may be impracticable in some foreign jurisdictions) and stop-transfer instructions -- may be necessary to inhibit abuses of Regulation S. With respect to the proposed new purchaser certification requirements, however, the Committee is concerned that the effect may be to render Regulation S essentially unavailable to domestic issuers for equity offerings, in that we believe many foreign purchasers are reluctant to sign such certificates. We would also suggest carve-outs from the new requirements (1) based on the "overseas directed offering" concept already in Regulation S, but expanded so that the offering need not be limited to a single country (offerings directed into the European Union, for example, should qualify for the carve-out), or (2) where there is an existing market outside the U.S. for the class of securities being offered (at least where the offering is made into that market or the country or countries in which the issuer operates). We believe such exclusions would focus the impact of the proposed changes on the situations most likely to give rise to abuse, while retaining flexibility for legitimate capital-raising by domestic issuers.
New Restrictions on Foreign Issuers. The Release notes that "abusive practices involving the equity securities of foreign issuers are not as evident as with domestic issuers." The Committee agrees with this observation and questions whether new restrictions on foreign equity issuers are in fact warranted. The Committee is concerned that a significant number of foreign issuers -- especially under a 50% test for "principal trading market"-- will be inappropriately limited in their capital-raising efforts, under the proposed new restrictions. For example, such foreign issuers may wish to make "legitimate" offerings in their home markets, but the procedures imposed by these amendments would often be impracticable in that context. In short, the Committee believes that the extension of the proposed new restrictions to foreign issuers would be a step backward toward the extraterritorial application of Section 5 of the Securities Act.
If the Commission nonetheless determines that such restrictions are in fact required for foreign issuers with a "principal market in the United States" for their equity securities, the Committee believes that the appropriate threshold percentage should be 80% or 90% of world trading volume occurring in the United States in order to reach the conclusion that the "principal market" is the United States. We would also urge that exclusions be added based on an expanded version of the "overseas directed offering" concept, as discussed above. Otherwise, many "world class" foreign issuers will be precluded from raising
equity capital in their home markets unless they comply with the additional restrictions proposed here, or else register such offerings under the Securities Act.
Further, it is the Committee's view that the trading data required to make such a determination may be difficult to obtain with respect to some issuers, and the Committee suggests reducing the measurement period from the proposed one year (or since date of incorporation, if less) to ninety days. This will, at least, reduce the administrative burden for foreign issuers seeking to comply with the rule.
Discounts. We are of the view that regulating discounts is an ineffective means of curbing abuses of Regulation S. We believe the existence and/or size of a discount for offshore sales may be attributable to many bona fide factors unrelated to potential abuse, including liquidity and market considerations which are constantly changing. We therefore do not believe that any discounted offers should be excluded from the safe harbor, solely by reason of the existence or size of the discount, and support the approach taken in the Release of not attempting to regulate discounts.
Promissory Notes. Rather than a complete prohibition on the use of promissory notes as payment in connection with Regulation S purchases of covered equity securities, the Committee believes the tolling approach already in place under Rule 144 should be adequate to inhibit abuses and is consistent with the notion of treating such securities as "restricted securities" under Rule 144. Thus, if the conditions specified in Rule 144 and in the Release are met, the use of promissory notes should be permitted.
Proposed New Rule 905. Proposed Rule 905 would establish that resales of "restricted securities" as defined in Rule 144 would continue to be restricted in the hands of offshore purchasers who acquire such securities in resale transactions pursuant to Rule 901 or Rule 904. The Committee believes that this result is a departure from current law, not merely a clarifying change. Further, the Committee believes that such requirements will be difficult to implement in foreign markets where there may now be restricted and unrestricted securities of the same class trading in such markets, and may represent a "trap for the unwary" foreign purchaser. The Committee does not support proposed new Rule 905.
Elimination of Form 8-K Filing Requirement
The Committee feels that the proposed amendments to Item 701 of Regulation S-K and related forms, to eliminate the requirement to report Regulation S sales on Form 8-K and require instead that such sales be reported only on a quarterly basis, is again consistent with the treatment of such securities as "restricted securities," and should be adopted.
We would again like to express our appreciation for the opportunity to provide these comments. We are available to discuss them further if you so desire.
Very truly yours,
Committee on Securities Regulation of the
Business Law Section of the New York State Bar Association
Richard E. Gutman
cc: The Hon. Arthur Levitt, Chairman
The Hon. Steven M.H. Wallman, Commissioner
The Hon. Isaac C. Hunt, Jr., Commissioner
The Hon. Norman S. Johnson, Commissioner
Brian J. Lane, Director,
Division of Corporation Finance