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Explaining Seed Round Funding

Posted on February 15, 2019 at 3:30 PM Comments comments (0)

First, we are talking equity. No notes or other debt is welcome unless convertible and even then probably not. Early stage investors demand partial ownership. It is too early for debt. Valuation is the rub.

 

Valuation is often not transparent to say the least. Valuation is subjective, based on management, track record, market size, competition and risk.

 

Stages of Seed or Early-Stage Funds

 

Pre-Seed Round

 

This is when the founders are getting the company’s operations off the ground. It is the first part of your Friends-and-Family Round.

 

SEC Rule 506(b allows up to 35 non-accredited investors. If you want family money and not all family members are accredited, go with 506(b and convert to 506(c when you need more capital.

 

Seed Round (also known as the Early-Stage Capital Round)

 

This round enables you to pay a founding team to perform market research and ongoing product development (and sometimes related product development). Your team determines what the final product or service should be and who its target demographic is.

 

Seed Round sources include angel investors, private equity investors, and other private placement investors. Some startups return to the friends-and-family well, the second part of the Friends-and-Family Round.

 

SEC Rule 506(c allows you to market your deal to the public (something not permitted for 80 years prior to enactment of the JOBS Act). The usual drill in Equity CrowdFunding is to use 506(b to raise from friends, family and associates and then use 506(c to raise from more money from the public, most commonly with online advertising.

 

Practice Note: You can go from 506(b to 506(c but not from 506(c to 506(b.

 

Valuations for Seed Rounds typically range between $3 million and $6 million while Seed Funding rounds themselves range from $10,000 to $20 million.

 

Equity CrowdFunding -- which means Regulation D, Regulation S and Regulation A under the JOBS Act -- is becoming the go-to tool for the Seed Round (as well as for the Pre-Seed Round). For $1 million offerings, “Reg Cf” is available.

 

Even after securing a Seed Round, in today’s tech-weighted economy, companies may attract insufficient investor interest from traditional Series A investors such as VCs and private equity funds. These companies now frequently turn to Equity Crowdfunding in the form of a Regulation A offering with a $50 million maximum raise or a Regulation D offering or Regulation S offering with no maximums.

 

If you have overseas investor interest, Regulation S allows you to take advantage of less regulatory oversight than with Regulation D offerings

 

Series A Round / Series B Round / Series C Round

 

These rounds are for companies that have developed a track record, established user base, consistent revenue figures or other key performance indicators. These rounds are used to further optimize the user base and to scale the product or service across different markets. The business model must promise long-term profits and a convincing, detailed description of how you go from here to there. You need more than a good idea. You a persuasive strategy for turning that idea into a successful, money-generating, ongoing business.

 

Series A, B and C rounds are where FINRA-licensed broker-dealers get involved. And this is when VCs and private equity players invest. A single investor may serve as the “anchor,” drawing in other, less adventuresome investors. Typically Series A rounds typically raise $2 million to $20 million. Series B and Series C Rounds raise from $50 million to much more than that.

 

Time for an IPO?

 

Of course, some startups find that they do not need Series A funding, let alone Series B or Series C funding. These companies already have sufficient outside funding together with operational cash flow.

 

Private Placement Advisors LLC designs and executes Seed Funding Rounds under the JOBS Act. That is all we do. Please contact [email protected]

 

 

How to raise cannabis capital using JOBS Act exemptions

Posted on January 26, 2019 at 11:15 PM Comments comments (0)

There are several ways to raise capital for your cannabis business using exemptions using JOBS Act exemptions Reg CF, Regulation A+, Regulation D, or Regulation S.

1. Regulation Crowdfunding (Reg CF)

Think Kickstarter with equity (or debt) being offered.

Reg CF or Regulation Crowdfunding is relatively new and makes it legal for private placements to be marketed to non-accredited investors. Securities purchased under the Reg CF exemption cannot be resold within a year. Only $1,070,000 can be raised each year.  You will need to file an annual report with financial statements. If you neglect to do so, you will be unable to fund-raise with Reg CF again until you file the missing annual report. You may concurrently raise funds from accredited investors using a Regulation D exemption.

2. Rule 506(b or Rule 506(c under Regulation D

Rule 506 is the easiest and most-used exemption. There is no limit to the amount you can raise under either 506 (b or 506 (c. Under the Rule 506(c exemption, general solicitation and advertising are permitted. Only accredited investors may invest. Under Rule 506(b, 35 investors may be non-accredited, but no general solicitation is permitted. This exemption is often used with the friends-and-family-round of capital raise or first capital stack.

3. Regulation S is a relatively new but popular option. You can sell securities offshore without regard to the sophistication or number of purchasers in the offering or the size of the offering. You can raise as much as you want from an unlimited number of people. The regulatory environment is far less burdensome than with Regulation D offerings. Regulation S selling efforts from the U.S. are permitted if the efforts are directed abroad. You can sell securities offshore without regard to the sophistication or number of purchasers in the offering or the size of the offering.

You can raise as much as you want from an unlimited number of people. Unlike Rules 506(b and 506(c of Regulation D, Regulation S does not have specific information requirements.

An issuer who makes a Regulation S offering online may do so without jeopardizing its exemption by including prominent statements on its website saying that the offer is directed only outside the U.S. A Private Placement Memorandum is not required for a Regulation S offering, but steps must be taken so that foreign investors understand the structure, principals, and risks associated with the offering. A Regulation S offering may be conducted concurrently with a Regulation D offering to U.S. accredited investors without the offerings being deemed integrated. S

Securities sold under Regulation S are subject to re-sale restrictions. The nature of the restrictions depends on whether the issuer is foreign or domestic; whether the issuer is a public company; the types of securities being sold; and whether there is a “substantial U.S. market interest.” The securities being sold must contain a legend stating that the securities may not be resold to US investors for a restricted period of time.

4. Regulation A+

Regulation A+ is designed for companies who want to raise more funds publicly, but don’t want to do a full-blown IPO. You can raise up to $50 million per year. Importantly, you can advertise your cannabis fundraising while you “test the waters” and solicit investors before filing with the SEC.

It can be expensive. Before you can start fundraising with a Reg A+ you need to pre-file an offering placement memorandum (OPM) with the SEC. An OPM is like a business plan wrapped with a whole bunch of legal disclaimers, and can cost serious legal fees. We (Private Placement Advisors LLC) advise issuers to schedule 30 days to compile the required documents; 21 days to complete and submit the forms; and then up to 45 days to get SEC approval. 5. Cannabis Funding Platforms Platforms friendly to cannabis are said to be around the corner. This will be easier than going it alone but you may end up paying the platform 7%-8% of what you raise.

Questions? Contact [email protected]

Private Placements for Broker-Dealers

Posted on January 25, 2019 at 1:20 AM Comments comments (0)

Some startups try to engage a registered broker-dealer to help them raise capital in a private placement offering.

Who is a registered broker-dealer?

A registered broker-dealer is a financial intermediary registered with the SEC and Financial Industry Regulatory Authority (FINRA). “Broker” means that the firm can sell securities for clients and “dealer” means the firm can sell securities for itself. Money is earned with fee-based services and from commissions on capital raised.

How can a broker-dealer help?

Not all broker-dealers work on private equity offerings. But a broker-dealer who likes your private placement may have investors and investment networks with lists of pre-qualified Accredited Investors. They also may have ties to investment banks, venture capital firms or private equity firms. Also, some broker-dealers assist you in crafting a PPM, term sheet, pitch deck, and other documents. They may even be willing to make presentations on your behalf.

Finally, investors’ perceptions may be altered in favorable way. They may assume there is less risk if the financial intermediary has done its own due diligence before agreeing to work with the issuer.

Why doesn’t everyone use broker-dealers?

First, they do not want to work on most private placements. Second, they have to be paid.

More questions? Email [email protected]

Cannabis Securities Compliance

Posted on January 17, 2019 at 6:50 PM Comments comments (0)

Cannabis Securities Compliance

The touchstone of what constitutes a security is whether or not it is a “passive investment.”

If the investment requires active management engagement by the investor, it is not a security.

If it is a passive investment where the investor relies on others, it is a security.

Investors often have the right to give input into management decisions but do not exercise this right. The trend in securities regulation is to look beyond the terms of the agreement to the realities. Cannabis businesses can choose to have all investors be active member-managers and draft their operating agreement accordingly. The following are guidelines to ensure that such investors are “active member-managers” rather than “passive investors.”

1. Investors have voting rights under the terms of the LLC operating agreement and exercise those rights.

2. Investors have a management role or are otherwise “actively engaged.”

3. Investors are members on committees tasked with business operations.

4. Investors had input into and negotiated terms of the LLC agreement.

5. Investors actually receive and even approve reports regularly.

6. Investors have input on key company strategic decisions – major decisions are made after consultation with investors.

If investors have an active and participatory role in management you can ignore securities issues. Accordingly, you may want to see if new investors have experience in the cannabis industry. As the number of cannabis investors grows and becomes more geographically diverse, it is more likely investors will be considered “passive.” At that point you will need rely on one or more securities exemptions and make the appropriate filings.

Cannabis businesses may utilize “management control” under recently released regulations. Regulations define as an “owner” any person who participates in the “direction, control, or management” of a business. Such individuals, having management rights, need to be vetted by state regulators in the license application process.

Both securities compliance and cannabis regulatory compliance are now very much in play. If investors lack management rights and are passive investors, securities compliance is required. 

Common missteps when structuring a private offering

Posted on January 16, 2019 at 1:40 AM Comments comments (0)

Using phrases like “the first” or “the only” can be problematic. Issuers should avoid any statements that can be construed as guarantees. When outlining the investment opportunity, cut to the chase. Less is more. Back up claims with references to reputable sources. Impress with thorough research and summaries of recent information from reputable sources. Use concise language. Avoid revisions that cause delay.

Offerings of operating companies rise and fall on their valuations. A valuation that is too low can lead to future dilution of owner’s equity while lowering the maximum that can be raised. A valuation that is too high can make it difficult to raise any capital at all. Try to have a well-reasoned rationale for the valuation.

Even a well crafted and sharply focused business plan will receive little interest with questionable investor returns or obviously excessive management fees. If management does not participate in profits until after investors' capital is returned, investors will be more willing to assume more risk. Inexplicable differences from industry average returns and fee structures are difficult to explain to investors. Some investors will not even try to figure out what the potential net return is, so make it easy for them. Multiple line items for consulting and advisory fees are red flags.

Use of proceeds that recaps the founders’ investment capital, if the capital was originally characterized as a loan, is understandably problematic. Real estate offerings using more than 70% leverage to acquire property will be perceived as risky, although high leverage can be appropriate in stabilized, low vacancy properties with creditworthy master tenants and a stable lease profile. Equity stack positions are appropriate for offerings of buy-and-hold-and-pray undeveloped land deals.

Commissions offered in Regulation D exempt offerings vary substantially by industry, but placement fees and broker compensation should not be so high as to be contrary to an investors’ interest. Try to use a flexible commission structure using language such as “up to X%” rather than a stated percentage. This will allow you to refer the deal to other brokers with a conventional syndicated commission structure if you need to go that way.

If the minimum offering amount is not received before the offering termination date, you face the time-consuming and irksome chore of notifying subscribers that the offering needs to be extended. And this notification can trigger a right of rescission giving an investor the right to reverse his or her decision to subscribe! Be sure to include a right to extend the offering period at the issuer's discretion. Allowing ample time for the offering avoids the need for “bridge” financing and permits the possibility of alternative financing sources.

A first impression is important when asking people for money. In this case, the first impression will likely be based on your offering documents including private placement memorandum (PPM), pitch deck, executive summary, and other documents. This is especially true for online offerings using a Regulation D, Rule 506(c exemption. Common pitfalls include hyperbolic pro-formas or financial models. Remember to be reasonable about forecasts and be sure to employ sensible operating metrics. Remember to identify the larger market relative to the revenue opportunity.

Contact [email protected] with any questions.

 

 

 

 

 

 

 

 


 

Cheat Sheet for Early-Stage ICO Sponsors

Posted on September 24, 2018 at 11:10 PM Comments comments (0)

Here are the questions you will be asked.


                                                For Starters

Does the ICO or ITO platform already exist?

Is the issuer doing a direct offering or a broker-dealer offering?

In what U.S. states and foreign countries will the issuer be doing business?

What is the purpose of the offering? What is the issuer’s business?

What exemptions will the issuer rely on for each jurisdiction: Rule 506(c, Rule 506(b, Rule 504, Regulation S, or Regulation A+.

What statements, representations, or comments have been made to third parties about future value?

Has the whitepaper been written? Released?

Is the white paper also an offering memorandum with prescribed disclosures and notices?

Has the smart contract code for the token been audited by a code audit firm?

Is there an exit strategy?

Does the issuer have a shareholders agreement?

Does the issuer have a board of directors?

Does the issuer have financial auditors?

Has the issuer worked with a transfer agent before?

Is the issuer comfortable with KYC and KYC best practices? 


                           Blockchain ( distributed ledger technology)

Does the blockchain facilitate transparency?

Does it provide guaranteed legal finality for securities transactions?

Does it provide recourse by means of technical intervention in case of errors or fraud?

Is there a published governance document?

Does the blockchain have financial institution recognition?

Has the issuer specifically determined that the blockchain does in fact prevent cryptocurrency fraud or unauthorized use? 



                                           Protocol

Which Protocol will the issuer use? 

Is the Protocol implemented on an enterprise-class technology platform? 

Does the Protocol manage the custodianship requirements of the security token? 

Does the Protocol have the capabilities to be managed by a regulated transfer agent?


                                     Investors/Purchasers

Will this be for accredited investors only?

How will the issuer confirm or verify accredited investor status?

Will the purchasers be seeking a return on their investment or are they buying the token for other purposes?

If other purposes, what are they?

What are the rights of token holders? Voting? Dividends? 



                                           Tokens 

Is the token coupled with a crypto-currency?

Will the tokens be immediately delivered to the purchasers? 

Is the number of tokens fixed or unlimited? •

Is there a release schedule for the tokens?

Will the tokens have a fixed value?

Does the issuer intend to list the tokens on any secondary markets? 

What are the lock-up periods?

Is the issuer using legends to satisfy re-sale requirements? 

Is the issuer planning on a bounty of free tokens?

____________________________________________________________

This article is not a legal advice, is not written by a lawyer, and is written for general informational purposes only. If you have questions or comments or are interested in learning more about these topics, feel free to email Doug Slain at [email protected] Doug is a securities regulation advisor and author who coaches ICO-sponsors and their advisors on JOBS Act best practices—especially Rule 506(c), Rule 506(b, Rule 504, and Regulation S. Doug authored the 21-volume Exempt Offering Series of audiobooks on Audible.com. He is the founder and sponsor of the 8 year-old LinkedIn discussion group, State Securities Regulation.


Rule 506(c & Regulation S

Posted on June 7, 2018 at 3:55 PM Comments comments (0)

The ideal exempt offering is offered globally with online general solicitation. In the U.S., it is illegal to sell securities that are not registered or exempt. The most popular exemption, Rule 506(c, covers accredited investors who are U.S. persons and whose accreditation status can be verified. Regulation S exempts offerings made to non-U.S. persons.

If an issuer only uses Regulation S, sales can only be made to non-U.S.persons. Launching two side-by-side offerings with one relying on Regulation S and the other on Rule 506(c, therefore, has compelling advantages to most issuers.

Note: If an issuer only uses Rule 506(c, it must verify every investor as accredited, even non-U.S. investors.

Take care to treat each offering as a separate offering.

• Insure best practices for a 506(c offering, including third-party verification of your investors’ accredited status.

• Insure best practices for a Regulation S offering, including qualification of its investors.

The dual offerings must clearly delineate between U.S. and foreign investors. Practice tip: Before launching a dual offering, set up two separate websites.

Resale Restrictions

Both Rule 506(c and Regulation S have important resale restrictions; they are different and they are state and fact distinct.

Douglas Slain https://www.linked com/in/douglasslain/

ISOs using Regulation S

Posted on May 31, 2018 at 8:40 PM Comments comments (0)

ISOs using Regulation S

What type of documentation is typically involved in a Regulation S offering of debt securities? What are the holding periods for the sale of Regulation S securities? How is the distribution compliance period measured for different types of securities? How are Regulation S transactions structured? What are the holding periods for the sale of Regulation S securities? What is the due diligence process for initial purchasers in a Regulation S offering? 

What type of documentation is typically involved in a Regulation S offering of debt securities?

A Regulation S offering is often combined with a Rule 144A and/or a Rule 506(c offering. The same disclosure package is used with debt and equity offerings, with or without Regulation S. Documents include: The PPM or private placement memorandum for a Regulation D [Rule 144A and/or Rule 506(c] must stress restrictions on re-sales. The SAFT (simple agreement for future tokens) documents the transaction and serves as a form of purchase agreement. The Operating Agreement contains representations, warranties, and covenants specific to each offering. The Subscription Agreement commits the investor to the investment. Practice Note: The Regulation S offering may be conducted using documents that are based on the country‐specific practices of the relevant non‐U.S. jurisdiction or jurisdictions. With equity securities offered by U.S. issuers, the legend must state that hedging transactions may not be conducted. The same legend must also be printed in any advertisement made or issued by the issuer, any distributor, and their respective affiliates or representatives. All investors must be given the same “disclosure package.” Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What are the holding periods for the sale of Regulation S securities?

Securities cannot be offered or sold to a U.S. person during the distribution compliance period. But there is no distribution compliance period in connection with securities sold in a Category 1 transaction, and the distribution compliance period for Category 2 transactions for both equity and debt, and for Category 3 transactions involving debt securities, is only 40 days. The distribution compliance period for Category 3 offerings of equity securities is six months if the issuer is a reporting company, and one year if not.

How is the distribution compliance period measured for different types of securities?

Medium‐Term Notes. In the case of continuous offerings, the distribution compliance period is deemed to begin at the completion of the distribution. • Warrants. Securities underlying warrants are considered to be subject to a continuous distribution as long as the warrants remain outstanding. A sample Rule 903 legend reads, “These securities will be offered only outside of the United States to non‐U.S. persons, pursuant to the provisions of Regulation S of the U.S. Securities Act of 1933, as amended. These securities will not be registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.”

How are Regulation S transactions structured?

If there is no SUSMI in a foreign issuer’s debt securities, the issuer need only comply with the general Regulation S requirements (i.e., offshore transaction and no directed selling efforts). A SUSMI in debt securities exists if the issuer’s debt securities are held of record by 300 or more U.S. persons, and U.S. persons hold of record at least 20% and at least $1 billion or more of the principal amount of debt securities, plus the greater of 14 liquidation preference or par value of non‐participating preferred stock, and the principal amount or balance of asset‐backed securities. Foreign issuers of debt securities (and U.S. issuers of non‐convertible debt securities) may rely on the Category 1 safe harbor if the transaction qualifies as an overseas directed offering. An offering of non‐convertible debt securities of a U.S. issuer must be directed into a foreign country in accordance with that country’s local laws and customary practices, and the securities must be non‐U.S. dollar denominated or linked securities in order to qualify as an overseas directed offering. T

The provisions of the issuer safe harbor specific to offerings of equity securities are summarized below.

(A) Category 1 Safe Harbor The Category 1 safe harbor is available for equity offerings if a foreign issuer reasonably believes at the beginning of the offering that there is no SUSMI in the equity securities. A SUSMI in equity securities exists if, during the shorter of the issuer’s prior fiscal year or the period since incorporation, either: • The U.S. securities exchanges and inter‐dealer quotation systems in the aggregate, constituted the single largest market for a class of the issuer’s securities; or • At least 20% of all trading in a class of the issuer’s securities occurred on the facilities of U.S. securities exchanges and inter‐dealer quotation systems, and less than 55% of such trading occurred on the facilities of the securities markets of a single foreign country. If there is no SUSMI in a foreign issuer’s equity securities, the issuer need only comply with the general Regulation S requirements to make offers and sales.

(B) Category 2 Safe Harbor The Category 2 safe harbor is only available for equity offerings by a reporting foreign issuer. Even if there is a SUSMI in the securities, reporting foreign issuers who implement the Category 2 offering and transactional restrictions for the distribution compliance period may rely on the safe harbor. This is the issuer safe harbor available to foreign issuers (both reporting and non‐reporting) and reporting U.S. issuers of debt securities.

(C) Category 3 Safe Harbor The issuer safe harbor is available to non‐reporting U.S. issuers of debt securities, provided that the debt securities are not offered or sold to a U.S. person, other than a distributor, during the 40‐day distribution compliance period, except pursuant to the registration requirements of the Securities Act or an exemption from registration. Issuers must comply with the offering and transactional restrictions applicable to Category 2 offerings and Rule 903(b)(3)’s additional transactional restrictions during the distribution compliance period. Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What is the due diligence process for initial purchasers in a Regulation S offering?

Modest due diligence is more acceptable in standalone Regulation S offerings that do not involve financial intermediaries. Due diligence can be divided into financial, business and management due diligence, and into documentary or legal due diligence. Necessary due diligence varies by whether the issuer is a new entity, whether the business of the issuer is risky, and based on the nature of the tokens or securities offered. Practice tip: The PPM and other offering documents are not subject to SEC review. File the Form D, use it to “notice file” state regulators, and otherwise just follow rules. 

Cryptocriminals & State Regulators

Posted on May 27, 2018 at 9:45 PM Comments comments (0)

The North American Securities Administrators Association (NASAA) last week announced a large crackdown on fraudulent Initial Coin Offerings and cryptocurrency offerings.

State regulators identified hundreds of ICOs in the final stages of preparation before being launched to the public. These pending ICOs were advertised and listed on ICO aggregation sites to attract investor interest. Many have been and are being examined; some are under active investigation, and some have already resulted in enforcement actions.

State regulators found approximately 30,000 crypto-related domain name registrations, almost all of which made in 2017 and 2018. For more information about ICOs and cryptocurrencies, watch NAASA’s video “Get in the Know About ICOs” or read NASAA’s Investor Advisories: “What to Know About ICOs” and “Be Cautious of the Crypto Investment Craze.”


ISOs using Regulation S

Posted on May 25, 2018 at 10:45 PM Comments comments (0)

What type of documentation is typically involved in a Regulation S offering of debt securities?

What are the holding periods for the sale of Regulation S securities?

How is the distribution compliance period measured for different types of securities?

How are Regulation S transactions structured?

What are the holding periods for the sale of Regulation S securities?

What is the due diligence process for initial purchasers in a Regulation S offering?

___________________

What type of documentation is typically involved in a Regulation S offering of debt securities? A Regulation S offering is often combined with a Rule 144A and/or a Rule 506(c offering. The same disclosure package is used with debt and equity offerings, with or without Regulation S. Documents include:

The PPM or private placement memorandum for a Regulation D [Rule 144A and/or Rule 506(c] must stress restrictions on re-sales.

The SAFT (simple agreement for future tokens) documents the transaction and serves as a form of purchase agreement.

The Operating Agreement contains representations, warranties, and covenants specific to each offering.

The Subscription Agreement commits the investor to the investment.

Practice Note: The Regulation S offering may be conducted using documents that are based on the country‐specific practices of the relevant non‐U.S. jurisdiction or jurisdictions.

All investors must be given the same “disclosure package.”

Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What are the holding periods for the sale of Regulation S securities?

Securities cannot be offered or sold to a U.S. person during the distribution compliance period. But there is no distribution compliance period in connection with securities sold in a Category 1 transaction, and the distribution compliance period for Category 2 transactions for both equity and debt, and for Category 3 transactions involving debt securities, is only 40 days.

The distribution compliance period for Category 3 offerings of equity securities is six months if the issuer is a reporting company, and one year if not.

How is the distribution compliance period measured for different types of securities?

Medium‐Term Notes. In the case of continuous offerings, the distribution compliance period is deemed to begin at the completion of the distribution. 

Warrants. Securities underlying warrants are considered to be subject to a continuous distribution as long as the warrants remain outstanding.

A sample Rule 903 legend reads, “These securities will be offered only outside of the United States to non‐U.S. persons, pursuant to the provisions of Regulation S of the U.S. Securities Act of 1933, as amended. These securities will not be registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.”

How are Regulation S transactions structured?

If there is no SUSMI in a foreign issuer’s debt securities, the issuer need only comply with the general Regulation S requirements (i.e., offshore transaction and no directed selling efforts). A SUSMI in debt securities exists if the issuer’s debt securities are held of record by 300 or more U.S. persons, and U.S. persons hold of record at least 20% and at least $1 billion or more of the principal amount of debt securities, plus the greater of 14 liquidation preference or par value of non‐participating preferred stock, and the principal amount or balance of asset‐backed securities.

Foreign issuers of debt securities (and U.S. issuers of non‐convertible debt securities) may rely on the Category 1 safe harbor if the transaction qualifies as an overseas directed offering.

An offering of non‐convertible debt securities of a U.S. issuer must be directed into a foreign country in accordance with that country’s local laws and customary practices, and the securities must be non‐U.S. dollar denominated or linked securities in order to qualify as an overseas directed offering.

The provisions of the issuer safe harbor specific to offerings of equity securities are summarized below.

(A) Category 1 Safe Harbor The Category 1 safe harbor is available for equity offerings if a foreign issuer reasonably believes at the beginning of the offering that there is no SUSMI in the equity securities. A SUSMI in equity securities exists if, during the shorter of the issuer’s prior fiscal year or the period since incorporation, either: • The U.S. securities exchanges and inter‐dealer quotation systems in the aggregate, constituted the single largest market for a class of the issuer’s securities; or • At least 20% of all trading in a class of the issuer’s securities occurred on the facilities of U.S. securities exchanges and inter‐dealer quotation systems, and less than 55% of such trading occurred on the facilities of the securities markets of a single foreign country.

If there is no SUSMI in a foreign issuer’s equity securities, the issuer need only comply with the general Regulation S requirements to make offers and sales.

(B) Category 2 Safe Harbor The Category 2 safe harbor is only available for equity offerings by a reporting foreign issuer. Even if there is a SUSMI in the securities, reporting foreign issuers who implement the Category 2 offering and transactional restrictions for the distribution compliance period may rely on the safe harbor. This is the issuer safe harbor available to foreign issuers (both reporting and non‐reporting) and reporting U.S. issuers of debt securities.

(C) Category 3 Safe Harbor The issuer safe harbor is available to non‐reporting U.S. issuers of debt securities, provided that the debt securities are not offered or sold to a U.S. person, other than a distributor, during the 40‐day distribution compliance period, except pursuant to the registration requirements of the Securities Act or an exemption from registration.

Issuers must comply with the offering and transactional restrictions applicable to Category 2 offerings and Rule 903(b)(3)’s additional transactional restrictions during the distribution compliance period. Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What is the due diligence process for initial purchasers in a Regulation S offering? Modest due diligence is more acceptable in standalone Regulation S offerings that do not involve financial intermediaries. Due diligence can be divided into financial, business and management due diligence, and into documentary or legal due diligence. Necessary due diligence varies by whether the issuer is a new entity, whether the business of the issuer is risky, and based on the nature of the tokens or securities offered.

Practice Note: The PPM and other offering documents are not subject to SEC review. File the Form D, use it to “notice file” state regulators, and otherwise just follow rules.

_______________________

More questions? Contact [email protected]


With equity securities offered by U.S. issuers, the legend must state that hedging transactions may not be conducted. The same legend must also be printed in any advertisement made or issued by the issuer, any distributor, and their respective affiliates or representatives. All investors must be given the same “disclosure package.”