The Unfounded Fear of Regulation S: Empirical Evidence on Offshore Securities Offerings

Regulation S provides U. S. issuers with an exemption from the registration requirements of the Securities Act of 1933 to the extent that securities are offered and sold solely outside the United States. Through resales back into the United States, however, U. S. investors may become exposed to unregistered securities initially distributed abroad through Regulation S. This Article identifies two distinct risks from an offshore securities offering. First, issuers may conduct an offering under Regulation S as a means to sell securities indirectly into the United States through resales in situations where the U. S. secondary market overvalues the issuer's securities. Second, even where the U. S. secondary market does not overvalue an issuer's securities, the managers of the issuer may utilize Regulation S to engage in self-dealing and other opportunistic behavior for their own private benefit at the expense of U. S. investors.

Employing a dataset of 701 offerings conducted pursuant to Regulation S from 1993 to 1997, this Article presents evidence that insider self-dealing may result in a greater offering discount for certain overseas offerings. Given the specific risks facing U. S. investors, the Article then argues that the SEC's 1998 reforms to Regulation S represent only an untailored response. Instead, the Article recommends specific reforms that both reduce the risk facing U. S. investors and lessen the regulatory burden on offshore securities offerings that pose little risk of investor abuse.