I found some information concerning Reg-S shares on an internet site that I visit (wallstreetcity.com). It was listed under Dirty Secrets of Wall Street. It is in the form of questions being asked and answered. Doesn't give me a good feeling. Read it and post your thoughts.
Question-Are companies abusing the distribution of Reg-S shares?
Answer-<<Companies that abuse the practice the most are those companies whose common share price is trading under $5 per share. Unfortunately, there are no current disclosures to investors concerning the terms and conditions of these secret little offshore transactions. Regulation-S, also known as Reg-S, stock transactions are perfectly legal. You can find out if a company may be issuing Reg-S stock by reviewing their quarterly reports. Let's say a company had 15,000,000 shares outstanding in the 3rd quarter, but reported 19,000,000 shares outstanding by the 4th quarter. You should investigate to find out why those additional shares were issued. If a company merger or acquisition did not take place, the odds are that Reg-S stock was issued to offshore investors or S-8 stock to consultants within the U.S.
Question-Can you describe the practice in detail?
Answer-Reg-S transactions allow a public company to issue any number of shares of common stock at a negotiated price to any foreign investor. Currently the public company does not have to disclose to the public who these offshore investors are, or the terms and conditions of the transactions. Reg-S stock transactions are generally
entered into when the public company is strapped for cash and cannot meet its financial obligations. It is a very common practice that if a stock is trading at $3 per share on the NASDAQ stock exchange, a public company may simultaneously sell stock to foreign investors at $1 per share. The Federal Securities Laws specifically state
that a U.S. investor cannot establish a foreign corporation and then purchase Reg-S stock from American companies. The Reg-S investor must be a bona fide foreign investor. Reg-S transactions commonly are associated with strong stock hype and investor promotion. Furthermore, when a company diluted by more than 5% with Reg-S stock transactions, the common share price within the NASDAQ stock exchange usually declines by over 50% over the next 4 to 6 months. This is due to that Wall Street realized that the public company is about to go bankrupt and is desperate for cash.
Question-Do these shares ever come back on the U.S. Markets?
Answer-Yes. Under the Federal law, a foreign investor must hold the stock for 40 days before liquidating them back into the U.S. market. However, foreign investors are, in fact, buying the restricted Reg-S stock certificates, and then shorting the stock on the same day that the stock transaction took place. There are other tricks of the
trade regarding this practice, but the reality is that foreign investors have little to no investment risk, and they are standing in line to participate in these transactions.>>
Scott |
