I thought this would clear up how long REG S stock is restricted.
Regulation S is a section of the federal law that permits publicly-traded companies to sell
unregistered securities to overseas investors. These "overseas" investors, in some cases, are
actually U.S. investors operating through offshore shell companies, often hedging their investments
by using options or short sales. That's particularly true when the issuers are risky small-cap
companies, which sometimes turn to Reg S offerings out to sheer desperation for cash.
(1/19/99) UPDATE: In Feb. 1997, the SEC changed the holding period for securities issued under
Regulation S from 40 days to one year. Most of the new rule became effective in late April, and the
final sections came on the books Jan. 1, 1999. In addition to lengthening the holding period for Reg
S securities, further restrictions apply. After the one year holding period expires, the shares are not
free trading and can only be sold subject to restrictions under Rule 144 or another exemption. The
SEC tightened its Reg S guidelines to deter fraud. The new guidelines apply only to U.S.
corporations.
In the past, these Reg S securities could be issued to the "overseas" investors and then sold back
into the US market before the existing shareholders even found out it. But the SEC realized that this
was a problem and recently changed the rules. A company that issues Reg S securities now must
file a Form 8-K within 15 days of its occurrence. Because Reg S securities are currently restricted
for 40-days after they are issued, existing shareholders will be warned about Reg S deals before the
shares can be sold. However, purchasers of Reg S securities can still short the stock before the 40
days are up, and later use the Reg S shares to cover their short position. Therefore, existing
shareholders can get hurt by Reg S offerings even under the new rules.
The most dangerous kind of Reg S offerings for existing shareholders are convertible securities
which can be converted into common stock at a fraction of the stock price at the time of conversion.
For example, the securities might convert into common stock at 75% of the average bid price over
the previous five trading days. No matter how low the stock price falls, the Reg S investors can still
convert into common stock at a price lower than the current stock price. And the lower the stock
price falls, the more shares they get. Therefore, they benefit from the stock price dropping and will
often even short the stock to help it fall further (and lock in higher sale prices of the stock as well.),
and then cover their short position with the shares they get from conversion. They almost can't lose!
It's the existing shareholders who are the losers. This type of Reg S offering will frequently cause a
massive increase in shares outstanding, which means that existing shareholders now own a smaller
piece of the company and hold shares that are worth much less than they were before. Watch out
for all Reg S offerings, but especially watch out for this type of Reg S! |
