On January 23, 2015, the staff of the United States Securities and Exchange Commission issued a new interpretation on the application of Rule 905 of Regulation S under the United States Securities Act of 1933, as amended (the “Securities Act”), that will make it easier for U.S. investors that purchase equity securities of foreign issuers to resell those securities in the foreign markets without registration under the Securities Act. Reversing the staff’s previously-stated position, the new interpretation will permit a holder of a restricted equity security of an issuer that was a “foreign issuer” (within the meaning of Regulation S) at the time the equity security was issued to resell the restricted security in an offshore transaction pursuant to Rule 904 of Regulation S and have the restricted nature of the security removed, even if the issuer has lost its status as a foreign issuer and is considered a “domestic issuer” (within the meaning of Regulation S) at the time of the resale transaction.
Rule 905 provides, in part, that any “restricted securities” under Rule 144 under the Securities Act that are equity securities of a domestic issuer will continue to be deemed to be restricted securities notwithstanding that they were acquired in a resale transaction pursuant to Rule 901 or 904. Pursuant to Rule 902 under the Securities Act, a “domestic issuer” includes, in addition to U.S. issuers, a non-U.S. issuer that has a majority of its outstanding voting securities held by U.S. residents, plus has other specific U.S. ties. Under the previous staff interpretation of Rule 905, U.S. investors faced uncertainty when investing in private placements of foreign issuers, because their ability to resell in the foreign markets depended on whether the issuer remained a foreign issuer at the time of resale. If the issuer’s connections to the U.S. became too great and the issuer became deemed a domestic issuer, a U.S. investor could effectively be prevented from reselling in the foreign markets absent registration under the Securities Act or another available exemption therefrom, such as Rule 144, which was not always available. The staff’s new interpretation eliminates this uncertainty.
While the staff’s new interpretation will be helpful for those investing in foreign issuers, some Rule 905 questions remain. For example, the new interpretation does not state how a U.S. investor that purchases warrants or other rights exercisable to acquire restricted equity securities of a foreign issuer may resell those underlying securities if the issuer is not a foreign issuer at the time of exercising the warrant or other right. Pending further staff guidance on this issue, issuers may continue to treat such securities as being subject to Rule 905 restrictions, and investors purchasing such securities may continue to seek covenants and other contractual protections to help facilitate their ability to resell the underlying securities following a transition to domestic issuer status.