Non-US marketplaces have struggled with how, in an electronic trading environment, to adequately ensure that securities transactions taking place outside of the US comply with applicable exemptions from registration under the Securities Act of 1933 (1933 Act).
Regulation S under the 1933 Act provides a conditional “safe harbor” establishing conditions under which offshore offers and sales will not trigger US registration requirements.
One of the requirements for Category 1 transactions under Regulation S is that the offer or sale be made in an “offshore transaction”. One prong of the offshore transaction definition includes an offer or sale where “at the time the buy order is originated, the buyer is outside the United States, or the seller and any person acting on its behalf reasonably believe that the buyer is outside the United States . . . .”
Category 2 of Regulation S applies to certain offerings where there is a greater risk of flowback to US investors and is applicable, for example, to offerings of non-US issuers that are US reporting companies and have a “substantial US market interest” (as defined in Regulation S) in respect of their securities. For Category 2 offerings, Regulation S provides, in relevant part, that:
- the offer or sale, if made prior to the expiration of the 40-day distribution compliance period, not be made to a US person or for the account or benefit of a US person, and
- prior to the expiration of the 40-day distribution compliance period any distributor selling securities to a distributor, dealer, or a person receiving a selling concession, fee or other remuneration in respect of the securities sold, send a confirmation or other notice stating that the securities are subject to the Category 2 restrictions.
On October 8, 2014, the Australian Stock Exchange (ASX) launched a new on-market pricing and allocation facility, called ASX Bookbuild, within its electronic trading platform. This facility may be used for primary offerings, whether IPOS or offerings by seasoned issuers, and for secondary block offerings, all which all would traditionally involve an investment bank led book-building process.
The ASX Bookbuild facility is intended to streamline this process by using an electronic system to set pricing and allocation parameters, including minimum price, coverage percentages (which determines the price in light of subscription demand), and type of bidder (priority of bidder as determined by the issuer). Some portion or all of the offering can utilize the Bookbuild facility. The ASX’s announcement of each offering would also include a legend disclosing the relevant restrictions on the ASX Market Announcements Platform.
Underwriters in offerings using this system will not know the identity of the clients of ASX members that bid to participate in such offerings, and will not, therefore, independently know whether the Regulation S requirements have been satisfied.
Pursuant ASX’s operating rules, Category 1 and category 2 restrictions, where applicable, will be disclosed in respect of each offering “and participating brokers (and their clients) will warrant that they are aware of an agree to such terms and conditions and are entitled to subscribe for the securities. They will specifically warrant through the bidding process as to the detailed requirements of the definition of offshore transaction noted above for Category 1 offerings and the non-US person status of the purchaser and their awareness of the 40-day resale requirements in the case of category 2.
On November 3, 2014, the SEC staff issued a no-action letter indicating that they would not bring enforcement action against the ASX for non-compliance with the Regulation S requirements described above based on the Bookbuild rules and warranties of brokers and their clients. In doing so, the SEC staff noted that in adopting Regulation S, the SEC staff did not specify the procedures to me used to establish a reasonable belief as to the satisfaction of these conditions.
Read the SEC’s no-action letter.