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Table of Contents    Cover    MCLE Test

MCLE Article and Self-Assessment Test

Beyond the Blue Horizon

Will the SEC be able to apply its principles of extraterritorial regulation to securities activities on the global Internet?

By Harvey L. Pitt, Mark Dorsey, Lawrence Bard, and Ted Whittemore

Harvey L. Pitt is a partner at Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C. He is also resident in the firm's New York office. Mark Dorsey is special counsel and Lawrence Bard and Ted Whittemore are associates in the Washinton, D.C., office. The authors would like to thank Jerry Tan, a summer associate, for his assistance in the preparation of this article.

In recent years, access to foreign securities markets by U.S. investors has significantly accelerated, while foreign securities issuers have increasingly utilized U.S. capital markets to raise funds.[1] At the same time, the Internet has evolved into a global medium that often transcends national boundaries. The convergence of these two developments—that is, for "an Iowa resident to buy...Frankfurt Stock Exchange-listed stocks over the Internet"—is only a matter of time.[2] This capability raises important questions concerning the extraterritorial application of the federal securities laws—particularly the securities registration provisions of Section 5 of the Securities Act of 1933 (the Securities Act) and the broker-dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934 (the Exchange Act)—and how those provisions might be applied to securities activities conducted on the Internet. 

The Securities Act primarily regulates the initial distribution of securities, including not only those instruments traditionally thought of as securities (i.e. stocks and bonds) but also more esoteric instruments such as combined interests in land and service contracts for a citrus grove, interests in equipment-leasing programs, or interests in real estate limited partnerships.[3] The Securities Act's purpose is twofold: 1) to provide the investing public with "full and fair disclosure" of material facts concerning publicly offered securities, and 2) to prevent fraud, deceit, and misrepresentation in the offer and sale of securities generally.[4] Under the Securities Act, issuers are required to file with the Securities and Exchange Commission an accurate and complete registration statement, and to provide to purchasers of securities a prospectus that includes financial and other basic information about the issuer and the offering.[5] Section 5 of the Securities Act prohibits any person, directly or indirectly, from using instrumentalities of commerce or the mails to offer or sell[6] a security unless a registration statement has been filed or is in effect for the security, or an exemption is otherwise available.[7] 

The potential scope of Section 5 is not limited by the nationality of the issuer or the nationality or location of investors.[8] Section 5 applies to any offer or sale of a security involving the use of the mails or the instrumentalities of interstate commerce. The term "interstate commerce" is defined to include "trade or commerce in securities or any transaction or communication relating thereto between any foreign country and any [s]tate."[9] Under this definition, the potential reach of the Securities Act is, in theory, exceedingly broad and could reach the offer and sale by a U.S. or foreign issuer of any security to investors conducted completely outside the United States, so long as the issuer uses the instrumentalities of interstate commerce. 

In 1990, the SEC adopted Regulation S (updating and codifying the principles set out in earlier releases) to provide safe harbors from the registration requirements of the Securities Act for offshore distributions of securities by foreign or domestic issuers.[10] Regulation S, the SEC's principal approach to the extraterritorial reach of Section 5, is based upon the general premise that offers and sales of securities that occur outside the United States are not subject to the registration requirements of the Securities Act.[11] Regulation S is directed at the problem of flowback: the danger that unregistered public offerings originally sold abroad will subsequently be resold back into the United States.[12] 

Rules 901 through 904 of Regulation S consist of a general statement on the applicability of the registration provisions of Section 5 and two nonexclusive safe harbors.[13] The general statement (Rule 901) provides that the registration provisions of the Securities Act do not apply to offers and sales that occur outside the United States if both the sale and the offer relating to the sale are made outside the United States.[14] Rules 903 and 904 define the conditions under which a sale of securities meets the safe-harbors requirement and will be deemed to be outside the United States for purposes of the general statement and thus not subject to Section 5 of the Securities Act.[15] The safe harbor contained in Rule 903, known as the Issuer Safe Harbor, applies to offers and sales by issuers, distributors,[16] their respective affiliates, and persons acting on their behalf.[17] 

The Issuer Safe Harbor imposes two general conditions that must be met by all offerings made under Regulation S. First, the offering must be made in an "offshore transaction." Second, no "directed selling efforts" may be made with respect to such sales in the United States.[18] For purposes of Regulation S, an offer or sale is made in an "offshore transaction" if the offer is not made to a person in the United States and either: 

  • The buyer is outside the United States (or the seller and any person acting on its behalf reasonably believes that the buyer is outside the United States) at the time the buy order is originated; or    
  • The transaction is executed in, on, or through a physical trading floor of an established foreign securities exchange that is located outside the United States.[19]

The first alternative focuses on the location of the buyer since the location of the buyer abroad objectively provides evidence of the offshore nature of the transaction. The buyer's location outside the United States also supports the expectation that the buyer is or should be aware that the transaction is not subject to the registration requirements of the Securities Act. The second alternative targets sales that are made outside the United States under the supervision of an offshore securities market, by or through a member of the market or any other person authorized to effect such a sale. Thus, the execution of such a transaction in a foreign marketplace provides objective evidence of the foreign locus.[20] 

"Directed selling efforts" are defined as "those activities that [can] reasonably be expected to have the effect of conditioning, or are intended, to condition the [U.S.] market with respect to the securities being offered."[21] Directed selling efforts are prohibited by Regulation S. Any selling efforts directed at the U.S. market will prevent that offering from being deemed to have "occurred outside the United States."[22] 

The directed-selling-efforts test precludes, among other things, marketing efforts in the United States designed to induce the purchase by investors in the United States of securities purportedly being distributed abroad. Activities such as mailing printed material to U.S. investors, conducting promotional seminars in the United States, or placing advertisements with radio or television stations broadcasting into the United States, or in "publications with a general circulation in the United States"[23] that discuss the offering or are otherwise intended to condition, or could reasonably be expected to condition, the market for the securities, constitute prohibited directed selling efforts.[24] 

The release adopting Regulation S provides additional clarification of the meaning of directed selling efforts. Directed selling efforts do not include: 

  • Bona-fide site visits [and tours] to real estate, plants or other facilities located in the United States conducted [by or] for a prospective investor by an issuer, a distributor, any of their respective affiliates or a person acting on behalf of any of the foregoing;    
  • Ordinary activities conducted in the United States [by issuers]Šsuch as routine advertising and corporate communications;    
  • News stories or other bona-fide journalistic activities;    
  • Selling activities [conducted] in the United States in connection with an offering of securities registered under the Securities Act or exempt from registration pursuant to Section 3 or 4 of the Securities Act.[25]

The release also states that an "isolated, limited contact" with the United States, such as a telephone call by a foreign broker-dealer to a U.S. investor to effectuate a single transaction, generally will not constitute a directed selling effort and will therefore not cause the safe harbor to be lost for the entire offering.[26] Such a contact, however, could constitute an offer in the United States in violation of the offshore transaction requirement, resulting in making the safe harbor unavailable to the person who made the offer.[27] 

In addition to the general conditions, the Issuer Safe Harbor may impose additional restrictions on the sale of securities depending upon the nature of the security being offered.[28] The first category, Category 1 of the Issuer Safe Harbor, applies to offerings of the following securities: 

  • Securities of a foreign issuer in which there is no "substantial U.S. market interest";    
  • Securities offered and sold in an "overseas directed offering";    
  • Securities backed by the full faith and credit of a foreign government;[29] or    
  • Securities offered and sold pursuant to certain employee benefit plans established and administered in accordance with the laws and customary practices and documentation of a foreign country.[30]

Under Category 1 there are no limitations or restrictions on an offer or sale of securities other than the general conditions of Rule 903, i.e., the transaction must be an "offshore transaction" and no "directed selling efforts" can be made in the United States. 

The test for whether there is a "substantial U.S. market interest" (SUSMI) for a particular security depends upon several quantitative elements.[31] The test also incorporates a "reasonable belief standard" as to the existence of a substantial U.S. market interest.[32] Foreign issuers who have no SUSMI are entitled to rely on Category 1, whether or not they are reporting under the Exchange Act,[33] have securities listed on a U.S. exchange or quoted on NASDAQ, or sponsor an American depository facility.[34] The rationale of this test is that certain types of securities are more likely to be resold back into the United States, and that such a result is more likely when the primary market for the securities offered is in the United States.[35] 

Two classes of securities are included within the term "overseas directed offerings." The first class includes offerings of securities of foreign issuers that are directed to residents of a single country other than the United States and that are made in accordance with local laws and the customary practices and documentation of that country.[36] The second class is comprised of offerings of nonconvertible debt securities and certain asset-backed securities and nonparticipating preferred stock of domestic issuers that are directed to residents of a single foreign country and that are made in accordance with local laws and the customary practices and documentation of that country.[37] 

The SEC has determined that these types of transactions are clearly outside its jurisdiction and are unlikely to result in unregistered distributions in the United States since they do not pose a significant risk of flowback into the United States. The SEC considers the requirement that overseas directed offerings be directed at a single country to be particularly important. This inquiry is cast in terms of a reasonable-knowledge standard: if the foreign issuer, distributor, affiliate, or other person knows, or is reckless in not knowing, that a substantial portion of the offering will be sold or resold outside that single country, the entire offering will fail to qualify as an overseas directed offering.[38] 

Securities offerings that are subject to the Category 2 of the Issuer Safe Harbor include offerings of securities of "reporting issuers";[39] and offerings of nonparticipating preferred stock or asset-backed- or debt securities of nonreporting foreign issuers.[40] The general conditions of Regulation S apply equally to Category 2 offerings. In addition, two types of selling restrictions apply to offerings of securities in this category: 1) "transactional restrictions," and 2) "offering restrictions."[41] 

The transactional restrictions require that to be eligible for the Issuer Safe Harbor, Category 2 securities must not be offered or sold to, or for the account or benefit of, a "U.S. person"[42] (other than a distributor) prior to the expiration of a 40-day restricted period.[43] The 40-day restricted period begins to run on the later of 1) the date upon which the securities were first offered to persons other than distributors, or 2) the date of the closing of the offering. In addition, certain "offering restrictions" must be adopted with regard to the entire offering by the issuer, distributors, their respective affiliates, and all persons acting on behalf of any of these parties.[44] 

The third category of the Issuer Safe Harbor is a residual category that includes offerings of all securities not covered by either of the prior two categories.[45] Offerings of securities in Category 3 are subject to the general conditions of Regulation S, as well as the offering restrictions applicable to Category 2. Equity securities offered under Category 3 may not be offered or sold to, or for the account or benefit of, a U.S. person (other than a distributor) prior to the expiration of a one-year restriction period.[46] 

The SEC has cautioned that neither the safe harbors nor the general statement of Regulation S are available for "any transaction or series of transactions [which,] although in technical compliance with the rules, is part of a plan or scheme to evade the registration provisionsŠ."[47] In a 1995 interpretive release, the SEC identified examples of the evasive Regulation S practices involving the flowback of securities into the U.S. market that it is trying to prevent.[48] The release describes a typical "offshore" transaction whereby a U.S. issuer or underwriter offers securities to an offshore shell entity, often at a substantial discount from the market price, in exchange for a short-term, unsecured promissory note for all or almost all of the purchase price. At the conclusion of the restriction period, the securities are returned to the U.S. market and the proceeds of their resale are used to pay off the original debt of the foreign "purchaser."[49] 

According to the release, securities in these types of transactions do not "come to rest abroad" for two reasons.[50] First, these transactions result in the incidence of ownership never leaving the U.S. market. Second, a substantial portion of the economic risk of the security is left in or returned to the U.S. market during the restricted period in these transactions. Such sham transactions do not qualify under either the safe harbors or the general statement of Regulation S because there can be "no reasonable expectation that the securities could be viewed as actually coming to rest abroad."[51] The release thus expressly requires an issuer or other seller of securities to consider both the location of the incidents of ownership and the location of the person who bears the ultimate economic risk of the securities sold in a transaction under Regulation S.[52] The SEC has eagerly brought enforcement actions to stem such transactions.[53] 

Section 15(a)(1) of the Exchange Act requires a broker or dealer to register with the SEC if the broker or dealer makes use of the mails or any means of interstate commerce to effect transactions in, or to induce the purchase or sale of, securities.[54] The terms "broker" and "dealer" are not limited by the Exchange Act to domestic entities, but encompass "any person," whether U.S. or foreign.[55] Equally important, the term "interstate commerce" is broadly defined to include any "trade commerce, transportation, or communications between any foreign country and any [s]tate."[56] As a result, almost any contact between a foreign broker-dealer and a U.S. investor in the United States could provide the necessary basis for broker-dealer registration.[57] 

As a policy matter, the SEC, as it has in the case of Regulation S, has adopted a territorial approach to the application of the Exchange Act's broker-dealer registration requirements.[58] Under this approach, broker-dealers that physically operate within the territorial limits of the United States would be required to register with the SEC. Thus, a foreign broker-dealer that opened an office or subsidiary in the United States to conduct broker-dealer activities, whether with or for U.S. or foreign investors, would be required to register with the commission.[59] Similarly, foreign broker-dealers located outside the United States that solicit investors residing in the United States generally would be required to register even though their broker-dealer operations are physically located outside the United States. 

In 1989, the SEC adopted Rule 15a-6, codifying much, but not all, of the guidance previously provided by the SEC staff in earlier no-action letters and interpretive releases.[60] Rule 15a-6 provides four exemptions for foreign broker-dealers from U.S. registration requirements. 

The first exemption provides that a foreign broker-dealer may execute transactions with or for U.S.-based investors without registration as a broker-dealer provided that the transaction is unsolicited.[61] As a policy matter, the SEC views persons residing in the United States who, of their own accord, seek out foreign broker-dealers operating abroad in order to purchase or sell securities as not reasonably expecting that the broker-dealer is subject to U.S. requirements.[62] Moreover, subjecting foreign broker-dealers whose operations are located outside the United States to U.S. registration requirements under such circumstances could result in foreign broker-dealers refusing to do business with U.S. investors.[63] 

The SEC has interpreted the term "solicitation" broadly to mean "any affirmative effort by a broker-dealer intended to induce transactional business for the broker-dealer or its affiliates" whether it involves a single transaction or an ongoing business relationship.[64] Conduct that generally would be deemed to involve solicitation would include: 

  • Telephone calls to encourage U.S. investors to use the broker-dealer.    
  • Visits by broker-dealer personnel to introduce the broker-dealer's services.    
  • Conducting investment seminars for U.S. investors.    
  • Advertising in the United States as a broker-dealer.    
  • Providing research to U.S. investors.    
  • Recommending the purchase or sale of securities.    
  • Distributing quotations in the United States.[65]

Rule 15a-6's second exemption permits foreign broker-dealers to provide research reports to major U.S. institutional investors and to effect transactions in the securities discussed in those reports with or for such investors provided that certain conditions are met.[66] Major U.S. institutional investors is a defined term and is limited to investors such as registered investment advisers, banks, savings and loan associations, insurance companies, and certain other institutions, that have, or have under management, total assets exceeding $100 million.[67] 

This exemption is available provided that the foreign broker-dealer does not: 

  • Recommend in the report that the investor use the broker-dealer to effect purchases or sales of any security;    
  • Contact the investor to follow up on the research report; or    
  • Provide research reports pursuant to an understanding that the investor will forward brokerage orders to the foreign broker-dealer in exchange.[68]

The third exemption allows foreign broker-dealers to have direct contact with U.S. institutional investors and major U.S. institutional investors provided that a registered broker-dealer effects any resulting transactions.[69] Generally, the rule requires that employees of the foreign broker-dealer conduct all of their securities activities from outside the United States.[70] However, foreign broker-dealer personnel may visit U.S. institutional investors and major U.S. institutional investors in the United States so long as they are accompanied on these visits by an employee of the registered broker-dealer, who takes responsibility for any communications.[71] The foreign broker-dealer also may solicit U.S. institutional investors by telephone provided that an employee of the registered broker-dealer participates in the conversations.[72] 

Among other things, the foreign broker-dealer must use its best efforts to provide the SEC with any information, testimony, or assistance related to these exempted transactions that the commission requests.[73] No employee of the foreign broker-dealer who deals with the U.S. investor may have been the subject of a disciplinary action by a foreign regulator or found to have violated investment-related laws.[74] Both the foreign broker-dealer and each applicable employee must provide written consent to service of process.[75] For its part, the registered broker-dealer must be responsible for effecting the transaction, issuing the required confirmation, extending any necessary credit, maintaining the required books and records, complying with the SEC's net capital and customer protection rules, and receiving and delivering the funds and securities.[76] 

The fourth exemption permits a foreign broker-dealer to solicit and effect transactions directly with certain specified persons without the intervention of a registered broker-dealer.[77] Such persons consist of: 

  • Registered broker-dealers;    
  • Banks acting in a broker-dealer capacity;    
  • Certain international organizations (e.g., the United Nations);    
  • An existing customer of the foreign broker-dealer who is temporarily present in the United States;    
  • Any agency or branch of a U.S. person permanently located outside the United States; and    
  • U.S. citizens residing abroad, provided that the foreign broker-dealer does not specifically target groups of such citizens (e.g., U.S. servicemen).[78]

These principles regarding the extraterritorial reach of the federal securities laws should generally be applicable with equal force to transnational activities conducted on the global Internet. Unfortunately, neither the SEC nor the federal courts have addressed this specific issue to date. However, recent SEC initiatives related to the Internet strongly suggest that the SEC will not treat activities effected on or through the Internet differently than securities activities conducted through conventional means of communication.[79] 

The application of these principles of extraterritorial regulation to securities activities conducted on the global Internet need not necessarily present novel or unique issues. For example, an offer of shares by a German company via its Web site (in German) that provides a disclaimer, in English, that the shares are not being offered for sale to investors in the United States and have not been registered for sale pursuant to the Securities Act would comply with the terms of Regulation S since it would be an "offshore transaction" that does not employ any "directed selling efforts."[80] By contrast, a German issuer who offers shares via its Web site in Germany, announced on an online investment news group in the United States, and providing English- and German-language versions and containing no disclaimers regarding U.S. laws, would not meet the requirements of Regulation S both because it would not be deemed an "offshore transaction" and because it employs "directed selling efforts" into the United States.[81] 

Similarly, a German broker-dealer that publicized its various services from Bonn to selected U.S. institutional investors through direct e-mail messages clearly would trigger the Exchange Act's broker-dealer registration requirements. 

Slightly more ambiguous, but still seemingly on the safe side of Rule 15a-6, would be the case of a German broker-dealer with an online trading system implemented from a Web site in Bonn for the securities of German issuers, which is accessed by a U.S. citizen surfing European-related investment sites. Any securities transactions the German broker-dealer subsequently effected would arguably be unsolicited. 

However, application of these extraterritorial principles to activities occurring on the Internet will not always be as simple as these illustrations suggest. One unique feature of the Internet is its global accessibility.[82] Once posted,[83] information on the Internet becomes immediately available anywhere in the world, including the United States—even when this is neither intended nor desired. This unique factor raises a novel issue with respect to the extraterritorial issues discussed above: would the mere act of posting on the global Internet constitute a solicitation of U.S. investors for purposes of the broker-dealer registration requirements or be considered an offer made into the United States for purposes of the Securities Act registration requirements? 

If one views the Internet as a global newspaper or bulletin board accessible by anyone from anywhere on Earth, then arguably any posting on the Internet, whether it be a prospectus or an online trading service, constitutes a global offer or solicitation, encompassing not only investors in the writer's home country but also investors in the United States. Indeed, a very analogous view appears to be held by state regulators trying to distinguish between interstate and purely intrastate Internet transactions.[84] One state regulator has explained the issue in the following manner: 

When an offer is directed into a state other than the state in which it originated, an offer occurs where it is received. Thus the analysis of whether an Internet communication constitutes an offer in the state turns on the concepts of "directed" and "received." Arguably, issuers do not direct or channel an offer on [the] Internet to a state; rather a user must request that the information be sent. However, given the unprecedented ease with which information can be transmitted over [the] Internet, a more realistic argument is that the offer should be deemed directed to every place that the offer could be viewed or downloaded.[85]

The SEC has not indicated whether it subscribes to this view on an international level. It has, however, indicated that it recognizes the issue. According to Commissioner Wallman: 

The Commission has extensive and detailed regulations regarding the operation of securities exchanges. How then would the [c]ommission regulate—and should the [c]ommission regulate—the posting of quotations on the Internet by a foreign stock exchange, when those quotes inevitably become available to investors in the U.S.? And how long will it be after that before there is a simple mechanism for an Iowa resident to buy, for example, Frankfurt Stock Exchange listed stocks over the Internet? Obvious are the enforcement difficulties, and the policy issues arising from the operation of disparate regulatory regimes, if one were to determine that U.S. jurisdiction exists as a result of this conduct.[86]

The view that a posting on the Internet is a global solicitation or offer, if it were to prevail, would have significant consequences for the foreign securities community and U.S. investors. Use of the Internet by foreign issuers and broker-dealers would, no doubt, be chilled, and the ability of the U.S. public to access foreign securities markets directly, without the intervention of a U.S. securities professional, would be significantly curtailed. 

Assuming that this view does not prevail, and that something more is required to make a posting on the global Internet a solicitation of, or offer to, U.S. investors, what should that "more" be? Should the language in which the posting is made be considered in determining whether a foreign broker-dealer or issuer has taken affirmative action to induce transactions with U.S. investors? For example, it may be perfectly rational to take the position that an advertisement posted by a foreign broker-dealer or issuer in a language other than English is evidence that there was no solicitation of, or offer made to, U.S. investors. It is questionable, however, whether the converse also should be true, that a posting by a foreign broker-dealer in English is a solicitation of a U.S. investor, when English is the predominant language of the Internet.[87] 

Another approach may be to require that the writer of the posting take some affirmative, supplemental step, in addition to simply placing a communication on the Internet, that can reasonably be expected to bring the communication to the attention of investors in the United States. By way of illustration, an issuer or broker-dealer that makes its prospectus or online trading service available not only by way of its Internet address in its home country, but also arranges for access to its site via an investment newsgroup arguably has taken steps to transcend its national borders. Perhaps more compelling is the situation where an issuer or broker-dealer has posted a communication on a bulletin board offered by a U.S. online service (such as Prodigy or America Online) that includes the Internet address of its Web site in its home country. 

If posting on the Internet in English is suspect, what steps can or should a foreign broker-dealer take to protect itself from the claim that it is required to register with the SEC? Would it be sufficient to include a disclaimer on any posting stating that no offering of securities or brokerage services is being made to U.S. investors? Could a broker-dealer that posted on the Internet protect itself if it only effected transactions for U.S. investors who indicated in writing that the transaction was unsolicited? Or, must the foreign broker-dealer refuse to deal with U.S. investors altogether? 

In an analogous context, state regulators have elected to take the latter approach. In this regard, a number of states have adopted an exemption from state registration requirements for Internet offerings that, in effect, prohibits an issuer or underwriter from effecting any sales with persons in that state.[88] 

Although a legislative response is always possible, the novel issues raised by the interplay of the extraterritorial reach of the federal securities laws and the use of the Internet by participants in the international securities markets are more likely to be determined by the SEC and the courts. In so doing, the SEC and the courts should attempt to do so in a way that allows the Internet to develop its promise to provide U.S. investors with ready and direct access to the world's securities markets. 


  1. For example, in 1987, $187 billion of foreign stocks were purchased by U.S. investors, while $481.1 billion of U.S. stocks were purchased by foreign investors. See generally J. Seligman, The Obsolescence of Wall Street: A Contextual Approach to the Evolving Structure of Federal Securities Regulation, 93 Mich. L. Rev. 649, 652 (1995) (citing Securities and Exchange Commission, Staff Report on Internationalization of the Securities Market (II-73) (1987)). In 1994, those numbers increased significantly: more than $850 billion of foreign securities were purchased by U.S. investors; foreign investors purchased more than $700 billion of U.S. securities. The International Politics of Global Finance, The Washington Quarterly, Autumn 1995, at 133. Foreign issuers' access to U.S. capital markets also has increased dramatically. For example, from January 1990 through February 1993, more than 200 foreign issuers made more than 300 registered offerings in the United States involving approximately $72 billion of securities, and private placements by foreign issuers increased from $19.4 billion in 1990 to approximately $23.3 billion in 1992. Richard M. Kosnik, Comments on "Barriers to Foreign Issuer Entry Into U.S. Markets," 24 Law & Pol'y Int'l Bus. 1237, 1242 (1993).    
  2. Steven M. H. Wallman, Regulating in A World of Technological and Global Change, Remarks Before the Institute of International Bankers 7 (Mar. 4, 1996).    
  3. See 15 U.S.C. Section 77b(2)(1) (1994) for the definition of a "security" under the Securities Act.    
  4. 15 U.S.C. Section Section 77a-77aa (1994).    
  5. The Securities Act Section 2(10) defines the term "prospectus" broadly as "any prospectus, notice, circular, advertisement, letter or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security." 15 U.S.C. Section 77(b)(10) (1994).    
  6. Under the Securities Act Section 2(3), 15 U.S.C. Section 77b(3), the terms "sale," "sell," and "offer to sell" include every contract and every attempt to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.    
  7. 15 U.S.C. Section 77c-e (1994).    
  8. See Thomas Joyce, et al., Offers and Sales of Securities by a Non-U.S. Company in the United States in Securities and Investment Regulation Handbook 17 (1992).    
  9. 15 U.S.C. Section 77b(7) (1994).    
  10. Regulation S was originally proposed in June 1988. Sec. Act. Rel. No. 6779, 53 Fed. Reg. 22661 (1988). Regulation S was reproposed in July 1989 and adopted on Apr. 24, 1990. See Offshore Offers and Sales, Sec. Act. Rel. No. 6838, 54 Fed. Reg. 30063 (1989); Sec. Act. Rel. No. 6863, 55 Fed. Reg. 18306 (1990).    
  11. 17 C.F.R. Section 230.901 (1996). Regulation S is based upon a "territorial approach" to the Securities Act Section 5. See 55 Fed. Reg. at 18308.    
  12. Sec. Act. Rel. No. 4708, 29 Fed. Reg. at 9828 (1964).    
  13. 17 C.F.R. Section 230.903-.904 (1996). See also 55 Fed. Reg. at 18307-08 ("The safe harbors are not exclusive and are not intended to create a presumption that any transaction failing to meet their terms is subject to Section 5 [of the Securities Act].").    
  14. 17 C.F.R. Section 230.901 (1996).    
  15. 17 C.F.R. Section Section 230.903(a)-(b) and 904(a)-(b) (1996).    
  16. For purposes of Regulation S, the term "distributor" includes underwriters, dealers, or other persons who participate in the process whereby securities move from the issuer to the public. The concept is similar, but not identical to, the definition of "underwriter" under the Securities Act Section 2(11), 15 U.S.C. Section 77b(11) (1994).    
  17. 17 C.F.R. Section 230.903 (1996). Rule 904, 17 C.F.R. Section 230.904 (1996), which contains the second safe harbor, known as the Resale Safe Harbor, applies to resales of securities by persons other than the issuer, a distributor, their respective affiliates (except certain officers and directors), and persons acting on behalf of any of the foregoing and is outside the scope of this article.    
  18. 17 C.F.R. Section 230.903(a)-(b) (1996).    
  19. 17 C.F.R. Section 230.902(i) (1996).    
  20. 55 Fed. Reg. at 18309-10.    
  21. 17 C.F.R. Section 230.902(b) (1996). See also 55 Fed. Reg. at 18311.    
  22. 17 C.F.R. Section 230.903(b) (1996); 17 C.F.R. Section 230.904(b) (1996).    
  23. See 17 C.F.R. Section 230.902(k) (1996) for the definition of "publication with a general circulation in the United States."    
  24. 55 Fed. Reg. at 18311.    
  25. 55 Fed. Reg. at 18312.    
  26. Id.    
  27. Id.    
  28. 17 C.F.R. Section 230.903(c)(1)-(3) (1996).    
  29. 17 C.F.R. Section 230.903(c)(1)(iii) (1996).    
  30. 17 C.F.R. Section 230.903(c)(1) (1996); see also 55 Fed. Reg. at 18315.    
  31. 17 C.F.R. Section 230.902(n)(1)-(2) (1996). Rule 902(n) states that, with respect to a class of an issuer's equity securities, SUSMI exists if at the beginning of the offering either: 1) the securities markets in the United States in the aggregate constitute the single largest market for such class of securities in the shorter of the issuer's prior fiscal year or the period since the issuer's incorporation; or 2) 20 percent or more of all trading in such class of securities took place in, on, or through securities markets in the United States and 55 percent of such trading took place in, on, or through securities markets of a single foreign country in the shorter of the issuer's prior fiscal year or the period since the issuer's incorporation.    
  32. 55 Fed. Reg. at 18314.    
  33. Issuers must register certain classes of securities under Exchange Act Section 12(b) or Section 12(g), 15 U.S.C. Section 78l(b) or (g) (1994), or are required to file reports for other classes of securities under Exchange Act Section 15(d), 15 U.S.C. Section 78o(d) (1994).    
  34. 55 Fed. Reg. at 18315. An American depository facility is a method whereby shares of a foreign issuer are held by a trustee in the United States, usually a bank, to facilitate trading of receipts (ADRs) for all or a portion of the shares' value in U.S. securities markets.    
  35. Sara Hanks, Offers and Sales by a Foreign Company Outside the U.S., in United States Securities and Investment Regulation Handbook, 143-44 (1992).    
  36. 17 C.F.R. Section 230.902(j)(1) (1996).    
  37. 17 C.F.R. Section 230.902(j)(2) (1996).    
  38. 55 Fed. Reg. at 18315.    
  39. Under Regulation S, a "reporting issuer" is any issuer, other than a registered investment company, that has a class of securities registered pursuant to Exchange Act Section 12(b) or Section 12(g) or is required to file reports under Exchange Act Section 15(d) and that has filed all required materials for a period of twelve months prior to a Regulations S offering. See 17 C.F.R. Section 230.902(l) (1996).    
  40. 17 C.F.R. Section 230.903(c)(2) (1996).    
  41. In the proposing release, the SEC noted that the specific offering and transactional restrictions for categories 2 and 3 are directly aimed, in increasing levels, at those instances where there is little, if any, information available to the U.S. marketplace about the issuer and its securities and where there is a likelihood of flowback. 53 Fed. Reg. at 22670.    
  42. 17 C.F.R. Section 230.902(o) (1996).    
  43. 17 C.F.R. Section 230.903(c)(2)(iii) (1996).    
  44. 17 C.F.R. Section 230.902(h) (1996).    
  45. 17 C.F.R. Section 230.903(c)(3) (1996).    
  46. 17 C.F.R. Section 230.903(c)(3)(iii)(A) (1996). In addition, the offer or sale of an equity security under Category 3 must meet four conditions that are not required in connection with an offer or sale of a debt security. See 17 C.F.R. Section 230.903(c)(3)(iii)(B)(1)-(4) (1996).    
  47. Regulation S, Preliminary Note 2, 17 C.F.R. Section Section 230.901 through 230.904 (1996).    
  48. Sec. Act. Rel. No. 7190, 60 Fed. Reg. 35663 (1995).    
  49. Id. at 35663-64.    
  50. Id. at 35664.    
  51. Id.    
  52. Bloomenthal & Wolff, Transnational Aspects of U.S. Securities Laws, in 10B International Capital Markets and Securities Regulation Section 5.01[12][b] (1996).    
  53. See, e.g., In the Matter of Candie's, Inc., Sec. Act. Rel. No. 7263, 61 S.E.C. (CCH) Docket 758 (Feb. 21, 1996) (Regulation S not available for the sale of unregistered securities to foreign purchasers at discounts of 15 percent to 40 percent in exchange for unsecured, short-term promissory notes); In the Matter of Donald J. Stoecklin, Sec. Act. Rel. No. 7207, 60 S.E.C. (CCH) Docket 327 (Sept. 1, 1995) (Regulation S unavailable for scheme involving an issuer reporting false sales to foreign shell companies and issuing securities to same for "marketing rights").    
  54. Exchange Act Section 15(a)(1) provides:   
    It shall be unlawful for any broker or dealer which is either a person other than a natural person or a natural person not associated with a broker or dealer which is a person other than a natural person (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptances, or commercial bills) unless such broker or dealer is registered in accordance with subsection (b) of this section.
    15 U.S.C. Section 78o(a)(1) (1994).    
  55. For purposes of the Exchange Act, a "broker" is defined to mean "any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank." 15 U.S.C. Section 78c(4) (1994). The term "dealer" is defined to mean "any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise, but does not include a bank, or any person insofar as he buys or sells securities for his own account, either individually or in some fiduciary capacity, but not as a part of a regular business." 15 U.S.C. Section 78c(5) (1994).    
  56. 15 U.S.C. Section 78c(17) (1994).    
  57. Exchange Act Rel. No. 27,017 (1989), 54 Fed. Reg. at 30013 (1989).    
  58. 54 Fed. Reg. at 30016.    
  59. The SEC applies an "entity approach" in deciding who must register. If a foreign broker-dealer organizes a subsidiary in the United States to carry on broker-dealer activities then only the subsidiary need register with the SEC. On the other hand, if the foreign broker-dealer were to open a branch or representative office to conduct business, then the foreign broker-dealer would be required to register. 54 Fed. Reg. at 30017.    
  60. 17 C.F.R. Section 240.15a-6 (1996). See also 54 Fed. Reg. at 30013, 30014, and 30019. On the same day that the SEC adopted Rule 15a-6, it also issued a release seeking comment on a conceptual approach to the regulation of foreign broker-dealers that would "recognize comparable foreign regulation of broker-dealers in order to achieve the goal of facilitating international securities transactions without compromising the essential protections of the U.S. broker-dealer regulatory regime." Exchange Act Rel. No. 27,018 (1989), 54 Fed. Reg. 30087 (1989).    
  61. 17 C.F.R. Section 240.15a6-1(a)(1) (1996).    
  62. 54 Fed. Reg. at 30017; Exchange Act Rel. No. 25,801 (1988), 53 Fed. Reg. 23645 (1988).    
  63. 54 Fed. Reg. at 30017; 53 Fed. Reg. at 23650.    
  64. 54 Fed. Reg. at 30017-18; 53 Fed. Reg. at 23650.    
  65. 54 Fed. Reg. at 30018; 53 Fed. Reg. at 23650-23651. The SEC generally allows foreign market places and foreign securities information vendors to distribute quotations by foreign broker-dealers subject to certain conditions. 54 Fed. Reg. at 30018-30019.    
  66. 17 C.F.R. Section 240.15a-6(a)(2) (1996).    
  67. 17 C.F.R. Section 240.15a-6(b)(4) and (b)(7) (1996). A U.S. institutional investor consists of: 1) An investment company registered with the commission under the Investment Company Act of 1940; or 2) A bank, savings and loan association, insurance company, business development company, small business investment company, or employee benefit plan defined in Regulation D Rule 501(a)(1) under the Securities Act of 1933 (17 CFR 230.501(a)(1)); a private business development company defined in Rule 501(a)(2) (17 CFR 230.501(a)(2)); an organization described in I.R.C. Section 501(c)(3), as defined in Rule 501(a)(3) (17 CFR 230.501(a)(3)); or a trust defined in Rule 501(a)(7) (17 CFR 230.501(a)(7)).    
  68. 17 C.F.R. Section Section 240.15a-6(a)(2)(i), (ii) & (iv) (1996). If the foreign broker-dealer has a relationship with a U.S. registered broker-dealer of the type described under the third exception, then any transaction in the securities discussed in the research report must be effected through the registered broker-dealer. 17 C.F.R. Section 240.15a-6(a)(2)(iii) (1996). A foreign broker-dealer may disclose that it is a market maker in the securities discussed in the report. 54 Fed. Reg. at 30022 n.109.   

    Although the rule itself refers only to effecting transactions in the securities discussed in the research reports, the accompanying release states that, "the foreign broker-dealer may effect trades in the securities discussed in the research or other securities at the request of major U.S. institutional investors receiving the report." 54 Fed. Reg. at 30022. 

  69. 17 C.F.R. Section 240.15a-6(a)(3)(i)(a) (1996). The rule permits the foreign broker-dealer to perform the actual execution of the transaction if the rules of the foreign security exchange or the over-the-counter market require the foreign broker-dealer, as a member or market maker, to do so. 54 Fed. Reg. at 30029 n.185.    
  70. 17 C.F.R. Section 240.15a-6(a)(3)(ii)(A) (1996).    
  71. 17 C.F.R. Section 240.15a-6(a)(3)(ii)(A)(1) (1996).    
  72. 17 C.F.R. Section 240.15a-6(a)(3)(iii)(B) (1996). A foreign broker-dealer may contact a major U.S. institutional investor by telephone without the participation of a registered broker-dealer. 54 Fed. Reg. at 30027.    
  73. 17 C.F.R. Section 240.15a-6(a)(3)(i)(B) (1996).    
  74. 17 C.F.R. Section 240.15a-6(a)(3)(ii)(B) (1996).    
  75. 17 C.F.R. Section 240.15a-6(a)(3)(iii)(D) (1996).    
  76. 17 C.F.R. Section 240.15a-6(a)(3)(iii) (1996).    
  77. 17 C.F.R. Section 240.15a-6(a)(4) (1996).    
  78. 17 C.F.R. Section 240.15a-6(a)(4) (1996).    
  79. See, e.g., Use of Electronic Media for Delivery Purposes, Exchange Act Rel. No. 36345, 60 Fed. Reg. 53458 (1995) (approving the use of electronic methods of transmission to satisfy prospectus and other information delivery or transmission obligations of the federal securities laws); Spring Street Brewing Company, SEC Interpretive Letter (Apr. 17, 1996) (applying the SEC's traditional analysis—focusing on the presence or absence of investor protection concerns—to the question of whether an electronic bulletin board trading system was required to register as a broker-dealer); Sec. Act Rel. No. 7288, 61 Fed. Reg. 24644, n.4 (1996) (the "substantive requirements and liability provisions of the federal securities laws apply equally to electronic and paper-based media. For example, the antifraud provisions of the Exchange Act and Rule 10b-5 thereunder apply to information delivered and communications transmitted electronically, to the same extent as they apply to information delivered in paper form.").    
  80. 17 C.F.R. Section 230.903(a)-(b) (1996).    
  81. Absent another applicable exemption from registration for its offering, this issuer would have to register under Securities Act Section 5, 15 U.S.C. Section 77e (1994).    
  82. See, e.g., Untangling the Web, Comm. Wk. Int'l, May 6, 1996, at 19 ("[T]he Web can become a universal access tool to data held in disparate systems.").    
  83. As used in this discussion, the term "posting" excludes those communications (e-mail) that are addressed to specific persons (i.e., johndoe@corp.com) and is used to refer to posting messages to a home page on the World Wide Web, a bulletin board system, or a USENET newsgroup. See ACLU v. Reno, 96 Civ. No. 963, 1996 U.S. Dist. LEXIS 7919, *33 (E.D. Pa., June 12, 1996) (outlining the six major methods of communication on the Internet).    
  84. See, e.g., NASAA, Resolution Regarding Securities Offered on the Internet (Jan. 7, 1996) ("A communication made on the Internet is directed generally to anyone who has access to the Internet"). See also Bradford P. Weirick, Securities Law, Nat'l L. J., May 6, 1996, at B5 ("Although the question of a state's jurisdiction over out-of-state persons who post securities offerings on-line is not yet entirely settled, state securities regulators have taken the position that an offer made over the Internet is subject to state regulation if it is accessible in-state—a prospect that could require an issuer posting a prospectus on the Internet to register or obtain an exemption in all 50 states.").    
  85. K. Robert Bertram, Counsel, Div. of Corporate Finance, Pennsylvania Securities Commission and Chair, NASAA Offers and Sales on the Internet Committee, Internet and Corporation Finance Concerns: Are the Skies Still Blue? 8-9 (1995) (unpublished manuscript on file with the authors).    
  86. Wallman, supra note 2, at 7.    
  87. Michael Specter, World, Wide, Web: 3 English Words, N.Y. Times, Apr. 14, 1996, at 1. ("[W]hether you are a French intellectual pursuing the cutting edge of international film theory, a Japanese paleobotanist curious about a newly discovered set of primordial fossils, or an American teen-ager concerned about Magic Johnson's jump shot, the Internet and the World Wide Web really only work as great unifiers if you speak English.").    
  88. To date, 12 states have promulgated identical or substantially similar exemptive orders for certain Internet offers from their state's registration requirements. See, e.g., Order of the Pennsylvania Securities Commission, (Aug. 31, 1995). The National Association of State Securities Regulators has called for the adoption of similar exemptive orders throughout the United States. See NASAA, Resolution Regarding Securities Offered on the Internet (Jan. 7, 1996) (calling for the adoption of an Internet offering exemption similar to Pennsylvania's in all of the states).

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