For issuers and fund managers with investor bases that extend beyond U.S. borders — particularly those working with South American family offices, LATAM institutional investors, and offshore funds — Regulation S provides the framework for selling securities to non-U.S. persons without registration under the Securities Act of 1933. The rule is grounded in the territorial principle: the registration requirements of Section 5 of the Securities Act were designed to protect the U.S. capital markets and U.S. investors, and do not reach transactions that occur entirely outside the United States. Regulation S codifies that principle with two threshold conditions and a tiered compliance structure that varies by issuer type. Understanding which tier applies to you, and what it requires, is essential before the first investor conversation begins.

The Two Foundational Conditions

Regulation S rests on two conditions that must both be satisfied for any transaction to qualify:

First, the offer and sale must be made in an offshore transaction. Rule 902(h) defines an "offshore transaction" as one where: (1) the offer is not made to a person in the United States; and (2) either the buyer is physically outside the United States at the time of the buy order, or the transaction is executed on a physical trading floor of an established foreign securities exchange located outside the United States. For private placements — where there is no exchange floor — the key question is whether the buyer is outside the U.S. when they execute the subscription agreement or otherwise commit to purchase. A South American investor who signs a subscription agreement while physically in Miami is not in an offshore transaction for these purposes.

Second, there must be no directed selling efforts in the United States. Rule 902(c) defines "directed selling efforts" broadly as any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the U.S. market for the securities. This includes placing advertisements in U.S. publications, broadcasting over U.S. radio or television, using the mails to send offering materials to U.S. addresses, and — critically — conducting road shows in the U.S. that include the securities in the offering. The prohibition applies regardless of whether any U.S. persons actually purchase. The activity itself is the violation.

Note what "directed selling efforts" does not prohibit: it does not prohibit the issuer from being headquartered in the United States, from having U.S. counsel or U.S. underwriters, from filing documents with U.S. regulators, or from generally conducting its business in the U.S. The prohibition is specifically directed at marketing activity targeting U.S. persons in connection with the particular offering.

The Three Issuer Categories

Regulation S divides issuers into three categories for purposes of determining the additional conditions that apply to the offshore offering. The categories reflect the SEC's assessment of the risk that securities sold offshore will flow back into the U.S. market — the "flowback" problem.

Category 1: Foreign Issuers with No Substantial U.S. Market Interest

Category 1 applies to foreign issuers that have no "substantial U.S. market interest" (SUSMI) in the class of securities being offered. A foreign issuer has SUSMI if, among other things, U.S. holders own 20% or more of the outstanding securities of the class, or the issuer's principal trading market is in the U.S. Category 1 also covers securities backed by the full faith and credit of a foreign government, certain foreign investment-grade debt, and securities offered and sold in "overseas directed offerings" — offerings expressly directed into a single foreign country in compliance with that country's laws.

The compliance burden for Category 1 is minimal: satisfy the two basic conditions (offshore transaction, no directed selling efforts) and nothing more. No distribution compliance period, no resale restrictions, no legends. Category 1 is essentially unavailable to U.S. issuers and to most foreign issuers with meaningful U.S. investor bases.

Category 2: Reporting Companies and Debt Securities of Non-Reporting Companies

Category 2 applies to SEC-reporting issuers (Exchange Act reporting companies) that do not qualify for Category 1, and to non-reporting foreign issuers offering investment-grade debt securities. For equity offerings, Category 2 is effectively limited to reporting companies.

Category 2 imposes a 40-day distribution compliance period for equity and convertible debt securities. During this period: (1) the issuer, its distributors, and their affiliates cannot make offers or sales to U.S. persons or for the account or benefit of U.S. persons; (2) any distributor selling to another distributor or dealer must send a "distribution compliance legend" notice; and (3) any offer or sale prior to the expiration of the compliance period requires that the buyer represent that it is not a U.S. person and is not acquiring for the account or benefit of a U.S. person, or that it is a U.S. person who purchased in a transaction exempt from registration (e.g., under Rule 144A).

Category 3: Non-Reporting Domestic Issuers — The Most Restrictive Tier

Category 3 applies to all issuers that do not qualify for Categories 1 or 2. In practice, this means domestic (U.S.) issuers that are not Exchange Act reporting companies — which describes the vast majority of private companies and private funds conducting Regulation S offerings alongside a Reg D domestic tranche. Category 3 is the most operationally demanding tier.

For equity securities offered under Category 3, the distribution compliance period is one year (extended from the prior six-month period for equity by the SEC's 2008 amendments). During that year:

  • Securities sold to non-U.S. persons must be "restricted securities" as defined in Rule 144(a)(3) — meaning they carry the same resale restrictions as securities issued in a private placement under Rule 144.
  • The securities must bear a restrictive legend stating that they have not been registered under the Securities Act and may not be offered or sold in the U.S. or to, or for the account of, U.S. persons except pursuant to an available exemption from registration.
  • The issuer must refuse to register any transfer of the securities that would violate the restrictions.
  • Each distributor must agree in writing that any offer or sale prior to the end of the compliance period will only be made pursuant to Regulation S, pursuant to registration, or pursuant to a Securities Act exemption.
  • Purchasers must provide a written certification confirming non-U.S. person status and their understanding that the securities are restricted.

The one-year distribution compliance period clock starts on the date of each sale, not the date of the first sale in the offering. For offerings with multiple closings, this means securities sold in later closings are subject to restrictions that expire later than those from earlier closings.

The Flowback Problem

The distribution compliance period exists specifically to address flowback — the risk that securities sold offshore to non-U.S. persons will be resold into U.S. markets before there has been adequate public information dissemination about the issuer. For non-reporting companies (Category 3 equity issuers), this concern is acute because there is no stream of Exchange Act reports providing the market with ongoing information. The one-year hold serves as a structural substitute for registration disclosure.

Flowback becomes a practical problem when offshore investors seek to resell their securities during the compliance period. Sales back into the U.S. market during the compliance period must be made pursuant to a valid Securities Act exemption — typically Rule 144 (subject to its holding period and other conditions) or Section 4(a)(7) for accredited investors. The offshore seller who transfers restricted securities to a U.S. buyer without a valid exemption has violated Section 5, and so has the U.S. buyer who resells. The legend on the certificate or book entry is the investor's daily reminder of this restriction.

What Is a U.S. Person?

The definition of "U.S. person" under Rule 902(k) is technical and broad. It includes: any natural person resident in the United States; any partnership or corporation organized under the laws of the United States or any state; any estate of which an executor is a U.S. person; any trust of which a trustee is a U.S. person; any agency or branch of a foreign entity located in the United States; any non-discretionary account held by a U.S. dealer or other U.S. fiduciary; and any discretionary account held by a U.S. dealer or fiduciary — unless the account is organized outside the U.S. and held for the benefit of non-U.S. persons.

The definition explicitly excludes: offshore branches of U.S. financial institutions if they operate for valid business reasons and are engaged in the banking or insurance business; any agency or branch of a U.S. person located outside the United States if the employee is recruited locally; and foreign governments and their political subdivisions.

For LATAM investors, the key questions are residency and entity formation. A Colombian family office that is organized as a Colombian sociedad anónima and whose beneficial owners are Colombian residents is not a U.S. person — even if its investment adviser is a Miami-registered RIA. A Colombian national who is also a U.S. green card holder residing in Miami is a U.S. person. The analysis is fact-specific.

Concurrent Reg D / Reg S Offerings: The U.S. and Offshore Tranche

The most common structure for Miami-based fund managers and private companies raising capital from both domestic and international investors is a simultaneous Rule 506(b) (or 506(c)) offering for U.S. investors and a Regulation S offering for non-U.S. investors. The two tranches can run concurrently as part of the same overall capital raise, provided they are properly segregated.

The critical rule in a concurrent offering is that the Regulation S offshore tranche must not be integrated with the Regulation D domestic tranche in a way that would cause the combined offering to violate the terms of either exemption. The SEC's integration doctrine asks whether what are nominally separate offerings are really one offering. Regulation S itself provides a safe harbor: an offshore transaction meeting the requirements of Regulation S will not be integrated with a concurrent domestic offering, as long as the two transactions are genuinely separate and the offshore securities are not offered to U.S. persons.

In practice, this means maintaining separate subscription agreements for the U.S. and offshore tranches, using different legends, maintaining separate investor files, and ensuring that the same placement agents or finders are not simultaneously soliciting U.S. and non-U.S. investors in ways that blur the line. Offering documents for the offshore tranche typically include a prominent legend on the cover stating that the securities have not been registered under the Securities Act and are being offered pursuant to Regulation S.

LATAM-Specific Considerations

For Miami-based counsel advising on capital raises that include South American investors, Regulation S is a daily practical tool. Several structural points bear particular attention in the LATAM context:

Investor certification language. Subscription agreements for the offshore tranche should require each investor to represent that it is not a U.S. person, that it is not acquiring the securities for the account or benefit of a U.S. person, that it is not a resident of the United States, and that the offer was made to it outside the United States. For Category 3 equity offerings, the certification should also confirm the investor's understanding of the one-year distribution compliance period and resale restrictions.

Anti-money laundering and FATCA considerations. Offshore investors from high-risk jurisdictions require enhanced due diligence under FinCEN's Customer Due Diligence rules, which apply to investment advisers covered by the 2024 IA AML rule. Separately, FATCA withholding and W-8BEN/W-8BEN-E certifications must be collected from all non-U.S. investors before any distributions are made. These requirements are independent of Regulation S but must be addressed in parallel.

Local country securities laws. Regulation S does not regulate whether an offering complies with the securities laws of the investor's home country. A U.S. issuer offering securities to Chilean investors using Regulation S is exempt from U.S. registration — but that does not mean it has complied with Chilean securities law. Issuers marketing broadly to LATAM investors should obtain local law guidance for each jurisdiction where they are actively soliciting.

The physical presence issue. As noted above, an offshore investor who is physically present in the United States at the time of the buy order does not satisfy the offshore transaction condition. For LATAM investors who spend significant time in Miami, New York, or other U.S. cities, this requires attention. Subscription agreements should be executed outside the United States, and the investor's physical location at the time of signing should be documented where possible.

Regulation S is a powerful tool when used correctly, but it is not a residual catch-all. It requires affirmative compliance, accurate investor classification, and ongoing restraint during the distribution compliance period. For issuers straddling the U.S.-LATAM capital markets, getting the structure right from the start is far less expensive than unwinding it later.