The unfounded fear of regulation S: Empirical evidence on offshore securities offerings

Regulation S provides U.S. issuers with an exemption from the registration requirements of the Securities Act of 1933 to the extent that securities ar e offered and sold solely outside the United States. Through resales buck i nto the United States, however, U.S. investors may become exposed to unregi stered securities initially distributed abroad through Regulation S. This A rticle identifies two distinct risks from an offshore securities offering F irst, issuers may conduct an offering under Regulation S as a means to sell securities indirectly into the United States through resales in situations where the U.S. secondary market overvalues the issuer's securities. Second even where the U.S. secondary market does not overvalue an issuer's securi ties, the managers of the issuer may utilize Regulation S to engage in self -dealing and other opportunistic behavior for their own private benefit at the expense of U.S. investors. Employing a dataset of 701 offerings conduct ed pursuant to Regulation S from 1993 to 1997, this Article presents eviden ce that insider self-dealing may result in a greater offering discount for certain overseas offerings. Given the specific risks facing U.S. investors, the Article then argues that the SEC's 1998 reforms to Regulation S repres ent only an untailored response. Instead the Article recommends specific re forms that both reduce the risk facing U.S. investors and lessen the regula tory burden on offshore securities offerings that pose little risk of inves tor abuse.