SEC Adopts Rule Meant to Curb Abuse of Overseas Stock Offerings

The Securities and Exchange Commission took a first step Wednesday to curb abuses in offshore stock offerings by American companies and foreign investors, and promised more rules by year’s end.

The SEC voted to require any U.S. company selling stock overseas under so-called Regulation S to notify its U.S. investors within 15 days of such a sale.

Regulation S refers to a 1990 rule that allows U.S. companies to sell stock abroad without registering the shares with the SEC. The foreign buyers can resell the shares in American markets 40 days after the initial sale.

Regulators say some capital-desperate small companies have used the rule to evade U.S. securities laws. They sell stock at a discount to offshore investors, who, when the waiting period expires, resell the shares in the United States at a higher price.

U.S. investors in such stocks have complained when offshore investors have dumped thousands of new shares on the market, depressing the securities’ prices. Moreover, U.S. investors often have been taken by surprise by such sales, because some of the companies issuing Regulation S shares have done so quietly, burying the news deep in quarterly financial statements, if they disclose it at all.

Regulation S “is one safe harbor with too many pirates in it,” SEC Chairman Arthur Levitt said.

Brian Lane, the SEC’s corporate finance director, said the SEC staff plans to recommend more changes by year’s end, including a proposal that would extend the 40-day waiting period before foreign investors can sell Regulation S shares.

“We want to stop overseas speculators from parking the stock they bought overseas and then flipping it for higher prices in the U.S.,” Lane said.

At its meeting, the SEC also modified requirements for financial statements of takeover targets in smaller mergers.

The SEC now requires companies to provide audited financial statements of takeover targets when the acquisition is greater than 10% of the company making the bid. The bidding company can’t sell any securities until it provides the financial statements, even if the sale is unrelated to the merger.

The SEC rule raised the requirement to apply only to large takeovers, or deals greater than 50% of the acquiring company.

Meredith Cross, deputy director of the SEC’s corporation finance division, said the rule would remove a barrier to securities sales in U.S. markets. To get around the restriction, some firms opt to sell stock overseas, eliminating the expense of providing audited financial statements for small takeover targets.