What Is Regulation S?
Regulation S is the SEC’s safe harbor for securities offerings that take place outside the United States. Adopted in 1990, it provides that offers and sales of securities made in offshore transactions to non-US persons are not subject to the registration requirements of Section 5 of the Securities Act of 1933. For fund managers raising capital from an international LP base, Regulation S is the framework that governs how you offer fund interests to investors outside the US.
The Two Core Conditions
Regulation S rests on two requirements that must both be satisfied:
Offshore transaction. The offer is not made to a person in the United States, and either (a) the buyer is outside the United States at the time the buy order is originated, or (b) the transaction is executed on an established foreign securities exchange. For private fund interests, this means the non-US investor must be outside the US when they commit to the investment.
No directed selling efforts. The issuer, its affiliates, and anyone acting on their behalf must not engage in directed selling efforts in the United States. Directed selling efforts include any activity that could condition the US market for the offered securities: advertising in US media, holding roadshows on US soil for the offshore offering, or targeting US residents through email campaigns.
The Three-Category Framework
Regulation S classifies offerings into three categories based on the likelihood of the securities flowing back into US markets:
Category 1. Securities with minimal risk of US market flowback, including securities of foreign private issuers with no substantial US market interest. Only the two basic conditions (offshore transaction, no directed selling efforts) apply.
Category 2. Reporting companies and certain debt securities. Additional restrictions apply, including a 40-day distribution compliance period during which the securities cannot be sold to US persons.
Category 3. All other offerings, including equity offerings by US domestic issuers and non-reporting companies. This is where most private funds fall. The distribution compliance period is one year, and additional safeguards apply: the buyer must certify it is not a US person, the securities must bear a restrictive legend, and the issuer must refuse to register any transfer to a US person during the compliance period.
Parallel Fund Structures
In practice, most fund managers raising globally do not rely on Regulation S alone. The standard approach is a parallel structure:
- A domestic fund (typically a Delaware limited partnership) raises capital from US limited partners under Regulation D.
- An offshore fund (typically a Cayman Islands limited partnership or exempted company) raises capital from non-US investors under Regulation S.
Both vehicles invest side-by-side into the same portfolio, managed by the same general partner. The parallel structure ensures US and non-US investors are segregated for regulatory purposes while receiving economically equivalent exposure.
Some managers add an offshore feeder that flows into the domestic master fund, depending on tax structuring preferences and LP requirements. The choice between parallel and master-feeder architecture is driven by tax efficiency (particularly for tax-exempt US LPs and non-US LPs seeking to avoid US trade or business income) rather than securities law alone.
Interaction with US Regulations
Regulation S does not immunize the issuer from all US securities laws. The antifraud provisions of the Securities Act and the Exchange Act still apply to offshore transactions. If the securities are offered through a scheme to evade registration requirements (for example, offering to non-US persons who are acting as nominees for US buyers), the safe harbor does not protect the issuer.
Fund managers should coordinate Regulation S compliance with their Regulation D strategy. Marketing materials, data rooms, and investor communications must be carefully segmented to ensure US-directed activities do not contaminate the Reg S offering, and offshore activities do not constitute general solicitation that could undermine a Rule 506(b) domestic offering.
Frequently Asked Questions
Can a US fund manager use Regulation S to raise capital from non-US investors?
Yes. A US-based fund manager can offer fund interests to non-US persons under Regulation S, provided the offer and sale occur in an offshore transaction and no directed selling efforts are made in the United States. Many funds use a parallel offshore vehicle (typically Cayman-domiciled) alongside a US domestic fund to accommodate non-US LPs under Reg S.
What are directed selling efforts under Regulation S?
Directed selling efforts include any activity that could condition the US market for the securities being offered. This covers mailings to US addresses, roadshows in the United States, and advertising in US publications or websites targeting US audiences. Even incidental US-directed activity can jeopardize the Reg S safe harbor.
Does Regulation S replace the need for Regulation D?
No. Regulation S applies only to offers and sales outside the United States to non-US persons. For US-based investors, the fund still needs a domestic exemption, typically under Regulation D. Most global fund structures use both: Regulation D for the US feeder or domestic fund, and Regulation S for the offshore feeder.
