By the late 1980s, as demonstrated by the Internationalization Study, global markets were here to stay and various SEC divisions were re-evaluating their rules and policies. One of the crucial questions that remained was exactly when an issuer engaged in a distribution of securities outside of the United States would have to register the offering with the SEC under the 1933 Act. Linda Quinn, then SEC Director of Corporation Finance, made it one of her priorities to create a regulatory approach which would clearly address this issue.
In the past, issuers who wanted to engage in a foreign public offering and had some jurisdictional link to the United States, would often approach the SEC for a no-action letter. The no-action letter would state that, given the specific facts of the transaction, the SEC would not take any action if the issuer did not register its securities under the 1933 Act, as the offering would occur abroad rather than in the U.S. Of equal concern was when securities initially sold abroad could be resold into the United States without registration.
The SEC's reliance upon no-action letters was cumbersome, resource intensive and did not provide definitive guidance. Sara Hanks comments that by 1986 there were "three feet" of no-action letters "and it was just getting ridiculous – using far too many resources."(99) Furthermore, as early as 1977, the Commission had concluded that a rule needed to be created.(100) However, it was not until nine years later that drafting began in earnest.
Regulation S attempted to provide a bright jurisdictional line regarding when registration was required. Hanks, one of the primary drafters, recalls, "We wanted to say, if you're selling outside the United States, you don't have to register with the SEC period."(101) The regulation was also intended to respect the sovereignty of other countries' securities commissions, many of which the SEC had assisted in creating. Hanks remembers, "We were getting new securities commissions all the time in other countries. And a lot of people were saying: Hang on a bit. You cannot regulate this stuff that your people are doing in our markets."(102) The intention of Regulation S was to recognize these jurisdictional boundaries. It stood in sharp contrast to the SEC's interpretation of the jurisdictional reach of the 1934 Act's fraud provisions, which the SEC sought to apply throughout the world.
Further driving the SEC's initiatives was the desire to create an institutional investor market much like the Eurobond market in Europe. The legal issue was how might large institutional investors such as mutual funds, banks, and insurance companies trade securities, which were not registered under the 1933 Act. If London had the lion's share of the international bond market, at least some hoped that Rule 144A might provide a way for U.S. markets to capture the international equity markets and provide a viable institutional market in debt and equity securities.
Although the drafters of Rule 144A and Regulation S did not originally focus on how the two rules might function together in the international context, it soon became clear. Regulation S would govern when an issuer would be deemed to be selling outside the U.S. and Rule 144A would then allow institutional investors to trade such unregistered securities in the United States. Although these rules are highly technical, they were an enormous step in recognizing, accommodating and furthering the internationalization of the securities markets.
(99) February 4, 2008 Interview with Sara Hanks
(100) January 1977 Final Report of the U.S. Securities and Exchange Commission's Major Issues Conference (courtesy of Paul Gonson)
(101) February 4, 2008 Interview with Sara Hanks
(102) Id.
