# Regulation S — Offshore Offering Rules

## What It Is

Regulation S (17 CFR 230.901-905) provides a safe harbor from SEC registration for offers and sales of securities that occur outside the United States. It is relevant when a US-based fund accepts investments from persons located outside the US at the time of the offering.

## Key Concepts

### General Conditions (Rule 903)

For Regulation S to apply, two conditions must be met:

1. **The offer or sale must be made in an "offshore transaction"**: The buyer must be outside the US at the time the buy order is originated, OR the transaction is executed on an established foreign securities exchange.
2. **No directed selling efforts in the US**: The issuer cannot engage in conditioning the US market for the securities being offered offshore.

### Categories of Securities

Regulation S has three categories with increasingly strict requirements:

- **Category 1**: Securities of foreign private issuers with no substantial US market interest. Most permissive. Not applicable to a US-domiciled fund.
- **Category 2**: Debt securities or equity of reporting foreign issuers. Not typically applicable.
- **Category 3**: Everything else, including **equity securities of US non-reporting issuers** — this is where a US private fund falls.

### Category 3 Requirements (Applicable to Palace Fund)

- **Distribution compliance period**: 12 months for equity securities of non-reporting US issuers.
- During this period:
  - No offers or sales to US persons
  - Purchaser certifies they are not a US person and agrees to resale restrictions
  - Fund interests cannot be transferred to a US person during the compliance period
  - Legends on certificates/documents noting the restrictions
- **Offering restrictions**: No directed selling efforts in the US for the offshore tranche.

## How It Applies to Palace Fund

**Scenario**: Palace Fund is a California LLC (US issuer). Korean investors who are physically in Korea at the time of purchase may be offered interests under Regulation S, separately from or in addition to Regulation D.

**Practical considerations**:
- Regulation S and Regulation D can be used **concurrently** — Reg D for US-based investors, Reg S for offshore investors. But the offerings must be properly separated to avoid integration.
- Korean investors who reside in the US (e.g., on work visas) are US persons for Regulation S purposes and must come in under Regulation D.
- A Korean citizen living in Korea who invests while in Korea can qualify under Regulation S.
- If a Korean investor travels to the US and signs subscription documents while in the US, Regulation S may not apply to that transaction.

## US Person Definition (Rule 902(k))

A "US person" includes:
- Any natural person resident in the United States
- Any partnership or corporation organized under US law
- Any trust with a US trustee (with exceptions)
- Any discretionary account held by a US dealer
- Various other categories

**Not a US person**: A natural person who is not a US resident, even if a US citizen abroad (for Regulation S purposes, unlike tax law).

## Korean Law Considerations

Selling fund interests to Korean residents may also trigger Korean securities regulations. See [Korean Securities Law](korea/securities/) for requirements under the Financial Investment Services and Capital Markets Act (FSCMA).

## Action Items for Palace Fund

1. **Determine investor residency.** For each Korean investor, confirm whether they are physically located outside the US at the time of purchase.
2. **Use Regulation S for truly offshore investors.** Korean residents investing from Korea can come in under Reg S. Korean residents in the US should come in under Reg D.
3. **Implement transfer restrictions.** Operating agreement and subscription documents should restrict transfer of interests to US persons during the 12-month compliance period for Reg S investors.
4. **Separate the offerings.** If using both Reg D and Reg S, maintain separate offering documents (or clearly separate sections) and do not engage in directed selling efforts in the US for the Reg S tranche.
5. **Include Reg S legends** on all documents and certificates for offshore investors.
6. **Address Korean law compliance.** Selling to Korean residents may require compliance with Korean securities law (e.g., FSCMA exemptions for qualified investors or small-number private placement).