On September 29, the SEC charged two groups of companies with running investment schemes through WhatsApp group chats and public Facebook pages. The SEC said the operators were likely overseas, falsely claimed SEC certification and posted a falsified Form D. Honest sponsors raising capital abroad use many of the same channels, and Regulation S judges those channels by where their messages land. The rule's name for a message that lands in the wrong place is directed selling efforts. For a U.S. sponsor running an offshore raise, it is the condition most easily broken without anyone noticing.
Regulation S lets a U.S. company sell securities to investors outside the United States without SEC registration. Each sale must be an offshore transaction, and no one may make directed selling efforts in the United States. The guide to Regulation S offerings covers the full framework. Because the test looks at effect rather than intent, a sponsor protects an offshore raise by deciding before launch which channels carry which message. Disclaimers added once a campaign is running do far less.
What Directed Selling Efforts Means Under Rule 902
Rule 902(c) defines directed selling efforts as any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for the securities being offered. The words "reasonably be expected" make the test objective. A post, an email or an event can count even if the sponsor never meant to reach American investors.
The rule also reaches further than the sponsor itself. Under Rule 903(a), the prohibition covers the issuer, any distributor, their affiliates and any person acting on behalf of any of them. In practice that includes placement agents, marketing firms and the sponsor's own principals posting on personal accounts. A sponsor that briefs its own team can still lose the safe harbor through a partner who was never briefed.
What Regulation S Excludes From the Definition
Rule 902(c)(3) lists activities that do not count, and several matter to real estate sponsors. Bona fide visits to real estate, plants or other facilities located in the United States are excluded. A prospective investor from abroad can tour a property with the sponsor without tainting the offering. Advertisements required by U.S. or foreign law are excluded, as are notices that follow the SEC's Rule 135 or Rule 135c. Some contacts with excluded U.S. persons and some press activity abroad are also covered, each with its own conditions.
Advertising is where sponsors most often misjudge the line. The definition includes advertising the offering in a publication with a general circulation in the United States. Under Rule 902(c)(2), that means a publication printed primarily for U.S. distribution, or one that averaged 15,000 or more U.S. copies per issue over the prior twelve months. A business magazine sold mainly abroad can still meet that test, so each placement deserves a check before it runs.
Why Websites and Social Channels Need Separate Lanes
The internet blurs every boundary Regulation S draws, and the SEC addressed it in a statement published in March 1998. It said a website offer is not treated as made in the United States if the offeror uses a meaningful disclaimer. The offeror also needs procedures reasonably designed to guard against sales to U.S. persons, such as checking a mailing address before any sale. U.S. issuers were held to a stricter standard, with controls similar to a password so visitors show they are not U.S. persons before seeing offering material.
That guidance predates social media, but its logic carries over. A LinkedIn post about an offshore offering reaches a sponsor's American followers as easily as anyone else. A chat group of investors abroad often includes members who now live in the United States, and a recorded webinar can be forwarded anywhere. Public channels can describe the sponsor's business in general terms. Material about the offshore offering itself belongs behind screening that confirms where the reader is.
Directed Selling Efforts and a Concurrent 506(c) Raise
Many sponsors pair an offshore raise with a Rule 506(c) offering for verified U.S. accredited investors, which allows general solicitation in the United States. That raises an obvious worry, since a 506(c) campaign is designed to condition the U.S. market. In its July 10, 2013 release adopting Rule 506(c), the SEC repeated that offshore offerings under Regulation S are not integrated with domestic offerings under Rule 506. Law firms including Skadden read the release as saying general solicitation for the U.S. offering does not by itself count as directed selling efforts offshore.
That reading protects the 506(c) campaign, not everything said alongside it. Pepper Hamilton noted in September 2013 that the SEC did not grant commenters' requests for an express confirmation on this point, so careful sponsors still keep the two marketing tracks apart. The U.S. campaign speaks about the 506(c) offering to U.S. readers, and offshore material reaches investors abroad only after screening. The comparison of Regulation S and Regulation D sets out how the two rules divide a single deal, and the guide to 506(c) verification covers the U.S. side.
What Still Applies After the Offshore Raise Closes
Directed selling efforts do not stop mattering at closing. A U.S. sponsor's offering is usually a Category 3 offering of equity, and Rule 903(b)(3) then sets a one year distribution compliance period, or six months for a company that reports to the SEC. During that period, sales may not go to a U.S. person. Buyers must certify that they are not U.S. persons and agree to resell only under Regulation S, registration or an exemption. The securities must carry a legend saying so. The sponsor's governing documents must also require it to refuse to register transfers that break those terms.
The risk of getting this wrong is concrete. If the safe harbor fails, the offshore sales need another exemption that fits the facts. Finding one after the event is a question for securities counsel, not a formality. One careless post can therefore put the whole offshore tranche in question, not just the investors it reached. These offerings also carry the ordinary risks of real estate, including loss of capital, illiquidity, falling property values and currency movements for investors who measure their wealth in another currency.
What Sponsors Can Do Before the Next Raise
The practical work starts before any material is written, and it follows the order of a raise. Each step is easier to settle with counsel early than to repair later.
- Map every channel the raise will use, including the personal accounts of principals, and decide which ones may mention the offshore offering at all.
- Brief each placement agent, marketing firm and consultant in writing, since Rule 903(a) covers anyone acting on the sponsor's behalf.
- Put offshore offering material behind screening that confirms the reader is outside the United States, as the SEC expected of U.S. issuers in 1998.
- Keep 506(c) materials and offshore materials separate, with their own landing pages, distribution lists and records.
- Check each print or online advertisement against the circulation test in Rule 902(c)(2) before it runs.
- Set the Category 3 legends, purchaser certifications and transfer controls in the offering documents before the first sale.
Raveum works with sponsors through four solutions, an investment management platform, fund administration, a global raise track under Regulation S and an operating partnership for selected sponsors. U.S. investors come in under Rule 506(c) and receive K-1s, offshore investors invest through a U.S. C corporation blocker, and sponsors keep their investor relationships, property and business plan. See how the Raveum Sponsor Program works.
Designing a Raise Around Where Messages Land
The September 29 case shows how easily a message crosses borders through a chat group or a public feed. Regulation S asks a U.S. sponsor to take that reach seriously in the other direction, because an honest post about an offshore offering can condition the U.S. market as surely as a misleading one. The rule's exclusions, the 1998 internet statement and the 2013 release all point the same way. A sponsor that settles its channels, screening and documents before launch keeps directed selling efforts out of the raise. One that adds disclaimers later is left defending each post after the fact. The guide to Regulation S offerings covers the rest of the framework.
Frequently Asked Questions
What Are Directed Selling Efforts Under Regulation S?
Directed selling efforts are any activity undertaken for the purpose of, or reasonably expected to have the effect of, conditioning the U.S. market for securities offered under Regulation S. The definition in Rule 902(c) includes advertising the offering in publications with a general U.S. circulation. Because the test looks at effect, marketing can count even when a sponsor never meant to reach American investors.
Can a U.S. Sponsor Mention a Regulation S Offering on Its Website?
A sponsor can describe its business publicly, but material about an offshore offering needs precautions. In a March 1998 statement, the SEC said website offers need a meaningful disclaimer and procedures to guard against sales to U.S. persons. It said U.S. issuers should go further, using controls similar to a password so visitors confirm they are outside the United States first.
Does LinkedIn or WhatsApp Marketing Count as Directed Selling Efforts?
It can, depending on who the message reaches. A LinkedIn post or a group chat about an offshore offering may reach followers or members living in the United States, which could condition the U.S. market under Rule 902(c). Sponsors usually keep social channels to general business news and share offshore offering material only after confirming each reader is outside the United States.
Can a Sponsor Run Rule 506(c) and Regulation S Offerings at the Same Time?
Yes, and many sponsors do. In its July 2013 release adopting Rule 506(c), the SEC repeated that Regulation S offerings are not integrated with domestic Rule 506 offerings. Law firms read the release as saying general solicitation for the U.S. offering does not by itself count as directed selling efforts offshore, though counsel usually still keeps the two marketing tracks separate.
Are Property Tours in the United States Directed Selling Efforts?
Not when they are genuine. Rule 902(c)(3) excludes bona fide visits to real estate, plants or other facilities located in the United States. A prospective investor from abroad can tour a sponsor's property without that visit counting as directed selling efforts. The exclusion covers the visit itself, so any marketing that surrounds the tour still needs the usual care.
What Happens if a Sponsor Makes Directed Selling Efforts?
If the issuer, a distributor or anyone acting for them makes directed selling efforts in the United States, the Regulation S safe harbor is not available for the offering. The offshore sales would then need another exemption that fits the facts. Raise this with securities counsel before launch, because rebuilding compliance after closing is far harder than planning it.
This article is for general education only and is not legal, tax or investment advice. Securities and tax rules change and depend on each sponsor's facts, so work with qualified securities counsel and tax advisors before launching an offering. Real estate investments involve risk, including loss of capital, illiquidity and changes in property values. Offerings on Raveum are available to eligible investors only and are not open to the general public.
