-- DiamondLake (OTC:DLMI) today released an insider’s guide to holding periods and secondary market exemptions under Regulation S for token offerings. As blockchain and tokenized assets continue to disrupt the financial markets, Regulation S provides a framework for offshore offerings and secondary market transactions, allowing issuers to raise capital outside the United States while remaining compliant with U.S. securities law.
R. Kaufman - VP Compliance - DiamondLake
Understanding Holding Periods and Compliance for Regulation S Token Offerings
Regulation S offers a safe harbor for offshore securities offerings, but compliance hinges on careful attention to holding periods and secondary market regulations. For token issuers and investors, understanding these periods is critical to ensure legal compliance and avoid penalties.
Kaufman of DiamondLake explains, “Holding periods vary depending on the type of security being issued. Tokens issued under Regulation S must be held for a set period before they can be resold to U.S. persons, and the secondary market resale must adhere to strict rules to maintain the validity of the original offering exemption.”
Key Holding Periods Under Regulation S
The holding period or distribution compliance period determines when securities can be resold without violating the terms of Regulation S:
- Category 1 Transactions: No distribution compliance period.
- Category 2 Transactions:
- Equity Securities: 6 months for reporting issuers, 1 year for non-reporting issuers.
- Debt Securities: 40 days.
- Category 3 Transactions: Typically involves a 1-year holding period for equity offerings by non-reporting issuers.
The distribution compliance period begins from the first offer made outside the United States or the closing of the offering, ensuring U.S. investors are excluded from participating during the restricted period.
Secondary Market Exemptions for Regulation S
In addition to initial offering rules, Regulation S also outlines secondary market exemptions under Rule 904, which allow resales of securities in offshore transactions. These secondary market transactions benefit from the safe harbor provisions provided the sale is made in an offshore transaction without “directed selling efforts” within the U.S.
“Secondary market transactions that occur in compliance with Regulation S can continue without affecting the original exemption, as long as the transaction happens offshore and does not target U.S. investors,” Kaufman added.
How to Ensure Compliance for Tokenized Offerings
Issuers of tokenized securities must take several steps to ensure compliance with Regulation S, including:
- Blocking U.S. Investors: Geofencing IP addresses and restricting U.S. access to offering materials.
- Distinct Offering Documents: Clear legends specifying that the securities are offered in reliance on Regulation S, with transfer restrictions for U.S. persons.
- Locking Tokens: For digital assets, best practice suggests locking tokens for at least one year to prevent “flowback” into the U.S. market.
About DiamondLake
DiamondLake (OTC:DLMI) is at the forefront of the tokenized economy, providing Sponsor Advisory services to help companies navigate the complexities of Regulation S and ensure SEC-compliant token offerings. With a deep understanding of both U.S. and international securities regulations, DiamondLake guides issuers through the process of raising capital through compliant offshore token offerings.
For more information, contact [email protected] or visit www.DiamondLake.com
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