regulation s shares for struggling us companies...
Was the United States government concerned that people around the world did not distrust, dislike – and in many cases loathe – Americans sufficiently? Was that why our legislators crafted Regulation S of the Securities Act of 1933, the mechanism that allows companies traded on U.S. financial exchanges to issue unregistered shares with impunity to non-U.S. citizens? Surely, Americans are not so xenophobic that we feel compelled to dump our securities refuse offshore. Or are we?
Overseas investors should be asking these questions – and seeking answers before they buy unregistered Regulation S stock issued by obscure, failing over-the-counter companies that trade on the OTC Bulletin Board and Pink Sheets. Or else, federal securities regulators should think about creating a level playing field that protects al investors, regardless of their national origin or global address.
Regulation S permits public companies to sell unregistered shares to non-U.S. residents, with this caveat – those shares cannot be resold within the U.S. for one year. Theoretically, that protects U.S. investors while creating a “safe haven” for sales to foreigners. Safety, however, is in the eye of the beholder. While the Regulation S purchaser is prevented from selling those shares in the U.S. for one year, there is nothing to prevent the immediate resale of those shares outside of the U.S. Did that possibility elude the Regulation S drafters or were they content to protect American investors and leave the rest of the world to fend for itself? So much for American paternalism. See, Beware the Evil Twins.
Regulation S shares generally have a built-in profit mechanism. Companies sell them at a deep discount to the public market price, reasoning that bargain basement prices are justified since the Regulation S purchaser is taking a significant risk by purchasing securities that must be held for at least one year. The fallacy, of course, is that the Regulation S buyer knows the shares can be moved far sooner.
As one might expect, stock scam artists soon spotted this loophole and set out to create markets for over-priced, over-hyped shares issued by struggling U.S. public companies that were eager to accept Regulation S dollars while turning a blind eye to the overseas buyers who ultimately would purchase this swill. Boiler rooms and aggressive telemarketers in Europe and the Pacific hawk this junk to wide-eyed investors who believe the label Made in America is an imprimatur of success for virtually any public company. All too often they discover that the entity whose shares they have purchased has no meaningful business, no money, and little chance for success.
Those buyers often lose their entire investment – but it can get worse. Investors invariably cling to a hope – however faint – that their worthless shares will somehow magically gain value. And, as might be expected, there are individuals poised to pounce on that dream. Here is what they do. They contact the shareholder and offer to buy the valueless stock – often at a premium to the original purchase price. They claim that the tiny company that issued the original Regulation S stock is about to merge or be acquired. They offer the investor something that seemed impossible – a chance to get back their money and turn a profit.
There is, of course, a catch. Before the stranger/savior delivers payment, the shareholder must pay a fee. We have heard from numbers of investors who have been solicited in such schemes and some who have made the requested prepayments – but none of whom have received the promised payments for their shares.
Just this week StockPatrol.com was contacted by a reader from Sydney, Australia who owns stock in Oasis Resorts International, Inc. Oasis, which was affiliated with stock promoter Richard Surber, claimed to be in the “casino and resort” business, but there is no sign it had any actual operations. That did not stop the Company from handing out oodles of shares to aggressive boiler room operators in Thailand, who hawked the stock in 2000 and 2001 to investors in Australia. See Biosecure Group Corp; Airtech International Group, Inc; Newbridge Capital, Inc; Nuoasis Resorts, Inc. – Still Gambling After All These Years. Those investors wound up holding worthless certificates. Oasis Resorts stopped filing public reports with the Securities and Exchange Commission in December 2000. In June 2004 the SEC started proceedings to revoke registration of Oasis shares.
Now, according to our reader, someone has been offering to buy Oasis shares from those hapless investors – with a catch, of course. Our reader tells us that he has been getting telephone calls for the past two years from various self-styled “merger and acquisition” companies offering $8 to $14 for his Oasis shares – which are, for all practical purposes, worthless. Why would he be reluctant to sell? Perhaps because of the string attached. Before these generous merger and acquisition companies pay for the shares they are asking the investor to pay them an upfront fee so that the shares will no longer be restricted and an additional fee to pay U.S. taxes owing on the shares.
As our reader should be aware – and we hope he now is – restricted stock can be sold, even in the U.S., once it has been held for the requisite period – generally one-year. Consequently, it is likely that the restriction could be shed, and the shares sold – assuming there was any real market for them – without paying the requested fee. And we know of no tax that would conceivably be due on the stock.
Our reader has exercised admirable restraint by resisting the offers, the latest of which, he says, came from an outfit calling itself Beijing International Research. We are not familiar with that firm but found their website at www.beijinginternationalresearch.com. The Company, which says it was founded in 1996, describes itself as “an independent full-service global financial institution with leadership positions in selected individual and institutional businesses and a reputation for outstanding research and quality client service.” It does not mention any of the public entities it follows or explain what research might conceivably support an investment in Oasis Resorts.
So what is Beijing International Research? The website provides an address at 3/F, Building B, E-Wing Center 113 Zhichun Road, Haidian District Beijing, China District Beijing 100086, China and says that the company has an “employee headcount” of 126 - but it does not name a single individual employed by the firm.
That, sadly, gives foreign investors little to go on – and no reasonable basis to fork over an advance fee on the chance that they might be able to sell stock that has no apparent value, like those shares of Oasis Resorts.
Regulation S. It may be a godsend for U.S. companies hungry for cash. For overseas investors it is the devil’s playground.
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