Sunday, January 30, 2011

REG S'ed

A couple of months ago, my wife came into the office to look for some files and thought I’d strike up a little conversation.

“Honey, did you know that Jordan is coming out with some bonds?”

I knew she’d be interested since we had visited Jordan in December 2009 and enjoyed the country very much.

“I’d like to buy some” she replied, even though I hadn’t told here what the terms were (not really exciting by the way).

“Sorry, but you can’t” I answered. “It’s REG S”.

It’s usually not a good idea to tell my wife she can’t do something, because she’ll just want to do it more. I knew I had to explain. (So here is kind of what I told her.

What happens is that in order to avoid going through the lengthy, complicated, bureaucratic and unpredictable process of registering a bond with the US SEC, many issuers will do what they call a private placement. They do it under REG S, basically promising that they won’t market or sell the bond to US Persons (citizens and legal residents). So the SEC leaves them alone.

“So I can’t buy it because I’m a US Citizen?” she said.


“That’s not fair” (you knew that was coming). “This is supposed to be the land of freedom” (and the capital of capitalism, I might add).

“Can I never buy these bonds?”

After a year you supposedly can, but good luck finding them or someone willing to sell them to you. Buying in an initial offering is normally a good deal also; the bonds routinely will trade a bit higher right after they’re issued. Sometimes the issuer will register the bonds with the SEC and make them available for trade on US markets, but they don’t have to.

“What about US companies? I can buy their bonds, right?”

No, not really. A lot of those, probably most, are REG S also. Even US companies figured out that it’s a lot easier to go that route and avoid dealing with the SEC.

I added that big US financial institutions could get in on most of these deals, even if my wife couldn’t, through a rule called 144A, which allowed “Qualified Institutional Buyers” or QIBs (not to be confused with Squibs, which are sons and daughters of magical parents who have no magical powers of their own), to participate in private placements also. So my wife needed not feel bad for Goldman Sachs or Morgan Stanley. They weren’t being left out.

By now my wife was very upset, she could do without buying Kingdom of Jordan 2015’s, but she did not like the to see her choices conditioned. In the world of investing, she was a second-class citizen, just for being a US citizen.

“I don’t understand. Why would the SEC do something that discriminates against US citizens?”

They do it to protect you. God forbid that Jordan or Dell Computer or someone else file their forms without all the right disclaimers, provisions and explanations that you are never going to read anyway.

“I’m really sorry I can’t give you a better reason.” I said as she left.

Of course, REG S, is just another example of regulatory patchwork, enacted in the 1990s to deal with exceptions and which ultimately became a rule. Along with security laws dating from the 1930s, which regulate markets and procedures inherited from the 19th century and before, you could think that the whole system was due for revamping.
Maybe we could use something more atoned to a global marketplace where information flows almost instantaneously. Things have changed in the last century or so (you’d think).

Don’t hold your breath. The current system serves the financial industry well. Very well. The recent events concerning Goldman Sachs’ private equity investment in Facebook illustrate the point.

As you may recall, Goldman agreed to invest $500 million in Facebook, through an ad-hoc vehicle. Goldman’s clients would then be allowed to participate in that vehicle and hence invest indirectly in Facebook.

Sounds like something to “like”, right?

The SEC then decided they should look into this deal a bit closer and perhaps force open Facebook’s private “books”. Facebook wasn’t quite ready for that level of information sharing with the world, so Goldman said “REG S”, which translated means “SEC, bug off”.

Vampire Squids 1, Regulators 0. Regular investors: DNP. (Do Not Play).

(The photo is Vampyroteuthis infernalis or the vampire squid from hell. Unofficial mascot of Goldman Sachs).


  1. I wouldn't touch Facebook at a $50b valuation with a 10-foot pole. Not even half that. IMO them "dumb" US citizens are better off. ;)

  2. Thx for stopping by. I'd agree on the valuation, but it's always nice to have the option.

  3. Its complicated. Reg S circumvents the need to go through the SEC, but it also protects (in theory) the issuer from liability predicated upon U.S. securities laws. I agree that not having the option sucks, but shouldn't issuing under Reg S raise a little red flag (at least).
    I believe the bond market is rigged against the individual retail investors. Retail investors should stay away from Reg S Bonds, in my view.