Accepting Foreign Investors? Here’s What You Need To Know

Thinking about accepting foreign investors? Here are the legal basics you must understand before crossing borders with your capital raise.

Raising capital is hard enough within U.S. borders. Add in foreign investors, and the legal stakes get even higher. Whether you’re a real estate syndicator, fund manager, or startup founder, accepting capital from outside the United States can open powerful doors—but only if you follow the rules.

The U.S. Securities and Exchange Commission (SEC) has laid out a legal path for international fundraising through Regulation S (Reg S), which allows offerings to foreign investors without triggering U.S. registration requirements. But Reg S is not a “get out of jail free” card. It comes with its own conditions, timelines, and compliance obligations.

In this article, we break down what you need to know to legally and confidently accept foreign capital in your next offering.

What Is Regulation S?

Regulation S (Reg S) is an SEC safe harbor that allows companies to raise capital from investors outside the U.S. without registering the securities offering domestically. It’s specifically designed for “offshore transactions,” meaning offers and sales must occur outside the United States and to non-U.S. persons.

Key requirements under Reg S include:

• Offshore Transaction: The offer and sale must take place outside the U.S.
• No Directed Selling Efforts in the U.S.: You can’t promote the offering to U.S. residents, even indirectly.
• Category-Based Restrictions: Depending on the type of issuer and the type of security, holding periods and additional restrictions may apply.

Used properly, Reg S can be a powerful complement to Regulation D offerings, especially if you’re targeting international investors who want to participate in U.S.-based projects or funds.

Who Counts As A Foreign Investor?

Not every non-citizen counts as a “foreign investor” under Reg S.

A foreign investor, for legal purposes, is a non-U.S. person as defined by the SEC. This generally means:

• Someone physically located outside the U.S. at the time of the offer and sale.
• Not a U.S. citizen residing in the U.S.
• Not a U.S.-based entity or trust.

For example, a U.S. citizen living in Canada may not qualify as a foreign investor if their primary residence or control remains within the United States. It’s important to verify residency and the location of the transaction, not just nationality.

Reg S Vs Reg D: Can You Use Both?

Yes—and many successful fundraisers do.

Reg D is used to raise capital from U.S.-based accredited investors, typically under Rule 506(b) or 506(c). Reg S, on the other hand, is used for raising capital from foreign investors.

Using both in parallel allows you to legally raise funds from a broader investor base without registering your offering with the SEC. But it’s crucial to maintain firewalls between the two:

• Separate marketing: Don’t blur the lines between U.S. and international promotion.
• Different offering materials: Tailor your PPM and documents to reflect Reg D or Reg S compliance.
• Independent timing and sales channels: Avoid crossover that could trigger SEC scrutiny.

Working with a securities lawyer experienced in dual-exemption offerings is key to getting this right.

Holding Periods And Resale Restrictions

Under Reg S, resale restrictions apply to prevent foreign investors from immediately selling securities back into the U.S. market. These restrictions vary based on:

• The type of issuer (reporting vs. non-reporting)
• The type of security (equity vs. debt)

Typical holding periods range from 40 days to one year, during which securities cannot be resold into the U.S. without registration or another exemption.

Make sure your offering documents disclose these restrictions clearly. Failure to do so could expose your offering to regulatory risk.

Compliance Tips For Accepting Foreign Capital

Here are some best practices to legally accept foreign investors under Reg S:

1. Verify residency and transaction location: Keep detailed records.
2. Segregate marketing efforts: Don’t advertise internationally if you’re only using Reg D.
3. Use tailored PPMs: One size does not fit all. Your foreign investor PPM should reflect Reg S requirements.
4. Mind the timeline: Resale restrictions and compliance deadlines matter.
5. Work with counsel: International offerings demand legal precision.

Accepting foreign capital is not just a legal issue—it’s a competitive advantage. But the cost of noncompliance is steep. Get it wrong, and your entire offering could be deemed illegal.

Book A Free Strategy Call To Get Your Legal Docs In Place

Want to accept foreign investors with confidence? Book a Free Strategy Call to Get Your Legal Docs in Place and ensure your next raise is 100% compliant.