Resales of Offshore Securities into the United States: Evaluating the Overvaluation Risk to U.S. Investors

Examining a sample of 701 offshore securities offerings under Regulation S of the Securities Act from 1993 to 1997, this Article tests whether foreign investors expect to resell Regulation S securities in the United States ahead of the U.S. secondary market reaction to news of the offering. The Article provides evidence from an event study that the secondary market reaction to a Regulation S offering is on average negative and statistically significant. Foreign investors able to resell into the United States before the secondary market reaction may act as conduits for issuers attempting to sell overvalued securities into the United States to the detriment of domestic investors. To the extent managers seek to benefit pre-offering shareholders, they will negotiate to give foreign investors as small an offering discount as possible. In contrast, where foreign investors are unable to resell prior to the secondary market negative reaction to news of the offering, foreign investors will demand a greater discount in compensation for the entire expected market reaction. Without such a discount, Regulation S offerings result in a transfer in value from foreign investors to U.S. investors; rational foreign investors will choose not to participate in such offerings. Controlling for other factors that may affect the offering discount, this Article furnishes evidence on the offering discount consistent with the hypothesis that foreign investors were in fact unable to engage in resales ahead of the U.S. secondary market reaction to a Regulation S offering. * Professor of Law, University of California, Berkeley (Boalt Hall). Special thanks to Un Kyung Park. Thanks for helpful comments to Jae-Sun Chung, Jesse Fried, Andrew Guzman, John Yoo and the participants at the F. Hodge O’Neal Corporate and Securities Law Symposium (2000). Washington University Open Scholarship p519 Choi.doc 4/20/01 5:35 PM 520 WASHINGTON UNIVERSITY LAW QUARTERLY [VOL. 78:519