A little-used financing mechanism authorized by the U.S. Securities and Exchange Commission has caused big trouble for thousands of foreign investors.

The provision, Regulation S, allows American companies to sell stock and other securities to qualified foreign buyers without filing the detailed financial and operating information required for a formal stock offering.

The catch: The unregistered securities cannot be resold on the U.S. market for one year.

Because of the added risk, such shares generally are sold at a discount. And individual buyers must have an annual income of $200,000 a year or a net worth of $1 million. Investment funds and other institutional buyers must have assets of $5 million.

The main problem is offshore brokerages, known as boiler rooms, that acquire blocks of the discounted shares and peddle them at big markups to individual foreign investors. In most cases, the investments are not suitable for those buyers, and the value almost always plunges.

When the Securities and Exchange Commission adopted Regulation S in 1990, the holding period was 40 days. That short wait meant shares could be sold offshore, then quickly returned to the U.S. market, sometimes even before a company disclosed the transaction in its quarterly SEC filings. In 1997, the SEC extended the holding period to one year.

To be sure, many companies legitimately use Regulation S as a fund-raising vehicle. For example, Charter Communications Inc. of Town and Country sold $1.5 billion in notes earlier this year in an offering that includes some offshore buyers.

Also of note: Stock and bond sales under the provision account for only a small percentage of the capital raised by U.S. businesses each year.