Takeaways

The amendments focus on providing material financial and non-financial information regarding guarantees and other credit enhancements applicable to registered debt offerings and otherwise making this information easier to understand for potential investors.
The amendments are also intended to reduce disclosure-related compliance burdens for issuers.
Voluntary compliance in advance of the January 4, 2021, effective date is permitted.

The Securities and Exchange Commission (SEC) has adopted final rules to amend disclosure requirements for guarantors and issuers of guaranteed securities in the context of registered debt offerings that include credit enhancements, such as subsidiary guarantees. The amendments to Rule 3-10 of Regulation S-X and Rule 3-16 of Regulation S-X constitute efforts by the SEC to encourage issuers to conduct these types of debt offerings on a registered basis and to provide investors with more focused and improved disclosures. These amendments, which also include new Rules 13-01 and 13-02 in a new Article 13 to Regulation S-X, will become effective on January 4, 2021, but with earlier compliance permitted.

Background

Under Section 2(a)(1) of the Securities Act of 1933 (Act), the SEC treats guarantees of debt securities as securities that are separate from the securities being guaranteed. As a result, offers and sales of these guarantees must either be registered or exempt from registration. In the absence of an exemption, registration requires that each of the issuer and the guarantor file its own audited annual and unaudited interim financial statements required by Regulation S-X. The offer and sale of the guaranteed securities would also subject both the issuer and guarantor to reporting requirements under Section 15(d) of the Securities Exchange Act of 1934 (Exchange Act).

The existing Rule 3-10 provides several exemptions to the registration requirements described in the preceding paragraph. Rule 3-10 is typically available for subsidiaries of a parent company where the parent company may be the issuer of debt securities where certain conditions are met, including (i) that all subsidiary guarantors be 100% owned by the parent and that all guarantees be full and unconditional, (ii) the time-consuming process of producing audited consolidated financial information and (iii) the requirement that the parent continue including the required disclosures in Exchange Act reporting for as long as any of the guaranteed debt securities remain outstanding. Given the somewhat restrictive nature of these conditions to the Rule 3-10 exemption and related expense, many issuers have chosen rather to rely on unregistered offerings of guaranteed debt securities.

In the case of affiliates of the registrant whose securities collateralize the securities being registered, Rule 3-16 provides that separate financial statements would only need to be provided for each affiliate whose securities constitute a substantial portion of the collateral based on a numerical threshold. However, production of the financial statements under Rule 3-16, including Exchange Act reporting for the affiliate thereafter, is typically time-consuming to the issuer and the requirement is triggered entirely by the outcome of the substantial portion test, without regard to the materiality of the affiliate’s financial statements to an investment decision or the comparative importance of the affiliate to the issuer’s business and operations as a whole. Consequentially, issuers might opt to reduce collateral packages or structure collateralized securities as unregistered offerings. 

Rule 3-10, Rule 13-01 and Rule 13-02

The SEC seeks to increase the likelihood that issuers will conduct guaranteed debt offerings on a registered basis as well as improve the quality of disclosure with the amendments to Rule 3-10 and Rule 3-16. The SEC approved amendments to Rule 3-10 such that it will partly be relocated to a new Rule 13-01 of Regulation S-X (Rule 13-01), and Rule 3-16 will be completely replaced by a new Rule 13-02 of Regulation S-X (Rule 13-02).

Under the new SEC amendments, Rule 3-10 allows more companies to utilize the exemption and provide consolidated financial statements with alternative disclosures that include financial and non-financial information. Additionally, there is now only a single set of eligibility criteria that applies to all issuer and guarantor structures. Under Rule 3-10, an issuer or guarantor of registered guaranteed securities is required to file financial statements by Regulation S-X—these financial statements may be omitted if all of the following conditions are met:

  • The issuer or guarantor is a consolidated subsidiary of the parent company and the parent company’s consolidated financial statements have been filed with the SEC (replacing the condition that a subsidiary issuer or guarantor be 100%-owned by the parent company);
  • The guaranteed security is debt or debt-like;
  • The parent company issues the security or co-issues the security, jointly and severally, with one or more of its consolidated subsidiaries, or a consolidated subsidiary issues the security or co-issues the security with one or more other consolidated subsidiaries of the parent company, and the security is guaranteed fully and unconditionally by the parent company; and
  • The parent company provides the disclosures specified in Rule 13-01 (Alternative Disclosures).

Rule 13-01 specifies the Alternative Disclosure requirements, which include both financial and non-financial information. The financial disclosure now only requires summarized financial information of issuers and guarantors on a combined basis for the most recently ended fiscal year and year-to-date interim period, as specified in Rule 1-02(bb)(1) of Regulation S-X (Rule 1-02(bb)(1)), replacing the requirement that consolidating financial information be included in the registration statement and the parent company’s Exchange Act reports. The non-financial disclosure requirements expand the qualitative disclosures about the guarantees and issuers and guarantors, which include descriptions of the terms and conditions of the guarantees and how the issuer and guarantor structure and other factors may affect payments to holders of the guaranteed securities.

In connection with the registration statement covering the offer and sale of the relevant securities and any related prospectus, and in Exchange Act reports on Form 10-K and Form 10-Q required to be filed during the fiscal year in which the first bona fide sale of the relevant securities is completed, the parent company now has the option to provide the Alternative Disclosures in a footnote to its consolidated financial statements or in management’s discussion and analysis of financial condition and results of operation described in Item 303 of Regulation S-K (MD&A). If not otherwise included in the consolidated financial statements or the MD&A, the Alternative Disclosures would be required in the prospectus immediately following “Risk Factors,” or otherwise, immediately following pricing information described in Item 503(c) of Regulation S-K.

The requirement that a parent company must continue to provide the Alternative Disclosures in its periodic reports for as long as the relevant securities are outstanding, even if its subsidiary issuer or guarantor’s reporting obligation with respect to the subsidiary’s guaranteed securities or subsidiary’s guarantees could be suspended under either Section 15(d) of or Rule 12-3 under the Exchange Act, has been eliminated. The parent company will only be required to provide the Alternative Disclosures to the extent there is an Exchange Act reporting obligation on issuers and guarantors with respect to the guaranteed securities.

In the case of affiliates of the registrant whose securities collateralize the securities being registered, the requirement that a registrant provide separate financial statements for each affiliate whose securities are pledged as collateral has been replaced. Rule 13-02 specifies the amended financial and non-financial disclosure requirements that a registrant is required to provide about each such affiliate. Similar to the disclosures for issuers and guarantors of guaranteed securities, (i) the financial disclosure requires financial information of the affiliate(s) as specified in Rule 1-02(bb)(1), (ii) the non-financial disclosure requirements are expanded to include the terms and conditions of the collateral arrangement, and (iii) the registrant is permitted to provide the disclosures outside the footnotes to its consolidated financial statements in all filings. Lastly, the requirement to provide disclosure only when the affiliate securities constitute a substantial portion of the collateral based on a numerical threshold under the rule is replaced with the requirement to provide the disclosures in all cases, unless they are not material to the holders of the collateralized security.

The requirements of Rule 3-10 as amended, Rule 13-01 and Rule 13-02 apply to several categories of issuers, including foreign private issuers, smaller reporting companies, and issuers offering securities pursuant to Regulation A.

With these new amendments, the SEC expects that many companies that have stayed away from the public markets to conduct guaranteed debt offerings will revisit the benefits of such registered public offerings. The amended rules streamline the disclosure obligations of registrants and reduce fees and expenses associated with SEC registration-related compliance. In addition, potential investors in registered debt offerings will be provided with information that is both material and easier to understand in making investment decisions about a guaranteed debt security.

Transition Guidance

For registration statements pursuant to the Act, the final amendments apply to any (i) registration statement that is first filed on or after January 4, 2021, and (ii) post-effective amendment filed on or after January 4, 2021, to include either the registrant’s latest audited financial statements in the registration statement or to update the prospectus under Section 10(a)(3) of the Act.

For Exchange Act registration statements, the final amendments apply to any registration statement that is first filed on or after January 4, 2021.

For Exchange Act periodic reports, (i) if the reporting company was required to comply with the final amendments in a registration statement, all Exchange Act periodic reports for periods ending after that registration statement became effective must comply with the final amendments and (ii) for all other Exchange Act reporting companies, the annual report on Form 10-K or Form 20-F, as applicable, for fiscal years ending after January 4, 2021, and quarterly reports on Form 10-Q for quarterly periods ending after January 4, 2021, must comply with the final amendments.

The SEC permits voluntarily compliance in advance of January 4, 2021, but after voluntary compliance, subsequent Exchange Act or Regulation A periodic reports must comply with the final rules.

To access the SEC’s final rule regarding the amendments to the disclosure requirements, please click here.

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