On March 2, 2020, the Securities and Exchange Commission (the “Commission”) announced (available here) the adoption of amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees, in an effort to “improve the quality of disclosure and increase the likelihood that issuers will conduct debt offerings on a registered basis."
Consistent with the Commission’s ongoing effort to establish a more principles-based disclosure framework, as opposed to a more directly comparable and uniform disclosure requirement (as discussed in greater detail in our other recent Client Alerts, available here, here, here and here), the Commission intended with the adopted amendments to “eliminate prescriptive requirements that have imposed unnecessary burdens and incentivized issuers of securities with guarantees and other credit enhancements to offer and sell those securities on an unregistered basis.”
The amendments will significantly lighten the current disclosure requirements for issuers looking to issue debt with guarantors or pledgors, or even those simply looking to file an omnibus shelf registration statement. Commission Chairman Jay Clayton emphasized the amendments as another example of the Commission’s ability to “modernize its rules and simultaneously increase investor protection, reduce compliance burdens and enhance capital formation." The amendments will be effective on Jan. 4, 2021, but voluntary compliance is permitted in advance of the effective date.
We discuss the amendments in greater detail and provide a “before and after" comparison chart in our Client Alert (available here).
As discussed in our August 6, 2018 alert on the proposed rule release issued on July 24, 2018 (available here), the main amendments are related to Rule 3-10 of Regulation S-X (and partial relocation to Rule 13-01 of Regulation S-X) and Rule 3-16 of Regulation S-X (and partial relocation to Rule 13-02 of Regulation S-X).
Rule 3-10 of Regulation S-X will be amended to:
• replace the condition that a subsidiary issuer or guarantor be 100% owned by the parent company with a condition that it be consolidated in the parent company's consolidated financial statements (e.g., joint ventures controlled or majority-owned by an issuer), which would mean more subsidiaries would be eligible for disclosure exceptions;
• replace condensed consolidating financial information with certain new financial and non-financial disclosures, consisting of summarized financial information, which may be presented on a combined basis, over fewer periods and expanded qualitative disclosures about the guarantees, issuers and guarantors, reducinggeneral disclosure requirements;
• permit the amended disclosures to be provided outside the footnotes to the parent company's audited annual and unaudited interim consolidated financial statements in all filings;and
• require the amended financial and non-financial disclosures for as long as an issuer or guarantor has an Exchange Act reporting obligation with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding, which would mean shorter reporting periods for companies that suspend their reporting obligations under the Exchange Act.
The final rule adopted the amendments substantially as proposed, with certain modifications, most notably the following:
• requiring disclosure of additional information about each guarantor that would be material for investors to evaluate the sufficiency of the guarantee, consistent with existing Rule 3-10;
• permitting the amended supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all cases, rather than only in limited circumstances; and
• requiring, in certain instances, pre-acquisition summarized financial information about significant recently acquired subsidiary issuers and guarantors.
Rule 3-16 of Regulation S-X will be relocated to Rule 13-02 in Regulation S-X, and amended to:
• replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the consolidated financial statements of the registrant that issues the collateralized security, which would reduce disclosure obligations while also targeting the information most material to investors;
• permit financial and non-financial disclosures to be located in filings in the same manner as described above for the disclosures related to guarantors and guaranteed securities; and
• replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the securities registered or being registered with a requirement to provide the proposed financial and non-financial disclosures in all cases, unless they are immaterial to holders of the collateralized security, which would increase the information available to potential investors.
These amendments facilitate greater speed to market for registered public offerings of certain guaranteed debt and debt-like securities, significantly reducing the registrant’s disclosure burdens under the Securities Act of 1933, as well as reducing the registrant's disclosure obligations in its subsequent annual and interim reports required under Securities Exchange Act of 1934. Taken together, the amendments represent a significant liberalization of the previously existing disclosure requirements.
We would like to thank Eric Scarazzo and Rodrigo Surcan in our New York office for their work on this article.