On July 24, 2018, the Securities and Exchange Commission (the “Commission") proposed amendments to Rules 3-10 and 3-16 of Regulation S-X (available here) in an effort to “simplify and streamline" the financial disclosures required in offerings of certain guaranteed debt and debt-like securities (collectively referred to as “debt securities"), as well as offerings of securities collateralized by securities of an affiliate of the registrant, registered under the Securities Act of 1933, as amended (the “Securities Act"). These proposed changes would, if implemented, facilitate greater speed to market for such public offerings, significantly reducing the Securities Act disclosure burdens for such registrants, as well as reducing the registrant's disclosure obligations in its subsequent annual and interim reports required under Securities Exchange Act of 1934, as amended (the “Exchange Act"). Taken together, the proposed changes represent a significant liberalization of the current disclosure requirements.
We discuss the proposed changes in greater detail and provide a “before and after" comparison chart in our Client Alert (available here).
The proposed amendments to Rule 3-10 of Regulation S-X would:
- 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 proposed financial and non-financial disclosures, including summarized financial information which may be presented on a combined basis over fewer periods and expanded qualitative disclosures about the guarantees, issuers and guarantors (as further described below), which would reduce general disclosure requirements;
- permit the proposed disclosures to be provided outside the footnotes to the parent company's audited annual and unaudited interim consolidated financial statements in the registration statement covering the offer and sale of the subject securities and any related prospectus, and instead in certain Exchange Act reports filed shortly thereafter;
- require the proposed disclosures be included in the footnotes to the parent company's consolidated financial statements for annual and quarterly reports beginning with the annual report for the fiscal year during which the first bona fide sale of the subject securities is completed (e.g., for guaranteed debt securities issued in the second quarter of fiscal year 2018, the Summary Financial Information would first be required to be included in the parent's annual report on Form 10-K for its fiscal year 2018); and
- require the proposed financial and non-financial disclosures for as long as the issuers and guarantors have 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 current requirement under S-X 3-10 to disclose condensed consolidating financial information, presented in columnar form for the issuer(s) and guarantors separately from the non-obligor consolidated entities would be replaced with a requirement to disclose summary financial information of the obligor group on a combined basis (after eliminating intra-obligor transactions). This information may be presented over fewer periods as well as on a combined basis. The proposed non-financial disclosures, among other matters, would expand the qualitative disclosures about the guarantees and the issuers and guarantors. Additionally, it would require disclosure of additional information that would be material to holders of the guaranteed security.
The proposed amendments to Rule 3-16 of Regulation S-X would:
- 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 the proposed 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.
The proposed 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. “I have seen firsthand instances in which an issuer did not pursue SEC registration of a debt offering that included a subsidiary guarantee or pledge of affiliate securities as collateral because of the costs and, in particular, time burdens of these rules," said Commission Chairman Clayton. “The proposed rules are intended to make the disclosures easier for investors to understand and to encourage these offerings to be conducted on a SEC-registered basis."
The proposed amendments will be subject to a 60-day public comment period. You can find instructions and a form for submitting comments on these proposed amendments here under Item 1: “Proposed Rules."
We would like to thank Alina Iarve in our New York office and Melissa Pick in our Houston office for their work on this article.