Client Alert

U.S. SEC Adopts Rule Amendments to Simplify Guarantor and Pledgor Financial Disclosures

28 May 2020

The U.S. Securities and Exchange Commission (the “SEC”) recently adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include certain credit enhancements.[1] The amendments will be effective on January 4, 2021, but voluntary compliance will be permitted in advance of the effective date.

Background

Rules 3-10 and 3-16 of Regulation S-X govern disclosures that are made in connection with registered debt offerings and subsequent periodic reporting. Rule 3-10 requires financial statements to be filed for all issuers and guarantors of securities that are registered or being registered, subject to certain exceptions. Rule 3-16 requires an issuer to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, based on a numerical threshold, for any class of registered securities as if the affiliate were a separate registrant.

On July 18, 2018, the SEC proposed rule amendments to Rules 3-10 and 3-16 of Regulation S‑X with the intention of focusing disclosures on information that is material to investors given the specific facts and circumstances, making the disclosures easier to understand and reducing the costs and burdens for issuers.[2] The SEC received 32 comment letters on the proposed amendments, which generally supported the SEC’s proposed changes.

Amendments to Rule 3-10

Rule 3-10 has been amended and some of the requirements have been relocated to new Rule 13‑01 of Regulation S-X. As amended, Rule 3-10 will continue to permit the omission of separate financial statements of subsidiary issuers and guarantors when specific conditions are met and the parent company provides supplemental financial and non-financial disclosures about the subsidiary issuers and/or guarantors and the guarantees. As with the existing rule, the amended rule provides the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements. The SEC also adopted Rule 13-01, which specifies the applicable disclosure requirements. The amendments:

  • replace the condition that a subsidiary issuer or guarantor be 100 percent owned by the parent company, with a condition that it be consolidated in the parent company’s consolidated financial statements;
  • replace condensed consolidating financial information with new financial and non‑financial disclosures that will consist of summarized financial information of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented;
  • permit that disclosures 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 a reporting obligation under the Securities Exchange Act of 1934 (the “Exchange Act”) with respect to the guaranteed securities, rather than for as long as the guaranteed securities are outstanding.
Rule 3-10 Conditions

The financial statements of a subsidiary issuer or guarantor can be omitted if the eligibility conditions specified in Rules 3-10(a) and 3-10(a)(1) are met and the alternative disclosures specified in Rule 13-01 are provided in the filing, as required by Rule 3-10(a)(2). The eligibility conditions are that:

  • the consolidated financial statements of the parent company have been filed;
  • the subsidiary issuer or guarantor is a consolidated subsidiary of the parent company;
  • the guaranteed security is debt or debt-like; and
  • one of the following eligible issuer and guarantor structures is applicable:
    • 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.

Parent Company Financial Statements Condition

As amended, Rule 3-10 continues to require the filing of the parent company’s consolidated financial statements. For this purpose, a revised definition of the term “parent company” has been included in amended Rule 3-10(b)(1). The “parent company” is the entity that:

  • is an issuer or guarantor of the guaranteed security;
  • is, or, as a result of the subject registration statement under the Securities Act of 1933 (the “Securities Act”), will be, an Exchange Act reporting company; and
  • consolidates each subsidiary issuer and/or subsidiary guarantor of the guaranteed security in its consolidated financial statements.

The third condition, that the entity consolidates each subsidiary issuer and guarantor in its consolidated financial statements, replaces the prior condition that the entity owns, directly or indirectly, 100 percent of each subsidiary issuer and guarantor.

Consolidated Subsidiary Condition

As amended, Rule 3-10(a) requires the subsidiary issuer or guarantor to be a consolidated subsidiary of the parent company pursuant to the relevant accounting standards already in use. In addition, a description of any factors that may affect payments to holders of the guaranteed security, such as the rights of a non-controlling interest holder, is required by Rule 13-01(a)(3), and separate disclosure of certain specified financial information for the issuers and guarantors to which those factors apply is required by Rule 13-01(a)(4)(iv).

This change eliminates the distinction between subsidiaries in corporate form and those in other than corporate form, to apply a consistent eligibility condition across all types of entities. Also, the SEC notes certain subsidiary issuers and guarantors that are currently not eligible to omit their financial statements under existing Rule 3-10, such as consolidated subsidiary issuers or guarantors that have issued securities convertible into their own voting shares, will be eligible to omit their financial statements under the amended rule.

Guaranteed Securities are Debt of Debt-Like Condition

Rule 3-10(b)(2), as amended, specifies when a guaranteed security would be considered “debt or debt-like.” Consistent with the SEC’s prior guidance, a guaranteed security would be considered “debt or debt-like” if:

  • the issuer has a contractual obligation to pay a fixed sum at a fixed time; and
  • where the obligation to make such payments is cumulative, a set amount of interest must be paid.

As was the case prior to the adoption of the amendments, the substance of the security’s obligation determines the availability of relief under Rule 3-10, rather than the form or title of the security. As a result, the rule specifies that:

  • neither the form of the security nor its title will determine whether a security is debt or debt-like—instead, the substance of the obligation created by the security will be determinative; and
  • the phrase “set amount of interest” is not intended to mean “fixed amount of interest.”

The SEC notes in the Adopting Release that floating and adjustable rate securities, as well as indexed securities, may meet the criteria specified in paragraph (b)(2)(ii), as long as the payment obligation is set in the debt instrument and can be determined from objective indices or other factors that are outside the discretion of the obligor.

Eligible Issuer and Guarantor Structures Condition

Consistent with the SEC’s proposed rule amendments, the specific issuer and guarantor structures permitted under the five exceptions previously specified in Rules 3-10(b) through (f) have been replaced with a two-category framework. The two-category framework specifies that an issuer and guarantor structure would be eligible if: (i) the parent company issues the security or co-issues the security, jointly and severally, with one or more of its consolidated subsidiaries, or (ii) a consolidated subsidiary issues the security, or co-issues it with one or more other consolidated subsidiaries of the parent company, and the security is guaranteed fully and unconditionally by the parent company. Under the amended rules, the ability to provide the alternative disclosures in lieu of separate subsidiary issuer and guarantor financial statements is only available when the parent company’s obligation is full and unconditional.

In the Adopting Release, the SEC notes that issuer and guarantor structures that fell under Rules 3-10(b), 3-10(c), and 3-10(d) will now fall under Rule 3-10(a)(1)(i), if the subsidiary co‑issued the security, jointly and severally, with its parent, or Rule 3-10(a)(1)(ii), if the subsidiary issued the security that is fully and unconditionally guaranteed by its parent, while issuer and guarantor structures that fell under Rules 3-10(e) and 3-10(f) will now fall under Rule 3‑10(a)(1)(i).

Disclosure Requirements

The alternative disclosures that are provided when the conditions of Rule 3-10 are met are now specified in new Rule 13-01. As adopted, Rule 13-01(a)(4) will require disclosure of summarized financial information (rather than consolidating information) for each issuer and guarantor (“Summarized Financial Information”). Under the final amendments, disclosure of additional line items of financial information beyond the line items specified in Summarized Financial Information is required if necessary to comply with Rule 13-01(a)(6) and (7). Unlike consolidating information, Summarized Financial Information does not include cash flow statement information. Rule 13-01(a)(4) includes a requirement to briefly describe the basis of presentation applicable to each of the required financial disclosures therein.

Rule 13-01(a)(4)(i) permits the Summarized Financial Information of each issuer and guarantor consolidated in the parent company’s consolidated financial statements to be presented on a combined basis with the Summarized Financial Information of the parent company, and Rule 13-01(a)(4)(ii) requires intercompany balances and transactions between issuers and guarantors whose information is presented on a combined basis to be eliminated. Rule 13‑01(a)(4)(iii) requires subsidiaries that are not issuers or guarantors to be excluded from the Summarized Financial Information; therefore, all non-issuer and non-guarantor subsidiary financial information must be removed from the financial information of the Obligor Group, even if an issuer or guarantor would otherwise consolidate such non-issuer and non-guarantor subsidiaries. An issuer or guarantor would not present its investments in non-issuer and non‑guarantor subsidiaries in the Summarized Financial Information. Rule 13-01(a)(4)(iv) specifies the requirement that, when information provided in response to Rule 13-01 is applicable to one or more, but not all, issuers and guarantors, separate disclosure of Summarized Financial Information for the issuers and guarantors to which the information applies is required.

As adopted, Rule 13-01(a)(4)(v) requires the financial disclosures to be provided as of and for the most recently ended fiscal year and year-to-date interim period included in the parent company’s consolidated financial statements. The SEC also adopted Rule 10-01(b)(9) to require compliance with Rules 3-10 and 13-01 in Quarterly Reports on Form 10-Q.

Rules 13-01(a)(1) through (3), as adopted, require certain non-financial disclosures about the issuers and guarantors, 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 the Adopting Release, the SEC notes that, “[w]hile the adopted non-financial disclosures are composed of the items we believe are most likely to be material to an investor, disclosure of additional facts and circumstances is required if necessary to comply with Rule 13-01(a)(6) and (7).” When a non-financial disclosure is applicable to one or more, but not all, issuers and guarantors, Rule 13-01(a)(4)(iv) requires, to the extent material, a separate disclosure of Summarized Financial Information for the issuers and guarantors to which the non-financial disclosure applies. The non-financial information specifically includes:

  • a description of the issuers and guarantors of the guaranteed security;
  • a description of the terms and conditions of the guarantees and how payments to holders of the guaranteed security may be affected by the composition of and relationships among the issuers, guarantors, and subsidiaries of the parent company that are not issuers or guarantors of the guaranteed security; and
  • a description of other factors that may affect payments to holders of the guaranteed security, such as contractual or statutory restrictions on dividends, guarantee enforceability, or the rights of a noncontrolling interest holder.
When Disclosure is Required

Prior to the amendments, if certain numerical thresholds were met, including that the parent company has “no independent assets or operations” and that all non-issuer and non-guarantor subsidiaries are “minor,” the alternative disclosures could take the form of a brief narrative in lieu of detailed consolidating information, but some type of the alternative disclosures was always required. The rule specified that Rule 3-10 disclosure may not omit any financial and narrative information about each guarantor if it would be material for investors to evaluate the sufficiency of the guarantee, and it shall include sufficient information so as to make the financial information presented not misleading. As amended, the “no independent assets or operations” and “minor” numerical thresholds used to determine the form and content of disclosure have been replaced with a requirement to provide all disclosures specified in the final rule, unless such information is not material.

As adopted, Rule 13-01(a)(4)(vi) includes four scenarios, which the SEC believes are the most common situations under which the financial information would not be material. If one of these scenarios is applicable and disclosed, the parent company could then omit the financial disclosures. The non-exclusive list of potential scenarios is as follows:

  • the assets, liabilities, and results of operations of the combined issuers and guarantors of the guaranteed security are not materially different than corresponding amounts presented in the consolidated financial statements of the parent company;
  • the combined issuers and guarantors, excluding investments in subsidiaries that are not issuers or guarantors, have no material assets, liabilities, or results of operations;
  • the issuer is a finance subsidiary of the parent company, the parent company has fully and unconditionally guaranteed the security, and no other subsidiary of the parent company guarantees the security; and
  • the issuer is a finance subsidiary that co-issued the security, jointly and severally, with the parent company, and no other subsidiary of the parent company guarantees the security.
Location of Disclosures and Audit Requirement

As adopted, Rule 13-01(b) permits the parent company to provide the alternative disclosures in a footnote to its consolidated financial statements or in its Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). If the disclosures are not otherwise included in the consolidated financial statements or in MD&A, the final rule requires the parent company to include the disclosures in its prospectus immediately following “Risk Factors,” if any, or otherwise, immediately following pricing information described in Item 105 of Regulation S-K. If the parent company elects to provide the alternative disclosures in a footnote to its audited consolidated financial statements, the alternative disclosures must be audited; however, the alternative disclosures need not be audited if the parent company provides the alternative disclosures outside of the audited consolidated financial statements.

Recently Acquired Subsidiary Issuers and Guarantors

Under the final rule, registration statements for debt securities must include the pre‑acquisition summarized financial information of any recently acquired subsidiary guarantor if:

  • the subsidiary has not been included in the registrant’s most recent balance sheet; and
  • the recently acquired subsidiary guarantor is considered a significant business in accordance with the criteria in Rule 1-02(w), when 20 percent is substituted for 10 percent.
Continuous Reporting Obligation

An issuer of securities is required to file reports under Section 13(a) of the Exchange Act, with respect to any class of securities registered pursuant to Sections 12(b) or 12(g) of the Exchange Act, or for any class of securities for which it has a reporting obligation under Section 15(d) of the Exchange Act. Section 12(b) registration is required only for so long as the class of securities is listed for trading on a national securities exchange. An issuer incurs a Section 15(d) reporting obligation for each class of securities that is the subject of a Securities Act registration statement that becomes effective, and Section 15(d)(1) provides that if, at the beginning of any subsequent fiscal year, the securities of any class to which the registration statement relates are held of record by fewer than 300 persons, or in the case of a bank, a savings and loan holding company or bank holding company by fewer than 1,200 persons, the registrant’s Section 15(d) reporting obligation is automatically suspended with respect to that class. Rule 12h-3 under the Exchange Act permits issuers to suspend a Section 15(d) reporting obligation at any time during a fiscal year, provided that the conditions of the rule are met.

Prior to the amendments to Rule 3-10, the parent company was required to continue to provide the alternative disclosures in its periodic reports for as long as the subject securities are outstanding, even if the reporting obligation of its subsidiary issuer or guarantor with respect to the subsidiary’s guaranteed securities or subsidiary’s guarantees could be suspended under either Section 15(d) or Rule 12h-3 of the Exchange Act.

The SEC has now eliminated the requirement that the parent company must continue to provide the alternative disclosures in its periodic reports for as long as the subject securities are outstanding. Instead, the parent company will be permitted to cease providing the alternative disclosures if the corresponding subsidiary issuer’s or guarantor’s Section 15(d) obligation is suspended automatically by operation of Section 15(d)(1) or through compliance with Rule 12h‑3. The SEC also adopted conforming amendments to provide analogous relief with respect to subsidiary guarantors that meet the definition of foreign private issuer and terminate their reporting obligations through compliance with Rule 12h-6 and to subsidiary issuers or guarantors that have filed an offering statement for a Tier 2 offering that has been qualified pursuant to Regulation A and suspend their reporting obligations through compliance with Rule 257(d).

If a subsidiary issuer or guarantor with an Exchange Act reporting obligation for the guaranteed securities were initially eligible to omit its financial statements because it met the requirements of amended Rule 3-10 and could rely on amended Rule 12h-5, but later ceased to satisfy those requirements, that subsidiary will be required to begin filing Exchange Act reports for the period during which it ceased to satisfy the requirements of amended Rule 3-10. In addition, the subsidiary is required to present the financial statements that are required by Regulation S-X at the time a report is due and is not able to present the alternative disclosures that amended Rule 3-10 would have allowed it to present for historical periods.

Application to Certain Issuers

Foreign private issuers will be required to comply with amended Rule 3-10 as well as new Rule 13-01; however, the SEC eliminated of the requirement for a parent company that prepares its financial statements on a comprehensive basis other than U.S. GAAP or IFRS as issued by the International Accounting Standards Board to reconcile financial information to U.S. GAAP, subject to the application of Rules 13-01(a)(6) and (7), which require the parent company to disclose additional financial information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee, as well as sufficient information so as to make the financial and non-financial information presented not misleading.

With respect to smaller reporting companies, Note 3 to Rule 8-01 of Regulation S-X requires compliance with existing Rule 3-10 if the subsidiary of a smaller reporting company issues securities guaranteed by the smaller reporting company or the subsidiary guarantees securities issued by the smaller reporting company, except that the periods presented are those required by Rule 8-02. The SEC has amended Note 3 to Rule 8-01 that states, rather than stating that the subsidiary issuer or guarantor of the smaller reporting company issuer or guarantor must present financial statements as required by existing Rule 3-10, that the requirements of Rule 3-10 are applicable to financial statements of the subsidiary issuer or guarantor. The final amendments also add a sentence to Note 3 to Rule 8-01 to require a smaller reporting company to provide the disclosures specified in proposed Rule 13-01. Finally, due to the fact that Item 1 of Part I of Form 10-Q permits a smaller reporting company to provide the information required by Rule 8‑03 of Regulation S-X if it does not provide the information required by Rule 10-01, the SEC added Rule 8-03(b)(6) to require compliance with Rules 3-10 and 13-01.

Forms 1-A, 1-K, and 1-SA, which are the forms for Regulation A issuers, have been amended to state that the requirements of Rule 3-10 are applicable to financial statements of the subsidiary issuer or guarantor. The SEC modified each form to require the disclosures specified in Rule 13-01 and to specify the location of the disclosures, similar to Rule 13-01(b), in a manner that is consistent with the requirements of Regulation A. If a parent company elects to provide the disclosures in its audited financial statements, the alternative disclosures will be required to be audited. The SEC made additional conforming amendments to address the reporting obligations of subsidiary issuers and guarantors.

With respect to issuers of asset-backed securities, the SEC adopted amendments to Items 1100(c)(2)(ii)(C) and (D) of Regulation AB to state that disclosures specified in Rule 13‑01 must be provided in the reports to be referenced and that financial statements of the subsidiary third party or subsidiary guarantor, as applicable, may be omitted if the requirements of Rule 3-10 are satisfied. The SEC also adopted conforming amendments to Items 1112, 1114, and 1115 of Regulation AB and Item 504 of Regulation S-K.

Amendments to Rule 3-16

Rule 3-16 specifies requirements for affiliates whose securities are pledged as collateral for securities registered or being registered, requiring separate annual and interim financial statements for each affiliate whose securities constitute a “substantial portion” of the collateral for any class of securities registered or being registered as if the affiliate were a separate registrant. The disclosure requirements in Rule 3-16 have been replaced with the amended disclosure requirements in new Rule 13-02 (although existing Rule 3-16 will remain in place for transitional purposes discussed below). Among other things, the amendments:

  • replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with amended 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 may be provided outside the footnotes to its audited annual and unaudited interim consolidated financial statements in all filings; 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.
Financial Disclosures

Rule 13-02(a)(4) requires Summarized Financial Information for each affiliate, which would include select balance sheets and income statement line items. Disclosure of additional line items of financial information beyond the line items specified in Summarized Financial Information is required if necessary to comply with Rules 13-02(a)(6) and (7). In the Adopting Release, the SEC noted that the final rule does not include requirements specific to non‑subsidiary affiliates, such as a non-subsidiary controlled affiliate of the registrant or a controlling affiliate of the issuer.

However, in the circumstances where the affiliate is not a consolidated subsidiary of the registrant, Rules 13-02(a)(6) and (7) would require the registrant to provide any financial and narrative information about each such affiliate, if the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral and sufficient information so as to make the financial and non-financial information presented not misleading. Given that the unconsolidated affiliate’s financial information is not included in the registrant’s consolidated financial statements, disclosure beyond what is specified in Rule 13-02(a)(1) through (4) may need to be provided, such as separate financial statements of the unconsolidated affiliate to satisfy the requirements of Rules 13-02(a)(6) and (7). Moreover, Rule 13-02(a)(4)(iii) requires an affiliate’s amounts due from, amounts due to, and transactions with certain entities not included in that affiliate’s summarized financial information to be presented in separate line items, to the extent material. These entities include the registrant, any of the registrant’s subsidiaries not included in the Summarized Financial Information of the affiliate, and related parties.

Rule 13-02(a)(4) includes a requirement to briefly describe the basis of presentation applicable to each of the required financial disclosures.

Presentation on a Combined Basis

Rule 13-02(a)(4)(i) permits the Summarized Financial Information of each affiliate whose securities are pledged as collateral that is consolidated in the registrant’s consolidated financial statements to be presented on a combined basis. Further, Rule 13-02(a)(4)(ii) requires that intercompany balances and transactions between affiliates whose information is presented on a combined basis to be eliminated. Unlike the requirements in Rule 13-01, because the securities pledged as collateral are an equity interest in that pledgor affiliate, the financial information of all subsidiaries that would be consolidated by that affiliate is included in the summarized financial information presented pursuant to Rule 13-02(a)(4), even if the securities of those subsidiaries are not pledged as collateral.

Rule 13-02(a)(4)(iv) provides that, when information provided in response to Rule 13-02 is applicable to one or more, but not all, affiliates, separate disclosure of Summarized Financial Information for the affiliates to which the information applies is required. The SEC notes in the Adopting Release that, consistent with the corresponding requirement in Rule 13‑01(a)(4)(iv), the SEC believes “a registrant should consider materiality and exercise judgment in determining the appropriate level of aggregation of affiliates based on the nature of the disclosure.” In this regard, the SEC notes that “it may be useful to consider quantitative factors, such as the financial significance of the affected affiliates, and qualitative factors, such as the nature of the facts and circumstances applicable to the affiliates.” Rule 13-02(a)(4)(iv) permits, in limited circumstances, narrative disclosure to be provided in lieu of the separate Summarized Financial Information, i.e., when such separate financial information applicable to the affected affiliates can be easily explained and understood.

Periods to Present

Rule 13-02(a)(4)(v) requires the financial disclosures to be provided as of and for the most recently ended fiscal year and year-to-date interim period included in the registrant’s consolidated financial statements. Rule 10-01(b)(10) requires compliance with Rule 13-02 in Quarterly Reports on Form 10-Q.

Non-Financial Disclosure Requirements

Rules 13-02(a)(1) through (3) require certain non-financial disclosures to the extent material:

  • a description of the securities pledged as collateral and the affiliates whose securities are pledged as collateral;
  • a description of the terms and conditions of the collateral arrangement, including the events or circumstances that would require delivery of the collateral; and
  • a description of the trading market for the affiliate’s security pledged as collateral or a statement that there is no market;

In the Adopting Release, the SEC notes that, while the adopted non-financial disclosures are composed of the items it believes are most likely to be material to an investor, disclosure of additional facts and circumstances is required if necessary to comply with Rules 13-02(a)(6) and (7). Further, when a non-financial disclosure is applicable to one or more, but not all, affiliates, Rule 13-02(a)(4)(iv) requires, to the extent  material, separate disclosure of Summarized Financial Information for the affiliates to which the non-financial disclosure applies.

When Disclosure is Required

The final rule replaces Rule 3-16’s “substantial portion” numerical thresholds with a requirement to provide all disclosures specified in the final rule, unless such information is not material. Rule 13-02(a)(6) requires disclosure of “[a]ny financial and narrative information about each such affiliate if the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral,” and Rule 13-02(a)(7) requires disclosure of “[s]ufficient information so as to make the financial and non-financial information presented not misleading.”

Rule 13-02(a)(4)(vi) identifies two scenarios that the SEC has identified as the most common situations under which the Summarized Financial Information would not be material. If the scenario is applicable and disclosed, then a registrant can omit the financial disclosures. The non-exclusive scenarios are:

  • the assets, liabilities, and results of operations of the combined affiliates, whose securities are pledged as collateral, are not materially different than the corresponding amounts presented in the consolidated financial statements of the registrant; and
  • the combined affiliates whose securities are pledged as collateral have no material assets, liabilities, or results of operations.
Location of the Disclosures and Audit Requirement

Rule 13-02(b) permits the registrant to provide the disclosures required by final Rule 13-02(a) in a footnote to its consolidated financial statements or in MD&A. If the disclosures are not otherwise included in the consolidated financial statements or in MD&A, the final rule requires the registrant to include the disclosures in its prospectus immediately following “Risk Factors,” if any, or otherwise immediately following pricing information described in Item 105 of Regulation S-K. If the registrant elects to provide the amended disclosures in a footnote to its audited consolidated financial statements, the disclosures must be audited; however, the disclosures need not be audited if the registrant provides them outside the audited consolidated financial statements.

Recently Acquired Affiliates Whose Securities are Pledged as Collateral

In certain circumstances, pre-acquisition Summarized Financial Information for recently acquired affiliates will be required to be provided in a Securities Act registration statement filed in connection with the offer and sale of the subject collateralized security. Similar to Rule 13‑01(a)(5) (discussed above), the pre-acquisition Summarized Financial Information will be required when a registrant has acquired a significant “business” after the date of its most recent balance sheet included in its consolidated financial statements and when that acquired business and/or one or more of its subsidiaries are affiliates whose securities are pledged as collateral. Whether a “business” has been acquired is determined in accordance with the guidance set forth in Rule 11-01(d) of Regulation S-X, and the registrant would also need to treat acquisitions of related businesses as a single business acquisition in a manner consistent with Rule 3-05(a)(3) of Regulation S-X. An acquired business will be deemed significant if it meets any of the conditions specified in the definition of significant subsidiary in Rule 1-02(w) of Regulation S‑X, substituting 20 percent for 10 percent each place it appears therein, based on a comparison of the most recent annual financial statements of the acquired business and the registrant’s most recent annual consolidated financial statements filed at or prior to the date of acquisition. As a result, a registrant will be required to provide pre-acquisition summarized financial information of a recently acquired affiliate for those acquisitions where it will be required to provide pre-acquisition financial statements of the acquired business pursuant to Rule 3-05 of Regulation S-X. This requirement is only applicable to Securities Act registration statements, and, in subsequent Exchange Act reports, financial information of a recently acquired affiliate, whose securities are pledged as collateral, will be included in the financial information of affiliates required by Rule 13-02(a).

Application to Certain Issuers

Foreign private issuers are required to comply with the disclosures specified in proposed Rule 13-02. With regard to smaller reporting companies, amendments to Note 4 to Rule 8-01 establish that the requirements of final Rules 3-16 and 13-02 are applicable if a smaller reporting company’s securities that are registered or being registered are collateralized by the securities of the smaller reporting company’s affiliates, and that the periods presented for purposes of compliance with final Rule 3-16 are those required by Rule 8-02 of Regulation S-X.

Forms 1-A, 1-K, and 1-SA, which are the forms for Regulation A issuers, have been amended to establish that the requirements of Rules 3-16 and 13-02 are applicable if a Regulation A issuer’s securities qualified or being qualified pursuant to Regulation A are collateralized by the securities of the issuer’s affiliates.

What’s Next?

The amendments will be effective on January 4, 2021. The SEC has provided the following transition guidance:

  • For Securities Act registration statements:
    • any registration statement that is first filed on or after January 4, 2021, must comply with the final amendments; and
    • any 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), must comply with the final amendments.
    • For Exchange Act registration statements:
      • any registration statement that is first filed on or after January 4, 2021, must comply with the final amendments.
      • For Exchange Act periodic reports:
        • 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
        • 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 transition period for Securities Act registration statements is also applicable to filings made in connection with offerings of securities pursuant to Regulation A, including Form 1-A and post-qualification amendments thereto. The transition period for Exchange Act periodic reports is also applicable to periodic reporting pursuant to Rule 257 of Regulation A, including Forms 1-K and 1-SA. 

The SEC indicates that voluntary compliance with the final amendments in advance of January 4, 2021, is permitted; however, after voluntary compliance, subsequent Exchange Act or Regulation A periodic reports must comply with the final rules.

Recognizing that registrants often structure debt agreements to release affiliate securities pledged as collateral if the disclosure requirements of Rule 3-16 would be triggered, and that the concerns of commenters that collateral may be released as a result of the elimination of Rule 3‑16 and the adoption of Rule 13-02, the SEC notes in the Adopting Release that the final amendments do not eliminate existing Rule 3-16. Instead, Rule 3-16 has been amended to include a scope paragraph stating that the requirements of Rule 3-16 apply to each registered security issued and outstanding before January 4, 2021, for which the registrant has not previously been required to provide Rule 3-16 financial statements. Rule 13-02 includes a scope paragraph stating that the requirements of new Rule 13-02 apply to each registered security issued and outstanding before January 4, 2021, for which the registrant has previously been required to provide Rule 3-16 financial statements. Further, any collateralized debt securities issued on or after the compliance date of the final amendments must comply with new Rule 13‑02, which is stated in the scope paragraph to final Rule 13-02.

The SEC’s rule changes provide a more flexible framework for registrants that conduct debt offerings involving certain credit enhancements and continue the SEC’s efforts to modernize and streamline the financial and non-financial disclosures required in SEC registration statements and reports.


[1] Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (Mar. 2, 2020), available at: https://www.sec.gov/rules/final/2020/33-10762.pdf (the “Adopting Release”).

[2] Release No. 33-10526, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (Jul. 24, 2018), available at: https://www.sec.gov/rules/proposed/2018/33-10526.pdf.

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