US private placement

The Law and Lore of Repackaging →Go uptown This wiki frequently includes untutored and probably disrespectful views on matters of US law, regulation and general culture. To be clear: the JC’s predominant purpose is to troll, not to give constructive advice on how to live your life, much less how to organise your regulatory affairs. The JC is not a US attorney, does not want to be one, and claims no great expertise or insight into US securities regulation, other an abiding conviction that it is way, way more complicated than it needs to be, and the benefit of that abstrusity accrues exclusively to those who are US attorneys and the organs of state that are populated by them. If you read this and take it seriously, other than as a source of entertainment, more fool you. Repack Anatomy: Hedging exemption | Covenant to pay | Quoted Eurobond exemption | Pre-enforcement | The curious structure of an MTNIndex: Click ᐅ to expand: Repackaging Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Questions you might want to ask yourself before blithely placing repackaged securities in to the US market.

1. Volcker rules: Would the Volcker rules prevent the arranger owning or conducting investment activities with the SPV? Is the SPV a “covered fund”?
2. Risk retention: Is it an asset-backed security and if so, must I retain 5% risk to the vehicle under the US risk retention rules?
3. Investment company: Is it an “investment company”, required to be registered under the Investment Company Act of 1940? Are exemptions availab le under Rule 3a-7 or Rule 3c-7?
4. Commodity pool: Could it be considered a commodity pool, and the arranger therefore a commodity pool operator? Applies to initial sales an those you plan from the outset. If there is no cash-settled derivative (ie physically-settled forward sales only) out of scope.
5. ’34 Act liability: Securities liability for sale: Issuer risks “10b-5 liability” for misstatement in an offer prospectus.

Volcker rule

The Volcker rule generally prohibits banking entities from engaging in proprietary trading or having certain relationships with hedge funds or private equity funds (“covered funds”).

It applies to any entity, or any affiliate or subsidiary of a banking entity that is, or is controlled by one that is, insured by the Federal Deposit Insurance Corporation, or is a foreign bank having branch or agency in the United States. It also covers non-bank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve Board.

In scope entities can still have relations with fund entities which have an exemption from “covered fund” status. These include:

• Foreign public funds
• Loan securitizations
• Public welfare investments
• Small business investment companies

Risk retention rule

If your fund or vehicle could be an asset-backed security consider whether the risk retention rules apply. These are potentially scary for a European style ring-fenced multiple issue repack vehicle because falling in scope for a single series might bring the whole vehicle in scope (and therefore have to hold 5% of the whole vehicle). We have heard this described as “vehicle pollution”, which has a touch of the zeitgeist about it. It arises because contractual ringfencing and multiple issue vehicles are not really a thing in the Americas, and opportunistic (or obtuse) regulators might misunderstand the ringfencing and disregard it.

“[[Asset-backed security]”] is a specific term of US art, and is wider than the European general conceptualisation. In particular the underliers need to be “self-liquidating financial assets”. This would exclude many types of physical monetisation (though careful if you wrap a repack in a repack: you might convert a non SLFA (such a wind farm) into an SFLA (a repacked financing of a wind farm)

Commodity pool operator

If you have a swap securitised with multiple investors. Physically settled forwards are not included in definition of swap.

Investment Company Act of 1940

Exemptions from requirement to register under the Securities Act as an investment company

Rule 3a-7

Rule 3a-7 of the Investment Company Act of 1940 excludes issuers of asset-backed securities from the definition of “investment company” where their securities are either rated or purchased exclusively by qualified purchasers and who do not make public offerings of their securities.

Rule 3a-7 funds do not qualify for the Volcker “covered fund” exemption.

Self-liquidating securities are securities that are backed by assets that generate cash flows to repay the securities. For example, mortgage-backed securities are self-liquidating because they are backed by mortgages that produce monthly payments. Tentatively emission allowances are not self-liquidating securities because they do not have a cashflow and do not automatically redeem

Rule 3a-7 under the Investment Company Act of 1940 upon the satisfaction of certain conditions.

Rule 3c-7

Permits qualifying private funds that do not plan to issue an IPO and which sells to qualified purchasers to qualify for the Rule 3c-7 exemption. Must be QIBs/QPs.

Securities Exchange Act of 1934

144A is a private placement targeted at US qualified purchasers in cleared form. Issuer has Rule 10b-5 liability for misstatements is in the offering prospectus. An “underwriter” who takes the securities down also has liability, but a simple placement agent (who is not taking securities only own balance sheet and reselling) is not liable.

Seems to be a suggestion that the Issuer remains liable for the prospectus in whosever hands it falls, so big-boy letters have limited value, especially with liquid notes.

Question: why even have a prospectus? European banks have taken this approach; the US Banks have tended to write long investor rep letters acknowledging detailed risk factors

Rule 4a-2

Rule 4a-2 is an exemption from SEC registration requirements for private transactions that do not involve a public offering. Held outside clearing system in definitive global registered form. Common for insurance companies standard form NAIC form of placement documents

See also

This wiki frequently includes untutored and probably disrespectful views on matters of US law, regulation and general culture. To be clear: the JC’s predominant purpose is to troll, not to give constructive advice on how to live your life, much less how to organise your regulatory affairs. The JC is not a US attorney, does not want to be one, and claims no great expertise or insight into US securities regulation, other an abiding conviction that it is way, way more complicated than it needs to be, and the benefit of that abstrusity accrues exclusively to those who are US attorneys and the organs of state that are populated by them. If you read this and take it seriously, other than as a source of entertainment, more fool you.