Selling restrictions
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The Law and Lore of Repackaging
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Selling restrictions
/ˈsɛlɪŋ rɪsˈtrɪkʃənz/ (n.)
A kind of cold spaghetti designed for pre-emptive self-flagellation.
An interminable intercessory prayer offered by an arranger that, by reciting the securities regulations of divers jurisdictions, its syndicate will therefore behave themselves. Selling restrictions are usually wrought in the inscrutable prose of Magic Circle boilerplate and buried deep in the back end of a prospectus.
Through the passage of time they have acquired their own permanent, institutional solidity: infused with the same sombre, ambulatory horror as netting opinions are to an ISDA Ninja, to most in the debt capital markets is unthinkable that they should ever fall away.
But.
On existence and function
Ask a capital markets lawyer what a selling restriction is, and you can expect a fulsome answer.
She will happily provide reams of examples — dense, lengthy tracts reciting ancient American securities laws, regulations, rules and associated apocrypha; inscrutable alphanumeric codes referencing regulations of the European Parliament and of the Council; block-capital harangues of New Hampshire residents; and any number of flavourless local variations. Bond lawyers collect these and paste them into precedent scrap-books, to be annually updated, the same way wanton schoolboys collect football cards for their Panini albums.
But ask her what selling restrictions are for, and you’ll get a blank look. If there is an answer, it has not yet made it to the Internet: for all its wealth of human knowledge, Google is no better informed (see panel).
Selling restrictions occupy, by immutable historical custom, about half of the prospectus. A prospectus is the securities world’s version of an advertorial: it hotly denies offering anything, let alone the securities it drones on about, but it is hard to see what else it could be for.[1]
In any case, the solemn pledge that a document shall not be given to, inter alios, New Jersey residents, when printed on that document, does little work if, in fact, it is not — and scarcely more if it is. Selling restrictions either describe, or contradict, the sorry state of the universe. They play no role in shaping it.
Except by accident: as do many of our best-laid plans, selling restrictions honoured in the breach may make matters worse. As she casually flips the pages,[2] an unchaperoned New Jerseyan might, on learning she has come by the prospectus through some impropriety or other, wonder whether she has stumbled upon a free option. If an institution has, by its own written admission, transgressed regulations, is this not a roadmap to litigation?
Was a cause of action ever dismissed because of a judicious selling restriction? We doubt it. Was one ever lost, because of a bad one? Again, we doubt it.
Artefact of a bygone era
Like much of the boilerplate of debt capital markets, selling restrictions speak to a time long passed into the annals of history. There is no end of bother one can theoretically get into should one offer for sale in a place you are not to meant to, a commercial security.
They are deep lore. They speak to two facts: one, that without actually erecting a billboard or advertising on the side of a bus, one can still offer a security for sale in a way that can get you deep in the shtuck; and two, that there was once a time, many, many years ago, when Belgian dentists, tax dodgers and other random unmentionables could buy and sell securities from the boot of each others’ Citroëns, no questions asked, and thus practical controls on who was offering one’s securities, and to whom, were very limited.
These days they are not: everything trades electronically, all is security controlled, hand-shaken, rousted and patted down for money-laundering, and held in a clearing system via instutyitional intermediaries with two-factor authentication, so that no-one has any excuse for knowing, or not knowing (or for that matter stopping) who they trade a given security with.
See also
References
- ↑ Beyond a make-work exercise for our learned friends, of course.
- ↑ She won’t. It is an axiom of financial services practice that no person alive reads a prospectus, including those who write them.