US private placement
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The Law and Lore of Repackaging
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A unicorn dies every time you say “private placement” without a 10b-5 opinion.
Questions you might want to ask yourself before blithely placing repackaged securities into the US market.
Volcker rules: Would the Volcker rules prevent the arranger owning or conducting investment activities with the SPV? Is the SPV a “covered fund”?
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?
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?
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.
’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 of “any old SPV-issued note”. 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
In the US, commodity swaps are regulated by the Commodity Futures Trading Commission (CFTC) which oversees the swaps market and ensures fair and transparent trading practices. If you are repackaging 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[1] or purchased exclusively by qualified purchasers[2] 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. These are notes held in definitive registered global form, outside clearing system. You can control transfer and require any transferee to sign up to investor representation letters, big boy letters and all that good stuff as a condition to taking a transfer.
Investing through Rule 4a-2 is common for insurance companies, and there are standard forms of National Association of Insurance Commissioners form of placement documents
See also
References
- ↑ “In 1 of the 4 highest categories assigned to long-term debt, or an equivalent for short-term debt, by at least one nationally-recognised statistical rating agency.”
- ↑ Or “accredited investors” or “qualified institutional buyers”