New Public Disclosure Requirements For Foreign Private Issuers Of OTC-Quoted Rule 144A Debt Securities – Securities

Key Takeaways:

• Beginning January 4, 2023, foreign private issuers of Rule 144A
  debt securities will be required to make certain financial
  information publicly available in order to allow for publication of
  quotations of such securities in the over-the-counter markets
  pursuant to Rule 15c2-11 of the U.S. Securities Exchange Act of
  1934.




• While certain foreign private issuers will be deemed to satisfy
  the requirements of Rule 15c2-11 through existing disclosure
  practices, for others, financial information may need to be
  produced and/or publicly disclosed for the first time.




• In the absence of exemptive relief, foreign private issuers of
  Rule 144A debt securities should take steps now to avoid a
  potential disruption in the trading and decrease in the liquidity
  of their Rule 144A debt securities.

Beginning January 4, 2023, foreign private issuers of Rule 144A
fixed income securities will be required to make certain financial
information publicly available in order to allow for publication of
quotations of such securities in the over-the-counter
markets pursuant to Rule 15c2-11 (“Rule
15c2-11”) of the United States Securities Exchange Act
of 1934, as amended (the “U.S. Exchange
Act”). While Rule 15c2-11 requires compliance by
broker-dealers, issuers may need to augment their public disclosure
practices in order to avoid a potential disruption in the trading
and decrease in the liquidity of their Rule 144A bonds.

Background. Rule 15c2-11 requires that a
broker-dealer that wishes to publish a quotation in a medium other
than a national securities exchange (i.e., over-the-counter, or
“OTC”) must first establish that certain current
financial information about the issuer is publicly available. As we
have previously reported, in a no-action letter dated
September 24, 2021, the staff of the U.S. Securities and Exchange
Commission (the “SEC”) confirmed its position that Rule
15c2-11 applies to fixed-income securities sold in reliance on Rule
144A of the United Stated Securities Act of 1933, as amended
(“Rule 144A”). Previously, it was sufficient that an
issuer of Rule 144A debt securities undertake to provide certain
financial information to qualified institutional buyers
(“QIBs”) upon request. The SEC, in a no-action letter
dated December 16, 2021, provided for a phase-in of compliance with
Rule 15c2-11, which requires, effective January 4, 2023,
broker-dealers and qualified interdealer quotation systems
(“Qualified QIDS”) to ascertain that the issuer
information required under Rule 15c2-11 is publicly available
before they publish quotations for the issuer’s Rule 144A
debt securities. Starting January 5, 2024, the quotation medium on
which a Rule 144A debt security is quoted will be required to
include a website link to the issuer’s publicly available
information.

Disclosure Requirements. The issuer information
required by Rule 15c2-11 includes (i) a balance sheet as of a date
no less than 16 months prior, (ii) a profit and loss and retained
earnings statement for the 12 months preceding the date of the most
recent balance sheet, and for the two preceding fiscal years and
(iii) a brief statement of the nature of the issuer’s
business, including its products and services. The information
requirements of Rule 15c2-11 do not require audited financial
statements, auditor reports, notes to financial statements or that
the information be prepared in accordance with U.S. generally
accepted accounting principles. Importantly, the information
provided must be of the issuer of the securities itself, and not of
an affiliated entity (such as a parent guarantor) that might
ordinarily produce financial statements of a consolidated
group.

Rule 15c2-11 specifies that information is deemed
“publicly available” if it is accessible without
passwords, fees or other restrictions through the issuer’s
website, the SEC’s website (EDGAR) or on the website of a
state or federal agency, on a website of a Qualified QID, a
registered national securities association or a registered broker
or dealer, or through an electronic information system that is
generally available to the public in the primary trading market of
a “foreign private issuer.”

Application to Foreign Private
Issuers. Foreign private issuers of Rule 144A debt
securities will generally be subject to Rule 15c2-11, but may be
deemed to satisfy the public disclosure requirements based on their
status and reporting under the U.S. Exchange Act.

First, if a foreign private issuer is subject to the
reporting requirements under the U.S. Exchange Act and has filed
all required periodic reports in the prior 12 months (or the
applicable shorter period that the issuer was required to file such
reports), then a broker-dealer would not need to confirm
separately that the current financial information of the issuer is
publicly available under Rule 15c2-11.

Second, a foreign private issuer with a class of equity
securities exempt from the reporting requirements of the U.S.
Exchange Act pursuant to Rule 12g3-2(b) (“Rule
12g3-2(b)”) of the U.S. Exchange Act and that has published,
since the first day of the most recently completed fiscal year, the
information required by Rule 12g3-2(b) would be considered to have
satisfied the public disclosure requirements of Rule 15c2-11. Rule
12g3-2(b) requires an issuer to publish on its website, or on an
electronic information delivery system generally available to the
public in its primary trading market, in English, certain
information made public pursuant to the laws of the issuer’s
country of incorporation or filed with the principal stock exchange
in the issuer’s primary trade market or distributed to
its security holders. Issuers with Level I ADR programs
(sponsored or unsponsored) are typically exempt from the reporting
obligations of the U.S. Exchange Act under Rule
12g3-2(b). 

Finally, foreign sovereign debt securities and debt guaranteed
by a foreign government are exempt from Rule 15c2-11.

Considerations for Foreign Private Issuers. In
advance of January 4, 2023, foreign private issuers of Rule 144A
debt securities that are quoted on OTC markets are advised to
consider the following to avoid disruptions in trading:

• Current status under the U.S. Exchange Act:
  For foreign private issuers subject to the reporting requirements
  of the U.S. Exchange Act, adherence to such reporting requirements
  negates the need to make public disclosure in satisfaction of Rule
  15c2-11. Similarly, foreign private issuers that rely on Rule
  12g3-2(b) for an exemption from the reporting requirements of the
  U.S. Exchange Act should ensure their compliance with its
  information dissemination requirements of Rule 12g3-2(b) in order
  to avoid the need to satisfy the Rule 15c2-11 informational
  requirements.




• Public dissemination of information: A foreign
  private issuer that is neither subject to the reporting obligations
  of the U.S. Exchange Act nor exempt from such reporting obligations
  pursuant to Rule 12g3-2(b) should consider carefully the definition
  of “publicly available” to determine whether the
  financial information that it has historically made available and
  disseminated satisfies Rule 15c2-11. If not, an issuer should make
  necessary administrative arrangements for the publication of
  information going forward, such as a publicly accessible website in
  order to ensure the continued quotation of its fixed income
  securities.




• Publishing financial information not previously
  available: Issuers of Rule 144A debt securities that are
  not subject to exchange or regulatory reporting requirements will
  commonly only make financial information available through a
  password-protected or otherwise restricted website accessible to
  QIBs and other selected categories of potential investors, in
  addition to providing information to QIBs upon request, pursuant to
  Rule 144A(d)(4). The application of Rule 15c2-11 could mean that
  financial information of a foreign private issuer that has not been
  publicly disclosed in the past will now become available to an
  issuer’s competitors, suppliers, customers or employees. As
  such, advanced consideration should be given to the potential
  investor relations and competitive impact of these
  requirements.




• Potential preparation of additional financial
  information:  Reporting covenants in indentures
  governing Rule 144A debt securities commonly permit financial
  statements delivered to investors to be those of an affiliated
  entity, such as a parent guarantor. However, Rule 15c2-11, as
  interpreted by the SEC, requires that the information be in respect
  of the issuer itself. As a result, to the extent not otherwise
  produced, foreign private issuers may need to prepare the necessary
  financial information at the issuer level for the relevant time
  periods.




• Future issuances of Rule 144A debt
  securities: Going forward, issuers should be mindful
  of additional disclosure and legal obligations that underwriters,
  investors and other third parties in future offerings of Rule 144A
  debt securities may demand relating to compliance with Rule
  15c2-11. Further, if a foreign private issuer that has currently
  outstanding Rule 144A debt securities wishes to enter into the
  market for an additional offering, then underwriters and investors
  may look to past compliance with Rule 15c2-11, and the trading
  activity of such securities, when evaluating the new issuance.

While various participants in the fixed-income securities market
have requested that the SEC extend the deadline for compliance or
provide further exemptive relief from the application of Rule
15c2-11 to fixed-income securities, to date, it is not clear if or
when the SEC will take further action. In the absence of further
exemptive relief, foreign private issuers of Rule 144A fixed income
securities should take steps now to ensure compliance with the
disclosure requirements of Rule 15c2-11 so that their Rule 144A
fixed income securities may be quoted by broker-dealers after
January 3, 2023.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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