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SEC 4530 - Disclosures relating to guarantors and issuers of guaranteed securities registered or being registered
Publication date: 28 Feb 2023
us PwC SEC Volume 4530
[Editor’s note: In March 2020 the SEC adopted significant changes to its disclosure requirements relating to guarantors and issuers of guaranteed securities that are registered or being registered. See SEC Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (SEC Release 33-10762). The new and amended rules became effective January 4, 2021, subject to voluntary early compliance and the transition provisions described in Section VI of SEC Release 33-10762. The guidance in SEC 4530 only relates to the new and amended rules (e.g., amended S-X 3-10 and new S-X 13-01). Reference should be made to the relevant pre-January 4, 2021 rules for disclosures made under those prior rules.]
[Editor’s note: The SEC staff has published interpretive guidance pertaining to the SEC’s disclosure requirements relating to guaranteed securities in SEC FRM 2500.]
.1 General
A guarantee is a common type of credit enhancement that issuers use to reduce the cost of capital. By providing guarantees, the issuer may be able to sell its securities at a lower effective yield (as compared to unguaranteed securities) or the issuer may be able to avoid the need to provide collateral to the investor.
Under U.S. securities laws, a guarantee of a debt security is a separate security, and the offer and sale of the guarantee generally must be registered under the Securities Act unless exempt from registration. If the offer and sale are registered, each issuer and each guarantor must generally file the financial statements required of a registrant in accordance with Regulation S-X. Additionally, absent an exemption, the offer and sale of the securities under the Securities Act cause each issuer and guarantor to become subject to the reporting requirements of Section 15(d) of the Exchange Act, which, among other things, would require each issuer and guarantor to file reports (e.g., Forms 10-K and 10-Q) with the SEC (for at least the fiscal year in which the Securities Act registration statement became effective).
The SEC has historically recognized that full Securities Act and Exchange Act disclosure by every subsidiary issuer and guarantor may not be necessary because in many cases an investor’s evaluation of the debt and guarantee together focuses on the consolidated financial statements of the parent company. The SEC has indicated that “this principle is grounded in the idea that the investment is in the consolidated enterprise when (1) the parent company is fully obligated as either issuer or full and unconditional guarantor of the security; (2) the parent company controls each subsidiary issuer and guarantor, including having the ability to direct all debt-paying activities; and (3) the financial information of each subsidiary issuer and guarantor is included as part of the consolidated financial statements of the parent” (footnotes omitted). Accordingly, the SEC provides an alternative disclosure framework and permits subsidiary issuers and guarantors to omit full financial statements when specified conditions are satisfied. The eligibility requirements for omitting the financial statements are set forth in S-X 3-10. The SEC also exempts subsidiary issuers and guarantors from requirements to file separate reports under the Exchange Act (e.g., Forms 10-K and 10-Q) if they are permitted to omit financial statements. See Exchange Act Rule 12h-5.
Registrants may wish to consult with their legal counsel regarding their registration and reporting obligations under U.S. securities laws.
[Editor's note: It is important to recognize the distinction between a guarantee and a collateral pledge when evaluating the applicable disclosure requirements. These two common types of credit enhancements are treated differently under the U.S. securities laws, and the SEC's disclosure requirements relating to guarantees are distinct from its disclosure requirements relating to collateral pledges. See SEC 4540 for a discussion of the disclosure requirements relating to affiliates whose securities collateralize securities that are registered or being registered. Depending on the circumstances, a particular subsidiary may be subject to the disclosure requirements applicable to collateralized securities and those applicable to guaranteed securities. For instance, if a consolidated subsidiary is a guarantor of its parent's registered debt and the parent has also pledged the subsidiary's common stock as collateral for that registered debt, then the parent should consider both sets of requirements.]
.11 Common transaction structures to which S-X 3-10 might apply
There are a number of transaction structures to which S-X 3-10 might apply. Two commonly encountered transaction structures are as follows:
Transaction Structure 1:
Facts: In September 2023, Company X, an SEC registrant with common stock listed for trading on a national securities exchange, issued debt securities in a private placement that was exempt from registration pursuant to Securities Act Rule 144A. The debt is a direct obligation of Company X and repayment of the debt is guaranteed by each of Company X's 10 U.S. consolidated subsidiaries. As a part of the private placement, Company X and the 10 subsidiary-guarantors entered into a registration rights agreement with the initial purchasers. Under the registration rights agreement, Company X and the 10 subsidiary-guarantors agreed to exchange the debt and guarantees that were issued in the private placement with substantially equivalent debt and guarantees that are registered under the Securities Act. The exchange offer will be registered on Form S-4 in November 2023.
Analysis: When Company X and the 10 subsidiary-guarantors conduct the registered exchange offer, they will be offering a total of 11 different securities: the Company X debt is one security and each of the 10 guarantees is a separate security. Absent relief, the Form S-4 used to register the exchange offer would need to include relevant disclosure (including separate financial statements) for Company X and for each of the 10 subsidiary-guarantors. Additionally, absent relief, each of the 10 subsidiary-guarantors would (for some period of time) have an obligation to file reports with the SEC (e.g., Forms 10-K, 10-Q, and 8-K). S-X 3-10 might permit omission of the historical financial statements of the subsidiary-guarantors from the registration statement filed in connection with the exchange offer, and if omission is permitted, Exchange Act Rule 12h-5 provides relief to the subsidiary-guarantors from the requirement to file Exchange Act reports with the SEC. An element of complying with S-X 3-10 includes providing the financial and nonfinancial disclosures specified by S-X 13-01 to the extent material.
[Editor's note: The provisions of S-X 3-10 and S-X 13-01 do not directly apply to the materials that are prepared in connection with the private placement (i.e., the securities and the guarantees issued in the private placement were exempt from registration). However, Company X may wish to consult with its legal counsel regarding any significant differences between the private offering materials and the requirements of a Securities Act registration statement. Many companies prepare the offering materials used in connection with a private placement in a manner that does not differ significantly from the disclosures that will be provided in connection with the subsequent registration statement. When there are significant differences, those differences are oftentimes highlighted in the private offering materials. Additionally, there may be covenants that require inclusion in the private offering materials of all financial information as if the securities were issued in a transaction that is registered with the SEC.]
Transaction Structure 2:
Facts: Company Y is an existing SEC registrant with securities listed for trading on a national securities exchange. In October 2023, Subsidiary Z (Company Y's consolidated subsidiary) intends to issue debt securities in a public offering. Company Y will guarantee the repayment of Subsidiary Z's debt. The offering of the debt and the guarantee will be registered on Form S-3. Prior to the intended offering, Subsidiary Z was not an SEC registrant.
Analysis: When Company Y and Subsidiary Z conduct the public offering, they will be offering two separate securities: the Subsidiary Z debt is one security and the Company Y guarantee is a separate security. Absent relief, the Form S-3 used to register the offering would need to include relevant disclosure (including separate financial statements) for Company Y and Subsidiary Z. Additionally, absent relief, Subsidiary Z will have an obligation to file reports with the SEC (e.g., Forms 10-K, 10-Q, and 8-K). S-X 3-10 might permit omission of the historical financial statements of Subsidiary Z from the Form S-3 filed in connection with the offer and sale of the securities, and if omission is permitted, Exchange Act Rule 12h-5 provides relief to Subsidiary Z from the requirement to file Exchange Act reports with the SEC. An element of complying with S-X 3-10 includes providing the financial and nonfinancial disclosures specified by S-X 13-01 to the extent material.
.2 Availability of the reporting and disclosure framework under S-X 3-10 and Exchange Act Rule 12h-5
As noted above, the SEC has historically recognized that full Securities Act and Exchange Act disclosure by every subsidiary issuer and guarantor may not be necessary. Accordingly, the SEC provides an alternative disclosure framework and permits subsidiary issuers and guarantors to omit full financial statements when specified conditions are satisfied. The SEC also exempts subsidiary issuers and guarantors from requirements to file separate reports under the Exchange Act (e.g., Forms 10-K and 10-Q) if they are permitted to omit financial statements.
.21 Conditions which must be met in order to omit financial statements under S-X 3-10
S-X 3-10 provides that a subsidiary issuer or guarantor of a guaranteed security that is registered or being registered may omit the financial statements required by Regulation S-X if all the conditions outlined in (i) through (v) are present:
(i) the issuer or guarantor is a consolidated subsidiary of the parent company;
(ii) the parent company’s consolidated financial statements have been filed;
(iii) the guaranteed security is debt or debt-like;
(iv) one of the following eligible issuer and guarantor structures is applicable:
(A) the parent company issues the security or co-issues the security, jointly and severally, with one or more of its consolidated subsidiaries; or
(B) 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; and
(v) the parent company provides the disclosures specified in S-X 13-01.
For purposes of evaluating the availability of S-X 3-10, the terms parent company, debt or debt-like, and full and unconditional are defined in S-X 3-10(b)(1), (2), and (3), respectively. The term subsidiary is defined in S-X 1-02(x).
If the conditions listed above are met, then the parent company's financial statements together with the financial and nonfinancial disclosures specified by S-X 13-01 may be presented in the registration statement and in the parent's future Exchange Act periodic reports and the subsidiary issuer's/guarantor's separate financial statements may be omitted. Additionally, the subsidiary issuer/guarantor is relieved of its separate Exchange Act reporting obligations by Exchange Act Rule 12h-5. See SEC 4530.22.
If these conditions are not met, then the subsidiary issuer's/guarantor's financial statements are required to be included in the registration statement and the subsidiary issuer/guarantor is not relieved of its separate Exchange Act reporting obligation.
[Editor’s note: See SEC 4530.909 regarding certain trust preferred securities.]
.22 Exemption from requirement to file separate Exchange Act reports with the SEC
Exchange Act Rule 12h-5 exempts any issuer of a guaranteed security or guarantor of a security that is permitted to omit financial statements by S-X 3-10 from the requirements to file separate reports with the SEC under Section 13(a) or Section 15(d) of the Exchange Act (e.g., Forms 10-K and 10-Q).
The conditions in S-X 3-10(a) must be met at the end of each annual and quarterly period for use of the Exchange Act 12h-5 exemption. See SEC FRM 2540.1. If a subsidiary issuer/guarantor with an Exchange Act reporting obligation for the guaranteed securities was initially eligible to omit its financial statements because it met the requirements of S-X 3-10 and could rely on Exchange Act Rule 12h-5, but later ceased to satisfy those requirements (e.g., the subsidiary is no longer consolidated by the parent company), that subsidiary will be required to begin filing Exchange Act reports for the period during which it ceased to satisfy the requirements of S-X 3-10. 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 disclosures specified by S-X 13-01 for historical periods.
[Editor’s note: If an issuer or guarantor of a guaranteed security has a different class of securities registered under Exchange Act Section 12, then it would not be able to rely on the relief provision in Exchange Act Rule 12h-5 until it deregisters the other class of securities. See SEC FRM 2540.1 and Exchange Act Rules CDI 254.01.]
.23 A parent company’s ability to cease providing disclosures specified by S-X 13-01
A parent company may be able to cease providing the disclosures specified by S-X 13-01 if the corresponding subsidiary issuer’s/guarantor’s Section 15(d) reporting obligation is suspended automatically by operation of Section 15(d)(1) of the Exchange Act or through compliance with applicable rules (e.g., Exchange Act Rule 12h-3). See SEC FRM 2540.2.
Section 15(d)(1) of the Exchange Act generally provides for an automatic suspension of Exchange Act reporting obligations as to any fiscal year (other than the fiscal year in which the registration statement became effective) if the securities of each class (other than any class of asset-backed securities) to which the registration statement relates are held of record by fewer than 300 persons at the beginning of the fiscal year (or held of record by fewer than 1,200 persons at the beginning of the fiscal year in the case of a bank, a savings and loan holding company or a bank holding company, as those terms are defined). Companies may wish to consult with their legal counsel regarding the application of Section 15(d)(1) of the Exchange Act or other guidance applicable to the suspension of Exchange Act reporting requirements.
If a particular subsidiary issuer/guarantor is not permitted to omit its financial statements in reliance on S-X 3-10 and, therefore, is not exempt from Exchange Act reporting under Exchange Act Rule 12h-5, it may qualify for a suspension of its reporting obligations after filing its first Form 10-K, if the relevant requirements (e.g., Section 15(d)(1) of the Exchange Act or Exchange Act Rule 12h-3) are met.
The parent company would not be permitted to cease providing the disclosures specified by S-X 13-01 as long as the subsidiary issuer or guarantor has a reporting obligation with respect to the guarantee or guaranteed security under Exchange Act Section 12(b) (e.g., if the security is listed for trading on a national securities exchange).
[Editor’s note: When evaluating whether it would be appropriate to stop providing the disclosures required by S-X 13-01, companies should consider reviewing the indenture relating to the securities to identify any provisions which may require continued reporting.]
.3 Disclosures required by S-X 13-01
S-X 13-01 requires a registrant to make specified disclosures (to the extent material) for each guaranteed security that is (i) subject to Section 13(a) or 15(d) of the Exchange Act or (ii) being registered under the Securities Act, for which the registrant is the parent company (as defined in S-X 3-10(b)(1)) of one or more subsidiaries that issue or guarantee the guaranteed security.
The disclosure requirements of S-X 13-01 are set forth in S-X 13-01(a) and include both non-financial disclosures (S-X 13-01(a)(1)-(3)) and financial disclosures (S-X 13-01(a)(4) and (5)).
.31 Non-financial disclosures required by S-X 13-01(a)(1)-(3)
Non-financial disclosures include a description of:
- the issuers and guarantors;
- the terms and conditions of the guarantees; and
- how the structure of the guarantees and other factors may affect payment.
Additionally, each subsidiary issuer/guarantor is required to be identified in an exhibit to the applicable filing. See, for example, S-K 601(b)(22).
See SEC FRM 2515.3.
.32 Financial disclosures required by S-X 13-01(a)(4) and (5)
Financial disclosures include the summarized financial information described in S-X 1-02(bb)(1) of each issuer and guarantor of the guaranteed security with an accompanying note that briefly describes the basis of presentation. The summarized financial information required by S-X 13-01(a)(4) must exclude subsidiaries that are not issuers or guarantors, even if an issuer or guarantor would otherwise consolidate such non-issuer/non-guarantor subsidiaries. An issuer’s or guarantor’s investment in a subsidiary that is not an issuer or guarantor shall not be presented (with this treatment likely discussed in the basis of presentation note). See SEC FRM 2520.1.
[Editor’s note: The treatment of non-issuer/non-guarantor subsidiaries of issuers and guarantors in the summarized financial information required by S-X 13-01(a)(4) is different from the treatment of subsidiaries that would be consolidated by an affiliate whose securities have been pledged as collateral under S-X 13-02(a)(4). See SEC 4540.22 for information relating to S-X 13-02(a)(4), if applicable.]
In addition to the line items specified by S-X 1-02(bb)(1), S-X 13-01(a)(4)(iii) requires separate line items for an issuer’s or guarantor’s amounts due from, amounts due to, and transactions with (i) subsidiaries that are not issuers or guarantors and (ii) related parties. Additional line items could also be necessary to comply with S-X 13-01(a)(6).
[Editor’s note: In SEC Release 33-10762, the SEC provided an example in which additional line items might be required. According to the SEC’s example, “if substantially all of the obligated entities’ non-current assets consisted of goodwill, separate presentation of goodwill from non-current assets would be required if the parent company concludes such disclosure would be material for investors to evaluate the sufficiency of the guarantee.”]
The summarized financial information of each issuer and guarantor that is consolidated in the parent company’s financial statements may generally be presented on a combined basis with the summarized financial information of the parent company with appropriate eliminations. See S-X 13-01(a)(4)(iv) for additional guidance, including guidance regarding the potential need to provide disaggregated summarized financial information. See also SEC FRM 2520.2 for additional implementation guidance.
[Editor’s note: In SEC Release 33-10762, the SEC stated that “a parent company should consider materiality and exercise judgement in determining the appropriate level of aggregation of issuers and guarantors based on the nature of the disclosure. In this regard, it may be useful to consider quantitative factors, such as the financial significance of the affected issuers and guarantors, and qualitative factors, such as the nature of the facts and circumstances applicable to the issuers and guarantors. For example, if the same contractual or statutory restrictions affect some but not all subsidiary guarantors, and such subsidiary guarantors represent a substantial portion of the Obligor Group, aggregation of the Summarized Financial Information of such subsidiary guarantors may be appropriate. Conversely, it may not be appropriate to aggregate the Summarized Financial Information of such subsidiary guarantors where the contractual or statutory restrictions are different.” (footnote omitted).]
S-X 13-01(a)(4) provides additional detail and instructions for the preparation of the summarized financial information.
See SEC FRM 2515.3.
.321 Disclosure of pre-acquisition summarized financial information in connection with a Securities Act registration statement (S-X 13-01(a)(5))
Disclosure of pre-acquisition summarized financial information is required in a Securities Act registration statement filed in connection with the offer and sale of a guaranteed security if:
(i) the parent company acquired a significant business after the date of the parent company’s most recent balance sheet included in its consolidated financial statements and
(ii) the acquired business, one or more of the acquired business’s subsidiaries, or the acquired business and one or more of its subsidiaries are issuers or guarantors of the guaranteed securities.
If pre-acquisition summarized financial information is required under S-X 13-01(a)(5), it would follow the form, content and periods specified in S-X 13-01(a)(4) for each recently acquired issuer or guarantor referred to in S-X 13-01(a)(5). See S-X 13-01(a)(5) for additional information, including additional guidance relating to whether a significant business has been acquired and the treatment of acquisitions of a group of related businesses.
[Editor’s note: The disclosure specified by S-X 13-01(a)(5) is only required in a Securities Act registration statement. It is not required to be included in periodic reports under the Exchange Act (e.g., Form 10-K or Form 10-Q).]
See SEC FRM 2530.
.33 Periods for which summarized financial information is required
Summarized financial information is required 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. For instance, a U.S. calendar year-end SEC registrant parent company that provides the S-X 13-01 disclosures in its filings would provide the following information in the indicated filing:
Filing |
Required summarized financial information |
|
|---|---|---|
Form 10-Q for the nine-month period ended September 30, 2024 |
As of December 31, 2023 and as of and for the nine-month period ended September 30, 2024. |
|
.34 Additional disclosure required by S-X 13-01(a)(6) and (7)
In addition to the specific disclosures referred to in S-X 13-01(a)(1)-(5), S-X 13-01(a)(6) and (7) require disclosure of:
- any financial and narrative information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee; and
- sufficient information to make the financial and non-financial information presented not misleading.
.35 Location of the S-X 13-01 disclosures
The parent company may elect to provide the disclosures required by S-X 13-01 in a footnote to its consolidated financial statements, or in management’s discussion and analysis of financial condition and results of operations (MD&A).
If the disclosures are not included in the consolidated financial statements or in MD&A, the parent company must include the disclosures in its prospectus immediately following “Risk Factors,” if any, or immediately following the pricing information described in S-K 105. See S-X 13-01(b). See SEC FRM 2515.3.
[Editor’s note: We expect most companies will provide the disclosures required by S-X 13-01 in MD&A or another location outside of the financial statements. Irrespective of the location, we expect companies will be considering the controls around the disclosures.]
.36 Audit requirements relating to the S-X 13-01 disclosures
If the parent company elects to provide the S-X 13-01 disclosures in a footnote to its audited consolidated financial statements, the disclosures must be audited (including consideration of related internal control over financial reporting, as applicable). If the parent company provides the S-X 13-01 disclosures outside the audited consolidated financial statements, then the disclosures do not need to be audited. See SEC FRM 2515.3.
.9 Frequently asked questions
.901 Are there any bright-line, quantitative thresholds which govern the requirements to provide disclosure under S-X 13-01?
As noted above, the disclosures specified in S-X 13-01 are required to the extent material. S-X 13-01 generally does not specify bright-line quantitative thresholds for the inclusion of disclosures.
Additionally, S-X 13-01(a)(4)(vi)(A) through (D) describe four non-exclusive circumstances in which the summarized financial disclosures may be omitted. Disclosure is a condition to omission. See SEC FRM 2520.3.
If a parent company determines that not all of the required financial information is material, the information that is not material may be omitted without additional disclosure or explanation.
[Editor’s note: In SEC Release 33-10762, the SEC stated “[a] parent company’s responsibility to determine whether the disclosures specified in Rule 13-01 are material is not different from how it assesses materiality in connection with other information it files with the Commission.”]
.902 Can a variable interest entity consolidated by the parent company under the applicable accounting framework qualify for the reporting model under S-X 3-10?
A variable interest entity that meets the definition of a subsidiary and is consolidated by a parent company under the applicable accounting framework (e.g., Accounting Standards Codification 810, Consolidation, by a parent company that applies U.S. generally accepted accounting principles) could qualify to use the reporting model under S-X 3-10.
.903 Has the SEC provided any examples of situations in which separate disclosure of summarized information under S-X 13-01(a)(4)(iv) might be required?
In SEC Release 33-10762, the SEC indicated that if a non-controlling interest holder, through its ability to exercise significant influence over a subsidiary guarantor, could materially affect payments to holders of the guaranteed debt, the parent company would be required to disclose those factors and separately disclose the summarized financial information attributable to that subsidiary guarantor.
Additionally, the appendix accompanying SEC Release 33-10762 states that “[i]f a subsidiary guarantee is not full and unconditional, or where there are multiple guarantees, not joint and several, disclosure of such terms and conditions will be required by Rule 13-01(a)(2). Separate disclosure of the summarized financial information for subsidiary guarantor(s) to which such terms and conditions apply is required (Rule 13-01(a)(4)(iv)).”
.904 Do subsidiary guarantee release provisions prevent a subsidiary guarantor from omitting its financial statements under S-X 3-10?
S-X 3-10 does not require a subsidiary’s guarantee to be full and unconditional. Therefore, the existence of subsidiary guarantee release provisions would not prevent that subsidiary guarantor from omitting its financial statements under S-X 3-10. However, SEC Release 33-10762 indicates that to the extent material, such release provisions would be required to be disclosed pursuant to S-X 13-01(a)(2) and separate disclosure of summarized financial information applicable to that subsidiary guarantor would be required by S-X 13-01(a)(4). See SEC FRM 2515.5.
[Editor’s note: SEC Release 33-10762 also indicates that any limitations and conditions of a subsidiary’s guarantee and whether the guarantee is joint and several with other guarantees may require disclosure and may also trigger the need for separate summarized financial information under S-X 13-01(a)(4)(vi).]
.905 Are the disclosures required by S-X 13-01 applicable to Form 10-Q?
Yes. See S-X 10-01(b)(9). As noted in SEC 4530.321, however, the disclosure of pre-acquisition summarized financial information pursuant to S-X 13-01(a)(5) is only required in connection with a Securities Act registration statement filed in connection with the offer and sale of a guaranteed security.
.906 Does the 74-day grace period provided in S-X 3-05(b)(4)(i)(B) which may be available in connection with financial statements of a recently acquired business also apply to the pre-acquisition summarized financial information of a recently acquired guarantor or issuer specified by S-X 13-01(a)(5)?
No. In SEC Release 33-10762, the SEC acknowledged that pre-acquisition summarized financial information may be required before the pre-acquisition financial statements are required by S-X 3-05. The SEC indicated that they “believe investors in a registered debt offering should be provided with information about issuers and guarantors in advance of an investment decision.” They also noted that the level of detail required by S-X 13-01(a)(5) is significantly less disclosure than the full pre-acquisition financial statements required by S-X 3-05. See SEC FRM 2530.4.
.907 Does the reporting model described in S-X 3-10 apply to smaller reporting companies, foreign private issuers and Regulation A issuers?
Yes, with some modifications as indicated in the relevant rules and form requirements. See, for example:
- S-X 8-01(c) and S-X 8-03(b)(6) with respect to smaller reporting companies;
- Instruction 1 to Item 8 of Form 20-F with respect to foreign private issuers; and
- Part F/S(b)(7)(i) of Form 1-A, Item 7(g)(1) of Form 1-K, Item 3(e)(1) of Form 1-SA and Securities Act Rule 257(b)(7) with respect to Regulation A issuers.
[Editor’s note: Smaller reporting companies, foreign private issuers and Regulation A issuers should look to the requirements of the specific form they are using or rule(s) they are subject to. See SEC FRM Note to Section 2510.2.]
.908 Did the SEC address how S-X 3-10 and S-X 13-01 should be applied in connection with a new shelf registration statement relating to guaranteed securities when there are no current plans to sell any guaranteed securities?
In SEC Release 33-10762 (see Section 3.C.2.c.iii), the SEC acknowledged this question stating “[i]ssuers meeting the definition of Well-Known Seasoned Issuer (“WKSI”) are currently afforded significant flexibility under [Securities Act] Rule 430B(a), which would include the flexibility to omit the information specified in Proposed Rule 13-01 at effectiveness so long as the information is added when the shelf registration statement is amended to identify subsidiary issuers and guarantors. We acknowledge that non-WKSI issuers are not similarly able to omit this information but note that WKSIs are afforded substantially greater latitude in registering and marketing securities.” (footnotes omitted). Companies with this fact pattern should consider consulting with their legal counsel.
.909 Can an issuer of trust preferred securities continue to omit its financial statements under S-X 3-10 following the adoption of the amendments in SEC Release 33-10762 ?
Trust preferred securities are generally issued by a special purpose entity created by a parent-company guarantor, which is also an SEC registrant. In these cases, the sole purpose of the special purpose entity is generally to hold securities issued by the parent company, such as junior subordinated debt or preferred stock, and to issue the trust preferred securities that have payment terms that mirror the terms of the securities it holds. An issuer of trust preferred securities is usually not consolidated by the parent-company guarantor under U.S. GAAP.
In November 2020, the SEC’s Division of Corporation Finance staff issued a no-action letter (https://www.sec.gov/corpfin/certain-trust-preferred-securities-111020) relating to S-X 3-10 and certain trust preferred securities. The no-action letter states:
“Based on the facts presented, the Division will not recommend enforcement action to the Commission if issuers of the Trust Preferred Securities described in your [incoming] letter continue to omit their separate financial statements following the effectiveness of the Commission’s recent amendments to Regulation S-X Rule 3-10 on January 4, 2021, as long as all the conditions set forth in your [incoming] letter are satisfied.”
It is important to note that one of the conditions outlined in the incoming letter referred to above is that the trust preferred securities were initially issued prior to March 2, 2020. Companies may wish to consult with their legal counsel to determine whether the guidance provided in the no-action letter is applicable to their specific facts and circumstances.
See SEC FRM 2520.4.
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