New SEC Rules on Guaranteed and Collateralized Securities

On March 2, 2020, the SEC adopted rule changes to simplify the financial disclosures that are required when an issuer offers debt securities with guarantees.

The old requirements were complex, and in some circumstances burdensome, and the utility of some resulting disclosures for investors was doubtful.  As discussed below, the new requirements are easier to apply and permit substantially simpler disclosures in some cases.

The SEC also adopted rule changes applicable to a similar, less common situation – securities that are collateralized by a pledge of shares (typically shares of a subsidiary of the issuer). 

The new rules have a long transition period.  They will become mandatory in 2021 – generally, for a registration statement first filed on or after January 4, 2021 and for a periodic report for a period ending after January 4, 2021.  However, earlier compliance is permitted, so an issuer planning a guaranteed or collateralized offering should consider whether to follow the new rules rather than the existing rules.  And an issuer that is complying with the existing rules in annual or quarterly reports, because of outstanding guaranteed securities, should consider whether to follow the new rules starting now. 

These rule changes are part of the broader Disclosure Effectiveness Initiative, which has produced a long list of reforms in the SEC’s disclosure regime since it was announced in late 2013.  We are maintaining a Disclosure Simplification Explainer, which you can find here.  As with many of the DEI measures, the recent rule changes reflect a regulatory philosophy of moving from detailed prescriptive rules towards principles-based norms that give registrants more flexibility.  As in several other recent instances, the approach drew a dissent from Commissioner Lee, who characterized these rule changes and others under the DEI rubric as based on unfounded “regulatory intuition” rather than evidence about investor protection.

Please click here to read the full alert memorandum.

(Republished March 21, 2020 by The Columbia Law School Blue Sky Blog.)