The SEC has announced proposals to make it more difficult for
foreign companies to use the Rule 144A exemption to US Securities
Act registration requirements to tap the US capital market.
The lengthy SEC proposals, called the "Aircraft
Carrier" because of their size and complexity, include provisions
to make Rule 144A less attractive to foreign securities issuers
that do not currently file reports with the SEC by
- introducing new registration requirements,
- imposing rules to reduce the attractiveness of Rule 144A
securities to buyers,
- generally discouraging the use of Rule 144A and other
These changes will make it more burdensome and expensive for many
foreign companies to raise capital in the US markets.
Those concerned with the "Aircraft Carrier" changes
should make their objections known to the SEC before June 30,
Explanation of Rule 144A
The basic principles of the US Securities Act of
1933 ("Securities Act") are that securities sold to the public must
be registered with the Securities Exchange Commission ("SEC").
Registration documents must disclose all material facts that could
reasonably affect a decision to purchase the security.
These registration restrictions are detailed,
burdensome and consequently expensive, but they are the price that
securities issuers must pay to get access to the public securities
market in the US.
There are certain exemptions from these general
requirements and one of the most important for the international
companies is Rule 144A. In general, Rule 144A permits the sale of
securities in the US to "qualified institutional buyers" (know as
"QIBs") under certain conditions without a Securities Act
Generally, Rule 144A can apply to any securities
a. securities listed on a US exchange or NASDAQ,
b. certain other securities such as those issued by an open-ended
investment company or unit investment trust.
However, securities purchased under Rule 144A are
categorised at "restricted securities" under US law and can be
resold only to limited categories of buyers such as QIBs, or buyers
that qualify under certain other exemptions.
A "QIB" must meet certain tests. Generally, it must
own or invest on a discretionary basis at least US$100 million in
the shares of an unrelated company (or $10 million in the case of a
registered broker-dealer). There are currently over 4000 QIBs.
The current advantages of Rule 144A are (1) non-US
companies can issue restricted securities (such as ADRs or GDRs) to
raise capital in the US market without having to comply with full
SEC registration or reporting requirements, (2) raising US capital
this way is cheaper and quicker than a public offering, and (3)
Rule 144A securities can be traded through the NASD's PORTAL system
which can allow QIBs holding Rule 144A securities to describe them
as "liquid" securities for regulatory reasons.
The disadvantages of Rule 144A are that the
exemption cannot be used for shares already listed on a US
exchange, and that market liquidity for Rule 144A offerings is
limited compared to other US securities because of resale
The "Aircraft Carrier" of Proposed
However, on November 13, 1998, the SEC issued rule
proposals that would significantly change the market for Rule 144A
securities. The 700 plus page proposals are so long and complex
they have been collectively dubbed "The Aircraft Carrier." One of
the key aims of the Aircraft Carrier is to discourage the use of
Rule 144A, and other exemptions to SEC registration requirements,
by making registration easier to achieve and imposing restrictions
that make Rule 144A a more expensive route to the US capital
The Aircraft Carrier proposes adopting new forms of
registration, streamlining the registration process and reducing
the liquidity of the market for Rule 144A offerings.
Large public companies with an SEC reporting
history will be allowed to use the new Form B registration
statement. This would give them the advantages of:
1. Issuing shares without prior SEC review,
2. Being permitted to incorporate most company information into the
offering documents by reference,
3. Being permitted to make offers to sell securities before the
registration material is filed, and
4. Being allowed more liberal communication with investors beyond
the required prospectus.
Medium size companies (public flotation exceeding
US$75 million) with a two-year reporting history could use a new
Form A registration statement which offers the advantage of being
able to incorporate company information by reference.
However, for companies that are not eligible
(because they are too small or do not have the required reporting
history) for Form A or B, things are less promising. They may lose
some of the flexibility they now have.
Foreign companies have often used Rule 144A to sell
high-yield securities to US QIBs. Under the new proposals, foreign
companies that have a reporting history could use Form B to
register offerings to QIBs. Those offerings would not be much
different from today.
However, non-reporting foreign companies could be
significantly disadvantaged by adoption of the Aircraft Carrier
proposals. Under the present rules, Rule 144A issuers may place
Rule 144A securities with QIBs and subsequently file a registration
statement which allows them to swap unrestricted, tradable
securities for the Rule 144A securities, often within 180 days.
This securities exchange device permits issuers of Rule 144A
securities to overcome what would otherwise be a liquidity problem.
Under the Aircraft Carrier proposals, this option would be
abolished. The SEC's position is that reducing the barriers to
registration makes this technique unnecessary.
However, non-reporting foreign companies would no
longer be able to offer a tradable securities "swap" for their Rule
144A sales. Consequently, the market for these Rule 144A securities
would contract forcing the issuers to offer a higher yield as an
The Aircraft Carrier also suggests that it now may
be appropriate to raise the QIB threshold from US$100 million to
US$200 million. This would further diminish liquidity for Rule 144A
offerings by reducing the pool of QIBs.
These proposals are opposed by a number of
influential organisations including the US Securities Industry
Association ("SIA") which represents over 700 securities firms.
They sent a long letter to the SEC (accompanied by an economic
analysis) on May 12, 1999 arguing that the Aircraft Carrier
proposals would be detrimental to securities issuers.
The SEC has extended time for comment on the
Aircraft Carrier until June 30, 1999. Those concerned about its
impact on access to US capital markets should register their
For more information contact Banking and
International Finance partner, Ned Swan on Tel: +44 (0)171 367 3000
or e-mail: email@example.com