Beginning on January 4, 2023, Rule 15c2-11 will be applied to prohibit broker-dealers from publishing quotations that facilitate secondary trading liquidity for bonds distributed in a Rule 144A offering if the issuer of the bonds is not an SEC reporting company or does not otherwise make its interim and annual financial reporting information publicly available (“private issuers”). In order to be publicly available, such information would need to be on one of the permitted platforms - ranging from EDGAR to the issuer's own website - without a username or password protection restriction, fees or other restraints. We anticipate that this prohibition will impact private issuers that have outstanding bonds as well as private issuers that may issue new bonds in a Rule 144A offering.
- Private Issuers with Outstanding Bonds: If broker-dealers are unable to publish quotations for secondary trading, the trading liquidity in the bonds naturally will fall and, as a result, the secondary trading prices of the bonds will likely decrease. As we have already started to see, investors in these outstanding bonds will push issuers to take necessary steps to enable the broker-dealers to publish quotations regardless of whether there is a contractual obligation to do so. One simple solution in these instances often is to remove the password protection restriction to the site that currently hosts the issuer’s interim and annual financial information or to post this information to the issuer’s website, thereby making the disclosure publicly available. This solution often works because the disclosure the issuer currently prepares satisfies the information requirements under Rule 15c2-11, but is not currently publicly available. The drawback of this approach, however, is that many issuers chose to do a Rule 144A offering so that competitors, suppliers and others would not be able to readily access the disclosure on the issuer’s business. Balancing these and other considerations will likely result in issuers developing a market response over the next several months.
- Private Issuers Contemplating New Bond Offerings: Many issuers that would be impacted by this change have recently included disclosure in their bond offerings about the change and the potential implications. We anticipate initial purchasers in Rule 144A bond offerings going forward to negotiate covenants requiring private issuers to make sufficient disclosure publicly available to enable broker-dealers to publish quotations. As a result, it may be harder going forward for issuers to restrict competitors, suppliers and others from gaining unrestricted access to their periodic financial information.
As suggested above, we do not anticipate any change to the type of substantive information that private issuers will need to prepare as a result of this rule implementation – we think that the issue is whether the information is publicly available or not. In general, private issuers are currently preparing disclosure that constitutes sufficient information for purposes of Rule 15c2-11. In order for a broker-dealer to publish a quotation on the bonds, the issuer must make publicly available, among other things, financial information (including balance sheet, profit and loss and retained earnings statements), a description of the issuer’s business and a description of the product or services offered by the issuer.
For the avoidance of doubt, this impending change only impacts private issuers. Companies, for example, that are SEC filers (including voluntary filers) are not impacted.
We anticipate there will be developments over the next several months in how private issuers address the potential problem in liquidity of outstanding bonds. Certain private issuers may explore creative solutions to limit the amount of information a competitor, supplier or other person can freely access, while still making sufficient information publicly available to enable broker-dealers to publish quotations. We also anticipate that a market standard on disclosure covenants will develop as a result of negotiations between initial purchasers and private issuers in new bond offerings. Finally, the SEC also may extend the January 4, 2023 effective date to further consider its approach to this issue, which could provide additional interim relief. Regardless, private issuers should monitor this evolving area. Please reach out to your Weil contact to discuss.