Market snapshot

Market climate

What types of debt securities offerings are typical, and how active is the market?

The US debt capital market is one of the most active markets in the world. Debt securities commonly offered in the United States include straight, high-yield, convertible, asset-backed and structured notes. Although not as common, active markets also exist for debt securities with special features, such as covered, remarketed, callable and auction-rate bonds. The type of security an issuer chooses to offer depends, among other things, on the nature and needs of the issuer, the issuer’s credit profile, the interest rate environment, the category of investors the issuer wants to target and the regulatory requirements applicable to the issuer (eg, regulatory capital rules).

Regardless of type, debt securities can be offered either in a registered public offering or in a private offering exempt from the registration requirements of the US federal securities laws. Whether a debt security is offered publicly or privately will have an impact on the overall offering process, the extent of documentation required and the investor base to which the securities may be offered and sold.

Regulatory framework

Describe the general regime for debt securities offerings.

Offerings of securities in the United States are primarily governed by the US Securities Act of 1933 (the Securities Act) at the federal level, with various other statutes and regulations applying at the state level (Blue Sky laws). The Securities Act requires that every offer or sale of securities in the United States be registered with the US Securities and Exchange Commission (SEC) unless an exemption from registration is available (because either the securities or the transaction are exempted). Securities that are publicly offered must be registered with the SEC by filing a registration statement on an appropriate form, which must become effective prior to the sale. Depending on the nature of offering and the issuer, the SEC may review the registration statement extensively before declaring it effective. In other cases (ie, for certain large SEC-reporting issuers known as ‘well-known seasoned issuers’ (WKSIs)), the registration statement becomes effective immediately upon filing without SEC review.

Private offerings, on the other hand, are exempt from SEC registration, and generally can be completed in a shorter time than public offerings. There may also be more flexibility regarding required disclosure in the offering documents. Certain issuers (eg, certain banking institutions and government bodies) are exempt from registration requirements as well. However, privately offered debt securities are restricted in the hands of the purchasers, meaning that they cannot be freely resold publicly, which may result in a liquidity discount in their offer price.

If an issuer issues debt securities in a public offering, it will become subject to the reporting requirements under the US Securities Exchange Act of 1934 (Exchange Act) if it is not already. The Exchange Act requires the issuer to file annual reports, quarterly reports (in the case of US issuers) and current reports when a material event occurs. Even in a private offering, the issuer will sometimes agree to file these reports voluntarily to facilitate high-quality information flow to investors.

The SEC is the main securities regulator in respect of the federal securities laws. Also relevant for the offering of securities are the rules imposed by the Financial Regulatory Authority (FINRA), an independent, self-regulatory organisation that oversees its member financial institutions, including broker-dealers that act as underwriters. FINRA rules regulate excessive underwriting fees and conflicts of interest, among other things.

Filing and documentary requirements

General filing requirements

Give details of any filing requirements for public offerings of debt securities. Outline any requirements for debt securities that are not applicable to offerings of other securities.

In a public offering, to ensure that all material information is available to potential investors, the Securities Act generally requires that a registration statement be filed with the SEC before any offers or sales are made. The registration statement contains the prospectus that will be used to market the offering, along with exhibits containing material agreements and other key documents.

In a public offering of debt securities, the US Trust Indenture Act of 1939 (TIA) requires the filing of a qualified indenture with the registration statement, prior to offering any securities. The indenture is the contract that embeds the terms of the securities and is entered into among the issuer, any guarantors and a trustee, which acts on behalf of the security holders. The TIA aims to protect debt investors by requiring certain provisions in the indenture for the securities. It is also customary, although not required, for an indenture used in a private offering of debt securities to contain certain provisions that are required under the TIA.

Prospectus requirements

In a public offering of debt securities, must the issuer produce a prospectus or similar documentation? What information must it contain?

The SEC has adopted various forms of registration statement. The applicable form turns on whether the issuer is a US issuer or foreign private issuer, how much reporting history it has and what type of offering it is planning, among other things. These forms specify the qualitative and quantitative information required in a prospectus, which generally includes, among other items:

  • a description of the issuer’s business and properties;
  • a description of the securities offered;
  • risk factors related to the issuer’s business and industry and the offering;
  • officers’ and directors’ biographies and a description of the board committees, corporate governance policies and executive compensation programmes;
  • a description of the planned use of proceeds from the offering;
  • information about the underwriters and the plan of distribution;
  • tax treatment of the securities;
  • financial statements and related information for the issuer and any guarantors prepared in accordance with US Generally Accepted Accounting Principles (US GAAP) (or reconciled to it) or International Financial Reporting Standards (IFRS), as well as for any significant investee or company being acquired (including pro forma financial statements relating to such an acquisition); and
  • management’s discussion and analysis of financial condition and results of operations (MD&A).

Most disclosure requirements apply to US issuers and non-US issuers, but non-US issuers may be subject to special disclosure requirements not applicable to US issuers, such as a description of home country regulation.

The disclosure rules under the US federal securities laws use an integrated disclosure framework, meaning that the disclosures required in filings under the Securities Act and the Exchange Act are based on the same set of rules. A significant benefit to this approach is the issuer’s ability to include the required information in the prospectus by incorporating by reference to its other filings with the SEC. If the issuer is already an Exchange Act-reporting company, then a significant portion of the information required in the prospectus can be incorporated by reference to its Exchange Act filings (eg, a description of the issuer’s business and the historical financial statements).


Describe the drafting process for the offering document.

The offering document is called a prospectus in a public offering and an offering circular or an offering memorandum in a private offering. However, no significant differences generally exist in the drafting process or the offering documents themselves. For private offerings, market practice is to track the disclosure requirements for a comparable public offering. This approach helps ensure the accuracy and completeness of the disclosure and protect the issuer and other offering participants from liability. Nonetheless, because there is no SEC review and the disclosure items for a public offering are technically not applicable, there is scope for some marginal flexibility in a private offering. For example, if preparing or reconciling certain financial information would be overly burdensome for the issuer, the working group may determine that its omission is not material.

Drafting an offering document is a joint effort by all parties involved in the offering. The issuer and its counsel take the lead in drafting the disclosure and preparing the required information, and the underwriters and their counsel, as well as the issuer’s auditors will be heavily involved in the comment and revision process. As part of the due diligence process, the underwriters and their counsel request back-up materials that support the disclosure. The SEC also occasionally requests some of these materials as part of its review process.

It is important for the issuer to start the drafting process early, especially if the issuer does not have Exchange Act filings upon which to draw. Particular attention should be paid to ensure that the issuer has all the required financial information, because its preparation can require substantial time if it is not ready. As a closing condition to a public or private offering, the underwriters will require that the issuer’s auditors deliver a customary comfort letter, which speaks to the audit and review work done by the auditors and the absence of material adverse changes relating to certain key line items.

The underwriters and their counsel often lead the drafting efforts for certain sections of the offering document, including the prospectus summary (commonly called the ‘box’, which gives highlights of the transaction and helps convey the marketing ‘story’); the description of the notes (and the corresponding indenture); and the underwriting section, which details how the transaction will be marketed.

Although the trustee and its counsel play a limited role in the drafting process, they generally review the offering documents for consistency with the terms of the indenture, especially those portions relating to the rights and obligations of the trustee.

In a public offering, it is critical to factor in time for SEC review (for issuers other than WKSIs). Depending on the scope of SEC comments and the issuer’s reporting and review history (or lack thereof), the review process can require two months or more, particularly for companies that are not SEC-reporting companies. In addition, documentary due diligence by the banks and their counsel can be time-consuming, particularly if the issuer is not pre-prepared with a data room containing its material documents.

In addition to addressing specific SEC line item requirements, it is critical to consider whether the disclosure contains any material misstatements or omissions. Such misstatements or omissions can give rise to SEC enforcement actions, as well as private claims (including class actions), under the US federal securities laws. Materiality is not a bright-line concept. Rather, information is material if it would be ‘viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available’ (Basic Inc v Levinson, US Sup Ct (1988)). Other US courts have defined it similarly and the SEC has emphasised that materiality is both a quantitative and qualitative determination based on all facts and circumstances.

Which key documents govern the terms and conditions of the debt securities? Who are the parties to such documents? How can such documents be accessed?

The terms and conditions of debt securities are typically governed by the indenture. Even though the underwriters are not parties to the indenture, their input on what investors will expect and accept is critical. This is particularly true for high-yield notes, which feature a complex array of covenants.

Although the offering document has a section that describes the terms and conditions of the notes, usually under the heading ‘Description of the Notes’, this section does not, strictly speaking, govern the terms and conditions of the notes. Instead, it describes those terms and conditions, but must do so accurately, because investors will make their investment decision on the basis of the description, rather than the indenture itself, and the issuer and offering participants will have potential liability for any material misstatements or omissions in the description.

The indenture will be accessible on the SEC website, as an exhibit to the registration statement in the case of a registered offering, or as an exhibit to the issuer’s Exchange Act reports (assuming it is an SEC-reporting issuer).

Does offering documentation require approval before publication? In what forms should it be available?

In a public offering, a registration statement containing a prospectus must be filed with the SEC before any offers can be made, and declared effective by the SEC before any sales can be made (with certain exceptions for WKSIs). With the exception of an automatic shelf registration statement for a WKSI, the SEC may review the registration statement before declaring it effective. Before commencing marketing efforts (or ‘launching’) the offering, the issuer generally clears all SEC comments to avoid any risk of having to amend the preliminary prospectus (or ‘red herring’) after it has been sent to potential investors. Also in the context of a public offering, unless an exemption applies (eg, for offerings of certain investment-grade non-convertible debt), FINRA approval may be required. FINRA review generally focuses on excessive and unfair underwriting compensation and potential conflicts of interest involving the underwriters. The SEC will not declare the registration statement effective until FINRA issues a no objection letter.

Prospectuses related to the public offering of debt securities are filed with the SEC and are publicly available on the SEC website. The issuer and the underwriters generally also send investors PDF versions of the preliminary and the final prospectuses, along with hard copies of the final prospectus.

Unlike the case of the public offering, in private offerings the offering memorandum is confidential and not required to be publicly filed. Also, there is no requirement to get FINRA approval prior to commencing a sale. The working group will often use PDF versions of the offering documents and generally deliver a hard copy of the final offering memorandum.


Are public offerings of debt securities subject to review and authorisation? What is the time frame for approval? What are the restrictions imposed, if any, on the issuer and the underwriters during the review process?

As discussed above, SEC and FINRA review may apply, and, depending on the issuer’s business, additional regulatory agencies also may be involved (eg, banking authorities). In certain circumstances, the issuer may confidentially submit a registration statement for SEC staff review prior to a public filing. The SEC will typically take about 30 days to review the initial filing, then less time to review subsequent amendments. The working group responds to the comments directly and also revises the registration statement in response. The initial confidential filing, the SEC staff comments and the issuer’s responses ultimately become part of the public record on the SEC’s website.

Depending on the category of the issuer and the type of offering, SEC review may not be necessary. For shelf registration statements, once the registration statement is declared effective, prospectus supplements used in ‘takedown’ offerings will not be subject to SEC review (for a WKSI, the shelf registration statement on Form S-3 (or, for a foreign private issuer, Form F-3) also becomes automatically effective without any SEC review). However, the SEC will, from time to time, review the periodic and current reports that the issuer files under the Exchange Act, which are incorporated by reference into the shelf registration statement.

In a public offering, no sales can be made unless the issuer has an effective registration statement on file with the SEC. Before or after filing a registration statement, issuers and underwriters may engage in oral or written communications in certain circumstances to determine whether they might have an interest in a contemplated registered securities offering.

On what grounds may the regulators refuse to approve a public offering of securities?

The scope of the SEC review may be light or heavy, and may cover qualitative disclosure as well as the issuer’s financial statements. Until all SEC comments are resolved and the review process is complete, the SEC will not declare the registration statement effective.

How do the rules differ for public and private offerings of debt securities? What types of exemptions from registration are available?

As discussed above, a public offering of debt securities in the United States is required to be registered with the SEC, and subject to a host of requirements relating to the content of disclosure and the offering process.

Section 4(a)(2) of the Securities Act exempts ‘transactions by an issuer not involving any public offering’, and the SEC has adopted safe harbours under this exemption. An offering memorandum used in a private offering is not subject to SEC filing and review process, giving the working group more control over the timing of the offering. In addition, there is more leeway regarding the scope of disclosure.

One safe harbour is Rule 506 of Regulation D. The rule generally allows the issuer to offer an unlimited amount of securities without having to register under the Securities Act if, among other conditions, the issuer does not use general solicitation or general advertising (GSGA) to sell the securities (unless all purchasers are accredited investors and the issuer takes reasonable steps to verify their accredited investor status, in which case GSGA is permitted) and files a Form D with the SEC. The other two rules - Rules 504 and 505 - under Regulation D relate to offerings of securities in amounts less than US$1 million and US$5 million, and may be useful to small businesses.

Rule 144A is a resale safe harbour that issuers commonly use to issue securities to qualified institutional buyers (QIBs) without registering with the SEC. Subject to certain conditions, Rule 144A exempts from registration any resale of securities to QIBs by a person that is not the issuer. In a typical Rule 144A transaction, the underwriters purchase the securities from the issuer in an exempt private offering, and resell these securities to QIBs (the banks therefore are typically referred to as ‘initial purchasers’ in a Rule 144A offering, though they perform the same role as they do in a public offering and, for ease of reference, are otherwise referred to in this chapter as ‘underwriters’).

One notable limitation to Rule 144A is that the securities subject to a Rule 144A resale must not be the same class of securities listed on a US national securities exchange (the ‘no fungibility’ requirement). Debt securities sold pursuant to Regulation D or Rule 144A will be restricted securities, meaning that they cannot be publicly resold in the United States until a holding period has passed.

Another safe harbour from registration is Regulation S, which is based on extraterritoriality, and not on being a private offering under section 4(a)(2). Regulation S allows securities to be offered and sold outside the United States in an offshore transaction without having to register with the SEC.

Depending on the category of issuer, as defined in Regulation S, there are various restrictions and conditions that apply, but, in any case, the offering generally must not be made to a person in the United States and there can be no directed selling efforts in the United States. Securities sold pursuant to Regulation S will generally not be restricted securities, but may be subject to restrictions on their distribution in the United States during the 40-day period following the offering.

Although private offerings are exempt from Securities Act registration, they are subject to the general anti-fraud provisions, section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Offering process

Describe the public offering process for debt securities. How does the private offering process differ?

For a public offering of debt securities other than shelf takedown offerings, the offering process generally involves the following stages.

  • Before launch, the issuer engages one or more underwriters and counsel, and the parties begin preparing the offering documentation. The underwriters, their counsel and the issuer’s counsel begin the due diligence process by conducting documentary due diligence and holding due diligence calls with the issuer’s management and the auditors. Once the registration statement is filed, the issuer waits for SEC comments and, together with its counsel, prepares response letters and amendments to the registration statement. At the same time, the parties continue to negotiate the underwriting agreement and other transaction documents (eg, comfort letter and legal opinions) and conduct due diligence. Once SEC comments are cleared, the offering launches if market conditions are right, and management and the underwriters market the offering. They use the preliminary prospectus and a slide deck for the roadshow. This process helps to gauge investor interest to facilitate pricing the securities (not all deals require a full-blown roadshow; some may be successfully executed with less intensive marketing efforts).
  • When ready, the issuer requests that the SEC declare the registration statement effective and a pricing call is held with the underwriters to determine the final offer price, the interest rate and other terms. The issuer and the underwriters then prepare a term sheet reflecting the pricing terms and file it with the SEC as a free-writing prospectus. At the same time, the underwriters confirm sales with the investors. The issuer, any guarantors and the underwriters execute the underwriting agreement and the auditors deliver the executed comfort letter to the underwriters. Within two business days, the issuer files the final prospectus reflecting the pricing information with the SEC.
  • Settlement typically takes place two to five business days from the pricing date. At settlement, the underwriters wire the net proceeds to the issuer and receive the debt securities, usually through the Depository Trust Company (DTC), the US clearing system. The indenture is executed and all closing documents, including legal opinions, negative assurance letters (10b-5 letters), certificates and bring-down comfort letter, are delivered to the respective parties.

For an offering of debt securities pursuant to an effective shelf registration statement, the offering process is largely the same, except that there is no need to file a registration statement and wait for SEC comments, as that has already been done. The issuer and the underwriters use a preliminary prospectus supplement, combined with the base prospectus contained in the already effective shelf registration statement, to launch the offering.

A final prospectus supplement reflecting the pricing terms is filed within two business days of pricing. The shelf takedown process saves a significant amount of time and is commonly used by eligible established SEC-reporting companies.

In the case of a private offering of debt securities, no SEC filing is needed, but the overall offering process is similar. The main offering document is a confidential offering memorandum, which generally is prepared using public offering-style disclosure. The marketing, pricing and settlement processes are essentially the same as in a public offering, except that the target investors may differ (eg, only QIBs can purchase in a Rule 144A offering).

Closing documents

What are the usual closing documents that the underwriters or the initial purchasers require in public and private offerings of debt securities from the issuer or third parties?

In both public and private offerings, a number of documents are delivered as a condition to the closing of a transaction. These documents are required by the underwriting agreement and indenture.

The main closing documents include:

  • legal opinions and negative assurance letters (10b-5 letters) from issuer’s and underwriters’ counsel, both addressed to the banks;
  • comfort letters from the issuer’s auditors addressed to the banks, related to the audit and review work done by the auditors and the absence of material adverse changes relating to certain key line items;
  • certificates from the issuer’s officers addressed to the banks addressing various matters, including the absence of a material adverse change and the correctness of the representations and warranties in the underwriting agreement; and
  • opinions and certificates addressed to the trustee, as required under the indenture.
Listing fees

What are the typical fees for listing debt securities on the principal exchanges?

The decision to list debt securities on an exchange is influenced by the types of securities and the target investors. In contrast to common stock, it is not uncommon for debt securities to trade readily without being listed. For listed debt securities, both the New York Stock Exchange (NYSE) and Nasdaq have an initial listing fee and an ongoing annual fee, but they are de minimis, and vary depending on the type of debt securities, the size of the principal amount and whether other securities of the issuer are already listed on the exchange.

Key considerations

Special debt instruments

How active is the market for special debt instruments, such as equity-linked notes, exchangeable or convertible debt, or other derivative products?

Depending on prevailing market conditions, including interest rates, there is generally a wide appetite in the United States for various types of specialised instruments, ranging from convertible bonds, which are particularly popular in the healthcare, pharmaceuticals and technology sectors, to equity-linked instruments structured by financial institutions and sold to retail investors.

Debt instruments are sometimes coupled with derivatives to enhance their features for market participants. For example, an issuer sometimes will issue convertible bonds while also entering into a ‘call spread’ with affiliates of the underwriters. In a call spread transaction, the issuer buys a call option the exercise price of which is matched to the conversion price of the convertible bonds, while financing the cost of that call by selling a call option exercisable at a higher price. This enables the issuer to protect against conversion by effectively raising the conversion price for the bonds from its perspective, while helping defray the cost of that protection.

What rules apply to the offering of such special debt securities? Are there any accounting implications that the issuer should be aware of?

The framework established by the Securities Act generally does not distinguish among the types of securities offered, though certain types of issuers (eg, resources companies and financial institutions) are subject to supplemental disclosure requirements. Specialised regimes also apply to investment companies and asset-backed issuers.

FINRA also imposes suitability requirements on underwriters, meaning that they must determine whether the instrument being offered to a particular investor is suitable for that investor. It may not be appropriate, for example, for underwriters to facilitate an offering of highly novel or complex securities to certain retail investors - even if the offering is registered with the SEC.

In addition, NYSE and Nasdaq apply shareholder approval requirements to certain offerings by issuers with listed equity. The exchanges apply these rules to convertible bonds, requiring careful analysis in advance of such an offering.

Convertible bonds and structured securities can carry complex accounting implications for the issuer, often turning on the settlement mechanism (eg, cash, physical or net share settlement) and other features. The issuer’s auditors should be closely consulted in advance of issuing these types of instruments.


What determines whether securities are classed as debt or equity? What are the implications for instruments categorised as equity and not debt?

Despite a security’s legal form and its treatment as debt or equity for purposes of complying with the Securities Act requirements (eg, using a qualified indenture and satisfying trustee requirements in the case of debt), a security may be categorised as debt or equity for other purposes, depending on its features. For example, mandatorily redeemable preferred stock may be treated as debt under accounting rules. Conversely, highly subordinated debt or mandatorily convertible debt may be treated as equity instead of debt for rating, tax and regulatory purposes.

Transfer of private debt securities

Are there any transfer restrictions or other limitations imposed on privately offered debt securities? What are the typical contractual arrangements or regulatory safe harbours that allow the investors to transfer privately offered debt securities?

Privately offered debt securities are restricted securities under the Securities Act. Restricted securities cannot be publicly resold in the United States until a holding period has passed. In the interim, they may be sold only pursuant to an available exemption from SEC registration (eg, in compliance with Rule 144A in sales to QIBs, or offshore in accordance with Regulation S).

Rule 144 under the Securities Act is a safe harbour from SEC registration that generally allows the free resale of restricted securities once they have been held by a non-affiliate of the issuer for at least six months after being acquired from the issuer or an affiliate if the issuer is an SEC-reporting company or otherwise after one year. If the investor is an affiliate of the issuer (and therefore holds ‘control’ securities), there are additional conditions that must be satisfied before a sale can be made under Rule 144, including, in particular, restrictions on the amount that can be publicly resold. Securities sold under Rule 144 become unrestricted in the hands of the purchaser (unless the purchaser is an affiliate of the issuer, in which case the securities will remain control securities).

In a private offering, an issuer will sometimes grant registration rights to the debt investors. The holders then can require the issuer in certain circumstances to file a registration statement with the SEC to facilitate the public resale of the securities by the holders.

Cross-border issues

Are there special rules applicable to offering of debt securities by foreign issuers in your jurisdiction? Are there special rules for domestic issuers offering debt securities only outside your jurisdiction?

The SEC has adopted special rules for foreign private issuers, including:

  • the ability to provide financial statements prepared in accordance with IFRS or home country accounting standards with a reconciliation to US GAAP;
  • an exemption from US proxy rules;
  • an exemption from certain ownership reporting requirements and short-swing profit disgorgement rules; and
  • special SEC registration and reporting forms, which require less onerous disclosure in certain respects than applies to US issuers.

NYSE and Nasdaq also exempt foreign private issuers from most of their corporate governance requirements, and allow the issuer to follow home country practices.

As discussed above, both US and foreign private issuers can use Regulation S to offer debt securities outside the United States.

Are there any arrangements with other jurisdictions to help foreign issuers access debt capital markets in your jurisdiction?

The Multijurisdictional Disclosure System facilitates the public offering of securities in the United States by Canadian issuers by allowing the use of a Canadian offering document. Similarly, reporting obligations under the Exchange Act can be satisfied by filing Canadian reporting documents with the SEC.

The SEC also allows foreign private issuers to use financial statements prepared in accordance with IFRS, without having to be reconciled to US GAAP, and for certain first-time registrants, two years, rather than three, of historical financial statements.


What is the typical underwriting arrangement for public offerings of debt securities? How do the arrangements for private offerings of debt securities differ?

Both public and private offerings are typically underwritten by a syndicate of banks, with the formal commitment of the banks being reflected in the underwriting agreement.

The syndicate is formed and led by one or more lead underwriters, which manage the offering process and provide the marketing and pricing advice to the issuer. Most investment banks have a master agreement among underwriters in place to govern the relationship among the lead underwriter(s) and the syndicate members. Underwritten offerings are nearly always on a firm commitment basis (ie, the underwriters take the full risk of the offering by committing to purchase from the issuer all the securities being offered to the public). The underwriters are compensated by purchasing the debt securities from the issuer at a discount to the offering price to investors.

How are underwriters regulated? Is approval required with respect to underwriting arrangements?

Underwriters and their activities are regulated by FINRA. FINRA makes and enforces its rules by imposing sanctions - fines, restitution, disgorgement and, in egregious cases, suspension - on member firms and their employees. In a public offering, FINRA’s primary focus is on regulating excessive and unfair compensation and conflicts of interest. FINRA also requires notice filings in certain private offerings, generally where the investors are natural persons.

Transaction execution

What are the key transaction execution issues in a public debt offering? How is the transaction settled?

In the United States, the issuer normally creates global certificates at DTC, so that investors can hold interests in them and trade in book-entry form. Settlement usually takes place two to five business days after the pricing date for an offering. The securities are typically delivered against payment of the net proceeds, making timely execution of the wire transfer a key component for a successful closing.

Holding forms

How are public debt securities typically held and traded after an offering?

Debt securities in the United States are almost always held in a registered form, because debt securities held in bearer form are subject to adverse US tax consequences.

Global certificates are commonly used for publicly offered debt securities, through which the investors indirectly hold interests in book-entry form through DTC. Most investors in turn hold the securities through brokers and dealers that participate in the DTC system.

Outstanding debt securities

Describe how issuers manage their outstanding debt securities.

Issuers frequently engage in transactions geared toward managing outstanding liabilities. Common techniques include:

  • exchange offers, in which new debt securities are offered in exchange for outstanding debt securities;
  • cash redemption, if permitted under the terms of the securities;
  • open-market or privately negotiated offers to repurchase outstanding securities;
  • public tender offers to repurchase outstanding securities; and
  • consent solicitations to amend the terms of outstanding securities.

Section 3(a)(9) of the Securities Act provides an exemption from SEC registration for offers to exchange securities of the same issuer for new securities, subject to certain conditions.

Transactions involving a tender offer (including exchange offers) for debt securities require compliance with the Exchange Act’s tender offer rules. Most notably, Regulation 14E generally requires that the tender offer be kept open for at least 20 business days from the commencement and 10 business days from any notice of change to certain terms of the tender offer, although under certain circumstances, the SEC allows a shortened five business day tender offer for non-convertible debt securities. Unlike equity tender offers (including tender offers for convertible bonds), for cash tender offers for debt securities there is no SEC filing requirement or specific form requirement for the offering document.

Regulation and liability

Reporting obligations

Are there any reporting obligations that are imposed after offering of debt securities? What information would be included in such reporting?

If the issuer sells debt securities in a public offering, it will become subject to the reporting requirements under the Exchange Act. Ongoing reporting obligations under the Exchange Act require filing of annual reports, quarterly reports (for US issuers) and current reports. The annual report is the most comprehensive filing. Among other items, it includes audited financial statements, MD&A, a business overview, risk factors, a discussion of management and compensation and a description of all of the issuer’s outstanding Exchange Act-registered securities. Quarterly reports are shorter quarterly updates that include, among other things, quarterly financial statements and related MD&A. Finally, current reports require that the issuers disclose certain material events when they occur.

Liability regime

Describe the liability regime related to debt securities offerings. What transaction participants, in addition to the issuer, are subject to liability? Is the liability analysis different for debt securities compared with securities of other types?

There are a number of sources of liability under the US federal securities laws, which generally focus on the material accuracy and completeness of disclosure when offering securities, whether debt or equity. Some of the key provisions are described below.

In the case of public offerings, section 11 of the Securities Act creates potential liability for the issuer, the directors and officers who sign the registration statement, the auditor and any underwriters of the securities for any material misstatements or omissions in the registration statement and related prospectus. The issuer is strictly liable under section 11, while others have the benefit of a due diligence defence, which generally protects them from liability if they can demonstrate that, after reasonable investigation, they had reasonable grounds to believe, and did believe, in the accuracy of the challenged disclosure.

In a public offering, section 12(a)(2) of the Securities Act imposes liability on any person who offers or sells a security by means of offering material or an oral communication that contains a material misstatement or omission. Similar to section 11, liability may be avoided under section 12(a)(2) if a defendant can show that it did not know, and with the exercise of reasonable care could not have known, of the untruth or omission.

Issuers and others may also face liability under section 10(b) of the Exchange Act and Rule 10b-5 thereunder in connection with purchases and sales of securities, whether publicly or privately offered. It is more difficult to recover under these provisions than under sections 11 or 12(a)(2) of the Securities Act, among other things, because it is necessary to prove that the defendant acted recklessly or wilfully. Unlike section 11 or section 12(a)(2) liability, Rule 10b-5 applies not only to documents filed with the SEC, but also to any information released to the public by the issuer.


What types of remedies are available to the investors in debt securities?

Investors may be able to obtain rescission of their purchase or monetary damages, depending on the circumstances.


What sanctioning powers do the regulators have and on what grounds? What are the typical results of regulatory inquiry or investigation?

The SEC may impose civil fines and penalties, including barring violators from the securities industry. The US Department of Justice may pursue criminal enforcement in connection with fraudulent activity, resulting in fines and imprisonment, among other things. FINRA may impose fines, restitution, disgorgement and, in extreme cases, suspension of member firms and their employees for violation of its rules.

Tax liability

What are the main tax issues for issuers and bondholders?

Generally, the issuance of debt securities is not a significant tax event for the issuer.

Payments of interest are generally deductible up to an amount equal to 30 per cent of ‘adjusted taxable income’ of the issuer. Adjusted taxable income is similar to EBITDA for taxable years 2018 to 2021, and EBIT thereafter. Repayment of principal at maturity does not have any material tax consequences. Issuers may recognise income or loss from a number of liability management transactions, including tender offers or redemption at a discount; exchange offers; and amendments to the payment terms or maturity of a debt instrument. US tax rules limit the ability to ‘reopen’ an existing series of debt securities by issuing additional securities with the same terms and maturity, particularly where the new securities would be issued with a greater discount than the original securities.

US taxable investors in debt securities are taxable on interest income and gain on sale. Gain on sale is typically treated as capital gain and is typically eligible for preferential rates for a non-corporate investor that holds the security for more than one year. Investors in debt that is issued with original issue discount (OID) in excess of a de minimis amount must generally accrue the OID over the life of the debt. Secondary market investors may be required to treat a portion of the gain on a debt security as ordinary income, if they acquired the security at a discount to its issue price (or, in the case of a security issued with OID, at a discount to its adjusted issue price). Investors may be required to accrue phantom income if they invest in indexed securities or securities with other types of contingencies, and to treat gain as ordinary rather than capital. There are no US transfer taxes on the purchase, sale or other transactions in debt instruments. Punitive tax rules may apply if US investors invest in debt securities in bearer form.

Non-US investors are generally exempt from US withholding tax on interest payments on debt securities issued by US issuers if the investor:

  • provides standard US tax forms or other acceptable information to a withholding agent;
  • does not actually or constructively own 10 per cent or more of the total combined voting power of the stock entitled to vote; and
  • is not a controlled foreign corporation that is related to the issuer actually or constructively through stock ownership.

Under current law, capital gains of non-US investors are generally not subject to US taxation. Under the Foreign Account Tax Compliance Act rules, commonly known as FATCA, some non-US investors may be required to provide information about their owners in order to avoid US withholding tax on payments on US securities.

Investors in convertible bonds of US issuers are treated as deriving deemed income if there is a conversion rate adjustment on the bond. That income may be subject to US withholding tax if the convertible bond is held by a non-US investor, including a fund organised outside the United States. Structured notes, other debt instruments that are not principal-protected and perpetual or hybrid debt securities may not qualify as debt for US tax purposes, in which case different rules would apply. In the case of a US issuer, an important question will usually be whether the instrument is characterised as equity for US tax purposes, in which case the issuer would not be entitled to deductions and the payment of interest to non-US investors would be subject to different US withholding tax rules. In some cases, structured notes that have payments linked to US equities will be subject to US withholding tax on actual or deemed dividend-equivalent amounts if they are held by a non-US investor.

Update and trends

Key developments of the past year

Please provide any updates and trends in your jurisdiction’s debt capital market.

Key developments of the past year30 Please provide any updates and trends in your jurisdiction’s debt capital market (trends, product types, special issues, etc).Disclosure effectiveness

Congress and the SEC have undertaken a broad disclosure effectiveness initiative. In March 2019, the SEC adopted a collection of amendments to its rules and forms, intended to modernise and simplify some of the disclosure requirements applicable to public companies. The amendments span a number of topics, including MD&A, property disclosure, risk factors, confidential treatment requests and exhibits.

Inline XBRL filing of tagged data

In June 2018, the SEC adopted final rules requiring operating companies and funds, on a phased-in basis, to file their financial statement information and risk/return summary information using inline eXtensible Business Reporting Language (XBRL). The amendments are intended to improve the data’s usefulness, timeliness and quality, and to decrease, over time, the cost of preparing the data for submission to the SEC. The requirement has kicked in for large accelerated filers.

Transition away from LIBOR

The London Inter-bank Offered Rate (LIBOR) is used extensively in the US as a benchmark for various financial contracts, including corporate debt. After LIBOR’s likely ceasing to be a viable benchmark at the end of 2021, market participants, including companies that have floating rate obligations tied to LIBOR, will need to transition to a new benchmark. This may be particularly challenging for obligations that will still be outstanding at the end of 2021. The Secured Overnight Financing Rate (SOFR) has emerged as a viable replacement, and SOFR-based debt issuances are on the rise.

Streamlined financials for registered debt

In July 2018, the SEC proposed amendments to rules under Regulation S-X to simplify and streamline the disclosure obligations of certain issuers of guaranteed securities. The amendments, if adopted, would reduce SEC financial disclosure requirements for guarantors and issuers of guaranteed securities, and issuers’ affiliates whose securities collateralise securities.

Sustainability disclosure

Investors are increasingly interested in how companies address environmental, social and governance (ESG) matters, yet, the SEC disclosure regime does not include - at least for now - specific rules calling for ESG disclosure, and SEC officials continue to encourage a materiality-based approach to such disclosure. MD&A and risk factor requirements could require disclosure of ESG matters if the information is material.