First, the bad news: As a general rule, all guarantors must present the same audited and unaudited financial statements as the issuer of the guaranteed securities.

A guarantee of a security (such as a guarantee of a debt or preferred equity security) is itself a security that must be registered under the Securities Act, absent an applicable exemption. As a result, under S-X Rule 3-10(a), the general rule is that guarantors are required to present the same audited and unaudited financial statements as the issuer of the guaranteed securities.

However, you have a shot at a silver lining, because there are exceptions to this onerous requirement.

Fortunately, S-X Rules 3-10(b)-(f) contain a number of important exceptions that permit issuers to disclose financial information about guarantors in a condensed format using a footnote to their own financial statements. Although the footnote approach can involve a fair amount of effort, it is far less burdensome than providing separate audited financial statements for every guarantor, which would be prohibitively expensive in most cases. S-X Rules 3-10(c), (e) and (f) go even further, dispensing with all additional information requirements for guarantors where the parent company issuer (or guarantor) does not have independent assets or operations of its own and all of the parent’s direct and indirect non-guarantor subsidiaries are “minor” (generally, aggregating less than three percent of the consolidated parent) and each guarantee is full and unconditional.

Here is a table describing these important exemptions and when they may apply. REMEMBER: for any of these exemptions to apply, the parent’s audited annual and unaudited interim financial statements must be filed for the periods required.

Click here to view table.

We can’t always be standup guys. Let’s talk about stock pledges.

Separate audited and interim financial statements are generally required for an issuer’s affiliate if the securities of that affiliate are pledged as collateral for the offering and those securities constitute a “substantial portion” of the collateral for the securities being registered. See S-X Rule 3-16 and Financial Reporting Manual Topic 2600.1. Securities of the affiliate are deemed to constitute a “substantial portion” of the collateral if the aggregate principal amount, par value, or book value of the pledged securities (as carried by the issuer), or the market value of the pledged securities, whichever is greater, equals 20 percent or more of the principal amount of the securities that are being secured. See S-X Rule 3-16. If that is the case, an affiliate must file (or incorporate by reference) the same financial statements that it would be required to file if it were the issuer. For this reason, it is often uneconomical to secure bonds with stock pledges in publicly registered offerings or private placements with registration rights. One way around this is to provide that individual stock pledges will fall away automatically if ever the existence of the pledge would trigger a separate financial statement requirement. Another way is to issue the bonds privately in a Rule 144A-for-life offering without registration rights. Be sure to discuss the pros and cons of these approaches with your client.