The Internal Revenue Service promulgated final Issue Price Regulations under Section 148 of the Internal Revenue Code of 1986, as amended, that were published in the Federal Register on December 9, 2016. The new regulations will be in effect for bonds sold on or after June 7, 2017, and issuers, underwriters, their counsel and other public finance participants will need to make changes to current practice in order to comply. The final regulations retain some concepts from present law and regulations, but adopt some of the simplifications requested with respect to the regulations that had been proposed in June of 2015.
The new general rule for establishing the issue price of an issue is similar to current law. In summary, the issue price for a bond issue is the sum of the prices at which at least 10 percent of each maturity is first sold to the public. If insufficient sales of any maturity occur on the sale date, the issuer will no longer be able to merely rely on an expectation to sell at the initial offering price for such maturity without further conditions being met. These conditions are:
- The underwriters (as defined in the regulations) must have offered the maturity of bonds to the public for purchase at a specified initial offering price on or before the sale date, and the lead underwriter in the underwriting syndicate or selling group (or, if applicable, the sole underwriter) provides, on or before the issue date, a certification to that effect to the issuer, together with reasonable supporting documentation for that certification, such as a copy of the pricing wire or equivalent communication.
- Each underwriter agrees in writing that it will neither offer nor sell the bonds to any person at a price that is higher than the initial offering price to the public during the period starting on the sale date and ending on the earlier of the following:
- The close of the fifth business day after the sale date; or
- The date on which the underwriters have sold an aggregate of 10 percent or more of that maturity of bonds to the public at a price that is no higher than the initial offering price to the public.
This “Hold the Offering Price” alternative cannot be used for a maturity of bonds if in fact the underwriters sell bonds of that maturity to a customer or another dealer during the hold period at a price higher than the initial offering price, and in that case the determination of issue price defaults to the actual sales rule.
The term “underwriter” includes members of the underwriting syndicate and anyone who contracts with a syndicate member to sell in the initial offering, including retail distribution groups. The preamble to the regulations is clear that each underwriter is individually or severally responsible for its agreement (rather than jointly responsible with other underwriters). The preamble further provides that “A false statement by an underwriter in a certification or in the agreement among underwriters under one of these special rules may result in a penalty against the underwriter under section 6700, depending on the facts and circumstances.”
A special rule for competitive sales permits the use of the initial offering prices to determine yield but requires, among other things, that three bids be obtained for the bonds and that the issuer obtain a certification from the winning bidder regarding the reasonably expected initial offering price to the public. If three bids are not obtained, the issuer must use the actual sales rule or the Hold the Offering Price rule to establish issue price.
While issuers are not required to use a particular method for establishing the issue price, they must identify what method is being using to determine issue price by the issue date and describe it in the books and records maintained for the bonds.
The agreement among the underwriters to meet the Hold the Offering Price rule will need to be reflected in bond purchase agreements, agreements among underwriters, and distribution group agreements in negotiated transactions, and notices of sale for competitive issues. Despite the individual and several responsibility of each underwriter for its agreement, it is likely that issuers will require that issue price certificates be revised to have the lead underwriter certify that no improper sales were made during the hold period by any other underwriter. The mechanics for actually making this determination will require further development. Similarly, the mechanics of determining and communicating when a hold period ends early may require internal reporting within a syndicate that does not now exist.