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NY2-734955.v5

Debt Capital Markets in the United States

June 12, 2014

Presented by: Ze’ev Eiger

Bradley Berman

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Topics for Presentation • Overview and recent market activity • Registered debt offerings

• Registration process • Ongoing reporting obligations and governance

• Unregistered debt offerings • Rule 144A offerings • Section 3(a)(2) offerings • Private placements (Regulation D/Section 4(a)(2) offerings) • Regulation S offerings

• Program documentation • Listing requirements • Liability concerns

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Overview Securities Act Mantra:

Every offer and sale of securities is either: • Registered • Exempt; or • Illegal

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Registration or Exemption? Registration:

Section 5 of the Securities Act: • Section 5(c): No offers or sales until a registration statement has been

filed with the SEC. • Section 5(b): After filing, all written offers must be a statutory prospectus. • Section 5(a): No sales of securities unless the SEC declares the

registration statement “effective.” What does Section 5 registration provide to investors? • Complete, fair and accurate information • Time to evaluate the information • A put right if the information turns out to be materially false

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Registration or Exemption? (cont’d) Exemptions: Securities Exemptions – Section 3

•Section 3(b) – Smaller issues exemptions – Rules 504 and 505 Transaction Exemptions - Section 4

•Section 4(a)(2) - by an issuer not involving a “public offering” • Rule 506 • Very little official interpretation as to Section 4(a)(2) itself

These are all issuer transactions – no underwriters allowed! •Dealers act as placement agents – sales are directly by the issuer to the purchasers.

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Recent Market Activity • The U.S. debt capital markets were very active in 2013 compared to the last few years, as the U.S. economy continues to recover and show signs of improvement from the financial crisis of 2008.

• There were approximately $1.395 trillion of debt securities issued by non-governmental borrowers in the U.S. debt capital markets (both public and private) in 2013.

• This is approximately a 0.8% increase from the roughly $1.385 trillion issued in 2012 (these amounts exclude mortgage-backed and asset-backed offerings and secured debt).

• Of the $1.395 trillion of debt securities issued by non-governmental borrowers in the U.S. debt capital markets in 2013, approximately $1.022 trillion consisted of investment grade debt, approximately $336.5 billion consisted of high yield debt and approximately $36.5 billion consisted of convertible debt.

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Recent Market Activity (cont’d) • The high yield debt market in particular has been very robust, with approximately a 2.2% increase in principal amount compared to 2012 (source: Securities Industry and Financial Markets Association (SIFMA)).

• The U.S. debt capital markets are expected to continue to be active in 2014; however, continued improvement in the U.S. economy and the Federal Reserve tapering its quantitative-easing program will result in rising interest rates and a decrease in liquidity.

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Registered Debt Offerings

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Which Issuers Typically Register? • Issuers very rarely register for the first time with the SEC in order to register debt securities.

•Typically, issuers registering debt securities are already reporting companies under the Exchange Act, with listed equity securities.

•However, this is not the case for: • Foreign issuers registering Yankee bonds. • Issuers relying on the Section 3(a)(2) exemption. • Certain high yield issuers that are voluntary filers under the Exchange Act.

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The SEC Review Process Once a registration statement is filed with the SEC, it will be

reviewed by the staff of the SEC’s Division of Corporation Finance in Washington, D.C. The SEC review process consists of both a legal and an accounting

review. This period is often referred to as the waiting period. The SEC staff will provide the company with a comment letter, typically within 30

days after the filing of the registration statement. It is not unusual for the SEC’s initial comment letter for a first time registrant to

contain a substantial number of comments. The company responds to the comment letter by filing an amendment to the

registration statement, a response letter and any supplemental materials the SEC staff requests. For a first time registrant, typically several comment letters and responsive

amendments are produced before the review process is finished.

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The SEC Review Process (cont’d) During the SEC review and comment process, the underwriter is

permitted to make offers to the public only through distribution of: the preliminary prospectus, any free writing prospectuses, and live oral presentations.

The preliminary prospectus or “red herring” is printed when the SEC review and response process is finalized. The waiting period ends when the SEC declares the registration

statement effective. Once the SEC has completed its review, the company and the

underwriters will request that the SEC declare the registration statement effective as of a specified date and time. Generally, the SEC requires 48 hours notice of the date and time of desired

effectiveness. A notice of effectiveness will be posted on the SEC’s website.

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Other Regulatory Clearances Stock Exchange Listing: Listing the company’s securities on a securities exchange is one of the most

important steps the company can take to achieve security holder liquidity. The company’s counsel will assist the company in determining the specific listing

requirements for the various securities markets and will assist the company in preparing and filing its listing application.

FINRA: Immediately following the initial filing of the registration statement, underwriter’s

counsel is required to file the registration statement, the form of underwriting agreement and any other underwriting documents (e.g., agreement among underwriters, selected dealers agreement, etc.) with the Financial Industry Regulatory Authority or “FINRA.” FINRA reviews the offering terms and the underwriting agreement to determine

whether the underwriting terms and arrangements are fair and reasonable. Before the SEC will declare the registration statement effective, FINRA must

advise the SEC staff that FINRA does not object to the fairness or reasonableness of the underwriting terms and arrangements.

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Registration Process

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Which Registration Statement Form Should Be Used?

• Registration on Form S-1. An issuer that does not currently file, or has only recently begun filing, Exchange Act reports must use Form S-1 (or Form F-1 for a foreign private issuer (“FPI”)) to register issuances of its debt securities.

• The contents of the prospectus are essentially the same as for a registration statement on Form S-1 (or Form F-1 for an FPI) for an offering of equity securities, plus a description of the terms of the debt securities, the indenture and the trustee.

• Shelf registration. An issuer may be eligible to use Form S-3 (or Form F-3 for an FPI) if it: (1) has filed periodic reports under the Exchange Act for at least 12 months; (2) has at least a $75 million worldwide common equity float held by non-affiliates; and (3) has been timely in its periodic filings.

• Form S-3 (or Form F-3 for an FPI) is a short-form registration statement and permits an issuer to disclose minimal information in the prospectus included in the Form S-3 (of Form F-3) by incorporating by reference the more extensive disclosures already filed with the SEC under the Exchange Act, primarily in the issuer’s most recent Annual Report on Form 10-K and its Form 8-Ks (or Form 20-F and Form 6-Ks for an FPI).

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Which Registration Statement Form Should Be Used? (cont’d)

• A specific offering of a class or series of debt securities is made by means of a prospectus supplement to the basic prospectus. The prospectus supplement includes specific information about the terms of the offering and the debt securities. Issuers often also use term sheets filed with the SEC as free writing prospectuses (“FWPs”) to describe the terms of the offered securities.

• Shelf registration for “well-known seasoned issuers” (“WKSIs”). An issuer may be eligible to use Form S-3ASR (or Form F-3ASR for an FPI) if it qualifies as a WKSI, and such registration statement is automatically effective without SEC review.

• Registration of unspecified amounts of specified classes of securities.

• Omission of information from base prospectus (e.g., identification of primary or secondary offering, description of securities names of selling security holders, and plan of distribution).

• Pay-as-you-go registration fee.

• Certain Canadian issuers may take advantage of the Multi-Jurisdictional Disclosure System (“MJDS”), which allows a shorter form of disclosure and incorporation by reference to Canadian disclosures.

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What Is a WKSI? • A WKSI is an issuer that has at least $700 million of common equity

held by non-affiliates or (b) issued $1 billion of non-convertible securities during the past three years.

• Can be a U.S. issuer or a non-U.S. issuer.

• Can be a subsidiary of a company that is a WKSI.

• Subject to certain disqualifications.

• Canadian companies filing under the MJDS system cannot be WKSIs.

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What Is a “Foreign Private Issuer”?

• An FPI is any issuer (other than a foreign government) incorporated or organized under the laws of a jurisdiction outside of the U.S., unless more than 50% of the issuer’s outstanding voting securities are held directly or indirectly by residents of the U.S., and any of the following applies:

• the majority of the issuer’s executive officers or directors are U.S. citizens or residents;

• the majority of the issuer’s assets are located in the U.S.; or • the issuer’s business is principally administered in the U.S.

• An FPI will be subject to the reporting requirements under U.S. federal securities laws if it registers with the SEC the public offer and sale of its securities under the Securities Act.

• However, an FPI may also deregister more easily than a U.S. issuer.

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Benefits Available to FPIs • An FPI may exit (or deregister) the U.S. reporting regime

more easily than a U.S. issuer.

• Quarterly reports: An FPI is not required to file quarterly reports – submits its non-U.S. reports under cover of Form 6-K.

• Proxies: An FPI is not required to file proxy statements.

• Ownership reporting: No Section 16 (“short-swing” profits) reporting.

• Governance: An FPI may choose to rely on certain home-country practices.

• XBRL: Temporary XBRL relief was previously granted to FPIs.

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• Internal controls: Annual internal control reporting, rather than with quarterly reports.

• Executive compensation: As an FPI, certain of the more onerous executive compensation disclosure requirements are not applicable.

• IFRS without GAAP reconciliation.

• Exchange Act Rule 12g3-2(b) exemption.

Benefits Available to FPIs (cont’d)

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Ongoing Reporting Obligations and Governance

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Ongoing Reporting Obligations

• An issuer that has registered securities under Section 12(b) or 12(g) of the Exchange Act or is required to file under Section 15(d) of the Securities Act (because it has recently completed a registered offering) is obligated to file the following Exchange Act reports with the SEC:

• Annual Report on Form 10-K (or Form 20-F for FPIs) • Current Reports on Form 8-K (or Form 6-K for FPIs)

• Reporting issuers must also file with the SEC a proxy statement for any shareholders' meeting, including the annual meeting (not required for FPIs).

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Annual Reports

• The information required to be disclosed in an Annual Report on Form 10-K (or Form 20-F for FPIs) includes, but is not limited to, the following:

• operating results; • liquidity and capital resources; • trend information; • off-balance sheet arrangements; • consolidated financial statements and other financial information; • significant business changes; • selected financial data; • risk factors; • history and development of the issuer; • business overview; and • organizational structure.

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Current Reports • A U.S. issuer must also “file” current reports on Form 8-K to the SEC when

certain specified events occur (which include material events).

• FPIs must “furnish” reports on Form 6-K to the SEC from time to time. • Generally, a Form 6-K contains information that is material to an investment

decision in the securities of an FPI. • May include press releases, securityholder reports and other materials that an

FPI publishes in its home-country in accordance with home-market law or custom, as well as any other information that the FPI may want to make publicly available.

• Reports on Form 6-K generally take the place of Quarterly Reports on Form 10-Q (which include financial reports) and Current Reports on Form 8-K (which include disclosure on material events) that U.S. issuers are required to file.

• For many of the larger FPIs, the Forms 6-K that are filed with the SEC generally include similar types of information and are filed with the same frequency as Forms 10-Q and 8-K that are filed by U.S. issuers.

• The disclosures are prepared in accordance with “home country” practice.

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Reporting Obligations of Insiders and Beneficial Owners

• Insiders of an issuer are subject to the short-swing profit limits set forth in Section 16(b) of the Exchange Act, and they are required to comply with the Section 16(a) reporting requirements (disclosing holdings of, and transaction in, equity securities of the issuer).

• This does not apply to insiders of an FPI.

• Beneficial owners, subject to the disclosure requirement under Section 13(g) of the Exchange Act, are required to file with the SEC a statement on either Schedule 13D or Schedule 13G.

• Rule 13d-1 of the Exchange Act mandates that a person who acquires, directly or indirectly, beneficial ownership of a class of registered equity security, must file a statement containing the information required by Schedule 13D with the SEC, within 10 business days.

• Alternatively, certain holders of securities of an issuer may be permitted to report their beneficial ownership on Schedule 13G, pursuant to Rule 13d-1(b). The disclosures under Schedule 13G are considerably less detailed than those required by Schedule 13D.

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Sarbanes-Oxley Requirements • Section 302 of Sarbanes-Oxley requires certifications by an issuer’s

CEO/CFO regarding the effectiveness of the issuer’s disclosure controls and procedures, the completeness and accuracy of the issuer’s reports filed under Section 13(a) and 15(d) of the Exchange Act, and any deficiencies in, and material changes to, the issuer’s internal control over financial reporting.

• Section 302 reporting begins once an issuer is an SEC registrant. • These certifications must be included in the issuer’s Form 10-K (or Form 20-F

for FPIs). • Other reports filed or furnished by the issuer, such as reports on Form 8-K (or

Form 6-K for FPIs), are not subject to the certification requirements.

• Section 404 of Sarbanes-Oxley requires an annual report by both management and external auditors regarding the effectiveness of the issuer’s internal controls over financial reporting.

• Section 404 reporting begins with the second annual filing with the SEC. • FPIs that are “non-accelerated” filers do not have to provide the auditor’s

attestation.

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• “Disclosure controls and procedures” are controls and other procedures designed to ensure that the information required to be disclosed in the reports filed under the Exchange Act, on a timely basis, is recorded, processed, summarized and reported.

• Disclosure controls and procedures include, but are not limited to, controls and procedures designed to ensure that information required to be disclosed by a company in its Exchange Act reports is appropriately accumulated and communicated to the company’s management, including its principal executive and financial officers, to allow timely decisions regarding required disclosure.

• Important to have an “up the chain” process of reporting from lower managers to CEO and CFO.

Disclosure Controls and Procedures

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Specialized Disclosure Issues

• Bank issuers must comply with Industry Guide 3. • Provides guidelines for statistical disclosures by banks and bank holding

companies in SEC filings. • Market practice to also meet guidelines for many types of unregistered offerings. • Statistical disclosures can be included in the registration statement itself or

incorporated by reference from the issuer’s annual report or quarterly/periodic reports.

• Generally, the data provided must be for each of the last three or five fiscal years, plus any interim period if necessary to keep the information from being misleading.

• Iran disclosures • Conflict minerals

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Conflict Minerals Disclosure • Section 1502 of the Dodd-Frank Act requires persons to disclose

annually whether any “conflict minerals” that are “necessary to the functionality or production” of a product of the person originated in the Democratic Republic of the Congo or an adjoining country and, if so, to provide a report describing, among other matters, the measures taken to exercise due diligence on the source and chain of custody of those minerals.

• This must include an independent private sector audit of the report that is certified by the person filing the report.

• The SEC adopted final rules on August 22, 2012, and the first required filings will be on May 31, 2014.

• Litigation challenging the rule was commenced. Rules upheld by a U.S. district court in July 2013.

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Resource Extraction Payments • Section 1504 of the Dodd-Frank requires reporting issuers engaged

in the commercial development of oil, natural gas or minerals to disclose, in an annual report, certain payments made to the United States or a foreign government. The SEC must make a compilation of the electronically-provided information available online.

• Section 1504 was enacted against a backdrop of international efforts seeking to encourage greater transparency and accountability in countries dependent on the revenues from oil, gas and mining.

• The SEC adopted final rules on August 22, 2012.

• Litigation challenging the rules has commenced, and a U.S. district court invalidated the rules in July 2013.

• SEC is currently contemplating new version of the proposal.

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Rule 144A Offerings

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Why Are Rule 144A Offerings Attractive?

• Rule 144A provides a clear safe harbor for offerings to institutional investors.

• Does not require extensive ongoing registration or disclosure requirements.

• “Benchmark” sized issuances may have liquidity in the Rule 144A market.

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• Rule 144A provides a non-exclusive safe harbor from the registration requirements of Section 5 of the Securities Act for resales of restricted securities to “qualified institutional buyers” (QIBs).

• The rule recognizes that not all investors are in need of the protections of the prospectus requirements of the Securities Act.

• The rule applies to offers made by persons other than the issuer of the securities (i.e., “resales”).

• The rule applies to securities that are not of the same class as securities listed on a U.S. securities exchange or quoted on an automated inter-dealer quotation system.

• A reseller may rely on any applicable exemption from the registration requirements of the Securities Act in connection with the resale of restricted securities (such as Reg S or Rule 144).

Rule 144A Overview

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Types of 144A Offerings

• 144A offering for an issuer that is not registered in the U.S. – usually a standalone

• 144A continuous offering program • Used for repeat offerings, often by financial institution and

insurance company issuers, to institutional investors.

• Often used for structured products and for covered bonds sold to QIBs.

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How are 144A Offerings Structured?

• The issuer initially sells restricted securities to investment bank(s) (i.e., the “Initial Purchasers”) in a Section 4(a)(2) private placement.

• The investment bank reoffers and immediately resells the securities to QIBs under Rule 144A.

• Often combined with a Regulation S offering.

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Rule 144A Offering Memorandum

• May contain similar information to a full “S-1/F-1” prospectus, or may be shorter.

• If the issuer is a public company, it may incorporate by reference the issuer’s Exchange Act reports or its filings from its home country.

• Scope of disclosure (whether included or incorporated by reference) may be comparable to a public offering, as the initial purchasers expect “10b-5” representations from the issuer, and legal opinions from counsel.

• Due diligence by counsel will often be similar to that performed in a public offering.

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How Are Rule 144A Offerings Conducted?

• Often similar to a registered offering.

• “Road show” with a preliminary offering memorandum.

• Confirmation of orders with the final offering memorandum. • The offering memorandum may be delivered electronically.

• Closing on a “T+3” basis, or as otherwise agreed with the investors.

• Publicity: historically, generally limited to a Rule 135c compliant press release – limited information about the offering. However, the new “general solicitation” rules enable broader announcements, although there is little evidence of that in the market.

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Conditions for Rule 144A Offering • Reoffers or resales only to a QIB, or to an offeree or purchaser that

the reseller reasonably believes is a QIB.

• Reseller must take steps to ensure that the buyer is aware that the reseller may rely on Rule 144A in connection with such resale.

• The securities reoffered or resold (a) when issued were not of the same class as securities listed on a U.S. national securities exchange or quoted on a U.S. automated inter-dealer quotation system and (b) are not securities of an open-end investment company, UIT, etc.

• For an issuer that is not an Exchange Act reporting company or exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, the holder and a prospective buyer designated by the holder must have the right to obtain from the issuer, upon the holder’s request, certain reasonably current information.

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What Is a QIB? • An entity that is an “accredited investor” acting for its own account

or the accounts of other QIBs, that in the aggregate owns and invests at least $100 million in securities of unaffiliated issuers ($10 million for a broker-dealer).

• Banks and savings and loan associations with a net worth of at least $25 million.

• A broker-dealer acting as a riskless principal for an identified QIB. • To qualify, the QIB must commit to the broker dealer that the QIB will

simultaneously purchase the securities from the broker-dealer.

• A QIB can be formed solely for the purpose of conducting a Rule 144A transaction.

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How Can a Reseller Ascertain a Person Is a QIB?

• the purchaser’s most recent publicly available annual financial statements;

• information filed with the SEC or another government agency or self-regulatory organization;

• information in a recognized securities manual, such as Moody’s or S&P;

• certification by the purchaser’s chief financial or other executive officer specifying the amount of securities owned and invested as of the end of the purchaser’s most recent fiscal year; and

• a QIB questionnaire.

A reseller may rely on the following (as long as the information is no more than 16 months old):

The SEC acknowledges that the reseller may use other information to establish a reasonable belief of eligibility.

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• By legending the security

• By including an appropriate statement in the offering document

• By obtaining an agreement that the purchaser understands that the securities must be reoffered and resold pursuant to an exemption or registration under the Securities Act

• By obtaining a restricted CUSIP number

How Will Reseller Make the Buyer Aware That Security Is a Rule 144A Security?

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•For securities of a non-public company, the holder and a prospective purchaser designated by the holder have the right to obtain from the issuer, upon request, the following information:

• A brief statement of the nature of the business of the issuer, and its products and services; and

• The issuer's most recent balance sheet and profit and loss and retained earnings statements, and similar financial statements for such part of the two preceding fiscal years as the issuer has been in operation.

• The financial statements should be audited, to the extent reasonably available.

•The information must be “reasonably current.”

Current Information Requirements

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Rule 159: “Time of Sale Information”

• Although Rule 159 is not expressly applicable to Rule 144A or Section 3(a)(2) offerings, many investment banks apply the same treatment, in order to help reduce the risk of liability.

• Use of term sheets and offering memoranda supplements, to ensure that all material information is conveyed to investors at the time of pricing.

• Counsel is typically expected to opine as to the “disclosure package,” as in the case of a public offering.

NY2 632073

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Rule 144A – Exxon Capital Exchange Offers

• Methodology is based principally on a 1988 no-action letter. • Securities are privately placed under Rule 144A, and then promptly exchanged for substantially identical securities that have been registered under the Securities Act (either on Form S-4 or F-4).

• Goal: combines the benefits of (a) Rule 144A (quick offering without SEC review) and (b) offering registered securities (liquidity for investors).

• Issuer typically pays “penalty interest” if registration is not effective within a specified period of time.

• Alternative to Exxon Capital: register the Rule 144A securities for resale on Form S-3 or F-3.

• Problem: identifying selling shareholders in a prospectus. • Problem: resale registration statement will require continued effectiveness of a shelf

registration.

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Section 3(a)(2) Offerings

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Section 3(a)(2) and Offerings by Banks

• Section 3(a)(2) of the Securities Act exempts from registration under the Securities Act any security issued or guaranteed by a bank.

• Basis: banks are highly regulated, and provide adequate disclosure to investors about their finances in the absence of federal securities registration requirements. Banks are also subject to various capital requirements that may increase the likelihood that holders of their debt securities will receive timely payments of principal and interest.

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What Is a “Bank”?

• Under Section 3(a)(2), the institution must meet both of the following requirements:

• it must be a national bank or any institution supervised by a state banking commission or similar authority; and

• its business must be substantially confined to banking.

• Examples of entities that do not qualify: • Bank holding companies • Finance companies • Investment banks • Foreign banks

• Regulated U.S. branches and agencies of foreign banks may qualify

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Guarantees

• Another basis for qualification as a bank: securities guaranteed by a bank.

• Not limited to a guaranty in a legal sense, but also includes arrangements in which the bank agrees to ensure the payment of a security.

• The guaranty or assurance of payment, however has to cover the entire obligation; it cannot be a partial guarantee or promise of payment.

• Again, guarantees by foreign banks (other than those of an eligible U.S. branch or agency) would not qualify for this exception.

• The guarantee is a legal requirement to qualify for the Section 3(a)(2) exemption; investors will not be looking to the US branch guarantor for payment/credit. Investors will look to the home office.

• Finance companies can issue under Section 3(a)(2), if the securities are guaranteed by a bank.

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Non-U.S. Banks/U.S. Offices • U.S. branches/agencies of foreign banks are conditionally entitled to

rely on the Section 3(a)(2) exemption.

• 1986: the SEC takes the position that a foreign branch/agency will be deemed to be a “national bank” or a “banking institution organized under the laws of any state” if “the nature and extent of federal and/or state regulation and supervision of that particular branch or agency is substantially equivalent to that applicable to federal or state chartered domestic banks doing business in the same jurisdiction.”

• As a result, U.S. branches/agencies of foreign banks are frequent issuers or guarantors of debt securities in the U.S. Most issuances or guarantees occur through the N.Y. branches of these banks.

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OCC Registration/Disclosure • National banks or federally licensed U.S. branches/agencies of foreign

banks regulated by the Office of the Comptroller of the Currency (the “OCC”) are subject to OCC securities offering (Part 16) regulations.

• 12 CFR 16.6 provides a separate partial exemption for offerings of “non-convertible debt” to accredited investors in denominations of $250,000 or more.

• Federal branches/agencies may rely on this exemption by furnishing to the OCC parent bank information which is required under Exchange Act Rule 12g3-2(b), and to purchasers the information required under Securities Act Rule 144A(d)(4)(i).

• The securities are “investment grade” – the new definition focuses on the probability of repayment, rather than an external investment-grade rating.

• The offering document and any amendments are filed with the OCC no later than the fifth business day after they are first used.

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FINRA Requirements • Even though securities offerings under Section 3(a)(2) are exempt from

registration under the Securities Act, public securities offerings conducted by banks must be filed with the Financial Industry Regulatory Authority (“FINRA”) for review under Rule 5110(b)(9), unless an exemption is available.

• Exemption: the issuer has outstanding investment grade rated unsecured non-convertible debt with a term of issue of at least four years, or the non-convertible debt securities are so rated.

• If an affiliated dealer is an agent for the offering, there is “prominent disclosure” in the offering document with respect to the conflict of interest caused by that affiliation and the bank notes are rated investment grade or in the same series that have equal rights and obligations as investment grade rated securities, then no filing will be required.

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Blue Sky Regulation • Securities issued under Section 3(a)(2) are considered “covered

securities” under Section 18 of the Securities Act. • However, because bank notes are not listed on a national securities

exchange, states may require a notice filing and a fee in connection with an offering of bank notes.

• Generally, blue sky filings are not needed in any state in which the securities are offered.

• State blue sky laws should be examined to ensure that either no notice filing or fee is required, or the state’s existing exemption for securities issued by banks does not require a filing.

• A state may not view an agency of a foreign bank, whose securities are eligible for the Section 3(a)(2) exemption, as within the state’s exemption for securities issued by banks.

• Rule 144A offerings of bank notes will fall within a state’s institutional purchaser exemption.

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Section 3(a)(2) Offering Documentation

• The offering documentation for bank notes is similar to that of a registered offering.

• Base offering document, which may be an “offering memorandum” or an “offering circular” (instead of a “prospectus”).

• For foreign issuers, IFRS financials or “home country” GAAP financials are acceptable.

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Section 3(a)(2) Offering Documentation (cont’d)

• Annual audited and at least semi-annual unaudited financial statements; and

• Consider including Guide 3 statistical disclosures. • The base document is supplemented for a particular

offering by one or more “pricing supplements” and/or “product supplements.”

• These offering documents may be supplemented by additional offering materials, including term sheets and brochures.

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1940 Act Issues Investment companies are subject to registration under the Investment Company Act of 1940, unless an exemption is available.

An investment company is defined broadly as an entity that holds itself out as being engaged primarily, or proposing to engage, in “investing, reinvesting or trading in securities” and also includes entities engaged, or that propose to engage, in the business of investing, reinvesting, owning, holding or trading in securities if securities represent 40% or more of the value of its total assets (excluding cash and government securities).

Exemptions: • U.S. banks are exempted under Section 3(c)(3) of the 1940 Act. • Foreign banks are exempted under Rule 3a-6 under the 1940 Act, subject to

certain conditions. • U.S. branches or agencies of foreign banks are exempted under an interpretive

release (1940 Act Release No. 17681 (Aug. 17, 1990)). • Finance subsidiaries of U.S. or foreign banks are exempted under Rule 3a-5,

subject to certain conditions.

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Private Placements

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Section 4(a)(2) SEC v. Ralston Purina, 346 U.S. 119 (1953) • Section 4(a)(2) case • “Needs” test – Availability of exemption turns on whether the offerees need

the protections of the Securities Act or whether they are able to fend for themselves

• Whether a purchaser can fend for itself depends, in part, on: • the purchaser’s access to the same kind of information as would be included

in a registration statement; and • the purchaser’s sophistication and ability to bear the economic risks of

investment.

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Section 4(a)(2) (cont’d) The result of Ralston Purina and other cases and SEC pronouncements is a multi-factor test for a good Section 4(a)(2) offering (i.e., whether or not an offering is a distribution to the public requiring registration):

• Numerosity and relationship of investors to the issuer o No magic number, pre-existing relationship to the issuer is a good factor

• Size of offering o Smaller is better

• Manner of offering – no general solicitation • Sophistication and experience of offerees

o General business knowledge and experience usually are sufficient

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Section 4(a)(2) (cont’d) • Nature and kind of information provided to the offerees or to which the offerees have ready access o Generally, need not be as extensive as in a registration statement.

• Actions taken by the issuer to prevent the resale of the securities. o Purchasers must be buying for investment, not with a view to distribution.

The factors above are flexible, fact-dependent and no single factor alone is determinative. As a result, Section 4(a)(2) does not offer much clarity for an issuer or a dealer offering a significant amount of securities.

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Regulation D – Overview •Regulation D (“Reg D”) provides three (3) exemptions from the registration requirements of Section 5 of the Securities Act.

•Reg D was promulgated by the SEC under the Securities Act to implement several exemptions under Sections 3 and 4 of the Securities Act.

•The exemptions are described in Rules 504, 505 and 506 of Reg D. •The exemption in Rule 506 is frequently used in PIPE transactions.

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Rule 506 Rule 506 is a safe harbor for a Section 4(a)(2) offering. There are eight rules:

• Rule 501: Definitions applicable to all Regulation D offerings. • Rule 502: General conditions relating to integration, information requirements,

limitations on the manner of offering and limitations on resale. • Rule 503: Notice filing (Form D) (not required). • Rule 504: Small offerings of up to $1,000,000 for non-reporting issuers. • Rule 505: Offerings up to $5,000,000. • Rule 506: No limit on the size of the offering. • Rule 507: Disqualification if a court order enjoining an issuer for not complying with

Rule 503. • Rule 508: Substantial compliance rule; exemption is still available even with an

insignificant failure to comply with a provision of Regulation D.

Rule 506 essentially codifies judicial and SEC interpretations of what is required for a Section 4(a)(2) offering.

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Rule 506 – Overview • No limitation on the dollar size of the offering. • Sales can be made to an unlimited number of accredited investors plus up to 35 additional investors.

• Reg D will “look through” an entity that is organized for the specific purpose of acquiring an issuer’s securities and treat each of the entity’s equity owners as a purchaser. Therefore, those equity owners that are not accredited investors will count towards the 35 non-accredited investor limitation of Rules 505 and 506.

• A non-accredited investor must be sophisticated or use a sophisticated purchaser representative not affiliated with the issuer.

• General solicitation and general advertising now permitted under Rule 506(c) so long as all purchasers are accredited investors, either because they fall within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that they qualify as accredited investors.

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Rule 506 – Overview (cont’d) • If an issuer provides information to accredited investors, it must make this information available to non-accredited investors as well. The issuer must also be available to answer questions by prospective purchasers.

• Financial statement requirements are the same as for Rule 505 (this requirement only applies to sales to non-accredited investors).

• Securities issued pursuant to Rule 506 are restricted securities. • New “bad actor” disqualification.

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Regulation D – Accredited Investor • “Accredited investor” means:

• certain institutional investors, such as a bank, a savings & loan association (“S&L”) or financial institution (whether acting in its individual capacity or as a fiduciary), an insurance company, a small business investment company (“SBIC”), a registered investment company, a public or private business development company (“BDC”) or a registered broker-dealer;

• an ERISA plan (a) with a fiduciary which is a bank, an S&L, an insurance company or a registered investment adviser, (b) with total assets in excess of $5 million or (c) which is a self-directed plan with investment decisions made solely by accredited investors;

• a corporation, partnership, business trust or IRS Code Section 501(c)(3) charitable organization, in each case with total assets in excess of $5 million that has not been formed for the specific purpose of acquiring the securities offered (note that the SEC also will treat an LLC meeting these requirements as an accredited investor);

• a trust with total assets in excess of $5 million that has not been formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person (i.e., a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment or who uses a sophisticated purchaser representative not affiliated with the issuer of the securities offered);

• a director or an executive officer of the issuer, or if the issuer is a partnership, a general partner (“GP”) of the issuer or a director, executive officer or GP of the issuer’s GP;

• any natural person whose (1) individual net worth, or joint net worth with that person’s spouse, at the time of the purchase exceeds $1 million (excluding the value of that person’s primary residence), or (2) income or joint income with that person’s spouse exceeds $200,000 or $300,000, respectively, in each of the two most recent years, and who has a reasonable expectation of reaching that same income level in the current year; or

• an entity in which all of the equity owners are accredited investors.

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New Net Worth Standard • The Dodd-Frank Act provides that, upon enactment and for four years following enactment, the net worth threshold for accredited investor status will be $1 million, excluding the equity value (if any) of the investor’s primary residence.

• Regulation D was amended to adjust the accredited net worth standard that applies to natural persons or spouses to $1 million, excluding the value of the primary residence.

• Previously, investors could count primary residence in net worth. • Mortgage indebtedness in excess of value of primary residence is considered a liability for

purposes of determining accredited investor status. • Incremental debt secured by the primary residence that is incurred within 60 days of the sale of

the security also counts as a liability.

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New “Bad Actor” Disqualification • “Bad actor” disqualification requirements prohibit issuers and others, such as underwriters, placement agents, directors, officers, and shareholders of the issuer, from participating in exempt securities offerings, if they have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws.

•The adopting amendments became effective on September 23, 2013.

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New “Bad Actor” Disqualification - Covered Persons

• The amendment added a new Section 506(d) to Regulation D. • The provisions are applicable only in the context of Rule 506 offerings,

whether or not general solicitation is used. • The disqualification provisions apply to the following “covered persons”:

• The issuer and any predecessor of the issuer or affiliated issuer; • Any director, executive officer, other officer participating in the offering process, general

partner, or managing member of the issuer; • Any beneficial owner of 20% or more of any class of the issuer’s voting equity securities,

calculated on the basis of voting power; • Any investment manager to an issuer that is a fund and any director, executive officer, officer

participating in the offering, general partner, or managing member of the manager, as well as any director, executive officer or officer participating in the offering of any such general partner or managing member;

• Any promoter (as defined in Rule 405) connected with the issuer in any capacity at the time of the sale;

• Any person that has been or will be paid, directly or indirectly, remuneration for solicitation of purchasers in a securities offering (a “compensated solicitor”); or

• Any director, executive officer, other officer participating in the offering, general partner, or managing member of such compensated solicitor.

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• The final rules include the following categories of disqualifying events:

• Criminal convictions; • Court injunctions and restraining orders; • Final orders (as defined in Rule 501(g)) of certain state regulators (such as

securities, banking, and insurance) and federal regulators, including the U.S. Commodity Futures Trading Commission;

• SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment advisers, and investment companies and their associated persons;

• Certain SEC cease-and-desist orders; • Suspension or expulsion from membership in, or suspension or barring from

association with a member of, a securities self-regulatory organization (“SRO”); • SEC stop orders and orders suspending a Regulation A exemption; and • U.S. Postal Service false representation orders.

• Many of these are quite common for broker-dealers.

New “Bad Actor” Disqualification - Disqualifying Events

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Waivers •The rule permits the SEC to grant waivers upon a showing of good cause.

•The rule does not articulate standards for granting waivers. •The adopting release lists various circumstances that might be relevant to a waiver, such as a change of control, a change of supervisory personnel, absence of notice and an opportunity for hearing, and a relief from a permanent bar for a person who does not intend to apply to reassociate with a regulated entity.

•Recent context: waivers for loss of WKSI status due to “bad actor rules” in those provisions.

•Waivers may also be granted by the SEC upon written advice from the issuing authority.

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Mandatory Disclosures of Triggering Events Pre-Dating Effective Date

•To address the comments relating to the proposed rules, which applied a retrospective approach to disqualifying events, the final rule disqualifies only for trigger events that occur following the effective date.

•However, the rule requires written disclosure of matters that would have triggered disqualification, except that these actions occurred prior to the effective date of the rule.

• Disclosures apply to all Rule 506 offerings. • Disclosures must be provided “a reasonable time prior to sale”. • Relief under Rule 508 will not be available for a failure to provide disclosures.

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New “Bad Actor” Disqualification - Reasonable Care Exception

• The final rule contains a reasonable care exception that applies if an issuer can establish that it did not know and, in the exercise of reasonable care, could not have known that a disqualification existed because of the presence or participation of a covered person.

• The issuer would need to conduct a factual inquiry, and the type of inquiry will depend on the facts and circumstances.

• Issuers should consider: • Adding additional questions to D&O questionnaires. • Having 20% or greater shareholders complete questionnaires.

• Public companies should be able to determine their 20% holders through their public filings (Form 10-K, Form 3 filings, Schedule 13D and 13G filings).

• Non-public companies should contact their transfer agent and registrar. • Requiring placement agents to complete a questionnaire or provide a

representation.

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New “Bad Actor” Disqualification - Reasonable Care Exception (cont’d)

• For example, in a placement agent agreement for a Rule 506 offering, the issuer and the placement agent could make mirror representations that (i) they are not subject to a disqualifying event, have obtained a waiver from disqualification or have fully disclosed any disqualifying event that occurred prior to the effective date of the amendments and (ii) have informed the other party of any event or proceeding that could, with the passage of time, become a disqualifying event.

• Require other participants (that may be covered persons) to complete questionnaires or provide representations.

• For funds or other issuers engaged in continuous or delayed offerings, refreshing or updating their diligence, such as through bring-down representations, questionnaires and certifications, negative consent letters, periodic re-checking of public databases and other steps, depending on the circumstances.

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New “Bad Actor” Disqualification - Reasonable Care Exception (cont’d)

•Placement agents should consider: • Prior to any Rule 506 offering, conducting diligence on issuers and other offering

participants so that any disqualifying events that occurred prior to the effectiveness of the amendments can be properly disclosed and determining whether the new representations described above can be made (including discussing the potential impact of any event that, with the passage of time, could become a disqualifying event).

• Reviewing Forms U-4, U-5 and U-6 and comparing any events described in those forms to the disqualifying events enumerated in Rule 506(d)(1), in preparation for the possibility of either disclosing such events as pre-effectiveness disqualifying events or to confirm compliance with any of the new representations described above.

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Relaxation of the Ban on General Solicitation

• On September 23, 2013, amendments relaxing the prohibition on general solicitation and general advertising for Rule 506 offerings became effective.

• The SEC’s final rules implement a bifurcated approach to Rule 506 offerings. • As proposed, an issuer may still choose to conduct a private offering in reliance on

Rule 506(b) without using general solicitation or general advertising. • In order to implement this approach, the SEC adopted a new paragraph (c) under Rule 506, which permits the use of general solicitation and general advertising, subject to the following conditions:

• The issuer must take reasonable steps to verify that the purchasers of the securities are accredited investors;

• All purchasers of securities must be accredited investors, either because they fall within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that they qualify as accredited investors, at the time of the sale of the securities; and

• The conditions of Rule 501 and Rules 502(a) and 502(d) of Reg D are satisfied.

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Relaxation of the Ban on General Solicitation (cont’d)

•The final rules amend Form D to add a check box to indicate whether the issuer is relying on new Rule 506(c).

•The final rules do not amend or modify the requirements relating to existing Rule 506(b) (for Rule 506 offerings without general advertising or general solicitation).

•The final rules do not address other communication safe harbors that may be affected by the relaxation of the prohibition on general solicitation and general advertising, nor do they address integration issues.

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Relaxation of the Ban on General Solicitation – Reasonable Efforts

•The SEC indicated in the final rules that “reasonable efforts” to verify investor status will be an objective determination based on the SEC’s prior principles-based guidance.

• In the proposed rules, the SEC had noted that “reasonable efforts” to verify investor status may differ depending on the facts and circumstances, and the SEC provided the following non-exhaustive list of factors that may be appropriate to consider:

• The nature of the purchaser. The SEC describes the different types of accredited investors, including broker-dealers, investment companies or business development companies, employee benefit plans, and wealthy individuals and charities.

• The nature and amount of information about the purchaser. Simply put, the SEC states that “the more information an issuer has indicating that a prospective purchaser is an accredited investor, the fewer steps it would have to take, and vice versa.”

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Relaxation of the Ban on General Solicitation – Reasonable Efforts (cont’d)

• The nature of the offering. The nature of the offering may be relevant in determining the reasonableness of steps taken to verify status (i.e., issuers may be required to take additional verification steps to the extent that solicitations are made broadly, such as through a website accessible to the general public, or through the use of social media or email). By contrast, less intrusive verification steps may be required to the extent that solicitations are directed at investors that are pre-screened by a reliable third party.

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Relaxation of the Ban on General Solicitation – Reasonable Efforts (cont’d)

• The final rules do not provide for a safe harbor; however, they do set out a supplemental non-exclusive list of methods that may be used to satisfy the verification requirement, including:

• A review of IRS forms for the two most recent years and a written representation regarding the individual’s expectation of attaining the necessary income level for the current year;

• A review of bank statements, brokerage statements, tax assessments, etc. to assess assets, and a consumer report or credit report from at least one consumer reporting agency to assess liabilities;

• A written confirmation from a registered broker-dealer, RIA, CPA, etc.; and • For existing investors (prior to the effective date of the final rules), a certification.

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•The SEC confirmed the view that Congress did not intend to eliminate the existing “reasonable belief” standard of Rule 501(a) of the Securities Act for Rule 506 offerings.

•The SEC confirmed that if a person were to supply false information to an issuer claiming status as an accredited investor, the issuer would not lose the ability to rely on the Rule 506(c) exemption for that offering, provided the issuer “took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was an accredited investor.”

Relaxation of the Ban on General Solicitation – Reasonable Efforts (cont’d)

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Using General Solicitation • Issuers at an earlier stage may be more likely to use general solicitation, and these may be issuers that have not retained a financial intermediary.

•A third-party verification service will be especially useful in this case given that it likely will be accustomed to handling financial information.

• Consider whether third-party verification service is a registered broker-dealer or a registered investment adviser.

• Conduct diligence regarding the third-party verification service and its procedures.

• If the issuer proposes to undertake the verification process on its own, the issuer should implement special procedures and consult with counsel. Counsel will be asked to render a “good private placement” opinion.

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Using General Solicitation (cont’d) • In a transaction with a financial intermediary, the issuer, the financial intermediary and their counsel should discuss the types of communications that will be used, and all communications should be approved by the issuer and its counsel.

• This can be covered in the engagement letter and/or the placement agency agreement (if there is one) in a manner similar to that in which market participants address the use of test-the-waters materials or FWPs.

•The issuer should establish its own media or communications policy and identify the officers that are permitted to speak on its behalf.

• The issuer will want to ensure that it controls the solicitation process, and that employees and other unauthorized persons are not engaging in general solicitation on its behalf.

• The issuer will want to review its social media policy. • An issuer that is a private fund or a commodity pool operator may be subject to

more prescriptive rules relating to the content of the communications.

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Using General Solicitation (cont’d) • If a registered broker-dealer is participating in the offering, it will want to ensure that:

• It has identified the group within the bank that will be involved. • It has undertaken training to make certain that each member understands the

requirements under FINRA Rule 2210 and FINRA Rule 5123. • Under FINRA Rule 2210, most communications likely to be used in connection

with general solicitation will be considered “retail communications.” • Communications must be fair and balanced. • Communications will be subject to review, filing with FINRA and recordkeeping

requirements. • It will want to remind bankers of the firm’s social media policy.

•FINRA already is focused on Regulation D offerings and recently announced a sweep on social media issues.

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Regulation D – Integration •The SEC’s integration doctrine may apply to an offering that otherwise qualifies for an exemption under Reg D.

•The integration doctrine is designed to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings to take advantage of exemptions from registration that would not be available for the combined offering.

• All sales that are part of the same Regulation D offering must meet all of the terms and conditions of Regulation D.

•Rule 502(a) provides a safe harbor for sales of securities more than six months prior to or after the Regulation D offering; those sales will not be integrated into the Regulation D offering so long as there are no offers or sales of securities by or for the issuer of the same or similar class as in the Regulation D offering.

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Regulation D – Integration (cont’d)

•Under the SEC’s integration doctrine, the following factors are considered in determining whether one sale of securities by an issuer will be integrated with (i.e., treated as part of the same offering as) a prior or subsequent offer or sale of securities by the issuer:

• whether the sales are part of a single financing plan; • whether the sales involve issuances of the same class of securities; • whether the same sales occur at or about the same time; • whether the same type of consideration is received; and • whether the sales proceeds will be used for the same general purpose.

• If the SEC’s integration doctrine applies, the Reg D standards are applied to both sales as a whole.

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Form D – Overview •While issuers using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file a “Form D” within 15 days after they first sell their securities.

•Form D is a brief notice that includes the names and addresses of the issuer’s owners and stock promoters, but very little additional information about the issuer.

•Form D must be filed through the SEC’s EDGAR system. • In connection with the final rules relaxing the prohibition on general solicitation and general advertising for Rule 506 offerings, the SEC also made some changes to Form D.

• The signature block has been amended. • The certification has been broadened so that issuers claiming a Rule 506

exemption must confirm that the offering is not disqualified from reliance on the Rule 506 exemption.

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Regulation S

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Regulation S – Overview

• Regulation S under the Securities Act (“Reg S”) provides an exemption from the registration requirements of Section 5 of the Securities Act for securities offered and sold outside the United States.

• Reg S, which is comprised of Rules 901 to 905 under the Securities Act, specifically provides non-exclusive safe harbors for (1) offers and sales by issuers, distributors and their affiliates and (2) resales by others.

• In practice, issuers try to comply with the safe harbors. However, if an issuer fails to comply with a specific safe harbor, an issuer may still argue that the registration requirements should not apply to the transaction.

• In general, in order to qualify, (1) there must be an “offshore transaction” (i.e., an offer cannot be made to a person in the United States (“U.S. person”) and the buyer must be outside the United States or the seller must reasonably believe the buyer is outside the United States) and (2) neither the issuer nor any distributor (or any affiliate of either) may engage in any “directed selling efforts” (i.e., activities that may condition the U.S. market for the securities).

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Regulation S – Overview (cont’d)

For many offerings (1) there is a “distribution compliance period” during which no offer or sale may be made to a U.S. person for 40 days and (2) the offering documents and underwriting agreements must reflect certain restrictions on sales to U.S. persons.

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Regulation S – Rule 903

• Rule 903 provides an issuer safe harbor for sales of securities offshore. • Directed selling efforts made by the issuer, any distributor, any of their respective affiliates or any person acting on their behalf will preclude reliance on the issuer safe harbor by any seller, whether or not that seller participates in the directed selling efforts.

• Directed selling efforts in the United States may not be made at any time while a distribution is in progress and, where the availability of the safe harbor is conditioned on the adoption of transactional restrictions, during the applicable distribution compliance period as well.

• There are 3 categories of securities based on the probability of flowback into the United States and the type/amount of information available in the United States, the first category being the least restrictive.

• Different restrictions apply to equity and debt securities. For purposes of the categories, convertible securities are treated like the underlying security.

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Regulation S – Category 1

• Category 1 includes the following securities: • Securities of foreign issuers with no “substantial U.S. market interest” (discussed below) in the equity or debt securities to be offered, or in the case of convertible securities, the underlying securities.

• Securities sold in an “overseas directed offering” (discussed below) by foreign or domestic issuers.

• Securities backed by the full faith and credit of a foreign government. • Securities sold pursuant to eligible employee benefit plans.

• Additional transactional restrictions: None. • “Overseas directed offering” means an offering directed to residents of a single foreign country in accordance with local laws, limited to straight debt, asset-backed securities or non-participating preferred stock denominated in a foreign currency and not convertible into U.S. dollar denominated securities.

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Regulation S – Category 2

• Category 2 includes the following securities: • Debt securities of issuers that are reporting companies or non-reporting foreign issuers.

• Convertible debt of foreign issuers that are reporting companies. • Additional transactional restrictions:

• No offer or sale to U.S. persons may be made during a 40-day distribution compliance period commencing on the closing date or the date the securities were first offered to persons not engaged in the distribution (note: the issuer must devise a means to ensure compliance).

• Distributors of the securities must advise certain securities professionals to whom they sell of the restricted period.

• Offers and sales by a distributor of an unsold allotment or subscription are deemed to be made during the restricted period, regardless of when the offers and sales are actually made. However, once a distributor sells an allotment after the restricted period to a non-U.S. person, the security may be resold immediately.

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Regulation S – Category 3

•Category 3 includes securities of any type that are not covered by Categories 1 and 2.

•Additional transactional restrictions: •All Category 2 restrictions are applicable. •Debt securities

•Distribution compliance period is 40 days. •During the distribution compliance period, the debt securities must be represented by a temporary global certificate.

•Definitive securities may only be issued after the end of the distribution compliance period, and only upon certification of ownership by a non-U.S. person or a U.S. person that acquired the security in a transaction not requiring registration.

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Regulation S – Offshore Transaction

•In order to qualify for both safe harbors, the offer or sale must be made in an “offshore transaction.”

•No offer is made to a person in the United States. •Either of the following additional conditions must be met:

• At the time of the buy order, the buyer is, or the seller reasonably believed that the buyer is, outside the United States, or

• The transaction is executed on (1) a physical trading floor of an established foreign securities exchange, in the case of Rule 903, or (2) on a designated offshore securities market and the seller does not know that the transaction has been pre-arranged with a buyer in the United States, in the case of Rule 904.

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Regulation S – Directed Selling Efforts

• In order to qualify for both safe harbors, no “directed selling efforts” may be made in the United States.

•Directed selling efforts include the following: • Mailing printed materials to U.S. investors. • Conducting promotional seminars in the United States. • Placing advertisements in a publication with a general circulation in the United

States. • Placing advertisements with radio or television stations broadcast in the United

States. • Making offers directed at identifiable groups of U.S. citizens in a foreign country

(e.g., members of the U.S. military).

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Regulation S – Directed Selling Efforts (cont’d)

•Permitted activities include the following: • Advertisements required to be published under foreign law. • Communications with persons excluded from the definition of U.S. person. • Tombstone advertisements in publications with less than 20% of their circulation in

the United States. • Bona fide visits to real estate facilities by prospective investors. • Quotations of a foreign broker-dealer distributed by a third-party system that

primarily distributes such information in foreign countries, provided that no security transaction can be executed through the system between broker-dealers and persons in the United States and contact with U.S. persons in not initiated.

• Proper notice under Securities Act Rule 135 that an issuer intends to make a registered public offering of its securities.

• Providing journalists with access to issuer meetings held outside the United States, or providing written press or press-related materials released outside the United States in compliance with Securities Act Rule 135.

• Isolated limited contact. • Routine advertising unrelated to selling efforts. • Customary and legal activities conducted outside of the United States.

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Regulation S – Directed Selling Efforts (cont’d)

For Reg S offerings with a Rule 144A tranche, the SEC has clarified that general solicitation and general advertising in connection with a Rule 144A offering will not be viewed as “directed selling efforts” in connection with a concurrent Reg S offering.

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Regulation S – Substantial U.S. Market Interest

•“Substantial U.S. market interest” means: •Debt: (a) $1 billion or more of debt securities are held by U.S. persons, (b) 20% or more of the issuer’s debt securities are held by U.S. persons and (c) the issuer’s debt securities are held of record by 300 or more U.S. persons.

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Regulation S – U.S. Persons

• The following are “U.S. persons”: • Any natural person in the United States. • Any partnership or corporation organized or incorporated under the laws of the

United States. • Any estate of which any executor or administrator is a U.S. person. • Any trust of which any trustee is a U.S. person. • Any agency or branch of a foreign entity located in the United States. • Any non-discretionary account or similar account (other than an estate or trust)

held by a dealer or other fiduciary organized, incorporated or (if an individual) residing in the United States.

• Any partnership or corporation, if: • Organized or incorporated under the laws of any foreign jurisdiction; and • Formed by a U.S. person principally for the purpose of investing in securities

not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) under Regulation D) who are not natural persons, estates or trusts.

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Regulation S – Rule 904

• Rule 904 provides a safe harbor for resales of securities offshore. • Resales by (a) any persons other than the issuer and (b) any officer or director of

the issuer or who is an affiliate solely by virtue of holding such position, are deemed to have occurred outside the United States, if the general conditions of Reg S apply (i.e., the offering is offshore and there are no directed selling efforts) and any applicable additional resale requirements are met.

• Additional resale requirements • Resales by dealers and persons receiving selling concessions: May resell the

securities in Categories 2 and 3 during the applicable restricted period only if they reasonably believe the offeree or buyer is not a U.S. person; and if the seller or its representative knows that the purchaser is a dealer, or is a person receiving a selling concession or other fee as to the securities, the seller or its representative must notify the buyer of the applicable distribution compliance period.

• Resales by certain affiliates: For an offer or sale by an officer or director of the issuer, who is an affiliate of the issuer or distributor by holding that position, no selling concession, fee or other remuneration is paid in connection with the offer or sale other than the usual and customary broker’s commission that would be received by a person executing the transaction as an agent.

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Program Documentation

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Program and Single Offering Documentation – Main Documents

Purchasing the securities: • Single offering: purchase agreement, negotiated for each offering,

executed at pricing • Program: distribution agreement, executed at the program

commencement o Terms agreement executed at each takedown o Terms agreement will indicate deliverables for closing

Legal opinions: • Single offering: full set of opinions delivered at the closing (corporate,

securities and disclosure letter) • Program: full set of opinions delivered at program commencement, may

or may not be delivered again at a takedown, depending on provisions of terms agreement o Most programs require quarterly delivery of certain legal opinions

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Program and Single Offering Documentation – Main Documents (cont’d)

Comfort letter: • Single offering: a comfort letter delivered at pricing, and a bringdown

comfort letter delivered at closing • Program: a comfort letter delivered at program commencement, may or

may not be delivered again at a takedown, depending on provisions of terms agreement o Most programs require quarterly delivery of comfort letters

Registration rights agreement: • Rule 144A only, in case of an A/B exchange offer (Exxon Capital)

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Listing Requirements

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Main Exchanges

• As of January 8, 2014, 6,289 debt securities were listed on the NYSE, 219 debt securities were listed on the NYSE Arca, 23 debt securities were listed on the NYSE MKT and 29 debt securities were listed on NASDAQ (source: Bloomberg).

• With respect to new issuances, for 2013, 704 new debt issuances were listed on the NYSE, two new debt issuances were listed on the NYSE MKT, 13 new debt issuances were listed on the NYSE Arca) and six new debt issuances were listed on NASDAQ.

• NASDAQ began listing debt securities only recently and has an immaterial share of the listed debt market.

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Main Requirements

• U.S. securities offerings, including offerings of debt securities, must be registered under the Securities Act, unless a valid exemption from registration is available. Registered offerings of debt securities may not involve listing on an exchange, although the issuer may be required for at least some time to file periodic reports with the SEC. Investment grade debt securities are likely to be listed on the NYSE.

• To trade on a U.S. exchange, a security must be both: • Registered with the SEC. • Accepted for listing on an exchange.

• The NYSE has separate listing standards for listed companies and their affiliates and for non-listed or affiliated companies. Companies must meet specified financial criteria. In addition, an issuer cannot list debt securities with a total market value of less than $5 million.

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Main Requirements (cont’d) • An issuer that has listed its debt securities on the NYSE must also have

registered those securities under the Exchange Act. Issuers that have only debt securities listed on the NYSE are not subject to most of the NYSE's corporate governance standards (other than audit committee requirements and certifications to the NYSE).

• The NYSE's quantitative continued listing requirements allow the exchange to de-list or suspend the trading of bonds if any of the following apply:

• The total market value or principal amount of publicly held bonds falls below $1 million.

• The issuer is no longer able to meet its obligations on the listed debt securities. • Debt securities are not eligible for procedures that would allow the issuer

time to conform to the exchange's continued listing requirements. In addition, in a number of circumstances (such as failure to comply with continued listing requirements), the NYSE can take discretionary enforcement action, including suspending trading and de-listing proceedings against a listed company.

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Trading Records and Accounts • For non-listed and affiliated companies, the debt securities must

either: • Have at least an S&P Corporation "B" rating (or equivalent rating by another

nationally recognised securities rating organisation (NRSRO)). • Be guaranteed by a listed company.

• If not rated, a company's: • Senior issue is rated investment grade. • A pari passu or junior issue of the company is given an S&P Corporation "B"

rating (or equivalent).

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Minimum Denominations • There are limited minimum denomination requirements depending on the

nature of the debt instrument. • Certain structured debt instruments that are registered and listed can be

required to have denominations of $10. • A customary denomination is $1,000 and the offering may require a

minimum purchase. • Private offerings typically have both higher minimum denominations (for

example, $250,000) and minimum purchases (for example, $1 million).

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Procedure for an FPI • The procedures for SEC registration and listing on an exchange are

substantially the same for FPIs and U.S. issuers, although the specific disclosure and corporate governance requirements differ and an FPI may be able to file its registration statement with the SEC initially on a confidential basis, either as an “emerging growth company” (“EGC”) or under the rules for FPIs.

• An EGC is an issuer (domestic or foreign) with total gross revenues of less than $1 billion. An issuer will remain an EGC until the earliest of any of the following:

• The last day of the fiscal year during which the issuer's total gross revenues exceed $1 billion.

• Five years from the initial public offering (“IPO”). • The date on which the issuer has sold more than $1 billion in non-convertible

debt. • The date on which the issuer becomes a large accelerated filer (public float of

$750 million).

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Procedure for an FPI (cont’d) •An FPI bases its decision whether to list debt securities on a number of factors, including:

• A comparison of the pricing levels in its home jurisdiction to the typical pricing levels in the U.S. markets.

• Investor demand.

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Convertible Securities • Listing requirements differ slightly for convertible debt securities (that is,

debt securities convertible into equity securities). • For example, convertible debt securities may be listed on the NYSE only if

both: • The underlying equity securities are subject to real-time last sale reporting in the

U.S. • The convertible debt issue has an aggregate market value or principal amount of

no less than $10 million.

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Convertible Securities (cont’d) • Convertible debt securities may be listed on the NASDAQ Capital Market if:

• The convertible debt issue has an aggregate principal amount of at least $10 million. • The current last sale information is available in the U.S. with respect to the underlying equity

securities. • There are at least three registered and active market makers for the convertible debt

securities. • One of the following applies:

• the issuer of the convertible debt securities has an equity security that is listed on NASDAQ, the NYSE MKT or the NYSE;

• an issuer whose equity securities are listed on NASDAQ, the NYSE MKT or the NYSE, directly or indirectly owns a majority interest in, or is under common control with, the issuer of the convertible debt securities, or has guaranteed the convertible debt securities;

• an NRSRO has assigned a current rating to the convertible debt securities that is no lower than an S&P Corporation "B" rating or equivalent rating by another NRSRO; or

• where no NRSRO has assigned a rating to the issue, an NRSRO has currently assigned an investment grade rating to an immediately senior issue, or a rating that is no lower than an S&P Corporation "B" rating, or an equivalent rating by another NRSRO, to a pari passu or junior issue.

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Liability Concerns

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Securities Liability – Rule 144A, Regulation D and

Section 3(a)(2)

• Neither Rule 144A offerings, Regulation D offerings or securities offerings of, or guaranteed by, a bank under Section 3(a)(2) are subject to the civil liability provisions under Section 11 and Section 12(a)(2) of the Securities Act.

• Rule 144A offerings, Regulation D offerings and offerings under Section 3(a)(2) are subject to Section 10(b) of the Exchange Act and the anti-fraud provisions of Rule 10b-5 of the Exchange Act.

• Impact on offering documents, and use of offering circulars to convey material information and risk factors.

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Liability Under the Exchange Act

• Rule 10b-5 applies to registered and exempt offerings.

• Rule 10b-5 of the Exchange Act prohibits: • the use of any device, scheme, or artifice to defraud; • the making of any untrue statement of a material fact or the omission of a

material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading; or

• the engaging in any act, practice, or course of business that would operate to deceive any person in connection with the purchase or sale of any securities.

• To bring a successful cause of action under Rule 10b-5, the plaintiff must prove:

• that there was a misrepresentation or failure to disclose a material fact, • that was made in connection with plaintiffs’ purchase or sale of a security, • that defendants acted with “scienter,” or the intent or knowledge of the violation, • that plaintiffs “relied” on defendants’ misrepresentation or omission, and • that such misrepresentation or omission caused plaintiffs’ damages.

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Section 11 Liability – Registered Offerings

• Directors and officers who sign a registration statement filed in connection with a securities offering are subject to the liability provisions of Section 11 of the Securities Act.

• Section 11 of the Securities Act creates civil liability for misstatements or omissions in a registration statement at the time it became effective.

• Any person that acquired a security registered under a registration statement, and did not have knowledge of the misstatement or omission at the time of the acquisition of the security, can bring suit against:

• every person who signed the registration statement, including the issuer; • every director of the issuer at the time of the filing of the registration

statement, whether or not such director signed the registration statement; and

• experts who consent to such status, but only with respect to those sections of the registration statement (e.g., auditors).

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Section 12 Liability – Registered Offerings

• Section 12 of the Securities Act assigns liability to any person who offers or sells a security in violation of Section 5 of the Securities Act (pursuant to Section 12(a)(1)), or by means of a prospectus or oral communication that includes a misstatement or omission of material fact (pursuant to Section 12(a)(2)).

• No action under Section 12(a)(1) may be brought more than three years after the bona fide public offering of a security, or, in the case of Section 12(a)(2), more than three years after the actual sale of a security.

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Extraterritorial Application of Rule 10b-5

• In 2010, the U.S. Supreme Court limited the extraterritorial application of Rule 10b-5 by holding that Section 10(b) of the Exchange Act covers private rights of action only for: (1) transactions in securities listed on domestic exchanges, and (2) domestic transactions in other securities.

• See Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) (emphasis added).

• “Foreign-cubed” cases – foreign issuers, foreign plaintiffs and foreign transactions – may no longer be brought in the U.S. courts.

• One U.S. federal appellate court has held that to be liable for “domestic transactions in other securities,” a “plaintiff must allege facts suggesting that irrevocable liability was incurred or title was transferred within the United States.” See Absolute Activist Value Master Fund Ltd. v. Ficeto, No. 11-0221-cv, Slip. Op. (2d Cir. Mar. 1, 2012).

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Extraterritorial Application of Rule 10b-5 (cont’d)

The Second Circuit confirmed that the fact of a dual listing – i.e., the securities in question, although listed on a foreign exchange, are represented by ADRs listed on a U.S. exchange – does not mean that a purchase of those securities was a transaction in securities listed on a domestic exchange for purposes of the first prong of Morrison. City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, et.al., No. 12-4355-cv, slip op. at 14 (2d Cir. May 6, 2014).