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Using Rule 144A to Access the U.S. Capital Markets, Contributed by Claude Serfilippi, Chadbourne & Parke (London) LLP

Wednesday, February 1, 2012

Non-U.S. issuers have frequently used private placements of securities to access the U.S. capital markets while avoiding the registration requirements mandated by the Securities Act of 1933 (Securities Act). However, prior to the adoption of Rule 144A, private placements were generally not as advantageous to issuers when compared to public offerings, principally due to the limitation on resale applicable to privately placed securities. Because a privately placed security is less liquid than a security registered with the Securities and Exchange Commission (SEC), issuers could expect to receive less competitive pricing when selling a privately placed security than when selling the same security in a public offering. Rule 144A was adopted in April 1990 to ease such resale restrictions. Rule 144A provides non-issuers with a non-exclusive safe harbour exemption from the registration requirements of the Securities Act for resales to qualified institutional buyers (QIBs) of privately placed securities and removes the restriction on immediate resale of such privately placed securities. Although Rule 144A does not apply to issuers, it is nevertheless valuable to issuers because it reduces an issuer's costs of raising capital by improving the liquidity of the institutional secondary market for privately placed securities, which in turn has a positive impact on pricing.

Benefits of Rule 144A Offerings

Rule 144A offerings have been popular for non-U.S. issuers for several reasons. First, a significant advantage of a Rule 144A offering is that it allows a non-U.S. issuer to avoid the registration requirements of the Securities Act. In a public offering, the SEC requires detailed information about the issuer and the offering. Although most issuers tend to disclose a similar amount of information in Rule 144A offerings as in a public offering, there are no firm rules governing disclosure. As a result, there is more flexibility for issuers in choosing what information to disclose. In addition, a Rule 144A offering does not trigger ongoing periodic reporting requirements under the U.S. securities laws. Therefore, as long as a non-U.S. issuer does not otherwise become a reporting company in the U.S., it will be able to remain exempt from the corporate governance provisions under U.S. laws and regulations, such as the Sarbanes-Oxley Act of 2002, and also avoid exposure from liabilities related to such laws. Secondly, a Rule 144A offering provides the non-U.S. issuer with greater control over timing of the offering and potentially quicker access to the U.S. capital markets. In a public offering, the SEC imposes significant scrutiny on the language contained in the issuer's registration statement filed with the SEC. It may take over 30 days before the SEC provides its initial comments on a registration statement filed in connection with an initial public offering. The issuer must then respond to the SEC's comments. The issuer may need to go through multiple rounds of this comment and response process before receiving the final sign off from the SEC. It may take a first-time issuer between 60 and 90 days before the SEC signs off on the registration statement. In contrast, an offering memorandum pursuant to Rule 144A is not reviewed by the SEC and can therefore be finalised much more quickly. The ability to get a deal to market quickly has become particularly important in the last several years, when volatile securities markets have provided issuers with short market windows to successfully complete an offering. Finally, the costs and expenses in connection with a Rule 144A offering will generally be lower than a public offering. When compared to a traditional private placement, the cost of capital for the issuer should be lower as the liquidity discount typically associated with a traditional private placement is reduced in a Rule 144A offering. Since a Rule 144A offering is a private placement, it will not incur filing fees in connection with review by the SEC. Furthermore, the shorter span of time necessary to conduct a Rule 144A offering also reduces overall costs for the issuer.

Conducting a Rule 144A Offering

In a Rule 144A offering, the issuer offers and sells unregistered securities in a private placement under Section 4(2) or Regulation D of the Securities Act to one or more "initial purchasers," typically broker-dealers. These initial purchasers then rely on Rule 144A to immediately resell the securities to QIBs. QIBs are institutional investors that in the aggregate own and invest on a discretionary basis at least $100 million in securities of unaffiliated issuers.

— Documentation

A Rule 144A offering will require two primary documents: the offering memorandum and the purchase agreement. Typically, counsel for the issuer will take the lead in drafting the offering memorandum, and counsel for the initial purchasers will take the lead in drafting the purchase agreement. The offering memorandum provides information about the issuer, the terms of the securities being offered, and other related information. Although Rule 144A does not require specific disclosures to be included in the offering memorandum, the issuer will still be subject to the anti-fraud provisions of various state and federal securities laws such as Rule 10b-5 under the Securities Exchange Act of 1934. Thus most offering memoranda include information that is comparable to that included in a prospectus for a registered offering. A purchase agreement is the agreement between the issuer and the initial purchasers and governs the price, terms, and other conditions relating to the offer, sale, and purchase of the securities. The purchase agreement is very similar to the underwriting agreement in a public offering. This is because the institutions that function as initial purchasers are in effect playing a role in the private placement that is similar to the underwriters in a public offering.

— Conditions

There are four conditions that must be met when conducting a Rule 144A offering. First, the securities must be offered or sold only to QIBs or to an offeree or purchaser that the seller reasonably believes to be a QIB. Rule 144A provides a number of non-exclusive methods of establishing a prospective purchaser's ownership and discretionary investments of securities, including confirming such information through the prospective purchaser's most recent publicly available financial statements or a certification from its chief financial officer. Secondly, the seller must take reasonable steps to ensure that the purchaser of the securities is aware that the seller may rely on Rule 144A. Thirdly, the securities offered or sold cannot be (1) part of the same class as securities listed on a registered national securities exchange or quoted in an automated U.S. inter-dealer quotation system; or (2) securities of an open-end investment company, unit investment trust, or face-amount certificate company. The condition at (1) above is sometimes also referred to as the "fungibility" requirement of Rule 144A. Finally, in the case of securities of an issuer that is neither required to file reports with the SEC (or a foreign issuer exempt from filing such reports) nor a foreign government, the holder and a prospective purchaser designated by the holder must have the right to obtain from the issuer upon their request certain financial and other information specified in Rule 144A.

Alternative Route

Given the fungibility requirement and other pre-conditions for use of Rule 144A, a Rule 144A offering may not be possible for every issuer. However, for certain non-U.S. issuers, a Rule 144A offering can be a less expensive and quicker alternative to a public offering than a traditional private placement. Claude Serfilippi is the managing partner of the London office of Chadbourne & Parke. He has extensive experience in advising domestic and foreign clients and financial institutions in corporate and securities matters, including mergers and acquisitions. His securities experience includes the representation of numerous issuers and underwriters in the sale of equity and debt securities, in both public and private offerings, with an emphasis on high-yield securities offerings and Rule 144A/Regulation S placements. Telephone: +44 (0) 20-7337-8030; E-mail:


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