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Chapter 3 — Affiliates Whose Securities Collateralize Securities Registered or Being Registered

3.3 Grandfathering for Collateralized Securities

3.3 Grandfathering for Collateralized Securities

Under Regulation S-X, Rule 3-16, an issuer is required to provide the separate financial statements of affiliates if (1) such affiliates’ securities collateralize the issuer’s registered securities offering and (2) the bright-line “substantial portion of the collateral”8 test is met. Historically, many registered offerings with collateral features have been structured such that they avoid the requirement to provide separate financial statements by including provisions that limit the amount of collateral to less than a “substantial portion” (“collateral cutback provisions”). For example, if an issuer includes a provision in a registered offering that automatically limits the pledges of affiliates’ stock to less than 20 percent of the security’s principal amount, such pledges would not exceed the substantial portion of collateral test, and thus separate financial statements would not be required.

Footnotes

8
Rule 3-16(b) states that “securities of a person shall be deemed to constitute a substantial portion of collateral if the aggregate principal amount, par value, or book value of the securities as carried by the registrant, or the market value of such securities, whichever is the greatest, equals 20 percent or more of the principal amount of the secured class of securities.”