On the Radar
SEC registrants may issue a variety of debt or debt-like securities
to finance their operations. In certain cases, a registrant may offer credit
enhancement arrangements under which (1) subsidiaries of the registrant guarantee
the debt or debt-like securities or (2) the registrant pledges the securities of its
affiliates as collateral. In addition, for various reasons, a subsidiary of the
registrant (rather than the registrant) may issue debt or debt-like securities.
While these structures or credit enhancement arrangements may be beneficial from a
cost-of-capital perspective, registrants should consider the SEC reporting
implications under SEC Regulation S-X, Rules 3-10, 3-16, 13-01, and 13-02, and
related complexities.
Guarantees of debt or debt-like securities that are registered under
the Securities Act of 1933 are considered securities themselves under that
legislation. Therefore, such guarantees, in addition to offerings of the guaranteed
securities, must be registered with the SEC unless they are exempt from
registration. Once a company registers them, an SEC reporting obligation is
established for each subsidiary issuer or guarantor under which the following (not
all-inclusive) must be provided separately:
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Full annual financial statements prepared in accordance with applicable accounting standards and audited in accordance with PCAOB standards.
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An annual assessment of internal control over financial reporting.
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Quarterly reporting of condensed financial information.
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MD&A.
Given how burdensome these requirements can be, the SEC typically
permits registrants to provide alternative nonfinancial and financial disclosures as
follows in their financial statements or MD&A as a form of relief in certain
circumstances:
Nonfinancial Disclosures
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A description of the issuers and guarantors.
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The terms and conditions of the guarantees, including whether a subsidiary guarantee is not full and unconditional or joint and several.
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Factors that may affect payments to holders of the guaranteed securities, including, but not limited to:
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The structure of and relationship between issuers, guarantors, and nonguarantors.
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Restrictions on dividends.
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Limitations on enforceability of the guarantees.
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The rights of noncontrolling interests.
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Financial Disclosures
Summarized financial information of the issuer and guarantors consisting of the
following line items, together with a brief description of the basis of
presentation:
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Current and noncurrent assets.
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Current and noncurrent liabilities.
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Redeemable preferred stock.
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Noncontrolling interests.
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Revenues.
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Gross profit.
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Income (loss) from continuing operations.
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Net income (loss).
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Net income (loss) attributable to the entity.
It is significantly less costly and burdensome for a registrant to
provide these alternative disclosures than comply with separate SEC reporting
obligations for each subsidiary issuer and guarantor. Thus, before issuing
securities, a registrant should determine whether it qualifies for such relief on
the basis of the contemplated legal structure and consult with SEC legal counsel as
appropriate. A registrant is eligible to provide alternative disclosures if its
securities are issued or fully and unconditionally guaranteed by a parent company
registrant, all issuers and guarantors are consolidated subsidiaries of the parent
company, the securities are debt or debt-like, and one of the following guarantee
structures is used:
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The parent company registrant issues (or co-issues on a joint-and-several basis with one or more of its consolidated subsidiaries) securities, and any guarantees are provided by one or more consolidated subsidiaries.
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A consolidated subsidiary issues (or co-issues with one or more other consolidated subsidiaries of the parent company registrant) the securities, and the securities are fully and unconditionally guaranteed by the registrant/parent company.
A registrant whose debt or debt-like securities meet these
requirements may provide alternative disclosures in lieu of separate financial
statements for the subsidiary issuers or guarantors. Note that while such
alternative disclosure requirements apply only to publicly registered securities
with these features, investors in private placement debt securities with similar
guarantee structures may expect companies to disclose similar information.
A registrant that issues securities that are collateralized by the
stock of an affiliate must also provide certain financial and nonfinancial
disclosures about the affiliates whose stock collateralizes the securities. This
includes summarized financial information about such affiliates and certain other
nonfinancial disclosures.
This Roadmap comprehensively discusses the
disclosure requirements for both guaranteed and
collateralized securities.