The Role of Custom in Rule 144A Capital Markets Transactions

Echeverri, Pablo

doi:10.1007/978-3-319-73362-3_7

Pablo Echeverri³

469 Accesses

Résumé

La Règle 144A adoptée par la Securities and Exchange Commission en 1990 conformément au Securities Act, a constitué une avancée réglementaire révolutionnaire. En facilitant la revente de titres « limités » émis dans des placements privés, la Règle a été à l’origine d’un marché d’1,7 milliard de dollars. En dépit de l’origine règlementaire de ce marché, le présent chapitre soutient que le fonctionnement interne de ce marché est plus gouverné par la coutume que par des obligations légales. Précisément, ce chapitre explique (1) comment les standards de transparence et de vérification de la Règle dans des offres relevant de l’article 144 A se sont développés comme une réponse d’origine coutumière à des avancées règlementaires et (2) quels sont les mécanismes d’incitation qui soutiennent ce régime coutumier.

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Notes

1.
Securities Act of 1933, Section 2(1)(11), 15 U.S. Code § 77b(a)(1) (defining the term “security”).
2.
Howell (2007), pp. 199, 200; see SEC v. Elliott, 2012 U.S. Dist. LEXIS 82992, at *1 (S.D.N.Y. June 12, 2012) (“The principal purpose of the Securities Act of 1933 is to ensure that the public has access to adequate disclosures regarding companies whose shares are offered for purchase and/or sale on a public stock exchange.”).
3.
Securities Act of 1933, Section 2(1)(11), 15 U.S. Code § 77b(a)(11) (defining the term “underwriter”). Generally, underwriters are persons who acquire securities with the intention of participating in a distribution, which is a public offering.
4.
The SEC’s mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” SEC, What We Do, https://www.sec.gov/Article/whatwedo.html.
5.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.144A (2016).
6.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.144A (2016).
7.
General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 240.10b-5 (2016); Securities Act of 1933, Section 17(a), 15 U.S.C.A. § 77q(a) (2006).
8.
See Cooter (1994), pp. 215, 218.
9.
Securities Act of 1933, Section 4(a)(1), 15 U.S. Code § 77d(a)(1); Robbins (2016), p. 49.
10.
Securities Act of 1933, Section 4(a)(2), 15 U.S. Code § 77d(a)(2); Robbins, supra note 7, at 49.
11.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.144(d)(1). The details regarding the holding period are not particularly relevant to this article.
12.
Robbins, supra note 7, at 49.
13.
Id. at 49–50.
14.
Id.
15.
Howell, supra note 2, at 207.
16.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.144A(d)(1) (2016).
17.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.144A(d)(2) (2016).
18.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.144A(d)(3) (2016).
19.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.144A(d)(4) (2016).
20.
See General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.144A(b)-(c) (2016).
21.
General Rules and Regulations, Securities Act of 1933, Regulation S-K, 17 C.F.R. § 229 (2016).
22.
General Rules and Regulations, Securities Act of 1933, Regulation S-X, 17 C.F.R. § 210 (2016).
23.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.405 (2016) (definition of “foreign private issuer ” under the Act); General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 249.3b-4(c) (2016) (definition of “foreign private issuer ” under the Exchange Act). The test is the same under both rules. An FPI is any foreign issuer other than a foreign government except an issuer that meets the following conditions:
1. (1)
  Has more than 50% of its outstanding voting securities owned by U.S. residents; and
2. (2)
  Any of the following:
  1. a.
    The majority of executive officers or directors are U.S. citizens or residents;
  2. b.
    More than 50% of the issuer ’s assets are located in the U.S.; or
  3. c.
    The business of the issuer is administered in the U.S.
24.
12 CFR § 363.1 (2016). Title 12 of the Code of Federal Regulations defines a public company as “an insured depository institution or other company that has a class of securities registered with the U.S. Securities and Exchange Commission or the appropriate Federal banking agency under Section 12 of the Securities Exchange Act of 1934 and nonpublic company means an insured depository institution or other company that does not meet the definition of a public company.”
25.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 239.11 (2016); SEC Form S-1.
26.
General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 249.310 (2016).
27.
General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 249.220F (2016).
28.
General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 249.308a (2016).
29.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.144A(d)(4) (2016).
30.
General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 240.12g3-2(b) (2016).
31.
Engel and McCoy (2007), pp. 2039–2104 at 2072 (in the context of mortgage-backed securities, “… Rule 144A does not require issuers to provide prospective purchasers anything beyond basic information about the risk profile of the loan pool”).
32.
Harmetz (2009), pp. 9–10; Pinedo and Tanenbaum (2016) §6.7.2 (“In connection with a Rule 144A transaction, the issuer typically prepares an offering memorandum that is provided to investors and contains disclosure similar to a registration statement.”).
33.
Kutak Rock & Campbell (Nov. 29, 1990) 1273 (“the Division will not respond to questions with respect to the adequacy of the information provided pursuant paragraph (d)(4).”).
34.
Telephone Interview with a capital markets partner at a major New York law firm (Mar. 30, 2017).
35.
See Howell, supra note 2, at 215 (“Almost every domestic issuer contemporaneously issues a registration application for the public market”); see Chaplinsky and Ramchand (2004), pp. 1073, 1079 (“… over 97% of domestic 144A issues are accompanied by simultaneous application for registration rights.”).
36.
See Securities and Exchange Commission, Report on review of disclosure requirements in regulation S-K 21-22 (2013).
37.
See GDF Suez OM at 100; AA PIK OM at 92; Grupo Famsa OM at 59; Grupo Bimbo OM at 43; 4finance OM at 88; Banco Schahin OM at 77; BNCR OM at 81; Hutchinson OM at 71; Inbursa OM at 66; Unifirm OM at 75; EPM at 113; Votorantim at 86; Bantrab OM at 69; AES Gener OM at 94; Grupo Lala OM at 66; Confidential OM 1; Confidential OM 2; Alpek OM at 65; but see e.g. Teamlease OM (does not discuss off-balance sheet transactions).
38.
Securities Act Release No. 33-873A (Aug. 29, 2006), Securities Exchange Act No. 54-302A (Aug. 29, 2006), File No. S7-03-04 (adopting new rules on executive compensation disclosure); See Securities and exchange commission, Report on review of disclosure requirements in regulation S-K 57-58 (2013).
39.
See e.g. All OMs in Appendix 2 (none contains a detailed executive compensation section). Moreover, no transaction on which I worked as a practitioner contained a detailed executive compensation section similar to that found in registered transactions.
40.
General Rules and Regulations, Securities Act of 1933, Regulation S-K, 17 C.F.R. § 229.402 (2016).
41.
See e.g. Grupo Famsa OM at 105 (executive compensation section that likely satisfied Item 6(a)); but cf. Grupo Bimbo OM (no disclosure about executive compensation).
42.
I interviewed several capital markets attorneys who confirmed this but requested to remain anonymous.
43.
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
44.
Vizcarrondo (2013), pp. 23–24.
45.
See Vizcarrondo supra note 43, at 23.
46.
Securities Act of 1933, Section 11(a), 15 U.S. Code § 77k(a) (2006).
47.
Securities Act of 1933, Section 11(b), 15 U.S. Code § 77k(a) (2006).
48.
Securities Act of 1933, Section 11(b)(3), 15 U.S. Code § 77k(b)(3) (2006).
49.
Accountants prepare financial statements while engineers often “expertize” sections about oil reserves in oil & gas transactions.
50.
Securities Act of 1933, Section 11(b)(3), 15 U.S. Code § 77k(b)(3) (2006).
51.
Securities Act of 1933, Section 11(b)(3), 15 U.S. Code § 77k(b)(3) (2006).
52.
Securities Act of 1933, Section 11(b)(3)(C), 15 U.S. Code § 77k(c) (2006).
53.
General Rules and Regulations, Securities Act of 1933, 17 C.F.R. § 230.176 (2008). Rule 176 identifies several factors that courts must consider when determining whether a reasonable investigation was conducted. They include, among others, the type of issuer , security, and person in question.
54.
See In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628 (S.D.N.Y. 2004).
55.
Id at 673 (“Any information that strips a defendant of his confidence in the accuracy of those portions of a registration statement premised on audited financial statements is a red flag”).
56.
Securities Act of 1933, Section 12(a), 15 U.S. Code § 77l(a) (2006).
57.
See In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 663 (S.D.N.Y. 2004) (“Section 12(a)(2) has a defense of reasonable care that is less demanding than the duty of due diligence imposed under Section 11.”).
58.
See Sanders v. John Nuveen & Co., 619 F.2d 1222, 1228 (7th Cir. 1980) (holding that, in this case, there is no significance in the difference between “reasonable care” under Section 12 and “reasonable investigation ” under Section 11), cert. denied, 450 U.S. 1005 (1981); see also Feit v. Leasco Data Processing Equip. Corp., 332 F. Supp. 544, 584 (E.D.N.Y. 1971) (equating, in dictum, the “reasonable care” and “reasonable investigation ” standards under Sections 12 and 11, respectively); Securities Offering Reform, SEC Release No. 33-8591 at 191 (July 19, 2005) (“Section 11 requires a more diligent investigation than Section 12(a)(2)”), www.sec.gov/rules/final/33-8591.pdf. While the SEC is in line with Worldcom in that the burden under Section 11 is higher, it refers to a “more diligent investigation,” which clearly suggests that a diligent investigation is still required under Section 12.
59.
Ford Jacob and Goldstein (2013), 15-2.
60.
Securities Offering Reform, SEC Release No. 33-8591 at 191 (July 19, 2005) (“Moreover, we believe that any practices or factors that would be considered favorably under Section 11 … also would be considered as favorably under the reasonable care standard of Section 12(a)(2)”).
61.
General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 240.10b-5 (2016).
62.
See Jacob and Goldstein supra note 58, at 2-2. Liability under Section 11 is limited to statements contained in or omissions from an effective registration statement. Since there are no registration statements in 144A deals, there can be no Section 11 liability. Note that potential defendants under Section 11 only include the issuer , signers, directors, experts and underwriter.
63.
See Gustafson v. Alloyd Co., Inc., 513 U.S. 561 (1995) (ruling that 12(a) liability “cannot attach unless there is an obligation to distribute the prospectus in the first place”); see Yung v. Lee, 432 F.3d 142 (2d Cir. 2005) (holding that 12(a)(2) does not apply even when the disclosure in the 144A transaction is based on disclosure used in a public offering); See In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628 (S.D.N.Y. 2004) (dismissing a 12(a) claim in the context of a 144A transaction); In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611, 624 (S.D.N.Y. 2007) (holding that Rule 144A offering cannot give rise to liability under Section 12(a)(2)).
64.
Herman & MacLean v. Huddleston, 459 U.S. 375, 380 (1983) (“Most significantly for present purposes, a private right of action under § 10(b) of the 1934 Act and Rule 10b-5 has been consistently recognized for more than 35 years. The existence of this implied remedy is simply beyond peradventure.”); Vizcarrondo supra note 43, at 56.
65.
See Vizcarrondo supra note 43, at 64.
66.
see Huber et al. (2002) 12 n.2 (“… initial purchasers in Rule 144A transactions have established a market practice (considered more than adequate to defeat a claim of scienter under Rule 10b-5) of engaging in a due diligence process substantially similar to that carried out by underwriters in public offerings.”); see Jacob and Goldstein, supra note 58, at 15-4 (“Moreover, in certain circumstances, proof of an adequate diligence process that did not uncover red flags would in all likelihood establish a defense for liability on scienter grounds.”); See generally Robbins (2013), p. 468 [hereinafter Robbins on Diligence]; Harmetz supra note 31, at 14 (“[T]he initial purchasers are not entitled to the “due diligence” defense that may be established under Section 11. Nonetheless, a thorough due diligence investigation by lawyers, accountants, the issuer , and the underwriter generally will result in better disclosure and a lower risk of liability or potential liability for material misstatements or omissions.”).
67.
See Vizcarrondo supra note 43, at 9.
68.
Caiola v. Citibank., N.A, 295 F.3d 312, 331 (2d Cir. 2002) (when a party speaks, it has a “duty to be both accurate and complete”); Ellenburg v. JA Solar Holdings Co., No. 08 Civ. 10475, 2010 U.S. Dist. LEXIS 49220 (S.D.N.Y. May 17, 2010) (once substance of transaction was disclosed, a duty to fully disclose all the risks arose, even though there was no duty to disclose the transaction in the first place); In re Bristol Myers Squibb Co. Sec. Litig., 586 F. Supp. 2d 148, 160 (S.D.N.Y. 2008) (“[E]ven an entirely truthful statement may provide a basis for liability if material omissions related to the content of the statement make it … materially misleading.”).
69.
See Vizcarrondo supra note 43, at 14.
70.
See Jacob and Goldstein supra note 58, at 15-1; see generally Robbins on Diligence; see Huber, supra note 65, at 12 n.2 (“… initial purchasers in Rule 144A transactions have established a market practice (considered more than adequate to defeat a claim of scienter under Rule 10b-5) of engaging in a due diligence process substantially similar to that carried out by underwriters in public offerings.”).
71.
See Robbins on diligence at 21.
72.
See Jacob and Goldstein, note 58, at 4-14–4-17.
73.
See Jacob and Goldstein supra note 58, ch. 6. Chapter 6 provides a very detailed account of what business due diligence may look like. In 144A deals, a lot of what this chapter discusses is condensed into a single large meeting, subject to follow-up calls, as needed.
74.
See id. at 4-3, 5-1–5-39. Chapter 5 provides a detailed list of the types of documents that law firms request and review.
75.
See id. at 4-9–4-12.
76.
See id. at 6-20–6-24.
77.
See id. at 4-12–4-13.
78.
See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 553 U.S. 148, 158 (2008) (holding that 10b-5 liability does not extend to secondary actors as aider and abettors but they can be subject to liability for statements they directly made).
79.
See Jacob and Goldstein supra note 58, at 4–11.
80.
See e.g. Howell, supra note 2, at 212 (stating that Rule 144A disclosure standards are only subject to Rule 10b-5 where the plaintiff must prove intent or recklessness) (citing Scott (2005), p. 73); see generally Robbins on diligence (discussing due diligence in private offerings without addressing 17(a)); see Huber, supra note 65, at 12 n.2 (“… initial purchasers in Rule 144A transactions have established a market practice (considered more than adequate to defeat a claim of scienter under Rule 10b-5) of engaging in a due diligence process substantially similar to that carried out by underwriters in public offerings.”); Strafford CLE Webinar: Rule 144A and Regulation S Securities Offerings: Navigating the Process and Closing the Deal (PowerPoint presentation) (Sept. 2015) (discussing due diligence and 10b-5 liability in 144A deals without mentioning 17(a)), available at http://media.straffordpub.com/products/rule-144a-and-regulation-s-securities-offerings-navigating-the-process-and-closing-the-deal-2015-09-03/presentation.pdf.
81.
See Part 4(b) herein.
82.
See Vizcarrondo supra note 43, at 55 (“10(b) and Rule 10b-5 continue to dwarf in importance other liability provisions under the securities laws.”).
83.
See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208 (1976) (equating Section 11’s due diligence defense with a negligence standard ).
84.
See id. at 212–214 (holding that plaintiffs were required to prove scienter to establish liability under 10b-5).
85.
See id.; see also Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008) (including scienter in the list of elements to prove a 10b-5 claim).
86.
See Bodner and Welsh (2004), p. 1728 (discussing the narrow path to recovery for investors in Rule 144A offerings).
87.
Stoneridge, 552 U.S. at 157 (“In a typical § 10(b) private action a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”).
88.
SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999) (to violate 10b-5 a defendant must have “(1) made a material misrepresentation or a material omission as to which he had a duty to speak, or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale of securities.”).
89.
see Vizcarrondo supra note 43, at 55–89 (containing a detailed discussion of 10b-5 liability).
90.
Auto. Indus. Pension Trust Fund v. Textron Inc., 682 F.3d 34, 39 (1st Cir. 2012) (stating that negligence or “puffing” do not constitute scienter); Southland Sec. Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004) (requiring severe recklessness); PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 681 (6th Cir. 2004) (defining recklessness as akin to “conscious disregard”); Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d 338, 344 (4th Cir. 2003) (requiring severe recklessness).
91.
Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634, 639 (D.C. Cir. 2008) (adopting the Seventh Circuit’s approach in Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977) and defining severe recklessness as “an extreme departure from the standards of ordinary care … which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.”).
92.
Atlantica Holdings, Inc. v. Sovereign Wealth Fund Samruk-Kazyna JSC, 2 F. Supp. 3d 550, 555-56 (S.D.N.Y. 2014).
93.
Id; see Vizcarrondo supra note 43, at 78–89 (detailed discussion of the pleading requirements).
94.
Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 108 (2d Cir. 2012); Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004).
95.
ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (quoting 15 U.S.C. § 78u-4(b)(2)).
96.
Central Bank of Denver , N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 166–67, 177–78 (2008) (holding that 10b-5 liability does not extend to those who merely aid and abet the commission of a violation of Rule 10b-5 but is limited to those who directly make a misstatement or omission or commit a manipulative act, which may include secondary actors).
97.
Central Bank, 511 U.S. 164, 177–78; Stoneridge, 552 U.S. at 152–153 (relying on Central Bank to preclude secondary liability in private action because defendants did not have a duty to disclose and their deceptive acts were, in fact, not communicated to the public).
98.
Janus Capital Grp., Inc. v. First Derivatives Traders, 564 U.S. 135, 142 (2011).
99.
See id.
100.
Securities Exchange Act of 1934, Section 20(e), 15 U.S. Code § 78t(e); Vizcarrondo supra note 43, at 142. In response to Central Bank, Congress created Section 20(e) to explicitly make secondary liability available in SEC enforcement actions under the Exchange Act.
101.
SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009).
102.
See SEC v. Apuzzo, 689 F.3d 204, 212 (2d Cir. 2012) (holding that to establish substantial assistance the SEC must prove that defendant participated in violation wishing to make it succeed).
103.
Id.
104.
See e.g. Howell, supra note 2, at 212 (stating that Rule 144A disclosure standards are only subject to Rule 10b-5 where the plaintiff must prove intent or recklessness) (citing Scott (2005) at 73); Robbins on diligence at 19 (2013) (discussing SEC v. Tambone in the context of due diligence without mentioning its extension of 17(a) negligence-based liability to defendants who “use” a false or misleading statement); see Huber, supra note 65, at 12 n.2 (“… initial purchasers in Rule 144A transactions have established a market practice (considered more than adequate to defeat a claim of scienter under Rule 10b-5) of engaging in a due diligence process substantially similar to that carried out by underwriters in public offerings.”); but see Jacob and Goldstein supra note 58, at 15-4 (referring to section 17 liability as a reason for conducting due diligence in 144a transactions).
105.
Securities Act of 1933, Section 17(a), 15 U.S.C.A. § 77q(a) (2006).
106.
See Vizcarrondo supra note 43, at 48.
107.
See Landry v. All Am. Assurance Co., 688 F.2d 381, 386 (5th Cir. 1982); See Vizcarrondo supra note 43, at 49.
108.
446 U.S. 680 (1980).
109.
Id. at 701-02.
110.
See Vizcarrondo supra note 43, at 50.
111.
550 F.3d 106, 127-28 (1st Cir. 2008), reh’g en banc granted, opinion withdrawn, 537 F.3d 54 (1st Cir. 2009) and opinion reinstated in relevant part on reh’g, 597 F. 3d 436 (1st Cir. 2010) (en banc); see Kelly-Dynega (July 3, 2012) 17-a-2-and-3.
112.
Tambone, 550 F.3d at 127 (17(a) “[l]iability attaches so long as the statement is used ‘to obtain money or property,’ regardless of its source.”).
113.
Janus, 564 U.S. at 142 (“the maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it”).
114.
See SEC v. Stoker, 873 F. Supp. 2d 605, 613 (S.D.N.Y. 2012) (imposing liability on a defendant who sent a copy of marketing materials to a potential investor).
115.
Steinberg (2016) §6.05[2]. (“[t]he overwhelming view today is that Section 17(a) does not provide for an implied private right of action.”); Goel et al. (2012), p. 474 (“[O]nly the SEC can bring an action under Section 17(a), whereas Section 10(b) provides private litigants a right of action.”), available at https://www.ropesgray.com/files/upload/20120308_PDFBloombergBNA.pdf.
116.
Vizcarrondo supra note 43, at 50; Steinberg Ste supra note 114, §6.05[2] (“Although a number of mostly older cases have answered this issue in the affirmative, the overwhelming majority of the more recent decisions have declined to imply such a remedy.”)
117.
Hochfelder, 425 U.S. at 212–214 (requiring scienter); Central Bank, 511 U.S. 164 (requiring direct and public statements for liability to attach); Janus, 564 U.S. 135 (rejecting liability for “substantial participation”); Stoneridge, 553 U.S. 148 (refusing to extend aider and abettor liability to secondary actors); Vizcarrondo supra note 43, at 50; see Steinberg supra note 114, §6.05[2] (“If an implied remedy under Section 17(a) is held to exist, a plaintiff may seek to recover for negligent misconduct, thereby avoiding Section 10(b)’s scienter requirement.”).
118.
Vizcarrondo supra note 43, at 49; see also Gennuso (1988), pp. 159–176 (illustrates that the courts have been divided on this issue for several decades).
119.
Id.
120.
See Bodner & Welsh supra note 85.
121.
Baugues et al. (SEC, October 2015).
122.
Boettrich and Starykh (2017) [hereinafter NERA Report].
123.
See SEC Report at 7 (Table 1). I obtained the totals and percentages from the numbers in Table 1. Refer the modified version of Table 1 with my additional calculations.
124.
See NERA Report at 3 (Figure 2). Note that this figure does not include IPO laddering cases, which is irrelevant here because there no such cases in the 2009–2014 period.
125.
This is not statistically guaranteed and is just an inference used for illustrative purposes.
126.
This includes six bankruptcy cases, three tax cases, two unrelated SEC enforcement actions, and numerous irrelevant cases in which the term “Rule 144A” was tangentially used.
127.
See Appendix 1 (last two cases in table).
128.
Of those 16 cases (1) 14 were at a “judgment as a matter of law” stage, eight of which were resolved in favor of the defendants (all claims were dismissed) and six in favor of plaintiffs (at least one claim survived); (2) one was at the class certification stage and plaintiffs obtained certification; and (3) one consisted of a motion to exclude expert testimony and reports by plaintiffs in which defendants prevailed. See Appendix 1 for a list of these cases.
129.
NERA Report at 14 (Figure 10).
130.
SEC, Select SEC and market data, Fiscal 2016 (2017), available at https://www.sec.gov/files/2017-03/secstats2016.pdf [hereinafter Enforcement Reports].
131.
SEC, Select SEC and market data, Fiscal 2009–2014 (2009–2014), available at https://www.sec.gov/reports?aId=edit-field-article-sub-type-secart-value&year=All&field_article_sub_type_secart_value=Reports+and+Publications-SelectSECandMarketData&tid=All [hereinafter Enforcement Reports].
132.
SEC, Litigation Releases, https://www.sec.gov/litigation/litreleases.shtml (last visited Jun. 6, 2017).
133.
SEC, Administrative Proceedings, https://www.sec.gov/litigation/admin.shtml (last visited Jun. 26, 2017).
134.
SEC, Open Administrative Proceeding Cases, https://www.sec.gov/litigation/apdocuments/ap-open-fileno-asc.xml (last visited Jun. 6, 2017).
135.
See SEC Report at 7 (Table 1).
136.
461/19,1633.
137.
Complaint at 20, SEC v. Ranko Cucuz et al., No. 2: 06-CV-11935 (E.D. Mich. Apr. 25, 2006) available at https://www.sec.gov/litigation/litreleases/2006/lr19668.htm.
138.
In re. Mark Tuminello, Securities Act Release No. 9023 (April 9, 2009), Securities Exchange Act Release No. 59739 (April 9, 2009) Admin. Proc. File No. 3-13436, 2009 SEC LEXIS 1197 (instituting administrative proceedings under 17(a) and 10b-5 against a managing director at Wachovia, which participated as an initial purchaser in a 144A deal); In re. Chandrashekhar Gopinathan, Securities Act Release No. 9057 (July 27, 2009), Securities Exchange Act Release No. 60389 (July 27, 2009), Admin. Proc. File No. 3-13470, 2009 Sec Lexis 2600 (same facts but defendant was a vice-president at Wachovia when the transaction took place). In both cases, the SEC pled “wilfull” violations of 17(a) and 10b-5 because defendants manipulated financial information that was included in the OM. Both actions were settled.
139.
Enforcement Report at 3 (Table 2). The SEC opened 497 stand-alone and 195 follow-on administrative proceedings during FY 2016, of which, 14 and 7, respectively, were classified under “securities offerings.”
140.
Vizcarrondo supra note 43, at 50 (“Thus, Aaron encourages the SEC to plead under § 17(a)(2) or (3) rather than § 10(b) or § 17(a)(1); as shown by cases such as Washington County Utility District, the SEC has responded as expected.”).
141.
Complaint at 20, SEC v. Ranko Cucuz et al., No. 2: 06-CV-11935 (E.D. Mich. Apr. 25, 2006) available at https://www.sec.gov/litigation/litreleases/2006/lr19668.htm.
142.
See Howell, supra note 2, at 215 (“Almost every domestic issuer contemporaneously issues a registration application for the public market”); see Chaplinsky and Ramchand supra note 34, at 1079 (“… over 97% of domestic 144A issues are accompanied by simultaneous application for registration rights.”).
143.
In re HealthSouth Corp. Secs. Litig., 261 F.R.D. 616, 622 n.8 (N.D. Ala. 2009).
144.
See Pinedo and Tanenbaum supra note 31, at §19.2.2 (“For a U.S. reporting issuer , it is customary for initial purchasers and counsel to use SEC disclosure standards as a guideline in preparing the offering memorandum for a Rule 144A offering.”).
145.
While smaller domestic issuers now have other avenues to raise capital under the JOBS Act, foreign issuers must resort to the 144A market to raise capital in the United States. Otherwise, they are limited to the home capital markets or non-U.S. markets.
146.
For example, including off-balance sheet transactions disclosure (Sarbanes-Oxley) is crucial because, if such transactions exist, they will not be reflected in the balance sheet, and their exclusion would both make the information in the balance sheet potentially misleading.
147.
I conducted a small survey of 11 associates from capital markets practices at major law firms asking them to rank from 1 to 22 the sections of an OM that receive the most comments from bankers (not in-house counsel). This is, of course, a very small sample, but the results do confirm my own experience in practice.
148.
100% and 72% ranked the “Summary” and “The Offering” (summary of the terms) in the top 5, respectively.
149.
45% ranked the “Risk Factors” in the top 5.
150.
This includes (1) tables with raw data from the financial statements for the preceding three years; (2) tables with operational data from the same period; and (3) the MD&A (management’s discussion and analysis), which consists of year-on-year explanations of the financial and operational results. 36% and 54% ranked the “Summary Consolidated Financial and Operating Information” and the MD&A in the top 5, respectively.
151.
72% ranked the “Description of the Securities” in the top 5.
152.
For example, in the GDF Suez OM, these sections represent 97 pages out of 261 (37%) (the total does not include the financial statements, which are prepared by the auditors and attached to the OM).
153.
See Robbins On diligence 21 (citing SEC Rel. 33-6383 (March 11, l982), Fed. Secs. L. Rep. (CCH) para. 72,328.).
154.
Assuming, for illustrative purposes, that intellectual property is usually not a material issue for oil companies. This could also be the case for environmental concerns when the issuer is a financial services provider.
155.
see Huber, supra note 65, at 12 n.2 (“… initial purchasers in Rule 144A transactions have established a market practice (considered more than adequate to defeat a claim of scienter under Rule 10b-5) of engaging in a due diligence process substantially similar to that carried out by underwriters in public offerings.”).
156.
This is not always true. There are some law firms that focus almost exclusively on issuer-side work, but most large firms do at least some work on both sides. See Westenberg (2013) Initial public offerings: a practical guide to going public. Practising Law Institute 9-8–9-9: “An added bonus is if company counsel has significant experience in representing both companies and underwriters in IPOs, since an understanding of the priorities and expectations of underwriters will facilitate the offering process on the company’s side.”
157.
See generally Wertlieb and Avedissian (2008), p. 7.
158.
See generally Spence (1973), p. 355; Spence (2002), p. 434.
159.
The JOBS Act is not addressed in this article because it does not directly affect disclosure or due diligence.
160.
See e.g. Dodona I, LLC v. Goldman, Sachs & Co., 847 F. Supp. 2d 624 (S.D.N.Y. 2012).
161.
But, of course, no long term consequences.
162.
17 C.F.R. Parts 229, 232, 240, 249 (2016). Disclosure for Asset-Backed Securities Required by Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 50 Fed. Reg. No. 17 (Jan. 26, 2011).
163.
Cases that arose out of the same set of facts as another case on the list are omitted from the table but cited in the footnote corresponding to the case that is listed.

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Robbins Collection, Berkeley Law, UC Berkeley, CA, USA
Pablo Echeverri

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Berkeley Law, University of California, Berkeley, CA, USA
Laurent Mayali
Faculty of Law, University of Montpellier, Montpellier, France
Pierre Mousseron

Appendices

Appendix 1: Relevant 144A Cases

From the list of 56 cases containing the term “Rule 144A” between 2009 and 2014 found in a Lexis search, this table isolates 18 cases related to a Rule 144A transaction. The first 16 are cases in which at least one of the claims arose directly from alleged false or misleading statements made in the context of a 144A transaction.^{Footnote 163} The last two cases involved a 144A transaction but the claims did not arise from the disclosure provided in relation to that transaction.

	Case	Type of claim^a	Procedural stage	Type of transaction	Defendants^b	Prevailing party^c	Details
1	In re HealthSouth Corp. Secs. Litig.^d	Bad disclosure. §11; §15; §10(b); §20(a)	Class certification	Exxon Capital Exchange	Auditors and Banks	Plaintiffs	Class cert. granted for 10b-5 claims. QIBs that only bought during 144A part of deal excluded from §11 class
2	Iconix Brand Grp., Inc. v. Merrill Lynch, Pierce/Fenner & Smith Inc. (In re Merrill Lynch Auction Rate Sec. Litig.) ^e	Market manipulation and bad disclosure. §10(b); §12(a)(1); State law	Motion to dismiss	Auction Rate Securities	Bank	Defendants	All claims dismissed. Website disclosures were sufficient
3	Dodona I, LLC v. Goldman, Sachs & Co.^f	Market manipulation Bad disclosure. §11; §15; §10(b); §20(a); State law	Motion to dismiss	Synthetic CDO	Bank & D&Os	Plaintiffs	Bad disclosure claims survive. Market manipulation claim dismissed
4	Anegada Master Fund, Ltd. v. PXRE Grp. Ltd. ^g	Bad disclosure. §12(a); §15; state law	Motion to dismiss	Vanilla 144A equity offering	Issuer & D&Os	Defendants	Fed. claims dismissed. Court declines jurisdiction over state law claims
5	Newby v. Enron Corp. (In re Enron Corp. Secs., Derivative & ERISA Litig.) ^h	Bad disclosure. §12(a); §15; state law	Motion to dismiss	Secured Notes offering through trust	Bank	Defendants	All claims dismissed. Court denies existence of UWs obligation to conduct due diligence
6	Crown Cork & Seal Co. v. Credit Suisse First Bos. Corp.ⁱ	Fraud claims (not specified in opinion)	Motion to exclude expert testimony and reports	Non-mortgage, asset-backed debt	Issuer, Banks, auditors	Defendants	Motion to exclude defense experts denied
7	Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Fin. Corp. ^j	Bad disclosure. §10(b); §20(a); state law	Motion to dismiss	Convertible debt	Issuer & D&Os	Plaintiffs	State claims barred by statute of limitations. Motion to dismiss fed. claims denied
8	Landesbank Baden-Württemberg v. Goldman Sachs & Co. ^k	Bad disclosure. State law claims	Motion to dismiss	CDO	Bank (also as issuer )	Defendants	Fraud claims dismissed for failure to plead with particularity. Neg. misrep. Claim dismissed for lack of special relationship
9	Atlantica Holdings, Inc. v. Sovereign Wealth Fund Samruk-Kazyna JSC ^l	Bad disclosure. §10(b); §20(a);	Motion to dismiss	Subordinated debt as part of reorg. plan	Issuer	Plaintiffs	Motion denied (only granted with regard to plaintiffs who did not participate in 144A deal)
10	King Cty. v. IKB Deutsche Industriebank AG ^m	Bad disclosure. State law	Motion to dismiss	Notes sold by investment fund	Sponsor, Bank (as placement agent and manager); ratings agencies	Plaintiff	Negligence, breach of fiduciary duty, and aiding and abetting claims dismissed. Negligent misrep. Claim survives
11	Phelps v. Stomber ⁿ	Bad disclosure. §10(b); §20(a); State law	Motion to dismiss	Equity sold by investment fund	Sponsor	Defendant	All claims dismissed because disclosure was adequate. No proof of falsehood
12	AIG Glob. Sec. Lending Corp. v. Banc of Am. Sec. LLC ^o	Bad disclosure. §10(b); State law	Motion to vacate jury verdict	Asset-backed debt	Banks	Plaintiffs	Motion denied. No reason to vacate verdict
13	In re Tronox, Inc. ^p	Bad disclosure. §10(b); §20(a); State law	Motion to dismiss	Vanilla debt offering	Previous owner of issuer , Auditors and Issuer D&Os	Plaintiffs	Motion denied (only granted with regard to previous owners, their D&Os, and some of the Issuer’s D&Os). Disclosure was public filings on which 144A buyers relied
14	Oaktree Capital Mgmt., L.P. v. KPMG ^q	Bad disclosure. §18; §20(a); State law	Motion to dismiss	Vanilla notes offering	Banks & auditors	Defendants	Fed. claims dismissed. Court declines jurisdiction over state law claims
15	United Heritage Life Ins. Co. v. First Matrix Inv. Servs. Corp. ^r	Bad disclosure. State law	Summary judgment	Mortgage-backed bonds	Issuer and banks	Plaintiffs	Motion mostly denied
16	N. Grp. Inc. v. Merrill, Pierce, Fenner & Smith ^s	Bad disclosure. State law	Summary judgment	Mortgage-backed bonds	Banks	Defendants	Motion granted
17	Amida Capital Mgmt. II, LLC v. Cerberus Capital Mgmt., L.P. ^t	Bad disclosure. §10(b); §20(a); State law	Motion to dismiss	Vanilla debt offering that never took place after roadshow	Issuer (would-be)	Defendants	All claims dismissed for failure to plead scienter. Disclosure in question were roadshow statements
18	Loritz v. Exide Techs. ^u	Bad disclosure. §11; §15; §10(b); §20(a)	Motion to dismiss	Exxon capital exchange (but plaintiffs bought notes after registration)	Issuer D&Os	Plaintiffs	Motion denied. Disclosure in question is public filings, not 144A OM

^aIncludes only relevant claims. “§10(b)” refers to §10(b) of the Exchange Act and Rule 10b-5 thereunder. “§18” refers to § 18 of the Exchange Act. “§20(a)” refers to §20(a) of the Exchange Act. “§11” refers to §11 of the Act. “§12(a)” refers to §12(a) of the Act. “§15” refers to §15 of the Act; “State Law” refers to claims under state law for fraud and/or negligent misrepresentation
^b“Bank” includes financial institutions in their role as initial purchasers/underwriters, broker-dealer and/or sponsor. “D&Os” means directors and officers
^cA ruling is considered favorable to plaintiffs if one or more of their claims survives
^d261 F.R.D. 616, 648 (N.D. Ala. 2009); In re HealthSouth Corp Sec. Litig., 257 F.R.D. 260 (N.D. Ala. 2009) (case arising out of the same facts with same result)
^eNo. 09 MD 2030 (LAP), 2012 U.S. Dist. LEXIS 77331 (S.D.N.Y. June 4, 2012)
^f847 F. Supp 2d 624 (S.D.N.Y. 2012)
^g680 F. Supp 2d 616 (S.D.N.Y. 2010)
^h761 F. Supp 2d 504 (S.D. Tex. 2011)
ⁱNo. 12-cv-05803-JLG, 2013 U.S. Dist. LEXIS 34368 (S.D.N.Y. Mar. 12, 2013)
^j793 F. Supp 2d 1138 (C.D. Cal. 2011)
^k821 F. Supp 2d 616 (S.D.N.Y. 2011)
^l2 F. Supp 3d 550 (S.D.N.Y. 2014)
^m863 F. Supp 2d 288 (S.D.N.Y. 2012); Abu Dhabi Commer. Bank v. Morgan Stanley & Co., 2013 U.S. Dist. LEXIS 31157 (S.D.N.Y. Mar. 5, 2013) (identical facts and result)
ⁿ883 F. Supp 2d 188 (D.D.C. 2012); Wu v. Stomber, 883 F. Supp 2d 233 (D.D.C. 2012) (identical facts and identical opinion pertaining to different plaintiffs)
^o646 F. Supp 2d 385 (S.D.N.Y. 2009)
^p2010 U.S. Dist. LEXIS 67664 (S.D.N.Y. June 28, 2010)
^q963 F. Supp 2d 1064 (D. Nev. 2013)
^rNo. CV 06-0496-S-MHW, 2009 U.S. Dist. LEXIS 91245 (D. Idaho Sep 30, 2009)
^s2014 NY Slip Op 31986(U) (Sup Ct.)
^t669 F. Supp 2d 430 (S.D.N.Y. 2009)
^uNo. 2:13-cv-2607-SVW-Ex, 2014 U.S. Dist. LEXIS 111491 (C.D. Cal. Aug. 7, 2014)

Appendix 2: List of Offering Memoranda

1.
“GDF Suez OM”: GDF Suez S.A., U.S.$750,000,000 1.625% Notes due 2017, U.S. U.S.$750,000,000 2.875% Notes due 2022 (Oct. 2, 2012), available at http://www.engie.com/wp-content/uploads/2012/11/Tribeca.om_.final_.pdf.
2.
“Teamlease OM”: Teamlease Services Limited (Feb. 5, 2016), available at https://www.credit-suisse.com/media/ib/docs/in/ipo/TeamLease-prospectus.pdf.
3.
“AA PIK OM”: AA PIK Co Limited, £350,000,000 91/2% / 101/4% Senior PIK Toggle Notes due 2019 (Oct. 31, 2013), available at http://www.theaaplc.com/~/media/Files/A/Aa-Plc/key-corporate-documents/final-offering-memorandum.pdf.
4.
“Grupo Bimbo OM”: Grupo Bimbo S.A.B. de C.V., U.S.$800,000,000 3.875% Notes due 2024, U.S.$500,000,000 4.875% Notes due 2044, available at http://ise.ie/debt_documents/ListingParticulars_fff41a2f-64d4-48cc-affd-fbf36f2390ce.PDF.
5.
“Grupo Famsa OM”: Grupo Famsa, S.A.B. de C.V., 7.250% Senior Notes due 2020 (Oct. 23, 2013), available at http://www.ise.ie/debt_documents/ListingParticulars_958c0cc6-bf1a-4b36-8129-7141b2377deb.pdf.
6.
“Banco Schahin OM”: Banco Schahin S.A., U.S.$300,000,000 Global Medium Term Note Program, available at http://www.ise.ie/debt_documents/banco_8137.pdf.
7.
“Banco ABC Brasil S.A.”: U.S.$3,000,000,000 Global Medium-Term Note Program (May 2, 2014), available at http://www.ise.ie/debt_documents/ListingParticulars_ea52bd6d-0fda-4a43-90b3-5f9ab192e454.PDF.
8.
“Votorantim OM”: €750,000,000 Voto-Votorantim Limited, 5.25% Senior Notes Due 2017 (Apr. 21, 2010), available at http://www.mzweb.com.br/votorantim/web/arquivos/Voto_VII_5.25_Senior_Notes_Due_2017.pdf.
9.
“4finance OM”: 4finance S.A., USD 325,000,000 10.75% Senior Notes due 2022 (Apr. 12, 2017), available at https://www.4finance.com/wp-content/uploads/2017/05/Offering-Memorandum.pdf.
10.
“Hutchison Whampoa OM”: Hutchison Whampoa International (12) Limited, Subordinated Guaranteed Perpetual Capital Securities (May 2, 2012), available at http://www.centasec.com/bond_files/USG4673LAA29_OC.pdf.
11.
“EPM OM”: Empresas Públicas de Medellín E.S.P., Ps.1,250,000,000,000 (Jan. 31, 2011), available at file:///C:/Users/peche/Downloads/Prospecto%20Empresas%20P%C3%BAblicas%20de%20Medellin%202021.pdf.
12.
“Inbursa OM”: Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa, U.S.$1,000,000,000 4.125% Senior Notes due 2024 (July 25, 2014), available at http://ise.ie/debt_documents/ListingParticulars_9fc2d0a1-b0fe-436b-9353-93a41a385c75.pdf?v=692014.
13.
“BNCR OM”: Banco Nacional de Costa Rica, U.S.$500,000,000 4.875% Senior Notes due 2018, U.S.$500,000,000 6.250% Senior Notes due 2023 (Oct. 25, 2013), available at https://www.bncr.fi.cr/BNCR.Documentos/Estados/PDF/Offering%20Memorandum%20BNCR.pdf.
14.
“Bantrab OM”: Banco de los Trabajadores, US$150,000,000 9.000% Senior Notes due 2020 (Jan. 21, 2014), available at https://www.scribd.com/doc/297162447/ws-refe-20160129235139-tsl2prod-53175-bantrab.
15.
“AES Gener OM”: AES Gener S.A., U.S.$425,000,000 5.000% Senior Notes due 2025 (July 9, 2015), available at http://www.bolsadesantiago.com/Noticiascibe/hechos%20esenciales/AESGENER/hes_2015070085188.pdf.
16.
“Unifin OM”: Unifin Financiera, S.A.B. de C.V., SOFOM, E.N.R., US$400,000,000 7.250% Senior Notes due 2023 (Sept. 27, 2016), available at http://www.unifin.com.mx/ri/uploads/info_bursatil/OM%20Carrera_1.PDF.
17.
“Alpek OM”: Alpek, S.A.B. de C.V., US$650,000,000 4.500% Senior Notes due 2022 (July 9, 2013).
18.
“Grupo Lala OM”: Grupo Lala, S.A.B. de C.V., 444,444,444 Shares (Oct. 15, 2013), available at http://www.grupolala.com/sites/default/files/inversionistas/LALA-prospecto_en.pdf.
19.
“Confidential OM 1”: Latin American Power Company, Debt Offering (2013).
20.
“Confidential OM 2”: Latin American Consumer Products Company, Debt Offering (2013).

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Echeverri, P. (2018). The Role of Custom in Rule 144A Capital Markets Transactions. In: Mayali, L., Mousseron, P. (eds) Customary Law Today. Springer, Cham. https://doi.org/10.1007/978-3-319-73362-3_7

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