2020 Best Best & Krieger LLP
Best Best & Krieger
Company/BestBestKrieger
@BBKlaw
City of Richmond
Disclosure Obligations of Issuers
in Public Offerings
Overview of Disclosure
• Purpose
• Initial Disclosure
• Continuing Disclosure
SEC Anti-Fraud Regulations
Excerpts
• Rule 10b-5 of Securities and
Exchange Act of 1934
• It is unlawful for any
person to directly or
indirectly make any
untrue statement of a
material fact or omit to
state a material fact
necessary in order to
make the statements
made, in light of the
circumstances under
which they were made,
not misleading.
• Section 17(a) of Securities and Exchange Act of
1933
• It is unlawful for any person in the offer or
sale of any securities to:
• (1) to employ any device, scheme,
or artifice to defraud, or
• (2) to obtain money or property by
means of any untrue statement of a
material fact or any omission to
state a material fact necessary in
order to make the statements
made, in light of the circumstances
under which they were made, not
misleading; or
• (3) to engage in any transaction,
practice, or course of business
which operates or would operate as
a fraud or deceit upon the
purchaser.
Rule 15c2-12 of the Securities
Exchange Act of 1934 Excerpts
• Initial Disclosure Requirements
• General.
• As a means reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices, it shall be unlawful for any broker, dealer, or municipal securities dealer (a “Participating Underwriter” when used in connection with an Offering) to act as an underwriter in a primary offering of municipal securities with an aggregate principal amount of $1,000,000 or more (an “Offering”) unless the Participating Underwriter complies with the requirements of this section or is exempted from the provisions of this section.
• (b) Requirements.
• (1) Prior to the time the Participating Underwriter bids for, purchases, offers, or sells municipal securities in an Offering, the Participating Underwriter shall obtain and review an official statement that an issuer of such securities deems final as of its date, except for the omission of no more than the following information: The offering price(s), interest rate(s), selling compensation, aggregate principal amount, principal amount per maturity, delivery dates, any other terms or provisions required by an issuer of such securities to be specified in a competitive bid, ratings, other terms of the securities depending on such matters, and the identity of the underwriter(s).
Preliminary Official Statement
(POS) and Final Official Statement
(OS)
• Description of Security
• Purpose Issued
• Description of Issuer and Financial
Condition
• Rating and Bond Insurance
• Risk Factors
• Tax Analysis
• Litigation
• Continuing Disclosure Compliance
Excerpts of Rule 15c2-12(b)(5) of
Securities Exchange Act of 1934
Continuing Disclosure Requirements
• Annual Filing
• A Participating Underwriter shall not purchase or sell municipal securities in connection with an Offering unless the Participating Underwriter has reasonably determined that an issuer of municipal securities, or an obligated person for whom financial or operating data is presented in the final official statement has undertaken … in a written agreement or contract for the benefit of holders of such securities, to provide the following to the Municipal Securities Rulemaking Board in an electronic format …
• Annual financial information for each obligated person for whom financial information or operating data is presented in the final official statement …
• If not submitted as part of the annual financial information, then when and if available, audited financial statements for each obligated person covered by paragraph (b)(5)(i)(A) of this section; Excerpts of Rule 15c2-12(b)(5)(C) of
Securities Exchange Act of 1934
Continuing Disclosure Requirements
• Event Notices
• (1) Principal and interest payment delinquencies;
• (2) Non-payment related defaults, if material;
• (3) Unscheduled draws on debt service reserves reflecting financial difficulties;
• (4) Unscheduled draws on credit enhancements reflecting financial difficulties;
• (5) Substitution of credit or liquidity providers, or their failure to perform;
• (6) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other
material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security;
• (7) Modifications to rights of security holders, if material; • (8) Bond calls, if material, and tender offers;
• (9) Defeasances;
• (10) Release, substitution, or sale of property securing repayment of the securities, if material;
• (11) Rating changes;
• (12) Bankruptcy, insolvency, receivership or similar event of the obligated person;
• (13) The consummation of a merger, consolidation, or
acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; • (14) Appointment of a successor or additional trustee or the change of name of a trustee, if material;
• (15) Incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material; and
• (16) Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties; and
Duty of Public Officials
• As Council members, you have a different perspective from the financing team and staff.
• Some of the questions you may ask, and may review the Preliminary Official Statement to be sure it discloses information concerning answers to those questions, include:
• 1. Is the discussion of the City and its operations, revenue sources or tax base as you understand it? Is there additional information an investor should know before purchasing the Bonds?
• 2. Is there any pending or threatened litigation against the City that can negatively impact finances?
• 3. Are there any circumstances that exist or that are now unfolding that can place an undue demand on City finances, or, are there any indirect demands that can impact the City’s general fund budget that are not described in the Preliminary Official Statement and that should be discussed before the Preliminary Official Statement is finalized? Continuing Disclosure
Agreement
• Annual reporting requirements and event notices
• Contents
• Audited financial statements
• Specified Information
• Posted to the Municipal Securities Rulemaking
Board’s (MSRB) online service, Electronic
Municipal Market Access (EMMA)
Consequences of Violating SEC
Statutes
• SEC investigation
• SEC enforcement action or private
lawsuit
• Rating downgrade
• Civil and/or criminal investigation
• Imposition of fines/penalties
• Market access
• Sanctions
SEC Enforcement Actions
• Allen Park, MI (2014)
• City of Miami, FL (2013)
• City of Harrisburg, PA (2013)
• City of San Diego, CA (2006)
CDIAC Disclosure
Requirements
• California Debt and Investment Advisory Commission
(CDIAC) requires the following disclosures:
• Report of proposed debt issuance at least 30 days
before bonds are sold and a final report after sale
• Annual report
• Immediate reporting (within 10 days) of:
• Non-payment of any portion of the payment of
principal of or interest on the bonds; or
• Draw on reserve fund
Disclosure in the Age of
COVID-19
• Examples of certain types of
disclosures that may be important
to provide:
• Information regarding the
impact of COVID-19 on
operations and financial
conditions
• Information regarding sources
of liquidity
• Information regarding
availability of federal, state
and local aid
• Reports prepared for other
governmental purposes
• Cautionary language