Two events have been added to the material events disclosure requirements under Rule 15c2‑12 which issuers and other obligated persons will be required to include in any new continuing disclosure agreement entered into on or after February 27, 2019 (a “new continuing disclosure agreement”) and report to EMMA within 10 business days of occurrence. The new events are:
(1) the incurrence of, or an amendment to, 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 affects security holder, if material.
This event would apply only to financial obligations, covenants, etc. entered into after bonds are issued for which a new continuing disclosure agreement is executed.
(2) a 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 reflects financial difficulty.
This item would apply only to events that occur after bonds are issued for which a new continuing disclosure agreement is executed, regardless of when the financial obligation was incurred.
Looking ahead, issuers and other obligated persons need to be cognizant of the expansive definition of “financial obligation.” Financial obligation means a (a) debt obligation, (b) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (c) guarantee of (a) or (b).
“Financial obligation” is intended to include those debt, debt-like and debt-related obligations that could impact liquidity, overall creditworthiness or an existing security holder’s rights, regardless of what the instrument is called and whether the obligation is short-term or long term. The new events will capture, as an example, private placements of bonds or other debt, continuing covenant agreements and leases that operate as vehicles to borrow money.
Other concepts that issuers and obligated persons will need to grapple with include the determination of “materiality,” how to determine what “reflects financial difficulty” and the monitoring of “defaults.” Beyond monetary default, “default” can include instances that may reflect financial difficulties without constituting events of default under the transaction documents.
Finally, the SEC maintains that market participants are “best suited” to developing best practices that will constitute the form of a material event notice under the amended rule.
Murray Barnes Finister LLP looks forward to the opportunity to assist issuers and obligated persons in navigating the application of these new rules and will keep subscribers apprised of further developments and guidance.