You Have Some Extra Time To Finalize Your Hedge Fund's Ads On Dealbreaker

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You are doing that aren't you? Now you have no excuse if they're not perfect:

Ms. Schapiro, in prepared testimony before a panel of the U.S. House oversight committee, said that the SEC would not meet a July 4 deadline set by Congress to complete the rules lifting the longstanding ban on publicizing private securities offerings.

She said the SEC's work on this issue is more complicated than it would seem because Congress directed the SEC to require issuers of private offerings to take reasonable steps to verify that purchases are accredited investors.

So I'm excited to see your ads on Dealbreaker for which you will pay top dollar, but as I idly looked for the MAAX zips documentation today it occurred to me that there's another interesting possibility in this rule change that could also redound to Dealbreaker's benefit, which is that it might dramatically increase the amount of information out there on private offerings.

Right now companies in the U.S. - and for "companies" read "companies, hedge funds, structured credit vehicles, and other what-have-you" - offer their securities in one of two ways:
(1) publicly, and
(2) not.

For companies that go with option (1), you can find the terms of those securities and information about their issuers pretty effortlessly on Bloomberg or the internet. Do you have questions about the terms of the $8,039,000 of notes linked to the JPMorgan ETF Efficiente 5 Index that JPMorgan issued today? Here are answers, enjoy! Would you like to know about Facebook's past (but not future!) revenue? Done.

For companies that go with option (2), though, you are much more in the dark, because those securities can only be offered to certain classes of investors. The most useful classes are "accredited investors," who are rich people or institutions who can buy hedge funds and stuff, and "qualified institutional buyers," who are even more accredited and richer and less human and can buy Rule 144A securities offerings, which in turn are more liquid and tradeable than hedge-funds-and-stuff. The prohibition on offering securities to non-qualified investors basically trickles down from companies to lots of market participants so that, for instance, it would be sort of bad for a Rule 144A securities offering memorandum or hedge fund investor presentation to end up on Bloomberg or online. Not, like, end-of-Bloomberg bad, but sort of bad - bad enough that nobody sends them to Bloomberg and they don't get put up and it's sometimes hard even for banks to get other banks' 144A offering memos.

What this means is that a whole variety of interesting issues - the tranching of 2006-vintage CDOs, the performance history of hedge funds, the protections against self-dealing in Harbinger's LP agreements - are in the public record only spottily or coincidentally or on an aggregate basis.

The coming new rules could change that: only qualified investors can buy non-public securities, but anyone can be "offered" them, which also means that anyone can read about them. Which in turn means that there's no particular reason for their terms not to be publicized, either by their issuers or their banks or anyone else.

I mean - there are reasons, of course. Some people may not want everyone up in their business, though of course some people will. Many hedge funds will still demand secrecy from their investors, though 144A issuers probably won't. But in any case, without an overhang of "it is a potentially criminal violation of the securities laws for you to distribute this offering memo," those demands will have less force. And so you would expect the QIB/accredited recipients of offering documents to be more comfortable sharing them with information providers, and the information providers to be more comfortable posting them publicly.

Right now you can go on the internet and find marketing materials for Goldman's Abacus CDO, and for Citi's similarly disgraced CDO, because, y'know. But you can't find the marketing materials for 99% of CDOs issued during the same time period unless, for the most part, you're a QIB who can get them from your sales coverage at a bank. And you can't get the marketing and fund structure materials for most hedge funds unless you're a(n accredited) potential investor. I would guess that, after the new rules, that will (slowly) change - and that eventually you'll see 144A offering documents (and maybe even hedge fund offering documents?) on Bloomberg (and maybe even on Edgar?).

That will be fun for me since I like to read offering memos. It might be good for everyone, too. Regulators can't be everywhere, and sometimes journalists catch problems before they do. Competitors and counterparties with axes to grind might also be good at catching problems. Many of the shadier activities in capital markets occur in non-public offerings, for obvious reasons: those offerings are subject to lower levels of liability than public offerings, and much of the time nobody but the buyers knows much about the specific terms of the deals. (And the buyers are accredited/qualified but not necessarily smart - and, as proud new owners of a thing, perhaps conflicted about digging into whether that thing is a fraud.) It may be complicated for the SEC to finish its rules to increase publicity about non-public offerings, but doing so might end up making their job easier.

Schapiro: Money-Fund Plan Would Give Funds Options [WSJ]

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