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Issuing and investing in debt securities

Are there any restrictions on issuing debt securities?

Australia

Australia

The general position under the Corporations Act 2001 (Cth) is that debt securities may only be offered and sold in Australia if they are accompanied by a disclosure document prepared in accordance with the Corporations Act 2001 (Cth). Disclosure documents must be lodged with ASIC.

 There are exceptions to the requirement to prepare a disclosure document which are outlined below.

The Corporations Act 2001 (Cth) also imposes a general prohibition on the advertising or publicity of offers of securities that require a disclosure document. There are further prohibitions on ‘hawking’ (i.e. unsolicited meetings or telephone calls).

If debt securities are listed on the Australian Securities Exchange, there are additional disclosure requirements and continuing obligations that will apply – these are contained in the Listing Rules of the Australian Securities Exchange.

Last modified 3 Dec 2019

Austria

Austria

There are restrictions on offering and selling debt securities under both Austrian and EU law.

The admission criteria to be listed on the Official Market and the Second Regulated Market are set out in the Stock Exchange Act 2018 (SEA).

The admission must be:

  • submitted in writing by the issuer;
  • co-signed by an exchange member; and
  • accompanied by:
    • a current excerpt from the companies register;
    • the current company by-laws;
    • the company's compliance guidelines; and
    • an approved prospectus in two counterparts in accordance with SEA, unless an exemption from these rules applies.

For the entire duration of the listing, the issuer's securities must be included in the continuous trading procedure according to the Trading Rules for the Automated Trading System XETRA (Exchange Electronic Trading). The applicable admission criteria and ongoing obligations of the issuer are set out in the prime market and mid-market rules which can be downloaded from the Vienna Stock Exchange website.

Last modified 6 Dec 2019

Belgium

Belgium

Both Belgian and EU law contain restrictions on offering and selling debt securities.

Unless certain exclusions or exemptions apply, the public offer of debt securities in Belgium and the admission of such securities to trading on a Belgian regulated market requires the publication of a prospectus in compliance with the Prospectus Regulation/Prospectus Law.

A prospectus shall, in particular, not be required for public offers of securities or other investment instruments that are either:

  • For a total consideration of less than, or equal to, EUR5,000,000.
  • For a total consideration of more than EUR5,000,000 and less than, or equal to, EUR8,000,000,000 which will be admitted to trading on Euronext Growth Brussels or Euronext Access Brussels.

However, any prospectus drawn up in respect of investment instruments (other than securities) will not benefit from the EEA passporting regime.

The Prospectus Law also requires issuers to prepare an "information note" in the following circumstances (in each case, subject to certain exemptions):

  • An offer to the public of securities or other investment instruments for a total consideration of less than EUR5,000,000.
  • An offer to the public of securities or other investment instruments for a total consideration of less than EUR8,000,000 to the extent these instruments will be listed on Euronext Growth Brussels or Euronext Access Brussels.
  • An admission to trading of securities or other investment instruments on Euronext Growth Brussels or Euronext Access Brussels.

This obligation does not apply to the following offers (the so called 'safe harbor provisions'):

  • an offer for a total consideration of less than, or equal to, € 5,000,000;
  • an offer for a total consideration of more than € 5.000.000 and less than, or equal to, € 8.000,000.000 which will be admitted to trading on Euronext Growth Brussels or Euronext Access Brussels.

Last modified 18 Dec 2019

Brazil

Brazil

There are restrictions on offering and selling debt securities under Brazilian law, in general, and Brazilian Securities Commission (CVM) regulation, specifically.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Brazil or to request that they are admitted to trading on a regulated market operating in Brazil unless:

  • an approved prospectus has been made available to the public; and
  • the offer is registered with CVM.

Last modified 4 Dec 2019 | Authored by Campos Mello Advogados

Canada

Canada

There are restrictions on the issuance of debt securities in all Canadian jurisdictions.

The rules relating to the issuance of debt securities are the same as those relating to the issuance of equity. Debt securities may not be issued to the public unless a prospectus has been filed with the securities commission of each province and territory in which the securities are proposed to be sold. Debt securities may be issued without filing a prospectus by way of a private placement.

Last modified 2 Jan 2020

Chile

Chile

In the debt market, debt securities have to be issued by institutions accredited by the CMF. In addition, the issuance is regulated by the CMF.

Last modified 6 Dec 2019 | Authored by BAZ|DLA Piper

Colombia

Colombia

Under Colombian law there are no restrictions on offering and selling debt securities but there are some requirements, including the following, that supervised financial institutions shall comply with.

  • Debt securities must be registered in the National Registry for Securities and Issuers (Registro Nacional de Valores y Emisores (RNVE)).
  • The Superintendency of Finance shall approve the specific regulations (ie rules and offering memorandum) for the issuance of securities by means of a public offer.
  • For the issuance of notes convertible into shares or notes with the option for the subscription of shares, the issuing company shall have its shares listed on the Colombian Stock Exchange (CSE), in which its notes also have to be listed. Unsecured notes issued by the public offer shall also be listed.
  • In case the issuance of debt securities is going to be made exclusively among the shareholders or between the creditors in order to capitalize the obligations of the issuing company, the securities do not need to be listed on the CSE.
  • The value of the credit represented by the notes should not be less than 2,000 monthly legal minimum wages (approximately US$ 491,156 using an exchange rate of COP$ 3,004).
  • The bond´s maturity period shall not be less than one year.

Last modified 20 Oct 2017 | Authored by DLA Piper Martinez Beltrán

Czech Republic

Czech Republic

Yes.

There are restrictions on offering and selling debt securities under both the Czech and EU law. The main restrictions under Czech law are contained in the Act No. 190/2004 Coll., on Bonds.

Any joint-stock company can issue debt securities unless forbidden by law, eg investment funds cannot issue debt securities.

Last modified 20 Oct 2017

Finland

Finland

There are restrictions on offering and selling debt securities under both Finnish and EU law. The Securities Markets Act regulates offering and selling debt securities in Finland.

Unless exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Finland or to request that they are admitted to trading on a regulated market operating in Finland unless a prospectus, that the Finnish Financial Supervisory Authority has approved, has been made available to the public.

Last modified 26 Nov 2019

France

France

There are restrictions on offering and selling debt securities under both French and EU law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in France or to request that they are admitted to trading on a regulated market operating in France unless an approved prospectus has been submitted for approval to the French regulator (Autorité des Marchés Financiers) and made available to the public.

The Autorité des Marchés Financiers has provided guidelines and instructions for the issuance of debts securities and the distribution of marketing materials to the public. 

Last modified 4 Dec 2019

Germany

Germany

German debt securities are predominantly bearer bonds. Issuing bearer bonds does not require any permission and, in particular, does not constitute deposit taking. Raising moneys on the basis of German law registered bonds (Namensschuldverschreibungen) may constitute deposit taking and may require a banking license.

Last modified 20 Oct 2017

Ghana

Ghana

Under the Companies Act, 2019 (Act 992), companies may issue shares or debentures. Debentures may be in the form of individual loans or debenture stock representing units of debt issued to separate holders. Debentures are transferable without restrictions unless express provision is made to the contrary. 

The business of arranging or underwriting the issuance of debt securities is carried out by licensed market operators such as issuing houses and broker-dealers.  

Only public companies as defined in the Companies Act are permitted to make an invitation to the public to acquire shares or debentures. Such an invitation requires the issuance of a prospectus.  It is usual, though not mandatory, for debt securities issued through invitations to the public to be listed on the Ghana Fixed Income Market which is part of the Ghana Stock Exchange. 

More than 90% of listed debt securities are issued by government (i.e. central government or the central bank). 

Government borrowing is subject to constitutional provisions and the provisions of the Public Finance Management Act, 2016 (Act 921). Pursuant to the Act, government debt securities are issued within the framework of a published medium-term debt management strategy and annual borrowing program. 

The Bank of Ghana Act, 2002 (Act 612) provides for issuance of securities by the central bank. 

External Issuance 

Beyond the domestic markets, the government issues Eurobonds from time to time. In the last few years there has tended to be one Eurobond issue each year. Private companies may also issue debt securities externally. 

Last modified 15 Jan 2020 | Authored by Reindorf Chambers

Hungary

Hungary

There are restrictions on offering and selling debt securities under both Hungarian and EU law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Hungary or to request that they are admitted to trading on a regulated market operating in Hungary unless an approved prospectus has been made available to the public.

Last modified 20 Oct 2017

Italy

Italy

Pursuant to the Italian Civil Code, a company may issue debt securities for an amount not exceeding twice its share capital, the legal reserve and the available reserves of that company, as set out under its last approved balance sheet.
These constraints do not apply in the following cases:

  • debt securities issued in excess of the limit set out above which are underwritten by institutional investors subject to prudential supervision;
  • debt securities secured by a first-ranking mortgage;
  • debt securities to be listed on a regulated market or negotiated on a multilateral trading facility (As a general remark, it is not possible to state a precise timeframe for listing which will be valid for all the issuers. Timeframes for the admission to trading may vary depending on the market (ie whether Borsa Italiana or EuroTLX), the type of issuer and/or the type of security. As a
    rule of thumb, the admission procedure can take from one week to a couple of months (or even longer if the relevant market requires more information from the issuer));
  • convertible bonds which grant the right to purchase or underwrite shares;
  • special authorization given by governmental authorities on national economic interest grounds; and
  • application of special laws relating to particular categories of companies (eg in relation to banks by virtue of the provisions set out under the Consolidated Banking Act).

Furthermore, pursuant to the Prospectus Regulation, and relevant implementing measures in Italy, an issuer shall draft and file with CONSOB a prospectus in order to offer the debt securities to the public and/or list such debt securities on a regulated market. Such provision is valid and effective to the extent that an exemption does not apply.

Last modified 22 Jan 2020

Japan

Japan

To issue debt securities (corporate bonds), the issuing entity must determine the offering terms and approve them through the relevant corporate organ as designated by the Companies Act.

An offer of debt securities is categorized as either a private placement or a public offering under the Financial Instruments and Exchange Act. If an offer is regarded as a public offering, the issuer is required to file a Securities Registration Statement through the Electronic Disclosure for Investors' NETwork (EDINET) before solicitation and deliver a prospectus to those who wish to purchase the securities. Solicitation is allowed only after a waiting period (15 days in principle) from the filing of the Securities Registration Statement.

However, the waiting period may prevent a company from issuing the securities in a timely manner. For this reason, a company issuing bonds by way of a public offering often adopts the Shelf Registration Scheme instead of filing the Securities Registration Statement. This permits an issuer which has submitted the Shelf Registration Form in advance to issue and allocate bonds immediately after submission of Shelf Registration Supplements.

Once the company files a Security Registration Statement or submits a Shelf Registration Form, periodic disclosure obligations including the issuance of an Annual Securities Report is triggered. Conversely, if an offer is regarded as a private placement where only qualified institutional investors (QIIs) or 49 or fewer non-QIIs are solicited within a six-month period, the periodic disclosure obligations are not triggered.

Last modified 5 Dec 2019

Luxembourg

Luxembourg

There are restrictions on offering and selling debt securities under both Luxembourg and EU law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Luxembourg or to request that they are admitted to trading on a regulated market operating in Luxembourg unless an approved prospectus has been made available to the public.

Certain forms of companies cannot offer securities.

The International Capital Market Association has published standard form selling restrictions for offers of debt securities in Luxembourg. These restrictions are aimed at preventing a breach of:

  • the rules on financial promotion; and
  • the rules on accepting deposits in Luxembourg.

Worth noting the creation of the Luxembourg Capital Markets Association in 1st March 2019.

Last modified 10 Dec 2019

Mauritius

Mauritius

There are restrictions on offering and selling debt securities in Mauritius. 

Save for certain exclusions or exemptions, it is unlawful to offer debt securities to the public or to request that they are admitted to trading on a regulated market unless a registered prospectus has been made available to the public.

Last modified 6 Dec 2019 | Authored by Juristconsult Chambers

Mexico

Mexico

There are restrictions on offering and selling debt securities under Mexican law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Mexico or to request that they are admitted to trading on a regulated market operating in Mexico unless a prospectus approved by CNVB has been made available to the public.

Last modified 5 Dec 2019

Morocco

Morocco

Under Moroccan law, there are certain restrictions on offering and selling debt securities.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Morocco unless an approved information document has been submitted for approval to the Moroccan regulator (AMMC).

The AMMC approves certain financial transactions before their execution and validates, depending on the case, the information document prepared in connection with the financial transaction. The AMMC has provided guidelines and circulars for the issuance of debt securities.

Last modified 6 Jan 2020

Netherlands

Netherlands

Yes.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in the Netherlands or to request that they be admitted to trading on a regulated market operating in the Netherlands unless an approved prospectus has been made available to the public.

The Dutch Authority for the Financial Markets (Autoriteit Financiële Markten) has published additional guidelines on issuing debt securities to the public in the Netherlands and/or their admission to trading on a regulated market operating in the Netherlands.

Last modified 6 Dec 2019

New Zealand

New Zealand

Issues of debt securities to retail investors are regulated under the Financial Markets Conduct Act 2013 (FMCA). Debt securities must be issued under a compliant trust deed and offers must be made in a registered product disclosure statement, and a licensed supervisor must be appointed to act on behalf of the holders of the debt security and supervise the issuer's performance. The supervisor is a party to the trust deed, with certain rights held in trust by the supervisor for the benefit of the holders of the debt securities.

Non-bank deposit takers (NBDT) are regulated under the Non-Bank Deposit Takers Act 2013. NBDTs make regulated offers of debt securities to retail investors and carry on the business of borrowing and lending money, but are not registered banks. NBDTs are licensed and prudentially regulated by the Reserve Bank of New Zealand. Issues of debt securities by NBDTs are regulated under the FMCA (as above).

Last modified 13 Dec 2019

Norway

Norway

There are restrictions on offering and selling debt securities under both Norwegian and EU law, the latter of which is almost always incorporated into Norwegian law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Norway or to request that they are admitted to trading on a regulated market operating in Norway unless an approved prospectus has been made available to the public.

Last modified 20 Oct 2017

Peru

Peru

There are certain restrictions on offering and selling debt securities under Peruvian law if those securities will be offered under a public offering.

A public offering of marketable securities is a public invitation to one or more individuals or legal entities of the general public, or specific segments thereof, to carry out a legal placement, acquisition or disposal of marketable securities.

The Securities Registry is where securities, securities issue program documentation, mutual funds, investment funds and participants in the securities market are registered, with the purpose of making the information thereon publicly available, allowing decision-making by investors and ensuring the market’s transparency. The legal entities entered in this registry and the issuer of registered securities are obliged to submit the information required by law and other regulation and are accountable for the truthfulness of such information.

The publicly offered securities and securities issue programs documentation are required to be entered in the Securities Registry and no previous administrative authorization is required (except for, in the case of financial companies the previous authorization to be obtained from the Superintendence of Banking, Insurance and Private Pension Fund Management Companies (SBS)). The registration of securities that will not be offered publicly is optional.

The holders of debt securities may request the registration of such securities in the Securities Registry in accordance with the provisions of the applicable law and the terms established in the issuance agreement or, as the case may be, the equivalent instrument. If no regulation has been set forth on this regard, the request must be backed up by the holders of such securities that represent the absolute majority of the outstanding amount issued.

Last modified 5 Dec 2019 | Authored by DLA Piper Pizarro Botto Escobar

Poland

Poland

There are restrictions on offering and selling debt securities under both Polish and EU law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Poland or to request that they are admitted to trading on a regulated market operating in Poland, unless an approved prospectus has been made available to the public.

The Prospectus Directive sets a standard for selling restrictions on offers of debt securities. These restrictions are aimed at preventing breaches of:

  • the rules on financial promotion; and
  • the rules on accepting deposits.

Last modified 6 Dec 2019

Portugal

Portugal

There are restrictions on offering and selling debt securities under both Portuguese and EU law.

Unless certain exclusions or exemptions apply, the offering of debt securities to the public in Portugal and the request for admission to trade debt securities on a regulated market operating in Portugal requires disclosure to the public by way of an approved prospectus.

Last modified 6 Dec 2019

Puerto Rico

Puerto Rico

There are restrictions on offering and selling debt securities under both Puerto Rican and US federal laws.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Puerto Rico unless an approved prospectus has been made available to the public. This prospectus needs to be approved by the Office of the Commissioner of Financial Institutions of Puerto Rico or the US Securities and Exchange Commission.

Last modified 11 Dec 2019

Romania

Romania

There are restrictions on offering and selling debt securities under both Romanian and EU law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Romania or to request that they are admitted to trading on a regulated market operating in Romania unless a prospectus approved by the Financial Supervisory Authority has been made available to the public.

Last modified 20 Oct 2017

Russia

Russia

There are restrictions on issuing debt securities in Russia which differ for Russian and foreign securities.

For Russian debt securities issued by Russian issuers, the general regulation for securities offerings must apply with special requirements established for each type of debt securities (bonds, depository receipts and etc.).

Foreign financial instruments may only be placed (sold for a first time to the first holder) in Russia if the following conditions are met:

  • an international securities identification number (ICIN) and a Classification of Financial Instruments (CFI) are assigned to the instrument; and
  • the instrument is qualified as security in accordance with the procedure established by the CBR,

provided that in each case the financial instrument is issued by a foreign issuer that complies with the requirements stated in the law (such as foreign organizations established in states that are members of the Organization for Economic Cooperation and Development (OECD), foreign organizations established in states whose relevant regulators (other authorized institutions) have entered into cooperation agreements with the CBR, and foreign organizations whose securities are listed on foreign exchanges included in the special list approved by the CBR).

Generally, in addition to the conditions set out above, foreign securities will be admitted for placement (initial sale to initial investors) in Russia provided that the prospectus describing such securities is registered by the CBR and such securities are registered with (held through) a depositary established in accordance with Russian law. A filing of a notice to the CBR with the results of the initial placement in the Russian territory and disclosure of this information are required, without which any subsequent trading/transacting in Russia is prohibited.

In certain cases, a decision to admit foreign securities to public circulation in Russia may be made by the Russian exchange if a listing procedure is started or finished by the foreign exchange and which is included in the list specified by the CBR.

Last modified 5 Dec 2019

Singapore

Singapore

There are restrictions on offering and selling debt securities under Singapore law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Singapore or to request that they are admitted to trading on a regulated market operating in Singapore unless an approved prospectus has been made available to the public.

Last modified 20 Oct 2017

Slovak Republic

Slovak Republic

There are restrictions on offering and selling debt securities under both Slovak law and EU law.

Any securities, including debt securities can be traded on the stock exchange market only one day following the publication of the prospectus, or offered to the public only after an approved prospectus has been made available to the public.

Last modified 6 Dec 2019

South Africa

South Africa

The South African debt capital market is regulated mainly by the Financial Markets Act (FMA), the Companies Act and the Banks Act. The Collective Investment Scheme Control Act and the Exchange Control Regulations may also be applicable to some debt instrument structures.

To offer and issue debt securities, an issuer must be registered as a bank, or authorized as a branch of a foreign bank under the Banks Act or must offer and issue debt securities in compliance with one of the available exemptions. The most prominent exemption for non-bank issuers is the exemption set out in the Commercial Paper Regulations which applies to prospective issuers that are listed companies or issuers that have a net asset value of at least ZAR100 million for at least 18 months prior to any issue of commercial paper.

The offer and sale of debt securities by a non-resident in South Africa is subject to the prior approval of the Financial Surveillance Department and SARB.

The Financial Advisory and Intermediaries Services Act (FAIS) prohibits any person other than a person licensed under the FAIS from marketing debt securities, acting as an intermediary in offers and sales of debt securities and recommending or providing guidance on the purchase of securities.

Last modified 5 Dec 2019

Spain

Spain

There are restrictions on offering and selling debt securities under both Spanish and EU law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Spain or to request that they are admitted to trading on a regulated market operating in Spain unless an approved prospectus has been made available to the public.

Last modified 5 Dec 2019

Sweden

Sweden

There are restrictions on offering and selling debt securities under both Swedish and EU law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in Sweden or to request that they are admitted to trading on a regulated market operating in Sweden unless a prospectus approved by the Swedish Financial Supervisory Authority (Finansinspektionen) has been made available to the public.

Last modified 22 Jan 2020

Thailand

Thailand

Generally, restrictions on the issuance of debt securities is dependent on the types of debt securities to be issued. For example:

  • Bonds / debentures and notes – A private limited company can issue bonds/debenture subject to approval from the SEC. A public limited company can issue bonds/debentures, convertible bonds/debentures, notes and structured notes with filing and/or approval as well as report requirements by the SEC.
  • Basel III Subordinated debt instruments – An issuer must be a financial institution under the Financial Institution Act B.E. 2551 (2008). A branch of a foreign commercial bank (although categorized as a financial institution under Thai laws) is not allowed to issue Basel III Subordinated debt instruments.

A foreign company can offer a sale of its bonds and/or debentures in Thailand and may be exempt from certain duties (eg the duty to file certain documents and a prospectus) if the foreign debt securities are offered to not more than ten investors within four months as this would be deemed a private placement.

Thai companies, foreign companies and certain entities under foreign laws (eg a unit or organization of foreign government, international organization and legal entities established under foreign laws and supervised by an authority which is a member of the International Organization of Securities Commissions) can issue bonds denominated in a foreign currency in Thailand provided the issuing entity complies with the relevant filing, approval and reporting requirements of the SEC.

Last modified 4 Apr 2020

Ukraine

Ukraine

It is unlawful to offer debt securities to the public in Ukraine, or to request that they are admitted to trading on a stock exchange operating in Ukraine, unless an approved prospectus has been made available to the public. A prospectus should include information on the issuer, its financial and economic position and the securities being issued.

Last modified 24 Jan 2020

UK - England and Wales

UK - England and Wales

There are restrictions on offering and selling debt securities under both UK and EU law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in the UK or to request that they are admitted to trading on a regulated market operating in the UK unless an approved prospectus has been made available to the public.

The International Capital Market Association has published standard form selling restrictions for offers of debt securities in the UK. These restrictions are aimed at preventing a breach of:

  • the rules on financial promotion; and
  • the rules on accepting deposits in the UK.

Last modified 6 Dec 2019

UK - Scotland

UK - Scotland

There are restrictions on offering and selling debt securities under both UK and EU law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities to the public in the UK or to request that they are admitted to trading on a regulated market operating in the UK unless an approved prospectus has been made available to the public.

The International Capital Market Association has published standard form selling restrictions for offers of debt securities in the UK. These restrictions are aimed at preventing a breach of:

  • the rules on financial promotion; and
  • the rules on accepting deposits in the UK.

Last modified 20 Oct 2017

United Arab Emirates

United Arab Emirates

There are a number of restrictions on offering and selling debt securities under UAE law.

Unless certain exclusions or exemptions apply, it is unlawful to offer debt securities (including foreign debt securities) to the public in the UAE or to provide trading services in respect of those debt securities without an appropriate license or approval from the Securities and Commodities Authority (SCA).

The SCA has published detailed rules and guidance on the restrictions for offers of debt securities in the UAE. These restrictions are aimed at preventing a breach of the rules on financial promotion and the protection of retail customer. However, the SCA's rules and regulations are still evolving and there continue to be changes in respect of permitted exceptions and exclusions to the SCA's regime.

Acting as a principal in respect of financial products that affect the financial position of any of the licensed financial institutions, including (but not limited to) debt securities will also  be considered financial activities subject to UAE Central Bank licensing and supervision in accordance with the provisions of the New Banking Law.

Last modified 23 Jan 2020

United States

United States

The offering and sale of debt securities is subject to both federal and state securities laws.

For an issuance of debt securities to be permitted under federal law, the issuance must either be registered under the Securities Act of 1933 (Securities Act), or the issuance must be exempt from registration pursuant to an exemption from the registration requirements of the Securities Act.

For certain debt securities, the Trust Indenture Act of 1939 (TIA) will also apply. However, the TIA does not apply to private placements. As a result, only debt securities issued in a registered offering, or subsequently registered in an 'A/B exchange offer' will be subject to the TIA. However, indentures for debt securities issued in the high yield market may incorporate by reference all, or a portion, of the TIA, although this is fading as a market practice.

State securities laws (known as 'blue sky' laws) regulate both the offering and sale of debt securities as well. However, federal law pre-empts state securities laws for certain types of offerings, particularly registered offerings.

Last modified 24 Jan 2020

Are there any restrictions on issuing debt securities?

The general position under the Corporations Act 2001 (Cth) is that debt securities may only be offered and sold in Australia if they are accompanied by a disclosure document prepared in accordance with the Corporations Act 2001 (Cth). Disclosure documents must be lodged with ASIC.

 There are exceptions to the requirement to prepare a disclosure document which are outlined below.

The Corporations Act 2001 (Cth) also imposes a general prohibition on the advertising or publicity of offers of securities that require a disclosure document. There are further prohibitions on ‘hawking’ (i.e. unsolicited meetings or telephone calls).

If debt securities are listed on the Australian Securities Exchange, there are additional disclosure requirements and continuing obligations that will apply – these are contained in the Listing Rules of the Australian Securities Exchange.

What are common issuing methods and types of debt securities?

The debt securities market in Australia includes stand-alone bonds and bond programs (e.g. Medium-Term Note programs) issued by large corporations and financial institutions.

Bonds may be issued in wholesale and retail formats. Wholesale issues do not require a prospectus or other disclosure document, and are rarely listed.

Many different types of debt securities are offered in the Australia, including guaranteed and asset-backed securities, high yield bonds, covered bonds, hybrid securities (including convertible notes and preference shares), derivative securities and green bonds.

Parties that are not resident in Australia may issue ‘Kangaroo Bonds’ (i.e. bonds issued in Australian dollars). In many cases, these issues are driven by favorable Australian dollar terms in the cross-currency swap markets.

Wholesale debt securities can be cleared through Austraclear, the Australian domestic clearing system. In order to be eligible, the securities must be issued in Australian dollars.

What are the differences between offering debt securities to institutional / professional or other investors?

Offers of debt securities can generally be made to institutional/professional investors without a disclosure document. Offers of debt securities to retail investors require a disclosure document prepared in accordance with the Corporations Act 2001 (Cth).

When is it necessary to prepare a prospectus?

The general position under the Corporations Act 2001 (Cth) is that debt securities may only be offered and sold in Australia if they are accompanied by a disclosure document prepared in accordance with the Corporations Act 2001 (Cth).

Offers of debt securities can generally be made to institutional/professional investors without a disclosure document.

Offers of debt securities to retail investors will require a disclosure requirement, most commonly in the form of a prospectus.

Even where a prospectus is not required by law, an information memorandum is commonly used for marketing purposes.

What are the main exchanges available?

The Australian Securities Exchange is the main exchange in Australia.

Is there a private placement market?

It is certainly possible to issue bonds through private placement in Australia, although domestic demand for such bonds is generally lower than in the US and Europe, due in part to a relative lack of liquidity. Many corporate issuers prefer to issue bonds in overseas jurisdictions.

Are there any other notable risks or issues around issuing or investing in debt securities?

Issuing debt securities

Issuers are required to take responsibility for disclosure documents for debt securities. Liability may arise for breach of statute for statements that are misleading or deceptive, or omit any required information. In addition to the issuer, directors, underwriters, and other parties making statements in a defective disclosure document may also be liable for the damage arising from such defective disclosure.

Investing in debt securities

Debt security terms and conditions typically contain provisions which may permit their modification without the consent of all investors and confer significant discretions on the trustee, which depending on the terms of issue may be exercised with or without the consent of investors and without regard to the individual interests of particular investors. The conditions also provide for meetings of investors to consider matters affecting the investors interests. These provisions typically permit defined majorities to bind all investors including investors who did not attend and vote at the relevant meeting and investors who voted against the majority.

Are there any restrictions on establishing a fund?

Generally

The Australian funds management industry is mature and heavily regulated. An Australian hedge or debt fund is usually structured as a unit trust and would ordinarily fall within the definition of a ‘managed investment scheme’ in the Corporations Act 2001 (Cth). That Act imposes a wide range of obligations and requirements on the operators of managed investment schemes. Managed investment schemes are regulated by ASIC

Managed investment schemes

The following key restrictions apply when establishing a managed investment scheme:

  • managed investment schemes, particularly those offered to ‘retail clients’ (as that term is defined in the Corporations Act 2001 (Cth)), are subject to relatively heavy regulatory requirements which may impose a significant compliance burden on the operators of such schemes;
  • the operator of the managed investment scheme (which is called the 'Responsible Entity') must hold an Australian Financial Services License (AFSL) issued by ASIC (or be an authorized representative of another entity's AFSL) which authorizes it to act as the Responsible Entity of managed investment schemes;
  • a managed investment scheme which is offered to retail clients must be registered with ASIC;
  • if a managed investment scheme is structured as a unit trust (as is usually the case), general trust law will apply to the operation of the trust; and
  • the offer of interests in a managed investment scheme to retail clients will require the preparation of a detailed disclosure document, the contents of which is heavily regulated.

Managed investment schemes may also be listed on the Australian Securities Exchange, provided that a range of regulatory requirements are met.

What are common fund structures?

Unit trust

As noted above, the most common fund structure in Australia is a unit trust, where each investor holds units representing a beneficial interest in the assets of the fund.

Unit trusts are usually managed so they can be treated as ‘flow through’ vehicles for tax purposes (similar to a partnership) so that the fund itself is not subject to taxation. Investors are taxed on their share of the net income and capital gains earned by the fund.

Certain units trusts that are managed investment schemes for Corporations Act 2001 (Cth) purposes may also qualify for tax concessions as a managed investment trust.

Collective investment vehicles

The Australian Government has been working on the introduction of an Australian collective investment vehicle (CIV) regime, which will introduce two alternatives to the current Australian unit trust structure. The new vehicles will be a corporate CIV and a limited partnership CIV, which will be similar to the equivalent structures which are commonly used in foreign jurisdictions.

The Australian Government is still conducting a consultation process (which began in 2017) with the most recent pieces of draft legislation outlining the proposed regime released in January 2019.

Asia Region Funds Passport

The Asia Region Funds Passport was implemented in Australia in 2018 with the Corporations Amendment (Asia Region Funds Passport) Act 2018 (Cth). It allows Australian fund managers to offer interests in qualifying funds to investors across multiple participating economies in the Asian region with limited additional regulatory requirements. Similarly, fund managers in other participating economies will be able to market their qualifying funds to Australian investors using the more streamlined regulatory process.

However, the uptake of the Asia Region Funds Passport will largely depend on how the corresponding tax reforms and the CIV regime will look once enacted by Parliament.

What are the differences between offering fund securities to professional / institutional or other investors?

Distinction between retail and wholesale investors

An investor is deemed to be a ‘wholesale’ investor for Australian law purposes where it has invested AUD500,000 or more in a particular fund. There are numerous other criteria for an investor to qualify as a ‘wholesale’ investor for Australian law purposes. For example, where an investor can produce a copy of a certificate given within the preceding two years by a qualified accountant that confirms that it has net assets of at least AUD2.5 million or has a gross income for each of the last two financial years of at least AUD250,000. Further, a person who has or controls gross assets of AUD10 million (including any assets held by an associate or under a trust that that person manages) is deemed to be a wholesale investor no matter what the size of its investment.

All investors that are not wholesale investors are considered to be retail investors.

Retail funds

Funds offered to retail investors must be registered with ASIC. The offer of interests in retail funds must be accompanied by a PDS, which must contain specific information as prescribed by the Corporations Act 2001 (Cth) (for example, information about the Responsible Entity, the fees and costs payable, the risks and benefits and significant characteristics of the fund). A PDS must also contain all other information that might reasonably be expected to influence the decision of a retail investor considering whether to invest in the fund.

Institutional/professional funds

Funds which are offered exclusively to wholesale investors do not need to be offered using a PDS. However, it is usual to provide another disclosure document, such as a private placement memorandum or information memorandum, when offering interests in such funds. Any such disclosure document must not be misleading or deceptive.

Are there any other notable risks or issues around establishing and investing in funds?

Establishing funds

As noted above, in order to establish a fund in Australia, the operator of the fund must usually hold an AFSL (or be an authorized representative of an AFSL holder) with appropriate license authorizations.

In addition, where the fund is a managed investment scheme (which is usually the case for retail funds), a Responsible Entity must be appointed. In order for an entity to act as a Responsible Entity, it must:

  • be an Australian public company;
  • hold an AFSL (or be an authorized representative of another AFSL holder) authorizing it to provide the various financial services relevant to the operation of the fund; and
  • either have a majority of directors who are external directors or have a compliance committee (to oversee the retail fund's compliance requirements) with a majority of 'external members'.

It is common for investment managers who do not satisfy the requirements for being a Responsible Entity to enter into an arrangement with an external or 'professional' Responsible Entity, which will operate the fund according to the investment strategy which the investment manager may set.

As mentioned, managed investment schemes may also qualify for tax concessions if they qualify as a “managed investment trust” under Australian tax laws. For a wholesale unit trust fund to qualify as a “managed investment trust”, the trust must be operated or managed by an AFSL licensee or by an authorised representative of such licensee.

Investing in funds

As noted above, most investment funds in Australia are structured as unit trusts. These funds are subject to the general law of trust. In addition, usually:

  • The investors in a fund have no power to influence the fund's investment strategy, or any of the decisions or operations of the fund, solely by virtue of being a unit holder.
  • The investors in the fund do not have a specific right to any particular assets of the trust.
  • The investors in the fund will rank behind the fund's creditors in the event of insolvency.
  • The fund operator will usually be entitled to an indemnity from the assets of the fund for any liabilities it may incur in performing its duties, and will usually limit its liability to the amount by which it is actually indemnified.

Are there any restrictions on marketing a fund?

The marketing of a fund in Australia will normally constitute providing 'financial product advice' and so will be a 'financial service' for the purposes of the Corporations Act 2001 (Cth). That Act provides that, generally, all providers of financial services must hold an AFSL (or be appointed as an authorized representative of another AFSL holder) with an authorization to provide the relevant financial service.

When offering interests in retail funds it is also generally necessary to prepare a PDS.

Exemptions

There are a number of very limited exemptions from the need to obtain an AFSL or to act under an authorization from another AFSL in order to market a fund in Australia. These exemptions generally only apply when the fund is marketed solely to wholesale investors. For example:

  • Certain foreign financial services providers who are regulated in jurisdictions that ASIC considers to have a regulatory framework sufficiently similar to the Australian regime (such as the UK, US, Singapore, Hong Kong and Germany) may be eligible to apply for relief from licensing to enable them to market funds to Australian 'wholesale' investors2.
  • An exemption applies where the marketing is done in Australia to a prospective investor which itself holds an AFSL and is not acting as a trustee or on behalf of another person (as Australian superannuation funds and Australian fund managers offer their products to their Australian investors through trusts, this limits the exemption to true proprietary investors which commonly do not have an AFSL as they are not usually required to hold one).
  • An exemption applies where a prospective Australian investor makes enquiries of a foreign fund manager without any prior solicitation by the foreign fund manager, and the foreign fund manager does not during this time actively solicit persons in Australia in respect of the relevant fund (other than in response to the enquiry initiated by the Australian investor or by the Australian investor's agent).

ASIC is currently conducting a consultation process to formalise this exemption into a foreign financial services licence for foreign financial services providers. ASIC has proposed a prospective commencement date of 1 April 2020, however this is subject to the finalisation of the draft instruments proposed by ASIC. 

Are there any restrictions on managing a fund?

Australian-domiciled funds will usually fall within the definition of 'managed investment scheme' in the Corporations Act 2001 (Cth). The Responsible Entity of a managed investment scheme (which is the operator of the fund) is typically required to hold an AFSL (or be an authorized representative of an AFSL holder) which authorizes it to provide the various financial services necessary to operate the fund, including a specific authorization to act as the Responsible Entity of a managed investment scheme.

As noted above an entity wishing to act as the Responsible Entity of a managed investment scheme must also:

  • be an Australian public company; and
  • either have a majority of directors who are external directors or have a compliance committee (to oversee the retail fund's compliance requirements) with a majority of 'external members'.

An investment manager which is not able to act as a Responsible Entity may enter into an arrangement with an external or ‘professional’ Responsible Entity, which will operate the fund according to the investment strategy which the investment manager may set. In those situations, from a strictly legal perspective, it is the Responsible Entity of a retail fund that engages the investment manager and is responsible for the acts of the investment manager, and the Responsible Entity will bear any liability for the mismanagement of the fund. Such external Responsible Entities will therefore typically charge a significant fee for their service.

If a managed investment scheme is to be offered to retail investors, it must be registered with ASIC and will be subject to a further layer of regulatory requirements. For example, a registered managed investment scheme must have a 'constitution' which is compliant with the Corporations Act 2001 (Cth) and must also maintain a 'compliance plan' which sets out the measures which the Responsible Entity must take to ensure compliance with the constitution and the Corporations Act 2001 (Cth).

The offer of interests in a managed investment scheme to retail investors will also generally require certain disclosure documents, including a PDS, to be prepared in accordance with the content requirements mandated by the Corporations Act 2001 (Cth) and by ASIC.

As mentioned, managed investment schemes may also qualify for tax concessions if they qualify as a “managed investment trust” under Australian tax laws. For a wholesale unit trust fund to qualify as a “managed investment trust”, the trust must be operated or managed by an AFSL licensee or by an authorised representative of such licensee. For a managed investment trust that seeks the 15% concessionally withholding tax rate for its fund payments, a substantial proportion of its investment activities must also be carried out in Australia.

Are there any restrictions on entering into derivatives contracts?

Unless an exemption or exclusion applies, a person issuing derivatives as part of its financial services business is deemed to be dealing in financial products, which requires an AFSL under the Corporations Act 2001 (Cth) and the Corporation Regulations 2001 (Cth). If a person issues derivatives without an AFSL, the counterparty would be entitled to rescind any agreements in relation to that product and the relevant agreements will be unenforceable. There are specific financial requirements for a person authorized to issue derivatives, which differ from requirements in relation to other financial products, which recognize the exposure of the licensee to counterparties arising from entering into derivatives.

For these purposes, a 'derivative' is broadly defined as an arrangement that has a future liability element and a derived value element, and is sufficiently wide to cover all commonly-regarded types of derivative contracts, including futures agreements and forwards, options, swaps and contracts for difference. Under the relevant legislation, certain arrangements are specifically excluded as derivatives including:

  • arrangements for mandatory physical delivery of tangible property;
  • a contract for the future provision of services; and
  • anything that falls within one of the other categories of financial product (such as a security).

AFSL licensees have ongoing obligations under the Corporations Act 2001 (Cth) in terms of their conduct, including to:

  • notify the ASIC of breaches or likely breaches of certain significant licensee obligations;
  • quote their AFSL number in documents;
  • comply with stipulated procedures when dealing with clients’ money; and
  • keep financial records.

What are common types of derivatives?

Derivative contracts are entered into in Australia for a range of reasons including hedging, trading and speculation.

Derivatives may be traded over-the-counter or on an organized exchange.

All of the main types of derivative contract are widely used in Australia, including futures agreements and forwards, options, swaps (including credit default swaps) and contracts for difference. Underlying assets commonly include equities, fixed income instruments, commodities, foreign currencies and credit events.

The gross notional outstanding for interest rate derivatives in Australia is worth in excess of AUD10 trillion, the majority of which are denominated in AUD. There is also a sizeable FX swap market, with average daily turnover in excess of AUD100 billion.

Are there any other notable risks or issues around entering into derivatives contracts?

Since the global financial crisis in 2007-to-2008, and the G20 summit in 2009 the derivatives market has been subject to a significant amount of new regulation, and this has led to substantial compliance costs for market participants.

In January 2013, ASIC introduced the ASIC Derivative Transaction Rules (Reporting) 2013, together with the ASIC Derivative Trade Repository Rules 2013. Among other things, these Rules introduced mandatory reporting requirements for derivative transactions for the majority of derivatives users. These rules were subsequently softened by the ASIC Derivative Transactions Rules (Reporting) Amendment 2015 (no 1).

Other recent regulatory changes of note include the requirement for certain standardized over-the-counter derivative trades to be subject to clearing with a prescribed Central Clearing Counterparty, as implemented through the Corporations (Derivatives) Amendment Determination 2015 (No 1), and the requirement for reporting of certain trades to a licensed Trade Repository, as implemented through the Derivative Transaction Rules (Reporting) 2013 (both regulations have been subject to subsequent amendment).

The Prudential Standard CPS 226 (Margining and risk mitigation for non-centrally cleared derivatives), as published by the APRA in 2016, establishes the requirement for the posting and collection of variation and initial margin in transactions which include a covered entity (for example, deposit-taking institutions that are authorized under the Banking Act 1959 (Cth)).

In addition, it is important to note that the approach to market misconduct is generally the same for securities and for derivatives (including market manipulation and insider trading) although compensation orders for damages do not apply to derivatives.

Finally, the ATO has recently issued guidelines setting out risk factors applicable to cross-border related party derivatives.

Onno Bakker

Onno Bakker

Partner
DLA Piper Australia
[email protected]
T +61 2 9286 8260
View bio

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