For decades companies have privately issued nonconvertible debt securities to large, sophisticated investors (usually in a Rule 144A transaction) and agreed to exchange those unregistered securities for subsequently issued, substantially identical debt securities registered within an agreed timeframe on Form S-4. This process allows infrequent issuers to access the debt markets quickly without first navigating the often difficult and expensive registration process while also attracting institutional investors that, for legal or policy reasons, cannot hold unregistered securities.

The SEC staff has endorsed this practice through a series of no-action letters beginning in 1988 with Exxon Capital Holdings Corporation, which gave this technique its name (also called an “A/B Exchange”). Assuming certain conditions are met, the original purchasers of the debt in the Rule 144A first step are not deemed to be underwriters engaged in a distribution of the debt securities. This means that the original purchasers may resell the new, subsequently registered and exchanged debt securities without further registration and without delivering a prospectus, which is an essential aspect of such an offering.

One requirement for an effective Exxon Capital exchange is that the issuer make certain representations regarding the manner in which the offering will be conducted, which companies have been dutifully doing for years now. Apparently, however, the SEC staff has “observed some variation” in these representations and, therefore, recently issued two identical CDIs (applicable to Form S-4 and to Securities Act Section 2(a)(11)) to bring order to their content.

The staff stated that the representations must address the following “essential matters” (which are quoted below):

• The issuer has not entered into any arrangement or understanding with any person who will receive Exchange Securities in the Exchange Offer to distribute those securities following completion of the Offer. The issuer is not aware of any person that will participate in the Exchange Offer with a view to distribute the Exchange Securities.
• The issuer will disclose to each person participating in the Exchange Offer that if such participant acquires the Exchange Securities for the purpose of distributing them, such person:

• Cannot rely on the staff’s interpretive position expressed in the Exxon Capital line of no-action letters, and
• Must comply with the registration and prospectus delivery requirements of the Securities Act in order to resell Exchange Securities, and be identified as an underwriter in the prospectus.

• The issuer will include in the transmittal letter an acknowledgement to be executed by each person participating in the Exchange Offer that such participant does not intend to engage in a distribution of the Exchange Securities. In addition, the issuer will include in the transmittal letter an acknowledgement for each person that is a broker-dealer exchanging securities it acquired for its own account as a result of market-making activities or other trading activities that such broker-dealer will satisfy any prospectus delivery requirements in connection with any resale of Exchange Securities received pursuant to the Exchange Offer. The transmittal letter may also include a statement to the effect that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

Though the staff also noted that the representations “need not follow any particular form,” there is little reason to deviate from the language provided above, and I would expect any substantive departure to draw a staff comment.