In mid-May, Salomon Brothers invited journalists to a briefing by Impress Metal, a newly-formed European canning business created through a management buyout led by equity investor, Doughty Hanson.
The briefing was scheduled for the River Room of the Savoy Hotel at 12.30pm on May 16. There was considerable interest. The single B-rated company was due to sell a Dm200 million Eurobond the following week, the third in a recent series of high-yield European corporate bond issues. Like its predecessors, the deal carried a 144A option for sale in the US.
No sooner had journalists put the date in their diaries than they received a follow-up letter. Everything said at the press conference was to be embargoed. Nothing could be published before the following Tuesday May 20, the launch day for the bond. Worse followed. On the morning of the planned news conference, Salomon Brothers' public relations department telephoned reporters to tell them, with many apologies, that the event had been cancelled.
Fortunately, journalists with a sudden hole in their diaries had another interesting engagement that day. The administration of the City of Moscow was celebrating its 850th anniversary at a conference hosted by Sachs Associates and Bloomberg on new opportunities in finance, investment and trade.
Journalists hoped they would hear more at the conference about a three-year dollar Eurobond issue with 144A option for the City of Moscow, due to be sold later in the month. They knew that Nomura and CS First Boston were conducting roadshows. But at the conference, delegates were careful to avoid talking about the forthcoming deal. One speaker from Renaissance Capital even apologized for not being able to talk much about Moscow and offered to talk instead about the City of St Petersburg.
Meanwhile, officials and lead managers, who had been enthusing about their latest credit research reports compiled using freshly-available information from the City of Moscow, apologized that, after checking with their compliance officers, these could not be handed out. Journalists were bemused.
De-briefing
This January, an American bank invited a handful of journalists to a London briefing on what was billed as a potentially trend-setting deal for a European sovereign borrower. Notes on the complicated deal were handed out on arrival, and as journalists pored over them, a library hush descended on the conference room. Five minutes later there was a whispering among the lead manager's staff near the doorway. The head of public relations walked around the table and, quietly but firmly, took back the papers she had just handed out.
The link between these stories is the limitation the American Securities and Exchange Commission (SEC) imposes on publicity before any new sale of securities. In most countries it is precisely when an issuer is preparing a large bond or equity deal that journalists want to write about it, to explain the issuer and the deal. In the US, as soon as an issuer reaches an agreement with a lead manager or syndicate to sell securities, the flow of news concerning issuer and deal, via research reports and press briefings, is severely limited.
The SEC enforces rules established under the Securities Act of 1933 and the Securities and Exchange Act of 1934. These were introduced with the trauma of the 1929 stock market crash still fresh in legislators' minds. The regulations aim to ensure the provision of reliable information about a company to enable investors to decide whether or not to buy newly-issued securities. Issuers and underwriters may only use a proper prospectus, with comprehensive financial information, risk factors and details of key executives included, to sell public securities. Particular emphasis is placed on any documents, or other written words, that might be seen as being used to sell securities. The law is based on an assumption, which makes many journalists smile, that the written word is inherently more authoritative than anything merely spoken.
The rules prevent an issuer from starting to market an offer through the media before it files its prospectus with the SEC for approval - so-called gun-jumping. From the moment a company reaches a preliminary agreement with a lead underwriter on a proposed financing, it is considered to be in registration. It is prevented from using any form of publicity to condition the market: that is, to arouse public interest in the company or its securities in a way designed to promote the new issue. Any such publicity may be construed as an offer to sell securities using something other than a proper prospectus. That precludes not only paid advertising to promote the company (advertising for a company's products is still allowed) but also on-the-record and even non-attributable interviews with company management about the company.
SEC employees monitor publicity closely, according to Meredith Cross, deputy director in the commission's corporate finance division, but she stresses there is no need for paranoia. What they are really looking for, Cross says, are cases of "clear-cut market conditioning before the offer is filed". For a company to leak a strong earnings projection two weeks before filing to sell a new issue would be unwise.
Arguing over implications
So far, so sensible, it might seem. But the legislation has spawned libraries full of related documents, as issuers' and underwriters' lawyers have argued over its implications.
"Believe me there exists case law, enforcement proceedings and interpretative letters over the question of whether simply paper-clipping a business card to a prospectus, or adding a covering letter saying 'Dear Bob, I like this deal, take a look at the accompanying prospectus', constitute inappropriate offers for sale using something other than the actual prospectus," says the head of European compliance at one American investment bank.
As with many common-law statutes, only so many clearly defined rules are spelled out in black and white. The writers' intention was to establish broad principles, not to proscribe or prescribe issuers' and underwriters' actions in exhaustive detail. Sensible judgements still have to be made. For example, it soon became clear that casting a blanket of silence over an issuer's affairs for several months prior to a new issue might have disastrous consequences for holders of its existing securities. These could, with justice, claim that they have the right to be promptly informed of key business developments which might affect the value of their investments.