When a corporation or municipality issues bonds, they must provide potential investors with accurate and complete information about the issuer’s financial condition and risks associated with the investment. This is where Disclosure Counsel comes in. Disclosure Counsel is responsible for advising the issuer on their disclosure obligations under federal securities laws and ensuring that all material information is disclosed to investors.
The Role of Disclosure Counsel
Disclosure Counsel works closely with the issuer and their other legal counsel to prepare the offering documents, including the prospectus and any supplements or amendments. They review the issuer’s financial statements and other relevant documents to identify material information that must be disclosed to investors. They also advise the issuer on their disclosure obligations under securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934.
Disclosure Counsel is responsible for ensuring that the offering documents are accurate and complete, and that they do not contain any false or misleading statements. They must also ensure that any forward-looking statements are accompanied by appropriate cautionary language.
Example of Disclosure Counsel Exposing a Bond Issuer to Liability
In 2010, the Securities and Exchange Commission (SEC) brought a case against the State of New Jersey for violating federal securities laws by failing to disclose the true state of its finances to investors in its municipal bond offerings. The SEC alleged that the state had not disclosed its significant underfunding of its pension system, which resulted in the state understating its liabilities and overstating its assets. The SEC also alleged that the state had misled investors by not disclosing that it was using one-time revenue sources to balance its budget.
In this case, Disclosure Counsel failed to ensure that the issuer was disclosing all material information to investors, which exposed the issuer to liability under federal securities laws.
Example of Disclosure Counsel Adding Value to an Issuer
In 2019, the city of Chicago issued $1.2 billion in bonds to fund various infrastructure projects. The city’s Disclosure Counsel played a critical role in ensuring that the offering documents were accurate and complete, and that all material information was disclosed to investors.
The Disclosure Counsel worked closely with the city’s finance department and other legal counsel to review the city’s financial statements, budget projections, and other relevant documents. They identified several risks associated with the bond issuance, including the city’s significant unfunded pension liabilities and the possibility of a downgrade in the city’s credit rating.
The Disclosure Counsel helped the city to address these risks by drafting appropriate disclosure language and ensuring that the offering documents accurately reflected the city’s financial condition. As a result, the bond issuance was successful, and the city was able to secure funding for its infrastructure projects at a favorable interest rate.
Conclusion
Disclosure Counsel plays a critical role in ensuring that investors in corporate or municipal bond offerings receive accurate and complete information about the issuer’s financial condition and risks associated with the investment. While failure to disclose all material information can expose an issuer to liability under federal securities laws, competent Disclosure Counsel can add significant value to an issuer by helping to identify and mitigate risks and ensure a successful bond issuance.
It’s important to work with an experienced attorney to ensure that your bond issuance is structured properly to minimize adversely consequences of inadequate disclosures.
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