A new set of laws has the potential to impact the catastrophe bond and insurance-linked securities market by easing some of the current restrictions on securities advertising, marketing and issuance. The Jumpstart Our Business Startups Act, or JOBS Act, was signed into law by President Obama on the 5th April and contains a number of changes to securities laws which could be beneficial to the cat bond and ILS market if the SEC applies the rules as they are currently interpreted.
As anyone involved in the marketing, issuance or investment of 144a securities will be aware, there are many restrictions surrounding who they can be marketed to and sold to. Investors have to be Qualified Institutional Buyers (QIB’s) who are registered with the SEC under the current rulings and openly advertising or marketing securities is not allowed as they may be seen by unqualified investors.
There are two items within the JOBS Act that could change the status quo for catastrophe bond and insurance-linked securities. It’s worth noting before we discuss them that although the JOBS Act has become effective the SEC has to write specific implementation rules for each item within it so there is no guarantee quite how the changes will manifest. However the below outlines the changes as they can be interpreted right now.
The first piece of the JOBS Act which could impact cat bonds and ILS says that no later than early July 2012, the SEC must revise Rule 506 of Regulation D of the Securities Act to say that the section of that rule which disallows general solicitation or advertising of securities offerings will not apply to securities offerings made under Rule 506 as long as all purchasers of the securities are accredited investors. This suggests that issuers of cat bonds and ILS will be able to advertise their offerings openly, with non-qualified investors able to see the offerings, as long as the final sale of securities is only to qualified investors.
This could be a big change across the securities world where offerings are generally marketed direct to known, qualified investors. In the cat bond space transactions are marketed through a roadshow, face-to-face meetings with investors and conference calls as well as documentation being directly emailed to potential investors. By allowing for wider advertising of cat bonds and ILS it could help to further raise the profile of the market and open it up to even more investors who may not have considered the space before. If this rule comes into effect, after the SEC has written its implementation of it, then you may even be able to advertise your pipeline cat bond transactions to Artemis’ audience of investors. The SEC will also have to add something into Rule 506 to force issuers to take reasonable steps to verify that investors are qualified and accredited.
The other item in the JOBS Act we wanted to highlight is a little more open to interpretation so it’s unclear exactly how much impact this could have. The JOBS Act also amends Section 3 of the Securities Act to allow for a new class of security which is exempt from many of the strict regulations including registration with the SEC, as long as the offering amount is less than $50m over a 12 month period. It’s unclear how broad this will be, whether it will apply to every 144a securities issuance of under $50m or just specific types of company fundraising. However, if it is broad then it could lead to a way to issue a cat bond or ILS deal without having to register the securities with the SEC and that would mean they could be sold to other classes of non-registered investors such as high-net-worth individuals, smaller family offices and smaller funds. The $50m issuance limit could be a problem due to the cost of issuing a cat bond or ILS, however there must be ways to structure a programme of cat bonds where a $250m deal could be issued over five years. Again, we won’t know the final impact of this ruling until the SEC weighs in with implementation guidance.
You can find some detailed discussion of the JOBS Act law and the potential changes to SEC rulings here from law firm Mayer Brown.