Securities offering reform legislation passed unanimously by the Securities and Exchange Commission last Wednesday that aims to broaden the ability for written information sharing prior to the final prospectus was the adoption of a rule that will expose Wall Street firms and issuers to liability based on a determination of the completeness and accuracy of information an investor receives at the time he or she purchases a security. The rule, dating back to 1933, was most recently in the public eye when Google Inc.'s initial public offering was nearly derailed following an article featuring its founders that appeared in Playboy Magazine. And while the liberalization of information sharing may be good for equity IPOs, the liabilities that come along with it could be a hindrance to the ABS market, which commonly maintains a pre-investment dialogue between issuers, underwriters and investors in order to structure a deal's underlying collateral and cash flows, for example, prior to the issuance of a final prospectus.
"This is going to change how all of Wall Street conducts itself in offering securities, particularly structured finance securities," said Mark Adelson, head of structured finance research at Nomura Securities. The process of doing deals may slow down to where we don't actually start taking or accepting orders until final disclosure materials are prepared, alternatively, street firms will have to just get comfortable with the idea that preliminary materials have a lot more liability associated with them than they used to. The idea of flexing or tuning a deal is really curtailed." Using the analogy of a bake sale, Adelson explained that, essentially, investors can't buy bonds when they are still baking in the oven. "We can't take orders for cookies until we take them out of the oven, and put them in the box," he added.