The assumption being, large institutions are clever enough to undertake due diligence without needing SEC help, contrary to individual investors, who most often do lack resources to verify claims from issuers, without help from the agency.
The rule also stipulates a two year holding period meaning a qualified U.S. institutional investor buying the bond from an issuer, cannot transfer ownership of it for two years. This makes short-term investment in such restricted securities possible. 144A bond issued by a qualified company investor has a maturity date that lasts for more than 10 years, when compared to a 144A note that usually matures within 10 years of the date of issue.
Since mid-2014, the Financial Industry Regulatory Authority (FINRA) with their Trade Reporting and Compliance Engine, started reporting transaction data for Rule 144A trades in the corporate debt market. This enhanced transparency and made access to more information about trade and transactions in the institutional debt market, easily available to all financial market participants including professional investors, hence, resulting in a more efficient way of pricing and valuation of such securities.
Most transactions involving securities of foreign companies are, however, not subject to SEC scrutiny, which exposes U.S. based institutions to the potential for fraudulent misrepresentations from foreign issuers. However, the rule also reduces the risks to the industry by allowing institutions to spread the risk from foreign-issued securities in private placements, making it easier for companies to issue private placement financing by essentially facilitating a secondary market among institutions for those securities.
This makes regular initial public offerings (IPO) and other public issuance less attractive to institutional investors, leaving individual investors with fewer investment options. A 144A bond issue is for United States resident qualified institutional investors and is usually but not always settled through DTCC in the U.S. and Euroclear or Clearstream in Europe.
How to issue a 144A bond
If your company plans to issue a bond, then you would need to write a disclosure document such as a private placement memorandum (PPM), under rule 144A. The terms of each bond issued will have the maturity date, interest rate, interest payment interval and other terms.
Since a PPM is technically a legal document, it is important that it protects you the entrepreneur by ensuring it satisfies the Security and Exchange Commission regulations, and also helps you gain the trust of interested qualified institutional investors.
What is the 144A Bond program process like?
2. Multiple conference calls held
3. Lending company analysis and pre-underwrites
4. If Lending Company issues a positive opinion in 1-2 weeks,
5. Lending company is engaged and you pay underwriting fee
6. Bond is then created
7. You get the funding
WHO CAN WRITE A PPM DOCUMENT FOR YOU?
Who can draft a PPM? You can hire a securities lawyer, investment banking consultant, or a professional PPM writer to draft the document for your company.
Though some of them charge a lot of money, it is important that you select and work with whoever fits within your budget and can write a proper document targeted towards the group of investors, you want to seek funding from.
A PPM is both legally important and strategic in terms of your company's business plan. When you want to attract investment as a startup, for instance, you should consider having a PPM whenever you visit venture capitalist forums or solicit investors over email.
And while using standard elevator pitches and executive summaries are good, a professionally drafted PPM document will help speed up negotiations, make you look prepared and improve on the introduction and investment interest in your business.
Not having a PPM though not an end to your funding request, can slow down negotiations and block investments making your business look unprofessional.
Before writing a PPM, you need to know what your potential investors are looking for so that you can focus on creating an attractive document, specifically targeted at the group of institutional investors you are seeking funding from. A good private placement setup is all you need to get investments.
Advantages of a 144a bond finance
- Lender funds 99% of total project cost (only 1% down payment needed)
- No funding cap ( loans from $1 Million USD to $500 Million USD or more)
- No personal guarantee required
- No loss of project equity
- Turn around time (closing timeline) is between 90-120 days
- Flexible repayment terms offered
- No asset verification process
- Funding available worldwide (International projects are funded)
- No need for credit verification
- Option to defer payments up to 12-24 months
- Financing can be done in one lump sum
- Low underwriting fee
- No upfront costs to borrower other than third party reports
- Costs of third party reports reimbursed at the time of funding
- Up to 30 years amortized, 4.5% - 8.00% Interest rate only during construction
- No prepayment penalty
Disadvantages of a 144A bond
Limited to institutions and not individual investors
PPM requirement and prohibitive third party costs and fees
All company assets used as collateral for the loan
What projects can be funded with a 144a bond?
Stabilized Real Estate
Construction
Rehab
Agriculture
Oil and Gas
Mines
Technology
Energy
Pharmaceutical
Major Business Acquisition/Expansion
Medical Practices (Dental, Veterinary, Ophthalmology and all Surgery Practices)
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