Investors want to know the material terms of an investment, such as a structured product, in order to make an informed investment decision. Some material terms of a structured note may not be determined on the trade date, the day on which investors commit to purchasing the notes. For example, the starting value (or “initial level” or “initial price”) of an index- or stock-linked structured product is very often one of these terms. The starting value can be, as in a “look back” structured note, the lowest value of the underlying asset for a period of time after the trade date.

This article briefly discusses the legal issues arising from terms that are not determined on the trade date. When the starting value, for example, is unknown at the time of sale, the issuer's obligation to disclose material information under Rule 159 under the Securities Act of 1933 (the “Securities Act”) at or prior to the time of sale would be satisfied if the issuer disclosed the methodology by which the investor can determine the starting value in the preliminary pricing supplement or free writing prospectus for the offering. Although at the time of sale the investors do not know the starting value, investors can still rely on the methodology to determine, or to understand the calculation of, the starting value. The methodology should also be included in the final pricing supplement. When drafting the methodology, the issuer or counsel for the issuer should ensure that the methodology is explained in plain English.

Under Rule 424(b)(2) under the Securities Act, a final pricing supplement must be filed within two business days following the earlier of the date of the determination of the offering price or the date when such document is first used. If the initial level or price is determined after the trade date but before the filing date, under Rule 423, which allows a pricing supplement to be dated the “approximate date of its issuance,” the date of the pricing supplement can be changed from the trade date to the pricing date (in this case, the date on which the initial level or price is determined).

An issuer who offers such notes is not legally required to deliver a new prospectus after the date of the sale, but it is common practice to convey the final terms to investors. The issuer can do this by delivering a short supplement to the final pricing supplement (referred to sometimes as a “sticker”), amend the final pricing supplement, or have the investors' broker confirm the final terms to its customers by phone or e-mail. Therefore, an issuer whose structured products offerings have one or more terms to be determined after the trade date should consider the following:

  • Clearly explaining the methodology for determining the unknown terms;
  • Disclosing who will make such determination and when that will happen; and
  • How investors will receive the final terms.

Originally published in REVERSEinquiries: Volume 4, Issue 1.
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January 19 2021

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