N.M. Code R. § 12.11.9.19

Current through Register Vol. 35, No. 11, June 11, 2024

Section 12.11.9.19 - DEBT SECURITIES

A. The following definitions shall apply to this section.

(1) "Adjusted cash flow" is the issuer's cash flow adjusted on a pro forma basis to reflect:

(a) the elimination of interest and fees on debt or debt securities and of cash dividends on preferred stock that are to be retired with the proceeds derived from the offering;

(b) the effect of any acquisitions or capital expenditures that were made by the issuer after its last fiscal year, or which are proposed or required for the current fiscal year, which materially affect the issuer's cash flow;

(c) the effect of interest and fees on debt or debt securities or cash dividends paid after the issuer's last fiscal year;

(d) the effect of any interest and fees or debt securities and of cash dividends on preferred stock or common stock that were issued during the issuer's last fiscal year, as if such debt, debt securities, preferred stock or common stock had been outstanding for the entire fiscal year;

(e) the effect of imputed or deferred charges of zero coupon debt or debt securities for the issuer's last fiscal year and any additional charges on such debt or debt securities issued after the issuer's last fiscal year;

(f) except as provided in Subsection C of this section, the effect of accrued dividends on preferred stock for the issuer's last fiscal year and any additional dividends on such preferred stock issued after the issuer's last fiscal year; and

(g) the effect of any other material changes to the issuer's future cash flow.

(2) "Cash flow" is the issuer's after-tax earnings that are derived from its normal operations, exclusive of extraordinary and nonrecurring items, less interest and dividends, plus certain noncash charges against earnings such as depreciation, depletion and amortization, determined according to generally accepted accounting principles consistently applied.

(3) A "promoter" may include:

(a) a person who, alone or in conjunction with one or more persons, directly or indirectly, founded or organized the issuer or controls the issuer;

(b) a person who, directly or indirectly, receives as consideration for services or property rendered, five percent or more of any class of the issuer's equity securities or five percent or more of the proceeds from the sale of any class of the issuer's equity securities;

(c) a person who receives securities or proceeds solely as underwriting compensation is excluded from the definition of promoter if that person falls outside of the definitions of Subparagraphs (a), (d) and (e) of Paragraph (3) of this subsection;

(d) a person who is an officer or director of the issuer;

(e) a person who legally or beneficially, directly or indirectly, owns five percent or more of any class of the issuer's equity securities ("five percent shareholder") if that person was in control of the issuer at the time of acquiring five percent of any class of the issuer's equity securities or if that person is in control of the issuer at the time of public offering of the issuer's equity securities; or

(f) a person who is an affiliate or an associate of a person specified in Subparagraphs (a), (b), (c) or (d) of Paragraph (3) of this subsection.

B. A public offering of debt securities may be disallowed by the director if the issuer's adjusted cash flow for the last fiscal year or its average adjusted cash flow for the last three fiscal years prior to the public offering was insufficient to cover its fixed charges, meet its debt obligations as they became due, and service the debt securities being offered.

C. Notwithstanding Subparagraph (f) of Paragraph (1) of Subsection A of this section, accrued dividends of cumulative preferred stock having a stated interest rate may be excluded from adjusted cash flow at the discretion of the director.

D. The director, in the director's sole discretion, may choose not to apply Subsection B of this section to a public offering of convertible securities that are superior in right of payment of interest and liquidation proceeds to any convertible debt that is or may be legally or beneficially, directly or indirectly, owned by promoters. The risks of failure to meet debt service obligations and the equity characteristics of such securities must be disclosed in the prospectus. An offering of such securities may be reviewed using guidelines for equity offerings.

E. Unless the director permits otherwise, public offerings of debt securities shall be offered and sold pursuant to a trust indenture ("indenture") which adequately protects the rights of the purchasers. Some of these protections are:

(1) the indenture shall comply with the provisions of the Trust Indenture Act of 1939; this shall be disclosed in the offering document;

(2) the events of default of the indenture shall be disclosed in the offering document;

(3) the trustee shall be provided with adequate reports, including any compliance reports from independent auditors, to allow the trustee to ensure compliance with the indenture;

(4) neither the trustee nor the promoters may be major creditors of the issuer or its affiliates;

(5) the indenture shall provide that upon any consolidation, merger, recapitalization, reorganization, pledge foreclosure, equity or share exchange, conveyance or transfer of the properties and assets of the issuer substantially as an entirety, or any other transaction having a substantially equivalent effect, the successor person shall expressly assume the payment obligations on the debt securities and the duty to perform the covenants of the indenture;

(6) the indenture shall provide that interest will accrue and be paid to the date(s) of redemption or conversion of the debt securities.

F. If the issuer's cash flow is subject to cyclical fluctuations or if the director deems it necessary for investor protection, the director may require that the issuer establish a sinking fund or redemption requirements.

N.M. Code R. § 12.11.9.19

12.11.9.19 NMAC - Rp, 12 NMAC 11.4.8.12, 1-1-2010