Beginning May 28, 2024, the new T+1 settlement cycle will apply to most routine securities transactions, which means that the settlement period for most securities issuances and trades will shorten from two business days after the trade date to one business day after the trade date.1 White & Case issued a Client Alert on this topic in February 2023.
As noted in our prior Client Alert, the SEC stated that the principal goal of the move to T+1 was to reduce credit, market and liquidity risks arising from unsettled securities trades. The SEC believes that the shortened time period between execution and settlement of trades should reduce the number of unsettled trades, the time period of exposure to those unsettled trades and potential price movements in the securities underlying unsettled trades. A T+1 settlement would also enable investors to access the proceeds from securities sales sooner.
This Client Alert highlights some practical advice for clients to consider as T+1 takes effect.
Impact on Standard Underwritten Offerings (including IPOs)
As we noted in our prior Client Alert, the new rules will shorten the settlement cycle for firm commitment underwritten offerings. Offerings that price before 4:30 p.m. ET will settle one business day after the underwriting agreement is signed, and offerings that price after 4:30 p.m. ET will be permitted to settle two business days after the underwriting agreement is signed (essentially treating “T” as the first business day after the day the underwriting agreement is signed).
We expect the primary impact of the move to T+1 settlement on standard underwritten offerings will be a further shifting of the preparation work for closing to earlier in the transaction. Under the current T+2 settlement regime, issuers, underwriters and their respective counsels already seek to complete all substantive tasks involving closing documentation prior to the pricing of an offering, and the move to T+1 will only put added pressure on the deal team to ensure that the documentation is ready far in advance of closing. We expect that issuer and underwriter counsels will work carefully with issuers, selling shareholders and their counsel (if any), auditors, transfer agents, brokers, financial printers and other parties to ensure that the documentation required for closing underwritten offerings is prepared on a timely basis.
Note that for firm commitment underwritten offerings, Rule 15c6-1(d) continues to enable parties to a transaction to agree in advance of the transaction to an alternate settlement cycle. Agreed alternate settlement cycles have long been common in the debt and preferred equity market given the additional documentation in those transactions, among other considerations. We do not expect, however, that more than a small minority of common equity transactions will use alternate settlement cycles.
Overnight Transactions and Block Trades
The need to give additional consideration to timing and planning issues with underwritten offerings discussed above will be more acute with overnight transactions and block trades. Despite the flexibility described above on settlement of some underwritten offerings (including IPOs) that price after 4:30 p.m. ET, some practitioners have noted that overnight transactions and block trades may be more likely to adopt a strict T+1 settlement cycle to align with the settlement cycle of a company’s existing publicly traded shares. In particular, if these types of transactions involve secondary sales (i.e., sales by an existing shareholder), the deal team will need to pay particular attention to logistical matters involved with delivery of the shares at closing. This could involve delivery of legal opinions and other paperwork to remove any restrictive legends on the shares being sold, satisfying any documentation required by the Issuer’s transfer agent (including medallion guarantees in some instances) and possibly delivering “wet ink” signatures on stock powers or other documents. Because overnight transactions and block trades are typically done on an accelerated timeline, parties who may want to engage in such a transaction will want to ensure that the right preparation work has occurred to ensure proper deal execution.
Restricted Securities and Rule 144 transactions
The same type of advance planning described above will be applicable for restricted securities, which are securities acquired from the issuer, or an affiliate of the issuer, in a transaction that is not a public offering. The de-legending process, while usually not a complicated operation, often takes a number of days and requires coordination among the selling shareholder, the issuer, issuer counsel and the transfer agent. The process can involve delivery of representation letters, instruction letters and legal opinions, as well as transfer forms and specific forms requested by the issuer’s transfer agent. In addition, there may be requirements to deliver medallion guarantees and/or “wet ink” signatures on some documents. We urge companies who have a significant amount of restricted securities outstanding to begin discussions with shareholders and their transfer agent now to avoid any unnecessary complications at the time a shareholder wishes to engage in an actual sale.
In conclusion, with the right type of planning, coordination and advice, we expect that the shift to a T+1 settlement cycle to be manageable for most public companies and companies looking to go public.
1 The final rule is available here (Shortening the Securities Transaction Settlement Cycle) and the corresponding fact sheet is available here. See also, SEC Press Release (SEC Finalizes Rules to Reduce Risks in Clearance and Settlement).
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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