Understanding The Prospectus And Prospectus Supplement

David M. Lukach

Partner

Structured Finance Group PricewaterhouseCoopers

Yogesh Gupta Director

Structured Finance Group PricewaterhouseCoopers

Thomas Knox

Director

Structured Finance Group PricewaterhouseCoopers

John Gibson

Director

Structured Finance Group PricewaterhouseCoopers

The registration, disclosure, and reporting requirements for publicly issued mortgage-backed securities (MBS) are governed by the Securities Act of 1933 and the Exchange Act of 1934. The modern asset-backed securitization (ABS) market did not exist at the time of the creation of these laws, and as a result, the process of mortgage-backed

PricewaterhouseCoopers has prepared this chapter regarding the prospectus and prospectus supplement in order to provide a framework for a general understanding to a user of such information. PricewaterhouseCoopers does not practice law and is not in this chapter interpreting the requirements of the U.S. securities law and regulations or providing legal advice. Readers should seek advice from legal counsel with regard to any matters of law related to the preparation or understanding of a prospectus or prospectus supplement. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, a Delaware limited-liability partnership or, as the context requires, the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

in security registration has been revised several times by Congress and the Securities and Exchange Commission (SEC) to better reflect the needs of the ABS market.

On December 22, 2004, the SEC published final regulations labeled "Regulation AB" that, among other things, consolidate and codify existing interpretative, primarily client-specific positions that clarify the Securities Act of 1993 registration requirements for asset-backed securities offerings.1

The Securities Act of 1933 defines a prospectus as ". . . any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security."2 For the discussion in this chapter, we will limit the definition of a prospectus to the formal written offer to sell securities that is filed with the SEC. We also will describe the types of information that are available to investors in a typical prospectus3 and prospectus supplement, as well as the benefits and limitation of such data.

In addition to the information contained in the prospectus, the offering process for MBS generally includes various computational or investor marketing materials to illustrate the potential economics of the various tranches of securities.

SECURITIES ACT REGISTRATION STATEMENTS: THE DISCLOSURE FRAMEWORK

The purpose of the prospectus is to disclose key material facts about an MBS that an investor needs in order to make an informed purchase decision. To this end, most MBS prospectuses contain

  • A description of the offered securities and the assets backing those securities
  • The legal and structural framework of the trust
  • The associated parties to the transaction
  • A disclosure of investment risks

Dealers are required to deliver a preliminary prospectus, or "red herring," prior to delivery of a confirmation of sale. The prospectus is filed with the SEC using prescribed forms. Most MBS are filed using Form S-3 (for repeat issuers), although some MBS/ABS securities are filed using Form S-1.

In 1992, the SEC amended Form S-3 to allow registration of investmentgrade asset-backed securities on a delayed, or "shelf," basis. Form S-3 allows an issuer or sponsor to register asset-backed securities for future issuance(s) through one or more offerings that represent a "takedown" off the shelf registration statement.

  1. Securities Act Release No. 8518 (Dec. 22, 2004) [70 FR 1506] (the "ABS Adopting Release"), available on the Web at http://sec.gov/rules/final/33-8518fr.pdf.
  2. 15 U.S.C. 77a et seq.
  3. Documents substantially similar to a prospectus are referred to as an "offering circular" or "indenture."

These documents are used for those offerings that are exempt from SEC registration.

Shelf registration on Form S-3 has become the preferred method of registration for public offerings of MBS.4 Offerings that do not meet the technical definition of asset-backed security typically are registered on Form S-1.5

For offerings registered on a shelf basis on Form S-3, the disclosure in the registration statement is typically presented through the use of two documents: the base or core prospectus and the prospectus supplement.

The base prospectus discloses the parameters and definitions or a menu of the different types of security that may be offered in the future, including the

  • Types of assets that may be securitized
  • Types of security structures that may be used
  • Types of possible credit enhancements
  • Parties to the transaction

The registration statement also contains one or more forms of a prospectus supplement, which outlines the format of deal-specific information that will be disclosed at the time of each future issuance, or "takedown." At the time of a takedown, a final prospectus supplement is prepared that describes the specific terms of the offered securities. The prospectus supplement and the base prospectus form the final prospectus, which is filed with the SEC.

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Responses

  • bryan
    What is a prospectus supplement?
    6 years ago
  • gloriana gardner
    Where are mortgage backed securities prospectus?
    6 years ago
  • Esme
    When does a prospectus supplement have to be delivered to an investor in an rmbs offering?
    6 years ago
  • daniela
    What information does the prospectus of a mortgage backed security generally contain?
    6 years ago

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