Dawn Lurie: Rupy, say you have a borrower who is unrelated to the NCE or the lender, and they’re providing all the information for the business plan, which will go into the PPM.
What do you think about issuers who don't want the PPM reviewed by the borrower (JCE)? In other words, all the borrower gets to see is the loan agreement, but they don't get to look at what's in the PPM. What's your feeling about that?
Rupy Cheema: The borrower is the one providing information on the business plan which is part of the PPM, so they should be reviewing it, and the NCE should be making sure there are no material misstatements.
Dawn Lurie: Do you check on that? Is that one of your questions to see if that's been done?
Rupy Cheema: You know, that's not something we've questioned because in a lot of deals, especially the large construction projects, the borrower is very involved. But that's a good question.
Greg, from a securities point of view, do you have any thoughts about that?
Gregory White: Yeah. The NCE is different from the JCE, and so the issue that you and Dawn are talking about is there. That is that the NCE is pulling together a company to go out and raise money and make a loan to the JCE, but it needs all the information from the JCE to describe the project. Frankly, we've had some complex structures where there are separate guarantors or third-parties where it is relevant to the investor in the NCE's offering. I'd say it is ultimately the obligation and responsibility of the NCE, which is conducting the securities offering to get all of that information, and to vet it, and to conduct due diligence on it.
I do think that, in some cases, it is important for the NCE to point out where the information came from. For example, we may prepare a PPM where all of the project information comes from the developer, or the information about the third-party guarantor is actually provided by them. In that case, we make it very clear that the NCE has relied upon those parties to obtain that information.
It's important that there are agreements between these parties that govern their relationship and actually have provisions sorting out who is ultimately responsible to provide the information and who is indemnifying whom if the information is incorrect, because most NCEs will never be able to completely verify all of the information that they get.
Now, due diligence is all about trying to find ways to verify that information. But I think people do need to understand that, in some of these arm's length situations, they need to let the investor know where the information is coming from. They need to advise that there's a risk that the information may not be accurate, or that the party providing the information may not have been able to control the information. Moreover, in a worst case scenario, there should be some rules of the road to lay out who is responsible for misstatements or the failure to provide the information.
Dawn Lurie: Greg, in terms of the disclosure you're saying that that information is relied on. What if the project had not reviewed the offering itself, would that be a necessary disclosure?
Gregory White: I'm not an expert in securities litigation, but what I can say with some level of expertise is that the primary obligation of the PPM is on the issuer. The issuer will be liable if information in that document is misleading or incorrect. The technical term is “violates rule 10b-5”. It doesn't really matter whether the developer has reviewed the offering memorandum, although the developer should review it.
What is critical is that the NCE has done the diligence to determine what's going on in the project, and has made sure that the developer reviewed that information. If I'm an NCE, I'm going to have an agreement with the developer that says, "If you review the information or you provide false information to me, and you review it and it's wrong, you're going to indemnify me." Even in the absence of an indemnity agreement, an NCE would be foolish to go forward with an offering that describes a developer's project without having had the developer approve it.
Now, whether the developer can be held liable for the issuer’s misstatement, certainly there’s a possibility of that. But whether that comes up as a direct liability or whether it's an indemnification, common law or otherwise, because the NCE's now going to turn around and sue the developer, that's another matter.
Dawn Lurie: That makes sense.
Rupy, I know you do the third party diligence, but could an NCE outsource their due diligence to you and have you do it for them and then state that in the offering?
Rupy Cheema: That's something I would ask my attorney, but they can definitely hire us to do their due diligence. We do get approached by regional centers that are looking to sponsor projects and they want us to look at deals that they're considering sponsoring.