Below are excerpts from an

article you may find

interesting. I've played with
the "crayons" a bit to draw
attention
to certain aspects of the
riddle we're trying to solve.
Doug

THE SECURITIES ACT OF

1933: SECTION 3(A)(3)
Section 3(a)(3) of the
Securities Act exempts from
the registration and
prospectus delivery
requirements of the
Securities Act any note,
draft, bill of
exchange, or bankers
acceptance which arises out
of a current transaction or
the proceeds of which have
been or are used for current
transactions, and
which has a maturity at the
time of issuance of not
exceeding nine months,
exclusive of days of grace, or
any renewal thereof the
maturity of which is
likewise limited[.]
In order to qualify for the
Section 3(a)(3) exemption
from the registration
and prospectus delivery
requirements of the
Securities Act, the proceeds
of the commercial paper
must be used only for current
transactions. The
current transaction test will
generally be satisfied when
the proceeds of the
commercial paper issuance
are used in producing,
purchasing, carrying or
marketing goods or in
meeting current operating
expenses of a business.
However, the test is
generally not satisfied when
the proceeds are used for
permanent or fixed
investments, such as land,
buildings, or machinery, nor
for speculative transactions
or transactions in securities
(except direct obligations
of the U.S. government).
In addition, the Section
3(a)(3) exemption applies
only to prime quality
negotiable commercial paper
of a type not ordinarily
purchased by the general
public, that is, paper issued
to facilitate well-recognized
types of current operational
business requirements and
of a type eligible for
discounting by U.S. Federal
Reserve banks.
THE SECURITIES ACT OF
1933: SECTION 4(2)
Commercial paper that does
not meet the Section 3(a)(3)
requirements may
nevertheless be sold without
registration under the
Securities Act in reliance
upon the Section 4(2) of the
Securities Act private
offering exemption
from the registration
requirements of the
Securities Act.
Unlike Section 3(a)(3),
Section 4(2) calls for a
private placement of the
securities. Section 4(2)
states that registration and
prospectus requirements
shall not apply to
transactions by an issuer
not involving any public
offering.

In order to satisfy the Section

4(2) private placement test,
the commercial paper
offering must be conducted
in such a manner so as not
to constitute a "public
offering." This is essentially a
question of fact requiring an
examination of the following
factors:
(1) The offerees should be
sufficiently sophisticated to
be able to understand
and bear the risks of the
investment and should be
provided access to the
type of information that is
necessary to make an
informed investment
decision.
(2) There should not be any
general solicitation or
advertising, and there should
not be any other public
offering that could be
integrated with the private
placement. Offers are
generally made only by
direct contact between the
commercial paper placement
agents sales representatives
and the person at the
purchasing institution
responsible for making the
investment decision.
(3) Commercial paper issued
in a Section 4(2) program
can generally only be sold to
accredited investors, as
defined in Rule 501(a) under
the Securities Act, and
comparable foreign
institutions. There is no
specific limit on the number
of such offerees. Minimum
investments of
$200,000 are generally required. To the extent there are any non-institutional
investors participating in the offering, however, there is a greater
risk that a public offering will be deemed to occur where there is more
than a limited number of such non-institutional investors participating.
(4) The issuer is responsible for ensuring that the initial purchasers do not
become conduits for a wider distribution of the securities being privately
placed. Each Note must bear a legend stating that it has not been registered
and that it may not be sold or otherwise transferred except to or through the
originating placement agent. This restriction on transfer is also referred to in
the private placement memorandum.
INTEGRATION OF SECTION 3(A)(3) AND SECTION 4(2)
PLACEMENTS
An integration problem can arise if an issuer decides to convert a commercial
paper program from a Section 3(a)(3) program to a Section 4(2) program
or to simultaneously conduct a Section 3(a)(3) offering and a Section
4(2) offering. The exemption from the registration provisions of the
Securities Act for Section 4(2) offerings requires that the offering does not
constitute a public offering. However, for purposes of Section 4(2), a Section
3(a)(3) offering is viewed as the equivalent of a public offering. Accordingly,
in order to effect a good private placement of commercial paper under
Section 4(2) concurrently with, or immediately following, an offering of
commercial paper under Section 3(a)(3), care must be taken to avoid the
"integration" of the Section 4(2) offering with the Section 3(a)(3) offering,
since integration of the Section 4(2) offering into the Section 3(a)(3) offering
would make it impossible to satisfy the non-public offering requirement
of the Section 4(2) exemption. The loss of the exemption provided by
Section 4(2) would mean that the offering would be in violation of the registration
requirements of Section 5 of the Securities Act if no other exemption
were available. ...

RULE 144A
In 1990, the Securities and Exchange Commission (SEC) adopted
Rule 144A. Rule 144A is designed to foster a more liquid and efficient secondary
trading market in restricted securities for institutional investors while
providing appropriate safeguards to ensure the continued integrity of the
retail securities market. Rule 144A provides a non-exclusive safe harbor
exemption from the registration requirements of the Securities Act for the
resale of certain restricted securities to specified institutions by persons other
than the issuer of such securities. Typically, the transactions are structured
such that the initial purchaser (generally an investment bank) purchases the
securities as principal in a Section 4(2) private placement and then immediately
resells such securities to QIBs in exempt transactions.
To qualify for the safe harbor exemption of Rule 144A, an offer or sale
must meet four basic conditions relating to the type of securities to be sold,
the institutions to whom the securities may be sold, the types of information
required to be furnished, if any, and the purchasers awareness of the sellers
reliance on Rule 144A.

The securities offered or sold under Rule 144A may not be of the same
class as securities of the issuer that are listed on a U.S. securities exchange
or quoted in a U.S. automated inter-dealer quotation system.
The securities must be offered or sold only to QIBs or to an offeree or
purchaser that the seller and any person acting on its behalf reasonably
believes is a QIB.
There is generally no requirement that prospective purchasers be provided
with specific information with respect to the issuer of the securities
offered or sold under Rule 144A. If, however, the issuer is neither (i) a
reporting company under the Securities Exchange Act of 1934, as
amended (the Securities Exchange Act), (ii) a foreign private issuer that
is exempt from reporting under Rule 12g3-2(b) under the Securities
Exchange Act by virtue of furnishing the SEC with home-country published
reports, nor (iii) a government of any foreign country or of any
political subdivision of a foreign country eligible to register securities
under Schedule B of the Securities Act, the holder of the securities
offered or sold and any prospective purchaser designated by the holder
must have the right to obtain from the issuer certain basic information
regarding the issuer.
The seller of the securities, and any person acting on its behalf, must take
reasonable steps to ensure that the purchaser is aware that the seller may
rely on the Rule 144A safe harbor.

REGULATION S
Securities that are privately placed in the U.S. may be resold outside the
U.S. without registration provided the requirements of Regulation S of the
Securities Act are satisfied. In order to qualify for Regulation S, the offering
must occur off-shore and there must be no direct selling efforts in the U.S.
Since the SECs adoption of Regulation S and Rule 144A in 1990, a significant
number of issuers have made global offerings of their securities
under offering structures that have included an offering outside the U.S. in
compliance with Regulation S and a private placement of a portion of the
securities within the U.S. in compliance with Rule 144A. If properly structured,
such a non-U.S. offering and the contemporaneous private placement
and Rule 144A resales will be exempt from registration under the Securities
Act.

RULE 3A-7: THE ASSET-BACKED SECURITY EXEMPTION

The SEC recognized that prior to the enactment of Rule 3a-7, the question
of whether a securitization vehicle was exempted from the Investment
Company Act turned on the nature of the assets securitized and not on the
structure of the securitization transaction or the credit quality of the underlying
assets. Rule 3a-7 was designed to mitigate this inconsistency. Adopted
in 1992, Rule 3a-7 is intended to exclude virtually all structured financings
from the definition of investment company. In practice, however, Rule 3a-
7 is seldom relied on in ABCP transactions because the substance and structure
of most ABCP transactions would not satisfy all of the requirements of
Rule 3a-7.

SECTION 3(C)(5): COMMERCIAL FINANCING AND

MORTGAGE BANKING BUSINESS EXEMPTION
Paragraphs (A) and (B) of Section 3(c)(5) of the Investment Company
Act provide that issuers primarily engaged in purchasing or otherwise
acquiring notes, drafts, acceptances, receivables and other obligations representing
part or all of the sales price of merchandise, insurance and services or
in making loans to manufacturers made in connection with the purchase of
specified merchandise and services are exempt from the Investment
Company Act. Paragraph (C) of Section 3(c)(5) provides the same exemption
for issuers that hold mortgages and other liens on and interests in real
estate.
For an issuer to be primarily engaged, it must invest at least 55 percent
of its assets in eligible loans and receivables under paragraphs (A) and (B)
under Section 3(c)(5) or qualifying interests under Paragraph C. The SEC
requires Paragraph C companies to invest an additional 25 percent of their
assets in real estate related assets.
To be eligible under paragraphs (A) and (B) of Section 3(c)(5), the loans
and receivables must represent part or all of the sales price of merchandise,
insurance or services. The credit must be for specific goods and services. It
should be noted that:
(1) qualifying assets include auto loans, credit card receivables and equipment
leases, so long as the loans and receivables or extensions of credit
relate to the purchase price of specific goods or services; and
(2) general consumer or commercial loans do not qualify.
Under the mortgage banking provision contained in Paragraph C, securities
that are qualifying interests must represent an actual interest in real
estate or be a loan or lien actually backed by real estate. Note that:

1) These include fee interests, leaseholds, mortgage loans, deeds of trust,

loans backed by interests in oil and gas properties and portfolios consisting
of several different types of qualifying interests.
2) Whole pool certificates may be qualifying interests if:
(a) they are issued by a Government Agency (Federal National
Mortgage Association (Fannie Mae), Government National
Mortgage Association (Ginnie Mae), etc.); or
(b) they are privately issued and the holder of securities will share the
same economic risks and benefits as a person holding the underlying
mortgages (i.e., risk of prepayment, power to foreclose).
(3) Partial pool certificates, mortgage placement fees and securities issued by
entities that invest in real estate or that are engaged in the real estate business
do not qualify.
(4) In general, however, the interests referenced in (3) may qualify as part of
the 25 percent investment in real estate related assets.

SCOPE OF THE SECURITIZATION FRAMEWORK

In general, the securitization framework will apply to transactions that
involve the stratification or tranching of credit risk. Securitization exposures
can include, but are not restricted to, the following: asset-backed securities,
mortgage-backed securities, credit enhancements, liquidity facilities, interest
rate or currency swaps and credit derivatives. Transactions that constitute
specialized lending (SL) will not be treated as securitizations but will
instead be treated as corporate exposures.

INTERNATIONAL ABCP PROGRAMS

International transactions present many issues which may not otherwise be
present in domestic securitizations. Figure 3 illustrates an example of an ABCP
program structure where the assets are originated outside the U.S. (in this
example, Japan) and the ABCP is issued in the U.S. Figure 4 illustrates an
example of the reverse, where the assets are originated in the U.S. and the
ABCP is issued outside the U.S. Figure 5 illustrates an example of assets purchased
generally in the secondary market with ABCP issued in the U.S. and
European markets. There are exchange rate risks because a detrimental change
may occur in the rate of exchange between a sovereigns currency and the currency
in which securities pay. Exchange control issues need to be addressed if
there are limitations on the convertibility of the sovereigns currency.
Cross border securitizations also need to address the regulatory issues
and issues of bankruptcy remoteness, perfection, true sale and taxation, all of
which will be jurisdiction specific. The materiality of these issues to investors
and related disclosure issues should also be addressed.
Most new ABCP transactions are now structured so that non-U.S. Dollar assets
may be acquired by the issuer and non-U.S. Dollar ABCP may be issued by the issuer.

THE ISSUANCE OF STERLING DENOMINATED ABCP

The U.K. Financial Services and Markets Act 2000 (Regulated
Activities) Order 2001 (RAO) was implemented in November 2001. This
legislation provides a format through which Sterling denominated ABCP has
been more frequently issued.
Under existing U.K. law, a company may not accept deposits in the U.K.,
unless it is an authorized institution or exempt under the Banking Act 1987
(the Banking Act) or the transaction itself is exempted through compliance
with regulations made under it. The meaning of deposit and deposit-taking
business is broadly defined and includes the acceptance in the U.K. by an
issuer of the issue proceeds of commercial paper. Section 3 of the Banking Act
makes it a criminal offense for any person (natural or legal) to accept a deposit
in the U.K. in the course of carrying on a deposit-taking business (unless it is
an authorized institution or exempt under the Banking Act).
Some institutions are authorized under the Banking Act to accept
deposits in the U.K. for example, banks established in the U.K. and certain
European Union financial institutions. Other institutions are exempt
from the operation of the Banking Act for example, building societies,
insurance companies, local authorities and certain supranational entities.
The Banking Act 1987 (Exempt Transactions) Regulations 1988 further
widened the group of institutions which could accept deposits without committing
an offense. These regulations provide that any issuer with net assets
of at least 25 million and whose shares or debt securities are listed and trad-
ed on the London Stock Exchange or on an European Economic Area
Exchange would be permitted to issue commercial paper.
Under RAO, deposits may be accepted by any person or any entity (the
previous stipulations that an issuer must have minimum net assets of 25
million and have shares or debt securities listed will be abolished) if the
deposits represent proceeds of an issue of commercial paper, provided that
the conditions outlined below are fulfilled:
(1) the commercial paper is offered to persons:
(a) whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes
of their businesses; or
(b) who it is reasonable to expect will acquire, hold, manage or dispose
of investments (as principal or agent) for the purposes of their businesses;
and
(2) the minimum denomination of commercial paper issued is 100,000.
The following categories of persons will for this purpose be considered
to manage investments: professional/institutional investors such as banks,
brokers, dealers, pension fund managers and insurance companies.
Therefore, commercial paper that satisfies the minimum denomination
requirement may be issued by any person or entity to dealers who may then
sell the commercial paper to investors in the capital markets.
In order to be classified as commercial paper for the purposes of RAO,
the commercial paper must be paid within 365 days from the date of original
issuance.
Although the restrictions regarding the taking of deposits in the U.K. are
currency neutral, the mechanics of issuance of Sterling denominated commercial
paper are more likely to involve the acceptance of deposits in the
U.K., even if the proceeds of issuance are received by an issuer in an account
located outside the U.K. For this reason, issuance of Sterling denominated
commercial paper by non-authorized issuers had, prior to the effectiveness of
the RAO, been fairly limited. Now issuers (including ABCP conduits) regularly
issue Sterling denominated commercial paper.

INNOVATIVE FUNDING SOURCE FOR PROJECT FINANCE

DEALS
As funding for project finance deals become costly and more difficult to
obtain given the current economic climate in the United States, Europe and
other parts of the world, project sponsors are finding it advantageous at this
time to obtain funding for their projects through the capital markets and,
more specifically, through proceeds arising out of the issuance of Notes.
Alternative sources of funding available through the capital markets can provide
cheaper financing even after taking into account additional costs that
may be associated with tapping into the capital markets.
Lenders (including, for example, commercial banks, government or
supranational bodies like the World Bank and export credit agencies) have
traditionally extended credit to project sponsors by making loans to them
(such loans sometimes reflecting subordinated, mezzanine and/or senior levels
of debt). >>Alternatively, project sponsors have obtained funding through
the private placement of project bonds to certain institutional investors.
These methods of financing have proven to be an established and workable
way of obtaining funding for projects all over the world.
However, these sources of funding are increasingly being stretched as
demands for funding various projects have increased. The related pricing has
risen and, perhaps more importantly, these funding sources may one day be
tapped out and not be able to meet increased funding demands.
Given these conditions, investors in Notes have become an extremely
attractive source of alternative funding. Such investors have already provided
funding for a number of projects. Parties in need of debt funding for project
deals have obtained these funds by having such securities repackaged
to transfer risks of lending in respect of such projects to other investors willing
to take such risks.
There are a myriad of options for accessing the capital markets in this
way for funding. For example, in a relatively straight-forward transaction, a
commercial paper conduit might purchase a project bond. The commercial
paper conduit finances its purchase of the bond by issuing Notes to capital
markets investors.
There are still other innovative structures that allow for an effective transfer
of risk to assist the project sponsor in obtaining cheaper funding. For example,
in one recently closed deal, a commercial bank purchased a surety-wrapped
project bond. However, because the commercial bank client (i) did not want
to bear direct risk of default on the project bond and the related surety bond
and (ii) wanted to reduce the amount of its related risk based capital, the commercial
bank entered into a credit default swap with a commercial paper conduit
pursuant to which the commercial paper conduit (and hence the holders
of the Notes issued by such conduit) assumed the credit risk of the insured project
bond. The commercial paper conduit raised money through the issuance
of commercial paper, but funds are released to the commercial bank only upon
the occurrence of the specified credit events. Risks associated with the project
bond and the surety bond were thereby effectively transferred to the commercial
paper conduit and the holders of Notes.
Tapping into the capital markets may, but does not necessarily, require a
rethinking of the financing structure used in the typical project finance
deal. The complexity involved in obtaining funds for project transactions
through the issuance of Notes into the capital markets will depend in particular
on the approach taken to obtain financing and the nature of the financing
taken.
A major consideration that a project sponsor will have to take into
account when structuring the deal is the role and perspective of the rating
agencies. First, to the extent the Notes offered are expected to be rated, the
relevant rating agencies will need to analyze the overall terms of the financing
they will focus on the rights of the providers of the debt under the
project documents, as these rights will form the basis of the rights of the purchasers
of the Notes.<<