A company may establish a commercial paper program in order to cover its short-term liabilities such as accounts payable, inventories and payrolls. Commercial paper refers to unsecured, short-term debt securities that typically have maturities of less than 12 months. It can be a convenient financing method for companies that have short-term financing and operational needs. The U.S. commercial paper market is one of the largest non-government debt markets, with large corporations and financial institutions acting as the main issuers of commercial paper.

Section 3(a)(3) of the Securities Act of 1933 (the Securities Act) provides an exemption from registration for commercial paper. Alternatively, commercial paper may be issued pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act. The key distinction is that a commercial paper program pursuant to Section 3(a)(3) is a public offering, whereas Section 4(a)(2) commercial paper involves a privately placement of securities.

In order to use the exemption under Section 3(a)(3) of the Securities Act, the company must use the proceeds for current transactions or working capital needs. The commercial paper must meet the following conditions in order to qualify for the exemption from registration under Section 3(a)(3):

• Prime quality
• Negotiable
• Not ordinarily purchased by the general public
• Discountable by Federal Reserve banks
• Proceeds used to finance current business operational requirements and transactions
• Maturity of nine months or less

The commercial paper is often issued in minimum denominations of $100,000 in order to satisfy the requirement that the commercial paper be of a type “not ordinarily purchased by the general public.”

Commercial paper may also be issued in a private placement using the exemption under Section 4(a)(2) of the Securities Act. The securities issued in a Section 4(a)(2) private placement are restricted securities. Unlike Section 3(a)(3) commercial paper, Section 4(a)(2) commercial paper does not have any limitations on maturity. Hence, commercial paper can be issued with maturities of greater than nine months. However, it is not common to have commercial paper with maturities of longer than 390 days.

In addition, the proceeds from a Section 4(a)(2) commercial paper issuance can be used for other purposes besides the financing of current business operations. This provides the company with flexibility to use the proceeds of the commercial paper program for other purposes such as funding an acquisition or a stock repurchase program.

Commercial paper programs that were established in reliance on Section 3(a)(3) can be converted into Section 4(a)(2) commercial paper programs. Converting from a public offering program to a private placement program of commercial paper is generally a straightforward process, but attention should be paid to the purchasers. In order to be eligible to purchase commercial paper issued pursuant to Section 4(a)(2), one must be an “accredited investor.” The federal securities laws require investors to meet one of the categories for an accredited investor under Rule 501 of Regulation D. For example, a natural person must have a net worth exceeding $1,000,000 in order to qualify as an accredited investor.

A commercial paper program usually involves a number of standard documents, such as a commercial paper dealer agreement, an offering circular and a liquidity agreement. If a public offering of commercial paper is involved, the commercial paper dealer agreement will generally be filed publicly with the Securities and Exchange Commission (SEC).