Final Treasury Regulations Defining Issue Price

For a variety of reasons related to arbitrage, it often is important to identify the "issue price" of tax-exempt bonds with precision and certainty.^[1] Existing Treasury Regulations generally allow the "issue price" of publicly offered bonds to be determined based on the first price at which at least 10% of all substantially identical publicly offered bonds in fact are sold to purchasers other than underwriters and wholesalers.^[2] By a special alternative rule, existing Treasury Regulations allow the "issue price" to be determined based on the issuer's reasonable expectations as of the sale date about the price at which substantially identical publicly offered bonds will be sold to the public.

On December 9, 2016, the Internal Revenue Service published final Treasury Regulations (the "New Regulations"), which revise the definition of "issue price" for arbitrage purposes. The New Regulations apply to bonds sold on or after June 7, 2017, and provide the following rules in connection with tax-exempt bonds issued for money:

1. The Core Existing General Rule Is Retained. The New Regulations will continue to allow the "issue price" of bonds to be determined based on the first price at which at least 10% of all bonds with the same credit and payment terms in fact are sold to purchasers other than underwriters or related parties. In general, this rule will apply to determine a separate "issue price" for each CUSIP of bonds.
2. Private Placements. In the case of private placement to a single buyer, the "issue price" is the actual price paid by the buyer.
3. Definition of Underwriter. The New Regulations define an underwriter to mean (1) any person who agrees to participate in the initial sale of the bonds to the public pursuant to a written contract with the issuer or the lead underwriter in an underwriting syndicate, or (2) any person who has a written contract directly or indirectly with a person described in the foregoing clause (for example, a retail distribution agreement with the lead underwriter).
4. Optional Alternative Special Rule for Publicly Offered "Hold-the-Price" Bonds. The New Regulations generally revoke the special rule based on the issuer's reasonable expectations in connection with publicly offered bonds, but substitute a new alternative special rule that the "issue price" may be the initial public offering price if each underwriter agrees in writing not to offer or sell any bonds to any person (including to another underwriter) at a higher price than the initial offering price until the earlier of (a) the close of the fifth (5th) business day after the sale date, or (b) at least 10% of the bonds in fact have been sold to the public at a price not higher than the initial offering price.
5. Optional Alternative Special Rule for Competitive Sales. As an additional alternative, the New Regulations allow the "issue price" of bonds sold in a qualified competitive sale to equal the reasonably expected initial reoffering price of the bonds to the public based on the winning bidder's certification of that price. A competitive sale qualifies for this alternative rule only if the issuer follows a prescribed competitive process which includes receiving bids from at least three (3) qualified firms and awards the sale to the bidder who submits a firm offer to purchase the bonds at the highest price (or lowest interest cost).

No later than the issue date, the issuer must identify on its books and records maintained for the bonds which of the above rules for determining "issue price" it has selected for the bonds.

^[1] Examples include yield restricted investment of bond proceeds, where yield is a function of the "issue price."
^[2] See Reg. 1.148-1(b).