As the CMBS market begins to get its feet underneath it, a number of folks have begun to pine for the public markets. Since 2009, every CMBS deal has been issued as a 144A (or otherwise privately placed). The public market is beginning to feel like a memory. While there seems to have been relatively robust demand for product, a number of bankers say that demand is still somewhat constrained in the 144A institutional market place. They fondly remember the benefits of the public market: liquidity, better pricing, a wider investor pool. As the market rebounds, these bankers suggest that it may be time to dust off the shelves.

And so we thought it would be useful to revisit that bid and ask. For this purpose, we’ll assume that the hypothetical banker is right and that there are significant benefits to be obtained by reanimation of the public deal zombie. That’s the bid.

Here’s the ask. First, there’s that pesky little liability issue. The liability exposure for bankers and sponsors in the 144A market is less than in a public (registered) deal. No liability under Sections 11 and 12 of the Securities Act. That liability is generally pretty absolute (as to non-expertized info) subject only to a diligence defense. Liability in the private market is limited to 10b-5. The need to prove scienter and reliance in a 10b-5 action is a significant burden for an aggrieved investor. The difference in exposure to liability is a distinction not to be sniffed at. Yes, of course we always mean to get the disclosure right. But the underlying assets are complex and there’s an undeniable hunger among the plaintiffs’ bar to “discover” disclosure defects where honest folks, acting in good faith, thought adequate disclosure had been made. (Note also how much more ominous the enhanced liability exposure in public deals will be after FinReg and its progeny become law. As disclosure gets more complex and elaborate, the opportunities to stumble into liability grow exponentially.)

And then you’ve got to recharge the shelves. Most registered shelves are out of date and there are material time commitments and costs associated with getting a shelf ready for prime time. One could also reasonably be leery about knocking on the door of the SEC to approve a new shelf based on existing rules in the lee of a gigantic pile of someday-to-be-effective legislative and regulatory change that the SEC, understandably, is likely to be itching to implement.

Remember Reg A/B and Offering Reform 2.0? It’s still all out there. The comment period ended on August 2, 2010 and it’s been crickets ever since. One theory has it that the SEC is waiting for joint rule making on risk retention, the comment period for which has just begun, while others say that the sheer project fatigue at the SEC, short on budget and personnel and long on projects, is responsible for the delay. In any event, not a terrific environment to paste a shelf back together under old rules.

If Reg A/B comes out, what would it look like? The industry had significant and systemic issues with the proposed regulation. What happens if the worst of the ideas floated last spring make it into the final rule? Will our CEOs face new responsibilities and liabilities? Will there be some interim form of risk retention imposed prior to the FSOL pending joint rule making initiatives effective sometime in 2013? Will static disclosure return to CMBS? How about the broadly loathed Python program?

Similarly, we have the new FinReg Section 945 regulations effective next January. Rule 193, which is (for the moment) limited to registered deals, implements new due diligence requirements. Issuers will be obligated to develop diligence schemes “designed and effected to provide reasonable assurance that the disclosure…is accurate in all material respects.”  So we have a new liability standard and a new obligation to disclose not only outcomes but processes. (Note that Rule15Ga-1, which was published at the same time as Rule 193 early this year, and which requires disclosure of both fulfilled and unfulfilled repurchase requests, regrettably applies both to registered and un-registered deals).

Finally, there remains the on-and-off again problem of expertizing the rating agencies’ rating information. Under FinReg. Section 939G, rating agencies were striped of their exclusion from expert status where ratings were included in registration statements. The SEC responded with a no action letter suspending 939G but who knows when that letter will be withdrawn and whether the problem will be front and center again.

That’s a lot to dislike and, frankly, one could be forgiven for having limited enthusiasm about ramping up a public initiative to run smack dab into a wall of a new and burdensome regulatory requirements.

When all is said and done, you need a pretty darn good reason right now to return to the public market and wade into the regulatory swamp burdening the registered deal. As our business continues to thrive (more or less) in the private markets we can both continue to reassess a return to the public market and hope the SEC will not become sufficiently miffed to further condition access to 144A on some of the provisions currently applicable only in the public arena. (I probably shouldn’t have even thought that thought out loud, should I?)

For the moment, the 144A market is open and robust. Net, net, I don’t see a return of the registered deal any time soon.

By Rick Jones.