#13093 - Recapitalizations - Securities Regulations (Duke Cox)

2(a)(3) defines sale as involving “every attempt to dispose of a security for value” no value, no sale

1. Example: start up giving one share for each registered user. Value = effort in registering

2. Merely providing shareholders a choice for dividend between receiving cash or stock dividend is not “for value”

   1. However, if the stockholders are granted a cash dividend, and then are later given the opportunity to waive their dividend for a stock dividend, that would appear to be a sale or offer to sell a security

Conversion of shares

1. Value given up is the preferred share this is a sale

2. Whether the underlying security – the security that may be acquired through conversion or the exercise of a warrant or option – must be registered depends upon when, by the instrument’s terms, the holder can acquire the underlying security through conversion or exercise of the warrant or option.

   1. If the conversion features or the warrant’s or the option’s terms provide that it can be exercised immediately, two distinct securities are then being offered, so that each must be registered or qualify for an exemption from registration

   2. On the other hand, if by the terms of the instrument the holder cannot convert or exercise the warrant or option until some future date, the underlying security is not “offered for sale” until that future date, and the underlying security’s registration is not required at the time the convertible security, warrant, or option is being offered

Modifying the corporation’s articles of incorporation to change the rights, privileges, and preferences of each class of a corporation’s stock is sale

1. It’s like asking SH to give up old shares and get new shares

2. Stockholders’ rights are also altered through the entity’s reincorporation in a jurisdiction whose corporate law accords security holders different sets of rights than in its former corporate domicile

   1. HOWEVER, the SEC views this only as a change in form, not substance so not for value no sale

Corporate spin-offs: A owns all the stocks of B. A no longer wishes to be owner of B. A distributes B shares as a property dividends pro rata among the A shareholders.

1. Datronics case:

   1. As the term “sale” includes a “disposition of a security,” the dissemination of the new stock among Datronic’s stockholders was a sale

   2. Value accrued to Datronics: Distribution is the dividend. By creating a market for these shares, the shares rose in value this was sufficient value for an underwriter transaction

SEC staff bulletin requirement

1. Anytime you have a spinoff, you have to register it

2. unless accompanying the transaction, disclosures are made to the shareholders of the parent company about the spun-off company. Information in the disclosures must be similar to what we find in a registration statement or a proxy statement.

Resale:

1. Affiliate who wishes to resell the shares must do so pursuant to Rule 144

2. Non affiliate: okay to resell provided the spun-off company is a reporting company

   1. If not reporting company, Rule 144

So when spin-off occurs, we want there to be publicly available information about private company

1. If not, then shares are restricted

3 markets:

1. Exchange

2. OTC (over-the-counter) bulletin board

3. Pink sheet

OTC and pink sheet operated by market maker you just contact that market maker when you have something to buy or sell

15c2-11

1. Designed to prevent brokers and dealers from furnishing initial quotations in the absence of any information about the issuer

2. Subject to certain exceptions, the Rule prohibits a broker or dealer from submitting a quotation for a security in a quotation medium unless it has in its records specified information concerning the security and the issuer and, in certain circumstances, furnishes the information to the interdealer quotation system 2 days before the publication of such quotation

Business combinations and recapitalizations trigger §5 concerns whenever they involve the issuance of securities

A business combination can take one of several forms:

1. Merger (one company acquired by another)

   1. consolidation

2. Transfer of assets (vote to sell)

   1. Then vote to liquidate

3. Exchange offer (exchange Alpha shares with Beta shareholder’s Beta shares)

Today, rules 145, 165, and 166 regulate much of the scope of §5 when securities are issued in connection with most business combinations

1. 165 and 166 apply only to transactions that fall within 145(a)(1)-(3)

145

1. 145(a) defines combination transactions.

2. 145(c) expands the scope of underwriter to include a holder who was a control person of the acquired or recapitalized shell company prior to the 145 transaction (such person is referred to as a “Rule 145 affiliate”) so resales must be in compliance with 145(d)

   1. 145 does not define who should be deemed an underwriter in a transaction beyond 145 or, for that matter, outside of shell companies

   2. A shell company is defined in 405 as a company with no or nominal operations and with assets that are either only cash or nominal except for cash

3. Not an exemption: a gateway to rules 165, 166

Gun jumping issues. These new and amended rules (145, 165, 166) permit parties to communicate freely about a planned business combination transaction before a registration statement is filed, as well as during the waiting period and post-effective periods.

1. 165 available only for transaction specified in 145(a) or exchange offer. 165(f).

2. Communication must be filed. 165(a).

3. Prospectus must have legend 165(c)(1)

4. The exemption is not available to communications that may technically comply with the rule, but have the primary purpose or effect of conditioning the market for a capital-raising or resale transaction

5. Substantial compliance rule good faith (similar to...