SEC Staff Legal Bulletin: SLB 3A — SEC — US

July 9, 2021

Division of Corporation Finance Securities and Exchange Commission

Action: Publication of CF Staff Legal Bulletin

Date: June 18, 2008

Summary: This staff legal bulletin provides the Division of Corporation Finance’s views regarding the Section 3(a)(10) exemption from the Securities Act of 1933’s registration requirements. The bulletin also expresses the Division’s views regarding the Securities Act resale status of securities that are received in certain transactions exempt from registration pursuant to Section 3(a)(10).1

Supplementary Information: The statements in this legal bulletin represent the views of the Division of Corporation Finance. This bulletin is not a rule, regulation, or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.

Contacts: For further information, please contact the Office of Chief Counsel in the Division of Corporation Finance at (202) 551-3500.

1. Overview

Section 3(a)(10)2 of the Securities Act3 is an exemption from Securities Act registration for offers and sales of securities in specified exchange transactions.4 Before the issuer can rely on the exemption, the following conditions must be met.5

The securities must be issued in exchange for securities, claims, or property interests; they cannot be offered for cash.6
A court or authorized governmental entity7 must approve the fairness of the terms and conditions of the exchange.
The reviewing court or authorized governmental entity must:
- find, before approving the transaction, that the terms and conditions of the exchange are fair to those to whom securities will be issued;8 and
- be advised before the hearing that the issuer will rely on the Section 3(a)(10) exemption based on the court’s or authorized governmental entity’s approval of the transaction.
The court or authorized governmental entity must hold a hearing before approving the fairness of the terms and conditions of the transaction.
A governmental entity must be expressly authorized by law to hold the hearing, although it is not necessary that the law require the hearing.
The fairness hearing must be open to everyone to whom securities would be issued in the proposed exchange.
Adequate notice must be given to all those persons.
There cannot be any improper impediments to the appearance by those persons at the hearing.

The Section 3(a)(10) exemption is available without any action by the Division or the Commission. Issuers that are unsure of whether the exemption is available for a specific contemplated transaction may, however, seek the Division’s views by requesting a “no-action” position from the Division.

This bulletin discusses the issues that commonly arise in those “no-action” requests. The Division believes that, by making its views on these issues more widely known, issuers will better understand when the exemption is available. Also, by making the Division’s views more widely known, this bulletin should decrease those situations in which an issuer is uncertain whether the exemption is available for a contemplated transaction.

2. Timing of No-Action Requests

The Division will not issue a no-action response concerning a transaction after the fairness hearing has been held. An issuer must, therefore, submit its no-action request before the fairness hearing. If an issuer submits a no-action request very close to the fairness hearing date, the Division may not have adequate time to consider the issues presented and respond before the fairness hearing.9

3. Timing of Security Holders’ Votes

When an issuer solicits security holders’ votes on the transaction before the fairness hearing, it is offering the securities to be issued in the transaction. This solicitation ordinarily requires either registration or an exemption.

A practical issue arises because many statutes governing fairness hearings require security holders to vote before the hearing, at a time when the issuer cannot be certain that it will be able to rely on the Section 3(a)(10) exemption. In these situations, the Division has not objected to a vote before the fairness hearing, even though this means an investment decision is made before the fairness hearing. The Division takes this view because the timing is required by the governing statute and, under that statute, the transaction is not effected unless the court or authorized governmental entity approves it. In the Division’s view, the issuer should submit to the court or authorized governmental entity the disclosure materials offering the securities before it mails them to the offerees.

4. Division Analysis of the Requirements Underlying the Exemption

A. The Securities Must Be Issued in Exchange for Securities, Claims, or Property Interests

This requirement generally does not raise interpretive issues.10 However, it is important to note that when options, warrants, or other convertible securities are issued in the Section 3(a)(10) transaction, Section 3(a)(10) does not exempt the later exercise or conversion.11

This is different than transactions that are exempt under Section 1145 of the U.S. Bankruptcy Code. Section 1145 specifically exempts the later exercise or conversion from Securities Act registration.12

B. A Court or Authorized Governmental Entity Must Approve the Exchange’s Terms and Conditions

1. Appropriate Authorization for Governmental Entity Approval

If a governmental entity is approving the exchange, that entity must be authorized by statute:

to hold a hearing on the transaction, although it is not necessary that the statute require the hearing; and
to approve the fairness of the exchange’s terms and conditions.13

In this analysis, the statute must require the entity to conclude affirmatively that the exchange is fair to the security holders participating in the exchange.14 For example, the statute must require the governmental entity to conclude that the terms and conditions of the exchange are “in the best interest of shareholders” or “fair” to shareholders, not that the exchange is “not unfair,” “not unreasonable,” “not prejudicial,” or “not counter to the best interest of shareholders.”15 Moreover, the governmental entity must find the terms and conditions to be fair both procedurally and substantively.

If there is a question as to whether the statute authorizes the governmental entity to hold a hearing on the transaction and to approve the fairness of the exchange’s terms and conditions, it may be clear from the actual practice of the authorized governmental entity. For example, in State Mutual Life Assurance Company (Mar. 23, 1995), the Division relied on an opinion from counsel to the Division of Insurance of the Commonwealth of Massachusetts that the relevant statute authorized the Massachusetts Insurance Commissioner to make the requisite fairness determination.

If an issuer intends to rely on the Section 3(a)(10) exemption, it may want to look at prior Division no-action responses and see if the particular statute has ever been the basis for a Division no-action position. If the statute has been the basis for a Division no-action position, the issuer should consider whether the language of the statute has changed since the Division took that no-action position.

2. Information That Must Be Available to the Court or Authorized Governmental Entity When It Makes Its Fairness Determination

The issuer must advise the court or authorized governmental entity before the hearing that the issuer will rely on the Section 3(a)(10) exemption based on the court’s or authorized governmental entity’s approval of the exchange. It is the Division’s view that the reviewing court or authorized governmental entity making the fairness determination “must have sufficient information before it to determine the value of both the securities, claims or interests to be surrendered and the securities to be issued in the proposed transaction.”16

3. Fairness Hearings Conducted under State Securities Laws

Under Section 18 of the Securities Act, securities that otherwise would be covered securities, and therefore exempt from the registration or qualification provisions of state securities laws, are removed from the definition of “covered securities” if they are offered and sold in reliance on the Section 3(a)(10) exemption.17 Accordingly, an issuer may rely upon a fairness hearing conducted under state securities law to perfect an exemption under Section 3(a)(10) for securities that otherwise would be covered securities.18

Because Section 18 exempts all securities issued in reliance on Section 3(a)(10) from the definition of “covered securities,” such securities are no longer exempt from the registration or qualification provisions of any state securities laws.

4. Foreign Courts

It is the Division’s view that the term “any court” in Section 3(a)(10) may include a foreign court.19

In connection with no-action requests in these situations:

all requirements that apply to exchanges approved by U.S. courts must be met; and
the issuer must provide the Division with an opinion from counsel licensed to practice in the foreign jurisdiction that says that, before the foreign court can give its approval, it must approve the fairness of the proposed exchange to persons receiving securities in the exchange.20

C. Before Approval, the Court or Authorized Governmental Entity Must Hold a Hearing on the Fairness of the Exchange; This Hearing Must Be Open to Everyone to Whom Securities Would Be Issued in the Proposed Exchange

The court or authorized governmental entity must:

hold a hearing to determine whether the proposed exchange’s terms and conditions are fair to all those who will receive securities in the exchange; and
approve the fairness of the terms and conditions of the proposed exchange.

The hearing must be open to everyone to whom securities would be issued in the proposed exchange.

The issuer must provide appropriate notice of the hearing in a timely manner.21 Section 3(a)(10) does not specify the information that must be included in the required notice.

Although the anti-fraud requirements of the federal securities laws would govern disclosure, the Division does not address the adequacy or appropriateness of the information provided to persons who have a right to appear at the hearing. In connection with no-action requests, the Division will consider the adequacy of the notice only to the extent that it:

adequately advises those who are proposed to be issued securities in the exchange of their right to attend the hearing; and
gives them the information necessary to exercise that right.

An issuer that intends to rely on the Section 3(a)(10) exemption should consider whether, as a practical matter, imposing prerequisites to appearance will prevent those persons from having a meaningful opportunity to appear at that hearing.22

5. Resale Status of Securities Received in a Transaction Exempt From Securities Act Registration Pursuant to Section 3(a)(10)

In Securities Act Release No. 8869 (Dec. 6, 2007), the Commission amended Securities Act Rule 145 to eliminate the presumptive underwriter provision in Rule 145(c) except for transactions involving a shell company, other than a business combination related shell company.

Accordingly, it is the Division’s view that securities received in a Rule 145(a) transaction not involving a shell company that was exempt under Section 3(a)(10) may generally be resold without regard to Rule 144 if the sellers are not affiliates of the issuer of the Section 3(a)(10) securities and have not been affiliates within 90 days of the date of the Section 3(a)(10)-exempt transaction, as such securities would not constitute “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act. In the event that the securities are held by affiliates of the issuer, those holders may be able to resell the securities in accordance with the provisions of Rule 144.23

When a Rule 145(a) transaction is exempt from Securities Act registration under Section 3(a)(10) and any party to that transaction is a shell company, other than a business combination related shell company, then the Rule 145(c) and (d) resale limitations apply to any party to that transaction (other than the issuer of the Section 3(a)(10) securities) and to any person who is an affiliate of such party at the time such transaction is submitted for vote or consent.24 In those situations, holders who are deemed to be underwriters under Rule 145(c) may resell their securities without registration in the manner permitted by Rule 145(d).25

1 The bulletin was originally issued on July 25, 1997 and revised on October 20, 1999 to provide the Division’s views on the availability of the Section 3(a)(10) exemption after the enactment of Section 302 of the Securities Litigation Uniform Standards Act of 1998. The bulletin is now further revised to express the Division’s views regarding the Securities Act resale status of securities that are received in transactions exempt from registration pursuant to Section 3(a)(10) in light of Securities Act Release No. 8869 (Dec. 6, 2007) [72 FR 71546], which amended Securities Act Rules 144 and 145. This bulletin replaces the two prior bulletins in their entirety.

2 15 U.S.C. §77c(a)(10). Section 3(a)(10) reads as follows: “Except with respect to a security exchanged in a case under title 11 of the United States Code, any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval.”

3 15 U.S.C. §77a et seq.

4 The Trust Indenture Act of 1939 does not include an exemption that is the equivalent of Section 3(a)(10) of the Securities Act. If an issuer is relying on Section 3(a)(10) to offer and sell debt securities without Securities Act registration, it should note that the Trust Indenture Act would still apply to that offering.

5 The staff derives these conditions from the language of Section 3(a)(10) and positions expressed by John J. Burns, the General Counsel of the Commission, in a letter excerpted in Securities Act Release No. 312 (Mar. 15, 1935) [11 FR 10953].

6 Section 3(a)(10) also exempts sales of securities that are “partly in such exchange and partly for cash....” It is the Division’s view that Section 3(a)(10) exempts transactions that are predominantly exchanges and that the “partly for cash” language is intended merely to permit flexibility in structuring those exchanges.Because this analysis necessarily would be very fact-specific, the Division is not able to give specific guidance on the issue in this staff legal bulletin. To the extent the issue is presented in a transaction, an issuer may wish to request a no-action position from the staff on that particular transaction.

7 Authorized governmental entities may include state insurance commissions, state corporation or securities commissions, state banking agencies, etc.

8 In the Division’s view, the reviewing court or authorized governmental entity must find the terms and conditions of the exchange to be fair both procedurally and substantively.

9 Generally, the Division strives to respond to requests for no-action within 30 days of receipt. It makes every effort to satisfy the time schedule of the requestor but may not be able to accommodate a very short deadline.

10 Despite the “exchange” requirement of Section 3(a)(10), the Division has not objected, in limited circumstances, to the issuance of securities as attorneys’ fees without registration in reliance on the Section 3(a)(10) exemption, such as when those securities amount to no more than one-third of the securities issued in the settlement. See, e.g., Hanover Compressor Co. (Jan. 27, 2004); Sprint Corp. (Aug. 25, 2003); Sulcus Corp. (June 19, 1996); and The Score Board (Nov. 3, 1995). For a discussion of exchanges that are “partly for cash,” see footnote 6.

11 See, e.g., Canadian Conquest Exploration, Inc. (Apr. 6, 1989); and Allied Leisure Industries, Inc. (Oct. 4, 1979).

12 11 U.S.C. §1145(a)(2).

13 Where an issuer will use court approval as a basis for relying on the Section 3(a)(10) exemption, the court also must make this finding. It is not necessary, however, that the court be expressly authorized by statute to do so. See Securities Act Release No. 312, supra note 5. See also the discussion in the Foreign Courts subsection of this bulletin for the requirements for a foreign court to approve the exchange.

14 In 1938, the staff of the Commission stated its view that:

“[A] commission or authority must be authorized to grant approval of the fairness of the terms and conditions of the issuance and exchange, from the point of view of the persons to whom the securities are issued in the exchange, and this authority must be express. This seems to be the proper interpretation if the requirement of a hearing upon the fairness of the terms and conditions is not to be rendered meaningless. As a result many commissions, such as public service commissions, whose authorization may be required for the reorganization of certain companies, will be found not to have the requisite authority because [they are] not authorized to pass upon the interest of the security holders.” (emphasis added)

— Milton V. Freeman, A Summary of Administrative Interpretations of the Securities Act of 1933, As Amended at 280-81 (draft of May 1, 1938) (citations omitted). This position was restated in the Report of the Task Force on Disclosure Simplification (Mar. 5, 1996), available at http://www.sec.gov/news/studies/smpl.htm (the “Task Force Report”). See also Securities Act Release No. 312, supra note 5 (“In my opinion a State governmental authority…must possess express authority of law to approve the fairness of the terms and conditions of the issuance and exchange of the securities in question. This interpretation seems necessary to give meaning to the express requirement of a hearing upon the fairness of such terms and conditions, which must subsume authority in the supervisory body to pass upon the fairness from the standpoint of the investor, as well as the issuer and consumer, and to disapprove terms and conditions because unfair either to those who are to receive the securities or to other security holders of the issuer, or to the public.”).

15 Examples of appropriate statutory standards in favorable Division responses to no-action requests include requirements that the entity determine that the transaction:

(1) is one where “an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve” (Transocean Inc., Sept. 26, 2007); (2) “adequately protects the interests of depositors, other creditors and shareholders” (Minowa Bancshares, Inc., Nov. 26, 1990); (3) is “fair and equitable” to shareholders (Farm Family Mutual Insurance Co., Apr. 2, 1996); and (4) promotes the “public convenience and advantage and the interest of [the merging] institutions, their members, stockholders and depositors” (CFX Corp., Apr. 19, 1996).

16 See Task Force Report, supra note 14, at page 80. See also ICICI Bank Limited (Dec. 13, 2001); Information Resources, Inc. (Feb. 27, 1995); and Applied Magnetics Corp. (May 30, 1995).

17 See 15 U.S.C. §77r(b)(4)(C). The National Securities Markets Improvements Act, Pub. L. No. 104-290 (1996) (“NSMIA”), amended Section 18 of the Securities Act to preclude any state from requiring registration or qualification of “covered securities.” “Covered securities” are defined in Section 18 and Securities Act Rule 146 to include, among others, securities listed or approved for listing on the New York Stock Exchange, the American Stock Exchange, or The NASDAQ Stock Market. The effect of this amendment was to preempt any state law that authorized a state fairness hearing relating to the registration, or exemption from registration, of securities that were “covered securities” before the hearing. An issuer, therefore, could not use such a hearing as a basis for relying on the Section 3(a)(10) exemption. (Of course, as noted in the original SLB 3, not all state fairness hearings relating to exchanges of securities were preempted by NSMIA. The preemption did not apply to state fairness hearing procedures outside the scope of state securities laws, such as those authorized by state corporation, banking or insurance law and not relating to registration, or an exemption from registration, of securities. Issuers were never precluded from using such hearings as a basis for relying on the Section 3(a)(10) exemption.)

NSMIA’s prohibition of reliance on certain state fairness hearings to perfect a Section 3(a)(10) claim of exemption with respect to “covered securities” was inadvertent. See 144 Cong. Rec. H6052, H6060 (daily ed. July 21, 1998) (statement of Rep. Cox). To correct this, Section 302 of the Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353 (1998), was enacted to amend Section 18(b)(4)(C) to add securities issued under Section 3(a)(10) of the Securities Act as a category of securities exempt from the definition of “covered securities.”

18 The Division first published its views regarding this matter in letters to Food Lion, Inc. (Jan. 13, 1999) and Maverick Networks (Jan. 25, 1999).

19 See, e.g., SanDisk Corp. (Sept. 21, 2006); AngloGold Ltd. (Jan. 15, 2004); Constellation Brands, Inc. (Jan. 29, 2003); Galen Holdings PLC (Aug. 7, 2000); Lucas Industries plc (Aug. 20, 1996); Symantec Corp. (Nov. 22, 1995); and Orbital Sciences Corp. (Oct. 13, 1995).

20 The Division requires this additional opinion because the fairness standard in foreign jurisdictions often is derived from case law that interprets and applies the statute(s), rather than from the specific language of the statute(s). The opinion of foreign counsel should state clearly that:

under applicable law, the court cannot approve the exchange unless it finds the transaction to be fair to the persons who will receive the securities;
those persons will receive notice of, and have the right to appear at, the fairness hearing; and
the issuer will advise the court before the hearing that it will rely on the Section 3(a)(10) exemption and not register the exchange under the Securities Act based on the court’s approval of the exchange.

21 For example, if the securities are held in bearer form, there must be appropriate publication of the notice.

22 The Division has not objected to the mere requirement to file a notice of an intention to appear. For examples of favorable staff responses to no-action requests where the filing of a notice of an intention to appear was required, see ICICI Bank Ltd. (Dec. 13, 2001); Digicon Inc. (Aug. 19, 1996); and Canadian Pacific Ltd., (June 26, 1996).

23 See Rule 144(b)(2) under the Securities Act.

24 In computing the holding period of the Section 3(a)(10) securities for purposes of Rule 145(d)(2)(ii) or (d)(2)(iii), such persons may not “tack” the holding period of the securities exchanged for the Section 3(a)(10) securities in the Section 3(a)(10)-exempt transaction.

25 However, Rule 145(d) is not available with respect to any transactions or series of transactions that, although in technical compliance with the rule, is part of a plan or scheme to evade the Securities Act registration requirements. Note to Rule 145(c) and (d) under the Securities Act.

Last Reviewed or Updated: June 18, 2008