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Section 3(a)(9) Exchanges Evaluated

Section 3(a)(9) of the Securities Act of 1933, provides an exemption from the registration requirements for “[E]xcept with respect to a security exchanged in a case under title 11 of the United States Code, any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.” Generally, in an exchange offer, the issuer offers to exchange new debt or equity securities for its outstanding debt or equity securities.

Since Section 3(a)(9) is a transactional exemption, the new securities issued are subject to the same restrictions on transferability, if any, of the old securities, and any subsequent transfer of the newly issued securities will require registration or another exemption from registration. However, since the new securities take on the character of the old securities, tacking of a holding period is generally permitted allowing for subsequent resales under Rule 144 (assuming all other conditions have been satisfied for use of such rule).

Section 3(a)(9) Exchanges Surge in Popularity

Section 3(a)(9) exchanges have recently gained in popularity as public companies attempt to manage liabilities and clean up their balance sheets in the face of a down economy. Section 3(a)(9) exchanges can be used to reduce interest payments or accruals (by exchanging high rate debt for lower rate or by exchanging accrued interest or preferred payments for equity); reduce or eliminate outstanding debt (by exchanging debt for equity) and to modify the terms of existing securities (for example, modifying conversion ratios and redemption provisions).

The advantages of a Section 3(a)(9) exchange include: (i) can be completed quickly as there is no registration required; (ii) are flexible (an issuer can retire partial or entire liabilities); (iii) minimal costs; and (iv) often can be accomplished largely tax free for debt holders. The disadvantages include: (i) the new securities may be restricted depending on the status of the old securities offered in exchange or the availability of Rule 144 tacking of a holding period; and (ii) no commissions or other compensation can be paid, such as to a broker or investment banker.

Four Criteria of Section 3(a)(9)

The four main requirements of Section 3(a)(9) are as follows: (i) same Issuer – the issuer of the old securities being surrendered must be the same as the issuer of the new securities; (ii) no additional consideration from the security holder; (iii) offer must be made exclusively with existing security holders; and (iv) no commission or compensation may be paid for soliciting the exchange.

Section 3(a)(9) exempts any securities exchange by the issuer with its security holders. This means that the new securities being issued and the securities that are being surrendered must be from the same issuer. The “same issuer” can at times be a successor issuer. The SEC has taken the position that where an Issuer has fully and unconditionally assumed the obligations of the debt securities of another issuer, the subsequent exchange of that debt by the successor issuer qualifies as a Section 3(a)(9) exchange. Presumably the successor issuer has become the “issuer” by fully and unconditionally assuming the obligation.

Parent Company and Subsidiary Considered Two Separate Issuers

A parent and subsidiary are generally considered two separate issuers. Accordingly, if a subsidiary proposes to exchange debt that is guaranteed by the parent, for debt that is not guaranteed by the parent , the exchange would not qualify under Section 3(a)(9). However, the SEC has granted no-action relief for parent/subsidiary exchange transactions in particular fact circumstances.

The prohibition against paying commission or other compensation for the solicitation of an exchange, does not include the payment of administrative or ministerial fees solely for document preparation, mailing or legal opinions.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

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