Tag Archives: 3(a)(10) exemption

What is the 3(a)(10) Exemption from Registration?

Section 3(a)(10) of the Securities Act of 1933 is an exemption from SEC registration for offers and sales of securities when the following conditions are met:

The securities must be issued in exchange for “securities, claims, or property interests” but not in exchange for cash (Usually convertible debt is exchanged for the Issuer’s common stock);
A court or “authorized governmental entity” must conduct a fairness hearing and approve the terms and conditions of the exchange.

What Are The Requirements of 3(a)(10)?

Before issuing an Order which approves a settlement between an Issuer and a Creditor, for instance,

  1. The Court must find that the terms and conditions of the settlement are “fair to those to whom securities will be issued”; and
  2. The Court must be advised by the Issuer before the fairness hearing that the Issuer intends to rely upon Section 3(a)(10) as an exemption from registration for the securities being exchanged for the Issuer’s debt; and
  3. The Court must actually hold a fairness hearing before approving the the terms and conditions of the settlement; and
  4. The fairness hearing must be open to everyone to whom securities would be issued if the proposed settlement is accepted; and (In the typical 3(a)(10) case, there is one creditor which is exchanging convertible debt which may have been purchased from one or multiple debt holders.)
  5. Adequate notice must be provided to all Parties; and
  6. There cannot be “any improper impediments” to the appearance at the fairness hearing by any Party that should be present.

Legal Representation for Issuers and Debt Holders in 3(a)(10) Matters

Securities lawyer Matt Stout represents OTC Markets public companies and their debt holders in resolving 3(a)(10) litigation and settlement of bona fide and documented 3(a)(10) claims in accordance with the SEC requirements discussed here.

3(a)(10) Lawyer for OTC Markets Companies

OTC Bulletin Board and OTC Markets Issuers that would like to learn more about how 3(a)(10) works in practice can contact securities attorney Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

What are the Most Important Elements of a 3(A)(10) Exchange?

The most important elements of a Section 3(a)(10) transaction are

  1. The claims held by the Plaintiff must be “bona fide”; and
  2. The Plaintiff exchanging the bona fide claims for the Issuer’s securities cannot secretly be an Affiliate; and
  3. The Issuer cannot be colluding with the Plaintiff in order to use the free trading securities obtained from the 3(a)(10) exchange as a backdoor, undisclosed method of “funding” the Company.

Not surprisingly, when any of these elements are missing, the SEC is not pleased, and both the Issuer and claim holder can expect close scrutiny and severe penalties.

Issuers Benefit By Providing Full Disclosure of the 3(a)(10) Exchange

That being said, more disclosure is a good thing and often preempts any question as to impropriety.   Issuers can choose to be transparent in their filings by attaching the 3(a)(10) court documents as exhibits to their 8-Ks or OTC Markets Information and Disclosure Statements.

3(a)(10) Requires Bona Fide Claims That Can Be Documented

As always, this is a substance over form issue, and if the claims being exchanged in a 3(a)(10) transaction are real, and can be documented through valid promissory notes or actual invoices owed by the public company and referenced in the Issuer’s filings, then Section 3(a)(10) provides a good opportunity for both parties when working with experienced securities counsel.

Issuers and 3(a)(10) claim holders seeking further information on the potential pitfalls of using the 3(a)(10) exemption from registration, or with questions on fairness hearings can contact securities lawyer Matt Stout at (410) 429-7076 or mstout@otclawyers.com.


What Information Does a Court Need to Approve the Fairness of a 3(a)(10) Transaction?

In a 3(a)(10) transaction, the Issuer must advise the Court before the fairness hearing that the Issuer plans to rely on the Section 3(a)(10) exemption and that this reliance will be based on the Court’s Order, approving the exchange of the bona fide claims for the Issuer’s securities.

The SEC takes the view that the Court 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.”

As a practical matter, if drafted properly, the Complaint, Answer, Settlement Agreement and draft Order that the Court reviews prior to the fairness hearing should provide all of the language necessary to satisfy this requirement.