Tag Archives: 3a10 lawyer

How are Free Trading Shares Issued Under 3(a)(10)?

Creditors of OTC Markets companies often contact securities lawyer Matheau J. W. Stout, Esq. with questions about exchanging bona fide claims for free trading stock under 3(a)(10).   OTC Bulletin Board and Pink Sheet Issuers also have questions about how they can clear debt and payables from their balance sheets using 3(a)(10).

In many respects, 3(a)(10) is easy to understand, but there are certain rules that must be followed in order for the stock issued to be eligible for the 3(a)(10) exemption from registration.

What Makes 3(a)(10) Advantageous to Creditors?

3(a)(10) permits claims arising from legitimate and documented unpaid invoices or contracts to be exchanged for free trading stock, which helps creditors that did not receive a promissory notes from the Issuer.

3(a)(10) also provides a Court Order to a successful Plaintiff which is binding on the Issuer.  This makes future conversions of the Claim Amount easier, since the Issuer cannot later refuse to honor the Settlement Agreement reached in the 3(a)(10) case.

3(a)(10) transactions are by their nature a matter of public record, such that the entire claim settlement process and the issuance in accordance with the 3(a)(10) exemption from registration are done transparently.  This transparency has an inherent advantage to creditors holding 3(a)(10) claims under the Court Order, making it easier to obtain opinions, and clear stock later.

Why is 3(a)(10) Advantageous to Issuers?

An OTC company with debt and mounting accounts payable clogging its balance sheet is unlikely to attract new investors or lenders unless the balance sheet can be cleaned up.

3(a)(10) provides an opportunity for an Issuer to settle multiple claims within one lawsuit, often at a discount, limiting the expense and time associated with litigation, and providing the certainty of a Court Order which specifies the criteria under which shares will be issued.

The transparency of a 3(a)(10) lawsuit, settlement and Court Order also benefits the Company by providing certainty to its shareholders and would-be financial partners.  There is no guess work as to the Company’s liability to issue shares under a 3(a)(10) settlement, and no question as to the Court Order.

What is a Bona Fide 3(a)(10) Claim?

Bona fide means “genuine” or “real.”  The claim holder has the responsibility for documenting the bona fide nature of the monies owed, and copies of the unpaid invoices, contracts or other correspondence are attached to the Complaint in a 3(a)(10) lawsuit.

Documentation is easier when the debts or claims are in SEC filings or OTC Markets reports. Email correspondence evidencing services provided, monies owed and collection activities are also helpful in proving the bona fide nature of a 3(a)(10) claim.

Of course, promissory notes and wire transfer confirmations evidencing loans to an OTC Bulletin Board or OTC Markets Pink Sheet Issuer also can prove a debt is bona fide.

Requirements for the Section 3(a)(10) Exemption from Registration

Section 3(a)(10) of the Securities Act of 1933 (the “Act”) provides an exemption from the registration of securities under the following criteria:

  1. The securities must be issued in exchange for a bona fide claim; and
  2. The terms of the issuance and exchange must be found by a court to be “fair” to those receiving shares; and
  3. Notice of the Fairness Hearing must be provided to those to receive shares and they must be afforded the opportunity participate in a Fairness Hearing; and
  4. The issuer must advise the court prior to a Fairness Hearing that it intends to rely on the exemption provided in Section 3(a)(10) of the Act; and
  5. There cannot be any impediments to the appearance of interested parties at the Fairness Hearing.

What is Not Allowed in a 3(a)(10) Transaction?

Aside from the need to document the bona fide nature of the claims exchanged in a 3(a)(10) transaction, the main pitfall all creditors and Issuers need to be wary of is the temptation to secretly funnel money to the Issuer or its Affiliates.

In some cases, the SEC has found that claims were fabricated by insiders.  The claims were for services which were not provided, or were actually fake invoices from companies secretly controlled by Affiliates.  This is prohibited.

In other cases, plaintiffs in 3(a)(10) cases were secretly sending an Issuer’s Affiliates a percentage of monies made when the free trading stock was sold.  This is prohibited.

3(a)(10) should be used as a transparent exchange of bona fide claims for securities only.  The fact that an Issuer’s balance sheet will be cleared of old debt is in itself a clear benefit to the Issuer and this should result in future financing opportunities without the need for any surreptitious kickbacks.

Securities Lawyer With Expertise in 3(a)(10) Matters

Experienced securities attorneys like Matt Stout perform due diligence on aged debt, promissory notes and invoices to confirm their bona fide nature in preparation for 3(a)(10) transactions.

3(a)(10) securities lawyer Matt Stout represents both OTC Markets companies and their debt holders with bona fide claims in 3(a)(10) settlement agreements and drafts legal opinions for clearing restricted stock under 3(a)(10).

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.

Rule 144 and Selling Stock in Former Shell Companies

As many shareholders in OTC Markets companies know, Rule 144 is the most common exemption for clearing and selling restricted stock.   But how does Rule 144 apply to the shares in former shell companies?

The Evergreen Rule and Rule 144

Rule 144 is only available for the sale of stock in a former shell company when the following requirements are met:

  1. The former shell must be subject to Exchange Act filing requirements; and
  2. The Issuer must have filed “Form 10 Information” with the SEC, although this could be accomplished through the filing of a Super 8-K, or any filing including all of the information found in a Form 10 filing, including audited financials of the operating company which was the subject of the reverse merger (which caused the vehicle to cease being a shell); and
  3. The Issuer must be current and have filed SEC reports (10-Q, 10-K, 8-K, etc.) for Twelve (12) months since the Issuer ceased to be a shell.

(This last requirement is known as the Evergreen Rule, because if the Issuer misses a filing it is not “current” and the requirement is not met).

The Issuer Must Approve Rule 144 Restrictive Legend Removal

When the public company is a former shell, under some circumstances, it can actually “veto” a Rule 144 opinion letter which requests the removal of a restrictive legend, even if the shareholder is a non affiliate, and has satisfied the holding period…and even if the requirements above are met.   How?

The Issuer Could Miss a Filing and Run Afoul of the Evergreen Rule

The argument to “veto” a request to remove a Rule 144 restrictive legend is that it cannot be removed from the shareholder’s certificate unless the shares are to be deposited immediately for sale with a broker, since in theory, if the Issuer missed the next filing, it could ceased to be “current” and in compliance with the Evergreen Rule.

Shares Must Be Deposited for Sale Immediately

For this reason, most Transfer Agents will spot this and insist that the shares be DWAC’d for deposit and sale at the broker, and that the shareholder rep forms detail this fact.

Alternatives to Rule 144 for Clearing Restricted Stock

This is just one of the many nuances of drafting securities law opinion letters under Rule 144. Shareholders and OTC Markets Issuers with questions about the Evergreen Rule, or alternatives to Rule 144 for clearing restricted stock, such as Section 4(1) or 3(a)(10) can contact Matt Stout, securities lawyer at (410) 429-7076 or mstout@otclawyers.com



What is a 3(a)(10) Legal Opinion?

Most investors in microcap public companies are familiar with Rule 144 opinions, but few are aware of what is covered under a 3(a)(10) legal opinion.   In general, a securities lawyer’s job when reviewing documents in preparation to issue an opinion on a 3(a)(10) transaction will focus on examining the following:

Claim Purchase Agreements

Were the debts purchased from bona fide creditors of the Issuer?  An easy way to tell is if these debts were shown in the Issuer’s past filings.  If not, were they otherwise documented through signed contracts, invoices, correspondence, cancelled checks, wire transfers, etc.?  As is always the case, more documentation is better.  The supporting documents are often attached as exhibits to the Complaint.

 Settlement Agreement under 3(a)(10)

The Settlement Agreement should detail a total claim amount which corresponds with the Claim Purchase Agreements and with Plaintiff’s Complaint.   The conversion formula, including any 9.99% or 4.99% blockers should be clearly stated.   The ratification of the settlement terms should be dependent upon a Fairness Hearing taking place.

3(a)(10) Fairness Hearing

The date of the Fairness Hearing under 3(a)(10) will be reflected in the Order.  In some states, like Florida, with streamlined scheduling processes for these cases, the fairness hearing will often occur within a few days following the Complaint.  In others, it is not uncommon to see a gap of 30 days or more.

This is a factor of docketing efficiency and does not reflect the time spent by the Court in examining the fairness of the Settlement Agreement.    The Plaintiff which is exchanging debt for shares in the Issuer is the party to whom the “fairness” applies, and if the fairness hearing was held, and that party was present, the requirement was met.

Court Order Authorizing Issuance of 3(a)(10) Shares

The Court Order is what ultimately results when the other requirements are met, and this is the document which the transfer agent relies upon in issuing free trading shares under the exemption from registration allowed by 3(a)(10).   In contrast to Rule 144, which some Issuers will attempt to thwart when a shareholder tries to deposit stock, an Issuer which signed the Settlement Agreement and attended the Fairness Hearing is not about to violate a Court Order, the penalties for which can be severe.

Matt Stout practices microcap securities law and represents OTC Markets public companies in SEC compliance, FINRA corporate actions, and 3(a)(10) transactions.   Issuers with questions regarding the 3(a)(10) exemption from registration can contact Matt Stout at (410) 429-7076 or via email at 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.