RECAPITALIZATIONS

For value – introduction to 2(a)(3)

1. 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

2. 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

3. 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

Shells and Spin-Offs

4. 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

5. 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.

6. 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

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

   1. If not, then shares are restricted

8. 3 markets:

   1. Exchange

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

   3. Pink sheet

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

10. 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...

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