Business Law Blog

Creating New OTC Listings Through Spin Off Transactions

The Commission has long held that a dividend of securities generally does not constitute a “sale” within the meaning of Section 2(a)(3) of the Securities Act because such dividend does not constitute a disposition “for value” within the meaning of that section. See Securities Act Release No. 929 (July 29, 1936). In the Staff Bulletin, the Staff addresses concerns specific to spin-offs that would warrant registration under the Securities Act despite this basic policy. The Staff Bulletin states “a subsidiary must register a spin-off of shares under the Securities Act if the spin-off is a “sale” of the securities by the parent.” The policy aims for the adoption of the Staff Bulletin were to protect against disguised sales, inadequate public disclosure concerning issuers and anti-fraud violations. The Staff Bulletin sets out five conditions under which a spin-off does not constitute a sale and no Securities Act registration is required.

The Staff Bulletin states that in a spin-off a subsidiary does not have to register its shares under the Securities Act if the following five conditions are met:

  •  the parent shareholders do not provide consideration for the spun-off shares;
  • the spin-off is pro-rata to the parent shareholders;
  • the parent provides adequate information about the spin-off and the subsidiary to its shareholders;
  • the parent has a valid business purpose for the spin-off; and
  • if the parent spins-off “restricted securities,” it has held those securities for at least two years.

Conversely, Footnote 5 of the Staff Bulletin provides guidance with respect to the spin-off of a non-reporting subsidiary company by a non-reporting parent company. Specifically, the Footnote provides that, prior to the date it spins-off the securities, the non-reporting parent company makes available adequate information:

  • Describing the spin-off and the subsidiary in substantial compliance with Regulation 14A or Regulation 14C;
  • That the holders of the spun-off securities can only transfer the securities in specific, limited situations;
  • Describing the transfer limitation to the holders;
  • That the spun-off securities have a legend on them that describes the transfer limits; and
  • That the spun-off subsidiary’s stock transfer books include stop transfer instructions that indicate the transfer limits.

The Staff opined further on the spin-off described in Footnote 5 in its no action letter to Axion, Inc. (“Axion”)(September 17, 1996). In Axion, the holders of the common and preferred stock of the non-reporting parent company received in a distribution all of the outstanding shares of capital stock of the non-reporting subsidiary. The dividend was distributed pro-rata on a number of shares of common and preferred stock by the parent stockholders, determined on an as-if-converted basis. In Axion, the Staff responded that they would not recommend enforcement action to the Commission if the parent conducts the proposed distribution of parent without registration under the Securities Act of 1933.

Securities Compliance Group, Ltd., a leading expert in OTC Market Compliance legal issues, offers FINRA-related legal advice to small public companies that trade on the over the counter market.

Attorney Adam S. Tracy and the law firm of the Securities Compliance Group, Ltd. is a leading provider of corporate, corporate finance, employment and securities legal services, compliance and consulting services to micro, small to mid-sized private and public entities. Our team is comprised of skilled, creative attorneys with a depth of experience in matters including registrations on Form 10, S-1 and S-8, reverse mergers, mergers and acquisitions, complex commercial litigation, public company reporting including Form 10-K, proxy statements and solicitations, DTC eligibility and chill removal and much more. The firm holds offices in both Chicago, IL and Beverly Hills, Ca.