This article focuses on complications arising under the Securities Act of 1933, as amended (“Securities Act”), relating to de-SPACed public companies that may restrict foreclosing lenders from selling shareholdings pledged under margin loans secured by shares in former SPACs.
Under the Securities Act, all offers and sales of securities must be registered with the Securities and Exchange Commission (“SEC”) unless an exemption applies. This requirement applies to any secondary sales of securities by investors, as well as to the issuer's original issuance.
Rule 144 under the Securities Act provides a safe harbor from registration for resales of securities acquired directly from an issuer other than in a public offering (“restricted securities”) and resales of securities held by affiliates of an issuer (“control securities”). A person who satisfies all applicable conditions of Rule 144 in connection with a sale transaction is deemed not to be an “underwriter,” as defined in Section 2(a)(11) of the Securities Act, and therefore may rely on the exemption from registration afforded by Section 4(a)(1) of the Securities Act.
In addition, Rule 145 of the Securities Act imposes additional restrictions on resales of securities issued by former SPACs that may result in the seller being deemed to be a presumptive underwriter, potentially requiring registration of the securities under the Securities Act in order to liquidate a sizeable position in the securities.
In the context of margin loans, a foreclosing lender that wishes to sell (or cause the sale of) pledged restricted or control securities must do so through a registration statement or by meeting the conditions provided under Rule 144 and Rule 145. Public resales of securities issued by former shell companies, including SPACs, under Rule 144 are also subject to additional requirements not applicable to the majority of other public companies that can significantly complicate resales of these securities by a foreclosing lender.
Rule 144 Requirements
Rule 144 is the rule typically relied on for public resales of restricted and control securities.
There are five basic requirements under Rule 144, although not all requirements apply to every sale. Affiliates of the issuer must comply with all five requirements. However, sellers who are not affiliates at the time of the sale, and have not been affiliates for the three months preceding the sale, must only comply with (1) the holding period requirement and (2) in certain circumstances, the current public information requirement. A summary of these requirements is below; however, certain important exceptions apply to former SPACs which are discussed in more detail following the summary.
- Current public information – Specified current information concerning the issuer must be publicly available (Rule 144(c)).
- Holding period – A six-month holding period is required for restricted securities of an issuer that has been a reporting company for at least 90 days and for which the current public information requirement is satisfied. Otherwise, a one-year holding period is required (Rule 144(d)).
- Volume limitation – The amount of securities that can be sold in any three-month period for listed companies is limited to the greater of (i) one percent of the shares or other units of that class outstanding, or (ii) the average weekly trading volume during the four calendar weeks preceding the filing of a Form 144, or if no such notice is required, the date of receipt of the order to execute the transaction. The amount of securities that can be sold in any three-month period for companies with over-the-counter, or OTC, securities is limited to one percent of the shares or other units of that class outstanding (Rule 144(e)).
- Manner of sale – Equity securities (but not debt securities) must be sold in unsolicited “brokers' transactions,” directly to “market makers,” or in “riskless principal transactions” (Rule 144(f) and (g)).
- Notice of sale – The seller must file a Form 144 with the SEC at the time the sell order is placed with the broker if the seller is an affiliate and intends to sell during any three-month period more than 5,000 shares or securities with a value in excess of $50,000 (Rule 144(h)).
Availability of Rule 144 in the context of Former SPACs
Rule 144 is not available for a former SPAC at all until one year after the de-SPAC closes and the company files its “Super 8-K” or “Super 20-F” (Rule 144(i)).
Additional Rule 144 Requirements for Former SPACs
Rule 144 contains additional conditions for “former shell companies” (as defined in Rule 405 of the Securities Act, including all former SPACs) in order to satisfy the requirements of Rule 144.
In order to qualify for the exemption afforded by Rule 144, former SPACs would have to meet the additional requirements prescribed for former shell companies under Rule 144. Namely the company:
- has ceased to be a shell company as defined in Rule 144(i)(1);
- mandatorily files reports with the SEC;
- has filed current “Form 10 information” (typically via a “Super 8-K” or “Super 20-F”) with the SEC reflecting the issuer's status as an entity that is no longer a shell company, and at least one year has elapsed since such Form 10 information was filed; and
- has filed all required SEC reports and other materials during the preceding 12 months (or for such shorter period that the issuer was required to file such reports and materials, other than Form 8-K reports) (“Evergreen Rule”).
The Evergreen Rule is of particular importance to former SPACs as well as interested parties holding restricted or control securities in former SPACs. Rule 144 is only available for so long as the issuer complies with the Evergreen Rule. Therefore, even after the one-year holding period, if a company experiences an issue with its SEC reporting, Rule 144 will not be available until the issuer's SEC reporting issue has been resolved. To be clear, this potential bar to using Rule 144 would not apply to companies that are not former SPACs or otherwise former shell companies.
Rule 144 and Pledges of Affiliate Securities in Margin Loans
In a margin loan context, the holding period requirement under Rule 144 is critical for lenders seeking an exemption from public registration. A lender must satisfy the relevant holding period prior to the sale. For restricted securities, the required holding period is usually six months but may extend to 12 months in some cases.
In order to meet the holding period prescribed under Rule 144, a lender could structure a foreclosure on the shares in a manner to avoid affiliate status and publicly sell (or cause the sale of) the securities under Rule 144 by “tacking” the holding period of the affiliate-pledgor. Rule 144(d)(3)(iv) permits a pledgee, who is allowed to rely on Rule 144 for the resale of the restricted pledged securities, to tack the holding period of an affiliate pledgor onto its holding period following a default by the pledger under the pledge. This tacking provision is subject to several requirements, including that the pledge of the restricted securities by the pledgor be subject to a bona fide pledge by the affiliate pledgor with recourse against the borrower.
If de-SPAC securities are involved, Rule 144 will not be available to facilitate public sales where the de-SPAC has occurred less than one year prior to the enforcement event. In this instance, securities could only be sold in private transactions or under a registration statement.
In addition, the Evergreen Rule has a number of practical implications for lenders seeking to liquidate securities pledged under a margin loan. Most notably, transfer agents and counsel to the issuer will not accommodate “blanket” legend removal requests, meaning that restricted legends must be removed on a transaction-by-transaction basis, which can result in significant administrative delays. In addition, the Evergreen Rule can result in uncertainty about the ability to resell securities without a registration statement that can extend years after the expiration of the initial one-year holding period.
Rule 145 provides that exchanges of securities in connection with reclassifications of securities, mergers or consolidations, or asset transfers subject to shareholder vote, constitute sales of securities.
Under Rule 145, if a party to one of these transactions is a shell company, Rule 145(c) deems any party to that transaction (other than the issuer, or any person who is an affiliate of the issuer when the transaction is submitted for vote or consent) who publicly offers or sells securities of the issuer acquired in connection with the transaction to be engaged in a distribution and therefore to be an “underwriter” who must comply with the restrictions on sales of those securities set forth under Rule 145.
Therefore, Rule 145 creates a “presumptive underwriter status” for certain affiliates of the parties to a de-SPAC transaction. As such, Rule 145 securities may only be sold pursuant to a registration statement or in compliance with the Rule 145(d) conditions (which align with the resale restrictions for securities of former shell companies in Rule 144).
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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