What Is The Section 1145 Exemption? Securities Lawyer 101

Securities law issues are an important consideration in structuring a Chapter 11 reorganization, particularly where the debtor is a public company. Section 1145 of the Securities Act of 1933, as amended (“Securities Act”) provides issuers in Chapter 11 reorganizations with an exemption from registration that eases some of the burdens of Chapter 11 reorganization.  An important requirement of the Section 1145 exemption is not available to an underwriter.

Determining Underwriter Status Under Section 1145

Under Section 1145(b)(3), an entity that does not meet the specifications of Section 1145(b)(1) is not an underwriter under Section 2(11) of the Securities Act of 1933, with respect to any securities offered or sold under Section 1145(a)(1).

A holder becomes an underwriter under Section 1145(b)(1) if the entity:

● Purchases a claim against an interest in or a claim for an administrative expense in the debtor’s case for the purpose of distributing the security received.
● Offers to sell securities offered or sold under the plan for the security holders;
● Offers to buy the securities offered or sold under the plan if the offer to buy is: (1) for the purpose of distributing the security, and (2) under an agreement made in connection with the Chapter 11 plan, consummation of the plan, or with the offer or sale of securities under the plan; and
● Is any person who, directly or indirectly, controls, is controlled by, or is under direct or indirect common control with, the issuer.

“Control” for purposes of Section 1145 is the possession, whether direct or indirect, of the power to direct or cause the direction of the policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

The Section 1145 Exemption From Registration

Assuming the issuer is not an underwriter, Section 1145(a)(1), provides that registration is not required if:

● The offer or sale is either (a) in exchange for a claim against, an interest in, or a claim for an administrative expense; or (b) principally in such exchange and partly for cash or property;
● Upon the exercise of: (a) a warrant, (b) an option, (c) a right to subscribe, or (d) a conversion privilege that was sold as described under Section 1145(a)(1); and
● The offer or sale of a securities of an issuer other than the debtor or an affiliate if: (1) the debtor owned the security as of the petition date, (ii) the issuer of the security meets the specifications of Section 1145(a)(3)(B), and (iii) the offer or sale does not exceed the limits of Section 1145(a)(3)(C).

Accordingly, Section 1145 exemption provides the debtor in a Chapter 11 proceeding with flexibility to issue stock, warrants, or bonds.  Section 1145 applies to offer or sale of securities that occurs after confirmation of a Chapter 11 plan in compliance with the Bankruptcy Code and as such issuers using pre-packaged plans may not qualify for the Section 1145 exemption.  The SEC has stated that a company structuring a prepackaged bankruptcy must rely on Section 3(a)(9) of the Securities Act before filing for bankruptcy and then complete an exchange under the exception in Section 1145 after filing for bankruptcy.

For further information about Section 1145, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.securitieslawyer101.com