A spin-off (“Spin-off”) involves a transaction in which a parent company (“Parent”) distributes shares of its subsidiary (“Subsidiary”) to the Parent’s shareholders so that the Subsidiary becomes a separate, independent company.
Spin-off shares are usually distributed on a pro-rata basis. State corporate law and the rules of stock exchanges determine if shareholder approval is required for a spin-off.
Spin-offs are becoming increasingly popular in going public transactions. If done properly they can be a short cut to a company seeking to go public. Where the parent has completed a going public transaction, the spin-off company does not have to register the shares of the spin-off under the Securities Act of 1933, as amended (the “Securities Act”) if certain conditions are met.
These conditions include that the Parent company provide adequate information about the spin-off to its shareholders and the trading markets. When an registration statement is required, however, the spin-off company must file a registration statement with the SEC. In these situations, the SEC’s Division of Corporation Finance may examine the registration statement to determine whether it complies with the SEC’s disclosure requirements.
Legal Bulletin No. 4
The SEC has taken the position, that as long as the conditions of Staff Legal Bulletin No. 4, set forth below, have been satisfied, the spin-off of the Subsidiary’s shares by the Parent will not require a registration statement under the Securities Act. Additionally, as long as the foregoing conditions are met, the securities distributed to the Subsidiary’s shareholders are not restricted securities.
In Staff Legal Bulletin No. 4, the SEC sets forth the criteria required for a Parent to spin-off a Subsidiary without filing a registration statement with the SEC. After the spin-off is complete, the private issuer must apply for a ticker symbol to complete its going public transaction. All five conditions below must be complied with in order to avoid registration:
♦ the shareholders of the Parent do not provide consideration for the spun-off Subsidiary shares; the spin-off shares are distributed pro-rata to the Parent shareholders;
♦ the Parent provides adequate information about the spin-off and its Subsidiary to its shareholders and to the trading markets;
♦ the Parent has a valid business purpose for the spin-off; and
♦ if the Parent spins-off restricted securities not registered with the SEC, the Parent has held the securities for at least one year.
In order for the spin-off to be exempt, the Parent shareholders cannot provide consideration for the Subsidiary shares they receive. If consideration is tendered, then a “sale” has occurred and a registration statement under Section 5 of the Securities Act is required, unless an exemption is available. In a spin-off, an exemption from registration is rarely available because of the number of shareholders receiving the Subsidiary’s shares.
Pro-Rata Requirement l SEC Registration Statement Requirements
An exempt spin-off is that the spin-off shares be distributed pro-rata to the Subsidiary’s shareholders, meaning that the Parent shareholders must hold the same percentage of the Parent and Subsidiary after the spin-off. If a spin-off is not pro-rata, the shareholders’ proportional holdings change and a registration statement under the Securities Act is required.
Adequate Public Information
In order for a spin-off to be exempt, the SEC requires that the Parent provide adequate information to its shareholders and the public markets.
Reporting Parent and Non-Reporting Issuer
If the Subsidiary is a non-reporting issuer, it can satisfy this requirement by providing the same information that would be found in a proxy statement under the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information must be provided prior to or contemporaneously with the spun-off shares. Additionally, a non-reporting Subsidiary must file a Form 10 registration statement. The Form 10 may be filed after the spin-off but must occur prior to the Subsidiary’s securities trading. A reporting Subsidiary is deemed to have satisfied its information requirements as long as it is current in its reporting obligations and has provided all relevant material information about the spin-off.
Non-Reporting Parent and Non-Reporting Issuer
Where both the Parent and Subsidiary are non-reporting, the adequate information requirement is satisfied if prior to the spin-off:
♦ the Parent provides the shareholders with an information statement which satisfies the Section 14 proxy rules of the Exchange Act;
♦ the shares are restricted securities until such time as the Subsidiary files a Form 10; and
♦ the transfer restrictions are enforced such as by means of stop transfer instructions to the transfer agent.
Valid Business Purpose
In order to be exempt from securities registration under the Securities Act, the spin-off must have a valid business purpose other than to create a public vehicle.
The SEC considers the following to be valid business purposes:
♦ allowing management of the Parent and of the Subsidiary to be separate and allowing each to focus solely on the relevant entity’s business;
♦ providing incentives to employees of each business linked solely to his or her respective employer;
♦ increasing potential funding opportunities by allowing investments into each business separately; and
♦ enabling the separate entities to do business with each other’s competitors.
Lastly, the Parent must have held the shares of the Subsidiary for at least twelve months. This is so the receiving shareholder may tack with the Parent’s holding period and thereby satisfy the holding period requirements of Rule 144.
If you are going to engage in a spin-off you will need the assistance of an experienced securities lawyer familiar with the SEC’s disclosure requirements, including the Proxy Statement requirements to ensure all required disclosures are provided.
For information about the registration provisions applicable to Spin-Offs please visit:
For further information about SEC registration statements and spin-offs, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202N, Boca Raton Florida, (561) 416-8956, by email at email@example.com or visit www.gopublic101.com. This memorandum about SEC registration statements and spin-offs 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 and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, Rule 144, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings or please contact Hamilton and Associates at (561) 416-8956 or by email at firstname.lastname@example.org. 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 N
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855