The 3(a)(10) Exemption from SEC Registration

Registration Statements - Securities Lawyer 101

Securities Lawyer 101 Blog

Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”) exempts the offer and sale of securities in certain exchange transactions from the registration statement requirements. In SEC Legal Bulletin 3A, the Securities and Exchange Commission (the “SEC”) provided guidance regarding the Section 3(a)(10) exemption and the resale status of securities issued pursuant to Section 3(a)(10). The Section 3(a)(10) exemption is available when securities are issued in exchange for other securities, not for cash, and the fairness of the exchange is approved by a court or a governmental entity.  The fairness hearing must be open to everyone to whom securities would be issued in the proposed exchange.

Abuses of Section 3(a)(10) Exchanges

Earlier this year, the Justice Department charged Anthony Lopez, the former president and CEO of Unico Inc. (“Unico”) with one count of conspiracy to commit securities fraud and two counts of obstructing justice. According to the indictment,  Unico issued approximately nine billion shares of unregistered securities in reliance upon Section 3(a)(10). The indictment alleges Lopez and Lefkowitz exploited Section 3(a)(10) which allows companies to issue unregistered shares of stock to settle “bona fide” debts. Lopez, on behalf of Unico, would enter into purported loan agreements with various shell corporations owned by Lefkowitz.  It was understood by the parties that Unico would purposefully default on the loan agreements so that Lefkowitz’s companies could initiate sham lawsuits against Unico and receive unregistered shares.  Each of the lawsuits would be brought by Florida-based lawyers in a Sarasota, Florida court.  Very soon after each lawsuit was filed, Lopez and Lefkowitz would draft a written settlement agreement.  In short, Lopez would agree to settle Unico’s purported debt by issuing unregistered shares of stock.

In recent years, the Section 3(a)(10) has become a means for illegal issuances of unrestricted securities by many reverse merger facilitators who ignore several requirements of the rule. In some instances these facilitators enter into pre-arranged transactions using sham debt obligations. Issuers using Section 3(a)(10) should exercise extreme caution when issuing unrestricted securities to ensure that the requirements of the rule are met.

Resale Status of Section 3(a)(10) Securities

Non-Shell Company Involved in 3(a)(10)Transaction

Section 3(a)(10) allows securities issued in a Rule 145(a) transaction by a non-shell company to be issued as unrestricted securities that can be resold without compliance with the conditions of Rule 144 if the sellers are not affiliates of the issuer and have not been affiliates within 90 days of the date of the Section 3(a)(10)-exempt transaction. If the sellers are affiliates, they must resell their securities under Rule 144.

Shell Company Involved in 3(a)(10) Transaction

When a Rule 145(a) transaction is exempt from the registration statement requirements under Section 3(a)(10) and the issuer is a shell company, then the Rule 145(c) and (d) resale limitations apply to any party to that transaction as well as their affiliates at the time such transaction is submitted for vote or consent. In these circumstances, the holders may resell their securities without registration as permitted by Rule 145(d).

In calculating the holding period for Section 3(a)(10) securities under Rule 145(d)(2)(ii) or (d)(2)(iii), “tacking” of the holding period of the securities exchanged for the Section 3(a)(10) securities is prohibited.

Section 3(a)(10) Requirements

Section 3(a)(10) Securities l Securities, Claims or Property Interests

Section 3(a)(10) exempts sales of securities that are “partly in such exchange and partly for cash”; however, the transactions must be predominantly exchanges of securities. The “partly for cash” language is intended merely to permit flexibility in structuring exchanges.

Section 3(a)(10) Issuances for Attorney Fees

One area of significant abuse is the use of Section 3(a)(10) for attorney fees. The SEC has only allowed the issuance of securities as attorneys’ fees under the Section 3(a)(10) exemption in limited circumstances where the securities amount to no more than one-third of the securities subject to a settlement.

Section 3(a)(10) and Convertible Securities

When convertible or exercise-able securities are issued in a Section 3(a)(10) transaction, only the securities issued and not the underlying securities are exempt from the Securities Act registration requirements. The securities issued upon exercise or conversion are not covered by the Section 3(a)(10) exemption.

Court Approval of 3(a)(10) Exchanges

A court, including a foreign court, must approve the fairness of the terms and conditions of the exchange by finding, after holding a hearing, that the terms and conditions are fair to those to whom securities will be issued.

In addition, the issuer must advise the court before the hearing that the issuer will rely on the Section 3(a)(10) exemption. The SEC has determined that the court have “sufficient information” to determine the value of both the securities, claims or interests to be surrendered and the securities to be issued in the proposed transaction. As such, issuers should exercise extreme caution in ensuring all relevant information is provided to the court.

The Section 3(a)(10) Hearings

The Section 3(a)(10) hearing must be open to everyone that would be issued securities in the transaction. The issuer must provide notice to such persons in a timely manner and advise the persons of their right to attend the hearing. The issuer must also provide them with the information necessary to exercise their right.

Timing of Security Holders’ Votes in 3(a)(10) Transactions

Issuers may obtain shareholder approval before the fairness hearing because the timing is required by the statute and, under that statute, the transaction is not effected unless the court approves the transaction. However, issuers should submit the shareholder materials offering the securities to the court before mailing them to the shareholders.

State Securities Laws and Section 3(a)(10) Hearings

The National Securities Markets Improvements Act of 1996 amended Section 18 of the Securities Act, and prevented any state from requiring registration or qualification of covered securities, which are nationally listed securities. This resulted in an issuer being unable to use a state fairness hearing as a basis for relying on the Section 3(a)(10) exemption. The SEC has stated that an issuer may rely upon a fairness hearing conducted under state securities law to perfect an exemption under Section 3(a)(10) for securities that otherwise would be covered securities.

Section 3(a)(10) exemptions are complicated, and violations could result in serious problems, including SEC enforcement actions.  Issuers should seek the advice of a qualified securities attorney before engaging in a 3(a)(10) transaction.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit   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 and compliance 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.