3(a)10 Debt for Equity Exchanges


Section 3(a)(10) of the Securities Act of 1933 (Securities Act) exempts the offer and sale of securities in certain exchange transactions from the normal registration requirements of the Securities Act. 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.

The Securities Must Be Issued in Exchange for Securities, Claims or Property Interests: When convertible or exercisable securities are issued in a Section 3(a)(10) transaction, only the securities issued are exempt from the Securities Act registration requirements. The issuance of the underlying securities upon exercise or conversion is not covered by the Section 3(a)(10) exemption. This is different from transactions that are exempt under Section 1145 of the U.S. Bankruptcy Code, which exempts the later exercise or conversion from Securities Act registration.

A court, including a foreign court, or authorized governmental entity (e.g., state insurance commissions, state corporation or securities commissions, state banking agencies, etc.) must approve the fairness of the terms and conditions of the exchange by finding, after holding a hearing, that the terms and conditions of the exchange are fair (both procedurally and substantively) to those to whom securities will be issued.

In addition, the issuer must advise the court or governmental entity before the hearing that the issuer will rely on the Section 3(a)(10) exemption based on the court’s or governmental entity’s approval of the exchange. It is required that the court or governmental entity “have sufficient information before it in order to determine the value of both the securities, claims or interests to be surrendered and the securities to be issued in the proposed transaction.”

NYC-shaowsAlthough somewhat complicated in its process, 3(a)10 transactions have become very popular with public company issuers and lenders. The issuers creditors, or debt holders involved in the transaction get paid in a timely and court sanctioned event, which is usually an appealing option. HFS can introduce clients to reputable lenders and professionals that can effect and complete these types of transactions, which can take as little as two weeks to close. CONTACT US today for more information on this finance instrument.