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SEC Rule 145

John W. Sellers
Attorney John W. Sellers
SEC Rule 145 Team Lead
Former DOJ Trial Attorney
envelope iconContact John

SEC Rule 145 is a critically important securities regulation that applies to a limited set of circumstances: Transactions involving securities in companies that have gone through a merger, acquisition, or reclassification. Rule 145 makes exemptions to the general requirement that all securities have to be registered in order to be bought or sold. Securities professionals who mistaken these exemptions run the risk of buying or selling unregistered securities and facing the severe repercussions of doing so.

The SEC compliance lawyers and securities litigation attorneys at the national law firm Oberheiden P.C. have guided securities professionals through the complex regulatory framework of SEC Rule 145, and have defended regulated securities professionals and their firms from allegations of misconduct or other violations of this important Rule.

SEC Rule 145: An Overview

The Securities Act of 1933 (15 U.S.C. § 77a et seq.) is enforced by the U.S. Securities and Exchange Commission (SEC). Importantly, part of this enforcement responsibility has been to promulgate rules that further the purpose of the Act and that temporarily fill in any holes in the interpretation of the law until courts can step up and resolve them with finality. However, as long as these regulations do not contradict the intent of the Act, the SEC’s reading of the law becomes a very influential interpretation that courts will often defer to.

SEC Rule 145 (17 C.F.R. § 230.145) is one of these regulations. Promulgated in 1972, it governs what can happen to the securities of a company that is reorganizing itself, often in the form of a merger, acquisition, consolidation, or a reclassification, or is transferring its corporate assets.

The problem that is targeted by Rule 145 is straightforward: What happens to the stocks and other securities in a corporation that has recently undergone a fundamental change to its structure? For example, if Company A buys Company B, what happens to Company B’s stocks?

SEC Rule 145 states that, absent an exemption, any transfer of securities in these situations is a sale of securities under section 2(a)(3) of the Securities Act (15 U.S.C. § 77b(a)(3)). The process of this sale begins with the offer, which is made when the company asks its security holders to vote on whether to exchange their existing securities due to the change in the company. As a sale of securities, it therefore triggers the registration requirements of the Securities Act.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd
Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester
Brian J. Kuester

Former U.S. Attorney

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney

Local Counsel

John W. Sellers
John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara
Linda Julin McNamara

Federal Appeals Attorney

Aaron L. Wiley
Aaron L. Wiley

Former DOJ attorney

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (DOJ)

Chris Quick
Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow
Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

The General Rule: Securities Must Be Registered

Under the terms of SEC Rule 145, there is a general rule and then there are exemptions from that rule. The general rule is that share exchanges have to be registered with the issuing company whenever there has been a business combination or alteration that required a shareholder vote or the consent of the company’s shareholders. Such registrations are made on SEC Form S-4.

The gist of Rule 145 is to give current investors in a company the opportunity to either accept or reject a new security in exchange for their old one, as the corporate restructuring is large enough to amount to a new investment decision.

Rule 145 Exemptions

However, there are several avenues around the registration requirements of SEC Rule 145. The most important are:

  1. Tender offers
  2. Open-market transactions
  3. Small-scale corporate reorganizations

Where one of these exemptions applies, the registration requirements of the Securities Act of 1933 are not triggered.

Tender Offers and Open-Market Transactions

A key exemption to Rule 145 – or, rather, a situation that explicitly falls outside the ambit of the Rule – is a transaction that deals directly with the shareholders, themselves, rather than with them through a corporate reorganization. These include tender offers, where bidding companies solicit a sale from the securities holders themselves, and open-market transactions, where company insiders seek certain transactions with the company’s securities holders.

Importantly, though, tender offers are heavily regulated and may still require registration. Such a requirement would just not come from Rule 145.

Small Corporate Reorganizations

Because SEC Rule 145 is concerned with protecting investors who have decided to invest in one company, but that company has undergone such a fundamental change in its structure that it puts its securities holders at risk, one of the exemptions to Rule 145 is when the fundamental change to the issuing corporation does not alter the core terms and expectations of the investment.

As a result, SEC Rule 145(a)(2) carves out an exemption to its registration requirement for corporate reorganizations whose sole purpose is to change the company’s domicile or state of incorporation, so long as it stays within the United States. Such alterations are not considered by the SEC to be severe enough to warrant the implementation of the registration requirement that is designed to protect shareholders.

Rule 145 and the Subsequent Sales of Securities Downstream

Once the corporate restructuring has been finalized, there are still regulations in SEC Rule 145 that may limit the subsequent sale of securities that have been affected by the Rule. Importantly, these rules about so-called “downstream sales” were heavily revised by the SEC in 2007.

Before these changes at the end of 2007, SEC Rule 145(c) labeled anyone affiliated with the issuer of the securities at the heart of a Rule 145 transaction as an “underwriter” because their sale of the securities was a distribution. This was known as the “presumptive underwriter doctrine,” and added lots of legal complexities to these transactions.

In 2007, though, the SEC scrapped the doctrine except for instances where the business reclassification involved certain types of shell companies.

Additionally, SEC Rule 145(d) regulates the subsequent sale of securities that were obtained by investors in Rule 145 transactions. Under this subsection of the Rule, these sellers would not be considered an underwriter under subsection (c) so long as the transaction complies with the resale limitations and requirements of SEC Rule 144.

Frequently Asked Questions About SEC Rule 145 and Oberheiden P.C.

What is the Presumptive Underwriter Doctrine Under Rule 145?

 

The presumptive underwriter doctrine is a part of SEC Rule 145(c). However, it has been gutted since the SEC’s revision of the Rule back in 2007 and only applies in a limited set of circumstances.

Basically, the doctrine stated that anyone affiliated with a party to a Rule 145 transaction, other than the issuer of the securities at hand, was an underwriter because their role in the transaction made them distributors of securities. This subjected them to the resale restrictions of Rule 145(d).

However, the 2007 amendments to SEC Rule 145 scrapped much of the presumptive underwriter doctrine. Now it only applies to securities that were obtained through business combinations that involved shell companies. The revisions to Rule 145 also brought the resale restrictions that had been in Rule 145(d) more in line with those in SEC Rule 144.

How Did the SEC Handle These Transactions in the Past?

 

Before Rule 145 was promulgated by the SEC in 1972, the agency had not considered these securities exchanges to be a type of sale. Because they were not a sale of securities, many of the regulatory requirements were not triggered. This left a lot of room for nefarious corporations and securities professionals to manipulate the market and harm investors.

Why Should I Choose Oberheiden P.C. to Represent Me or My Securities Firm?

 

Because Oberheiden P.C. is a unique securities litigation firm that takes a different approach to legal representation than most other firms.

Typically, when you hire a law firm to represent you or your securities house, you will get drawn to the firm by the experience of its top attorneys. Many of them are highly experienced and will have won numerous trials. However, the legal representation that you end up receiving will come from a junior associate and a team of paralegals, with the experienced lawyer that attracted you to the firm only providing a distant supervision.

That is not how we operate at Oberheiden P.C. Our firm is exclusively staffed with senior attorneys. We do not hire paralegals or junior associates. The experienced lawyer that convinced you to hire Oberheiden P.C. for your legal needs will provide your legal representation – all of it.

Why Doesn’t Oberheiden P.C. Call Itself the Best Federal Defense Firm?

 

That is something that we would rather let our clients say about our law firm. While our attorneys are all senior level, are highly experienced in defending our clients against securities litigation cases or helping our clients comply with the extensive framework of laws and regulations that are enforced by the SEC, and have a long track record of successful outcomes in our past, we still think that these claims about our firm are best heard from our prior clients.


SEC Compliance Attorneys at the National Law Firm of Oberheiden P.C.

SEC Rule 145 is a complicated regulation that closely monitors the complicated types of transactions that can happen during or after a complicated corporate restructuring. Understanding the requirements of SEC Rule 145 can be challenging. Complying with the law is both essential and difficult.

The SEC compliance lawyers at the national law firm of Oberheiden P.C. have walked numerous securities professionals through this tricky regulation so they could buy and sell securities on behalf of their clients without exposing themselves to serious legal liabilities. Our attorneys have also defended regulated securities professionals who have been accused of buying or selling unregistered securities that needed to be registered under the requirements of Rule 145.

Contact our firm online or call us at (888) 680-1745 to get the legal help you need today.

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