An analysis of the Section 3(a)(10) exemption under the Securities Act of 1933 in the context of the public offering component of Section 3(c)(1) of the Investment Company Act of 1940

Fordham Journal of Corporate & Financial Law, 2003 by Holzapfel, Marc F

Accordingly, an analysis of the 1933 Act becomes necessary.

II. THE 1933 ACT

The 1933 Act34 is "essentially a disclosure statute"35 aiming to "assure the availability of adequate reliable information about securities that are offered to the public."36 As with the 1940 Act,37 the 1933 Act's main feature is its registration requirement.38 Subject to certain specific exemptions, no security-a term broadly defined in the 1933 Act-can be offered or sold to the public unless first registered with the SEC.39 However, Congress specifically exempted securities and transactions from registration,40 where the "intrinsic nature of the issuer or the character of the security [or transaction] itself . . . would make further governmental regulation superfluous."41 One such exemption is section 3(a)(10),42 which, unfortunately suffers "from a relative paucity of authoritative interpretation."43 Consequently, much of what is known about section 3(a)(10)'s requirements and applicability comes from no-action letters.44

A. Section 3(a)(10)

Section 3(a)(10) specifically exempts from registration any security which is:

[I]ssued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval.45

The SEC has determined that an issuer must satisfy the following criteria to claim a section 3(a)(10) exemption:

The securities must be issued in exchange for securities, claims or property interests; they cannot be offered for cash;

A court or authorized governmental entity must approve the fairness of the terms and conditions of the exchange;

The reviewing court or authorized governmental entity must find, before approving the transaction, that the terms and conditions of the exchange are fair to those to whom securities will be issued; and be notified before the hearing that the issuer will rely upon the section 3(a)(10) exemption based on the court's or authorized governmental entity's approval of the transaction;

The court or authorized governmental entity must hold a hearing before approving the fairness of the terms and condition of the transaction;

A governmental entity must be expressly authorized by law to hold the hearing, although it is not necessary that the law require the hearing;

The fairness hearing must be open to everyone to whom securities would be issued in the proposed exchange;

Adequate notice of the hearing must be given to all those persons; and

There cannot be any improper impediments to the appearance by those persons at the hearing.46

Many of these criteria focus on a reviewing court or similar government entity because securities offered pursuant to section 3(a)(10) protect investors not so much through dissemination of a disclosure document,47 but through the substantive review by an impartial tribunal.48