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

According to the SEC, the main justification for exempting section 3(a)(10) securities from registration is because the "examination and approval by the body in question of the fairness of the issue in question is a substitute for the protection afforded to the investor by the information which would otherwise be made available to him through registration."49 In fact, "[m]any regulators would consider this form [a substantive review by an impartial tribunal as provided in section 3(a)(10)] ... [to be] a form of protection superior to the [1933] Act's registration process,"50 notwithstanding the fact that the impartial tribunal can be a court in a foreign country.51 Indeed, with the SEC's blessing,52 foreign companies in cross-border acquisitions are able to rely on section 3(a)(10) to exempt from registration those securities that it will issue to U.S. shareholders.53

III. RELATIONSHIP BETWEEN SECTION 3(A)(10) AND SECTION 3(c)(1)

Although exempt from the registration requirements of the 1933 Act, section 3(a)(10) securities are still subject to other U.S. securities laws.54 For example, section 3(a) of the 1933 Act does not provide an exemption from section 10(b)-the insider trading rules-of the Securities Exchange Act of 1934.55 The Trust Indenture Act of 1939(56) does not "include an exemption that is the equivalent of section 3(a)(10) of the Securities Act. [Thus, i]f an issuer is relying on section 3(a)(10) to offer and sell debt securities without [1933] Act registration, it should note that the Trust Indenture Act would still apply to that offering."57

In this vein, the issue arises of whether or not section 3(a)(10) securities will trigger the public offering component of other securities acts, such as section 3(c)(1) of the 1940 Act.58 If the answer is yes, then such an issuer can no longer rely on the section 3(c)(1) exception because it would no longer meet the two prong test of section 3(c)(1),59 and would thus be required to register under the 1940 Act.60 If the answer is no, then a whole host of hedge funds and foreign investment companies can utilize the section 3(a)(10) exemption to offer their securities as consideration in an acquisition, and still rely on section 3(c)(1) to avoid the onerous requirements imposed by 1940 Act registration.61 This interplay between section 3(a)(10) securities and section 3(c)(1) is particularly relevant to the many foreign investment companies that wish to exploit section 3(a)(10) by issuing securities-once highly valued-as consideration in acquisitions to U.S. shareholders.62

As outlined in Part I, an offering is "not public" for purposes of section 3(c)(1) if it complies with section 4(2) of, or Rule 506 under, the 1933 Act.63 Section 4(2) of the 1933 Act exempts from registration transactions "by an issuer not involving any public offering."64 The determination of what constitutes a public offering is "essentially a question of fact."65 An important interpretation of the requirements of public offerings is the 1953 U.S. Supreme Court decision66 in Ralston Purina Co.67 The Court attempted to clarify section 4(2) by stating that:68