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

IV. ANALYSIS

The determination of whether or not a section 3(a)(10) offering will be deemed non-public under section 4(2) of the 1933 Act89-and fall within the parameters of section 3(c)(1)90-is thus made on a case by case, characteristic by characteristic basis. Each of the "public offering" factors, such as, the number of offerees, the size of the offering, and the manner of the offering91-and whether the offerees need the protections of the 1933 Act92-will be scrutinized.

The foregoing criteria are helpful in providing some guidance to those wishing to rely on both section 3(a)(10) and section 3(c)(1). The SEC, however, has never expressly ruled on this issue, although it has been presented with the question.93 An issuer hoping to rely on section 3(a)(10) to issue shares as consideration in an acquisition and avoid the registration requirements of the 1940 Act argued in a no-action letter that its section 3(a)(10) offering should not be considered "public." The issuer relied on the position that U.S. shareholders receiving the section 3(a)(10) shares were, in its transaction, merely changing their shares as an investment in one company to one in a similar company.94 The letter specifically argued that

[I]n the context of a corporate reorganization exempt from registration under section 3(a)(10) of the 1933 Act and involving no new investment decisions and no fundamental change in the underlying investment, and where the underlying securities entered the U.S. markets through secondary market trading, it would be inappropriate to treat the transaction as involving a 'public offering' for purposes of section 7(d) of the 1940 Act.95

The SEC, however, responded on an unrelated issue and did not address the validity of this argument. In fact, the SEC stated that the petitioner should not have requested a no-action letter because its situation "is the type of transaction [that] should generally be approved through the exemptive process."96 Was the SEC indicating that exemptive relief would be granted in such a situation? Could a section 3(c)(1) company thus seek specific relief from the SEC and rely on section 3(a)(10) to issue shares? Because the SEC has never resolved this issue, and because of the uncertainty in the language of the 1933 Act and the 1940 Act, the answer, unfortunately, remains unclear.

V. IMPLICATIONS

If a section 3(c)(1) company is unable to rely on the section 3(a)(10) exemption in a certain instance, it is limited to basically two options: it can either (1) not proceed with the transaction, or (2) register itself as an investment company.97 Option one obviously ends the discussion. Option two would free a company from having to rely on both the 100 beneficial owner and "public offering" confines of section 3(c)(1). However, registration pursuant to the 1940 Act carries with it numerous other requirements that are more burdensome98 than either attempting to structure a certain transaction as "private",99 or seeking some sort of exemptive relief from the SEC. In fact, registration is not a very realistic solution.