Margin Loans and Former SPACs: Rules 144 and 145 Impose Important Additional Requirements on Resales of Securities | Morrison & Foerster LLP

Margin Loans and Former SPACs: Rules 144 and 145 Impose Important Additional Requirements on Resales of Securities | Morrison & Foerster LLP
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an introduction

This article focuses on complications arising under the Securities Act of 1933 and its amendments (“Securities Law‘), relating to public de-SPACed corporations that may restrict foreclosed lenders from selling mortgaged stock under margin loans secured by stock in former SPACs.

Under the Securities Act, all offers and sales of securities must be registered with the Securities and Exchange Commission (“SEC”).SEC“) unless an exception applies. This requirement applies to any secondary sales of securities by investors, as well as to the issuer’s original issue.

Rule 144 under the Securities Act provides a safe haven from registration for the resale of securities acquired directly from an issuer other than a public offering (“Restricted Securities“) and reselling the securities owned by the issuer’s subsidiaries (“stock controlA person who meets all applicable requirements of Rule 144 in connection with a sale is not a “guarantor,” as defined in Section 2(a) (11) of the Securities Act, and can therefore rely on the exemption from registration granted under Section 4(a)(1) of the Securities Act.

In addition, Rule 145 of the Securities Act imposes additional restrictions on the resale of securities issued by previous SPACs that may result in the seller being considered a default underwriter for the subscription, which may require the securities to be registered under the Securities Act in order to liquidate a significant position in the Securities Finance.

In the context of margin loans, a prohibited lender wishing to sell (or cause the sale of) restricted or controlled securities must do so through a registration statement or by meeting the conditions set forth in Rule 144 and Rule 145. Public Resale of Securities Issued by former shell corporations, including SPACs, under Rule 144 are also subject to additional requirements that do not apply to the majority of other public corporations that can substantially complicate the resale of such securities by a foreclosure lender.

Article 144 Requirements

Rule 144 is the rule normally relied upon for the public resale of restricted and controlled securities.

There are five basic requirements under Rule 144, although not all of the requirements apply to every sale. The issuer’s subsidiaries must comply with all five requirements. However, sellers who were not affiliated at the time of sale, and who were not affiliated for the three months preceding the sale, must comply only with (i) the retention period clause and (ii) in certain circumstances, current public information requirements. Below is a summary of these requirements; However, some important exceptions apply to earlier SPACs which are discussed in more detail after the summary.

  1. Current general information – Current specific information relating to the source must be publicly available (Rule 144(c)).
  1. Contract period A six-month holding period is required for the restricted securities of an issuer that has been a reporting company for at least 90 days and for which current public information requirements have been met. Otherwise, a one-year holding period is required (Rule 144(d)).
  1. sizing – The amount of securities that may be sold in any three month period for listed companies is limited to more than (i) one percent of the outstanding shares or other units of that class, or (ii) the average weekly trading volume during the four weeks preceding the submission of Form 144, or if such notice is not required, is the date the order to execute the transaction was received. The amount of securities that may be sold in any three-month period to companies with OTC or OTC securities is limited to one percent of the shares or other units of that class outstanding (Rule 144(e)).
  1. Selling method Securities (not debt securities) must be sold in unsolicited “brokers’ transactions,” directly to “market makers,” or in “risk-free principal transactions” (Rule 144(f) and (g)).
  1. sale notice The seller must file Form 144 with the SEC at the time the sell order is filed with the broker if the seller is an affiliate and intends to sell more than 5,000 shares or securities during any three-month period, with a value of more than $50,000 (Rule 144(h)) .

Availability of Rule 144 in the Context of Previous SPACs

Rule 144 is not available at all to a previous SPAC until one year after de-SPAC closes and the company saves “Super 8-K” or “Super 20-F” (Rule 144(i)).

Additional Rule 144 Requirements for Previous SPACs

Rule 144 contains additional requirements for “former shell corporations” (as defined in Rule 405 of the Securities Act, including all prior SPACs) in order to satisfy the requirements of Rule 144.

In order to qualify for the exemption granted by Rule 144, former SPAC corporations must meet the additional requirements set forth for former shell corporations under Rule 144. They are the corporation:

  • is no longer a shell company as defined in Rule 144 (1) (1);
  • Mandatory reporting with the Securities and Exchange Commission;
  • File current “Form 10 information” (usually via “Super 8-K” or “Super 20-F”) with the SEC reflecting the issuer’s status as an entity that is no longer a shell company, and has at least one year that has elapsed since this information was submitted in form 10; And
  • has submitted all SEC reports and other required materials within the previous twelve months (or for a shorter period where the issuer was required to provide such reports and materials, other than Form 8-K reports) (“evergreen base“).

The Evergreen Rule is of particular interest to former SPACs as well as interested parties who have restricted or controlled securities in prior SPACs. Rule 144 is only available as long as the issuer complies with the evergreen rule. Therefore, even after the one-year retention period, if a company encounters a problem with SEC reporting, Rule 144 will not be available until the issuer’s SEC reporting problem is resolved. To be clear, this potential ban on the use of Rule 144 will not apply to companies that are not former SPACs or former shell companies.

Rule 144 and covenants of dependent securities in margin loans

In the context of a margin loan, the holding period requirement under Rule 144 is critical for lenders seeking exemption from public registration. The lender must satisfy the relevant holding period prior to the sale. For restricted securities, the required holding period is usually six months but may extend to 12 months in some cases.

In order to meet the holding period set forth in Rule 144, the lender can arrange a lien on the shares in a way that avoids the position of the subsidiary and publicly sell the securities (or cause a sale) under Rule 144 by “processing” the holding period from the pledged ally. Rule 144(d)(3)(4) allows a pledgee, who is permitted to rely on Rule 144 to resell the restricted pledged securities, to defer the holding of the pledged ally to the holding period after a default on his part. pledge under the covenant. This clause is subject to several requirements, including that the pledge of restricted securities by the mortgagor be subject to a pledge of good faith by the dependent mortgagor with recourse against the borrower.

If de-SPAC securities were involved, Rule 144 would not be available to facilitate public sales when de-SPAC occurred less than one year before the enforcement event. In this case, the securities can only be sold in private transactions or under a registration statement.

In addition, the evergreen rule has a number of practical implications for lenders seeking to liquidate the mortgaged securities under a margin loan. In particular, transfer agents and the issuer’s advisor will not accommodate requests to remove the legend that is “widespread”, which means that the limiting legends must be removed on a transaction-by-transaction basis, which can lead to significant administrative delays. In addition, the Evergreen Rule can create uncertainty about the ability to resell securities without a registration statement that can extend for years beyond the expiration of the initial one-year holding period.

Base 145

Rule 145 states that stock exchanges in connection with reclassifications of securities, mergers, consolidations, or transfers of assets subject to a shareholder vote constitute sales of securities.

Under Rule 145, if a party to a transaction is a shell company, then Rule 145(c) considers any party to that transaction (other than the issuer, or any person affiliated with the issuer when the transaction is submitted for voting or approval) that is publicly offering or selling The securities of the issuer acquired in connection with the transaction to participate in the distribution and thus to be a “guarantor” must comply with the restrictions on sales of such securities set forth in Rule 145.

Therefore, Rule 145 creates a “virtual guarantor status” for certain subsidiaries of the parties to a de-SPAC transaction. As such, the securities under Rule 145 may only be sold in accordance with the registration statement or in accordance with the terms of Rule 145(d) (which are consistent with the previous shell company’s resale restrictions in Rule 144).

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