Does the Subsidiary Have to Register the Spin-Off Under the Securities Act?
A. The Subsidiary Does Not Have to Register the Spin- Off if Five Conditions are Met
It is the Division's view that the subsidiary does not have to register a spin-off under the Securities Act when: /4
* the parent shareholders do not provide consideration for the spun-off shares;
* the spin-off is pro-rata to the parent shareholders;
* the parent provides adequate information about the spin-off and the subsidiary to its shareholders and to the trading markets;
* the parent has a valid business purpose for the spin-off; and
* if the parent spins-off "restricted securities," it has held those securities for at least two years.
B. An Explanation Of The Conditions
1. The parent shareholders do not provide consideration for the spun-off shares
If the parent shareholders provide consideration for the spun-off shares, the parent would be transferring the spun-off securities for value. This transfer of securities for value is a "sale" under the Securities Act. So, when shareholders provide consideration, the subsidiary must register the spin-off unless an exemption is available.
2. The spin-off must be pro rata
When the spin-off is pro rata, the parent shareholders have the same proportionate interest in the parent and the subsidiary both before and after the spin-off. If a spin-off is not pro rata, the shareholders' relative interests change and some shareholders give up value for the spun-off shares. Ordinarily, Securities Act registration would be required if a spin-off is not pro rata.
3. The parent must provide adequate information to its shareholders and the trading markets
Whether the parent provides adequate information about the spin-off and the subsidiary to its shareholders and the trading markets depends on whether the subsidiary is an Exchange Act reporting company or a non-reporting company before and after the spin-off. In this discussion, we assume the parent is a reporting company. /5
a. Non-reporting subsidiary
If the subsidiary is a non-reporting company, the parent provides adequate information if, by the date it spins-off the securities:
* it gives its shareholders an information statement that describes the spin-off and the subsidiary and that substantially complies with Regulation 14A or Regulation 14C under the Exchange Act; and
* the subsidiary registers the spun-off securities under the Exchange Act. /6
b. Reporting Subsidiary
If the subsidiary is a reporting company, the parent may provide less information about the spin-off to its shareholders. In this situation, the parent provides adequate information if, by the date it spins-off the securities:
* the subsidiary has been subject to the Exchange Act reporting requirements for at least 90 days;
* the subsidiary is current in its Exchange Act reporting; and
* the parent gives its shareholders information about the ratio it used to compute the number of shares distributed for each share held, how it will treat fractional shares, and the spin-off's expected tax consequences. /7
If the reporting subsidiary has not been reporting for 90 days or is not current in its Exchange Act reporting, the parent may provide adequate information in the same manner as for a non- reporting company. /8 c. Foreign companies
When the parent and subsidiary are foreign, the parent provides adequate information if, by the date it spins-off the securities:
* it gives its U.S. shareholders an information statement that describes the spin-off and the subsidiary and that substantially complies with Regulation 14A or Regulation 14C; and
* the subsidiary registers the spun-off securities under the Exchange Act.
There may be situations where the subsidiary will not register the spun-off securities under the Exchange Act (for example, the Rule 12g3-2(a) or 12g3-2(b) exemption from registration may be available). Whether the parent provides adequate information in these situations requires an analysis of all of the facts and circumstances. /9 We will continue to consider requests for "no-action" positions from foreign companies that do not intend to register the spun-off shares under the Exchange Act.
4. Valid Business Purpose for Spin-Off
When there is a valid business purpose for a spin-off, it is less likely that the parent indirectly will receive value for the spun-off shares through the creation of a market in those securities. /10 The Division has recognized the following as examples of valid business purposes for a spin-off:
* allowing management of each business to focus solely on that business;
* providing employees of each business stock-based incentives linked solely to his or her employer;
* enhancing access to financing by allowing the financial community to focus separately on each business; or
* enabling the companies to do business with each other's competitors.
In our view, there is not a valid business purpose for a spin-off when the purpose is:
* creating a market in the spun-off securities without providing adequate information to the shareholders or to the trading markets;
* the creation of a public market in the shares of a company that has minimal operations or assets; or
* the creation of a public market in the shares of a company that is a development stage company that has no specific business plan or whose business plan is to engage in a merger or acquisition with an unidentified company.
Other than the business purposes discussed above, the facts of a particular situation will determine whether the business purpose is valid. Accordingly, the parent must determine whether there is a valid business purpose for the spin-off.
5. If the parent spins-off "restricted securities," the parent must have held those securities for at least two years
A company that spins-off "restricted securities" may be an underwriter in the public distribution of those securities. /11 The Division believes, however, that the parent would not be an underwriter of the spun-off securities and the subsidiary would not have to register the spin-off under the Securities Act when:
* the parent has held the "restricted securities" at least two years; and
* the spin-off satisfies the conditions described above. /12
This two-year holding period position does not apply where the parent formed the subsidiary being spun-off, rather than acquiring the business from a third-party.
5. Does Securities Act Rule 145 Require the Subsidiary To Register A Spin-Off?
Securities Act Rule 145 requires specified transactions to be registered under the Securities Act when investors decide whether to accept a new or different security in exchange for their existing security. For example, when shareholders vote on a plan or an agreement for the transfer of assets in consideration for the issuance of securities, Rule 145(a)(3) may deem that vote to be a "sale" under the Securities Act.
Parent companies often ask their shareholders to vote on proposed spin-offs. Further, spin-offs may include the transfer of assets to the subsidiary.
Based on Rule 145(a)(3), the Division generally has refused to say that the subsidiary does not have to register a spin-off where the parent's shareholders vote on an asset transfer from the parent to the subsidiary. /13 However, we have reconsidered this position where the parent wholly owns the subsidiary. In this situation, we will no longer require Securities Act registration of a spin-off solely as a result of a shareholder vote on the asset transfer. The reason for the change in our view is that, when the other conditions described in response to Question 4, immediately above, are met, the vote on the asset transfer does not change the overall nature of the transaction. /14
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