Why you should be an equity receiver
February 5th, 2014 by Robert Stevens
The SEC calls.
Much ado has been circulating lately about the role of a Receiver in distressed and defunct public companies. On September 3, 2014 the United States Securities and Exchange Commission (“SEC”) delisted 255 essentially dormant Issuers to prevent persons intending to unleash “Wolf of Wall Street” type fraud through manipulating the prices of the Issuers’ stock. According to some, the SEC is acting to prevent illegal hijacking of these companies for pump-and dump activities.
About a month ago I received a call from the SEC on a project company, for which I serve as Receiver. We had recently cleared a reverse stock split with FINRA and were preparing a disclosure statement. Friendly and professional, the Staff member told us that the SEC had recently sent letters to hundreds of companies listed as “Unable to Locate” – and apparently this Issuer was one of these. A five minute call resolved his primary concerns – that “someone was minding the store” – and I thanked him for his professionalism.
More recently, and in the midst of wild discussions and incorrect information I thought it timely to discuss Receivership, the role of the Receiver, and why you should keep the strategy as an “arrow in your quiver”.
This is not Bankruptcy.
Often confused with Bankruptcy, which has been made law and repealed several times in the US before the Chandler Act in 1938, receivership can take place in state or federal court, or even out of court as a shareholder or board appointed receiver. A receivership is not a bankruptcy and does not enjoy the wide-reaching powers of a federal bankruptcy court, but has its own advantages and powers, typically defined in the statute authorizing appointment and confirmed or refined in the court’s appointment order.
Receivership places an individual (or entity) in a position over the board of directors and executive officers. The receiver’s prime charge is the protection of the assets of the corporation – from waste, theft or mismanagement. Unlike a bankruptcy trustee, a receiver need not be an independent party and may be an interested person, such as a creditor or shareholder of the Issuer. However the Receiver is accountable to the appointing court and is primarily focused on a successful reorganization, be it liquidation or sale of the Issuer, or other appropriate, and ultimately court approved action.
Let’s look at Nevada Statutes, since a good deal of public companies are Nevada Corps:
NRS 78.635 Appointment of receiver or trustee of insolvent corporation: Powers.
1. The district court, at the time of ordering the injunction, or at any time afterwards, may appoint a receiver or receivers or a trustee or trustees for the creditors and stockholders of the corporation.
2. Receivers or trustees shall have full power and authority:
(a) To demand, sue for, collect, receive and take into possession all the goods and chattels, rights and credits, moneys and effects, lands and tenements, books, papers, choses in action, bills, notes and property, of every description of the corporation;
(b) To institute suits at law or in equity for the recovery of any estate, property, damages or demands existing in favor of the corporation;
(c) In their discretion to compound and settle with any debtor or creditor of the corporation, or with persons having possession of its property or in any way responsible at law or in equity to the corporation at the time of its insolvency or suspension of business, or afterwards, upon such terms and in such manner as they shall deem just and beneficial to the corporation; and
(d) In case of mutual dealings between the corporation and any person to allow just setoffs in favor of such person in all cases in which the same ought to be allowed according to law and equity.
Practical Considerations. Seeking to be appointed receiver is a risky move – particularly if the receiver isn’t a judgment creditor or a shareholder with a significant ownership – a court will be unlikely to unseat management of a company that is active in the day to day operations of the business. The process cannot be short-circuited – and there will be costs and time involved. These resources must be expended regardless of the ultimate outcome. This requires careful analysis and consideration from the outset. The process itself usually takes as long as a normal civil case.
If you are appointed, then what?
The Receiver for a corporation is granted certain powers by statute, and can be granted more powers by virtue of the order of court. A receiver can sell assets to pay creditors, dissolve the corporation, and even sell “Receiver Certificates” to finance the cash needs of the company. There are several interesting and useful exemptions that can be applicable as well, including 3(a)(7) and 3(a)(10) of the Securities Act of 1933.
An often unused exemption for raising funds is 3(a)(7), which provides for the issuance of short term debt instruments, aka “Receiver Certificates”. These enjoy a federal exemption — although the SEC has offered guidance they need to be ordered by the court, and also enjoy exemption from registration in all 50 states (as of the writing of this blog) – so while they may not be “covered securities”, they might as well be.
Section 3(a)(10) allows for the exchange of claims for the issuance of stock, although the technical aspects of the exemption need to be addressed in a case-by-case scenario; is NOT an acceptable means of resolving DTC issues; and most certainly not to be used for fund raising activities. Before trying to leverage this exemption it is key to retain a skilled and experienced securities lawyer.
Now what?
The takeaway from this piece is that you may have additional rights as a creditor or stockholder in “a deal gone bad.” Management of these companies may be all too happy to take your money, and use the company’s common stock as a printing press to finance their lifestyle. Perhaps they should be ousted, and replaced by someone more qualified: YOU.
Reg D…
June 3rd, 2013 by Robert Stevens
The proposed change to allow for general solicitation of accredited investors under Regulation D, “Rule 506(c)”, has some interesting implications for capital formation for Issuer companies. For one, it is a 180 degree turn from the basic premise of securities law back to 1933 – that general solicitation needs to be blessed by the SEC or a state regulator – “registered” – or follow some tricky exemption from registration. Failure to do so exposed the companies and its principals to action by state and federal securities regulators.
Meaning what? Well, for one, you better have lots of rich friends and acquaintances.. or better yet you hire a FINRA registered Broker Dealer to do the raise for you. .. Enter Rule 506(c)..
We anticipate something final out the the SEC within 60 days.. stay tuned.
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