SEC Rule 145 - Federal Lawyer (2024)

SEC Rule 145 is a critically important securities regulation that applies to a limited set of circ*mstances: Transactions involving securities in companies that have gone through a merger, acquisition, or reclassification. Rule 145 makes exemptions to the general requirement that all securities have to be registered in order to be bought or sold. Securities professionals who mistaken these exemptions run the risk of buying or selling unregistered securities and facing the severe repercussions of doing so.

The SEC compliance lawyers and securities litigation attorneys at the national law firm Oberheiden P.C. have guided securities professionals through the complex regulatory framework of SEC Rule 145, and have defended regulated securities professionals and their firms from allegations of misconduct or other violations of this important Rule.

SEC Rule 145: An Overview

The Securities Act of 1933 (15 U.S.C. § 77a et seq.) is enforced by the U.S. Securities and Exchange Commission (SEC). Importantly, part of this enforcement responsibility has been to promulgate rules that further the purpose of the Act and that temporarily fill in any holes in the interpretation of the law until courts can step up and resolve them with finality. However, as long as these regulations do not contradict the intent of the Act, the SEC’s reading of the law becomes a very influential interpretation that courts will often defer to.

SEC Rule 145 (17 C.F.R. § 230.145) is one of these regulations. Promulgated in 1972, it governs what can happen to the securities of a company that is reorganizing itself, often in the form of a merger, acquisition, consolidation, or a reclassification, or is transferring its corporate assets.

The problem that is targeted by Rule 145 is straightforward: What happens to the stocks and other securities in a corporation that has recently undergone a fundamental change to its structure? For example, if Company A buys Company B, what happens to Company B’s stocks?

SEC Rule 145 states that, absent an exemption, any transfer of securities in these situations is a sale of securities under section 2(a)(3) of the Securities Act (15 U.S.C. § 77b(a)(3)). The process of this sale begins with the offer, which is made when the company asks its security holders to vote on whether to exchange their existing securities due to the change in the company. As a sale of securities, it therefore triggers the registration requirements of the Securities Act.

The General Rule: Securities Must Be Registered

Under the terms of SEC Rule 145, there is a general rule and then there are exemptions from that rule. The general rule is that share exchanges have to be registered with the issuing company whenever there has been a business combination or alteration that required a shareholder vote or the consent of the company’s shareholders. Such registrations are made on SEC Form S-4.

The gist of Rule 145 is to give current investors in a company the opportunity to either accept or reject a new security in exchange for their old one, as the corporate restructuring is large enough to amount to a new investment decision.

Rule 145 Exemptions

However, there are several avenues around the registration requirements of SEC Rule 145. The most important are:

1. Tender offers
2. Open-market transactions
3. Small-scale corporate reorganizations

Where one of these exemptions applies, the registration requirements of the Securities Act of 1933 are not triggered.

Tender Offers and Open-Market Transactions

A key exemption to Rule 145 – or, rather, a situation that explicitly falls outside the ambit of the Rule – is a transaction that deals directly with the shareholders, themselves, rather than with them through a corporate reorganization. These include tender offers, where bidding companies solicit a sale from the securities holders themselves, and open-market transactions, where company insiders seek certain transactions with the company’s securities holders.

Importantly, though, tender offers are heavily regulated and may still require registration. Such a requirement would just not come from Rule 145.

Small Corporate Reorganizations

Because SEC Rule 145 is concerned with protecting investors who have decided to invest in one company, but that company has undergone such a fundamental change in its structure that it puts its securities holders at risk, one of the exemptions to Rule 145 is when the fundamental change to the issuing corporation does not alter the core terms and expectations of the investment.

As a result, SEC Rule 145(a)(2) carves out an exemption to its registration requirement for corporate reorganizations whose sole purpose is to change the company’s domicile or state of incorporation, so long as it stays within the United States. Such alterations are not considered by the SEC to be severe enough to warrant the implementation of the registration requirement that is designed to protect shareholders.

Rule 145 and the Subsequent Sales of Securities Downstream

Once the corporate restructuring has been finalized, there are still regulations in SEC Rule 145 that may limit the subsequent sale of securities that have been affected by the Rule. Importantly, these rules about so-called “downstream sales” were heavily revised by the SEC in 2007.

Before these changes at the end of 2007, SEC Rule 145(c) labeled anyone affiliated with the issuer of the securities at the heart of a Rule 145 transaction as an “underwriter” because their sale of the securities was a distribution. This was known as the “presumptive underwriter doctrine,” and added lots of legal complexities to these transactions.

In 2007, though, the SEC scrapped the doctrine except for instances where the business reclassification involved certain types of shell companies.

Additionally, SEC Rule 145(d) regulates the subsequent sale of securities that were obtained by investors in Rule 145 transactions. Under this subsection of the Rule, these sellers would not be considered an underwriter under subsection (c) so long as the transaction complies with the resale limitations and requirements of SEC Rule 144.

Frequently Asked Questions About SEC Rule 145 and Oberheiden P.C.

SEC Compliance Attorneys at the National Law Firm of Oberheiden P.C.

SEC Rule 145 is a complicated regulation that closely monitors the complicated types of transactions that can happen during or after a complicated corporate restructuring. Understanding the requirements of SEC Rule 145 can be challenging. Complying with the law is both essential and difficult.

The SEC compliance lawyers at the national law firm of Oberheiden P.C. have walked numerous securities professionals through this tricky regulation so they could buy and sell securities on behalf of their clients without exposing themselves to serious legal liabilities. Our attorneys have also defended regulated securities professionals who have been accused of buying or selling unregistered securities that needed to be registered under the requirements of Rule 145.

Contact our firm online or call us at (888) 680-1745 to get the legal help you need today.