The Section 3(a)(10) exemption of the Securities Act of 1933 is meant to exempt securities transactions where a fairness hearing by a judge or government agency’s ruling replaces the usual SEC registration requirements. Recently, there has been a rise in 3(a)(10) financing schemes, where a third party investor, what I call a “3(a)(10) financier,” will offer to purchase the outstanding debts of a company from its creditors in exchange for discounted, and unregistered, shares of stock. In many cases these exchanges are done with no notification to current shareholders whose value falls precipitously when the 3(a)(10) financier begins not only selling, but through a common clause in these 3(a)(10) financing contracts, also demanding that the company issue more shares to them at any time. The companies who work with 3(a)(10) financiers have, in some cases, become complicit in the scheme in order to hide these transactions from investors who provide the liquidity for the 3(a)(10) financier sell-offs. I conclude that the SEC needs to provide updated guidance on Section 3(a)(10) as well as bring significant enforcement actions to curtail this budding predatory finance scheme.
Thomas S. Glassman,
3(A)(10) Financing: New Predatory Financing Using the Securities Act,
Mich. Bus. & Entrepreneurial L. Rev.
Available at: https://repository.law.umich.edu/mbelr/vol5/iss1/5