The staff of the Securities and Exchange Commission, through a series of letters, which began with a 1988 no-action letter to Exxon Capital Holdings Corporation, has taken the position that, when an issuer has privately sold non-convertible debt or other securities (Original Securities) to large, sophisticated investors, the issuer may register the exchange (A/B Exchange) of the Original Securities for substantially similar securities (Exchange Securities) that can be resold by most holders thereof (Exchange Recipients) without further registration or delivery of a prospectus. One reason for the SEC’s position as to A/B Exchanges is that the participants in such an exchange are not engaged in a distribution of the Exchange Securities (unless the participants are underwriters). As a condition to the SEC not objecting to the registration of the Exchange Securities issued in A/B Exchanges, the staff of the SEC has requested that the issuer of the Exchange Securities make certain representations. On July 11, the SEC issued two new Compliance and Disclosure Interpretations (C&DIs), which are duplicative of each other, to clarify that, although there is no particular form that the representations must take, the issuer does need to represent that the issuer:
- is not aware of any Exchange Recipient participating in the A/B Exchange with a view to distribute the Exchange Securities following its completion, and does not have any arrangement or understanding with any Exchange Recipient to facilitate, enable or engage in the foregoing;
- will disclose to each Exchange Recipient that, if such Exchange Recipient acquires the Exchange Securities for the purpose of distributing them, such Exchange Recipient:
- cannot rely on the staff’s interpretive position expressed in the Exxon Capital series of no-action letters with respect to A/B Exchanges, and
- must comply with the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (Securities Act), in order to resell the Exchange Securities, and be identified as an underwriter in the prospectus; and
- will include in the transmittal letter:
- an acknowledgement to be executed by each Exchange Recipient that such Exchange Recipient does not intend to engage in a distribution of the Exchange Securities, and
- an acknowledgement for each Exchange Recipient that is a broker-dealer exchanging securities it acquired for its own account as a result of market-making activities or other trading activities that such broker-dealer Exchange Recipient will satisfy any prospectus delivery requirements in connection with any resale of Exchange Securities received pursuant to the A/B Exchange. The transmittal letter may also include a statement to the effect that by so acknowledging and by delivering a prospectus, a broker-dealer Exchange Recipient will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.
In the C&DIs, the staff of the SEC noted that these representations can either be included in the issuer’s prospectus or in correspondence submitted in connection with the filing.
The complete text of the new A/B Exchange C&DIs can be found here.