A few new interps from the SEC

By Cydney Posner

Today, the SEC added a few new interps and withdrew one interp.

The staff is extending the interpretation regarding lock-ups in connection with acquisition transactions to apply to lock-ups (or agreements to tender) that are entered into, before the filing of a registration statement, with note holders in connection with debt exchange offers. The basic principle is that execution of a lock-up agreement (or agreement to tender) may constitute a contract of sale under the Securities Act. If so, the offer and sale of the issuer's securities would be made to note holders who entered into such an agreement before the exchange offer is made to other note holders.

However, the staff recognizes that there are legitimate business reasons to seek lock-up agreements in this type of transaction and will not object to the registration of offers and sales when lock-up agreements have been signed in the following circumstances:

• the lock-up agreements are signed only by accredited investors;
• the persons signing the lock-up agreements collectively own less than 100% of the outstanding principal amount of the particular series of notes;
• a tender offer will be made to all holders of the particular series of notes; and
• all note holders eligible to participate in the exchange offer will receive the same amount and form of consideration.

If these conditions are not satisfied, then the subsequent registration of the exchange offer on Form S-4 may be inappropriate because the exchange offer is a single transaction that was commenced privately and therefore must be completed privately. Similarly, if a note holder actually tenders its notes — for example, by signing a transmittal form — before the filing of the Form S-4, the staff has objected to the subsequent registration of the exchange offer on Form S-4 for any of the note holders because offers and sales have already been made and completed privately. An issuer seeking to lock up note holders must also consider whether these efforts represent the commencement of a tender offer.

In a similar staff accommodation in the context of a negotiated third-party exchange offer, an acquiring company may obtain lock-up agreements (or agreements to tender) before the filing of the registration statement from management and principal security holders of a target company to tender their shares in the exchange offer in the following circumstances:

• the lock-up agreements involve only executive officers, directors, affiliates, founders and their family members and holders of 5% or more of the subject securities of the target company;
• the persons signing the lock-up agreements collectively own less than 100% of the subject securities of the target;
• a tender offer will be made to all holders of the subject securities of the target; and
• all holders of the subject securities of the target eligible to participate in the exchange offer will receive the same amount and form of consideration.

If these conditions are not satisfied for lock-up agreements executed before the filing of a registration statement, the subsequent registration of the exchange offer on Form S-4 may be inappropriate because the exchange offer is a single transaction that was commenced privately and therefore must be completed privately. Similarly, if a holder actually tenders its subject securities — for example, by signing a transmittal form — before the filing of the Form S-4, the staff has objected to the subsequent registration of the exchange offer on Form S-4 for any of the holders of the subject securities because offers and sales have already been made and completed privately. An acquiring company seeking to lock up holders of the subject securities must also consider whether these efforts represent the commencement of a tender offer.

Rule 13d-1(a) states that a Schedule 13D beneficial ownership report must be filed within 10 days after the acquisition of more than 5% of a class of equity securities registered under Section 12 of the Exchange Act. The Schedule 13D must be filed within 10 days of the trade date, not the settlement date, of the securities transaction. Although, under contract law, the date on which the ownership of the shares is transferred may be the settlement date, an investor may, at a minimum, exercise investment power over the securities that were acquired through the trade as of the trade date. For purposes of calculating the 10-day time period, the first calendar day after the trade date counts as day number one. The SEC has withdrawn the prior interp (103.05), which counted the trade date itself as day number one in calculating the 10-day time period.