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Lawyer 101
WHAT IS A SPIN-OFF?
A spin-off (Spin-off) involves a transaction in which a parent company
(Parent) distributes securities of its subsidiary (Subsidiary) to the Parents
stockholders so that the Subsidiary becomes a separate, independent
company. Spin-off securities are usually distributed on a pro-rata basis.
State law dictates whether stockholder approval of a spin-off is required.
Securities issued in spin-offs do not require registration under the
Securities Act of 1933, as amended (the Securities Act) if certain conditions
are met. The SEC has taken the position, that as long as the conditions of
Staff Legal Bulletin No. 4, have been satisfied, the spin-off of the Subsidiarys
securities by the Parent will not require a registration statement under the
Securities Act. Afterthe spin-off is complete, theprivate issuer mustlocate a
sponsoring marketmaker to submit a Form 211 to FINRA to seek a
ticker symbol.
CONSIDERATION
In order for the spin-off to be exempt from registration, the Parent
stockholders cannot provide consideration for the Subsidiary
securities they receive.
If consideration is tendered, then a sale has occurred and
aregistration statement under Section 5 of the Securities Act is
required, unless an exemption is available.
In a spin-off, an exemption from registration is rarely available
because of the number of stockholders receiving the Subsidiarys
securities.
DISCLOSURE REQUIREMENTS
In order for a spin-off to be exempt from the SECs registration
requirements, the Parent must provide adequate information to its
stockholders and the public marketsabout the transaction.
If the Subsidiary is a non-reporting issuer, it can satisfy the adequate public
information requirement by providing the same disclosures that would be
found in a proxy statement under the Securities Exchange Act of 1934 , as
amended (Exchange Act). The disclosures must be provided to
stockholders prior to or contemporaneously with the spin-off securities. If
the Subsidiary is not reporting with the SEC, it must file a Form 10
registration prior to the time the Subsidiarys securities trade. A reporting
Subsidiary is deemed to have satisfied its information requirements as long
as it is current in its reporting obligations and has provided all relevant
material information about the spin-off.
Securities
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