SPINOFFS

The securities regulations issues of corporate spin-offs are addressed by SEC Legal Bulletin No. 4 (1997).  A parent may spin off its subsidiary as a separate entity by issuing shares of the subsidiary to the parent company’s shareholders.  If a “sale” takes place under the Securities Act, then registration under the Securities Act is required.  If the distribution takes place as a dividend to shareholders of the parent, then no sale has occurred and registration is not required.  The shares spun off are free trading shares if there is adequate public information about the subsidiary.  This is provided through a separate Form 10 filing of the subsidiary under the 1934 Securities Exchange Act.

There are spin-off situations that the SEC could consider to be a “sale” and require registration of the shares under the 33 Act.  If shares in the subsidiary are exchanged for other shares, for example, or a minority interest of the subsidiary is owned by the parent and a transfer of assets from parent to subsidiary takes place, this may trigger registration requirements.

In order to qualify as exempt under Sections 4(1) or 4(2) of the Securities Act, a spin-off must satisfy the following five requirements:

1.     -The shares must be distributed without consideration (as a dividend)

2.      =The spin-off must be pro rata to shareholders of the parent in proportion to their ownership in the parent. 

3.      -The parent must provide adequate information to the shareholders and the market. (this requires a Form 10 filing on behalf of the subsidiary).

4.      -The parent must have a valid business purpose for the spin-off.

5.      =If the parent spins off “restricted securities” they must have been held for a minimum of two years.  This requirement has probably changed to one year, given the changes in Rule 144.  This requirement does not apply if the parent formed, rather than acquired, the subsidiary.

PROCEDURE FOR A SPIN-OFF:

1.      The parent should file an Information Statement and obtain approval of  a majority of its shareholders.  This is not required if the subsidiary has been subject to the reporting requirements of the 34 Act for at least 90 days, if the parent is a reporting company, current in its obligations, and the parent gives information to the shareholders as to how the ratio of the spin-off was determined, how fractional shares are to be treated and the potential tax consequences.  Since this is all required in an Information Statement, proper form dictates that this step should not be skipped.

2.      The parent distributes a dividend of shares in the subsidiary on a pro rata basis to its shareholders.

3.      The subsidiary files a Form 10 to register its shares under the 34 Act.

RESTRICTIONS ON SPUN OFF SHARES