This came from our friends over at Sonfield & Sonfield:
We are informed that some folks believe so-called “aged debt” is exchangeable for common stock or other securities that endure a holding period beginning on the date of creation of the debt. The folks who unfortunately believe this untruth rely on Section 3(a)(9) that exempts transactions: “[E]xcept with respect to a security exchanged in a case under title 11 of the United States Code, any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.”
Rule 144(d)(3)(ii) provides that if securities are acquired from an issuer solely in exchange for other securities of the same issuer, the newly acquired securities may tack onto the holding period and shall be deemed to have been acquired at the same time as the securities surrendered for conversion, even if the securities surrendered were not convertible or exchangeable by their terms. Rule 144 also authorizes the issuer and investor to agree to conversion terms and still benefit from tacking the holding period of a promissory note, or other security that does not have a conversion feature as originally written.
The exemption from registration makes no mention of “debt.” The exemption applies to exchanges only of securities.
However, the Securities Act provides an exemption from the registration requirements for the offer and sale of securities by issuers in exchange for debt, if: “The terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval.”
SEC Staff Bulletin 3 provides that the resale of securities issued in Section 3(a)(10) transactions may be had without regard to Rule 144 if the seller is not an affiliate of the issuer either before or after the Section 3(a)(10) transaction. That is, if the seller is not an affiliate of the issuer, securities issued in a 3(a)(10) transaction are unrestricted and may be immediately sold in the public markets.
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