Section 3(a)(10) of the Securities Act provides an exemption from Securities Act registration for offers and sales of securities in specified exchange transactions. There are several conditions to the exemption, including the requirement that a court or other authorized governmental entity approve the fairness of the terms and conditions of the exchange. Because the California Commissioner of Business Oversight has statutory authority to conduct fairness hearings (Cal. Corp. Code § 25142), fairness hearings before the Commissioner have proven to be a cost-effective alternative in California to registration of shares exchanges in connection with merger transactions. See this post from 2012.
Section 3(a)(10) is not limited to just merger transactions. Recently, for example, I came across the following disclosure in a Form 8-K:
"A creditor (“Creditor”) of InterCloud Systems, Inc. (the “Company”) purchased the right to collect the balance of an unpaid judgment against the Company by White Winston Select Asset Funds, LLC (“White Winston”) pursuant to a receivable purchase agreement. The amount currently owed to the Creditor is $849,238.39, plus interest, fees, costs and expenses. The Company entered into a Stipulation for Settlement of Claims (the “Settlement”) with the Creditor to settle the judgment claim in exchange for the issuance to Creditor of shares of common stock of the Company ("Common Stock"). The settlement was court approved under 25017(f)(3) of the California Corporations Code and Section 3(a)(10) of the Securities Act of 1933, as amended ("Securities Act"). In full and final settlement of the claim, the Company will issue and deliver to the Creditor 39,121,707 shares of Common Stock ("Initial Issuance"), subject to the subsequent adjustments as set forth in the Settlement."
When the Commissioner of Business Oversight holds a fairness hearing, the issuer has applied for a permit. When a court holds a hearing on the fairness of an issuance or exchange, there is no need to apply for a permit because Section 25017(3) effectively provides that there is no offer or sale.
