WHAT IS A STOCK SPINOFF?

BY: THE GOING PUBLIC LAWYERS

Securities
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.

WHAT IS A SPIN-OFF? (CONT.)

As long as the requirements of Staff Legal Bulletin No. 4 are met, the
securities distributed to the Subsidiarys stockholders are not
restricted securities if:
the stockholders of the Parent do not provide consideration for
the spun-off
Subsidiary securities; the spin-off securities are
distributed pro-rata to the Parent stockholders;
the Parent provides adequate information about the spin-off and
its Subsidiary to its stockholders and to the trading markets;
the Parent has a valid business purpose for the spin-off; and
the Parent spins-off restricted securities not registered with the
SEC, the Parent has held the securities for at least one year.

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.

PRO-RATA ISSUANCE REQUIREMENT

A spin-off is exempt when the spin-off securities are distributed prorata to the Subsidiarys stockholders, meaning that the Parent
stockholders must hold the same percentage of the Parent and
Subsidiary after the spin-off. If a spin-off is not pro-rata, the
stockholders proportional holdings change and a registration
statementunder the Securities Act is required.

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.

DISCLOSURE REQUIREMENTS (CONT.)

Where both the Parent and Subsidiary are non-reporting issuers the adequate
information requirement is satisfied if prior to the date of the spin-off:
the Parent provides the stockholders with an information statement
which satisfies the Section 14 proxy rules of the Exchange Act;
the securities issued are restricted until such time as the Subsidiary
files a Form 10 registration statement; and
the transfer restrictions are enforced such as by means of stop transfer
instructions to the transfer agent.

VALID BUSINESS PURPOSE REQUIREMENT IN

SPIN-OFFS

In order to be exempt from the registration requirements of Securities Act,

the spin-off company must have a valid business purpose for the spin-off.
Creating a public company or shell is not a valid business purpose.
Examples of valid business purposes include:
allowing management of the Parent and of the Subsidiary to be
separate and allowing each to focus solely on the relevant entitys
business;
providing incentives to employees of each business linked solely to
his or her respective employer;
increasing potential funding opportunities by allowing investments
into each business separately; and
enabling the separate entities to do business with the others
competitors.

HOLDING PERIOD SPIN-OFF SECURITIES

Lastly, the Parent must have held the securities of the Subsidiary
for at least twelve months. This is so the receiving stockholder
may tack with the Parents holding period and thereby satisfy the
holding period requirements of Rule 144.
If you are going to engage in a spin-off you will need the
assistance of an experienced securities law firm like Hamilton &
Associates to assist you with the SECs registration statement
requirements to ensure all required disclosures are provided.
For information about the registration statement requirements that
apply to a registered Spin-Off please visit:
https://www.securitieslawyer101.com/registration-statement

For further information about thissecurities law blogpost, please

contactBrenda Hamilton, securities attorneyat 101 Plaza Real S,
Suite 202 N, Boca Raton Florida,(561) 416-8956, by email at
info@securitieslawyer101.com.Thissecurities law blogpostis
provided as a general informational service to clients and friends
ofHamilton & Associates Law Groupand should not be construed
as, and does not constitute legal advice on any specific matter,
nor does this message create an attorney-client relationship.
Please note that the prior results discussed herein do not
guarantee similar outcomes.
Hamilton & Associates| Securities Lawyer
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com

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