Founder of a publicly traded company pledged unregistered, “control securities” to a bank to collateralize a personal loan.
Oct 01, 2015OUTCOME: The case was settled, and the loan was renegotiated with terms that were favorable to our client.
A client, “Mr. Founder,” retained forty percent of the shares of his company (“COMPANY”) when it had its initial public offering (“IPO”). As is customary, his shares were not registered with the SEC an ... d were not part of the IPO, thus making them untradeable on the NASDAQ where the COMPANY was listed. Mr. Founder then borrowed $50 million from a bank (“THE BANK”) and pledges his unregistered shares in the COMPANY as collateral for the loan. The loan documents stated that if the share price dropped below $5, THE BANK could seize the pledged shares. Due to a computerized trading glitch, the stock market crashed, and the shares of the COMPANY, which had always traded at over $10, had a brief few minutes where they (along with almost all other shares being traded the stock market that day) reached a new low when it’s shares traded at $4.25. Later in the day, the shares recovered somewhat, and closed at $7.12. When THE BANK sought to exercise its rights to foreclose on the collateral, Mr. Founder asked us to help. We began to negotiate a new loan with the loan specialist at THE BANK to replace the loan where it had called in the collateral. THE BANK’s lawyers had convinced it that a trigger price to call the collateral was needed since after THE BANK seized them, it would be required to comply with SEC Rule 144 (17 C.F.R. § 230.144). Litigation was started to foreclose on the shares. We needed to settle the case and get the loan re-negotiated. We argued that once it obtained the shares, THE BANK would not be subject to Rule 144 because it wasn't concerned with the distribution of restricted securities as part of an IPO, but instead, THE BANK was foreclosing, and was therefore neither a seller or buyer. If there had been no pledge of these shares to THE BANK, and if the CEO proposed to sell the shares, Rule 144 would oblige the CEO to file papers with the SEC. THE BANK, by accepting as collateral, shares in COMPANY, did not fit the definition of “underwriter” as set forth in the law. In light of the purpose of the Act, exemptions generally are to be interpreted to promote full disclosure of information necessary to protect the investing public. SEC v. Ralston Purina Co., 346 U.S. 119, 124-25 (1953). None of these factors or the reasoning, applies to THE BANK, which had no interest in purchasing the shares in connection with the distribution of the shares. Moreover, the law supported us.. A.D.M. Corp. v. Thompson, 707 F.2d 25, 26-27 (1st Cir. 1983). See, Rule 144(d)(3)(iv) and (e)(3)(ii); SEC Release No. 33–6099 (August 2, 1979), Q.49 (SEC treated estate as separate from its beneficiaries for purposes of determining the volume limitation); See, also, persuasive: 1 L. Loss, Securities Regulation 645-51 (2d ed. 1961); 11 H. Sowards, Business Organizations, § 4.01[3][b] & [c]. See, also, Getz v. Cent. Bank of Greencastle, 147 Ind. App. 356 (1970). See, also, Russell Ranch, SEC No-Action Letter, 1995 WL 476256 (Aug. 11, 1995); Angelo K. Tsakopoulos, SEC No-Action Letter, 1993 WL 31695 (Feb. 5, 1993); Sec. Pac. Bank Ariz., SEC No-Action Letter, 1992 WL 159159 (June 26, 1992); Albuquerque Fed. Sav. & Loan Ass'n., SEC No-Action Letter, 1987 WL 108519 (Oct. 26, 1987); Harbor Properties Inc., SEC No-Action Letter, 1983 WL 28691 (Sept. 22, 1983); In the Matter of Otc Live, Inc. & Mark A. Suleymanov, SEC No-Action Letter, Release No. 261 (Sept. 30, 2004).