BLUE SKY LAWS ‑- PERMIT TO ISSUE SECURITIES ‑- DEBTOR CORPORATIONS UNDERGOING REORGANIZATION UNDER SUPERVISION OF FEDERAL COURTS
The Washington Blue Sky Law does not apply to transactions of corporations in the course of reorganization under court supervision in which securities are issued in exchange for existing securities or as payment to creditors. The law is applicable when such securities are issued for cash.
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August 14, 1953
Honorable Della Urquhart
Department of Licenses
Olympia, Washington Cite as: AGO 53-55 No. 112
Attention: !ttMr. L. J. Hayes, Administrator
Dear Mrs. Urquhart:
We have your letter requesting an opinion on our Blue Sky Law as it pertains to the following situation:
A foreign corporation is the subject of reorganization proceedings pursuant to Chapter X of the Federal Bankruptcy Act. The trustee appointed in such proceedings is now engaged in the preparation of a plan of reorganization for presentation in the United States District Court where the proceedings are pending. It is contemplated that the plan of reorganization may involve not only the substitution of new securities for those now outstanding, but also the issuance and sale of additional securities to existing stockholders and others.
The Washington Blue Sky Law, RCW 21.04.010, subsection (1), expressly excludes from the definition of the word "companies" all "executors, administrators, receivers or other trustees acting under the authority of a court." You have asked for our opinion on whether or not this exclusion was designed to exempt any issuance of securities pursuant to a plan of reorganization approved by a federal court in a proceeding pursuant to Chapter X of the Bankruptcy Act: (1) where such securities are issued in exchange for existing securities, and (2) where they are issued and sold for cash.
[[Orig. Op. Page 2]]
It is our conclusion that the Blue Sky Law has no application in situations in which securities are issued in exchange for existing securities or as payment to creditors, but that the law is applicable when such securities are issued for cash.
RCW 21.04.030 provides in part as follows:
"No company, or underwriter thereof, shall sell, or offer for sale, negotiate for the sale of, or take subscriptions for any security of its own issue, until the company or an underwriter thereof shall have first applied for and secured from the director a permit authorizing the sale of such security: * * *Provided further, That this shall not apply to transactions not involving a public offering: * * *"
Chapter X of the Federal Bankruptcy Act deals with corporate reorganization. Upon approval of the reorganization petition, Chapter X, section 116, subsection (2) of the Federal Bankruptcy Act provides that the judge may authorize a trustee to issue certificate of indebtedness. The payment of these certificates generally constitutes an expense of administration.
Section 5 of the Securities Act of 1933 provides for registration with the Securities and Exchange Commission prior to the issuance of securities. The securities act itself exempts from its provisions "certificates issued by a receiver or by a trustee in bankruptcy with the approval of the court." 15 U.S.C., § 77C (a) (7). Because of the exemption from the Securities Act of 1933, the reorganization court is under the duty to scrutinize with care the securities to be issued in order to prevent the issuance of unsound or deceptive securities. In re American Department Stores Corporation (D. Del. 1936) 15 Fed. Supp. 977. Section 264 of Chapter X of the Bankruptcy Act provides that the registration required by section 5 of the Securities Act of 1933 shall not apply to certificates of indebtedness issued by a trustee nor other issuance of securities pursuant to a plan in exchange for securities of or claims against the debtor corporation undergoing reorganization. Section 264 of Chapter X,supra, is discussed in Senate Report No. 1916 on H.R. 8046, 75th Congress (3rd sess. (1938) 38) in part as follows:
"Under this provision no registration in compliance with the Securities Act of 1933 is required for the issuance of securities to the security holders or creditors of the debtor in whole or part exchange for their old securities or claims. However, new issues sold by the reorganized company for cash are required to be registered under the Securities Act just as any other new issues of securities, in order that prospective [[Orig. Op. Page 3]] investors may have all material information before buying. Furthermore, the exemption for the issuance of securities to security holders and creditors under the plan does not extend to any subsequent redistribution of such securities by the issuer or an underwriter; for any such redistribution is subject to the same need for public disclosure of relevant data as in the case of a new issue. This need for registration upon redistribution has been recognized by the Securities and Exchange Commission in its interpretation of section 77B (h), but the revision embodied in section 264 is designed to remove all doubt as to the correctness of that interpretation.
The same considerations of policy appear to be applicable to our Blue Sky Law. The issuance of securities to security holders and creditors pursuant to a reorganization plan supervised by a court is not properly to be considered as a "public offering." These transactions appear to fall within the exemption provision of RCW 21.04.030,supra.
Hence, we conclude that the Washington Blue Sky Law does not apply to transactions of corporations in the course of reorganization under court supervision in which securities are issued in exchange for existing securities or as payment to creditors, but that the law is applicable when such securities are issued for cash.
Very truly yours,
Assistant Attorney General