The SEC’s Division of Corporation Finance recently granted no-action relief that allows an SEC reporting company, Minn-Dak Farmers Cooperative, to cease reporting on the basis that the company’s common and preferred stock are not “securities” under the federal securities laws.
Minn-Dak successfully argued that, notwithstanding the “common stock” and “preferred stock” titles, these instruments are not “stock” or “investment contracts” under the tests that have been prescribed by the U.S. Supreme Court. Minn-Dak’s stock is held exclusively by Minn-Dak’s sugar beet producers, and the stock is used to define the terms of Minn-Dak’s relationship with the producers rather than as an investment. For example, Minn-Dak’s letter to the Division states that “the units of preferred stock entitle the shareholders to sell sugar beets to the Company and determine the minimum and maximum number of acres of sugar beets the member is required or entitled to sell to the Company.
Although the Division frequently issues no-action letters regarding the definition of a security, this letter involves some unusual aspects:
- The common and preferred stock were issued in a registered offering in 1995. Because registration statements are for securities offerings, it is unusual for a company to file a registration statement and later assert that the instrument is not a security.
- As a result of the registered transaction, the company had been filing reports with the SEC since 1995. Most no-action letters addressing whether an instrument is a security are granted before the instrument’s issuance rather than in a “going dark” context.
- Minn-Dak promised the Division that even if it received no-action relief, it would (1) hold a shareholder vote on whether to actually stop reporting, (2) comply with the vote outcome, and (3) not amend a bylaw that requires the company to provide certain financial information to its shareholders. Although not directly related to the U.S. Supreme Court’s tests regarding the definition of a security, these promises might have made it more palatable for the Division to allow the company to go dark after reporting for 17 years.
A copy of the no-action letter can be found at: http://www.sec.gov/divisions/corpfin/cf-noaction/2012/minn-dak092412-2a1.htm.