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Section 3(a)(10) Deals Spark Suits, SEC Inquiries

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In the shadow of the Great Recession, Ironridge Global Partners pioneered a micro-cap financing mechanism in which investors buy an issuer’s delinquent or current liabilities, sue the company, and then retire the payables in return for stock. The strategy, which is effected under acourt approved, pre-arranged settlement pursuant to Section 3(a)(10) of the Securities Act, has begun to gain traction in the market among more investors such as IBC Funds and Southridge affiliate ASC Recap. The regulation allows companies to issue unregistered but free trading shares for “bona fide outstanding claims,” among other events. Issuers are often willing participants in the arrangements. That differs significantly from conventional private placements involving unregistered securities, in which investors typically must wait for the filing of an effective registration statement or six months before they can begin trading the shares.