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November 3, 2016 download PDF
(updated November 18, 2016) On November 1, 2016, the staff of the Securities and Exchange Commission's Division of Corporation Finance issued an interpretive letter concluding that, for purposes of Rule 144 of the Securities Act, the holding period for shares of a publicly traded corporation in an "UP-C structure," received in exchange for partnership units of the tax partnership in the UP-C structure, commences upon the acquisition of the partnership units.1
Businesses that are taxed as partnerships for U.S. federal income tax purposes frequently employ an Umbrella Partnership - C-Corporation ("UP-C") structure when they conduct an initial public offering ("IPO"). In an UP-C structure, rather than offer to public investors a direct investment in the existing tax partnership, a separate entity that is treated as a corporation for U.S. federal income tax purposes offers its common stock to public investors and in turn acquires a corresponding equity interest in the existing tax partnership. As a result, the pre-IPO owners continue to hold their equity interests directly in the tax partnership and public investors hold an indirect equity interest in the tax partnership through the corporation. In the pre-IPO reorganization, the pre-IPO owners are given the right to exchange their partnership units for the corporation's publicly traded shares on a one-to-one basis. The UP-C structures as to which the interpretive guidance was sought are described in greater detail in the request.
Rule 144 provides a "safe harbor" from registration under the Securities Act for public resales of "restricted securities," which are securities first issued in a transaction not involving a public offering. This safe harbor requires these securities to be held for at least six months after they have been acquired and are fully paid for (or for at least one year if the securities are issued by a company that has been public for fewer than 90 days). In limited circumstances, a holder of restricted securities may "tack" the holding period of such restricted securities while they are held by prior holders or of related securities held by such holder for purposes of resales of such restricted securities.
Prior to the SEC staff guidance, practitioners took the position that a new six-month holding period commenced when shares of the publicly traded corporation were acquired in exchange for partnership units of the tax partnership in UP-C structures and that the holder could not "tack" the holding period of the partnership units. Therefore, publicly traded corporations would typically file registration statements to register the issuance of shares in exchange for partnership units or the resale of the shares following the exchange of partnership units.
Impact of SEC Staff Guidance
The SEC staff guidance provides that, for purposes of Rule 144, the holding period for shares received in exchange for partnership units of the tax partnership in an UP-C structure commences upon the acquisition of the partnership units. The SEC staff guidance applies generally to UP-C structures that include the characteristics described in the request. This guidance will permit holders of partnership units in a compliant UP-C structure to sell under Rule 144 the shares received in exchange for partnership units immediately following such exchange (provided the partnership units had been held for at least six months) instead of needing to hold such shares for another six months or having the corporation file a registration statement to cover the issuance or resale of the shares.
On November 17, 2016, the staff of the Division orally confirmed to this firm that the SEC staff guidance also applies to similar Umbrella Partnership Publicly Traded Partnership (UP-PTP) structures. As a result, for purposes of Rule 144, the holding period for publicly traded partnership units received in exchange for operating partnership units in an UP-PTP structure commences upon the acquisition of the operating partnership units. Holders of operating partnership units in a compliant UP-PTP structure are now permitted to sell under Rule 144 the publicly traded partnership units received in exchange for operating partnership units immediately following such exchange (provided the operating partnership units had been held for at least six months).
1 The SEC staff issued the letter in response to a request jointly submitted by three law firms, including Paul, Weiss, Rifkind, Wharton & Garrison LLP. A copy of the letter and the request are available at: https://www.sec.gov/divisions/corpfin/cf-noaction/2016/up-c-110116-144.htm.