11 U.S.C. Section 1145 - Application of Securities Laws

What Is Section 1145?

Section 1145 exempts certain securities issuances under confirmed Chapter 11 plans from the registration requirements of Section 5 of the Securities Act of 1933 and from comparable state "blue sky" registration regimes. Without this exemption, every debt-for-equity swap and every distribution of new securities to creditors under a confirmed plan would require either an SEC registration statement (potentially a years-long process) or reliance on a transactional exemption like Section 4(a)(2) or Regulation D - none of which fits comfortably with the public, court-supervised, mass-creditor distribution model of Chapter 11.

By exempting plan-issued securities, Section 1145 enables reorganized debtors to emerge from Chapter 11 with restructured capital structures - new common stock to creditors, new notes, warrants, or rights - distributed to large creditor classes that would otherwise be ineligible for non-registration channels.

The Three Exemption Categories: Section 1145(a)

Section 1145(a) provides that "section 5 of the Securities Act of 1933 and any State or local law requiring registration for offer or sale of a security or registration or licensing of an issuer of, underwriter of, or broker or dealer in, a security do not apply to" three categories of issuance:

• (a)(1)(A) and (B): The offer or sale under a plan of a security of the debtor, of an affiliate participating in a joint plan with the debtor, or of a successor to the debtor under the plan - principally in exchange for a claim against, an interest in, or a claim for an administrative expense in the case concerning, the debtor or such affiliate; or principally in such exchange and partly for cash or property;
• (a)(2): The offer of a security through any warrant, option, right to subscribe, or conversion privilege that was sold in the manner specified in paragraph (1), or the sale of a security upon the exercise of such a warrant, option, right, or privilege;
• (a)(3): The offer or sale, other than under a plan, of a security of an issuer other than the debtor or an affiliate, if such security was owned by the debtor on the date of the filing of the petition (i.e., resale of portfolio securities held by the debtor at filing, subject to additional conditions specified in the subsection).

The Underwriter Carve-Out: Section 1145(b)

Section 1145(b) carves underwriters out of the exemption: persons who acquire plan securities with a view to distribution are "underwriters" within the meaning of Section 2(a)(11) of the Securities Act and cannot resell free of registration. The provision defines an "underwriter" for purposes of Section 1145 to include four categories:

• A person who purchases a claim against, interest in, or claim for an administrative expense in the case concerning, the debtor, if such purchase is with a view to distribution of any security received in exchange for such a claim or interest;
• A person who offers to sell securities offered or sold under the plan for the holders of such securities;
• A person who offers to buy securities offered or sold under the plan from the holders of such securities, if such offer to buy is with a view to distribution of such securities under an agreement made in connection with the plan, with the consummation of the plan, or with the offer or sale of securities under the plan; or
• A person who is an "issuer," as used in such section 2(a)(11), with respect to such securities (typically, a 10%+ holder or other affiliate of the issuer).

The "Ordinary Trading Transactions" Safe Harbor

Section 1145(b)(1) contains an important softening: a person is not deemed an underwriter "with respect to an agreement that provides only for - (A) the matching or combining of fractional interests in securities offered or sold under the plan into whole interests; or (B) the purchase or sale of such fractional interests from or to entities receiving such fractional interests under the plan." More broadly, the SEC and the courts have long recognized that securities received by a creditor under a Chapter 1145(a)(1) exemption may be resold in "ordinary trading transactions" without registering or qualifying as an underwriter - meaning isolated, non-distribution sales through the public markets after the plan effective date are permitted.

The "ordinary trading transactions" standard largely tracks SEC No-Action Letter guidance interpreting the predecessor Bankruptcy Act provisions and has been carried into modern practice through SEC staff positions and judicial decisions. Practically, creditors that receive plan securities can resell them through ordinary brokerage transactions, while affiliates and persons holding 10%+ blocks remain subject to additional resale restrictions (typically tracked through Rule 144 framework, modified by the 1145 context).

State Blue-Sky Preemption

Section 1145(a) expressly preempts state blue-sky registration as well as federal Section 5 registration. State antifraud provisions (state-law equivalents of Section 10(b) and Rule 10b-5) are not preempted; the exemption is from registration only, not from antifraud liability. Plan disclosure statements remain subject to the Section 1125 disclosure requirements (and to potential 10b-5 liability if they contain material misstatements), and the federal/state antifraud provisions continue to apply to communications and post-distribution conduct.

Common Procedural Postures

• Plan-confirmation findings under Section 1129 that the plan satisfies the Section 1145 prerequisites (typically a "Section 1145 finding" in the confirmation order);
• Stock-exchange listing applications for reorganized debtor common stock, where the listing exchange requires Section 1145 documentation;
• Transfer-agent and depositary-trust onboarding for new plan securities, often requiring Section 1145 opinion letters;
• Rights-offering structures combining 1145 exemption (for the rights distribution) with private-placement exemptions (for the backstop commitments) - a common tool in middle-market and large Chapter 11 cases;
• Resale opinions for distressed-debt funds that acquired claims pre-confirmation and need to determine their underwriter status post-distribution.

Practical Significance

Section 1145 is the legal foundation enabling debt-for-equity recapitalizations in Chapter 11. Without it, the largest restructurings of recent decades would have been impossible at the speed and scale at which they occurred. The provision reflects a deliberate congressional accommodation of federal securities law to federal bankruptcy law: the protective purpose of Securities Act registration (informing investors about the issuer) is replaced in the Chapter 11 context by the parallel protective regime of Section 1125's disclosure-statement requirement, plus the court-supervised confirmation process. Investors receiving plan securities are protected through court-approved disclosure and confirmation findings, not through pre-distribution SEC review.

Related Bankruptcy Code Sections

• Section 1125 - Postpetition disclosure and solicitation
• Section 1129 - Plan confirmation requirements
• Section 1141 - Effect of confirmation
• Section 1123 - Plan contents (debt-for-equity swap, new-securities provisions)
• Section 364(f) - Exemption from securities laws for certain DIP-financing transactions