Section 1145 Exemption
The Section 1145 Exemption is a Bankruptcy Code securities-law exemption that can permit specified securities issued under a Chapter 11 plan to be offered or sold without Securities Act Section 5 registration and certain state or local registration requirements.
How it works
Section 1145(a) applies only to transactions that fit its statutory conditions. A principal route covers securities of the debtor, a participating affiliate or a successor offered or sold under a plan in exchange for claims, interests or administrative-expense claims, or principally in that exchange and partly for cash or property. Section 1145(b) contains a specialized underwriter definition that can limit resale treatment for specified holders.
The exemption is transaction-specific
Section 1145 does not exempt an issuer merely because it is in Chapter 11. The offer or sale must fit a transaction Congress identified.
Claims-for-securities exchanges are a core use
The statute expressly covers qualifying securities issued under a plan in exchange for claims, interests or administrative-expense claims.
Some mixed consideration can qualify
Section 1145(a)(1)(B) can cover an exchange principally for a qualifying claim or interest and partly for cash or property.
Underwriter status remains important
Section 1145(b) defines specified entities as underwriters for this bankruptcy exemption, which can affect resale treatment.
Worked example: exchange vs. new-money purchase
A creditor receives 8 million shares for surrendering its claim and separately buys 2 million shares for fresh cash. The two legs should not automatically be treated as one exempt transaction.
Why it matters for liquidity
Registration status and resale restrictions can affect how quickly creditors monetize equity and therefore the economic value of the recovery.
Common mistakes
Assuming all Plan Securities are Section 1145 securities; ignoring underwriter status; treating a pure cash purchase as a claims exchange; and assuming Chapter 11 eliminates securities-law analysis.
Example
A confirmed plan exchanges unsecured bond claims for new common shares in the Reorganized Debtor. If the exchange fits Section 1145(a)(1) and the recipient is not an underwriter under Section 1145(b), ordinary Securities Act registration may not be required.
Example
A confirmed plan exchanges unsecured bond claims for new common shares in the Reorganized Debtor. If the exchange fits Section 1145(a)(1) and the recipient is not an underwriter under Section 1145(b), ordinary Securities Act registration may not be required.
Professional note
Do not use “bankruptcy exempt” as shorthand for every plan security. Rights offerings funded with new cash, backstop purchases, affiliate transactions and underwriter status can require separate securities-law analysis.
Related terms
- Restricted Securities
Restricted securities are securities acquired in specified unregistered transactions that cannot be freely resold into the public market unless the resale is registered or an exemption is available.
- Section 4(a)(2)
Section 4(a)(2) of the Securities Act exempts transactions by an issuer that do not involve a public offering from Securities Act registration.
- Plan Distribution
A Plan Distribution is cash, securities, property or other consideration delivered to a creditor or interest holder under the treatment and timing provisions of a confirmed Chapter 11 plan.
- Plan Securities
Plan Securities are debt, equity, warrants or other securities issued or distributed as part of a Chapter 11 plan to implement the restructuring, fund the plan or provide consideration to creditors and interest holders.
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