FAQ Real Estate Investment Trust Morrison Foerster | 11 What is a limited partnership roll-up transaction? In the late 1980s, the management of a number of finite life entities, whether public or private, decided to convert their entities into, or to cause interests in such entities to be exchanged for securities of, publicly traded perpetual life REITs. Typically, these transactions involved a number of these entities being “rolled up” into one publicly traded REIT. The SEC saw a number of conflicts and abuses arising from this process. In response, the SEC issued rules on “roll-up transactions,” and, in 1993, Congress enacted Section 14(h) and related provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Financial Industry Regulatory Authority (“FINRA”) also issued rules governing the responsibilities of broker-dealers in roll-up transactions. In addition, the Statement of Policy Regarding Real Estate Investment Trusts (the “NASAA REIT SOP”) adopted by the North American State Securities Administrators Association (“NASAA”) included restrictions regarding roll-up transactions in the NASAA REIT SOP when it was initially adopted in 1993. Federal Roll-Up Rules Section 14(h)(4) of the Exchange Act defines a limited partnership roll-up transaction as a transaction involving the combination or reorganization of one or more limited partnerships, directly or indirectly, in which, among other things, investors in any of the limited partnerships involved in the transaction are subject to a significant adverse change with respect to voting rights, the term of existence of the entity, management compensation, or investment objectives; and any of such investors are not provided an option to receive or retain a security under substantially the same terms and conditions as the original issue. Section 14(h)(5) of the Exchange Act provides that the following transactions are not “limited partnership roll-up transactions”: ▪ The transaction only involves a limited partnership that retains cash available for distribution and reinvestment in accordance with the SEC requirements; ▪ In such transaction, the interests of the limited partners are redeemed in accordance with a preexisting agreement for securities in a company identified at the time of the formation of the original limited partnership; ▪ The securities to be issued or exchanged in the transaction are not required to be, and are not, registered under the Securities Act of 1933, as amended (the “Securities Act”); ▪ The issuers are not required to register or report under the Exchange Act before or after the transaction; ▪ Unless otherwise provided in the Exchange Act, the transaction is approved by not less than two thirds of the outstanding shares of each of the participating limited partnerships and the existing general partners will receive only compensation set forth in the preexisting limited partnership agreements; and ▪ Unless otherwise provided in the Exchange Act, the securities were reported and regularly traded not less than 12 months before the securities offered to investors and the securities issued to investors do not exceed 20% of the total outstanding securities of the limited partnership. See also Item 901 of Regulation S-K. If the transaction is a limited partnership roll-up not entitled to an exemption from registration, in addition to the requirements of Form S-11 and SEC Industry Guide 5 (see “What is Form S-11?” and “What is Industry Guide 5?” above), Section 14(h) of the Exchange Act and Items 902 through 915 of Regulation S-K will require significant additional disclosure on an overall and per partnership basis, addressing changes in the business plan, voting rights, form of ownership interest, the compensation of the general partner or another entity from the original limited partnership, additional risk factors, conflicts of interest of the general partner and statements as to the fairness of the proposed roll-up transaction to the investors, including whether there are fairness opinions, explanations of the allocation of the roll-up consideration (on a general and per partnership basis), federal income tax consequences and pro forma financial
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