The SEC told bankrupt Hertz it has issues with its plan to sell stock, Chairman Jay Clayton says

Jay Clayton, chairman of U.S. Securities and Exchange Commission

Zach Gibson | Bloomberg | Getty Images

The Securities and Exchange Commission told Hertz, which filed for bankruptcy during the pandemic, that the regulator has issues with the rental car company’s plan to sell stock. 

“In this particular situation we have let the company know that we have comments on their disclosure,” SEC Chairman Jay Clayton said on CNBC’s “Squawk on the Street” on Wednesday. “In most cases when you let a company know that the SEC has comments on their disclosure they do not go forward until those comments are resolved.”

In an effort to get a piece of the market’s rebound from the coronavirus downturn, retail investors are piling into bankrupt companies like car rental company Hertz. With the economic conditions improving suddenly, investors are betting these bankrupt companies are now in better shape than when they limped into Chapter 11. The issue is that equity investors are behind bondholders and other creditors in a bankruptcy and will likely lose their money.

But just this month, Hertz’s stock is up more than 110%. 

Clayton said the company is aware the SEC has issues, but the regulator has not heard back yet from Hertz.

When a company submits a filing to sell a security, the SEC will often submit comments back to the company asking it to improve the disclosure or any irregularities in the filing. Clayton did not elaborate specifically on what the issues were with the Hertz filing.

 “We at the SEC, were are trying to carry out our responsibility in the situations like this as best we can and I expect the other professionals around the situation to carry out their responsibilities and best they can,” Clayton added. 

Hertz said it would seek to sell $500 million in stock in a securities filing with the SEC on Monday. In quite an unusual disclosure in that filing, Hertz told potential investors that they would likely lose their money.

“Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels,” the filing said.

Shares of Hertz rallied nearly 12% on Wednesday.  

Trading activity on names like Hertz, has spiked on millennial favored stock trading app Robinhood in the days following the bankruptcy filings, according to Robintrack, which tracks Robinhood account activity but is not affiliated with the company.

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