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Libraries:   Frequently Asked Questions
Filters:   Shareholder Approval; Private Placements - 20% Limit, Private Placements - Aggregation, Private Placements - General/Applicability, Private Placements - Pricing
 
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Frequently Asked Questions
  If a company has two (or more) classes of common stock, how is the potential issuance calculated under the shareholder approval rules?    
Identification Number 288
Generally, the potential issuance is calculated as a percentage of the aggregate outstanding shares of all classes of common stock. For example, if a company has two classes of common stock, Class A and Class B, and plans to issue shares of Class A in a private placement, the percentage issuance would be calculated by dividing: (i) the number of Class A shares that could be issued; by (ii) the number of pre-transaction outstanding shares of both classes combined. This calculation generally applies even if only one of the classes is listed on Nasdaq.
 
Publication Date*: 7/31/2012 Identification Number: 288 Mailto Link
Frequently Asked Questions
  What is a "penny warrant" and may a Nasdaq-listed company issue "penny warrants"?    
Identification Number 280
Nasdaq closely examines any transaction that includes warrants that are exercisable for little or no consideration, sometimes called "penny warrants". Such a transaction may provide little or no economic benefit for the company and be highly dilutive to public shareholders.
 
As such, Nasdaq may exercise its discretionary authority under Listing Rule 5101 to object to such a transaction, even when shareholder approval is not required. Any Nasdaq-listed company considering a transaction involving "penny warrants" or other deeply discounted securities is encouraged to contact its Listing Qualifications analyst by phone at +1 301 978 8008 to discuss the transaction prior to entering into a definitive agreement.  
 
Publication Date*: 7/31/2012 Identification Number: 280 Mailto Link
Frequently Asked Questions
  May a company utilize a generic proxy proposal to obtain shareholder approval prior to entering into a transaction?    
Identification Number 286
If shareholder approval of a transaction is required, then the proposal in the proxy should give specific details on the nature of the transaction (e.g., the number of shares offered, type of security being issued, the names of the investors and the purchase price).

If the proposal in the proxy is for a non-specific transaction, Nasdaq will consider whether the shareholders have sufficient information to make a meaningful decision. For example, proposals that ask for shareholder approval to issue more than 20% of the company's total shares outstanding or total voting power for future unspecified acquisitions would not be acceptable. Similarly, a generic proxy proposal would not suffice for shares issued as equity compensation.
 
However, if the company seeks shareholder approval for a private placement, but has not yet identified the investors or arrived at specific terms, Nasdaq may consider the proposal sufficient for the purposes of compliance with the shareholder approval requirements of Listing Rule 5635(d) if the company discloses:
    • The maximum number of shares to be issued;
    • The maximum dollar amount of the issuance;
    • The maximum amount of discount to the market;
    • The purpose of the transaction; and
    • The time frame to complete the transaction - generally, within three months.
In addition, if the generic proposal relates to a potential change of control, which requires shareholder approval under Listing Rule 5635(b), the proxy must also identify the potential new controlling shareholder.
 
Publication Date*: 7/31/2012 Identification Number: 286 Mailto Link
Frequently Asked Questions
  Is shareholder approval required for share issuances made pursuant to a court-ordered reorganization under federal or comparable non-U.S. bankruptcy laws?    
Identification Number 287
 
Publication Date*: 7/31/2012 Identification Number: 287 Mailto Link
Frequently Asked Questions
  Can an investor in a Nasdaq-listed company obtain the right to nominate or designate directors to the company's board?    
Identification Number 292
A Nasdaq-listed company may allow an investor to nominate or designate directors to its board. However, under Listing Rule 5640 (the Voting Rights Rule), the voting rights of existing shareholders cannot be disparately reduced through any corporate action. Thus, should a company allow an investor to nominate or designate directors at a level which is disproportionately greater than its ownership position, Nasdaq would view that corporate action as disparately reducing the voting power of the other shareholders.
 
The investor's ownership position should generally be consistent with the voting power held by the investor as a percentage of the overall votes entitled to be cast in the election of directors. For example, if the investor has a 30% ownership interest in the company, it could nominate or designate 30% of the members of the board. The number of directors can be rounded up to next whole number. However, rounding up would not be acceptable where the investor has less than a 50% ownership position but rounding up would allow the investor to nominate or designate a majority of the board. Please note that in evaluating voting power, Nasdaq will generally consider votes attributable to otherwise non-voting securities that are immediately convertible into voting securities at the investor's option, unless the investor must make additional payments to receive the voting security (such as with warrants).
 
The number of directors that can be nominated or designated is determined based on the ownership position at the time that the directors are initially appointed. Any agreement for the nomination or designation of directors must take into account subsequent reductions in the investor's voting power. As such, if the investor’s ownership position materially declines, whether through sales by the investor or additional issuances by the company, the investor's nomination or designation rights should be concomitantly reduced (this is sometimes called a "step-down"). In addition, the agreement with respect to directors should include a minimum level below which the investor would lose these rights. For example, Nasdaq has allowed agreements which provided that if the investor's ownership position were to fall below 5%, it would lose its director rights. Nasdaq would not require that a director be forced to resign intra-term as a result of a change to the investor's ownership.
 
In limited circumstances, such as when director rights derive from a substantial investment in the debt or non-voting securities of a troubled company, it may be appropriate to afford voting rights to the investor. In such cases, Nasdaq will generally evaluate such investments by comparing the amount of the investment to the company's market value.
 
Publication Date*: 2/2/2016 Identification Number: 292 Mailto Link
Frequently Asked Questions
  What is the effect of shareholder approval on a transaction, which violates Nasdaq's voting rights rule?    
Identification Number 296
Shareholders may not vote to disenfranchise themselves or to disparately reduce their voting rights. Thus, shareholder approval for the transaction that led to a violation of the voting rights rule will not remedy the violation.
 
Publication Date*: 7/31/2012 Identification Number: 296 Mailto Link
Frequently Asked Questions
  How can I find the appropriate consolidated closing bid price?    
Identification Number 272
For purposes of determining "market value" under the shareholder approval requirements, Nasdaq looks to the consolidated closing bid price as of 4 PM Eastern time. To get this information, Nasdaq issuers may call their representative at Nasdaq's Market Intelligence Desk. Issuers can find the telephone number for their representative by logging into Nasdaq Online and clicking on "My MID". Others may call the Market Intelligence Desk at +1 646 344 7800 or Nasdaq MarketWatch at +1 301 978 8500 or +1 800 537 3929. When requesting this information, please be sure to specify the consolidated closing bid price.
 
Publication Date*: 7/31/2012 Identification Number: 272 Mailto Link
Frequently Asked Questions
  For purposes of Nasdaq's shareholder approval rules, what is "book value"?    
Identification Number 273
"Book value" is the stockholders' equity from the company's most recent public filing with the SEC. Book value per share is the stockholders' equity divided by the total shares outstanding. Goodwill and other intangible assets are included in a company's book value.
 
Publication Date*: 7/31/2012 Identification Number: 273 Mailto Link
Frequently Asked Questions
  May a book value be used which is more recent than that reflected in the last SEC periodic filing?    
Identification Number 274
Yes. A more recent book value may be used if the company files a document with the SEC, such as a Form 8-K or 6-K, reflecting the company's stockholders' equity and shares outstanding to allow for the calculation of an updated book value.
 
Publication Date*: 7/31/2012 Identification Number: 274 Mailto Link
Frequently Asked Questions
  How does Nasdaq determine whether securities that are convertible into or exercisable for common stock are issued at a discount to market value?    
Identification Number 276
To determine whether securities that are convertible into or exercisable for common stock are issued at a discount to market value, the conversion or exercise price is compared to the market value of the common stock. Market value is the consolidated closing bid price immediately before the company enters into a binding agreement with the investor. If the conversion or exercise price is less than the market value, then the issuance is at a discount.
 
A potential adjustment to the number of shares or conversion price due to a change to the company’s capital structure, such as due to a stock split or extraordinary dividend, does not affect the determination of whether a transaction is at a discount to market value. However, if the company may reduce the conversion price, issue additional shares, or make a cash payment to the investors as a result of subsequent transactions or events, including "make whole" payments, the calculation of the conversion price will presume that the maximum amount of any such adjustments will be made. Similarly, potential cash payments to the security holders at the time of conversion, other than for accrued interest, are deducted from the value of the note and the resulting amount would be divided by the number of shares issuable when determining the effective conversion price. An example of such cash payments is payments for “foregone interest” that would have been earned by the investors after the time of conversion.
 
Publication Date*: 6/4/2014 Identification Number: 276 Mailto Link
Frequently Asked Questions
  Does a flexible settlement provision in a convertible instrument change the way Nasdaq determines whether securities that are convertible into common stock are issued at a discount to market value?
Identification Number 1136
No. A flexible settlement provision in a convertible instrument allows the issuer to settle conversions through payment or delivery of cash, shares of the company’s common stock, or a combination of cash and shares. A convertible instrument with a flexible settlement provision that affects only the form of the settlement, without changing the conversion price of the instrument, will be treated under Rule 5635(d) the same as a convertible instrument with physical settlement only. See also FAQ# 276.
 
Publication Date*: 3/2/2015 Identification Number: 1136 Mailto Link
Frequently Asked Questions
  What is the effect of an anti-dilution provision for purposes of determining whether an issuance is at a discount?    
Identification Number 277
The presence of any provision that could cause the conversion or exercise price to be reduced to below the market value immediately before the entering into of the binding agreement will cause the transaction to be viewed as a discounted issuance. These provisions include anti-dilution provisions (except for stock splits or similar changes to the company's capitalization) or provisions allowing the company to voluntarily reduce the conversion or exercise price.
 
Publication Date*: 7/31/2012 Identification Number: 277 Mailto Link
Frequently Asked Questions
  When an issuance includes common stock (or the equivalent) issued at a discount and warrants, are the shares underlying the warrants aggregated with the common stock portion?    
Identification Number 278
Generally, shares underlying warrants are aggregated with an accompanying issuance of common stock (or the equivalent) at a discount unless the warrants: (i) are not exercisable for at least six months following closing, and (ii) are not exercisable for less than the greater of book and market value. Please refer to the Staff Interpretative Letters for additional guidance on this issue.
 
Publication Date*: 7/31/2012 Identification Number: 278 Mailto Link
Frequently Asked Questions
  When an issuance includes common stock (or the equivalent) and warrants, is it necessary to attribute a value to warrants for purposes of determining whether the common stock portion is at a discount?    
Identification Number 279
Yes. A value of $0.125, plus any amount that the warrant is currently in the money or could be in the money due to adjustments, such as for price protection, is attributed to each warrant. For example, consider a company with a market value of common stock of $10 per share. In the transaction, the company will issue units consisting of one share of common stock and one warrant exercisable for one share at $10 per share. Nasdaq will consider the common stock to be issued at a discount unless the issuance price of the units is at least $10.125. Increasing the exercise price of the warrants by $0.125 does not satisfy this pricing requirement. If, in the above example, a company issues a convertible instrument rather than common stock, Nasdaq will consider the common stock issuable in such transaction to be at market price if the conversion price is at least $10.125 and warrant exercise price is at least $10.
 
This analysis is without regard to whether the warrants are immediately exercisable because delay in the exercisability of the warrant does not render it without value.
 
Publication Date*: 8/21/2017 Identification Number: 279 Mailto Link
Frequently Asked Questions
  Does a sale of securities in a transaction (other than a public offering) at a discount to the market value to officers, directors, employees, or consultants require shareholder approval under Listing Rule 5635(c)?  
Identification Number 275
Yes. The issuance of common stock (or equivalents) or securities convertible into or exercisable for common stock to officers, directors, employees, or consultants at a price less than the market value of the stock is considered a form of "equity compensation" and requires shareholder approval unless the issuance is part of a public offering (as described in IM-5635-3). For this purpose, market value is the closing bid price immediately preceding the time the company enters into a binding agreement to issue the securities.
 
Issuances to an entity controlled by an officer, director, employee, or consultant of the listed company may also be considered equity compensation under certain circumstances, such as where the issuance would be accounted for under Generally Accepted Accounting Principles as equity compensation or result in the disclosure of compensation under the applicable provisions of Regulation S-K.
 
Note that this provision also applies to limited partnerships, which are required by Rule 5615(a)(4)(H) to obtain the same approval for equity compensation as would be required under Rule 5635(c) and IM-5635-1.
 
A company considering an issuance to an entity controlled by an officer, director, employee, or consultant is encouraged to contact its Listing Qualifications analyst by phone at +1 301 978 8008 to discuss the transaction prior to entering into a definitive agreement.
 
Publication Date*: 6/18/2013 Identification Number: 275 Mailto Link
Frequently Asked Questions
  How is the percentage of shares of common stock to be issued in a transaction calculated?    
Identification Number 182
The percentage of shares of common stock to be issued in a transaction is calculated using the following formula:
 
Maximum Potential Issuance of Shares of Common Stock
Pre-transaction Issued and Outstanding Shares of Common Stock
 
To correctly calculate the percentage of shares to be issued, the numerator of this equation must contain all securities initially issued or potentially issuable or potentially exercisable or convertible into shares or common stock as a result of the transaction (e.g., earn-out clauses, penalty provisions, equity compensation awards assumed or in assumed plans, etc.).
 
To correctly determine the denominator, the company should use only issued and outstanding shares. If the company has multiple classes of common stock, all shares should be added together. However, the denominator should not assume the conversion or exercise of any options, warrants or other convertible securities.
 
Publication Date*: 7/31/2012 Identification Number: 182 Mailto Link
Frequently Asked Questions
  What factors does Nasdaq consider when determining whether to aggregate the shares issued in separate transactions for purposes of determining whether the threshold for shareholder approval has been triggered?    
Identification Number 283
In deciding whether to aggregate transactions to determine whether shareholder approval is required, Nasdaq will consider whether the company is engaging in a stand-alone transaction or a series of issuances.

In general, Nasdaq will consider the following factors in making this determination:
    • Timing of the issuances - Timing alone is not necessarily a determining factor, and there is no definitive time period as to whether transactions are aggregated. Generally, if there are no other linkage factors present, transactions more than six months apart would not be aggregated;
    • Initiation of the subsequent transaction or transactions - At the time of the first transaction, was the company already planning the subsequent transaction? Did it already expect that it would have to raise additional capital?;
    • Commonality of investors - Transactions with common investors are more likely to be aggregated. In addition, the time period over which transactions would be aggregated, may be extended when there are common investors;
    • Existence of any contingencies between the issuances or transactions - Are the sales contingent upon one another? For example, a company may be required to obtain an equity line of credit before completing a discounted private placement;
    • Commonality as to the use of the proceeds/Same plan of financing - Transactions may be aggregated if they are used for the same purpose or plan of financing; and
    • Timing of the board of directors approval.
When transactions are aggregated, the calculation total shares outstanding or total voting power outstanding is made based on the shares and votes outstanding prior to the closing of the first issuance.
 
Publication Date*: 7/31/2012 Identification Number: 283 Mailto Link
Frequently Asked Questions
  Do Nasdaq’s listing rules limit or restrict the issuance of warrants that provide for cashless exercise and/or exchanges of the warrant for stock?
Identification Number 1143
Listed companies may issue warrants that allow the holder, under certain circumstances, to exercise or exchange them for stock in a cashless transaction.   Nasdaq’s Listing Rules do not explicitly prohibit or restrict the issuance of warrants with this kind of cashless exercise/exchange provision.   However, these warrants may be Future Priced Securities, as defined in Rule IM-5635-4.  Typically,  a warrant that is a Future Priced Security would allow the warrant holder to surrender an “out-of-the-money” warrant in exchange for a fixed dollar value of shares (usually calculated through a formula) with the actual number of shares determined based on the share price at the time of surrender.  This would result in the issuance of an increasing number of shares as the share price declines.   Depending on the circumstances, Nasdaq may determine that the issuance of securities with this provision raises public interest concerns under the Rule 5100 Series.

Warrants may be structured to limit or mitigate these concerns through features that may limit the dilutive effect of the transaction. Such features may provide incentives to the investor to hold the security for a longer time period or limit the number of shares into which the Future Priced Security may be converted.  
When reviewing transactions that include these types of securities for compliance with the Listing Rules, including whether they raise public interest concerns, Nasdaq generally assumes that conversion of the warrants will result in the maximum possible dilution over the shortest period of time. In addition, in determining whether the issuance of a warrant that is a Future Priced Security raises public interest concerns, Nasdaq staff will consider among other things: (1) the business purpose of the transaction; (2) the amount to be raised in the transaction relative to the Company's existing capital structure; (3) the dilutive effect of the transaction on the existing shareholders; (4) the risk undertaken by the Future Priced Security investor(s); (5) the relationship between the investor(s) and the Company; (6) whether the transaction was preceded by other similar transactions;  (7) whether the transaction is consistent with the just and equitable principles of trade; and (8) whether the warrant includes features to limit the potential dilutive effect of its conversion or exercise, including floors on the conversion or exercise price.  Nasdaq encourages any company considering issuing a warrant that provides for cashless exercise and/or exchanges of the warrant for stock to review IM-5635-4 and to consult with the Listing Qualifications Department at (301) 978-8008.
Publication Date*: 2/11/2016 Identification Number: 1143 Mailto Link
Frequently Asked Questions
  For purposes of Nasdaq's shareholder approval rules, what is "market value"?    
Identification Number 271
As set forth in Listing Rule 5005(a)(22), "market value" means the consolidated closing bid price multiplied by the measure to be valued. For purposes of the shareholder approval requirements, "market value" is the consolidated closing bid price per share immediately preceding the entering into of the binding agreement to issue the securities. If the transaction is entered into during market hours, before the close of the regular session at 4 PM Eastern Time, the previous trading day's consolidated closing bid price is used. If the transaction is entered into after the close of the regular session, then that day's consolidated closing bid price is used. Please note that the Nasdaq Official Closing Price may differ from the consolidated closing bid price and, therefore, should not be used to determine market value for this purpose. In addition, an average price over any period of time is not acceptable.
 
Publication Date*: 7/31/2012 Identification Number: 271 Mailto Link
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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