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Frequently Asked Questions
  Staff Interpretation Letter 2014-4
Identification Number 1130
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from Nasdaq’s shareholder approval requirements with respect to the proposed issuance of securities (the “Proposed Transaction”).
 
You have stated that since its inception, the Company has recorded net losses in every fiscal year but one. Additionally, in the most recent annual report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern. You have stated that, without the Proposed Transaction, the Company has only enough cash to fund operations for the next four weeks.
 
In the Proposed Transaction, the Company will issue units consisting of common stock and convertible preferred stock (the “Preferred Stock”). The purchase price would be at a discount to the current market value of the units (when such value is determined by adding the current market values of the common stock shares issued as part of the units and common stock shares to be issued upon a future conversion of the Preferred Stock shares issued as part of the units).
 
You stated that investors in the Proposed Transaction would include officers and directors, as well as current and new shareholders of the Company (the “Proposed Investors”). Following completion of the Proposed Transaction and subject to conversion of the Preferred Stock, the Proposed Investors would own greater than 50% of the outstanding common stock shares, with the largest shareholder owning more than 20% of the outstanding common stock shares. The common stock shares issued or issuable as a result of the Proposed Transaction will represent more than 20% of the pre-transaction total number of outstanding common stock shares.
 
You stated that the Company has pursued multiple alternative financing strategies for over one year, including the potential sale of the Company, and that there are no realistic alternatives to the Proposed Transaction. You stated that if the Proposed Transaction is not completed in the very near term, the Company would be forced to cease operations and terminate most employees, and that the Company’s assets would be liquidated through an assignment for the benefit of creditors or through a bankruptcy process. You stated that there can be no assurance that any liquidation proceeds would remain for distribution to the Company’s shareholders. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.
 
Without the requested exception, shareholder approval may be required pursuant to each of the following rules: Listing Rule 5635(b), because one of the Proposed Investors would own more than 20% of the shares of common stock outstanding upon completion of the Proposed Transaction; Listing Rule 5635(c), because the issuance at a discount of common stock shares to the officers and directors constitutes equity compensation; and Listing Rule 5635(d), because common stock shares issued or issuable as a result of the Proposed Transaction at a price less than the greater of book or market value would represent more than 20% of the pre-transaction number of outstanding common stock shares.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid the ceasing of operations. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration to be received) and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
 
Publication Date*: 10/7/2014 Mailto Link Identification Number: 1130
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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