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Frequently Asked Questions
  Staff Interpretation Letter 2005-29
Identification Number 876
This is in response to your letters regarding the applicability of The NASDAQ Stock Market’s shareholder approval requirements to issuances of securities contemplated by the company.  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D)(ii) (the “Rules”).
 
According to the information you provided, the company will issue secured promissory notes (the “Series B Notes”) to two Purchasers.  The proceeds from the Series B Notes are expected to be used for working capital purposes and for potential future acquisitions.  No shares of common stock are issuable unless shareholder approval is obtained.
 
The company intends to seek shareholder approval of the conversion of the Series B Notes into Series B Convertible Preferred Stock (the “Series B Preferred”) and warrants exercisable for 25% of the number of shares of common stock issuable upon conversion of the Series B Preferred (collectively, the “Conversion”).  The Series B Preferred will be convertible into shares of common stock at a discount to the market value, although the voting rights will be contractually limited to ensure that the votes that may be cast by the holders of the Series B Preferred do not exceed the number of votes equal to the principal plus interest of the Series B Notes converted into the Series B Preferred, divided by the closing bid price of the shares of common stock immediately preceding the issuance of the Series B Notes.  If shareholder approval is not obtained for the Conversion, no shares of common stock will be issuable.
 
The issuance of the securities in the Conversion could result in one of the Purchasers becoming the largest shareholder in the company, with an ownership position of greater than 20%.
 
Previously, in a private placement, the company sold to the Purchasers shares of Series A Convertible Preferred Stock (the “Series A Preferred”) and warrants to purchase shares of common stock (the “Prior Transaction”).  Although the Series A Preferred contains anti-dilution price adjustment provisions, the aggregate issuance upon conversion is limited to 19.9% of the pre-transaction outstanding shares.  The Series A Warrants are exercisable for no less than market value immediately preceding the execution of the definitive agreement, and they were not exercisable until six months after issuance.  No officer, director, employee, or consultant was a purchaser in the Series A transaction.  The company was not required to obtain, and did not seek, shareholder approval of the Series A financing.
 
You stated that the Series A and Series B financings were not contingent on each other and that the Series B financing was not contemplated at the time of the Series A financing.
 
Further, you stated that the proxy statement relating to the approval of the conversion feature of the Series B Notes would include: (i) a description of the Series B Notes and the proposed conversion feature, including the use of a portion of the proceeds to fund working capital and potential future acquisitions; (ii) a statement that approval of the Series B conversion feature would also constitute approval of any change of control deemed to occur in connection with the Series B financing; and (iii) a statement that shareholder approval of the Series B conversion feature would constitute approval of an issuance of more than 20% of the pre-transaction outstanding shares or voting power for less than the greater of book or market value.
 
The issues you raised in your correspondence relate to: (i) whether the issuance of securities in the Series A financing would be aggregated with the Series B financing for purposes of Listing Rule 4350(i)(1)(D); and (ii) whether the holders of the securities issued in the Series A financing may vote to approve the Conversion.
 
Following our review of the information you submitted, we have concluded that the Series A financing and the Series B financing will not be aggregated for purposes of Listing Rule 4350(i)(1)(D) because: (i) over 11 months  time passed between the two financings; (ii) neither was contingent on the other, and (iii) the Series B financing was not contemplated at the time of the Series A financing.  Therefore, the Rule will not prohibit the holders of any voting securities issued in the Series A transaction from voting those securities in the vote to approve the Conversion.  With regard to Listing Rule 4350(i)(1)(B), you stated that the proxy proposal will include a statement that the approval of the Series B conversion feature would also constitute approval of any change in control deemed to occur in connection with Series B financing.  Accordingly, the company will have complied with the requirements of Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 876
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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