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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. In order to properly reflect the potential dilutive effect, such floors must be subject to adjustment for reverse stock splits and other changes to the company's capital structure. 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 Mailto Link Identification Number: 1143
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