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Frequently Asked Questions
  Staff Interpretation Letter 2010-4    
Identification Number 703
This is in response to your correspondence regarding whether a proposed equity financing facility (the “Proposed Facility”) would be aggregated with a prior equity financing facility (the “Prior Facility”) for purposes of the shareholder approval requirements of Listing Rule 5635(d) (the “Rule”). The company develops pharmaceutical products.
According to the information you provided, the company entered into the agreement with Investor One for the Prior Facility (the “Agreement”) approximately five months ago. Under the Prior Facility, the company, at its discretion, was entitled to sell to Investor One, and Investor One was obligated to buy, shares of the company’s common stock from time to time over an eighteen-month period. The number of shares that could be sold under the Prior Facility was limited to 19.9% of the shares outstanding prior to the execution of the Agreement (the “Share Maximum”), and the aggregate dollar value of the shares issued was limited to a specified amount (the “Dollar Maximum”).
You stated that at the time the company entered into the Agreement, it was nearing completion of its Phase 3 trial for a specific product then under development (the “Product”). You stated that the purpose of the Prior Facility was to assure the availability of funding in the event the completion of the Phase 3 trial was delayed. You further stated that the Prior Facility was never intended to be the company’s primary source of funds and that the company planned to undertake an underwritten public common stock offering (the “Public Offering”) to fund further development and potential marketing of the Product following its expected favorable completion of the Phase 3 trial.
Approximately three months after entering into the Agreement, the Phase 3 trial was completed, and the results did not meet the company’s expectations. On the day the results were announced, the company’s stock price declined approximately 75%. You stated that as a consequence of the unexpected results, the company’s capital raising needs and planned use of capital changed drastically. Following the announcement of the results, the company was required to provide comfort to its lenders that a “material adverse change,” which would have constituted an event of default under its secured credit facility, had not occurred. To satisfy the lenders, the company completed two draw-downs under the Prior Facility, the more recent of which was approximately six weeks ago. The proceeds from the draw-downs were used to provide working capital to fund the company’s operations while it worked to redefine its strategy following the negative Phase 3 results. Following the draw-downs, the Agreement automatically terminated because the Share Maximum had been reached. As such, no additional funding was available under the Prior Facility even though the aggregate dollar amount of the draw-downs was only approximately 23% of the Dollar Maximum.  The company believes that the Public Offering is no longer a viable alternative given the negative Phase 3 results.
The company plans to enter into the Proposed Facility in approximately three weeks with Investor Two, who is not affiliated with Investor One. Similar to the Prior Facility, the Proposed Facility would be available over a specified time period and would be limited to 19.9% of the pre-transaction outstanding shares and to an aggregate dollar amount.  The proceeds of the Proposed Facility would be used to effect the company’s redefined strategy. Specifically, the company will use the proceeds to conduct regulatory and clinical activities designed to target the Product towards a specific group of patients for which the Phase 3 data showed potential benefits and to secure a strategic partner or other transaction to allow it to continue to develop the Product. You stated that the need for funds for these purposes only arose following the negative Phase 3 trials.
Following our review of the information you provided, we have determined that the Prior Facility and the Proposed Facility will not be aggregated for purposes of the applicability of the Rule.  We have reached this conclusion because: (i) circumstances have changed significantly since the company entered into the Prior Facility resulting in its having to significantly alter its capital raising plans; (ii) the use of proceeds from the Proposed Facility would be different from that of the Prior Facility; (iii) approximately six months will have passed following the execution of the Agreement before the execution of the agreement for the Proposed Facility; (iv) there are no contingencies between the Prior Facility and the Proposed Facility; and (v) there is no commonality of investors between the facilities. NASDAQ is expressing no opinion on whether shareholder approval is required under any other provision of Listing Rule 5635.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 703
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