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  Staff Interpretation Letter 2009-17
Identification Number 735
This is in response to your correspondence requesting: (i) an exemption under Listing Rule 5635(f) from NASDAQ’s shareholder approval requirements and (ii) an exemption from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), with respect to a proposed transaction (“Proposed Transaction”).  The company is a provider of investment banking and brokerage services.
According to the information you provided, the company proposes to issue to multiple investors (the “Investors”) preferred stock convertible into shares of the company’s common stock and warrants exercisable for additional common shares. Approximately 90% of the securities would be purchased by persons or entities not currently affiliated with the company. The remainder would be purchased by officers, directors, or employees of the company (the “Insiders”) who would be participating in the Proposed Transaction as a condition imposed by the lead outside investor and on the same terms as all other Investors. The purchase price would be a price less than the greater of book or market value, and the number of common shares that could be issued upon conversion and exercise exceeds 20% of the pre-transaction outstanding shares.
As such, without the requested exceptions, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance would result in a change of control; (ii) Listing Rule 5635(c) because the issuance at a discount to the Insiders would be considered equity compensation; and (iii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would effectively have greater voting rights than the common shares as, although it would vote on an as-converted basis, it would convert at a discount to the market value.
According to the information you submitted, the severity of the company’s current financial situation is largely a result of litigation brought against it in connection with the activities of a former client and a former employee of the company (the “Litigation”). The company has spent several million dollars in legal fees over the past year in connection with the Litigation and recently entered into a tentative settlement with the litigants for an amount equal to approximately 75% of the amount of its most recently reported stockholders’ equity. The company believes that a binding settlement agreement cannot be reached unless the company has access to the funds that would be raised in the Proposed Transaction. The proceeds from the Proposed Transaction would be used to provide funds for the settlement and to inject funds into the company’s operations.
You have also indicated that the company is operating in a challenging economic environment. The financial impact of these problems has made it difficult for the company’s broker-dealer subsidiary, which comprises substantially all of the company’s revenues, to remain in compliance with the FINRA minimum net capital requirements. Non-compliance with these requirements could result in FINRA forcing the company to cease operations.
While the company has maintained operations over the past few months through a series of bridge financings, it believes that the Proposed Transaction will provide sufficient funding for the settlement of the litigation and its continued operations. The company’s management believes that without the Proposed Transaction, the company may be forced to dissolve in the near future, and the stockholders likely would receive nothing in such dissolution. The company has unsuccessfully explored alternative financings including structures that would satisfy the shareholder approval requirements.
With respect to the participation of the Insiders, you stated that the lead investor is not willing to invest unless such Insiders also participate and that such a refusal would likely preclude a successful consummation of the Proposed Transaction. The terms of the transaction were negotiated with the lead investor, and the Insiders are required to accept the same terms. With respect to the voting power of the preferred stock, you stated that all of the terms of the securities were heavily negotiated with the lead investor and that the company believes that the Proposed Transaction represents the best available option for achieving value for its stockholders and, thus, is in the best interest of stockholders.
In the Proposed Transaction, the company expects to raise sufficient capital to continue operating. The company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement. In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with that requirement.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 735
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