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Frequently Asked Questions
  Staff Interpretation Letter 2008-3
Identification Number 748
This is in response to your correspondence regarding the applicability of the shareholder approval requirements to a proposed issuance of securities by the company in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(A) and 4350(i)(1)(B) (the “Rules”).
 
According to the information you submitted, in the Transaction the company would issue shares of common stock and warrants to the Investor at market value.  In the aggregate, the number of shares that would be issued, including those that could be issued upon the exercise of the warrants, would equal approximately 5% of the company’s pre-transaction outstanding shares.  The proceeds of the Transaction would be used to fund a strategic acquisition (the “Acquisition”).  As a result of prior transactions, the Investor currently beneficially owns 19.32% of the company’s outstanding common stock.  The company’s board of directors includes two members who are affiliated with the Investor.
 
The purchase price of the common stock and the exercise price of the warrants will equal the closing bid price immediately prior to entering into the binding agreement, and the purchase price of the warrants will be $0.125 for each share of common stock subject to the warrants.  You stated that the aggregate number of shares to be issued in the Transaction and the Acquisition would be significantly less than 20% of the shares outstanding before the Transaction.
 
Approximately three years ago, the company entered into an agreement to issue common stock and warrants to the Investor in a prior transaction (the “Prior Transaction”).  The company sought shareholder approval of the Prior Transaction for reasons including that the issuance would result in a change of control for purposes of Listing Rule 4350(i)(1)(B).  Following the approval of its shareholders (the “Shareholder Approval”) approximately two and one-half years ago, the company issued the securities in the Prior Transaction resulting in the Investor owning approximately 24.5% of the company’s then outstanding shares of common stock.  Subsequently, the Investor has acquired additional shares on the open market, and the company has issued additional shares to other investors in acquisitions and in a public offering, together resulting in a decrease in the Investor’s beneficial ownership to 19.32% of the shares outstanding.  The company’s second largest shareholder beneficially owns approximately 6.5%.
 
Following our review of the information you provided, we have determined that the Transaction will not require shareholder approval under the Rules.  Although two members of the board are affiliated with the Investor, shareholder approval under Listing Rule 4350(i)(1)(A) is not required because the purchase price is not at a discount to market value.  Shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the company’s shareholders previously approved a change of control with regard to the Investor, and since that time: (i) the Investor’s ownership position has not significantly decreased and only recently has fallen below 20% to its current level of 19.32%; (ii) the decrease was not caused by any action of the Investor but rather was a result of issuances by the company to other investors; and (iii) the Investor has remained the largest shareholder.  You did not ask, and we do not express any opinion on whether the Acquisition would require shareholder approval under NASDAQ rules.
 
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 748
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