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  Staff Interpretation Letter 2005-18
Identification Number 865
This is in response to your letters regarding the applicability of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) to a proposed sale of securities by the company (the “Proposed Financing”).  Specifically, you asked whether the Proposed Financing would be aggregated with the company’s private placement completed in 2004 (the “Prior Financing”) for purposes of the Rules.
According to the information you provided, in the Prior Financing the company issued approximately 17% of the then outstanding shares of common stock, to accredited investors (the “Prior Investors”), at a discount to the market price.  In addition, the Investors in the Prior Financing received warrants (the “Prior Warrants”) to purchase 8.5% of the outstanding shares of the company’s common stock at a premium to the market price.  The Prior Warrants are not exercisable until six months following their issuance at a price not less than the greater of book and market value as of the date of the definitive agreement.  Shareholder approval was not required of the Prior Financing under 4350(i)(1)(D), because the issuance at less than market value was less than 20% of the pre-transaction outstanding shares; or under 4350(i)(1)(B), because no purchaser could reach a control position as a result of the transaction.
In the Proposed Financing, the company expects to issue convertible notes due between 2008 and 2010 (the “Notes”).  The Notes will be issued with warrants to purchase common stock.  The Notes will be convertible into common stock, at a conversion price that will be no less than the sum of: (i) the closing bid price immediately prior to the execution of the definitive agreement (the “Closing Bid”) and (ii) an amount to allow for the attribution of $0.125 for each full warrant.  The exercise price of the warrants will be no less than the Closing Bid.  Based on the recent market price, the resulting issuance would be up to 36% of the pre-transaction outstanding shares as a result of the conversion of the Notes and up to 22% as a result of the exercise of the Warrants.
Through a right of first refusal (the “Right”), investors in the Prior Financing have the right to participate in the Proposed Financing.  You stated that by terms of the Right, approximately 82% of the Proposed Financing is available for purchase by investors other than the Prior Investors.  You also stated that there are no contingencies between the Prior Financing and the Proposed Financing.  There is a provision included in both the Notes and the Warrants that will prevent any holder of the Notes or warrants from converting any Note or exercising any Warrant if such conversion or exercise would result in acquisition of beneficial ownership of 9.9% of the company’s common stock.  You stated that this limitation may be amended only with the approval of the company’s shareholders, and that if such approval is sought and not obtained, there would be no changes in the terms of the Proposed Financing.
Following our review of the information you provided, we have determined that the Proposed Financing will not be aggregated with the Prior Financing for purposes of Listing Rule 4350(i)(1)(D) because the price will not be less than the greater of book or market value.  Accordingly, because the price will not be at a discount, shareholder approval of the Proposed Financing will not be required pursuant to Listing Rule 4350(i)(1)(D) provided that the terms remain as described in your submission.  Further, given the ownership restrictions described above, the Proposed Financing will not result in a change of control, and shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B).
Publication Date*: 7/31/2012 Mailto Link Identification Number: 865
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