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  Staff Interpretation Letter 2005-51
Identification Number 898
This is in response to your letters wherein you described a proposed private offering of the company’s securities (the “Transaction”) and asked that the company be granted an exception (the “Exception”) to the stockholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2).
Prior to this Transaction, you had previously issued the following securities (the “Prior Transactions”):
(i) convertible preferred stock and warrants pursuant to a transaction entered into September 2004, and amended in August 2005 (the “Amended September 2004 Transaction”); (ii) shares of common stock, in connection with the Amended September 2004 Transaction; (iii) shares of common stock and warrants in August 2005 (the August 2005 Transaction”); and (iv) the potential issuance of common stock due to the exercise of participation rights (following the August 2005 Transaction) held by investors who purchased convertible notes from the company in March 2005.
According to the information you provided, in the Transaction, the company would sell shares of its common stock, at below market value, with warrants attached that would allow the purchase of additional shares of the common stock.  You represented that no officers, directors, employees or consultants will participate in the Transaction.
Although the issuance in the Transaction would be less than 20% of the pre-transaction outstanding shares, the Transaction would require shareholder approval pursuant to 4350(i)(1)(D) because together with the Prior Transactions  with which the Transaction would be aggregated, the potential issuance would exceed 20% of the pre-transaction shares outstanding at a price less than market value.
In your submission, you stated that without the Exception, the company may be required to seek bankruptcy protection within a week, and that the company therefore does not have time to seek shareholder approval.  Specifically, according to the company’s cash projection, it will run out of cash within two weeks unless it successfully liquidates certain investments and defers payment on substantial amounts of its account payables.  In any event, the company does not expect to be able to meet its current and ongoing obligations for more than three weeks.  The company estimates that it would take a minimum of seven weeks and as many as thirteen weeks, to obtain shareholder approval for this Transaction.  You stated that completing the Transaction pursuant to the Exception seems to be the company’s last alternative to bankruptcy.
In addition, you stated that the company would expect material and potentially long-lasting material adverse effects on its business if it is unable to secure the needed financing.  It would be unable to pursue protection of its intellectual property rights and to retain its employees.  If it is able to consummate the Transaction, the company expects it would be able to continue operations into early 2006 and be better positioned to pursue an underwritten public offering to further extend the company’s viability.
Based on our review of the circumstances described in your letter and on your representations regarding the company’s financial condition, we have determined to grant the Exception.  This determination is based on your representations regarding the company’s inability to meet its financial commitments and likely need to seek bankruptcy protection in the event that the Transaction is delayed.  The Exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Transaction, a letter describing the Transaction and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit  committee, or a comparable body of the board of directors, has expressly approved the Exception; and (iii) the company must issue a press release that includes the information required to be included in the shareholder mailing.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 898
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