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  Staff Interpretation Letter 2004-20
Identification Number 918
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval ... prior to the issuance of designated securities … in connection with a transaction other than a public offering involving: … (ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% of more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
Relevant Facts:  A company proposes a private placement (the “Unit Offering”).  Pursuant to the Unit Offering, the company intends to sell units consisting of one share of common stock and one warrant exercisable into a fractional share of common stock.  The common stock and warrants represent approximately 25% and 15%, respectively, of the company’s pre-issuance total shares outstanding.
The price of the units will equal the market value of the common stock immediately preceding the signing of the definitive agreement, plus an additional cost to allow for the attribution of $0.125 for each full share purchasable under a warrant.  The warrants will contain anti-dilution provisions for stock splits and similar events, including transactions affecting all shareholders generally, but will not contain other adjustments affecting either the price or the number of shares.  The exercise price of the warrants would be set at a 25% premium (or higher) to the price per unit.
Additionally, the company states that no participating investor, alone or as a member of a group, will own or otherwise control greater than 19.9% of the company’s common stock or 19.9% of the voting power of the company on a post-transaction basis.
Issue:  Is shareholder approval required for the Unit Offering?
Determination:  No.  By structuring the transaction as described, shareholder approval will not be required under NASDAQ rules.  While the Unit Offering will result in an issuance of 20% or more of the company’s pre-transaction outstanding shares, as contemplated by Listing Rule 4350(i)(1)(D)(ii), the price of the common stock to be issued will not be less than the greater of book and market value.  Further, the warrants to be issued were not priced at a discount, assigned an appropriate value and do not contain any price protection or anti-dilution provisions.  In addition, shareholder approval is not required, pursuant to Listing Rule 4350(i)(1)(B), because the Unit Offering will not result in a change of control, since no participating investor, alone or as a member of a group, will own or otherwise control 20% or more of the company’s common stock or voting power following the proposed transaction.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 918
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