Rule 4350(i)(1)(B): Each issuer shall require shareholder approval … prior to the issuance of designated securities … in connection with the acquisition of the stock or assets of another company…when the issuance or potential issuance will result in a
change of control of the issuer.
Rule 4350(i)(1)(C)(ii): Each issuer shall require shareholder approval … prior to the issuance of designated securities …in connection with the acquisition of the stock or assets of another company …where, due to the present or potential issuance of common
stock, or securities convertible into or exercisable for common stock, other than a public offering for cash: (a) the common stock has or will have upon issuance voting power equal to or in excess of 20% of the voting power outstanding before the issuance
of stock or securities convertible into or exercisable for common stock; or (b) the number of shares of common stock to be issued is or will be equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the stock
or securities.
Rule 4350(i)(1)(D): 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: The company proposes an issuance of convertible debentures with 50% warrant coverage to 10 to 15 institutional investors (the “Proposed PIPE”). The debentures will be convertible at an initial conversion price equal to the greater of:
(i) 105% of the closing bid price of the company’s common stock on the trading day immediately preceding the closing date of the Proposed PIPE, which is when the company and investors will enter into a definitive agreement (the “Closing Bid”), or (ii) the
sum of the Closing Bid and $0.0625. The warrants will be exercisable at the greater of: (i) a set price or (ii) the Closing Bid. The warrants are not exercisable until 181 days after closing. The conversion price and the exercise price will be subject to
adjustment in the event of a future stock split, merger, or reorganization and similar changes affecting holders of the common stock generally, but neither the debentures nor the warrants will contain “market-price” or “exercise-price” anti-dilution adjustment
provisions.
The company will not at any time issue shares in payment of interest on, or in redemption of, debentures at a price below the Closing Bid if such shares, when aggregated with all prior issuance of shares pursuant to the debentures (excluding warrant shares),
represent more than 19.9% of the outstanding common stock as of the closing of the Proposed PIPE, unless shareholder approval has been obtained. No officers, directors, employees, or consultants of the company will be among the purchasers in the Proposed
PIPE.
The company completed a PIPE in October (the “First PIPE”). None of the investors in the First PIPE will participate in the Proposed PIPE. Substantially all of the proceeds of the First PIPE have been used to pay the initial price of the company’s acquisition
of Entity A. The proceeds from the Proposed PIPE will be used for general corporate purposes that are largely unrelated to the acquisition. There are no contingencies between the First PIPE and the Proposed PIPE. No purchaser in the Proposed PIPE will be
permitted to own more than 4.99% of the company’s common stock by means of conversion or exercise.
Issue: Will the Proposed PIPE be aggregated with the First PIPE, for purposes of determining whether shareholder approval is required pursuant to Marketplace Rules 4350(i)(1)(B), 4350(i)(1)(C)(ii) and 4350(i)(1)(D)?
Determination: NASDAQ determined that the First PIPE and the Proposed PIPE will not be aggregated for purposes of Listing Rule 4350(i)(1)(D) because the investors in each transaction are different, the purposes of the transactions and the uses of proceeds
are different, and the two transactions are not contingent upon each other. In the Proposed PIPE, the company cannot issue shares at a discount prior to obtaining shareholder approval when such shares, aggregated with all prior issuances pursuant to the debentures,
would represent more than 19.9% of the pre-transaction outstanding shares. The warrants cannot be exercised at a price less than the greater of book or market value as of the date as of the definitive agreement. Accordingly, the Proposed PIPE will meet the
requirements of Listing Rule 4350(i)(1)(D). In addition, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B) because the Proposed PIPE will not result in a change of control since no participating investor will be permitted to own
more than 4.99% of the company’s common stock as a result of the Proposed PIPE. Further, Listing Rule 4350(i)(1)(C) is not implicated by the Proposed PIPE because the issuance is not in connection with an acquisition.