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SEC Approves Revised Nasdaq Rule for Shareholder Approval of Private Placements

by   |   September 30, 2018

The SEC has approved an amendment to Nasdaq Rule 5635(d) to modify the circumstances in which shareholder approval is required for issuances of securities in private placement transactions.

The revised rule provides shareholder approval is required prior to a 20% Issuance at a price that is less than the Minimum Price.  A “20% Issuance”, for purposes of Rule5635(d), is defined as a transaction, other than a public offering as defined in IM-5635-3, involving the sale, issuance, or potential issuance by the issuer of common stock (or securities convertible into or exercisable for common stock), which, alone or together with sales by officers, directors, or substantial shareholders of the issuer, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance.

The definition combines the existing provisions of Nasdaq Rule 5635(d)(1) and (d)(2) into one provision. According to NASDAQ, this revision does not make any substantive change to the threshold for quantity or voting power of shares being sold that would give rise to the need for shareholder approval, although the applicable pricing test has changed.

“Minimum Price,” is defined as the price that is the lower of (1) the closing price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement or (2) the average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement.

The revised rule no longer includes a requirement that the price exceed the book value of the common stock.