On September 26, 2018, the SEC approved a significant change to the price tests used in Nasdaq's 20% private placement shareholder approval rule, Nasdaq Rule 5635(d) (the “Private Placement Shareholder Approval Rule"), effective immediately. Rule 5635(d) is the Nasdaq shareholder approval rule that is often implicated in PIPE transactions (private investments in public equity) and other private offerings, including many private offerings involving convertible securities or warrants.
Prior to the recent rule change, the Private Placement Shareholder Approval Rule exempted from shareholder approval offerings priced at or above the greater of book or market value per share. The book value concept now has been eliminated from the rule, and the market value concept has been revised to incorporate a five-day average concept and to use the last closing price, instead of the consolidating closing bid price.
Generally speaking, under the amended rule, a private offering involving a 20% or greater issuance will not require shareholder approval if the offering price is greater than or equal to the lesser of: (i) the last closing price immediately preceding the signing of a binding agreement and (ii) the average closing price of the common stock on Nasdaq for the five trading days immediately preceding the signing of the binding agreement. The amended rule also reflects certain other clean up and conforming changes.
As was the case previously, in addition to applying to private offerings, the Private Placement Shareholder Approval Rule applies to certain SEC-registered offerings that Nasdaq does not consider to be “public offerings" under its interpretive material (e.g., many registered direct offerings). Note that the Rule 5635(d) amendments do not affect the other requirements to obtain shareholder approval under Rule 5635 in connection with certain acquisitions, in connection with a change of control or in connection with equity compensation.
As amended, Rule 5635(d) now reads in its entirety as follows:
(d) Transactions other than Public Offerings
(1) For purposes of this Rule 5635(d):
(A) "Minimum Price" means a price that is the lower of: (i) the closing price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement; or (ii) 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.
(B) "20% Issuance" means a transaction, other than a public offering as defined in IM-5635-3, involving the sale, issuance or potential issuance by the Company 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 Company, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance.
(2) Shareholder approval is required prior to a 20% Issuance at a price that is less than the Minimum Price.
A link to Nasdaq Rule 5635 as amended can be found here: http://nasdaq.cchwallstreet.com/NASDAQTools/bookmark.asp?id=nasdaq-rule_5635&manual=/nasdaq/main/nasdaq-equityrules/
A link to the SEC release approving the rule change can be found here: https://www.sec.gov/rules/sro/nasdaq/2018/34-84287.pdf
A special thank you to Eric Scarazzo in the New York office for his assistance with this post.