As we have previously discussed on our blog, the securities exchanges impose shareholder vote requirements in connection with certain financing transactions.  These rules are often referred to as the “20% Rule,” since, for Nasdaq, for example, a shareholder vote is required to be obtained by a listed company that intends to complete certain private placement transactions that will result in the issuance of 20% or more of the total pre-transaction voting shares outstanding.   We discuss these rules in our recently updated FAQs (see:

Recently, Nasdaq filed with the SEC an amendment that would update certain of these rules.  Nasdaq had solicited comments on these changes (see our prior post from the summer (available here:  The proposal would, among other things:

  • amend the measure of “market value” in connection with assessing whether a transaction is being completed at a discount from the closing bid price to the lower of:  the closing price as reflected by Nasdaq, or the average closing price of the common stock for the five trading days preceding the definitive agreement date;
  • refer to the above price as the “Minimum Price,” and existing references to “book value” and “market value” used in Rule 5635(d) will be eliminated; and
  • eliminate the references to “book value” for purposes of the shareholder vote requirement.

See the full text of the amendments here:









Practising Law Institute’s Exempt and Hybrid Securities Offerings is the first practical, accessible resource to provide you with comprehensive legal, regulatory, and procedural guidance regarding these increasingly popular offering methodologies.

Authored by Morrison & Foerster Partners Anna Pinedo and James Tanenbaum, the third edition of Exempt and Hybrid Securities Offerings gives you a useful understanding of the applicable regulations and legal framework for these transactions, as well as the implications of these regulations for structuring transactions.

The treatise provides a detailed analysis of the regulations and guidance affecting exempt and hybrid securities offerings, as well as offers market context and practical structuring advice. Packed with checklists, transactional timelines, SEC guidance, and a wealth of labor-saving sample documents, Exempt and Hybrid Securities Offerings offers the relative advantages and drawbacks of the most commonly used forms of exempt and hybrid offerings. It clearly explains:

  • conducting venture private placements;
  • traditional and structured PIPE transactions;
  • institutional (debt) private placements;
  • Rule 144A offerings;
  • Regulation S offerings;
  • Regulation A offerings and crowdfunding;
  • shelf takedowns;
  • registered direct and ATM offerings;
  • confidentially marketed public offerings; and
  • continuous issuance programs, including MTN and CP programs.

This comprehensive three-volume treatise, with useful forms, has been updated to reflect changes brought about by the Dodd-Frank Act, the JOBS Act, the FAST Act, and other recent regulatory changes.

For more information, please click here.

A pre-funded warrant is a type of warrant that allows its holder to purchase a specified number of a company’s securities at a nominal exercise price, typically as low as $0.01 per share.  The term “pre-funded” refers to the structural feature that allows the company to receive, as part of the pre-funded warrant’s purchase price, the exercise price that would be due for a traditional (not pre-funded) warrant, except for the nominal exercise price, at the time of the warrant’s issuance instead of at the time of the warrant’s eventual exercise.  Pre-funded warrants are generally issued as part of a larger financing transaction, such as a venture capital investment, minority equity investment, or mezzanine financing.  A pre-funded warrant provides a holder with the flexibility to avoid exceeding the designated ownership threshold prior to the warrant’s exercise while still maintaining the ability to immediately acquire the underlying securities at a nominal exercise price when the investor is ready to do so.  Pre-funded warrants allow the company to receive almost all of the cash proceeds immediately upon the warrant’s issue at a time when the company’s underlying valuation is likely difficult to obtain or uncertain, instead of waiting until the warrant is exercised.  In our “Practice Pointers on Pre-funded Warrants,” we describe the features of pre-funded warrants, discuss why they are used, how they are structured and 20% rule considerations, and provide sample pre-funded warrant language.

The practice pointers are available here.

MoFo is rolling out the classics—MoFo Classics Series, that is. These two CLE sessions will focus on developments in the private placement market. Mark your calendar for these in-person only sessions, held at our New York office from 8:30 a.m. to 9:30 a.m.

Private Placement Market Developments – Thursday, September 14, 2017
Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

During this session, we will discuss developments affecting private placements, including:

  • Increased reliance on Section 4(a)(2) instead of the Rule 506 safe harbor;
  • Addressing no registration opinions;
  • Bad actor diligence for issuers and placement agents;
  • Diligence and the use of “big boy” letters;
  • FINRA Rule 5123 updates;
  • FINRA and SEC enforcement developments affecting private placements; and
  • Nasdaq’s 20% rule.

Late Stage Private Placements – Tuesday, September 19, 2017
Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

Successful privately held companies considering their liquidity opportunities or eyeing an IPO often turn to late stage private placements. Late stage private placements with institutional investors, cross-over investors and strategic investors raise a number of considerations distinct from those arising in earlier stage and venture financing transactions. During this session, we will discuss:

  • Timing and process for late stage private placements;
  • Terms of late stage private placements;
  • Principal concerns for cross-over funds;
  • Diligence, projections and information sharing;
  • IPO and acquisition ratchets;
  • Governance issues;
  • The placement agent’s role; and
  • Planning for a sale or an IPO.

NY and CA CLE credit is pending for both sessions.

To register, please click here.

Nasdaq posted the following notice and request for comment:

“Last year, Nasdaq, solicited comments on our shareholder approval rules. These rules were adopted in 1990 and have remained largely unchanged since then. The comment solicitation was designed to elicit views on whether the rules could be updated given changes in the capital markets since then, without sacrificing the crucial investor protections they provide.

Following review of the comments provided, Nasdaq is considering a rule amendment to: (i) change the definition of market value for purposes of the shareholder approval rules from the closing bid price to a five day trailing average of the closing price; and (ii) eliminate the requirement for a company to obtain shareholder approval for issuances of common stock at a price less than book value.  As part of these changes, Nasdaq would also require that an issuance of 20% or more of the company’s outstanding securities be approved by the company’s independent directors where shareholder approval is not required.

We encourage all interested parties to review the detailed description of these proposed changes in our Comment Solicitation and provide comments before July 31, 2017.”

See Nasdaq statement.

See Nasdaq comment solicitation.

Many groups have come forward in recent weeks with their lists of regulations that should be reviewed or amended, as well as their list of areas that merit close review in light of the potential burdens that may be imposed by current regulation.  As far as securities regulation is concerned, much of the focus, at least in the popular press, has been placed on measures that relate to IPOs; however, modest changes in other areas would have a positive impact on capital formation—here is our current list:

  • Adopting the proposed amendments relating to smaller reporting companies;
  • Continuing to advance the disclosure effectiveness initiative;
  • Continuing the review of the industry guides in order to modernize these requirements and eliminate outdated or repetitive requirements;
  • Revisiting the WKSI standard in order to see if similar accommodations and offering related flexibility should be made available to a broader universe of companies;
  • Reviewing existing communications safe harbors in order to modernize these and make communications safe harbors available to a broader array of companies, including business development companies;
  • Adopting the proposed amendment to Rule 163(c) that would allow underwriters or other financial intermediaries to engage in discussions on a WKSI’s behalf relating to a possible offering;
  • Assessing whether a policy rationale remains for including MLPs within the definition of “ineligible issuer” when MLPs undertake public offerings on a best efforts basis;
  • Assessing who suffers when ineligible issuers are prevented from using FWPs other than for term sheet purposes;
  • Removing the limitations that require certain issuers to conduct live only roadshows;
  • Eliminating the need for “market-maker” prospectuses;
  • Reviewing the one-third limit applicable to primary issuances off of a shelf registration statement for certain smaller companies;
  • Modernizing the filing requirements for BDCs, permitting access equals delivery for BDCs and modernizing the research safe harbors to include BDCs;
  • Adding knowledgeable employees to the definition of accredited investor;
  • Eliminating the IPO quiet period;
  • Working with the securities exchanges to review their “20% Rules” (requiring a shareholder vote for private placements completed at a discount that will result in an issuance or potential issuance of securities greater than 20% of the pre-transaction total shares outstanding);
  • Addressing the Rule 144 aggregation rules for private equity and venture capital fund related sales;
  • Shortening the Rule 144 holding period for reporting companies;
  • Including sovereign wealth funds and central banks within the definition of QIBs;
  • Shortening the 30-day period in Rule 155; and
  • Shortening the six-month integration safe harbor contained in Regulation D.

Wednesday, September 21, 2016
12:00 p.m. – 1:00 p.m. EDT

Morrison & Foerster Partners Anna Pinedo and James Tanenbaum will be joined by David A. Donohoe, Jr. (President, Donohoe Advisory Associates LLC) in hosting a teleconference entitled “Securities Exchanges, Shareholder Vote Requirements and the 20% Rule.” Whether you are contemplating a financing to fund an acquisition, engaged in an opportunistic financing, contemplating a “private” placement or PIPE, your transaction will be affected by the requirements of the securities exchanges to seek shareholder approval in certain circumstances.

Speakers will address:

  • Change of control issues;
  • Stock sales to related parties;
  • Private placements and PIPEs;
  • Warrants;
  • Acquisitions; and
  • Related issues.

CLE credit is pending for California and New York.

To register for this session, or for more information, please click here.

Recently, the Staff posted this FAQ and response relating to the issuance by Nasdaq-listed companies of warrants with cashless exercise features. See below:

FAQ – Do Nasdaq’s listing rules limit or restrict the issuance of warrants that provide for cashless exercise and/or exchanges of the warrant for stock?

Listed companies may issue warrants that allow the holder, under certain circumstances, to exercise or exchange them for stock in a cashless transaction. Nasdaq’s Listing Rules do not explicitly prohibit or restrict the issuance of warrants with this kind of cashless exercise/exchange provision. However, these warrants may be Future Priced Securities, as defined in Rule IM-5635-4. Typically, a warrant that is a Future Priced Security would allow the warrant holder to surrender an “out-of-the-money” warrant in exchange for a fixed dollar value of shares (usually calculated through a formula) with the actual number of shares determined based on the share price at the time of surrender. This would result in the issuance of an increasing number of shares as the share price declines. Depending on the circumstances, Nasdaq may determine that the issuance of securities with this provision raises public interest concerns under the Rule 5100 Series.

Warrants may be structured to limit or mitigate these concerns through features that may limit the dilutive effect of the transaction. Such features may provide incentives to the investor to hold the security for a longer time period or limit the number of shares into which the Future Priced Security may be converted.

When reviewing transactions that include these types of securities for compliance with the Listing Rules, including whether they raise public interest concerns, Nasdaq generally assumes that conversion of the warrants will result in the maximum possible dilution over the shortest period of time. In addition, in determining whether the issuance of a warrant that is a Future Priced Security raises public interest concerns, Nasdaq staff will consider among other things: (1) the business purpose of the transaction; (2) the amount to be raised in the transaction relative to the Company’s existing capital structure; (3) the dilutive effect of the transaction on the existing shareholders; (4) the risk undertaken by the Future Priced Security investor(s); (5) the relationship between the investor(s) and the Company; (6) whether the transaction was preceded by other similar transactions; (7) whether the transaction is consistent with the just and equitable principles of trade; and (8) whether the warrant includes features to limit the potential dilutive effect of its conversion or exercise, including floors on the conversion or exercise price. Nasdaq encourages any company considering issuing a warrant that provides for cashless exercise and/or exchanges of the warrant for stock to review IM-5635-4 and to consult with the Listing Qualifications Department at (301) 978-8008.

Publication Date*: 2/11/2016

Recently, as we blogged about, the Nasdaq Listing and Hearing Review Council published a solicitation in which it sought comment regarding the Nasdaq Stock Market, Inc.’s shareholder approval rules. Given the effect of these rules on various capital formation transactions by Nasdaq-listed companies, we collaborated with Dave Donohoe and David Compton of Donohoe Advisory Associates LLC to provide some perspectives regarding various aspects of the existing rules and suggest some areas in which the rules might be reviewed or refined in order to acknowledge and address the significant changes in the capital markets since the original adoption of these requirements. You may access the comment letter here:

The NYSE Listed Company Manual contains a number of rules requiring a listed company to obtain shareholder approval for certain issuances of securities, which rules are often referred to as the “20% rule” or “shareholder approval requirements.” On December 31, 2015, the SEC approved a proposed change by the NYSE to Section 312.03(b) of the NYSE Listed Company Manual to permit “early stage companies” listed on the NYSE to issue shares of common stock (or exchangeable or convertible securities) without shareholder approval to a related party, a subsidiary, affiliate or other closely-related person of a related party or any company or entity in which a related party has a substantial direct or indirect interest. An “early stage company” is defined as a company that has not reported revenues in excess of $20 million in any two consecutive fiscal years since its incorporation; and a “related party” is defined as a director, officer or holder of 5% or more of the company’s common stock. In order to take advantage of the exemption, the audit committee (or a comparable committee comprised solely of independent directors) of the early stage company is required to review and approve the proposed transaction prior to completion. Once a company reports revenues greater than $20 million in each of two consecutive fiscal years, it will lose its designation as an early stage company and become subject to all the shareholder approval requirements of Section 312.03(b), which requires a company to obtain shareholder approval, with certain exceptions, before it issues shares exceeding either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance to related parties, affiliates of related parties or entities in which a related party has a substantial interest. A company’s annual financial statements before listing will be considered when determining if the company should lose its early stage company designation. In addition, the exemption for early stage companies is only available for sales for cash and is not available for issuances in connection with an acquisition. The amendments took effect immediately following the SEC’s approval.

This modest change will be beneficial to shareholders because the shareholder approval requirements often deter companies from raising much-needed capital. The change should also be viewed in the broader context of the securities exchanges’ recent efforts to review the shareholder approval requirements which have been considered outmoded. For example, on November 18, 2015, Nasdaq solicited comments on its 20% rule, specifically (1) whether it is too restrictive, (2) whether the percentage should be higher, (3) whether there are other shareholder provisions that are sufficient and (4) whether the insider interest in acquired assets test is still needed.