Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Modify the Listing Requirements Contained in Listing Rule 5635(d) To Change the Definition of Market Value for Purposes of the Shareholder Approval Rule and Eliminate the Requirement for Shareholder Approval of Issuances at a Price Less Than Book Value but Greater Than Market Value, 24379-24382 [2018-11224]
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Federal Register / Vol. 83, No. 102 / Friday, May 25, 2018 / Notices
pricing date, the entire procedure will
be completed before the next
notification is sent out to shareholders,
thus avoiding any overlap. Applicants
believe that these procedures will
eliminate any possibility of investor
confusion. Applicants also state that
monthly repurchase offers will be a
fundamental feature of the Funds, and
their prospectuses will provide a clear
explanation of the repurchase program.
7. Applicants submit that for the
reasons given above the requested relief
is appropriate in the public interest and
is consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Act.
Applicants’ Conditions
Applicants agree that any order
granting the requested relief shall be
subject to the following conditions:
1. The Fund (and any Future Fund
relying on this relief) will make a
repurchase offer pursuant to rule 23c–
3(b) for a repurchase offer amount of not
less than 5% in any one-month period.
In addition, the repurchase offer amount
for the then-current monthly period,
plus the repurchase offer amounts for
the two monthly periods immediately
preceding the then-current monthly
period, will not exceed 25% of the
Fund’s (or Future Fund’s, as applicable)
outstanding common shares. The Fund
(and any Future Fund relying on this
relief) may repurchase additional
tendered shares pursuant to rule 23c–
3(b)(5) only to the extent the percentage
of additional shares so repurchased does
not exceed 2% in any three-month
period.
2. Payment for repurchased shares
will occur at least five business days
before notification of the next
repurchase offer is sent to shareholders
of the Fund (or Future Fund relying on
this relief).
For the Commission, by the Division of
Investment Management, under delegated
authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–11296 Filed 5–24–18; 8:45 am]
BILLING CODE 8011–01–P
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SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
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Extension:
Rule 206(4)–3, SEC File No. 270–218, OMB
Control No. 3235–0242
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Rule 206(4)–3 (17 CFR 275.206(4)–3)
under the Investment Advisers Act of
1940, which is entitled ‘‘Cash Payments
for Client Solicitations,’’ provides
restrictions on cash payments for client
solicitations. The rule requires that an
adviser pay all solicitors’ fees pursuant
to a written agreement. When an adviser
will provide only impersonal advisory
services to the prospective client, the
rule imposes no disclosure
requirements. When the solicitor is
affiliated with the adviser and the
adviser will provide individualized
advisory services to the prospective
client, the solicitor must, at the time of
the solicitation or referral, indicate to
the prospective client that he is
affiliated with the adviser. When the
solicitor is not affiliated with the
adviser and the adviser will provide
individualized advisory services to the
prospective client, the solicitor must, at
the time of the solicitation or referral,
provide the prospective client with a
copy of the adviser’s brochure and a
disclosure document containing
information specified in rule 206(4)–3.
Amendments to rule 206(4)–3, adopted
in 2010 in connection with rule 206(4)–
5, specify that solicitation activities
involving a government entity, as
defined in rule 206(4)–5, are subject to
the additional limitations of rule
206(4)–5. The information rule 206(4)–
3 requires is necessary to inform
advisory clients about the nature of the
solicitor’s financial interest in the
recommendation so the prospective
clients may consider the solicitor’s
potential bias, and to protect clients
against solicitation activities being
carried out in a manner inconsistent
with the adviser’s fiduciary duty to
clients. Rule 206(4)–3 is applicable to
all Commission-registered investment
advisers. The Commission believes that
approximately 4,395 of these advisers
have cash referral fee arrangements. The
rule requires approximately 7.04 burden
hours per year per adviser and results in
a total of approximately 30,941 total
burden hours (7.04 × 4,395) for all
advisers.
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Please direct your written comments
to Pamela Dyson, Director/Chief
Information Officer, Securities and
Exchange Commission, C/O Remi
Pavlik-Simon, 100 F Street NE,
Washington, DC 20549; or send an email
to: PRA_Mailbox@sec.gov.
Dated: May 18, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–11219 Filed 5–24–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83294; File No. SR–
NASDAQ–2018–008]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change To Modify the
Listing Requirements Contained in
Listing Rule 5635(d) To Change the
Definition of Market Value for
Purposes of the Shareholder Approval
Rule and Eliminate the Requirement
for Shareholder Approval of Issuances
at a Price Less Than Book Value but
Greater Than Market Value
May 21, 2018.
I. Introduction
On January 30, 2018, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
modify the listing requirements
contained in Nasdaq Rule 5635(d) to (1)
change the definition of market value
for purposes of shareholder approval
under Nasdaq Rule 5635(d); (2)
eliminate the requirement for
shareholder approval of issuances at a
price less than book value but greater
than market value; and (3) make other
conforming changes. The proposed rule
change was published for comment in
the Federal Register on February 20,
2018.3 On April 4, 2018, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to either approve the
proposed rule change, disapprove the
proposed rule change, or institute
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 82702
(February 13, 2018), 83 FR 7269 (February 20, 2018)
(‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
2 17
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proceedings to determine whether to
disapprove the proposed rule change.5
The Commission received three
comments on the proposed rule
change.6 This order institutes
proceedings under Section 19(b)(2)(B) of
the Act 7 to determine whether to
approve or disapprove the proposed
rule change.
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II. Description of the Proposal
The Exchange has proposed to amend
Nasdaq Rule 5635(d) to modify the
circumstances in which shareholder
approval is required for issuances of
securities in private placement
transactions. Currently, under Nasdaq
Rule 5635(d), the Exchange requires a
Nasdaq-listed company to obtain
shareholder approval prior to the
issuance of securities in connection
with a private placement transaction
(i.e. a transaction other than a public
offering 8) involving: (1) The sale,
issuance, or potential issuance by the
company of common stock (or securities
convertible into or exercisable for
common stock) at a price less than the
greater of book or market value which
together with sales by officers, directors,
or Substantial Shareholders 9 of the
company equals 20% or more of
common stock or 20% or more of the
voting power outstanding before the
issuance; or (2) the sale, issuance, or
potential issuance by the company of
common stock (or securities convertible
into or exercisable common stock) equal
to 20% or more of the common stock or
20% or more of the voting power
outstanding before the issuance for less
than the greater of book or market value
of the stock.10
5 See Securities Exchange Act Release No. 82994
(April 4, 2018), 83 FR 15441 (April 10, 2018). The
Commission designated May 21, 2018, as the date
by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the
proposed rule change.
6 See Letters to Brent J. Fields, Secretary,
Commission, from Michael A. Adelstein, Partner,
Kelley Drye & Warren LLP, dated February 28, 2018
(‘‘Kelley Drye letter’’); Penny Somer-Greif, Chair,
and Gregory T. Lawrence, Vice-Chair, Committee on
Securities Law of the Business Law Section of the
Maryland State Bar Association, dated March 13,
2018 (‘‘MSBA Letter’’); and Greg Rodgers, Latham
Watkins, dated March 14, 2018 (‘‘Latham Watkins
Letter’’).
7 15 U.S.C. 78s(b)(2)(B).
8 See Nasdaq Rule IM–5635–3 (Definition of a
Public Offering).
9 An interest consisting of less than either 5% of
the number of shares of common stock or 5% of the
voting power outstanding of a Company or party
will not be considered a substantial interest or
cause the holder of such interest to be regarded as
a ‘‘Substantial Shareholder.’’ See Nasdaq Rule
5635(e)(3).
10 See Nasdaq Rule 5635(d). The Commission
notes that Nasdaq Rule 5635 also requires
shareholder approval under Nasdaq Rules 5635(a),
(b), and (c) for issuances involving an acquisition
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‘‘Market value’’ is defined in Nasdaq
Rule 5005(a)(23) as the consolidated
closing bid price multiplied by the
measure to be valued (e.g., a company’s
market value of publicly held shares is
equal to the consolidated closing bid
price multiplied by a company’s
publicly held shares).11 This definition
applies to the shareholder approval
rules as well as other listing rules. The
Exchange has proposed to amend the
definition of market value only for
purposes of Nasdaq Rule 5635(d). The
new definition, to be known as the
‘‘Minimum Price,’’ is defined as the
price that is the lower of (1) the closing
price (as reflected on Nasdaq.com) 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.12 Under the proposal,
shareholder approval will only be
required for private placement
transactions that are priced below the
Minimum Price as described above.
In proposing to use the closing price
on Nasdaq, rather than the Nasdaq bid
price as under the current rule, the
Exchange explained, in its proposal,
that the closing price reported on
Nasdaq.com is the Nasdaq Official
Closing Price, which is derived from the
closing auction on Nasdaq, reflects
actual sale prices at one of the most
liquid times of the day, and is highly
transparent to investors.13 According to
the Exchange, the closing price reported
on Nasdaq.com is a better reflection of
the market price of the security than the
closing bid price.14 The Exchange also
noted that this use of closing price is
of stock or assets of another company, a change of
control, and equity compensation. Nasdaq is not
proposing to amend these other shareholder
approval provisions in its proposal.
11 See Nasdaq Rule 5005(a)(23).
12 See proposed Nasdaq Rule 5635(d)(1)(A).
13 See Notice, supra note 3, at 7270, which
discusses the Nasdaq Official Closing Price and
notes, among other things, that the closing auction
is ‘‘highly transparent to all investors through the
widespread dissemination of stock-by-stock
information about the closing auction, including the
potential price and size of the closing auction.’’ The
Exchange stated that the closing price is published
on Nasdaq.com with a 15 minute delay and is
available without registration or fee. According to
the Exchange, Nasdaq does not currently intend to
charge a fee for access to this data or otherwise
restrict availability of this data. The Exchange
further stated that it would file a proposed rule
change under Section 19(b) of the Act before
implementing any such change and, in such filing,
address the impact of the proposed rule change on
compliance with this rule. See id. at 7270 n.6.
14 See Notice, supra note 3, at 7270. According to
the Exchange, the price of an executed trade
generally is viewed as a more reliable indicator of
value than a bid quotation. See id.
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consistent with the approach of other
exchanges.15
Further, in proposing to also use a
five-day average closing price to
determine if a shareholder vote is
required under Nasdaq Rule 5635(d),
the Exchange noted that while investors
and companies sometimes prefer to use
an average when pricing transactions,
there are potential negative
consequences to using a five-day
average as the sole measure of whether
shareholder approval is required. For
example, in a declining market, the
Exchange noted that the five-day
average price will be above the current
market price, which, according to the
Exchange, could make it difficult for
companies to close transactions because
investors could buy shares at a lower
price in the market. The Exchange also
noted concerns with using a five-day
average in a rising market, in that the
five-day average price will appear to be
at a discount to the closing current
market price. Further, according to the
Exchange, if material news is
announced during the five-day period,
the average price could be a worse
reflection of market value than the
closing price after the news is disclosed.
The Exchange stated, however, that it
believed that these risks of using the
five-day average price are already
accepted by the market, as evidenced by
the use of an average price in
transactions that do not require
shareholder approval, such as those
transactions where less than 20% of the
outstanding shares are being issued. In
its rule filing, the Exchange also noted
that several commenters raised concerns
regarding a 2017 solicitation of
comments by the Exchange on a
proposal to use the five-day average
price as the sole measure of market
value (‘‘2017 Solicitation’’).16 The
Exchange stated that it believed these
concerns were justified and, as such,
proposed to define market value as the
lower of the closing price or five-day
average price. As the Exchange noted,
this means that, under its proposal, an
issuance would not require shareholder
approval as long as the issuance occurs
15 See Notice, supra note 3, at 7270 & n.3 (citing
Section 312.04(i) of the NYSE Listed Company
Manual).
16 As the Exchange stated in the Notice, in 2017,
the Exchange solicited comments on a proposal to
amend Nasdaq Rule 5635(d) and the Exchange
based its current proposal on its experience and
comments received during that process. See Notice,
supra note 3, at 7270. The Commission notes that,
in its rule filing, the Exchange stated that it received
support for this proposal in its 2017 Solicitation,
but four commenters raised concerns about reliance
on the five-day average price to measure market
value in certain circumstances. See id. at 7271.
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at a price greater than the lower of the
two measures.17
The Exchange also proposed, in
conjunction with its proposal to
redefine market value for purposes of
determining when a shareholder vote is
triggered under Rule 5635(d), to
eliminate its current requirement for
shareholder approval of private
placement issuances at a price that is
less than book value. Currently, as noted
above, the Exchange’s rules require
shareholder approval of a private
placement transaction if it is priced
below market or book value.
Accordingly, under the proposal,
private placement transactions that are
priced below book value but above
market value, as defined by the
Minimum Price, would not require
shareholder approval. In its proposal,
the Exchange stated that book value is
an accounting measure that is based on
the historic cost of assets rather than
their current value. According to the
Exchange, book value is not an
appropriate measure of whether a
transaction is dilutive or should
otherwise require shareholder
approval.18
Further, the Exchange proposed to
revise Nasdaq Rule 5635(d) to provide
that shareholder approval is required
prior to a 20% Issuance at a price that
is less than the Minimum Price.19 Under
the proposal, the Exchange would
define ‘‘20% Issuance’’ for purposes of
Rule 5635(d) as 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.20
According to the Exchange, the
Exchange is not making a 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, as
described above, the applicable market
value pricing test will change.21
In addition, the Exchange proposed to
amend the preamble to Nasdaq Rule
5635 and the title of Nasdaq Rule
5635(d) to replace references to ‘‘private
placements’’ with ‘‘transactions other
than public offerings’’ 22 to, according to
the Exchange, conform the language to
that in Nasdaq Rule IM–5635–3, which
defines a public offering,23 and to make
other conforming changes to Nasdaq
Rules IM–5635–3 and IM–5635–4.24
III. Summary of Comments
The Commission received three
comments on the proposed rule change,
all of which supported the proposal.25
Of these commenters, one stated it
supported the proposed rule change
without reservation and the Exchange’s
reevaluation of its shareholder approval
rules in light of changes in market
practice and investor protection
mechanisms that have taken place since
the adoption of these rules.26 Another
commenter stated that, while it
supported more significant changes to
Nasdaq Rule 5635(d), the proposed rule
change would be a strong first step in
correcting the inadequacies and
inequitableness of Nasdaq Rule
5635(d).27
Two of the commenters in support of
the proposal specifically addressed the
changes to the definition of market
value. One commenter stated that the
proposed method to determine market
value using the lower of the Nasdaq
closing price and five-day average of
Nasdaq closing prices is a better
determination of market value than the
current use of closing bid price because
it will more accurately reflect the type
of price that would occur in an armslength transaction. This commenter
stated that the proposed measure will
provide flexibility to account for market
fluctuations and events, without
incurring the typical adverse
consequence of material movements,
positive or negative, in a stock price at
or near the end of a five-day period.28
Another commenter noted that parties
often prefer to structure a transaction
using an average price to smooth out
unusual price fluctuations. This
22 See
proposed Nasdaq Rule 5635 and subsection
(d).
23 See
Notice, supra note 3, at 7271.
proposed Nasdaq Rules IM–5635–3 and
IM–5635–4.
25 See Kelley Drye Letter, MSBA Letter, and
Latham Watkins Letter, supra note 6. These three
commenters previously provided comment letters
to the Exchange in response to the 2017
Solicitation. For a summary prepared by the
Exchange of these comment letters, see the Notice,
supra note 3, at 7273–74.
26 See Latham Watkins Letter, supra note 6.
27 See Kelley Drye Letter, supra note 6, at 1–2.
28 See Kelley Drye Letter, supra note 6, at 3.
24 See
17 See
Notice, supra note 3, at 7270–71.
Notice, supra note 3, at 7271. The
Commission notes that, in its rule filing, the
Exchange stated that it received support for this
change in its 2017 Solicitation, but also received
comments opposing the change, one of which
raised specific concerns that the Exchange
acknowledged in its proposal. See id. at 7271, 7274.
19 See proposed Nasdaq Rule 5635(d)(2).
20 See proposed Nasdaq Rule 5635(d)(1)(B).
21 See Notice, supra note 3, at 7271.
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18 See
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24381
commenter stated that the proposed
changes to the definition of market
value provides listed companies with
additional flexibility in structuring their
securities transactions, brings the
shareholder approval rule more in line
with how transactions are structured
when the rule is not a consideration,
and provides a reasonable indication of
market value.29 This commenter also
supported the proposed change to use
the Nasdaq Official Closing Price.30
As to the proposal to eliminate book
value, two of the commenters
specifically discussed their support of
this change. One commenter stated that
book value does not reflect the actual
value of securities and is not relied
upon in connection with investment
decisions, whereas market price of an
issuer’s common stock represents the
market’s consensus on the value of the
security. This commenter also stated
that in the rare instances where book
value exceeds market value, this usually
occurs due to the accounting treatment
of certain types of capital investments
by the issuer and should not impact the
issuer’s ability to raise capital at market
prices.31 Another commenter strongly
supported the proposed elimination of
book value and stated it agreed with
statements in the Notice that book value
is not an appropriate measure of current
value and, therefore, whether a
transaction is dilutive or should require
shareholder approval.32
IV. Proceedings To Determine Whether
To Approve or Disapprove SR–
NASDAQ–2018–008 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act to determine
whether the proposal should be
approved or disapproved.33 Institution
of such proceedings is appropriate at
this time in view of the legal and policy
issues raised by the proposed rule
change, as discussed below. Institution
of disapproval proceedings does not
indicate that the Commission has
reached any conclusions with respect to
any of the issues involved.
Pursuant to Section 19(b)(2)(B) of the
Act, the Commission is providing notice
of the grounds for disapproval under
consideration. The Commission is
29 See
MSBA Letter, supra note 6, at 1–2.
MSBA Letter, supra note 6, at 2.
31 See Kelley Drye Letter, supra note 6, at 2. In
addition, this commenter stated that book value
may exceed market value due to a market
correction, burst bubble, or financial crisis, which
is a time when an issuer needs to be able to raise
sufficient capital. See id.
32 See MSBA Letter, supra note 6, at 2.
33 15 U.S.C. 78s(b)(2)(B).
30 See
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instituting proceedings to allow for
additional analysis and input
concerning the proposed rule change’s
consistency with the Act 34 and, in
particular, with Section 6(b)(5) of the
Act, which requires, among other
things, that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.35
As discussed above, the Exchange
proposed to modify Nasdaq Rule
5635(d) to change the definition of
market value for purposes of
shareholder approval of private
placement transactions such that (1)
shareholder approval would be required
prior to an issuance of 20% or more at
a price that is less than the lower of the
closing price or the five-day average
price; and (2) shareholder approval
would not be required prior to an
issuance of 20% or more at a price that
is less than book value but greater than
market value. In response to the
Exchange’s 2017 Solicitation, as noted
above, some commenters had raised
questions about the use of a five-day
average price as a measure of market
value under certain market conditions
and the elimination of the book value
standard. Accordingly, the Commission
is specifically requesting additional
comment on these two parts of the
Exchange’s proposal in light of the
questions raised in connection with the
Exchange’s 2017 Solicitation.36
V. Commission’s Solicitation of
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written view of interested
persons concerning whether the
34 15
U.S.C. 78f(b)(5).
proposal is consistent with Section
6(b)(5) or any other provision of the Act,
or the rules and regulations thereunder.
Although there do not appear to be any
issues relevant to approval or
disapproval that would be facilitated by
an oral presentation of views, data, and
arguments, the Commission will
consider, pursuant to Rule 19b–4, any
request for an opportunity to make an
oral presentation.37
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by June 15, 2018. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by June 29, 2018. The
Commission asks that commenters
address the sufficiency of the
Exchange’s statements in support of the
proposal which are set forth in the
Notice,38 in addition to any other
comments they may wish to submit
about the proposed rule change. In
particular, the Commission seeks
comment, including where relevant, any
specific data, statistics, or studies, on
the following:
1. Is the five-day average closing price
a reasonable alternative to determining
market value for purposes of
shareholder approval requirements
under Nasdaq Rule 5635(d)? If so, what
are the benefits and/or risks to
companies and their shareholders? Do
the benefits and risks to companies and
shareholders change under certain
market conditions, such as rising
markets, and if so how?
2. Are there benefits and/or risks to
listed companies and shareholders by
permitting sales in private placements
that are above market value but below
book value? Could there be any
potential impact on share price? Would
the assessment of any potential impact,
if any, change depending on the reason
why a stock is trading above market
price but below book value (i.e., market
conditions, accounting issues)?
Comments may be submitted by any
of the following methods:
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35 Id.
36 The Commission also notes that the Exchange
proposal stated that the ‘‘closing price’’ used is the
closing price (as reflected on Nasdaq.com) at the
time of the transaction. The Exchange should
address in its rule proposal if ‘‘at the time of the
transaction’’ would use the previous day’s close or
the close on the day of the transaction and should
clarify this in the rule text. Unlike the closing price
reference, the five-day average closing price
provision, as proposed, currently makes clear it is
based on the five days immediately preceding the
signing of a binding agreement.
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18:28 May 24, 2018
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37 Section 19(b)(2) of the Exchange Act, as
amended by the Securities Act Amendments of
1975, Public Law 94–29 (June 4, 1975), grants the
Commission flexibility to determine what type of
proceeding—either oral or notice and opportunity
for written comments—is appropriate for
consideration of a particular proposal by a selfregulatory organization. See Securities Act
Amendments of 1975, Senate Comm. on Banking,
Housing & Urban Affairs, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
38 See Notice, supra note 3.
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2018–008 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2018–008. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2018–008 and
should be submitted on or before June
15, 2018. Rebuttal comments should be
submitted by June 29, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–11224 Filed 5–24–18; 8:45 am]
BILLING CODE 8011–01–P
39 17
E:\FR\FM\25MYN1.SGM
CFR 200.30–3(a)(57).
25MYN1
]]>Agencies
[Federal Register Volume 83, Number 102 (Friday, May 25, 2018)]
[Notices]
[Pages 24379-24382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-11224]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83294; File No. SR-NASDAQ-2018-008]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Modify the Listing Requirements Contained in
Listing Rule 5635(d) To Change the Definition of Market Value for
Purposes of the Shareholder Approval Rule and Eliminate the Requirement
for Shareholder Approval of Issuances at a Price Less Than Book Value
but Greater Than Market Value
May 21, 2018.
I. Introduction
On January 30, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to modify the listing requirements contained in
Nasdaq Rule 5635(d) to (1) change the definition of market value for
purposes of shareholder approval under Nasdaq Rule 5635(d); (2)
eliminate the requirement for shareholder approval of issuances at a
price less than book value but greater than market value; and (3) make
other conforming changes. The proposed rule change was published for
comment in the Federal Register on February 20, 2018.\3\ On April 4,
2018, pursuant to Section 19(b)(2) of the Act,\4\ the Commission
designated a longer period within which to either approve the proposed
rule change, disapprove the proposed rule change, or institute
[[Page 24380]]
proceedings to determine whether to disapprove the proposed rule
change.\5\ The Commission received three comments on the proposed rule
change.\6\ This order institutes proceedings under Section 19(b)(2)(B)
of the Act \7\ to determine whether to approve or disapprove the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 82702 (February 13,
2018), 83 FR 7269 (February 20, 2018) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 82994 (April 4,
2018), 83 FR 15441 (April 10, 2018). The Commission designated May
21, 2018, as the date by which it should approve, disapprove, or
institute proceedings to determine whether to disapprove the
proposed rule change.
\6\ See Letters to Brent J. Fields, Secretary, Commission, from
Michael A. Adelstein, Partner, Kelley Drye & Warren LLP, dated
February 28, 2018 (``Kelley Drye letter''); Penny Somer-Greif,
Chair, and Gregory T. Lawrence, Vice-Chair, Committee on Securities
Law of the Business Law Section of the Maryland State Bar
Association, dated March 13, 2018 (``MSBA Letter''); and Greg
Rodgers, Latham Watkins, dated March 14, 2018 (``Latham Watkins
Letter'').
\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal
The Exchange has proposed to amend Nasdaq Rule 5635(d) to modify
the circumstances in which shareholder approval is required for
issuances of securities in private placement transactions. Currently,
under Nasdaq Rule 5635(d), the Exchange requires a Nasdaq-listed
company to obtain shareholder approval prior to the issuance of
securities in connection with a private placement transaction (i.e. a
transaction other than a public offering \8\) involving: (1) The sale,
issuance, or potential issuance by the company of common stock (or
securities convertible into or exercisable for common stock) at a price
less than the greater of book or market value which together with sales
by officers, directors, or Substantial Shareholders \9\ of the company
equals 20% or more of common stock or 20% or more of the voting power
outstanding before the issuance; or (2) the sale, issuance, or
potential issuance by the company of common stock (or securities
convertible into or exercisable common stock) equal to 20% or more of
the common stock or 20% or more of the voting power outstanding before
the issuance for less than the greater of book or market value of the
stock.\10\
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\8\ See Nasdaq Rule IM-5635-3 (Definition of a Public Offering).
\9\ An interest consisting of less than either 5% of the number
of shares of common stock or 5% of the voting power outstanding of a
Company or party will not be considered a substantial interest or
cause the holder of such interest to be regarded as a ``Substantial
Shareholder.'' See Nasdaq Rule 5635(e)(3).
\10\ See Nasdaq Rule 5635(d). The Commission notes that Nasdaq
Rule 5635 also requires shareholder approval under Nasdaq Rules
5635(a), (b), and (c) for issuances involving an acquisition of
stock or assets of another company, a change of control, and equity
compensation. Nasdaq is not proposing to amend these other
shareholder approval provisions in its proposal.
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``Market value'' is defined in Nasdaq Rule 5005(a)(23) as the
consolidated closing bid price multiplied by the measure to be valued
(e.g., a company's market value of publicly held shares is equal to the
consolidated closing bid price multiplied by a company's publicly held
shares).\11\ This definition applies to the shareholder approval rules
as well as other listing rules. The Exchange has proposed to amend the
definition of market value only for purposes of Nasdaq Rule 5635(d).
The new definition, to be known as the ``Minimum Price,'' is defined as
the price that is the lower of (1) the closing price (as reflected on
Nasdaq.com) 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.\12\ Under the proposal,
shareholder approval will only be required for private placement
transactions that are priced below the Minimum Price as described
above.
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\11\ See Nasdaq Rule 5005(a)(23).
\12\ See proposed Nasdaq Rule 5635(d)(1)(A).
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In proposing to use the closing price on Nasdaq, rather than the
Nasdaq bid price as under the current rule, the Exchange explained, in
its proposal, that the closing price reported on Nasdaq.com is the
Nasdaq Official Closing Price, which is derived from the closing
auction on Nasdaq, reflects actual sale prices at one of the most
liquid times of the day, and is highly transparent to investors.\13\
According to the Exchange, the closing price reported on Nasdaq.com is
a better reflection of the market price of the security than the
closing bid price.\14\ The Exchange also noted that this use of closing
price is consistent with the approach of other exchanges.\15\
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\13\ See Notice, supra note 3, at 7270, which discusses the
Nasdaq Official Closing Price and notes, among other things, that
the closing auction is ``highly transparent to all investors through
the widespread dissemination of stock-by-stock information about the
closing auction, including the potential price and size of the
closing auction.'' The Exchange stated that the closing price is
published on Nasdaq.com with a 15 minute delay and is available
without registration or fee. According to the Exchange, Nasdaq does
not currently intend to charge a fee for access to this data or
otherwise restrict availability of this data. The Exchange further
stated that it would file a proposed rule change under Section 19(b)
of the Act before implementing any such change and, in such filing,
address the impact of the proposed rule change on compliance with
this rule. See id. at 7270 n.6.
\14\ See Notice, supra note 3, at 7270. According to the
Exchange, the price of an executed trade generally is viewed as a
more reliable indicator of value than a bid quotation. See id.
\15\ See Notice, supra note 3, at 7270 & n.3 (citing Section
312.04(i) of the NYSE Listed Company Manual).
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Further, in proposing to also use a five-day average closing price
to determine if a shareholder vote is required under Nasdaq Rule
5635(d), the Exchange noted that while investors and companies
sometimes prefer to use an average when pricing transactions, there are
potential negative consequences to using a five-day average as the sole
measure of whether shareholder approval is required. For example, in a
declining market, the Exchange noted that the five-day average price
will be above the current market price, which, according to the
Exchange, could make it difficult for companies to close transactions
because investors could buy shares at a lower price in the market. The
Exchange also noted concerns with using a five-day average in a rising
market, in that the five-day average price will appear to be at a
discount to the closing current market price. Further, according to the
Exchange, if material news is announced during the five-day period, the
average price could be a worse reflection of market value than the
closing price after the news is disclosed. The Exchange stated,
however, that it believed that these risks of using the five-day
average price are already accepted by the market, as evidenced by the
use of an average price in transactions that do not require shareholder
approval, such as those transactions where less than 20% of the
outstanding shares are being issued. In its rule filing, the Exchange
also noted that several commenters raised concerns regarding a 2017
solicitation of comments by the Exchange on a proposal to use the five-
day average price as the sole measure of market value (``2017
Solicitation'').\16\ The Exchange stated that it believed these
concerns were justified and, as such, proposed to define market value
as the lower of the closing price or five-day average price. As the
Exchange noted, this means that, under its proposal, an issuance would
not require shareholder approval as long as the issuance occurs
[[Page 24381]]
at a price greater than the lower of the two measures.\17\
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\16\ As the Exchange stated in the Notice, in 2017, the Exchange
solicited comments on a proposal to amend Nasdaq Rule 5635(d) and
the Exchange based its current proposal on its experience and
comments received during that process. See Notice, supra note 3, at
7270. The Commission notes that, in its rule filing, the Exchange
stated that it received support for this proposal in its 2017
Solicitation, but four commenters raised concerns about reliance on
the five-day average price to measure market value in certain
circumstances. See id. at 7271.
\17\ See Notice, supra note 3, at 7270-71.
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The Exchange also proposed, in conjunction with its proposal to
redefine market value for purposes of determining when a shareholder
vote is triggered under Rule 5635(d), to eliminate its current
requirement for shareholder approval of private placement issuances at
a price that is less than book value. Currently, as noted above, the
Exchange's rules require shareholder approval of a private placement
transaction if it is priced below market or book value. Accordingly,
under the proposal, private placement transactions that are priced
below book value but above market value, as defined by the Minimum
Price, would not require shareholder approval. In its proposal, the
Exchange stated that book value is an accounting measure that is based
on the historic cost of assets rather than their current value.
According to the Exchange, book value is not an appropriate measure of
whether a transaction is dilutive or should otherwise require
shareholder approval.\18\
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\18\ See Notice, supra note 3, at 7271. The Commission notes
that, in its rule filing, the Exchange stated that it received
support for this change in its 2017 Solicitation, but also received
comments opposing the change, one of which raised specific concerns
that the Exchange acknowledged in its proposal. See id. at 7271,
7274.
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Further, the Exchange proposed to revise Nasdaq Rule 5635(d) to
provide that shareholder approval is required prior to a 20% Issuance
at a price that is less than the Minimum Price.\19\ Under the proposal,
the Exchange would define ``20% Issuance'' for purposes of Rule 5635(d)
as 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.\20\ According to the Exchange, the Exchange is not making a
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, as described above, the applicable market value
pricing test will change.\21\
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\19\ See proposed Nasdaq Rule 5635(d)(2).
\20\ See proposed Nasdaq Rule 5635(d)(1)(B).
\21\ See Notice, supra note 3, at 7271.
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In addition, the Exchange proposed to amend the preamble to Nasdaq
Rule 5635 and the title of Nasdaq Rule 5635(d) to replace references to
``private placements'' with ``transactions other than public
offerings'' \22\ to, according to the Exchange, conform the language to
that in Nasdaq Rule IM-5635-3, which defines a public offering,\23\ and
to make other conforming changes to Nasdaq Rules IM-5635-3 and IM-5635-
4.\24\
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\22\ See proposed Nasdaq Rule 5635 and subsection (d).
\23\ See Notice, supra note 3, at 7271.
\24\ See proposed Nasdaq Rules IM-5635-3 and IM-5635-4.
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III. Summary of Comments
The Commission received three comments on the proposed rule change,
all of which supported the proposal.\25\ Of these commenters, one
stated it supported the proposed rule change without reservation and
the Exchange's reevaluation of its shareholder approval rules in light
of changes in market practice and investor protection mechanisms that
have taken place since the adoption of these rules.\26\ Another
commenter stated that, while it supported more significant changes to
Nasdaq Rule 5635(d), the proposed rule change would be a strong first
step in correcting the inadequacies and inequitableness of Nasdaq Rule
5635(d).\27\
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\25\ See Kelley Drye Letter, MSBA Letter, and Latham Watkins
Letter, supra note 6. These three commenters previously provided
comment letters to the Exchange in response to the 2017
Solicitation. For a summary prepared by the Exchange of these
comment letters, see the Notice, supra note 3, at 7273-74.
\26\ See Latham Watkins Letter, supra note 6.
\27\ See Kelley Drye Letter, supra note 6, at 1-2.
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Two of the commenters in support of the proposal specifically
addressed the changes to the definition of market value. One commenter
stated that the proposed method to determine market value using the
lower of the Nasdaq closing price and five-day average of Nasdaq
closing prices is a better determination of market value than the
current use of closing bid price because it will more accurately
reflect the type of price that would occur in an arms-length
transaction. This commenter stated that the proposed measure will
provide flexibility to account for market fluctuations and events,
without incurring the typical adverse consequence of material
movements, positive or negative, in a stock price at or near the end of
a five-day period.\28\
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\28\ See Kelley Drye Letter, supra note 6, at 3.
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Another commenter noted that parties often prefer to structure a
transaction using an average price to smooth out unusual price
fluctuations. This commenter stated that the proposed changes to the
definition of market value provides listed companies with additional
flexibility in structuring their securities transactions, brings the
shareholder approval rule more in line with how transactions are
structured when the rule is not a consideration, and provides a
reasonable indication of market value.\29\ This commenter also
supported the proposed change to use the Nasdaq Official Closing
Price.\30\
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\29\ See MSBA Letter, supra note 6, at 1-2.
\30\ See MSBA Letter, supra note 6, at 2.
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As to the proposal to eliminate book value, two of the commenters
specifically discussed their support of this change. One commenter
stated that book value does not reflect the actual value of securities
and is not relied upon in connection with investment decisions, whereas
market price of an issuer's common stock represents the market's
consensus on the value of the security. This commenter also stated that
in the rare instances where book value exceeds market value, this
usually occurs due to the accounting treatment of certain types of
capital investments by the issuer and should not impact the issuer's
ability to raise capital at market prices.\31\ Another commenter
strongly supported the proposed elimination of book value and stated it
agreed with statements in the Notice that book value is not an
appropriate measure of current value and, therefore, whether a
transaction is dilutive or should require shareholder approval.\32\
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\31\ See Kelley Drye Letter, supra note 6, at 2. In addition,
this commenter stated that book value may exceed market value due to
a market correction, burst bubble, or financial crisis, which is a
time when an issuer needs to be able to raise sufficient capital.
See id.
\32\ See MSBA Letter, supra note 6, at 2.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2018-008 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act to determine whether the proposal should be
approved or disapproved.\33\ Institution of such proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change, as discussed below. Institution of
disapproval proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
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\33\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act, the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is
[[Page 24382]]
instituting proceedings to allow for additional analysis and input
concerning the proposed rule change's consistency with the Act \34\
and, in particular, with Section 6(b)(5) of the Act, which requires,
among other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system and, in general, to protect investors and the public
interest.\35\
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\34\ 15 U.S.C. 78f(b)(5).
\35\ Id.
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As discussed above, the Exchange proposed to modify Nasdaq Rule
5635(d) to change the definition of market value for purposes of
shareholder approval of private placement transactions such that (1)
shareholder approval would be required prior to an issuance of 20% or
more at a price that is less than the lower of the closing price or the
five-day average price; and (2) shareholder approval would not be
required prior to an issuance of 20% or more at a price that is less
than book value but greater than market value. In response to the
Exchange's 2017 Solicitation, as noted above, some commenters had
raised questions about the use of a five-day average price as a measure
of market value under certain market conditions and the elimination of
the book value standard. Accordingly, the Commission is specifically
requesting additional comment on these two parts of the Exchange's
proposal in light of the questions raised in connection with the
Exchange's 2017 Solicitation.\36\
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\36\ The Commission also notes that the Exchange proposal stated
that the ``closing price'' used is the closing price (as reflected
on Nasdaq.com) at the time of the transaction. The Exchange should
address in its rule proposal if ``at the time of the transaction''
would use the previous day's close or the close on the day of the
transaction and should clarify this in the rule text. Unlike the
closing price reference, the five-day average closing price
provision, as proposed, currently makes clear it is based on the
five days immediately preceding the signing of a binding agreement.
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V. Commission's Solicitation of Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
view of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\37\
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\37\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by June 15, 2018. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 29,
2018. The Commission asks that commenters address the sufficiency of
the Exchange's statements in support of the proposal which are set
forth in the Notice,\38\ in addition to any other comments they may
wish to submit about the proposed rule change. In particular, the
Commission seeks comment, including where relevant, any specific data,
statistics, or studies, on the following:
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\38\ See Notice, supra note 3.
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1. Is the five-day average closing price a reasonable alternative
to determining market value for purposes of shareholder approval
requirements under Nasdaq Rule 5635(d)? If so, what are the benefits
and/or risks to companies and their shareholders? Do the benefits and
risks to companies and shareholders change under certain market
conditions, such as rising markets, and if so how?
2. Are there benefits and/or risks to listed companies and
shareholders by permitting sales in private placements that are above
market value but below book value? Could there be any potential impact
on share price? Would the assessment of any potential impact, if any,
change depending on the reason why a stock is trading above market
price but below book value (i.e., market conditions, accounting
issues)?
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2018-008 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2018-008. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2018-008 and should be submitted
on or before June 15, 2018. Rebuttal comments should be submitted by
June 29, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11224 Filed 5-24-18; 8:45 am]
BILLING CODE 8011-01-P
