Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 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, 49599-49603 [2018-21366]

Download as PDF Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Notices 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 the 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–Phlx–2018–59 and should be submitted on or before October 23, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.12 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–21365 Filed 10–1–18; 8:45 am] BILLING CODE 8011–01–P 1 15 SECURITIES AND EXCHANGE COMMISSION amozie on DSK3GDR082PROD with NOTICES1 Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 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 I. Introduction On January 30, 2018, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or the ‘‘Exchange’’) filed with the Securities 12 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 17:16 Oct 01, 2018 Jkt 247001 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 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’’). 5 15 U.S.C. 78s(b)(2). 6 See Securities Exchange Act Release No. 82994, 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. 7 See Securities Exchange Act Release No. 83294, 83 FR 24379 (May 25, 2018) (‘‘Order Instituting Proceedings’’). The Commission designated August 19, 2018, as the date by which the Commission shall approve or disapprove the proposed rule change. 8 See Letter to Brent J. Fields, Secretary, Commission, from Arnold Golub, Vice President and Deputy General Counsel, Nasdaq, Inc., dated July 18, 2018 (‘‘Nasdaq Response Letter’’). 9 See Securities Exchange Act Release No. 83865, 83 FR 42545 (August 22, 2018). The Commission 2 17 [Release No. 34–84287; File No. SR– NASDAQ–2018–008] September 26, 2018. 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 The Commission received three comments on the proposed rule change.4 On April 4, 2018, pursuant to Section 19(b(2) of the Act,5 the Commission designated a longer period within which to either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.6 On May 21, 2018, the Commission instituted proceedings under Section 19(b)(2)(B) of the Act to determine whether to approve or disapprove the proposed rule change.7 The Commission thereafter received a response to the Order Instituting Proceedings from the Exchange.8 On August 16, 2018, the Commission designated a longer period for Commission action on the proceedings to determine whether to approve or disapprove the proposed rule change.9 On August 16, 2018, the PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 49599 Exchange filed Amendment No. 1 to the proposed rule change.10 The Commission is publishing notice of the filing of Amendment No. 1 to solicit comment from interested persons and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. II. Description of the Proposal, as Modified by Amendment No. 1 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 11) 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 12 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 for 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.13 As extended the date by which the Commission shall approve or disapprove the proposed rule change to October 18, 2018. 10 In Amendment No. 1, the Exchange clarified that: (i) In the new definition of ‘‘Minimum Price,’’ the closing price (as reflected on Nasdaq.com) is measured immediately preceding the signing of the binding agreement, and (ii) a private placement is a transaction other than a public offering. Amendment No. 1 is available at https:// www.sec.gov/comments/sr-nasdaq-2018-008/ nasdaq2018008-4223952-172984.pdf. 11 See Nasdaq Rule IM–5635–3 (Definition of a Public Offering). 12 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). 13 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. E:\FR\FM\02OCN1.SGM 02OCN1 49600 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Notices described in more detail below, the Exchange is proposing to combine these two sections into one definitional section and make changes to the pricing test for triggering shareholder approval. ‘‘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).14 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) 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.15 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.16 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.17 The Exchange also 14 See Nasdaq Rule 5005(a)(23). proposed Nasdaq Rule 5635(d)(1)(A). See also Amendment No. 1, supra note 10. 16 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. 17 See id. at 7270. According to the Exchange, the price of an executed trade generally is viewed as a amozie on DSK3GDR082PROD with NOTICES1 15 See VerDate Sep<11>2014 17:16 Oct 01, 2018 Jkt 247001 noted that this use of closing price is consistent with the approach of other exchanges.18 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 closing 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 fiveday average in a rising market, in that the five-day average closing 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 closing 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 closing price as the sole measure of market value (‘‘2017 Solicitation’’).19 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 fiveday average closing price. As the Exchange noted, this means that, under its proposal, an issuance would not more reliable indicator of value than a bid quotation. See id. 18 See id. at 7270 & n.3 (citing Section 312.04(i) of the NYSE Listed Company Manual). 19 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 id. 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 closing price to measure market value in certain circumstances. See id. at 7271. PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 require shareholder approval as long as the issuance occurs at a price greater than the lower of the two measures.20 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.21 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.22 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.23 This definition combines the existing provisions of Nasdaq Rule 5635(d)(1) and (d)(2) into one provision. According to the Exchange, this proposed 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 20 See id. at 7270–71. id. 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. 22 See proposed Nasdaq Rule 5635(d)(2). 23 See proposed Nasdaq Rule 5635(d)(1)(B). 21 See E:\FR\FM\02OCN1.SGM 02OCN1 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Notices approval, although, as described above, the applicable pricing test will change.24 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’’ 25 to, according to the Exchange, conform the language to that in Nasdaq Rule IM–5635–3, which defines a public offering,26 and to make other conforming changes to Nasdaq Rules IM–5635–3 and IM–5635–4.27 In Amendment No. 1, Nasdaq stated that private placements would continue to be considered ‘‘transactions other than public offerings’’ under the proposed rule change.28 III. Summary of Comment Letters The Commission received three comments on the proposed rule change, all of which supported the proposal,29 as well as a letter from the Exchange in response to the Order Instituting Proceedings and in support of its proposal.30 Of the three commenters noted above,31 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.32 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).33 Two of the commenters in support of the proposal specifically addressed the changes to the definition of market value.34 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 24 See 25 See Notice, supra note 3, at 7271. proposed Nasdaq Rule 5635 and subsection current use of closing bid price because it will more accurately reflect the type of price that would occur in an armslength transaction.35 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.36 Another commenter noted that parties often prefer to structure a transaction using an average price to smooth out unusual price fluctuations.37 This commenter stated that the proposed change 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.38 This commenter also supported the proposed change to use the Nasdaq Official Closing Price.39 In the Nasdaq Response Letter, Nasdaq stated that it believes that the five-day average closing price is a reasonable alternative to use when determining market value for purposes of the shareholder approval requirements under Nasdaq Rule 5635(d) and that the use of the five-day average closing price will provide benefits to companies and their shareholders.40 Specifically, Nasdaq stated that the five-day average closing price is a reasonable alternative to the closing bid price, as used in the current market value standard and previously approved by the Commission, because it is determined at the most liquid time of day, prices reflecting actual sales are less prone to manipulation than bid prices, and it is more difficult to manipulate a closing price over several days than a single day.41 Further, Nasdaq stated that the five-day average closing price is a reasonable alternative for measuring market value given the impracticality of assessing market value (d). 26 See Notice, supra note 3, at 7271. proposed Nasdaq Rules IM–5635–3 and IM–5635–4. 28 See Amendment No. 1, supra note 10. 29 See Kelley Drye Letter, MSBA Letter, and Latham Watkins Letter, supra note 4. 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. 30 See Nasdaq Response Letter, supra note 8. 31 See supra, note 4. 32 See Latham Watkins Letter, supra note 4. 33 See Kelley Drye Letter, supra note 4, at 1–2. 34 See Kelley Drye Letter and MSBA Letter, supra note 4. amozie on DSK3GDR082PROD with NOTICES1 27 See VerDate Sep<11>2014 17:16 Oct 01, 2018 Jkt 247001 35 See Kelley Drye Letter, supra note 4, at 3. id. 37 See MSBA Letter, supra note 4, at 2. 38 See id. This commenter also stated that providing listed companies with the alternative of using the five-day average closing price ‘‘does not harm stockholders and is in line with the spirit and purpose of the Rule.’’ See id. 39 See id. 40 See Nasdaq Response Letter, supra note 8, at 2. 41 See id. Nasdaq also noted that the Toronto Stock Exchange uses a volume weighted average trading price for the five trading days immediately preceding the relevant date in requiring shareholder approval of certain private placements that are not at or above market price. 36 See PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 49601 as of a specific time and could be a more fair indicator of value of the securities than closing bid prices, which are prone to unanticipated market fluctuations.42 Nasdaq also stated that the five-day average closing price will more likely be above the final day’s closing price in a declining market and below the final day’s closing price in a rising market, but that actual results are less predictable because markets usually do not move exclusively in a single direction over time. Nasdaq noted that, in either a rising or a falling market, the proposal would allow companies to be able to complete transactions by accepting the lower of the average of the closing prices for each of the five days immediately preceding the signing of a binding agreement or the most recent closing price before the signing of a binding agreement.43 As to the proposal to eliminate book value, two of the commenters specifically discussed their support of this change.44 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.45 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.46 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.47 The Nasdaq Response Letter also stated that book value is just one point in a myriad of financial data points that is already incorporated into the market value of the security regardless of market conditions or accounting issues.48 In particular, the Exchange stated that the marketplace determines the fair value of a security based on all 42 See id. at 3. id. 44 See Kelley Drye Letter and MSBA Letter, supra note 4. 45 See Kelley Drye Letter, supra note 4, at 2. 46 See id. 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. 47 See MSBA Letter, supra note 4, at 2. 48 See Nasdaq Response Letter, supra note 8, at 4. 43 See E:\FR\FM\02OCN1.SGM 02OCN1 49602 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Notices publicly available information about the issuers’ securities, including, in large part, the issuers’ financial position, and that through disclosure of book value in quarterly and annual reports such information is quickly incorporated into the market price of a listed security.49 As a result, the Exchange stated its belief that the change to eliminate book value will not introduce any significant risks to investor protection and will provide benefits to companies trying to raise money quickly.50 IV. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.51 In particular, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with Section 6(b)(5) of the Act,52 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; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The development and enforcement of meaningful corporate governance listing standards for a national securities exchange is of substantial importance to financial markets and the investing public, especially given investor expectations regarding the nature of companies that have achieved an exchange listing for their securities. The corporate governance standards embodied in the listing standards of national securities exchanges, in particular, play an important role in assuring that exchange-listed companies observe good governance practices including safeguarding the interests of shareholders with respect to certain potentially dilutive transactions.53 49 See id. id. 51 15 U.S.C. 78f(b). In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 52 15 U.S.C. 78f(b)(5). 53 See, e.g., Securities Exchange Act Release No. 76814 (Dec. 31, 2015), 81 FR 0820 (Jan. 7, 2016) (NYSE–2015–02) (approving amendments to the NYSE Listed Company Manual to exempt early stage companies from having to obtain shareholder approval in certain circumstances). See also amozie on DSK3GDR082PROD with NOTICES1 50 See VerDate Sep<11>2014 17:16 Oct 01, 2018 Jkt 247001 As discussed above, the proposal would 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 closing 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 and concerns about the use of a five-day average closing price as a measure of market value under certain market conditions, such as the potential that the five-day average would permit the sale of discounted stock in rising markets, and the elimination of the book value standard. Accordingly, in the Order Instituting Proceedings, the Commission specifically requested additional comment on these two aspects of the Exchange’s proposal in light of the questions raised in connection with the Exchange’s 2017 Solicitation.54 Other than the Nasdaq Response Letter, the Commission received no additional comment letters following publication of the Order Instituting Proceedings. The Commission has carefully considered the proposal and finds that the proposed rule change is consistent with the Act. The Commission notes that it received three comment letters on the proposal, all of which were supportive of the proposal, as well as the Nasdaq Response Letter.55 In addition, the Commission believes that the Exchange sufficiently responded to the issues highlighted for commenters in the Order Instituting Proceedings in Securities Exchange Act Release No. 48108 (June 30, 2003), 68 FR 39995 (July 3, 2003) (approving equity compensation shareholder approval rules of both the NYSE and the National Association of Securities Dealers, Inc. n/k/a NASDAQ); and Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (order approving registration of BATS Exchange, Inc. noting that qualitative listing requirements including shareholder approval rules are designed to ensure that companies trading on a national securities exchange will adequately protect the interest of public shareholders). 54 The Commission also noted in the Order Instituting Proceedings that the Exchange should clarify, for purposes of the definition of Minimum Price, when the closing price would be measured. See Order Instituting Proceedings, supra note 7, at 24382 n. 36. As discussed above, Amendment No. 1 to the proposed rule change clarified that the closing price refers to the closing price immediately preceding the signing of a binding agreement. See Amendment No. 1, supra note 10. 55 See Section III, supra. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 either Amendment No. 1 or the Nasdaq Response Letter.56 The Commission believes that the proposed change to the definition of market value for purposes of shareholder approval under Nasdaq Rule 5635(d) to use the lower of the closing price or five-day average closing price on Nasdaq.com is consistent with the Act. As noted by commenters and the Exchange, the proposed method to determine market value has the potential to provide a better indication of actual market value than the current use of closing bid price under certain market conditions.57 Nasdaq also stated its belief that the closing price is less prone to manipulation than are bid prices.58 In addition, the proposal to use the Nasdaq Official Closing Price for purposes of market value should help to ensure transparency to investors in calculating market value for purposes of the rule.59 The Commission also notes that the five-day period for establishing the average closing price, according to some of the commenters, is related to the way transactions are actually structured to help smooth out price fluctuations.60 The Commission believes that the proposal to eliminate the requirement for shareholder approval of 20% Issuances at a price that is less than book value but above market value is also consistent with the Act. As noted 56 See supra note 10. See also supra notes 40–43 and 48–50 and accompanying text. 57 See Notice, supra note 3, at 7272. See also supra notes 16–18 and 35–43 and accompanying text. See also infra notes 63–65 and accompanying text. 58 See Notice, supra note 3, at 7270 (describing the closing auction on the Exchange, which is how the Nasdaq Official Closing Price is derived. The Exchange states that the closing auction ‘‘is designed to gather the maximum liquidity available for execution at the close of trading, and to maximize the number of shares executed at a single price at the close of the trading day,’’ and ‘‘promotes accurate closing prices by offering specialized orders available only during the closing auction and integrating those orders with regular orders submitted during the trading day that are still available at the close.’’ In addition, the Exchange states that the closing auction is ‘‘made highly transparent to all investors.’’) See also supra note 16. 59 See supra notes 57–58. The Commission notes that using closing prices for determining whether shareholder approval is needed for certain stock issuances is consistent with the rules of another exchange. See NYSE Listed Company Manual Rule 312.04(i). The Commission also notes that the Exchange has stated that Nasdaq does not currently intend to charge a fee for access to this data or otherwise restrict availability of this data and that the Exchange 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 supra note 16. 60 See supra notes 35–39 and accompanying text. E:\FR\FM\02OCN1.SGM 02OCN1 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Notices by commenters and the Exchange,61 market value (as determined pursuant to the proposal) may be a more appropriate indicator of whether a transaction is dilutive than book value for purposes of Nasdaq’s shareholder approval rule.62 The Commission notes, in approving the changes to measure market value as the lower of the closing price and fiveday average closing price and eliminate the book value requirement, that the ability of listed companies to issue securities in private placements without shareholder approval continues to remain limited by other important Exchange rules.63 For example, the Commission notes that any discounted issuance of stock to a company’s officers, directors, employees, or consultants would require shareholder approval under the Exchange’s equity compensation rules.64 In addition, shareholder approval would be required if the issuance resulted in a change of control and for the acquisition of stock or assets of another company, including where an issuance increases voting power or common shares by 5% or more and an officer or director or substantial security holder has a 5% direct or indirect interest (or collectively 10%) in the company or assets to be acquired. 65 V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule Change Interested persons are invited to submit written data, views, and arguments concerning whether Amendment No. 1 to the proposed rule change is consistent with the Act. amozie on DSK3GDR082PROD with NOTICES1 61 See supra notes 21 and 45–50 and accompanying text. 62 For example, as the Exchange stated in the Nasdaq Response Letter, among other things, book value is disclosed in quarterly and annual reports and is just one point of financial data already incorporated in the market value of the security. See Nasdaq Response Letter, supra note 8, at 4. 63 See, e.g., Nasdaq Rule 5635 (a),(b) and (c). The Commission notes that, under Nasdaq rules, if shareholder approval was not required under the private placement requirements in Rule 5635(d) it could still be required under one of the other shareholder approval provisions in Rule 5635 since these provisions apply independently of each other. 64 See Nasdaq Rule 5635(c). 65 See Nasdaq Rule 5635(a) and (b). The Commission notes that as to the additional proposed changes to the rule text, Nasdaq has indicated that these changes were made to improve the readability of the rule, to conform the language of the rule to the rule text and other rules, and to conform references in other rules to the proposed new standards. Among these changes are the changes that replace the references in Rule 5635 from ‘‘private placements’’ to ‘‘transactions other than public offerings.’’ The Commission notes that in Amendment No. 1 the Exchange stated that private placements would continue to be considered ‘‘transactions other than public offerings’’ under Nasdaq Rule 5635(d), as amended by the proposed rule change. See Amendment No. 1, supra note 10. VerDate Sep<11>2014 17:16 Oct 01, 2018 Jkt 247001 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 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 the 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 October 23, 2018. VI. Accelerated Approval of the Proposed Rule Change, as Modified by Amendment No. 1 The Commission finds good cause to approve the proposed rule change, as modified by Amendment No. 1, prior to the thirtieth day after the date of publication of notice of the filing of Amendment No. 1 in the Federal Register. The Commission notes that Amendment No. 1 clarifies the proposed PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 49603 rule change. In particular, Amendment No. 1 clarifies that: (i) In the new definition of ‘‘Minimum Price,’’ the closing price (as reflected on Nasdaq.com) is measured immediately preceding the signing of the binding agreement; and (ii) a private placement is a transaction other than a public offering.66 The clarifications in Amendment No. 1 should help to avoid any confusion as to the scope or application of the rule changes being adopted herein. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Act,67 to approve the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. VII. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,68 that the proposed rule change (SR–NASDAQ– 2018–008), as modified by Amendment No. 1 be, and it hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.69 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–21366 Filed 10–1–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meetings 2:00 p.m. on Thursday, October 4, 2018. PLACE: The meeting will be held at the Commission’s headquarters, 100 F Street NE, Washington, DC 20549. STATUS: This meeting will be closed to the public. MATTERS TO BE CONSIDERED: Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the closed meeting. Certain staff members who have an interest in the matters also may be present. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B) and (10) and 17 CFR 200.402(a)(3), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and (a)(10), permit consideration of the scheduled matters at the closed meeting. TIME AND DATE: 66 See 67 15 supra note 10. U.S.C. 78s(b)(2). 68 Id. 69 17 E:\FR\FM\02OCN1.SGM CFR 200.30–3(a)(12). 02OCN1

Agencies

[Federal Register Volume 83, Number 191 (Tuesday, October 2, 2018)]
[Notices]
[Pages 49599-49603]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21366]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84287; File No. SR-NASDAQ-2018-008]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 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

September 26, 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\ The Commission 
received three comments on the proposed rule change.\4\ On April 4, 
2018, pursuant to Section 19(b(2) of the Act,\5\ the Commission 
designated a longer period within which to either approve the proposed 
rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\6\ On May 21, 2018, the Commission instituted proceedings under 
Section 19(b)(2)(B) of the Act to determine whether to approve or 
disapprove the proposed rule change.\7\ The Commission thereafter 
received a response to the Order Instituting Proceedings from the 
Exchange.\8\ On August 16, 2018, the Commission designated a longer 
period for Commission action on the proceedings to determine whether to 
approve or disapprove the proposed rule change.\9\ On August 16, 2018, 
the Exchange filed Amendment No. 1 to the proposed rule change.\10\ The 
Commission is publishing notice of the filing of Amendment No. 1 to 
solicit comment from interested persons and is approving the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \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\ 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'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 82994, 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.
    \7\ See Securities Exchange Act Release No. 83294, 83 FR 24379 
(May 25, 2018) (``Order Instituting Proceedings''). The Commission 
designated August 19, 2018, as the date by which the Commission 
shall approve or disapprove the proposed rule change.
    \8\ See Letter to Brent J. Fields, Secretary, Commission, from 
Arnold Golub, Vice President and Deputy General Counsel, Nasdaq, 
Inc., dated July 18, 2018 (``Nasdaq Response Letter'').
    \9\ See Securities Exchange Act Release No. 83865, 83 FR 42545 
(August 22, 2018). The Commission extended the date by which the 
Commission shall approve or disapprove the proposed rule change to 
October 18, 2018.
    \10\ In Amendment No. 1, the Exchange clarified that: (i) In the 
new definition of ``Minimum Price,'' the closing price (as reflected 
on Nasdaq.com) is measured immediately preceding the signing of the 
binding agreement, and (ii) a private placement is a transaction 
other than a public offering. Amendment No. 1 is available at 
https://www.sec.gov/comments/sr-nasdaq-2018-008/nasdaq2018008-4223952-172984.pdf.
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II. Description of the Proposal, as Modified by Amendment No. 1

    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 \11\) 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 \12\ 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 for 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.\13\ As

[[Page 49600]]

described in more detail below, the Exchange is proposing to combine 
these two sections into one definitional section and make changes to 
the pricing test for triggering shareholder approval.
---------------------------------------------------------------------------

    \11\ See Nasdaq Rule IM-5635-3 (Definition of a Public 
Offering).
    \12\ 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).
    \13\ 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.
---------------------------------------------------------------------------

    ``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).\14\ 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) 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.\15\ Under the proposal, shareholder approval 
will only be required for private placement transactions that are 
priced below the Minimum Price as described above.
---------------------------------------------------------------------------

    \14\ See Nasdaq Rule 5005(a)(23).
    \15\ See proposed Nasdaq Rule 5635(d)(1)(A). See also Amendment 
No. 1, supra note 10.
---------------------------------------------------------------------------

    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.\16\ 
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.\17\ The Exchange also noted that this use of closing 
price is consistent with the approach of other exchanges.\18\
---------------------------------------------------------------------------

    \16\ 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.
    \17\ See id. 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.
    \18\ See id. at 7270 & n.3 (citing Section 312.04(i) of the NYSE 
Listed Company Manual).
---------------------------------------------------------------------------

    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 closing 
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 closing 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 closing 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 closing price as the sole measure of market value 
(``2017 Solicitation'').\19\ 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 closing price. As 
the Exchange noted, this means that, under its proposal, an issuance 
would not require shareholder approval as long as the issuance occurs 
at a price greater than the lower of the two measures.\20\
---------------------------------------------------------------------------

    \19\ 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 id. 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 closing price to measure market value in certain 
circumstances. See id. at 7271.
    \20\ See id. at 7270-71.
---------------------------------------------------------------------------

    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.\21\
---------------------------------------------------------------------------

    \21\ See id. 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.
---------------------------------------------------------------------------

    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.\22\ 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.\23\ This definition combines the existing provisions of 
Nasdaq Rule 5635(d)(1) and (d)(2) into one provision. According to the 
Exchange, this proposed 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

[[Page 49601]]

approval, although, as described above, the applicable pricing test 
will change.\24\
---------------------------------------------------------------------------

    \22\ See proposed Nasdaq Rule 5635(d)(2).
    \23\ See proposed Nasdaq Rule 5635(d)(1)(B).
    \24\ See Notice, supra note 3, at 7271.
---------------------------------------------------------------------------

    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'' \25\ to, according to the Exchange, conform the language to 
that in Nasdaq Rule IM-5635-3, which defines a public offering,\26\ and 
to make other conforming changes to Nasdaq Rules IM-5635-3 and IM-5635-
4.\27\ In Amendment No. 1, Nasdaq stated that private placements would 
continue to be considered ``transactions other than public offerings'' 
under the proposed rule change.\28\
---------------------------------------------------------------------------

    \25\ See proposed Nasdaq Rule 5635 and subsection (d).
    \26\ See Notice, supra note 3, at 7271.
    \27\ See proposed Nasdaq Rules IM-5635-3 and IM-5635-4.
    \28\ See Amendment No. 1, supra note 10.
---------------------------------------------------------------------------

III. Summary of Comment Letters

    The Commission received three comments on the proposed rule change, 
all of which supported the proposal,\29\ as well as a letter from the 
Exchange in response to the Order Instituting Proceedings and in 
support of its proposal.\30\ Of the three commenters noted above,\31\ 
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.\32\ 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).\33\
---------------------------------------------------------------------------

    \29\ See Kelley Drye Letter, MSBA Letter, and Latham Watkins 
Letter, supra note 4. 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.
    \30\ See Nasdaq Response Letter, supra note 8.
    \31\ See supra, note 4.
    \32\ See Latham Watkins Letter, supra note 4.
    \33\ See Kelley Drye Letter, supra note 4, at 1-2.
---------------------------------------------------------------------------

    Two of the commenters in support of the proposal specifically 
addressed the changes to the definition of market value.\34\ 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.\35\ 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.\36\
---------------------------------------------------------------------------

    \34\ See Kelley Drye Letter and MSBA Letter, supra note 4.
    \35\ See Kelley Drye Letter, supra note 4, at 3.
    \36\ See id.
---------------------------------------------------------------------------

    Another commenter noted that parties often prefer to structure a 
transaction using an average price to smooth out unusual price 
fluctuations.\37\ This commenter stated that the proposed change 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.\38\ This commenter also 
supported the proposed change to use the Nasdaq Official Closing 
Price.\39\
---------------------------------------------------------------------------

    \37\ See MSBA Letter, supra note 4, at 2.
    \38\ See id. This commenter also stated that providing listed 
companies with the alternative of using the five-day average closing 
price ``does not harm stockholders and is in line with the spirit 
and purpose of the Rule.'' See id.
    \39\ See id.
---------------------------------------------------------------------------

    In the Nasdaq Response Letter, Nasdaq stated that it believes that 
the five-day average closing price is a reasonable alternative to use 
when determining market value for purposes of the shareholder approval 
requirements under Nasdaq Rule 5635(d) and that the use of the five-day 
average closing price will provide benefits to companies and their 
shareholders.\40\ Specifically, Nasdaq stated that the five-day average 
closing price is a reasonable alternative to the closing bid price, as 
used in the current market value standard and previously approved by 
the Commission, because it is determined at the most liquid time of 
day, prices reflecting actual sales are less prone to manipulation than 
bid prices, and it is more difficult to manipulate a closing price over 
several days than a single day.\41\ Further, Nasdaq stated that the 
five-day average closing price is a reasonable alternative for 
measuring market value given the impracticality of assessing market 
value as of a specific time and could be a more fair indicator of value 
of the securities than closing bid prices, which are prone to 
unanticipated market fluctuations.\42\
---------------------------------------------------------------------------

    \40\ See Nasdaq Response Letter, supra note 8, at 2.
    \41\ See id. Nasdaq also noted that the Toronto Stock Exchange 
uses a volume weighted average trading price for the five trading 
days immediately preceding the relevant date in requiring 
shareholder approval of certain private placements that are not at 
or above market price.
    \42\ See id. at 3.
---------------------------------------------------------------------------

    Nasdaq also stated that the five-day average closing price will 
more likely be above the final day's closing price in a declining 
market and below the final day's closing price in a rising market, but 
that actual results are less predictable because markets usually do not 
move exclusively in a single direction over time. Nasdaq noted that, in 
either a rising or a falling market, the proposal would allow companies 
to be able to complete transactions by accepting the lower of the 
average of the closing prices for each of the five days immediately 
preceding the signing of a binding agreement or the most recent closing 
price before the signing of a binding agreement.\43\
---------------------------------------------------------------------------

    \43\ See id.
---------------------------------------------------------------------------

    As to the proposal to eliminate book value, two of the commenters 
specifically discussed their support of this change.\44\ 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.\45\ 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.\46\ 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.\47\
---------------------------------------------------------------------------

    \44\ See Kelley Drye Letter and MSBA Letter, supra note 4.
    \45\ See Kelley Drye Letter, supra note 4, at 2.
    \46\ See id. 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.
    \47\ See MSBA Letter, supra note 4, at 2.
---------------------------------------------------------------------------

    The Nasdaq Response Letter also stated that book value is just one 
point in a myriad of financial data points that is already incorporated 
into the market value of the security regardless of market conditions 
or accounting issues.\48\ In particular, the Exchange stated that the 
marketplace determines the fair value of a security based on all

[[Page 49602]]

publicly available information about the issuers' securities, 
including, in large part, the issuers' financial position, and that 
through disclosure of book value in quarterly and annual reports such 
information is quickly incorporated into the market price of a listed 
security.\49\ As a result, the Exchange stated its belief that the 
change to eliminate book value will not introduce any significant risks 
to investor protection and will provide benefits to companies trying to 
raise money quickly.\50\
---------------------------------------------------------------------------

    \48\ See Nasdaq Response Letter, supra note 8, at 4.
    \49\ See id.
    \50\ See id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\51\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\52\ 
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; and are not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \52\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The development and enforcement of meaningful corporate governance 
listing standards for a national securities exchange is of substantial 
importance to financial markets and the investing public, especially 
given investor expectations regarding the nature of companies that have 
achieved an exchange listing for their securities. The corporate 
governance standards embodied in the listing standards of national 
securities exchanges, in particular, play an important role in assuring 
that exchange-listed companies observe good governance practices 
including safeguarding the interests of shareholders with respect to 
certain potentially dilutive transactions.\53\
---------------------------------------------------------------------------

    \53\ See, e.g., Securities Exchange Act Release No. 76814 (Dec. 
31, 2015), 81 FR 0820 (Jan. 7, 2016) (NYSE-2015-02) (approving 
amendments to the NYSE Listed Company Manual to exempt early stage 
companies from having to obtain shareholder approval in certain 
circumstances). See also Securities Exchange Act Release No. 48108 
(June 30, 2003), 68 FR 39995 (July 3, 2003) (approving equity 
compensation shareholder approval rules of both the NYSE and the 
National Association of Securities Dealers, Inc. n/k/a NASDAQ); and 
Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 
49498 (August 21, 2008) (order approving registration of BATS 
Exchange, Inc. noting that qualitative listing requirements 
including shareholder approval rules are designed to ensure that 
companies trading on a national securities exchange will adequately 
protect the interest of public shareholders).
---------------------------------------------------------------------------

    As discussed above, the proposal would 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 closing 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 and concerns about the use of a five-day average 
closing price as a measure of market value under certain market 
conditions, such as the potential that the five-day average would 
permit the sale of discounted stock in rising markets, and the 
elimination of the book value standard. Accordingly, in the Order 
Instituting Proceedings, the Commission specifically requested 
additional comment on these two aspects of the Exchange's proposal in 
light of the questions raised in connection with the Exchange's 2017 
Solicitation.\54\ Other than the Nasdaq Response Letter, the Commission 
received no additional comment letters following publication of the 
Order Instituting Proceedings.
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    \54\ The Commission also noted in the Order Instituting 
Proceedings that the Exchange should clarify, for purposes of the 
definition of Minimum Price, when the closing price would be 
measured. See Order Instituting Proceedings, supra note 7, at 24382 
n. 36. As discussed above, Amendment No. 1 to the proposed rule 
change clarified that the closing price refers to the closing price 
immediately preceding the signing of a binding agreement. See 
Amendment No. 1, supra note 10.
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    The Commission has carefully considered the proposal and finds that 
the proposed rule change is consistent with the Act. The Commission 
notes that it received three comment letters on the proposal, all of 
which were supportive of the proposal, as well as the Nasdaq Response 
Letter.\55\ In addition, the Commission believes that the Exchange 
sufficiently responded to the issues highlighted for commenters in the 
Order Instituting Proceedings in either Amendment No. 1 or the Nasdaq 
Response Letter.\56\
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    \55\ See Section III, supra.
    \56\ See supra note 10. See also supra notes 40-43 and 48-50 and 
accompanying text.
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    The Commission believes that the proposed change to the definition 
of market value for purposes of shareholder approval under Nasdaq Rule 
5635(d) to use the lower of the closing price or five-day average 
closing price on Nasdaq.com is consistent with the Act. As noted by 
commenters and the Exchange, the proposed method to determine market 
value has the potential to provide a better indication of actual market 
value than the current use of closing bid price under certain market 
conditions.\57\ Nasdaq also stated its belief that the closing price is 
less prone to manipulation than are bid prices.\58\ In addition, the 
proposal to use the Nasdaq Official Closing Price for purposes of 
market value should help to ensure transparency to investors in 
calculating market value for purposes of the rule.\59\ The Commission 
also notes that the five-day period for establishing the average 
closing price, according to some of the commenters, is related to the 
way transactions are actually structured to help smooth out price 
fluctuations.\60\
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    \57\ See Notice, supra note 3, at 7272. See also supra notes 16-
18 and 35-43 and accompanying text. See also infra notes 63-65 and 
accompanying text.
    \58\ See Notice, supra note 3, at 7270 (describing the closing 
auction on the Exchange, which is how the Nasdaq Official Closing 
Price is derived. The Exchange states that the closing auction ``is 
designed to gather the maximum liquidity available for execution at 
the close of trading, and to maximize the number of shares executed 
at a single price at the close of the trading day,'' and ``promotes 
accurate closing prices by offering specialized orders available 
only during the closing auction and integrating those orders with 
regular orders submitted during the trading day that are still 
available at the close.'' In addition, the Exchange states that the 
closing auction is ``made highly transparent to all investors.'') 
See also supra note 16.
    \59\ See supra notes 57-58. The Commission notes that using 
closing prices for determining whether shareholder approval is 
needed for certain stock issuances is consistent with the rules of 
another exchange. See NYSE Listed Company Manual Rule 312.04(i). The 
Commission also notes that the Exchange has stated that Nasdaq does 
not currently intend to charge a fee for access to this data or 
otherwise restrict availability of this data and that the Exchange 
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 supra note 16.
    \60\ See supra notes 35-39 and accompanying text.
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    The Commission believes that the proposal to eliminate the 
requirement for shareholder approval of 20% Issuances at a price that 
is less than book value but above market value is also consistent with 
the Act. As noted

[[Page 49603]]

by commenters and the Exchange,\61\ market value (as determined 
pursuant to the proposal) may be a more appropriate indicator of 
whether a transaction is dilutive than book value for purposes of 
Nasdaq's shareholder approval rule.\62\
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    \61\ See supra notes 21 and 45-50 and accompanying text.
    \62\ For example, as the Exchange stated in the Nasdaq Response 
Letter, among other things, book value is disclosed in quarterly and 
annual reports and is just one point of financial data already 
incorporated in the market value of the security. See Nasdaq 
Response Letter, supra note 8, at 4.
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    The Commission notes, in approving the changes to measure market 
value as the lower of the closing price and five-day average closing 
price and eliminate the book value requirement, that the ability of 
listed companies to issue securities in private placements without 
shareholder approval continues to remain limited by other important 
Exchange rules.\63\ For example, the Commission notes that any 
discounted issuance of stock to a company's officers, directors, 
employees, or consultants would require shareholder approval under the 
Exchange's equity compensation rules.\64\ In addition, shareholder 
approval would be required if the issuance resulted in a change of 
control and for the acquisition of stock or assets of another company, 
including where an issuance increases voting power or common shares by 
5% or more and an officer or director or substantial security holder 
has a 5% direct or indirect interest (or collectively 10%) in the 
company or assets to be acquired. \65\
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    \63\ See, e.g., Nasdaq Rule 5635 (a),(b) and (c). The Commission 
notes that, under Nasdaq rules, if shareholder approval was not 
required under the private placement requirements in Rule 5635(d) it 
could still be required under one of the other shareholder approval 
provisions in Rule 5635 since these provisions apply independently 
of each other.
    \64\ See Nasdaq Rule 5635(c).
    \65\ See Nasdaq Rule 5635(a) and (b). The Commission notes that 
as to the additional proposed changes to the rule text, Nasdaq has 
indicated that these changes were made to improve the readability of 
the rule, to conform the language of the rule to the rule text and 
other rules, and to conform references in other rules to the 
proposed new standards. Among these changes are the changes that 
replace the references in Rule 5635 from ``private placements'' to 
``transactions other than public offerings.'' The Commission notes 
that in Amendment No. 1 the Exchange stated that private placements 
would continue to be considered ``transactions other than public 
offerings'' under Nasdaq Rule 5635(d), as amended by the proposed 
rule change. See Amendment No. 1, supra note 10.
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V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 to the proposed rule 
change is consistent with the Act. 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 the 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 October 23, 2018.

VI. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. The Commission notes that Amendment No. 1 
clarifies the proposed rule change. In particular, Amendment No. 1 
clarifies that: (i) In the new definition of ``Minimum Price,'' the 
closing price (as reflected on Nasdaq.com) is measured immediately 
preceding the signing of the binding agreement; and (ii) a private 
placement is a transaction other than a public offering.\66\ The 
clarifications in Amendment No. 1 should help to avoid any confusion as 
to the scope or application of the rule changes being adopted herein. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\67\ to approve the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \66\ See supra note 10.
    \67\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\68\ that the proposed rule change (SR-NASDAQ-2018-008), as 
modified by Amendment No. 1 be, and it hereby is, approved on an 
accelerated basis.
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    \68\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\69\
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    \69\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21366 Filed 10-1-18; 8:45 am]
 BILLING CODE 8011-01-P
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