Utah Administrative Code
Topic - Commerce
Title R164 - Securities
Rule R164-12 - Sales Commission
Section R164-12-1f - Commissions on Sales of Securities
Universal Citation: UT Admin Code R 164-12-1f
Current through Bulletin 2024-18, September 15, 2024
A. Preliminary Notes
(1) This R164-12-1 f
regulates the compensation which may be received by any person in connection
with a public offering of securities pursuant to a registration by
qualification under Section 10 of the Utah Uniform Securities Act (the "Act").
The Rule does not effect offerings which are registered by coordination or
offerings which are sold pursuant to an exemption from the Act.
(2) This R164-12-1 f does not effect the
requirements of the Act and the rules thereunder as to registration,
supervision and termination of agents.
(3) This R164-12-1f is an extended version of
the standards that the Utah Securities Division (the "Division") has in the
past required to be met. The standards herein are based upon reasonableness,
the NASAA guidelines as to options and warrants issued to underwriters, and
FINRA's interpretations of fair compensation. The percentage of cash
commissions that is permitted under this R164-12-1f is unchanged from the
former Rule A67-03-12.
B. Persons Subject to this Rule
(1) This R164-12-1 f regulates compensation
to participants in a distribution of securities which are registered by
qualification pursuant to Section 10 of the Act and the rules and regulations
thereunder.
(2) No registrant,
affiliate of a registrant, or person acting on behalf of a registrant in
connection with a public offering registered pursuant to Section 10 of the Act
may give, directly or indirectly, compensation which is in violation of this
R164-12-1 f.
(3) No agent,
underwriter or affiliate of an agent or underwriter may receive, directly or
indirectly in connection with a public offering registered pursuant to Section
10 of the Act, compensation which is in violation of this R164-12-1
f.
C. Definitions
As used in this R164-12-1 f, the following terms shall have the indicated meanings:
(1)
"Compensation" includes all cash; the value of all options, warrants, rights
and other securities; the gross amount of the underwriter's discount; total
expenses payable by the issuer, whether accountable or non-accountable, to or
on behalf of the participant in the distribution which would normally be paid
by the participant in the distribution; counsel's fees and expenses of the
participant in the distribution payable by the issuer; finder's fees; financial
consulting and advisory fees; and the value of all contracts and agreements
with respect to the issuer or its affiliates which are connected with the
distribution or with the negotiation of compensation in the
distribution.
(2) "Corporate equity
security" means any security which presently represents an ownership interest
in a corporate entity and which includes common stock and preferred stock but
does not include a security which is not presently, but is at some future time
convertible into, a corporate equity security.
(3) "Participant in the distribution" means
any person offering, selling, delivering, distributing, soliciting interest in
or otherwise involved in the distribution, offer or sale of securities to the
public or to any member of the public and includes persons commonly known as
underwriters, agents and finders.
D. Maximum Compensation
(1) Distributions of Corporate Equity
Securities: the maximum compensation that shall be given, directly or
indirectly, to the participants in a distribution of corporate equity
securities is an amount equal to 15% of that portion of the public offering
price of the securities being distributed which is actually received by or on
behalf of the registrant; provided, however, that any securities issued in
connection with such distribution comply with paragraph F of this
R164-12-1f.
(2) All Other
Distributions: the maximum compensation that shall be given, directly or
indirectly, to the participants in a distribution of securities other than
corporate equity securities shall be 20% of that portion of the public offering
price of the securities being sold which is actually received by or on behalf
of the registrant; provided, however, that any securities issued also comply
with paragraph F of this R164-12-1f.
E. Determination of Amount Received by or on Behalf of the Registrant
The amount of the public offering price which is actually received shall be determined as follows:
(1) The following shall be included:
(a) Cash received;
(b) Fair market value of any securities
received; and
(c) Fair market value
of any tangible property received excluding items listed in subparagraph E(2)
of this R164-12-1f.
(2)
The following shall be excluded:
(a)
Promissory notes or similar promises to provide cash or property in the
future;
(b) Assessments, whether
conditional or obligatory; and
(c)
Intangible property such as patents, royalties, etc.
F. Securities Issued to Participants in a Distribution
(1) Options or
Warrants:
Options or warrants issued to participants in a distribution must be justified by the applicant. Options or warrants will be considered justified if all of the conditions of this paragraph F are met.
(a) The options or warrants are issued only
to a broker-dealer registered with this Division and are not transferable
except in cases where the broker-dealer is a partnership and then only within
the partnership.
(b) The number of
shares covered by all options or warrants does not exceed ten percent of the
shares to be outstanding upon completion of the offering.
(c) The options or warrants do not exceed
five years in duration and are exercisable no sooner than one year after
issuance.
(d) The initial exercise
price of the options or warrants is at least equal to the public offering price
plus a step-up of said public offering price of either seven per cent each year
they are outstanding, so that the exercise price throughout the second year is
one hundred seven per cent, throughout the third year one hundred fourteen per
cent, throughout the fourth year one hundred twenty-one per cent, throughout
the fifth year one hundred twenty-eight per cent; or in the alternative, twenty
per cent at any time after one year from the date of issuance; provided that an
election as to either alternative must be made by the broker-dealer at the time
that the options or warrants are issued.
(e) The options or warrants are issued by a
relatively small company, which is in the promotional stage, or which, because
of its size, lacks public ownership of its shares, or other facts and
circumstances make it appear that the issuance of options is necessary to
obtain competent investment banking services.
(f) The prospectus used in connection with
the offering fully discloses the terms and the reason for the issuance of such
options or warrants; provided that if such reason relates to future advisory
services to be performed by the broker-dealer without compensation in
consideration for the issuance of such options or warrants, a statement to that
effect is placed in the prospectus.
(g) The total amount of options and warrants
issued or reserved for issuance at the date of the public offering shall be
reasonable. The amount of options and warrants shall be presumed reasonable if
the number of shares represented by such options and warrants does not exceed a
number equal to ten per cent of the number of shares outstanding during the
period the registration is in effect. The number of options and warrants
reserved for issuance may be disregarded if the issuer files an undertaking or
states in the prospectus that the amount of outstanding options and warrants
shall not exceed the above limitation during the period the registration is in
effect.
(2) The value of
any securities received, which value shall be included in determining the
amount of compensation for the purposes of paragraph D of this R164-12-1f shall
be as follows:
(a) Options/Warrants: The
market value of such options or warrants, if any, shall be used. In cases where
no market value exists, a presumed fair value of twenty per cent of the public
offering price of the shares to which the options or warrants pertain shall be
used, unless evidence indicates that a contrary valuation exists.
(b) Stock: The amount of compensation
received when stock is issued shall be the difference between the cost of such
stock and the proposed public offering price or, in the case of securities with
a bona fide independent market, the cost of such stock and price of the stock
on the market on the date of purchase. If, however, there is a binding
obligation to hold such stock for a substantial period of time, an adjustment
in such valuation may be made.
(c)
Convertible Securities: The amount of compensation received when convertible
securities are issued shall be the difference between the conversion price and
the proposed public offering price or, in the case of securities with a bona
fide independent market, the conversion price and the price of the stock on the
market on the date of purchase.
(3) Equity Securities Issued to Participants
in a Distribution:
Equity securities or securities convertible into equity securities, when combined with securities issued pursuant to subsection (F)(1) of this Rule, acquired by a participant in a distribution, whether acquired prior to, at the time of, or after, but which are determined to be in connection with or related to, the offering shall not in the aggregate be more than ten percent of the total number of units being offered in the proposed offering. The maximum limitation in the case of "best efforts" underwritings or participations shall be on the basis of no more than one unit received for every ten units actually sold. For the purposes of this paragraph:
(a) No securities shall be issued to a
participant in a distribution where such participant is not a broker-dealer
registered with this Division;
(b)
Over-allotment shares and shares underlying warrants, options, or convertible
securities which are part of the proposed offering are not to be counted as
part of the aggregate number of shares being offered against which the ten
percent limitation is to be applied.
(c) In an exceptional or unusual case
involving an offering of convertible securities of a company whose stock
already has a public market and where the circumstances require, taking into
consideration the conversion terms of the securities to be received by the
above persons, the receipt of underlying shares by such persons aggregating the
above referred to ten percent limitation may be considered improper and a
lesser amount considered more appropriate.
(d) In an exceptional or unusual case, where
a large number of shares of a company are already outstanding and/or the
purchase price of the securities, risk involved or the time factor as to
acquisition or other circumstances justify, a variation from the above
limitations may be permitted but in all cases the burden of demonstrating
justification for such shall be upon the person seeking the
variation.
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