La. Admin. Code tit. 10 § XIII-507

Current through Register Vol. 50, No. 11, November 20, 2024

Section XIII-507 - Options, Warrants and Convertible Debenture

A. Warrants or stock purchase options, conversion privileges and other rights to acquire stock or other securities must be justified by the applicant. The following standards will be followed in determining whether the issuance of such warrants and stock options is justified.

1. Fifteen Percent Limitation. Unless good cause for an exception is shown, authorized warrants and options to purchase shares (excluding those specified in §507. A.3 shall not be in excess of 15 percent of the common shares to be outstanding if the entire public offering is sold, except as may otherwise be permitted under §507. A.7 g

2. Five-Year Limitation. Except as otherwise permitted under §507. A.7 a, or unless good cause for an exception is shown, a warrant or option to purchase shares shall not be exercisable after the expiration of five years from the date such warrant or option is granted.

3. Pro-Rata Offerings. Prorate issuance of options or warrants to all purchasers in connection with a public offering will be considered justified if reasonable in number and method of exercise.

4. Employee Options. Options to employees shall be considered justified if reasonable in number and method of exercise.

a. Qualified stock options, as defined in Section 422(b) of the United States Internal Revenue Code of 1954, issued in accordance with the terms of a qualified stock option plan will be considered reasonable in number when the total number of shares subject to such options (and any restricted stock options outstanding) at any one time does not exceed 10 percent of the then outstanding common shares of the issuer.

b. Options granted to employees of the issuer which are not qualified stock options will be considered on an individual basis, provided, however, that the total number of shares subject to such stock options (and any options outstanding pursuant to a qualified stock option plan) shall not exceed 10 percent of the then outstanding common shares of the issuer, and further provided that, in determining whether such options are justified, consideration shall be given to whether such options contain a step-up provision similar to the one set forth in §507. A.5 c

5. Options and Warrants to Underwriters. Ordinarily, warrants or options to underwriters will be considered with disfavor, unless all of the following conditions are met:

a. the warrants or options are issued to a managing underwriter in connection with a firm underwriting and are not exercisable for 11 months after the date of the offering, or, in connection with a best efforts basis, and are not issued and are not exercisable for 11 months following the sale of the entire issue or such lesser amount as is approved by the commissioner;

b. the warrants or options are nontransferable other than by will or pursuant to the laws of descent and distribution, except to a partner of the underwriter when the underwriter is a partnership or to a person who is both a stockholder and officer of the underwriter when the underwriter is a corporation;

c. the initial exercise price of the options is at least equal to the public offering price plus a step-up of said public offering price of either:

i. 7 percent each year they are outstanding, commencing one year after issuance, so that the exercise price throughout the second year is 107 percent; throughout the third year 114 percent; throughout the fourth year 121 percent; and throughout the fifth year 128 percent; or in the alternative;

ii. 20 percent at any time after one year from the date of issuance; provided that an election as to either alternative must be made by the underwriters at the time the options are issued to the underwriters;

d. the options and warrants are issued by a relatively small company which is in the promotional stage or which, because of its size, lack of public ownership of its shares or other facts and circumstances, makes it appear to the commissioner that the issuance of options is necessary to obtain competent investment banking services, and the direct commissions to the underwriters are lower than the usual and customary commissions would be in the absence of such options;

e. the prospectus issued in connection with the registration statement contains a full disclosure as to the terms and the reason for the issuance of the warrants and options, and if such reason is in connection with future advisory services to be performed by the underwriter without compensation in consideration of the issuance of the options, a statement to that effect shall be placed in the prospectus;

f. the same tests shall be applied to options issued by the selling shareholders unless evidence indicates that the selling shareholders are so separated from the corporate entity and so lacking in control of the corporate entity as to require more liberal treatment;

g. the number of shares or units called for by such warrants or options does not exceed 5 percent of the number of shares or units to be sold, or in fact, sold for the issuer in the offering;

h. selling expenses, commissions and discounts, including the value of such options to be issued, do not exceed the limitations contained in §505

6. No Options to Issuer's Agents. No options or warrants shall be issued to an agent of the issuer.

7. Options, Warrants and Convertible Debentures Issued in Connection with Financing Arrangements. Ordinarily, options, warrants and convertible debentures issued in connection with financing arrangements made by the corporation will be considered with disfavor unless all of the following conditions are met.

a. The options, warrants or convertible debentures are issued to the lender for valuable consideration. "Valuable consideration" shall be deemed to have been given if the requirements of §507. A.7.g are satisfied in respect to the percentage limitation set forth therein.

b. The options or warrants shall expire not later than the original maturity date of the loan and the convertible debenture shall expire upon payment of the loan. Notwithstanding the limitation of §507. A.2 and §507. A.7 b, if the requirements of §507. A.7.g are met, the options or warrants may have an expiration date up to, but not exceeding 10 years from the date such option or warrants are granted, even if the maturity date of the loan is less than 10 years from the date the loan is made.

c. The options, warrants and convertible debentures shall have been issued as a result of bona fide negotiations between the corporation and the lender.

d. At the date of issuance, the lender shall not be affiliated with the corporation nor be a party to an agreement which creates or contemplates creating an affiliation. For the purposes of this provision, a lender will be considered affiliated with the corporation if it directly, or indirectly, controls, or is controlled by, or is under common control with the corporation. Control means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Any person who owns beneficially (either directly or through one or more controlled companies) more than 25 percent of the issued and outstanding voting securities of any company shall be presumed not to control such company.

e. The exercise or conversion price of such options, warrants or convertible debentures shall not be less than the fair market value of the shares into which they are exercisable or convertible on the date the corporation receives a commitment in writing from the lender to make the loan. "Fair market value" shall be deemed to be the trading price of the stock if there is a public market therefor and if such public market is broadly based, meaningful and significant. Otherwise, "fair market value" will be deemed to be the price determined through bona fide negotiation of the parties. The existence of a public market shall not in itself be a presumption that it is broadly based, meaningful and significant.

f. Upon exercise of the options or warrants or conversion of the convertible debentures, both of the following conditions shall be satisfied.

i. The number of shares issuable shall be fair and reasonable both in number and method of exercise at the time of issuance of the options, warrants or convertible debentures. The standard required by the preceding sentence shall be deemed to be satisfied if the conditions set forth in §507. A.7 are met.

ii. At the time of issuance, the product obtained by multiplying the number of shares issuable by the exercise or conversion price did not exceed the face amount of the loan.

g. Notwithstanding any percentage limitation applicable to options, warrants and convertible debentures set forth in this Section, options, warrants and convertible debentures issued in connection with financing arrangements may cover shares which total in number 20 percent of the common shares to be outstanding, if the entire public offering is sold or if either of the following conditions is satisfied.

i. The issuance thereof to the lender was in conjunction with the lender's unconditionally guaranteeing the payment of a loan or loans being made to the company, provided, however, that as of the date of issuance of warrants, options or convertible debentures, the product obtained by multiplying the number of shares issuable by the exercise or conversion price thereof did not exceed an amount equal to that portion of the loan unconditionally guaranteed by the lender.

ii. If issued to the lender in conjunction with a loan by the lender of cash funds to the company and if:

(a). the loan is subordinated (including any security interest against the assets of the company) by its terms to all borrowing of the company from banks and other institutional lenders;

(b). no part of such loan was required by its term to be amortized during the first three years. The company may prepay such loan, however, without adversely affecting the exception granted by this Subparagraph; and

(c). as of the date of issuance of the warrants, options or convertible debentures, the product obtained by multiplying the number of shares issuable by the exercise of conversion price thereof did not exceed the face amount of the loan.

h. Options, warrants or convertible debentures held by other than the original holder, which options, warrants or convertible debentures were issued by the corporation in connection with financing arrangements, will be subject to the conditions provided by this Section.

La. Admin. Code tit. 10, § XIII-507

Adopted by the Commissioner of Securities, November 9, 1971.

AUTHORITY NOTE: Promulgated in accordance with R.S. 51:707 and R.S. 51:708.