[Federal Register Volume 60, Number 112 (Monday, June 12, 1995)]
[Notices]
[Pages 30917-30919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14327]



-----------------------------------------------------------------------


SECURITIES AND EXCHANGE COMMISSION
[Investment Company Rel. No. 21116; 812-9428]


Equitex, Inc.; Notice of Application

June 6, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application under the Investment Company Act of 1940 
(the ``Act'').

-----------------------------------------------------------------------

APPLICANT: Equitex, Inc.

RELEVANT ACT SECTION: Section 61(a)(3)(B).

SUMMARY OF APPLICATION: Applicant seeks an order authorizing applicant 
to issue stock options pursuant to applicant's Amended 1993 Stock 
Option Plan for Non-Employee Directors (the ``Directors' Plan'').

FILING DATES: The application was filed on December 14, 1994 and 
amended on April 24, 1995.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on July 3, 1995, 
and should be accompanied by proof of service on applicant, in the form 
of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of the date of a hearing may request notification by writing 
to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicant, 7315 East Peakview Avenue, Englewood, Colorado 80111.

FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or C. David 
Messman, Branch Chief, at (202) 942-0564 (Division of Investment 
Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

APPLICANT'S REPRESENTATIONS
    1. Applicant is a business development company (``BDC'') within the 
meaning of section 2(a)(48) of the Act.\1\ Applicant seeks an order 
pursuant to section 61(a)(3)(B) of the Act authorizing it to: (a) Grant 
options to purchase 100,000 shares of applicant's common stock to each 
current non-employee director of applicant on the date the Commission 
issues the order requested hereby (the ``Order Date''); and (b) grant 
options to purchase 100,000 shares of applicant's common stock to each 
new non-employee director of applicant who may be elected or appointed 
to applicant's Board of Directors (the ``Board'') subsequent to the 
Order Date.

    \1\ Section 2(a)(48) defines a BDC to be any closed-end 
investment company that operates for the purpose of making 
investments in securities described in sections 55(a)(1) through 
55(a)(3) and makes available significant managerial assistance with 
respect to the issuers of such securities. Such issuers are small, 
nascent companies whose securities typically are illiquid. Certain 
of the regulatory restrictions of the Act are relaxed for BDCs.
---------------------------------------------------------------------------

    2. The Directors' Plan provides for non-discretionary grants of 
stock options to non-employee directors of applicant to acquire, in the 
aggregate, up to 500,000 shares of applicant's common stock. The 
Directors' Plan was adopted by the Board on April 1, 1993 (the 
``Effective Date'') and approved by applicant's shareholders on 
December 28, 1993 for a ten year term commencing on the Effective Date. 
On April 20, 1995, the Board cancelled all options conditionally 
granted under the Director's Plan, none of which were exercisable or 
had been exercised, and adopted amendments to the Directors' Plan (the 
``Directors' Plan Amendments''). The Directors' Plan Amendments revised 
the Directors' Plan to provide that options shall automatically be 
granted not on the [[Page 30918]] Effective Date but rather on the 
Order Date.\2\

    \2\ Section 61(a)(3)(B) requires that the proposal to issue 
stock options to non-employee directors of a BDC, pursuant to an 
executive compensation plan, be authorized by SEC order before any 
such options are issued. Since the options initially were issued 
without the required SEC order, applicant cancelled the outstanding 
options and proposes to reissue them, in accordance with section 
61(a)(3)(B), upon receiving the order requested hereby.
---------------------------------------------------------------------------

    3. Applicant's primary investment objective is to achieve long-term 
capital appreciation through investing in new and developing companies 
and in companies which are experiencing financial difficulties. 
Applicant does not have an external ``investment adviser'' within the 
meaning of the Act. Applicant's investment decisions are made by its 
officers and directors. Applicant typically provides a substantial 
commitment of capital to its investee companies and makes available to 
them significant managerial assistance.
    4. Each non-employee director of applicant receives $1,500 for each 
Board meeting attended and reimbursement for expenses incurred in 
attending Board meetings. The non-employee directors do not receive any 
additional compensation for serving on applicant's audit or 
compensation committees. The non-employee directors do not receive 
compensation from applicant for providing managerial assistance to 
investees of applicant. Non-employee directors, may, however, receive 
nominal compensation from investee companies for serving on their 
boards of directors.
    5. Each non-employee director of applicant, on the Order Date, will 
receive options to acquire 100,000 shares of applicant's common stock. 
Each person who becomes a non-employee director of applicant after the 
Order Date automatically will receive options to acquire 100,000 shares 
of applicant's common stock ninety days after the non-employee becomes 
a director. Currently, there are two non-employee directors who will be 
eligible to receive options under the Directors' Plan on the Order 
Date.
    6. As of April 20, 1995, the aggregate amount of applicant's voting 
securities that would result from the exercise of all options issues or 
issuable under the Directors' Plan and applicant's existing employee 
stock option plan would be 1,289,786 shares, or approximately 19.99% of 
the 6,448,930 shares of applicant's common stock outstanding. Applicant 
has no warrants, options, or rights outstanding other than those 
granted to its directors, officers, and employees as part of its 
employee stock option plan.
    7. Options granted under the Directors' Plan will expire within ten 
years from the date of grant. Fifty percent of the options granted will 
vest and become exercisable six months following the date of grant, 
with the remaining fifty percent of the options exercisable ratably on 
a monthly basis over the following eighteen months. The exercise price 
of options granted under the Directors' Plan will be the current market 
value of applicant's common stock on the date the option is granted.
    8. If a non-employee director ceases to be a director or is removed 
as a director of applicant for cause, all options granted to that 
director will terminate on the date of his removal as a director. If a 
non-employee director dies while in office, all options granted to such 
director may be exercised by such person's estate at any time within 
one year after the director's death, but not later than the expiration 
of the original term of the option. If a non-employee director ceases 
to be a director of applicant for any reason other than cause or death, 
all options granted to such director will terminate three months after 
the date the director ceases to be a director.
Applicant's Legal Analysis

    1. Section 63(3) of the Act permits a BDC to sell its common stock 
at a price below current net asset value upon the exercise of any 
option issued in accordance with section 61(a)(3) of the Act.
    2. Section 61(a)(3)(B) of the Act provides, in pertinent part, that 
a BDC may issue to its non-employee directors options to purchase its 
voting securities pursuant to an executive compensation plan, provided 
that: (a) the options expire by their terms within ten years; (b) the 
exercise price of the options is not less than the current market value 
of the underlying securities at the date of issuance; (c) the proposal 
to issue such options is approved by the company's shareholders, and is 
authorized by order of the Commission upon application; (d) the options 
are not transferable except for the dispositions by gift, will or 
intestacy; (e) no investment adviser of the company receives any 
compensation described in section 205(1) of the Investment Advisers Act 
of 1940, except to the extent permitted by clause (A) or (B) of that 
section; and (f) the company does not have a profit-sharing plan as 
described in section 57(n) of the Act.
    3. In addition, section 61(a)(3)(B) provides that the amount of the 
company's voting securities that would result from the exercise of all 
outstanding warrants, options, and rights at the time of issuance may 
not exceed 25% of the company's outstanding voting securities except 
that if the amount of voting securities that would result from the 
exercise of all outstanding warrants, options, and rights issued to 
such company's directors, officers, and employees pursuant to an 
executive compensation plan would exceed fifteen percent of the 
company's outstanding voting securities, then the total amount of 
voting securities that would result from the exercise of all 
outstanding warrants, options, and rights at the time of issuance shall 
not exceed twenty percent of the outstanding voting securities of such 
company.
    4. Applicant asserts that the Directors' Plan and the stock options 
to be granted automatically to applicant's non-employee directors, and 
the stock options to be granted automatically to each new non-employee 
director of applicant who joins applicant's Board subsequent to the 
Order Date, pursuant to such plan would meet all applicable 
requirements of the Act: (a) The options will expire by their terms 
within ten years; (b) the exercise price of the options will not be 
less than the current market value of the underlying securities at the 
date of the issuance of the options; (c) the proposal to issue the 
options has been authorized by applicant's shareholders; (d) the 
options will not be transferable except for disposition by gift, will, 
or intestacy; (e) applicant does not have an investment adviser; and 
(f) applicant does not have a profit-sharing plan described in section 
57(n). In addition, the total amount of voting securities that would 
result from the exercise of all outstanding warrants, options, and 
rights at the time of issuance will not exceed 20% of the outstanding 
voting securities of applicant.
    5. Applicant asserts that in order to attract and retain qualified 
personnel, it must provide non-employee directors with incentives in 
the form of an executive compensation program. Applicant believes that 
the skill and experience of its management and directors are critical 
to its success. Applicant asserts that it directors are actively 
involved in the oversight of applicant's affairs, and that it relies 
extensively on the judgment and experience of the directors. In 
addition, applicant represents that one or more of its officers and 
directors often are elected to the boards of directors of its portfolio 
companies.
    6. Applicant submits that the terms of the Directors' Plan and the 
stock options [[Page 30919]] to be granted automatically to applicant's 
non-employee directors are fair and reasonable and do not involve any 
overreaching of applicant or its shareholders. The total number of 
shares for which options would be granted under the Directors' Plan 
would depend on whether there are changes in applicant's Board. If the 
two non-employee directors currently serving on applicant's Board 
exercised all of the options proposed to be granted to them, 200,000 
shares, or approximately, 3.1% of applicant's outstanding common stock, 
will be issued under the Directors' Plan. If all options available for 
grant under the Directors' Plan are granted and exercised, 500,000 
shares, or approximately 7.8% of applicant's common stock will be 
issued. Given these relatively small amounts of stock, applicant 
submits that the exercise of the options will not have a substantial 
dilutive effect on the net asset value of the common stock of 
applicant.
    7. Applicant asserts that because 50% of the stock options granted 
to a non-employee director would vest six months following the date of 
grant, and the remaining 50% would vest ratably on a monthly basis over 
the next eighteen months, the plan would provide non-employee directors 
with incentives to remain with applicant. In addition, applicant 
contends that because the options granted pursuant to the plan have no 
value unless the price of applicant's common stock exceeds their 
exercise price, the options provide significant incentives for non-
employee directors to devote their best efforts to the success of 
applicant's business. The options also provide a means for applicant's 
thereby helping to ensure a closer identification of their interests 
with those of applicant and its shareholders. Applicant contends that 
incentives in the form of stock options enable it to maintain 
continuity in its board membership and to attract and retain as 
directors the highly experienced, successful, and dedicated business 
and professional people that are critical to its success as a BDC and 
to the success of its investee companies.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14327 Filed 6-9-95; 8:45 am]
BILLING CODE 8010-01-M