[Federal Register Volume 65, Number 38 (Friday, February 25, 2000)]
[Notices]
[Pages 10134-10137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4472]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42437; File No. SR-AMEX-99-50]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by The American Stock Exchange 
LLC Adopting Interpretive Materials Regarding Future Priced Securities

February 17, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), \1\ notice is hereby given that on December 30, 1999, the 
American Stock Exchange LLC (``Amex'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Amex. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex is proposing to adopt interpretive material relating to 
certain convertible securities. Below is the text of the proposed rule 
change. All text is being added.
* * * * *
Section 101
Commentary
.10 Future Priced Securities
Summary
    Future Priced Securities are private financing instruments which 
were created as an alternative means of quickly raising capital for 
issuers. The security is generally structured in the form of a 
convertible security and is often issued via a private placement. 
Issuers will typically receive all capital proceeds at the closing. The 
conversion price of the Future Priced Security is generally linked to a 
percentage discount to the market price of the underlying common stock 
at the time of conversion and accordingly the conversion rate for 
Future Priced Securities floats with the market price of the common 
stock. As such, the lower the price of the issuer's common stock at the 
time of conversion, the more shares into which the Future Priced 
Security is convertible. The delay in setting the conversion price is 
appealing to issuers who believe that their stock will achieve greater 
value after the financing is received. However, the issuance of Future 
Priced Securities may be followed by a decline in the common stock 
price, creating additional dilution to the existing holders of the 
common stock. Such a price decline allows holders to convert the Future 
Priced Securities into large amounts of the issuer's common stock. As 
these shares are issued upon conversion of the Future Priced Security, 
the common stock price may tend to decline further.
    For example, an issuer may issue $10 million of convertible 
preferred stock (the Future Priced Security), which is convertible by 
the holder or holders into $10 million of common stock based on a 
conversion price of 80% of the closing price of the common stock on the 
date of conversion. If the closing price is $5 on the date of 
conversion, the Future Priced Security would receive 2,500,000 shares 
of common stock. If, on the other hand, the closing price is $1 on the 
date of conversion, the Future Priced Security holders would receive 
12,500,000 shares of common stock.
    Unless the issuer carefully considers the terms of the securities 
in connection with several Exchange rules, the issuance of Future 
Priced Securities could result in a failure to comply with the listing 
standards and concomitant delisting of the issuer's securities from The 
American Stock Exchange. The Exchange's experience has been that 
issuers do not always appreciate this potential consequence. Sections 
of the Exchange's Listing Standards, Policies and Requirements that 
bear upon the continued listing qualifications of an issuer and that 
must be considered when issuing Future Priced Securities include:
    1. The shareholder approval rules
    2. The voting rights rules
    3. The rules relating to low priced securities
    4. The listing of additional shares rules
    5. The rules relating to the acquisition of a listed company by an 
unlisted company
    6. The Exchange's discretionary authority rules
    It is important for issuers to clearly understand that failure to 
comply with any of these rules could result in the delisting of the 
issuer's securities.
    This notice is intended to assist companies considering financings 
involving Future Priced Securities. By adhering to the above 
requirements, issuers can avoid unintended listing qualifications 
problems. Issuers having any questions about this notice or proposed 
transactions should contact The Nasdaq-Amex Listing Qualifications 
Department at (301) 978-8026. The Exchange will provide an issuer with 
written interpretation of the application of Exchange rules to a

[[Page 10135]]

specific transaction, upon request of the issuer.
How the Rules Apply

Shareholder Approval

    Section 713 of the Listing Standards, Policies and Requirements 
provides, in part:
    The Exchange will require shareholder approval* * *in connection 
with a transaction involving* * *the sale or issuance by the company of 
common stock (or securities convertible into common stock) equal to 20% 
or more of presently outstanding stock for less than the greater of 
book or market value of the stock.\2\
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    \2\ The Exchange may make exceptions to this requirement when 
the delay in securing stockholder approval would seriously 
jeopardize the financial viability of the enterprise and reliance by 
the company on this exception is expressly approved by the Audit 
Committee or a comparable body of the Board of Directors.
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    When Exchange staff is unable to determine the number of shares to 
be issued in a transaction, it looks to the maximum potential issuance 
of shares to determine whether there will be an issuance of 20 percent 
or more of the common stock outstanding. In the case of Future Priced 
Securities, the actual conversion price is dependent on the market 
price at the time of conversion, and so the number of shares that will 
be issued is uncertain until the conversion occurs. Accordingly, staff 
will look to the maximum potential issuance of common shares at the 
time the Future Priced Security is issued. Typically, with a Future 
Priced Security, the maximum potential issuance will exceed 20 percent 
of the common stock outstanding because the Future Priced Security 
could, potentially, be converted into common stock based on a share 
price of one cent per share, or less. Further, for purposes of this 
calculation, the lowest possible conversion price is below the book or 
market value of the stock at the time of issuance of the Future Priced 
Security. Therefore, shareholder approval must be obtained prior to the 
issuance of the Future Priced Security. Issuers should also be 
cautioned that obtaining shareholder ratification of the transaction 
after the issuance of a Future Priced Security does not satisfy the 
shareholder approval requirements.
    Some Future Priced Securities may contain features to obviate the 
need for shareholder approval by: (1) placing a cap on the number of 
shares that can be issued upon conversion such that the holders of the 
Future Priced Security cannot, without prior shareholder approval, 
convert the security into 20 percent or more of the common stock or 
voting power outstanding before the issuance of the Future Priced 
Security; \3\ or (2) placing a floor on the conversion price, such that 
the conversion price will always be at least as high as the greater of 
book or market value of the common stock prior to the issuance of the 
Future Priced Securities.
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    \3\ In order to obviate the need for shareholder approval 
through such an arrangement, those shares already issued in 
connection with the Future Priced Security must not be entitled to 
vote on the proposal to approve the issuance of additional shares 
upon conversion of the Future Priced Security.
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Voting Rights

    Section 122 provides:
    Voting rights of existing shareholders of publicly traded common 
stock registered under Section 12 of the Exchange Act cannot be 
disparately reduced or restricted through any corporate action or 
issuance.
    Under the voting rights rules, an issuer cannot create a new class 
of security that votes at a higher rate than an existing class of 
securities or take any other action that has the effect of restricting 
or reducing the voting rights of an existing class of securities. The 
voting rights rules are typically implicated when the holders of the 
Future Priced Security are entitled to vote on an as-converted basis or 
when the holders of the Future Priced Security are entitled to 
representation on the Board of Directors. Exchange staff will consider 
whether a voting rights violation exists by comparing the Future Priced 
Security holders' voting rights to their relative contribution to the 
company based on the company's overall book or market value at the time 
of the issuance of the Future Priced Security. The percentage of the 
overall vote attributable to the Future Priced Security holders and the 
Future Priced Security holders' representation on the board of 
directors must not exceed their relative contribution to the company 
based on the company's overall book or market value at the time of the 
issuance of the Future Priced Security. If the voting power or the 
board percentage exceeds that percentage interest, a violation exists 
because a new class of securities has been created that votes at a 
higher rate than an already existing class. Future Priced Securities 
that vote on an as-converted basis also raise voting rights concerns 
because of the possibility that, due to a decline in the price of the 
underlying common stock, the Future Priced Security holder will have 
voting rights disproportionate to its investment in the Company.
    It is important to note that compliance with the shareholder 
approval rules prior to the issuance of a Future Priced Security does 
not affect whether the transaction is in violation of the voting rights 
rule. Furthermore, shareholders cannot otherwise agree to permit a 
voting rights violation by the issuer. Because a violation of the 
voting rights requirement can result in delisting of the issuer's 
securities from the Exchange, careful attention must be given to this 
issue to prevent a violation of the rule.

The Low Selling Price Provision

    Section 1003(f)(v) provides that the Exchange may delist a security 
when it sells for a substantial period of time at a low price per 
share. This provision must be thoroughly considered because the 
characteristics of Future Priced Securities often exert downward 
pressure on the price of the issuer's common stock. Specifically, 
dilution from the discounted conversion of the Future Priced Security 
may result in a significant decline in the price of the common stock. 
Furthermore, there appear to be instances where short selling has 
contributed to a substantial price decline, which, in turn, could lead 
to a failure to comply with the low selling price provision.\4\
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    \4\ If used to manipulate the price of the stock, short selling 
by the holders of the Future Priced Security is prohibited by the 
antifraud provisions of the securities laws and by Exchange rules 
and may be prohibited by the terms of the placement.
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Listing of Additional Securities

    Section 301 provides:
    A listed company is not permitted to issue, or to authorize its 
transfer agent or registrar to issue or register, additional securities 
of a listed class until it has filed an application for the listing of 
such additional securities and received notification from the Exchange 
that the securities have been approved for listing.
    Issuers should be cognizant that under this rule the application 
for listing of additional securities is required prior to issuing any 
security (including a Future Priced Security) convertible into shares 
of a class of securities already listed on the Exchange. Failure to 
provide such notice can result in an issuer's delisting.

Public Interest Concerns

    Section 1003(f)(iii) provides that the Exchange will consider 
delisting a security if the company or its management engages in 
operations which, in the opinion of the Exchange, are contrary to the 
public interest.

[[Page 10136]]

    The returns on Future Priced Securities may become excessive 
compared with those of public investors in the issuer's common 
securities. In egregious situations, the use of a Future Priced 
Security may be contrary to the public interest. In addition to the 
demonstrable business purpose of he transaction, other factors that 
Exchange staff will consider in determining whether a transactions 
raises public interest concerns include: (1) the amount raised in the 
transaction relative to the issuer's existing capital structure; (2) 
the dilutive effect of the transaction on the existing holders of 
common stock; (3) the risk undertaken by the Future Priced Security 
investor; (4) the relationship between the Future Priced Security 
investor and the issuer; (5) whether the transaction was preceded by 
other similar transactions; and (6) whether the transaction is 
consistent with the just and equitable principles of trade.
    Some Future Priced Securities may contain features that address the 
public interest concerns. These features tend to provide incentives to 
the investor to hold the security for a longer time period and limit 
the number of shares into which the Future Priced Security may be 
converted. Such features may limit the dilutive effect of the 
transaction and increase the risk undertaken by the Future Priced 
Security investor in relationship to the reward available.

Acquisition of a Listed Company by an Unlisted Company

    Section 341 provides that the Exchange will apply its original 
listing guidelines to the surviving company following a plan of 
acquisition, merger or consolidation, which results in a listed company 
being acquired by an unlisted company even though the listed company is 
the nominal survivor.\5\ In applying this policy, consideration will be 
given to all relevant factors, including the proportionate amount of 
the securities of the resulting company to be issued to each of the 
combining companies, changes in ownership or management of the listed 
company, whether the unlisted company is larger than the listed 
company, and the nature of the businesses being combined.
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    \5\ This provision is designed to address situations where a 
company attempts to obtain a listing on the Exchange by merging with 
an Exchange-listed company with minimal assets and/or operations.
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    This provision applies regardless of whether the issuer obtains 
shareholder approval for the transaction. It is important for listed 
companies to realize that in certain instances, the conversion of a 
Future Priced Security may implicate this provision. For example, if 
there is no limit on the number of common shares issuable upon 
conversion, or if the limit is set high enough, the exercise of 
conversion rights under a Future Priced Security could result in a 
change of control in a deemed merger or consolidation with the holders 
of the Future Priced Securities. In such event, an issuer would be 
required to reapply for initial listing and satisfy all initial listing 
requirements.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Amex has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Amex staff has seen an increase in the use of Future Priced 
Securities, which are securities that convert into common stock of the 
issuer based upon a below-market floating conversion rate. In some 
cases, it appears that there may be some lack of understanding as to 
how these transactions may implicate the rules of the Exchange. 
Accordingly, the Exchange has prepared interpretive material, which 
issuers can use when considering whether to issue these securities.
    Future Priced Securities are generally structured in the form of 
convertible preferred stock and are often issued via a private 
placement. Issuers will typically receive all capital proceeds at the 
closing. The conversion price of the Future Priced Security is 
generally linked to a percentage discount to the future market price of 
the underlying common stock and accordingly the conversion rate for 
Future Priced Securities floats with the market price of the common 
stock. As such, the lower the price of the issuer's common stock at the 
time of conversion, the more shares into which the Future Priced 
Security is convertible. The delay in setting the conversion price is 
appealing to issuers who believe that their stock will achieve greater 
value after the financing is received. However, the issuance of Future 
Priced Securities may be followed by a decline in the common stock 
price, creating addition dilution to the existing holders of the common 
stock. Such a price decline allows the holders of the Future Priced 
Security to convert into large amounts of the company's common stock. 
As the company issues more shares, the common stock price may tend to 
decline further.
    While Future Priced Securities can provide a legitimate mechanism 
for issuers to raise capital, each issuance may raise concerns under 
several Exchange rules, including those rules relating to shareholder 
approval, voting rights, low selling prices, listing of additional 
securities, and the acquisition of a listed company by an unlisted 
company. In addition, the use of Future Priced Securities may be 
inconsistent with the protection of investors and the public interest. 
An issuer may negotiate features designed to protect the issuer and the 
existing shareholders. The interpretive material is designed to alert 
issuers to the potential affect Future Priced Securities may have on 
the issuer's qualification for continued listing on the Exchange.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b)(5) \6\ of the Act, which requires, 
among other things, the Exchange's rules to be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest. The interpretive material is designed to 
educate issuers as to how the Amex applies its various rules to Future 
Priced Securities in order to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, and, 
in general, to protect investors and the public interest.
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    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

[[Page 10137]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange did not solicit or receive written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(i) of the Securities Exchange Act of 1934 and subparagraph 
(f)(1) of the Securities Exchange Act Rule 19b-4. At any time within 60 
days of the filing of such proposed rule change, the Commission may 
summarily abrogate such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.\7\
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    \7\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
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 inspection and copying in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal office of the 
Amex. All submissions should refer to the File No. SR-Amex-99-50 and 
should be submitted by March 17, 2000.
    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority. \8\
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    \8\ 17 CFR 200.30-3(a)(12)

    Dated:
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-4472 Filed 2-24-00; 8:45 am]
BILLING CODE 8010-01-M