Self-Regulatory Organizations; Order Approving a Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to the Definition of “Public Offering” for Purposes of Nasdaq's Shareholder Approval Rules

On August 11, 2000, The National Association of Securities Dealers, Inc. (“NASD” or “Association”), through its wholly owned subsidiary, The Nasdaq Stock Marker, Inc. (“Nasdaq”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) a proposed rule change regarding the adoption of interpretive material defining “Public Offering” for purposes of Nasdaq's shareholder approval rules. On October 4, 2000, the Nasdaq filed Amendment No. 1 to the proposed rule change. The proposed rule change was noticed in the Federal Register. On October 13, 2000, the NASD filed Amendment No. 2 to the proposed rule change. No comments were submitted on the proposed rule change. This order approves the proposed rule change, as amended.

I. Background

Nasdaq rules require shareholder approval for stock issuances of 20 percent or more of an issuer's total shares outstanding, offered at less than the greater of book or market value. The applicable rules further provide, however, that shareholder approval is not required for a “public offering,” although that term is not defined in the rules. Recently, a number of issuers have inquired as to whether certain large, below-market offerings were “public offerings” because the transactions, which were initiated pursuant to exceptions to the registration requirements, were registered with the Commission prior to closing the transactions. Historically, for purposes of assessing the applicability of the shareholder approval rules, Nasdaq staff has interpreted “public offering” as a broadly distributed, registered offering based on a firm commitment underwriting. Conversely, Nasdaq staff does not consider a transaction to be a “public offering” for these purposes when the transaction is of limited distribution and/or is not based on a firm commitment underwriting, even if the offering was registered. Because the offerings described had limited distributions and, in some cases, the offerees were pre-determined by the issuer, Nasdaq believed that these transactions were not “public offerings” for purposes of the shareholder approval rules.

To help to ensure that all issuers understand how Nasdaq will determine whether a transaction is a “public offering” for purposes of the shareholder approval rules, Nasdaq has prepared the proposed Interpretative Material. Determinations as to whether a transaction is a “public offering” for purposes of these rules will be made based on the facts and circumstances surrounding each particular transaction. The proposed Interpretative Material identifies a number of factors that will be considered when determining whether an offering is a “public offering,” including the type of offering; the marketing of the offering; the extent of the offering's distribution; the offering price; and the extent to which the issuer controls the offering and its distribution.

II. Discussion

The Commission finds that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act, which requires, among other things, that the Association's rules 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 Commission believes the Interpretative Material is designed to educate issuers and other interested parties as to how Nasdaq defines a “public offering” in order to ensure that issuers are aware as to which transactions require shareholder approval under the NASD's rules, thus promoting just and equitable principles of trade and protecting investors and the public interest.

It Is Therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposal, SR-NASD-00-50, as amended, be and hereby is approved.