Ariz. Admin. Code § 14-4-105

Current through Register Vol. 30, No. 45, November 8, 2024

Section R14-4-105 - Promotional Securities; Definitions

A. Promotional securities, held by promoters of a promotional stage corporation that proposes to make a public offering of its securities pursuant to A.R.S. Title 44, Chapter 12, Article 7, except pursuant to A.R.S. § 44-1901, shall be subject to a restrictive sales agreement in accordance with the provisions of this Section.

B. As used in this Section, the following terms have the meaning indicated.

1. "Consideration" includes cash, services rendered, and tangible or intangible property.

2. "Earnings per share" means fully diluted earnings computed in accordance with generally accepted accounting principles.

3. "Promoters" means any person who meets any one of the following conditions. Promoter does not include an unaffiliated institutional investor or a person who receives either securities or proceeds solely as underwriting compensation and who is not a promoter under subsection (B)(3)(a), (c), (d), or (e).

a. Alone or in conjunction with one or more persons, directly or indirectly, founded, organized, or controls the issuer;

b. Directly or indirectly receives, as consideration for service and property rendered, 5% or more of any class of the issuer's equity securities or 5% or more of the proceeds from the sale of any class of the issuer's equity securities;

c. Is an officer, or director of the issuer;

d. Directly or indirectly, legally or beneficially owns 10% or more of the issuer's outstanding shares before or immediately following the public offering;

e. Directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, a promoter as defined in subsections (B)(3)(a) through (d).

4. "Promotional stage corporation" means a corporation that has no public market for its shares and has no significant earnings.

5. "Promotional securities" means securities issued to a promoter, at any time during the three-year period prior to the proposed public offering date, that meet the conditions of subsection (C). Promotional securities shall be limited to common stock unless securities other than common stock were issued for the primary purpose of evading this Section.

6. "Public market" means a public place of exchange where securities are bought and sold, directly or through intermediaries. Public market excludes "thin markets" that do not result in reliable prices. To determine if the securities trade in a public market, the Commission may consider the market history, the public trading volume, the spread between the bid and asked prices, the number of market makers, the public float, the pricing formula, the marketplace in which the securities trade, the length of time the securities have been traded in that marketplace, and other relevant factors.

7. "Restrictive sales agreement" means an agreement between a promotional stage corporation and a promoter, for the benefit of the shareholders of the corporation, entered into prior to the proposed public offering of the promotional stage corporation's securities, subjecting the promotional securities to a sales restriction for up to three years following the proposed public offering and including the terms contained in subsection (H). As a condition of registration, the issuer shall submit the agreement to the Commission for review.

8. "Significant earnings" means earnings per share, based upon the issuer's shares outstanding immediately before the proposed public offering, of at least one of the following. Such test shall not be deemed the exclusive test for the determination of "significant earnings."

a. 5% of the public offering price per common share for the prior fiscal year, or the period of the issuer's existence if less than one fiscal year;

b. 4% of the public offering price per common share for each of the prior two fiscal years; or

c. 3% of the public offering price per common share for each of the prior three fiscal years.

9. "Unaffiliated institutional investor" means any unaffiliated bank; investment company registered under the Investment Company Act of 1940, 15 U.S.C. 80a-1 to 80a - 64(1994), as amended; business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940, 15 U.S.C. 80a - 2(a)(48) (1994 & Supp. II 1996), incorporated by reference; small business investment company licensed by the U.S. Small Business Administration under Section 301 of the Small Business Investment Act of 1958, 15 U.S.C. 681(1994), as amended; employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, 29 U.S.C. 1002(3) (1994), incorporated by reference; insurance company; private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940, 15 U.S.C. 80b - 2(a)(22) (1994), incorporated by reference; or comparable business entity engaged as a substantial part of its business in the purchase and sale of securities and that owns less than 20% of the securities to be outstanding at the completion of the proposed public offering. Copies of documents incorporated by reference do not contain any later amendments or editions, are on file in the Office of the Secretary of State, and are available from the Securities Division of the Corporation Commission and from the Superintendent of Documents, Government Printing Office, Washington, D.C. 20402.

C. Securities that are issued to promoters for consideration valued at less than the following percentages of the proposed public offering price, in an amount that represents an ultimate right of participation in excess of 15% of the securities to be outstanding at the completion of the proposed public offering, shall be promotional securities. The value of consideration other than cash received by the issuer for shares shall be established to the Commission's satisfaction by appraisals, evidence of amounts paid by others for substantially similar services or property, evidence of a bona fide offer to purchase such services or property, evidence of significant services rendered or contractually required to be rendered to the issuer, which may take into account the relevant experience, special skills, and other qualifications of the person rendering the service, or any other evidence. The value of noncash consideration that cannot be established to the satisfaction of the Commission shall be 0.

1. For all securities issued to a promoter within one year prior to and including the date of the offering of securities to the public: 85%.

2. For all securities issued to a promoter within two years but not less than one year prior to and including the date of the offering of securities to the public: 75%.

3. For all securities issued to a promoter within three years but not less than two years prior to and including the date of the offering of securities to the public: 65%.

D. A summary of the sales restriction terms shall be included in the offering documents, and a legend evidencing the sales restriction shall appear on each certificate representing the shares subject to the restriction.

E. In the event that any of the following occurs during the term of the restrictive sales agreement, the promotional securities shall be released in accordance with subsection (G):

1. For 60 consecutive trading days commencing at least 90 days after the date of the offering of the securities to the public, the issuer's securities trade in a public market at a price of not less than 150% of the offering price per share.

2. For 90 consecutive trading days commencing at least 12 months after the date of the offering of the securities to the public, the issuer's securities trade in a public market at a price of not less than 110% of the offering price per share.

3. For any fiscal years ending after the date of the offering of the securities to the public, the issuer has earnings per share of at least:

a. 5% of the public offering price per common share for that fiscal year;

b. 4% of the public offering price per common share for that fiscal year and for the prior fiscal year, calculated independently, whether or not such prior fiscal year ended after the date of the offering of the securities to the public; or

c. 3% of the public offering price per common share for that fiscal year and for each of the two prior fiscal years, calculated independently, whether or not such prior fiscal years ended after the date of the offering of the securities to the public.

4. The securities become covered securities as that term is defined in subsection 18(b)(1)(A) of the Securities Act of 1933 ( 15 U.S.C. 77 r(b)(1)(A) (Supp. II 1996)), incorporated by reference.

5. A bona fide tender offer or an offer to merge or otherwise acquire the issuer's equity securities by an unaffiliated purchaser, pursuant to a vote by the majority of the shareholders and in accordance with the following:

a. If the transaction occurs within 24 months of the effective date of the offering registered with the Commission, all public shareholders of the issuer will receive cash in the amount of at least two times the public offering price per share of equity securities at the effective date of the tender offer, merger, or other acquisition, or securities--listed or to be listed, or qualified in all respects for listing, on the New York Stock Exchange, the American Stock Exchange, or the National Market System of the National Association of Securities Dealers Automated Quotations System--in value equal to at least two times the public offering price per share of equity securities at the effective date of the tender offer, merger, or other acquisition.

b. If the transaction occurs more than 24 months after the effective date of the offering registered with the Commission, all public shareholders of the issuer will receive cash in the amount of at least 1 1/2 times the public offering price per share of equity securities, or securities in value equal to at least 1 1/2 times the public offering price per share of equity securities.

6. The securities are transferred by will or pursuant to the laws of descent and distribution or by court order. In all such cases, only the securities so transferred shall be released from the terms of the restrictive sales agreement.

F. If the promotional securities, or any part thereof, have not been released pursuant to subsections (E)(1) through (6), then at the end of the first 12-month period after the date of commencement of the restrictive sales agreement, over each of the next eight calendar quarters, 1/8 of the promotional shares shall be released from the restrictive sales agreement and the restrictive legend may be removed from the certificates representing such shares. There is no filing requirement in connection with the securities released under this subsection.

G. Promotional securities shall automatically be released from the restrictive sales agreement and the restrictive legend may be removed from the share certificates upon the filing with the Commission of any one of the following:

1. With respect to subsections (E)(1), (2), or (4), a written representation from the promoter indicating compliance with the applicable subsection;

2. With respect to subsection (E)(3), a written representation from the promoter indicating compliance with such subsection accompanied by financial statements, prepared in accordance with generally accepted accounting principles and audited and reported upon by an independent certified public accountant, that indicate compliance with the subsection;

3. With respect to subsection (E)(5), a written representation from the promoter indicating compliance with such subsection accompanied by any offering materials relating to the specified transaction; or

4. With respect to subsection (E)(6), a certified copy of an order issued by a court of competent jurisdiction that orders the release or transfer of promotional securities, a certified copy of an instrument of distribution filed with a court of competent jurisdiction, or a written representation from the issuer stating that the securities were transferred pursuant to a will or the laws of descent and distribution.

H. The restrictive sales agreement shall include the following terms and conditions:

1. Except as otherwise provided in the agreement, the promotional securities shall not be transferred, sold, pledged, hypothecated, or encumbered nor shall the issuer recognize any attempted transfer, sale, pledge, hypothecation, or encumbrance for three years following the conclusion of the proposed offering;

2. The number of promotional securities subject to the restriction;

3. The identity of owners of the promotional securities;

4. The terms of release under subsections (E), (F), and (G);

5. Any profits realized by a promoter who sells promotional securities in violation of the restrictive sales agreement shall inure to and be recoverable by the issuer;

6. Promotional securities may be transferred by gift to family members, not more remote than first cousins, or to trusts or similar instruments of which the promoter is the beneficiary for estate-planning purposes, provided the securities remain subject to the terms of the restrictive sales agreement;

7. Promotional securities may be transferred by any method or transaction approved by a majority of the shareholders other than the promoters, provided the securities shall remain subject to the terms of the restrictive sales agreement;

8. Holders of promotional securities shall continue to have all voting and other rights to which they are entitled by ownership of the promotional securities; and

9. All certificates representing stock dividends from promotional securities and all securities resulting from stock splits from promotional securities shall be subject to the terms of the restrictive sales agreement.

I. A breach of the restrictive sales agreement by a promoter shall be deemed a violation of this Section by such promoter.

Ariz. Admin. Code § R14-4-105

Former Order S-5; Former Section R14-4-105 repealed, new Section R14-4-105 adopted effective July 30, 1986 (Supp. 86-4). Amended by final rulemaking at 5 A.A.R. 1437, effective April 19, 1999 (Supp. 99-2).