N.M. Code R. § 12.11.9.13

Current through Register Vol. 35, No. 11, June 11, 2024

Section 12.11.9.13 - PROMOTIONAL SHARES

A. Escrow of promotional shares: The director may require that some or all of the promoters deposit some or all of their promotional shares into an escrow account ("escrow") with an escrow agent according to the terms of an escrow agreement ("agreement") as a condition to registering a public offering of equity securities. The promoters, who are required to deposit some or all of their promotional shares into escrow, are hereinafter collectively referred to as depositors. The director may, at his discretion, require a lock-in agreement on substantially the same terms and conditions as an agreement.

B. Release of promotional shares.

(1) The escrow agent shall release the promotional shares in the following manner, if:

(a) the issuer's aggregate revenues are:

(i) $500,000 or more, provided that neither the auditor's report nor any footnote to the issuer's latest audited financial statement contains an opinion or statement regarding the ability of the issuer to continue as a going concern; beginning one year from the date the offering is declared effective, two and one-half percent of promotional shares held in escrow may be released each quarter pro rata among the depositors; all remaining promotional shares shall be released from escrow on the second anniversary from the date the offering is declared effective; or

(ii) less than $500,000; beginning two years from the date the offering is declared effective, two and one-half percent of promotional shares held in escrow may be released each quarter pro rata among the depositors; all remaining promotional shares shall be released from escrow on the third anniversary from the date the offering is declared effective;

(b) the public offering has been terminated and no securities were sold pursuant thereto; or

(c) the public offering has been terminated and all of the gross proceeds that were derived therefrom have been returned to the public investors.

(2) In the event of a dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of the issuer's assets or securities (including by way of tender offer), or any other transaction or proceeding with a person who is not a promoter which results in the distribution of the issuer's assets or securities ("distribution"), while this agreement remains in effect, the depositors agree that:

(a) all holders of the issuer's equity securities will initially share on a pro rata, per share basis in the distribution, in proportion to the amount of cash or other consideration that they paid per share of equity securities (provided that the director has accepted the value of the other consideration), until the public shareholders have received, or have had irrevocably set aside for them, an amount that is equal to 100 percent of the public offering's price per share times the number of shares of equity securities that they purchased pursuant to the public offering and which they still hold at the time of the distribution, adjusted for stock splits, stock dividends, recapitalizations and the like;

(b) all holders of the issuer's equity securities shall thereafter participate on an equal, per share basis times the number of shares of equity securities they hold at the time of the distribution, adjusted for stock splits, stock dividends, recapitalizations and the like; and

(c) a distribution may proceed on lesser terms and conditions than the terms and conditions stated in Paragraph (1) of this subsection if a majority of the equity securities that are not held by promoters or their associates or affiliates, vote or consent by consent procedure, to approve the lesser terms and conditions at a special meeting called for that specific purpose.

(3) In the event of a dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of the issuer's assets or securities (including by way of tender offer) or any other transaction or proceeding with a person who is a promoter, which results in a distribution while this agreement remains in effect, the depositors' promotional shares shall remain in escrow subject to the terms of the agreement.

(4) In the event securities in the escrow become "covered securities" as defined in the National Securities Markets Improvement Act of 1996, all securities in the escrow shall be released.

C. Documentation regarding the termination of the escrow agreement or the release of promotional shares or both.

(1) A request for the release of any of the promotional shares from escrow shall be in writing and be forwarded to the escrow agent.

(2) The issuer shall provide to the escrow agent the documentation showing that the requirements of Subsection B of this section have been met.

(3) The escrow agent shall terminate the agreement, or release some or all of the promotional shares from escrow, or both, if all the applicable provisions of the agreement have been satisfied. The escrow agent shall maintain all records relating to the agreement for a period of three years following the termination of the agreement. Copies of all records retained by the escrow agent shall be forwarded to the director promptly upon written request.

D. Restrictions on the transfer, sale or disposal of promotional shares.

(1) Promotional shares may be transferred by will, the laws of descent and distribution, operation of law or any court of competent jurisdiction and proper venue.

(a) The promotional shares of a deceased depositor may be hypothecated to pay the expenses of the deceased depositor's estate provided that the hypothecated promotional shares shall remain subject to the terms of the agreement.

(b) No promotional shares may be transferred, sold or disposed of ("transferred") until the escrow agent has received a written statement signed by the proposed transferee ("transferee") which states that the transferee has full knowledge of the terms of the agreement, the transferee accepts the promotional shares subject to the terms of the agreement, and the transferee realizes that the promotional shares shall remain in escrow until they are released pursuant to Subsection B of this section.

(2) With the exception of Subparagraph (a) of Paragraph (1) of this subsection, promotional shares may not be pledged to secure a debt.

(3) Promotional shares may be transferred by gift to the depositor's family members, provided that the promotional shares shall remain subject to the terms of the agreement.

(4) With the exception of Paragraph (1) of this subsection, no promotional shares, any interest therein or any right or title thereto, may be transferred.

(5) In the case of a self-underwritten offering, notwithstanding the provisions of Paragraph (1) of Subsection B of this section, promoters shall be prohibited from selling any of the promotional shares that are not subject to escrow during the time that the issuer is offering its securities to the public.

E. Terms of the escrow.

(1) Except as noted in Subparagraph (c) of Paragraph (2) of Subsection B, depositors shall have the same voting rights as shareholders who purchased equity securities pursuant to the public offering ("public shareholders").

(2) All certificates representing stock dividends and shares resulting from stock splits of escrowed shares, recapitalizations and the like that are granted to or received by depositors while their promotional shares are held in escrow shall be deposited with and held by the escrow agent subject to the terms of the agreement. Any cash dividends that are granted to or received by depositors while their promotional shares are held in escrow, shall be deposited with and held by the escrow agent subject to the terms of the agreement. The escrow agent shall invest such cash dividends as directed by the depositors. The cash dividends and any interest earned thereon will be disbursed in proportion to the number of shares released from the escrow.

(3) Equity securities that are received by depositors as the result of the conversion or exercise of convertible securities, warrants, options or rights to purchase common stock or similar securities, while their promotional shares are in escrow, shall be deposited with and held by the escrow agent subject to the terms of the escrow.

(4) A summary of the agreement shall be included in the prospectus and subsequent amendments thereto, annual reports to shareholders, proxy statements and other disclosure materials that are used to make investment decisions until the public offering has been terminated.

(5) The escrow agent shall be entitled to reasonable compensation from the issuer for its services as set forth in the agreement. If the escrow agent is required to render additional services that are not expressly provided for therein, or if it is made a party to or intervenes in any action, suit or proceeding pertaining to the agreement, it shall be entitled to receive reasonable compensation from the issuer and the depositors. If additional services are provided, the escrow agent, after giving written notice to the depositors and issuer, may deduct reasonable compensation from any cash dividends, interest and other offering proceeds that are being held by it for distribution pursuant to the agreement.

(6) The issuer and the depositors shall hold the escrow agent harmless from, and indemnify it for, any cost or liability regarding any administrative proceeding, investigation, litigation, interpretation, implementation or interpleading relating to the agreement, including the release of promotional shares and the disbursement of dividends, interest or other offering proceeds, unless the cost or the liability arises from the escrow agent's failure to abide by the terms of the agreement.

(7) The agreement shall be binding upon the depositors, their heirs and assignees, and upon the issuer and escrow agent and their successors.

(8) Except for the escrow agent's compensation and indemnification provisions which shall survive until they are satisfied, the agreement will be terminated when all of the promotional shares have been released or the issuer's equity securities or the assets have been distributed pursuant to the agreement.

N.M. Code R. § 12.11.9.13

12.11.9.13 NMAC - Rp, 12 NMAC 11.4.8.6, 1-1-2010