Transaction Exemption for Securities Listed on Certain Quotation Systems

PURPOSE: This rule prescribes the circumstances under which transactions in securities listed on the National Association of Securities Dealers, Inc., Automated Quotation System are exempt from the requirements of sections 409.3-301 and 409.5-504 of the Missouri Securities Act of 2003. (1) The commissioner, pursuant to the provisions of section 409.2-203 of the Missouri Securities Act of 2003 (the Act), exempts the following transactions from the requirements of sections 409.3-301 and 409.5-504 of the Act: (A) The offer or sale of a security designated or approved for designation upon notice of issuance (including initial public offerings) on the National Market of the National Association of Securities Dealers, Inc., Automated Quotation System (NASDAQ) and any other security of the same issuer that is of senior or substantially equal rank, any security called for by subscription rights or warrants or any warrant or right to purchase or subscribe to any of the foregoing securities; (B) The administrator shall have the authority, after notice and hearing and upon written Findings of Fact and Conclusions of Law subject to judicial review: 1. To terminate this exemption if the administrator finds that the designation standards have been so changed or insufficiently applied that the protection of investors contemplated by the original designation standards is no longer afforded; 2. To deny the exemption from registration of, or revoke, a specific issue of securities; and 3. To deny the exemption by rulemaking to a category of securities when necessitated by the public interest and for the protection of investors; and (C) For purposes of the exemption granted in this section of the Act, the commissioner shall apply the following standards for designation of additional quotation systems: 1. The association providing the automated quotation system (association) shall require at least the following standards to be met for designation of securities of an issuer on the quotation system: Alt. No. 1 Alt. No. 2 Net Tangible Assets 1/ $4,000,000 $12,000,000 Public Float $ 500,000 $ 1,000,000 Pretax Income $ 750,000 __________ Net Income $ 400,000 __________ Shareholders 2/ 800/400 800/400 Market Value of Float $3,000,000 $15,000,000 Minimum Bid $ 5/Share __________ Operating History _________ 3 Years The rules of each association shall require at least two (2) authorized market makers for each issuer; 2. The association shall require at least the following minimum corporate governance standards for its domestic issuers: A. Distribution of annual and interim reports. (I) Each issuer shall distribute to shareholders copies of an annual report containing audited financial statements of the company and its subsidiaries. The report shall be distributed to shareholders a reasonable period of time prior to the company’s annual meeting of shareholders and shall be filed with the association at the time it is distributed to shareholders. (II) Each issuer which is subject to U.S. Securities and Exchange Commission (SEC) Rule 13A-13 shall make available to shareholders copies of quarterly reports, including statements of operating results, either prior to or as soon as practicable following the company’s filing its Form 10-Q with the SEC. If the form of the quarterly report differs from the Form 10-Q, both the quarterly report and the Form 10-Q shall be filed with the association. The statement of operations contained in quarterly reports shall disclose, at a minimum, any substantial items of an unusual or nonrecurrent nature and net income and the amount of estimated federal taxes. (III) Each issuer which is not subject to SEC Rule 13A-13 and which is required to file with the SEC or another federal or state regulatory authority interim reports relating primarily to operations and financial position, shall make available to shareholders reports which reflect the information contained in those interim reports. These reports shall be made available to shareholders either before or as soon as practicable following filing with the appropriate regulatory authority. If the form of the interim report made available to shareholders differs from that filed with the regulatory authority, both the report to shareholders and the report to the regulatory authority shall be filed with the association; B. Independent directors. Each issuer shall maintain a minimum of two (2) independent directors on its board of directors. For purposes of subsection (1)(C), independent director shall mean a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director; C. Audit committee. Each issuer shall establish and maintain an audit committee, a majority of the members of which shall be independent directors; D. Shareholder meetings. Each issuer shall hold an annual meeting of shareholders and shall provide notice of the meeting to the association; E. Quorum. Each issuer shall provide for a quorum as specified in its bylaws for any meeting of the holders of common stock; provided, however, that in no case shall the quorum be less than thirty-three and one-third percent (33 1/3%) of the outstanding shares of the company’s common voting stock; F. Solicitation of proxies. Each issuer shall solicit proxies and provide proxy statements for all meetings of shareholders and shall provide copies of the proxy solicitation to the association; G. Conflicts of interest. Each issuer shall conduct an appropriate review of all related party transactions on an ongoing basis and shall use the company’s audit committee or a comparable body for the review of potential conflict of interest situations where appropriate; and H. Shareholder approval policy. Each issuer shall require shareholder approval of the issuance of securities in connection with the following: (I) Options, plans or other special remuneration plans for directors, officers or key employees; (II) Actions resulting in a change in control of the issuer; and (III) The acquisition, direct or indirect, of a business, a company, tangible or intangible assets or property or securities representing any such interests— (a) From a director, officer or substantial security holder of the company (including its subsidiaries and affiliates) or from any company or party in which one of these persons has a direct or indirect interest; and (b) Where the present or potential issuance of common stock or securities convertible into common stock could result in an increase in outstanding common shares of twenty-five percent (25%) or more; 3. Voting rights. A. The rules of each association shall provide as follows: No rule, stated policy, practice or interpretation of this association shall permit the designation on the NASDAQ System’s National Market (authorization), or the continuance of authorization, of any common stock or other equity security of a domestic issuer if, on or after July 7, 1988, the issuer of the security issues any class of security or takes other corporate action with the effect of nullifying, restricting or disparately reducing the per share voting rights of holders of an outstanding class(es) of common stock of the issuer registered pursuant to Section 12 of the Securities Exchange Act of 1934. B. For purposes of subparagraph (1)(C)3.A., the following shall be presumed to have the effect of nullifying, restricting or disparately reducing the per share voting rights of an outstanding class(es) of common stock: (I) Corporate action to impose any restriction on the voting power of shares of the common stock of the issuer held by a beneficial owner or record holder based on the number of shares held by the beneficial or record holder; (II) Corporate action to impose any restriction on the voting power of shares of the common stock of the issuers held by a beneficial or record holder based on the length of time the shares have been held by that beneficial or record holder; (III) Any issuance of securities through an exchange offer by the issuer for shares of an outstanding class of common stock of the issuer, in which the securities issued having voting rights greater than or less than the per share voting rights of any outstanding class of the common stock of the issuer; and (IV) Any issuance of securities pursuant to a stock dividend, or any other type of distribution of stock, in which the securities issued have voting rights greater than the per share voting rights of any outstanding class of the common stock of the issuer. C. For purposes of subparagraph (1)(C)3.A., the following, standing alone, shall be presumed not to have the effect of nullifying, restricting or disparately reducing the per share voting rights of holders of an outstanding class(es) of common stock: (I) The issuance of securities pursuant to an initial registered public offering; (II) The issuance of any class of securities, through a registered public offering, with voting rights not greater than the per share voting rights of any outstanding class of the common stock of the issuer; (III) The issuance of any class of securities to effect a bona fide merger or acquisition, with voting rights not greater than the per share voting rights of any outstanding class of the common stock of the issuer; and (IV) Corporate action taken pursuant to state law requiring a state’s domestic corporation to condition the voting rights of a beneficial or record holder of a specified threshold percentage of the corporation’s voting stock on the approval of the corporation’s independent shareholders. D. Definitions. The following terms shall mean, for purposes of this subsection, and the rules of each association shall include these definitions for the purposes of the prohibition in subparagraph (1)(C)3.A. of this rule: (I) The term common stock shall include any security of an issuer designated as common stock and any security of an issuer, however designated which, by statute or by its terms, is common stock (for example, a security which entitles the holders of the security to vote generally on matters submitted to the issuer’s security holders for a vote); (II) The term domestic issuer shall mean an issuer that is not a foreign private issuer as defined in Rule 3b-4 under the Securities Exchange Act of 1934 (17 CFR 240.3b-4); (III) The term equity security shall include any equity security defined as such pursuant to Rule 3a11-1 under the Securities Exchange Act of 1934 (17 CFR 240.3a11-1); and (IV) The term security shall include any security defined as such pursuant to Section 3(a)(10) of the Securities Exchange Act of 1934, but shall exclude any class of security having a preference or priority over the issuer’s common stock as to dividends, interest payments, redemption or payments in liquidation, if the voting rights of the securities only become effective as a result of specified events, not relating to an acquisition of the common stock or the issuer, which reasonably can be expected to jeopardize the issuer’s financial ability to meet its payment obligations to the holders of that class of securities; 4. Maintenance criteria. After designation or authorization for quotation on a quotation system, a security must meet the following criteria to continue to be designated or authorized for quotation on the quotation system: A. The issuer of the security has net tangible assets of at least— (I) Two (2) million dollars if the issuer has sustained losses from continuing operations or net losses, or both, in two (2) of its three (3) most recent fiscal years; or (II) Four (4) million dollars if the issuer has sustained losses from continuing operations or net losses, or both, in three (3) of its four (4) most recent fiscal years; B. There are at least two hundred thousand (200,000) publicly held shares; C. There are at least four hundred (400) shareholders or at least three hundred (300) shareholders of round lots; and D. The aggregate market value of publicly held shares is at least one (1) million dollars; 5. The associations promptly shall notify the commissioner of the revocation of designation of an issue of securities by their marketplace; and 6. The marketplace receiving an exemption will use its best efforts to make available on a timely basis information from existing data bases regarding offerings of securities subject to the exemption. AUTHORITY: sections 409.2-203 and 409.6-605, RSMo Supp. 2003.* This rule was previously filed as 15 CSR 30-54.200. Original rule filed Aug. 7, 1981, effective Nov. 12, 1981. Emergency rescission filed Aug. 1, 1984, effective Aug. 11, 1984, expired Nov. 11, 1984. Rescinded and readopted: Filed Aug. 1, 1984, effective Nov. 11, 1984. Amended: Filed March 27, 1989, effective June 12, 1989. Amended: Filed Jan. 3, 1990, effective March 11, 1990. Emergency amendment filed Aug. 19, 2003, effective Sept. 12, 2003, expired March 9, 2004. Amended: Filed Aug. 27, 2003, effective Feb. 29, 2004. *Original authority: 409.2-203, RSMo 2003; 409.6-605, RSMo 2003.