(1) The commissioner will
consider the granting of warrants or options, to
persons other
than purchasers of securities, as grounds for denial
of an
application for registration, with the exception of:
(a) options to management in the nature of restricted options for incentive
purposes, if reasonable in number and method of exercise;
(b) options to employees or their nominees pursuant to stock purchase plans or
profit sharing plans, if reasonable in number and method of exercise; and
(c) options or warrants issued to underwriters or other persons as compensation, in
whole or in part, for the sale of securities if:
(i) the
issuer does not have:
(A) a
public market for its securities; or
(B) previously issued options or warrants to an underwriter in connection with more
than one public offering of its securities;
(ii) the options or warrants are issued
only to a managing underwriter and no options or warrants are issued in
connection with a best efforts underwriting unless the entire issue is sold,
except that options or warrants may be issued in connection with a minimum-maximum
offering if the amount to be issued is prorated depending on the amount of the
underwriting which is sold;
(iii) the options or warrants may not be
exercised for a period of 1 year from the completion of the public offering;
(iv) the options or warrants are
nontransferable except by will, by intestate succession, or by operation of
law, except that the options or warrants may be transferred without payment
thereto to:
(A) partners of the underwriter if the
underwriter is a partnership;
(B) persons who are both officers and
shareholders of the underwriter if the underwriter is a corporation; or
(C) employees of the underwriter;
(v) the initial exercise price of the
options or warrants is at least equal to the public offering price plus either:
(A) 7% each year they are outstanding,
commencing 1 year after issuance, so that the exercise price throughout the
second year is 107%, throughout the third year is 114%, throughout the fourth
year is 121%, and throughout the fifth year is 128%; or
(B) 20%
at any time after 1 year from the date of issuance;
(vi) the
term of an option or warrant is not longer than 5 years; and
(vii) units of securities underlying the options or warrants acquired by an
underwriter and related persons, whether acquired prior to, at the time of, or
after the offering (but which is determined to be in connection with or related
to the offering) are not, in the aggregate, more than 10% of the total number
of shares that are outstanding at the conclusion of the offering. For purposes
of this limitation, over-allotment units and units underlying options,
warrants, or convertible securities that are a part of the proposed public
offering are not to be counted as part of the aggregate number of shares being
offered against which the 10% limitation is to be applied.
(2) The
commissioner may, upon a showing of good cause, approve an application even
though warrants or options have been granted that do not meet the conditions
specified in (1) of this rule. However, the burden of justifying issuance rests
upon the applicant.