On September 26, 2018, the Securities and Exchange Commission approved amendments (the “Amendments”) to NASDAQ Rule 5635(d) (commonly referred to as the “20% Rule”).  The purpose of the 20% Rule is to protect an issuer’s existing public shareholders against a significantly dilutive private offering by giving the shareholders an opportunity to vote on the offering and/or sell their stock prior to its consummation.  The Amendments simplify the triggers for shareholder approval under the 20% Rule and provide NASDAQ listed issuers with more flexibility to negotiate and price a private offering.

The amended 20% Rule provides that “[s]hareholder approval is required prior to a 20% Issuance at a price that is less than the Minimum Price.”  A “20% Issuance” means a transaction, other than a public offering as defined in NASDAQ’s IM-5635-3, involving the sale, issuance or potential issuance of common stock (or securities convertible into or exercisable for common stock), which, alone or together with sales by officers, directors or substantial shareholders, equals 20% or more of the common stock or voting power outstanding before the issuance.  “Minimum Price” means a price that is the lower of (i) the closing price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement for the transaction or (ii) the average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement for the transaction.  The amended 20% Rule and related interpretations are available here.