Yes. The issuance of common stock (or equivalents) or securities convertible into or exercisable for common stock to officers, directors, employees, or consultants at a price less than the market value of the stock is considered a form of "equity compensation" and requires shareholder approval unless the issuance is part of a public offering (as described in IM-5635-3). For this purpose, market value is the consolidated closing bid price immediately preceding the time the company enters into a binding agreement to issue the securities.

Issuances to an entity controlled by an officer, director, employee, or consultant of the listed company may also be considered equity compensation under certain circumstances, such as where the issuance would be accounted for under Generally Accepted Accounting Principles as equity compensation or result in the disclosure of compensation under the applicable provisions of Regulation S-K.

Note that this provision also applies to limited partnerships, which are required by Rule 5615(a)(4)(H) to obtain the same approval for equity compensation as would be required under Rule 5635(c) and IM-5635-1. Also note that the Minimum Price, as defined in Listing Rule 5635(d), is not applicable to Listing Rule 5635(c) and thus is not relevant to this FAQ.

A company considering an issuance to an entity controlled by an officer, director, employee, or consultant is encouraged to contact its Listing Qualifications analyst by phone at +1 301 978 8008 to discuss the transaction prior to entering into a definitive agreement.

• Timing of the issuances - Timing alone is not necessarily a determining factor, and there is no definitive time period as to whether transactions are aggregated. Generally, if there are no other linkage factors present, transactions more than six months apart would not be aggregated;
• Initiation of the subsequent transaction or transactions - At the time of the first transaction, was the company already planning the subsequent transaction? Did it already expect that it would have to raise additional capital?;
• Commonality of investors - Transactions with common investors are more likely to be aggregated. In addition, the time period over which transactions would be aggregated, may be extended when there are common investors;
• Existence of any contingencies between the issuances or transactions - Are the sales contingent upon one another? For example, a company may be required to obtain an equity line of credit before completing a discounted private placement;
• Commonality as to the use of the proceeds/Same plan of financing - Transactions may be aggregated if they are used for the same purpose or plan of financing; and
• Timing of the board of directors approval.

To determine whether securities that are convertible into or exercisable for common stock are issued at a discount to the Minimum Price, the conversion or exercise price is compared to the Minimum Price of the common stock. For purposes of Listing Rule 5635(d) "Minimum Price" means a price that is the lower of: (i) the Nasdaq Official Closing Price (as reflected on https://www.nasdaq.com/market-activity/quotes/historical-nocp) immediately preceding the signing of the binding agreement; or (ii) the average Nasdaq Official Closing Price of the common stock (as reflected on https://www.nasdaq.com/market-activity/quotes/historical-nocp) for the five trading days immediately preceding the signing of the binding agreement. See FAQ #271. If the conversion or exercise price is less than the Minimum Price, then the issuance is at a discount to the applicable value. Please note that the Nasdaq Official Closing Price is different from the Closing Price.

A potential adjustment to the number of shares or conversion price due to a change to the company's capital structure, such as due to a stock split or extraordinary dividend, does not affect the determination of whether a transaction is at a discount to Minimum Price. However, if the company may reduce the conversion price, issue additional shares, or make a cash payment to the investors as a result of subsequent transactions or events, including "make whole" payments, the calculation of the conversion price will presume that the maximum amount of any such adjustments will be made. Similarly, potential cash payments to the security holders at the time of conversion, other than for accrued interest, are deducted from the value of the note and the resulting amount would be divided by the number of shares issuable when determining the effective conversion price. An example of such cash payments is payments for "foregone interest" that would have been earned by the investors after the time of conversion.

Note that the determination as to whether convertible securities are issued at a discount may differ for insiders (officers, directors, employees and consultants) and all other investors. When considering an issuance to an insider, the security must be issued at a price greater than "market value". See FAQ#271.

Nasdaq rules require shareholder approval for certain transactions that are priced below the "Minimum Price," as defined in Nasdaq's rules. Under Listing Rule 5635(d), shareholder approval is required in connection with a transaction, other than a public offering, at a price below the Minimum Price involving the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable for common stock), which alone or together with sales by officers, directors or Substantial Shareholders of the Company, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. Listing Rule 5635(d) defines "Minimum Price" as the lower of: (i) the closing price (as reflected on Nasdaq.com); 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. Please note that the Nasdaq Official Closing Price is different from the Closing Price. For purposes of Listing Rule 5635(d), the “closing price” means the Nasdaq Official Closing Price, available at https://www.nasdaq.com/market-activity/quotes/historical-nocp. See also FAQ #272.     

In addition, under Listing Rule 5635(c), shareholder approval is required for any issuance to an officer, director, employee or consultant of the company at a price less than market value. For this purpose, Listing Rule 5005(a)(23) defines "market value" as the consolidated closing bid price per share immediately preceding the entering into of the binding agreement to issue the securities.

If the transaction is entered into during market hours, before the close of the regular session at 4 PM Eastern Time, market value or Minimum Price are determined based on the previous trading day's closing bid or closing price (or the average closing price for the previous five trading days), as applicable. If the transaction is entered into after the close of the regular session, then that day's closing bid or closing price (or the average closing price for that day and the previous four trading days) is used. Please note that the closing price (Nasdaq Official Closing Price) may differ from the consolidated closing bid price and, therefore, a transaction priced at or above the Minimum Price may still be at a discount to market value for purposes of Listing Rule 5635(c). See also FAQ #275.