exv10w4





Exhibit 10.4



Execution







Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Asterisks denote omissions.




REGULUS THERAPEUTICS INC.




FOUNDING INVESTOR RIGHTS AGREEMENT




 









 





REGULUS THERAPEUTICS INC.




FOUNDING INVESTOR RIGHTS AGREEMENT




     This Founding Investor Rights Agreement (the “Agreement”) is entered into as of the
1st day of January 2009, by and among Regulus Therapeutics Inc., a Delaware corporation (the
“Company”) on the one hand, and Isis Pharmaceuticals, Inc., a Delaware Corporation (“Isis”) and
Alnylam Pharmaceuticals, Inc., a Delaware corporation (“Alnylam”) who are each holders of the
Company’s Series A Preferred Stock (the “Preferred Stock”) on the other hand. Isis and Alnylam may
be referred to hereinafter collectively as the “Founding Investors” and each individually as a
“Founding Investor”. The Company, Isis and Alnylam may be referred to hereinafter collectively as
the “Parties” and each individually as a “Party”.



Recitals




     Whereas, the Company was formerly a Delaware limited liability company with the
Founding Investors as its only members;



     Whereas, the Company converted to a Delaware corporation in January 2009;



     Whereas, in connection with the Company’s conversion to a Delaware corporation, the
Founding Investors received the Preferred Stock in exchange for their membership interests in the
limited liability company; and



     Whereas, in connection with the issuance of the Preferred Stock, the parties desire
to enter into this Agreement in order to grant registration, information rights, buy-out rights and
other rights to the Founding Investors as set forth below.



     Now, Therefore, in consideration of these premises and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:



SECTION 1. DEFINITIONS.




Capitalized terms used herein and not defined elsewhere herein have the meanings set forth in
Exhibit A.



SECTION 2. RESTRICTIONS ON TRANSFER.



No Founding Investor may directly or indirectly sell, assign, transfer, pledge, hypothecate, or
otherwise deal with or encumber or dispose of in any way (each a “Transfer”) such Founding
Investor’s Shares or Registrable Securities, whether in whole or in part, voluntarily or
involuntarily, by operation of law or otherwise, except in accordance with the terms and conditions
set forth in this Section 2.




     2.1 Restrictions on Transfer Before Initial Offering. Except as provided in this Section 2,
before the Company’s Initial Offering, each Founding Investor agrees that it may not



1.









 







and will not Transfer its Shares or Registrable Securities without the prior written consent
of the other Founding Investor.



     2.2 Restrictions on Transfer After Initial Offering. Each Holder agrees not to make any
disposition of all or any portion of the Shares or Registrable Securities unless and until:



          (a) there is then in effect a registration statement under the Securities Act covering such
proposed disposition and such disposition is made in accordance with such registration statement;
or




          (b) (i) The transferee has agreed in writing to be bound by the terms of this Agreement,
(ii) such Holder will have notified the Company of the proposed disposition and will have furnished
the Company with a detailed statement of the circumstances surrounding the proposed disposition,
and (iii) if reasonably requested by the Company, such Holder will have furnished the Company with
an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not
require registration of such shares under the Securities Act. It is agreed that the Company will
not require opinions of counsel for transactions made pursuant to Rule 144, except in unusual
circumstances. After its Initial Offering, the Company will not require any transferee pursuant to
Rule 144 to be bound by the terms of this Agreement if the shares so transferred do not remain
Registrable Securities hereunder following such transfer.




     2.3 Exempt Transfers. Notwithstanding the provisions of Sections 2.1 and 2.2 above, no such
restriction will apply to a transfer by a Founding Investor that is:



          (a) a Transfer by a Founding Investor to an Affiliate of such Founding Investor; provided,
however, that (i) the Affiliate of such transferring Founding Investor must have the resources,
assets, experience, qualifications, permits and other rights necessary to perform under this
Agreement and each of the Ancillary Agreements and (ii) the transferee will agree in writing to be
subject to the terms of this Agreement to the same extent as if it were an original Founding
Investor hereunder.




          (b) Transfer pursuant to a Change in Control of such Founding Investor. In the event of a
Change in Control of a Founding Investor, the other Founding Investor may initiate a Buy-Out
pursuant to Section 4.




     2.4 Stock Legends. Each certificate representing Shares or Registrable Securities will be
stamped or otherwise imprinted with legends substantially similar to the following (in addition to
any legend required under applicable state securities laws):




THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT
SUCH



2.









 






REGISTRATION IS NOT REQUIRED.




THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND
CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT BY AND BETWEEN THE
STOCKHOLDER AND THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE
OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.



          (a) The Company will be obligated to promptly reissue unlegended certificates at the request
of any Holder thereof if the Company has completed its Initial Offering and the Holder has obtained
an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the
Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of
without registration, qualification and legend, provided that the second legend listed above will
be removed only at such time as the Holder of such certificate is no longer subject to any
restrictions hereunder.




          (b) Any legend endorsed on an instrument pursuant to applicable state securities laws and the
stop-transfer instructions with respect to such securities will be removed upon receipt by the
Company of an order of the appropriate blue sky authority authorizing such removal.




SECTION 3. COVENANTS OF THE COMPANY.




     3.1 Financial Information and Reporting.



          (a) The Company will cause to be maintained complete books and records accurately reflecting
the accounts, business and transactions of the Company on a calendar-year basis and with sufficient
detail and completeness customary and usual for businesses of the type engaged in by the Company.
The Company’s books and records and financial statements will be kept using the accrual method of
accounting and in accordance with U.S. generally accepted accounting principles. The Company will
maintain a system of internal accounting controls which are sufficient to provide reasonable
assurance that (w) transactions are executed in accordance with the Company’s signature authority
policy; (x) transactions are recorded as necessary to permit preparation of the financial
statements of the Company and to maintain accountability for the Company’s assets; (y) access to
the Company’s assets is permitted only in accordance with management’s authorization; and (z) the
reporting of the Company’s assets is compared with existing assets at regular intervals. The
Company’s financial statements will be audited annually by an independent nationally recognized
public accounting firm approved by the Company’s Board of Directors.




          (b) During Consolidation Period. For so long as (1) Isis’ independent auditors advise Isis
that Isis should consolidate Regulus’ financial statements with Isis’ financial statements or (2)
Regulus is using Isis’ financial systems (the “Consolidation Period”) Regulus will do the
following:




3.









 








               (i) Commencing with respect to the fiscal year ending December 31, 2008, and for each fiscal
year during the term hereof, the Company will deliver or mail to each Founding Investor the audited
annual financial statements of the Company at least [***] ([***]) [***] prior to the earliest date
by which either Founding Investor is required to file its annual report on Form 10-K for such
fiscal year (or such earlier time as may be required by either Founding Investor to satisfy its
reporting obligations under law, including without limitation, the rules and regulations of the
SEC), which financial statements will have been prepared in accordance with U.S. generally accepted
accounting principles.



               (ii) For each fiscal quarter during the term hereof, the Company will deliver or mail to each
Founding Investor an unaudited balance sheet of the Company as at the end of such quarter and
unaudited statements of income and cash flows of the Company for such quarter and for the current
fiscal year to the end of such fiscal quarter within [***] ([***]) days after the end of each
fiscal quarter of the Company (or such earlier time as may be required by a Founding Investor to
satisfy its reporting obligations under law, including without limitation, the rules and
regulations of the SEC).



               (iii) Commencing with the month ending on January 31, 2009, the Company will deliver to each
Founding Investor an unaudited balance sheet of the Company as at the end of such month and
unaudited statements of income and of cash flows of the Company for such month and for the current
fiscal year to the end of such month promptly following the Company’s completion of the review of
its financial statements for such month (other than the last month of any fiscal quarter) (or such
earlier time as may be required by a Founding Investor to satisfy its reporting obligations under
law, including without limitation, the rules and regulations of the SEC).



               (iv) The income statements and balance sheets referred to in this Section 3.1 will be
accompanied by the report thereon, if any, of any independent accountants engaged by the Company or
by the certificate of the President that such financial statements were prepared without audit from
the books and records of the Company.



               (v) The Company will use the same accounting firm as Isis uses to audit its financial
statements.



               (vi) The Company’s principal executive officer and principal financial officer, or persons
performing similar functions, will provide certifications to Isis corresponding to those required
under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and the Company will provide to Isis
an attestation report of its auditors with respect to the Company’s internal controls, as may be
requested by Isis’ external auditors.



               (vii) If after reasonable discussions in good faith, the Company’s audit committee and Isis’
audit committee cannot resolve any dispute with respect to accounting policies and practices for
the Company’s financial reporting, the Parties agree that they will apply the accounting policy or
practice proposed by Isis’ audit committee.



          (c) After the Consolidation Period. After the Consolidation Period and until neither Isis nor
Alnylam is required to record their respective share of Regulus’ profit/loss,




4.









 







Regulus will provide Isis and Alnylam the information as specified on Exhibit E
attached hereto.




          (d) Once Isis and Alnylam are no longer required to record their respective share of Regulus’
income/losses, Regulus will not be required to provide the information to Isis and Alnylam outlined
in Section 3.1(c) above. However, Regulus will provide to Isis and/or Alnylam any financial
information reasonably requested by either company so that such company can determine if an
impairment in Regulus exists, and Regulus will make its management available to Isis and/or Alnylam
for reasonable inquiries regarding its financials.




     3.2 Tax Matters.



          (a) The Company will prepare or cause to be prepared, at the Company’s expense, all tax
returns and statements, if any, that must be filed on behalf of the Company with any taxing
authority, and will make timely filing thereof, including filings pursuant to extensions permitted
under applicable federal and state tax regulations. With respect to the Company’s tax return for
the fiscal year ended December 31, 2008, the Company will provide a draft of such tax return to
each Founding Investor within a reasonable amount of time prior to filing such return to allow each
Founding Investor an opportunity to review and comment on such return. In addition, the Company
will give due consideration to each Founding Investor’s comments regarding the tax return for the
year ended December 31, 2008.




          (b) Each Founding Investor may request from the Company any information reasonably necessary
for the Founding Investor to complete any of its tax returns or compute estimated tax payments and
the Company will, within a reasonable period of time following the request, provide such
information to the requesting Founding Investor.




     3.3 Confidentiality of Records. Each Founding Investor agrees to use the same degree of care
as such Founding Investor uses to protect its own confidential information to keep confidential and
not disclose to any party any information furnished to such Founding Investor pursuant to
Section 3.1 and 3.2 hereof that the Company identifies as being confidential or proprietary (so
long as such information is not in the public domain), except that such Founding Investor may
disclose such proprietary or confidential information (i) to any partner, subsidiary or parent of
such Founding Investor as long as such partner, subsidiary or parent is advised of and agrees or
has agreed to be bound by the confidentiality provisions of this Section 3.3 or comparable
restrictions; (ii) at such time as it enters the public domain through no fault of such Founding
Investor; (iii) that is communicated to it free of any obligation of confidentiality; (iv) that is
developed by Founding Investor or their respective agents independently of and without reference to
any confidential information communicated by the Company; or (v) as required by applicable law.
Upon request by the Company, each Founding Investor agrees to enter into a separate confidentiality
agreement with the Company.



     3.4 Reservation of Common Stock. The Company will at all times reserve and keep available,
solely for issuance and delivery upon the conversion of the Preferred Stock, all Common Stock
issuable from time to time upon such conversion.



5.









 





     3.5 Board of Directors. The Board will consist of up to [***] ([***]) directors (each, a
“Director”). Alnylam will have the right to designate [***] ([***]) Directors who need not be
Independent Directors (the “Alnylam Directors”). Isis will have the right to designate [***]
([***]) Directors who need not be Independent Directors (the “Isis Directors”). The President of
the Company will, at all times while in office, be a Director. The remaining two members will be
independent industry representatives approved by the other Directors then serving on the Board.
Other than the President, each Director will serve at the pleasure of the Founding Investor
designating such Director until such Director’s removal by the designating Founding Investor or
such Director’s resignation. If there is a vacancy on the Board, the vacancy will be filled by the
Founding Investor, if any, who initially designated the Director, except if the vacancy is caused
by the termination of the President, such vacancy will be filled when the then existing Board
appoints the new President. Any Founding Investor may remove, at any time and for any reason, any
or all of the Directors designated by such Founding Investor and, subject to the Independent
Director requirements, designate in lieu thereof any individual(s) to serve the remainder of the
relevant term.



          (a) Observers. The right to attend all or particular meetings of the Board (“Observer
Rights”) may be granted to any Person designated by a Founding Investor upon the approval of the
other Founding Investor (such approval not to be unreasonably withheld or delayed); provided,
however, that any Person granted Observer Rights, and/or any representative of such Person
attending meetings of the Board, will agree in writing to be subject to appropriate confidentiality
obligations if requested by a Director; provided, further, that such holder of Observer Rights may
be excluded from any meeting or any portion of a meeting for which any Director believes (i) such
meeting or portion will involve a discussion of information that the Company or the Founding
Investor designating such Director considers to be a trade secret or of a confidential or
proprietary nature, (ii) exclusion of such holder of Observer Rights is desirable in order to
preserve the attorney client-privilege or (iii) exclusion is otherwise merited.




          (b) Other Attendees. Any Director may invite a subject matter expert to attend any meeting of
the Board; provided, however, that any Person granted attendance rights will agree in writing to be
subject to appropriate confidentiality obligations if requested by a Director and provided further
that no other Director objects to such expert’s presence. Upon such objection, the expert will be
excluded from any meeting or any portion of a meeting.




          (c) The Directors designated as of the Effective Date are set forth on Exhibit B
hereto.




     3.6 Directors’ Liability and Indemnification. The Company’s Certificate of Incorporation and
Bylaws will provide (a) for elimination of the liability of a Director to the maximum extent
permitted by law and (b) for indemnification of Directors for acts on behalf of the Company to the
maximum extent permitted by law. In addition, the Company will enter into and use its best efforts
to at all times maintain reasonable and customary indemnification agreements with each of its
Directors to indemnify such directors to the maximum extent permissible under applicable law.



     3.7 Operating Plan. The Company will use commercially reasonable efforts to operate the
Company in accordance with the Approved Operating Plan (as defined below). The



6.









 







initial Operating Plan, dated April 30, 2008 attached hereto as Exhibit C (the
“Initial Operating Plan”), will be deemed the “Approved Operating Plan” for the period beginning on
September 6, 2007 and ending on December 31, 2009 (such period, the “Initial Commitment Period”).



          (a) No later than September 30, 2009, and no later than September 30 in each fiscal year
thereafter, Regulus’ management will prepare and submit to the Board a proposal for revising the
Approved Operating Plan then in effect (“Proposed Operating Plan”), which will include a proposed
Development Plan (“Proposed Development Plan”), proposed Operating Budget (“Proposed Operating
Budget”).




          (b) Each Proposed Operating Plan that has been prepared and submitted by Regulus’ management
in accordance with Section 3.7(a) will be considered at the first meeting of the Board following
its submission and will be subject to the approval of the Board. The Chairperson will call a
special meeting of the Board for this purpose at the request of any Director if the next scheduled
regular meeting is later than December 31 of the year in which submission is made. Any such
Proposed Operating Plan (or any amendment thereto) that is approved by the Board will be considered
the “Approved Operating Plan” for all purposes of this Agreement until amended or replaced.




          (c) If, after the Initial Commitment Period, the Board is unable to approve a Proposed
Operating Plan that has been prepared and submitted by Regulus’ management in accordance with
Section 3.7(a) within three months following the date such Proposed Operating Plan is submitted for
approval (a “Stalemate”), either Founding Investor may initiate a Buy-Out in accordance with
Section 4; provided, however, that in the event sufficient funding is available to the Company to
continue to carry out the Development Plan after the Initial Commitment Period, a Stalemate will
not be deemed to have occurred, and neither Founding Investor may initiate a Buy-Out, until a date
[***] ([***]) days prior to the date on which all of the Company’s funds are expected to be
depleted as determined based on the Approved Operating Plan then in effect.




     3.8 Scientific Advisory Board. The Company will maintain a Scientific Advisory Board (“SAB”)
consisting of at least three (3) members. The initial members and chairperson of the SAB will be
as set forth on Exhibit B. Any changes to the composition of the Scientific Advisory
Board, including the removal or appointment of the chairperson, will be approved by the Board. The
SAB will meet at least at least three time a year until December 31, 2009 and will initially be
responsible for (i) advising the Company as to research goals and plans, (ii) reviewing research
data and advising the Company with respect to interpretation of such research data, as requested by
the Board, President or Chief Scientific Officer; and (iii) advising the Company with respect to
research and development decisions, as requested by the Board, President or Chief Scientific
Officer.



     3.9 Termination of Covenants. All covenants of the Company contained in Section 3 of this
Agreement (other than the provisions of Section 3.1 and 3.3) will expire and terminate as to each
Founding Investor upon the earlier of (i) the effective date of the registration statement
pertaining to an Initial Offering or (ii) upon a Liquidation Event, Acquisition or Asset Transfer



7.









 




(in each case as defined in the Company’s Certificate of Incorporation as such may be amended
from time to time).




SECTION 4. BUY-OUT.




     4.1 Right to Initiate Buy-Out. Within (a) solely in the event of a Stalemate occurring after
the end of the Initial Commitment Period (as further described in Section 3.7(c), the [***] ([***])
day period following such Stalemate, (b) at any time, whether before or after the end of the
Initial Commitment Period, during the [***] ([***]) day period following notice from a Founding
Investor that it has entered into a binding agreement providing for a Change of Control of such
Founding Investor (such [***] ([***]) or [***] ([***]) day period, a “Buy-Out Notice Period”), or
(c) as provided for in the License Agreement, either Founding Investor (in the case of (a)), the
Founding Investor receiving the notice of a Change in Control (in the case of (b)), or the Founding
Investor or Founding Investors as specified in the License Agreement (in the case of (c) (in each
case, the “Initiating Founding Investor”) has the right, exercisable upon written notice to the
Company and the other Founding Investor (the “Buy-Out Notice”), to initiate the sale of the Company
or the distribution the Company’s assets, including the Company Intellectual Property and Company’s
rights in Licensed IP, in accordance with the terms set forth on Exhibit D (the
“Buy-Out”).



     4.2 Voting Agreement; Cooperation. If any Founding Investor initiates a Buy-Out under Section
4.1, each Founding Investor agrees to vote or act with respect to their Shares, Registrable
Securities and designated members of the Board so as to authorize and approve the Buyout unless
Exhibit D expressly allows a Founding Investor to withhold such vote or action. Each Party further
agrees to assist the other Parties in every proper way to consummate the Buy-Out, effect the
Buy-Out, including but not limited to executing and delivering such documents and performing such
other acts as a Party may reasonably request in connection with effecting the Buy-Out.



     4.3 Preservation of Intent. If any term, covenant or condition of this Section 4 or Exhibit D
or the application thereof to any Party or circumstance, to any extent, is invalid or
unenforceable, then (a) the remainder of this Section 4 and Exhibit D, or the application of such
term, covenant or condition to Parties or circumstances other than those as to which it is invalid
or unenforceable, will not be affected thereby and each term, covenant or condition of this Section
4 and Exhibit D will be valid and be enforced to the fullest extent permitted by law; and (b) the
Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in
good faith in order to provide a reasonably acceptable alternative to the term, covenant or
condition of this Section 4 and Exhibit D or the application thereof that is invalid or
unenforceable, it being the intent of the Parties that the basic purposes of this Section 4 and
Exhibit D are to be effectuated.



     4.4 Termination of Buy-Out. The provisions set forth in this Section 4 will expire and
terminate upon the effective date of the registration statement pertaining to an Initial Offering.



8.









 





SECTION 5. RIGHTS OF FIRST REFUSAL




     5.1 Subsequent Offerings. Subject to applicable securities laws, each Founding Investor will
have a right of first refusal to purchase its pro rata share of all Equity Securities, as defined
below, that the Company may, from time to time, propose to sell and issue after the date of this
Agreement, other than the Equity Securities excluded by Section 5.6 hereof. Each Founding
Investor’s pro rata share is equal to the ratio of (a) the number of shares of the Company’s Common
Stock (including all shares of Common Stock issuable or issued upon conversion of the Shares or
upon the exercise of outstanding warrants or options) of which such Founding Investor is deemed to
be a holder immediately prior to the issuance of such Equity Securities to (b) the total number of
shares of the Company’s outstanding Common Stock (including all shares of Common Stock issued or
issuable upon conversion of the Shares or upon the exercise of any outstanding warrants or options)
immediately prior to the issuance of the Equity Securities. The term “Equity Securities” will mean
(i) any Common Stock, Preferred Stock or other security of the Company, (ii) any security
convertible into or exercisable or exchangeable for, with or without consideration, any Common
Stock, Preferred Stock, or other security (including any option to purchase such a convertible
security), (iii) any security carrying any warrant or right to subscribe to or purchase any Common
Stock, Preferred Stock or other security or (iv) any such warrant or right.



     5.2 Exercise of Rights. If the Company proposes to issue any Equity Securities, it will give
each Founding Investor written notice of its intention, describing the Equity Securities, the price
and the terms and conditions upon which the Company proposes to issue the same. Each Founding
Investor will have [***] ([***]) days from the giving of such notice to agree to purchase its pro
rata share of the Equity Securities for the price and upon the terms and conditions specified in
the notice by giving written notice to the Company and stating therein the quantity of Equity
Securities to be purchased. Notwithstanding the foregoing, the Company will not be required to
offer or sell such Equity Securities to any Founding Investor who would cause the Company to be in
violation of applicable federal securities laws by virtue of such offer or sale.



     5.3 Issuance of Equity Securities to Other Persons. The Company will have [***] ([***]) days
thereafter to sell the Equity Securities in respect of which the Founding Investor’s rights were
not exercised, at a price not lower and upon general terms and conditions not materially more
favorable to the purchasers thereof than specified in the Company’s notice to the Founding
Investors pursuant to Section 5.2 hereof. If the Company has not sold such Equity Securities
within [***] ([***]) days of the notice provided pursuant to Section 5.2, the Company will not
thereafter issue or sell any Equity Securities, without first offering such securities to the
Founding Investors in the manner provided above.



     5.4 Termination and Waiver of Rights of First Refusal. The rights of first refusal
established by this Section 5 will not apply to, and will terminate upon the earlier of (i) the
effective date of the registration statement pertaining to the Company’s Initial Offering or
(ii) an Acquisition. Notwithstanding Section 7.5 hereof, the rights of first refusal established
by this Section 5 may be amended, or any provision waived with and only with the written consent of
the Company and the Founding Investors holding a majority of the Registrable Securities held by all
Founding Investors.



9.









 





     5.5 Assignment of Rights of First Refusal. The rights of first refusal of each Founding
Investor under this Section 5 may be assigned to the same parties, subject to the same restrictions
as any transfer of registration rights pursuant to Section 6.7.



     5.6 Excluded Securities. The rights of first refusal established by this Section 5 will have
no application to any of the following Equity Securities:



          (a) shares of Common Stock and/or options, warrants or other Common Stock purchase rights and
the Common Stock issued pursuant to such options, warrants or other rights issued to employees,
officers or directors of, or consultants or advisors to, the Company or any subsidiary pursuant to
stock purchase or stock option plans or other arrangements that are approved by the Board of
Directors;




          (b) stock issued or issuable pursuant to any rights or agreements, options, warrants or
convertible securities outstanding as of the date of this Agreement; and stock issued pursuant to
any such rights or agreements granted after the date of this Agreement, so long as the rights of
first refusal established by this Section 5 were complied with, waived, or were inapplicable
pursuant to any provision of this Section 5.6 with respect to the initial sale or grant by the
Company of such rights or agreements;




          (c) any Equity Securities issued for consideration other than cash pursuant to a merger,
consolidation, acquisition or similar business combination approved by the Board of Directors;




          (d) any Equity Securities issued in connection with any stock split, stock dividend or
recapitalization by the Company;




          (e) any Equity Securities issued pursuant to any equipment loan or leasing arrangement, real
property leasing arrangement, or debt financing from a bank or similar financial or lending
institution approved by the Board of Directors;




          (f) any Equity Securities that are issued by the Company pursuant to a registration statement
filed under the Securities Act;




          (g) any Equity Securities that are issued by the Company in connection with any underwritten
public offering;




          (h) any Equity Securities issued in connection with strategic transactions involving the
Company and other entities, including, without limitation (i) joint ventures, manufacturing,
marketing or distribution arrangements or (ii) technology transfer or development arrangements;
provided that the issuance of shares therein has been approved by the Company’s Board of Directors;
and




          (i) Any Equity Securities issued to third-party service providers in exchange for or as
partial consideration for services rendered to the Company.




10.









 








SECTION 6. REGISTRATION RIGHTS; MARKET STAND-OFF.




     6.1 Piggyback Registrations. The Company will notify all Holders of Registrable Securities in
writing at least fifteen (15) days prior to the filing of any registration statement under the
Securities Act for purposes of a public offering of securities of the Company (including, but not
limited to, registration statements relating to secondary offerings of securities of the Company,
but excluding Special Registration Statements) and will afford each such Holder an opportunity to
include in such registration statement all or part of such Registrable Securities held by such
Holder. Each Holder desiring to include in any such registration statement all or any part of the
Registrable Securities held by it will, within fifteen (15) days after the above-described notice
from the Company, so notify the Company in writing. Such notice will state the intended method of
disposition of the Registrable Securities by such Holder. If a Holder decides not to include all
of its Registrable Securities in any registration statement thereafter filed by the Company, such
Holder will nevertheless continue to have the right to include any Registrable Securities in any
subsequent registration statement or registration statements as may be filed by the Company with
respect to offerings of its securities, all upon the terms and conditions set forth herein.



          (a) Underwriting. If the registration statement of which the Company gives notice under this
Section 6.3 is for an underwritten offering, the Company will so advise the Holders of Registrable
Securities. In such event, the right of any such Holder to include Registrable Securities in a
registration pursuant to this Section 6.3 will be conditioned upon such Holder’s participation in
such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to
the extent provided herein. All Holders proposing to distribute their Registrable Securities
through such underwriting will enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any
other provision of this Agreement, if the underwriter determines in good faith that marketing
factors require a limitation of the number of shares to be underwritten, the number of shares that
may be included in the underwriting will be allocated, first, to the Company; and second, to the
Holders on a pro rata basis based on the total number of Registrable Securities held by the
Holders; provided, however, that such reduction will not be permitted unless such registration
does not include shares of any other selling stockholders. If any Holder disapproves of the terms
of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the
Company and the underwriter, delivered at least ten (10) business days prior to the effective date
of the registration statement. Any Registrable Securities excluded or withdrawn from such
underwriting will be excluded and withdrawn from the registration. For any Holder which is a
partnership, limited liability company or corporation, the partners, retired partners, members,
retired members and stockholders of such Holder, or the estates and family members of any such
partners, retired partners, members and retired members and any trusts for the benefit of any of
the foregoing persons will be deemed to be a single “Holder,” and any pro rata reduction with
respect to such “Holder” will be based upon the aggregate amount of shares carrying registration
rights owned by all entities and individuals included in such “Holder,” as defined in this
sentence.




          (b) Right to Terminate Registration. The Company will have the right to terminate or
withdraw any registration initiated by it under this Section 6.1 whether or not any




11.









 







Holder has elected to include securities in such registration. The Registration Expenses of
such withdrawn registration will be borne by the Company in accordance with Section 6.3 hereof.




     6.2 Form S-3 Registration. In case the Company receives from any Holder or Holders of
Registrable Securities a written request or requests that the Company effect a registration on
Form S-3 (or any successor to Form S-3) or any similar short-form registration statement and any
related qualification or compliance with respect to all or a part of the Registrable Securities
owned by such Holder or Holders, the Company will:



          (a) promptly give written notice of the proposed registration, and any related qualification
or compliance, to all other Holders of Registrable Securities; and




          (b) as soon as practicable, effect such registration and all such qualifications and
compliances as may be so requested and as would permit or facilitate the sale and distribution of
all or such portion of such Holder’s or Holders’ Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given within fifteen (15)
days after receipt of such written notice from the Company; provided, however, that the Company
will not be obligated to effect any such registration, qualification or compliance pursuant to
this Section 6.2:




               (i) if Form S-3 is not available for such offering by the Holders;



               (ii) if the Holders, together with the holders of any other securities of the Company entitled
to inclusion in such registration, propose to sell Registrable Securities and such other securities
(if any) at an aggregate price to the public of less than fifteen million dollars ($15,000,000);



               (iii) if within thirty (30) days of receipt of a written request from any Holder or Holders
pursuant to this Section 6.2, the Company gives notice to such Holder or Holders of the Company’s
intention to make a public offering within ninety (90) days, other than pursuant to a Special
Registration Statement;



               (iv) if the Company will furnish to the Holders a certificate signed by the Chairman of the
Board of Directors of the Company stating that in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company and its stockholders for such
Form S-3 registration to be effected at such time, in which event the Company will have the right
to defer the filing of the Form S-3 registration statement for a period of not more than one
hundred twenty (120) days after receipt of the request of the Holder or Holders under this
Section 6.2; provided, that such right to delay a request will be exercised by the Company not more
than twice in any twelve (12) month period;



               (v) if the Company has, within the twelve (12) month period preceding the date of such
request, already effected one (1) registration on Form S-3 for the Holders pursuant to this
Section 6.2, or



12.









 





               (vi) in any particular jurisdiction in which the Company would be required to qualify to do
business or to execute a general consent to service of process in effecting such registration,
qualification or compliance.



          (c) Subject to the foregoing, the Company will file a Form S-3 registration statement
covering the Registrable Securities and other securities so requested to be registered as soon as
practicable after receipt of the requests of the Holders.




     6.3 Expenses of Registration. Except as specifically provided herein, all Registration
Expenses incurred in connection with any registration, qualification or compliance pursuant to
Section 6.1 or 6.2 herein will be borne by the Company. All Selling Expenses incurred in
connection with any registrations hereunder, will be borne by the holders of the securities so
registered pro rata on the basis of the number of shares so registered. The Company will not,
however, be required to pay for expenses of any registration proceeding begun pursuant to
Section 6.2, the request of which has been subsequently withdrawn by the Initiating Holders unless
(a) the withdrawal is based upon material adverse information concerning the Company of which the
Initiating Holders were not aware at the time of such request or (b) the Holders of a majority of
Registrable Securities agree to deem such registration to have been effected as of the date of such
withdrawal for purposes of determining whether the Company will be obligated pursuant to Section
6.2(b)(v), as applicable, to undertake any subsequent registration, in which event such right will
be forfeited by all Holders). If the Holders are required to pay the Registration Expenses, such
expenses will be borne by the holders of securities (including Registrable Securities) requesting
such registration in proportion to the number of shares for which registration was requested. If
the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to
clause (a) above, then such registration will not be deemed to have been effected for purposes of
determining whether the Company will be obligated pursuant to Section 6.2(b)(v) to undertake any
subsequent registration.



     6.4 Obligations of the Company. Whenever required to effect the registration of any
Registrable Securities, the Company will, as expeditiously as reasonably possible:



          (a) prepare and file with the SEC a registration statement with respect to such Registrable
Securities and use all commercially reasonable efforts to cause such registration statement to
become effective, and, upon the request of the Holders of a majority of the Registrable Securities
registered thereunder, keep such registration statement effective for up to thirty (30) days or,
if earlier, until the Holders have completed the distribution related thereto; provided, however,
that at any time, upon written notice to the participating Holders and for a period not to exceed
sixty (60) days thereafter (the “Suspension Period”), the Company may delay the filing or
effectiveness of any registration statement or suspend the use of any registration statement (and
the Initiating Holders hereby agree not to offer or sell any Registrable Securities pursuant to
such registration statement during the Suspension Period) if the Company reasonably believes that
there is or may be in existence material nonpublic information or events involving the Company,
the failure of which to be disclosed in the prospectus included in the registration statement
could result in a Violation (as defined below). In the event that the Company will exercise its
right to delay the filing or effectiveness or suspend the use of a registration hereunder, the
applicable time period during which the




13.









 







registration statement is to remain effective will be extended by a period of time equal to
the duration of the Suspension Period. The Company may extend the Suspension Period for an
additional consecutive sixty (60) days with the consent of the Holders of a majority of the
Registrable Securities registered under the applicable registration statement, which consent will
not be unreasonably withheld. If so directed by the Company, all Holders registering shares under
such registration statement will (i) not offer to sell any Registrable Securities pursuant to the
registration statement during the period in which the delay or suspension is in effect after
receiving notice of such delay or suspension; and (ii) use their commercially reasonable efforts
to deliver to the Company (at the Company’s expense) all copies, other than permanent file copies
then in such Holders’ possession, of the prospectus relating to such Registrable Securities
current at the time of receipt of such notice. Notwithstanding the foregoing, the Company will
not be required to file, cause to become effective or maintain the effectiveness of any
registration statement other than a registration statement on Form S-3 that contemplates a
distribution of securities on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act.




          (b) Prepare and file with the SEC such amendments and supplements to such registration
statement and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement for the period set forth in subsection (a)
above.




          (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such other documents as
they may reasonably request in order to facilitate the disposition of Registrable Securities owned
by them.




          (d) Use its commercially reasonable efforts to register and qualify the securities covered by
such registration statement under such other securities or Blue Sky laws of such jurisdictions as
will be reasonably requested by the Holders; provided that the Company will not be required in
connection therewith or as a condition thereto to qualify to do business or to file a general
consent to service of process in any such states or jurisdictions.




          (e) In the event of any underwritten public offering, enter into and perform its obligations
under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of
such offering. Each Holder participating in such underwriting will also enter into and perform
its obligations under such an agreement.




          (f) Notify each Holder of Registrable Securities covered by such registration statement at
any time when a prospectus relating thereto is required to be delivered under the Securities Act
of the happening of any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing. The Company will use commercially
reasonable efforts to amend or supplement such prospectus in order to cause such prospectus not to
include any untrue statement of a material fact or omit to




14.









 







state a material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.




          (g) Use its commercially reasonable efforts to furnish, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities are being sold through
underwriters, (i) an opinion, dated as of such date, of the counsel representing the Company for
the purposes of such registration, in form and substance as is customarily given to underwriters
in an underwritten public offering, addressed to the underwriters, if any, and (ii) a letter,
dated as of such date, from the independent certified public accountants of the Company, in form
and substance as is customarily given by independent certified public accountants to underwriters
in an underwritten public offering addressed to the underwriters.




     6.5 Delay of Registration; Furnishing Information.



          (a) No Holder will have any right to obtain or seek an injunction restraining or otherwise
delaying any such registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 6.




          (b) It will be a condition precedent to the obligations of the Company to take any action
pursuant to Section 6.1 or 6.2 that the selling Holders will furnish to the Company such
information regarding themselves, the Registrable Securities held by them and the intended method
of disposition of such securities as will be required to effect the registration of their
Registrable Securities.




          (c) The Company will have no obligation with respect to any registration requested pursuant
to Section 6.2 if the number of shares or the anticipated aggregate offering price of the
Registrable Securities to be included in the registration does not equal or exceed the number of
shares or the anticipated aggregate offering price required to originally trigger the Company’s
obligation to initiate such registration as specified in Section 6.2.




     6.6 Indemnification. In the event any Registrable Securities are included in a registration
statement under Section 6.1 or 6.2:



          (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder,
the partners, members, officers and directors of each Holder, as applicable, any underwriter (as
defined in the Securities Act) for such Holder and each person, if any, who controls such Holder
or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages, or liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a “Violation”) by the Company: (i) any
untrue statement or alleged untrue statement of a material fact contained in such registration
statement or incorporated by reference therein, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or




15.









 







(iii) any violation or alleged violation by the Company of the Securities Act, the Exchange
Act, any state securities law or any rule or regulation promulgated under the Securities Act, the
Exchange Act or any state securities law in connection with the offering covered by such
registration statement; and the Company will reimburse each such Holder, partner, member, officer,
director, underwriter or controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage, liability or
action; provided however, that the indemnity agreement contained in this Section 6.6(a) will not
apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company, which consent will not be unreasonably
withheld, nor will the Company be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon a Violation which occurs
in reliance upon and in conformity with written information furnished expressly for use in
connection with such registration by such Holder, partner, member, officer, director, underwriter
or controlling person of such Holder.




          (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration qualifications or compliance
is being effected, indemnify and hold harmless the Company, each of its directors, its officers
and each person, if any, who controls the Company within the meaning of the Securities Act, any
underwriter and any other Holder, as applicable, selling securities under such registration
statement or any of such other Holder’s partners, directors or officers or any person who controls
such Holder, against any losses, claims, damages or liabilities (joint or several) to which the
Company or any such director, officer, controlling person, underwriter or other such Holder, or
partner, director, officer or controlling person of such other Holder may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based upon any of the
following statements: (i) any untrue statement or alleged untrue statement of a material fact
contained in such registration statement or incorporated reference therein, including any
preliminary prospectus or final prospectus contained therein or any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Securities Act (collectively, a “Holder Violation”),
in each case to the extent (and only to the extent) that such Holder Violation occurs in reliance
upon and in conformity with written information furnished by such Holder under an instrument duly
executed by such Holder and stated to be specifically for use in connection with such
registration; and each such Holder will reimburse any legal or other expenses reasonably incurred
by the Company or any such director, officer, controlling person, underwriter or other Holder, or
partner, officer, director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action if it is judicially
determined that there was such a Holder Violation; provided, however, that the indemnity agreement
contained in this Section 6.6(b) will not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the consent of the
Holder, which consent will not be unreasonably withheld; provided further, that in no event will
any indemnity under this Section 6.6 exceed the net proceeds from the offering received by such
Holder, as applicable.




16.









 








          (c) Promptly after receipt by an indemnified party under this Section 6.6 of notice of the
commencement of any action (including any governmental action), such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under this Section 6.6,
deliver to the indemnifying party a written notice of the commencement thereof and the
indemnifying party will have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties; provided, however, that an
indemnified party will have the right to retain its own counsel, with the fees and expenses
thereof to be paid by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party represented by such counsel
in such proceeding. The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action will relieve such indemnifying party of any
liability to the indemnified party under this Section 6.6 to the extent, and only to the extent,
prejudicial to its ability to defend such action, but the omission so to deliver written notice to
the indemnifying party will not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 6.6.




          (d) If the indemnification provided for in this Section 6.6 is held by a court of competent
jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages
or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, will to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection with the
Violation(s) or Holder Violation(s) that resulted in such loss, claim, damage or liability, as
well as any other relevant equitable considerations. The relative fault of the indemnifying party
and of the indemnified party will be determined by a court of law by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the omission to state
a material fact relates to information supplied by the indemnifying party or by the indemnified
party and the parties’ relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission; provided, that in no event will any contribution by
a Holder, as applicable, hereunder exceed the net proceeds from the offering received by such
Holder, as applicable.




          (e) The obligations of the Company and Holders under this Section 6.6 will survive completion
of any offering of Registrable Securities, as applicable, in a registration statement and, with
respect to liability arising from an offering to which this Section 6.6 would apply that is
covered by a registration filed before termination of this Agreement, such termination. No
indemnifying party, in the defense of any such claim or litigation, will, except with the consent
of each indemnified party, consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or litigation.




17.









 








     6.7 Assignment of Registration Rights. The rights to cause the Company to register
Registrable Securities pursuant to this Section 6 may be assigned by a Holder to a transferee or
assignee of Registrable Securities (for so long as such shares remain Registrable Securities) that
(a) is a subsidiary, parent, general partner, limited partner, retired partner, member or retired
member, stockholder or other affiliate of a Holder that is a corporation, partnership or limited
liability company, (b) acquires all of such Holders Registrable Securities in connection with the
sale of all or substantially all of such Holder’s business, or (c) acquires at least two hundred
thousand (200,000) shares of Registrable Securities (as adjusted for stock splits and
combinations); or (d) is an entity affiliated by common control (or other related entity) with such
Holder provided, however, (i) the transferor will, within ten (10) days after such transfer,
furnish to the Company written notice of the name and address of such transferee or assignee and
the securities with respect to which such registration rights are being assigned and (ii) such
transferee will agree to be subject to all restrictions set forth in this Agreement.



     6.8 Limitation on Subsequent Registration Rights. Other than as provided in Section 5.10,
after the date of this Agreement, the Company will not enter into any agreement with any holder or
prospective holder of any securities of the Company that would grant such holder rights to demand
the registration of shares of the Company’s capital stock, or to include such shares in a
registration statement that would reduce the number of shares includable by the Holders.



     6.9 “Market Stand-Off” Agreement. Each Holder hereby agrees that such Holder, as the case may
be, will not sell, transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale, any Common Stock
(or other securities) of the Company held by such Holder (other than those included in the
registration) during (i) the 180-day period following the effective date of the Initial Offering
(or such longer period, not to exceed 34 days after the expiration of the 180-day period, as the
underwriters or the Company will request in order to facilitate compliance with NASD Rule 2711 or
NYSE Member Rule 472 or any successor rule), and (ii) the 90-day period following the effective
date of a registration statement of the Company filed under the Securities Act (or such longer
period, not to exceed 18 days after the expiration of the 90-day period, as the underwriters or the
Company will request in order to facilitate compliance with NASD Rule 2711); provided, that, with
respect to (i) and (ii) above, all officers, directors of the Company and all entities who hold
Common Stock (or Securities Convertible into Common Stock) in an amount that is greater than 1% of
the Company’s then issued and outstanding Common Stock are bound by and have entered into similar
agreements. The obligations described in this Section 6.9 will not apply to a Special Registration
Statement.



     6.10 Agreement to Furnish Information. Each Holder hereby agrees to execute and deliver such
other agreements as may be reasonably requested by the Company or the underwriter that are
consistent with such Holder’s obligations under Section 6.9, as applicable, or that are necessary
to give further effect thereto. In addition, if requested by the Company or the representative of
the underwriters of Common Stock (or other securities) of the Company, each Holder will provide,
within ten (10) days of such request, such information as may be required by the Company or such
representative in connection with the completion of any public offering of the Company’s securities
pursuant to a registration statement filed under the Securities Act. The obligations described in
Section 6.9 and this Section 6.10 will not apply to a Special



18.









 







Registration Statement. The Company may impose stop-transfer instructions with respect to the
shares of Common Stock (or other securities) subject to the foregoing restriction until the end of
said day period. Each Holder agrees that any transferee of any shares of Registrable Securities
will be bound by Sections 6.9 and 6.10. The underwriters of the Company’s stock are intended third
party beneficiaries of Sections 6.9 and 6.10 and will have the right, power and authority to
enforce the provisions hereof as though they were a party hereto.



     6.11 Rule 144 Reporting. With a view to making available to the Holders, as applicable, the
benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable
Securities to the public without registration, the Company agrees to use its best efforts to:



          (a) Make and keep public information available, as those terms are understood and defined in
SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times
after the effective date of the first registration filed by the Company for an offering of its
securities to the general public;




          (b) File with the SEC, in a timely manner, all reports and other documents required of the
Company under the Exchange Act; and




          (c) So long as a Holder owns any Registrable Securities, as applicable, furnish to such
Holder forthwith upon request: a written statement by the Company as to its compliance with the
reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any
time after it has become subject to such reporting requirements); a copy of the most recent annual
or quarterly report of the Company filed with the Commission; and such other reports and documents
as a Holder may reasonably request in connection with availing itself of any rule or regulation of
the SEC allowing it to sell any such securities without registration.




     6.12 Termination of Registration Rights. The right of any Holder to request registration or
inclusion of Registrable Securities in any registration pursuant to Sections 6.1 or 6.2 hereof will
terminate upon the earlier of: (i) the date three (3) years following an Initial Offering; or (ii)
following the Initial Offering, such time as all Registrable Securities issuable or issued upon
conversion of the Shares held by and issuable to such Holder (and its affiliates) may be sold
pursuant to Rule 144 during any ninety (90) day period. Upon such termination, such shares will
cease to be “Registrable Securities” hereunder for all purposes.



SECTION 7. MISCELLANEOUS.




     7.1 Governing Law. This Agreement will in all respects be governed by and construed in
accordance with the substantive laws of the State of Delaware, without regard to its choice of law
rules.



     7.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions
hereof will inure to the benefit of, and be binding upon, the parties hereto and their respective
successors, assigns, heirs, executors, and administrators and will inure to the benefit of and be
enforceable by each person who will be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written notice of



19.









 







the transfer of any Registrable Securities specifying the full name and address of the
transferee, the Company may deem and treat the person listed as the holder of such shares in its
records as the absolute owner and holder of such shares for all purposes, including the payment of
dividends or any redemption price.



     7.3 Entire Agreement. This Agreement, together with the Ancillary Agreements, including the
exhibits and schedules hereto and thereto, constitutes the entire agreement among the Founding
Investors and the Company with respect to the specific subject matter hereof, and supersedes all
prior and contemporaneous agreements, representations, and understandings of the parties with
respect to such specific subject matter. No party hereto will be liable or bound to the other in
any manner by any warranties, representations or covenants with respect to the subject matter
hereof except as specifically set forth herein. Notwithstanding the foregoing and except as
provided herein or in any Ancillary Agreement, neither the dissolution of the Company nor the
termination of any Ancillary Agreement will have any affect on any other agreement or contract
between the Founding Investors, and the termination or cancellation of any such other agreement or
contract will have no effect on this Agreement or any Ancillary Agreement.



     7.4 Severability. If one or more provisions of this Agreement are held by a proper court or
arbitral tribunal to be unenforceable under applicable law, the unenforceable portions of such
provisions, or such provisions in their entirety, to the extent necessary and permitted by law,
will be severed herefrom, and the balance of this Agreement will be enforceable in accordance with
its terms.



     7.5 Amendment and Waiver.



          (a) Except as otherwise expressly provided, this Agreement may be amended or modified, and
the obligations of the Company and the rights of the Holders under this Agreement may be waived,
only upon the written consent of (i) the Company, and (ii) a 2/3 majority of shares held by the
Founding Investors.




          (b) For the purposes of determining the number of Holders or Founding Investors entitled to
vote or exercise any rights hereunder, the Company will be entitled to rely solely on the list of
record holders of its stock as maintained by or on behalf of the Company.




     7.6 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power,
or remedy accruing to any party, upon any breach, default or noncompliance by another party under
this Agreement will impair any such right, power, or remedy, nor will it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar
breach, default or noncompliance thereafter occurring. It is further agreed that any waiver,
permit, consent, or approval of any kind or character on any party’s part of any breach, default or
noncompliance under the Agreement or any waiver on such party’s part of any provisions or
conditions of this Agreement must be in writing and will be effective only to the extent
specifically set forth in such writing. All remedies, either under this Agreement, by law, or
otherwise afforded to any party, will be cumulative and not alternative.



     7.7 Notices. Except where otherwise specifically provided in this Agreement, all notices,
requests, consents, approvals and statements will be in writing and will be deemed to



20.









 







have been properly given by (i) personal delivery, (ii) electronic facsimile transmission,
(iii) electronic mail, or by (iv) nationally recognized overnight courier service, addressed in
each case, to the intended recipient as set forth below:



	 	 	 
	To the Company:

	 	Regulus Therapeutics LLC
	 

	 	1896 Rutherford Road
	 

	 	Carlsbad, California 92008
	 

	 	Attention: President
	 
	 	 
	With a copy to:

	 	Alnylam and/or Isis at the addresses below
	 
	 	 
	To Alnylam:

	 	Alnylam Pharmaceuticals, Inc.
	 

	 	300 Third Street, 3rd Floor
	 

	 	Cambridge, MA 02142
	 

	 	Attention: Vice President, Legal
	 
	 	 
	With a copy to:

	 	WilmerHale
	 

	 	60 State Street
	 

	 	Boston, MA 02109
	 

	 	Attention: Steven D. Singer, Esq.
	 
	 	 
	To Isis:

	 	Isis Pharmaceuticals, Inc.
	 

	 	1896 Rutherford Road
	 

	 	Carlsbad, California 92008
	 

	 	Attention: Chief Financial Officer
	 
	 	 
	With a copy to:

	 	Isis Pharmaceuticals, Inc.
	 

	 	1896 Rutherford Road
	 

	 	Carlsbad, California 92008
	 

	 	Attn: General Counsel
	 

	 	(fax) 760-268-4922





Such notice, request, demand, claim or other communication will be deemed to have been duly given
on (a) the date of personal delivery, (b) the date actually received if by facsimile or electronic
mail; or (c) on the third business day after delivery to a nationally recognized overnight courier
service, as the case may be. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.




     7.8 Fees and Expenses. Each party will pay all costs and expenses that it incurs with respect
to the negotiation, execution, delivery and performance of this Agreement. If any action at law or
in equity is necessary to enforce or interpret the terms of any of this Agreement, the prevailing
party will be entitled to reasonable attorneys’ fees, costs and necessary disbursements



21.









 







in addition to any other relief to which such party may be entitled. For purposes of this
Section 7.8, “prevailing party” means the net winner of a dispute, taking into account the claims
pursued, the claims on which the pursuing party was successful, the amount of money sought, the
amount of money awarded, and offsets or counterclaims pursued (successfully or unsuccessfully) by
the other Party. If a written settlement offer is rejected and the judgment or award finally
obtained is equal to or more favorable to the offeror than an offer made in writing to settle, the
offeror is deemed to be the prevailing party from the date of the offer forward.



     7.9 Titles and Subtitles; Form of Pronouns; Construction and Definitions. The titles of the
Sections and paragraphs of this Agreement are for convenience only and are not to be considered in
construing this Agreement. All pronouns used in this Agreement will be deemed to include
masculine, feminine and neuter forms, the singular number includes the plural and the plural number
includes the singular and will not be interpreted to preclude the application of any provision of
this Agreement to any individual or entity. Unless the context otherwise requires, (i) each
reference in this Agreement to a designated “Section,” “Schedule,” “Exhibit,” or “Appendix” is to
the corresponding Section, Schedule, Exhibit, or Appendix of or to this Agreement; (ii) the word
“or” will not be applied in its exclusive sense; (iii) “including” will mean “including, without
limitation”; (iv) references to “$” or “dollars” will mean the lawful currency of the United
States; and (v) “herein,” “hereof,” “hereunder” and other words of similar import refer to this
Agreement as a whole and not to any particular Section or other subdivision. References in this
Agreement to particular sections of the Securities Act or to any provisions of Delaware law will be
deemed to refer to such sections or provisions as they may be amended or succeeded after the date
of this Agreement.



     7.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which
will be deemed an original, but all of which together will constitute one and the same instrument,
and will become effective when there exist copies hereof which, when taken together, bear the
authorized signatures of each of the parties hereto. Only one such counterpart signed by the party
against whom enforceability is sought needs to be produced to evidence the existence of this
Agreement.



     7.11 Aggregation of Stock. All shares of Registrable Securities held or acquired by
affiliated entities or persons or persons or entities under common management or control will be
aggregated together for the purpose of determining the availability of any rights under this
Agreement.



     7.12 Specific Performance. The failure of any party to this Agreement to perform its
agreements and covenants hereunder, including but not limited to Section 4, may cause irreparable
injury to the other parties to this Agreement for which monetary damages, even if available, will
not be an adequate remedy. Accordingly, each of the parties hereto hereby consents to the granting
of equitable relief (including specific performance and injunctive relief) by any court of
competent jurisdiction to enforce any Member’s obligations hereunder. The parties further agree to
waive any requirement for the securing or posting of any bond in connection with the obtaining of
any such equitable relief and that this Section 7.12 is without prejudice to any other rights that
the Founding Investors and the Company hereto may have for any failure to perform this Agreement.



22.









 





     7.13 Termination. This Agreement will terminate and be of no further force or effect upon the
earlier of (i) a Liquidation Event, Acquisition or Asset Transfer; or (ii) the date three (3) years
following the Closing of the Initial Offering that results in the conversion of all outstanding
shares of Preferred Stock.



[THIS SPACE INTENTIONALLY LEFT BLANK]




23.









 





     In Witness Whereof, the parties hereto have executed this Founding
Investor Rights Agreement as of the date set forth in the first paragraph hereof.



COMPANY:




Regulus Therapeutics Inc.




	 	 	 	 	 
	By:

	 	/s/ K.G. Xanthopoulos
	 	 
	 

	 	 	 	 





FOUNDING INVESTORS:




Isis Pharmaceuticals, Inc.




	 	 	 	 	 
	By:

	 	/s/ B. Lynne Parshall
	 	 
	 

	 	 	 	 





Alnylam Pharmaceuticals, Inc.




	 	 	 	 	 
	By:

	 	/s/ Barry Greene
	 	 
	 

	 	 	 	 





1.









 





EXHIBIT A




DEFINITONS




     1.1 “Ancillary Agreements” means the License Agreement and the Services Agreement each as
amended from time to time.



     1.2 “Change of Control” means, with respect to a Founding Investor (the “Affected Founding
Investor”), the earlier of (x) the public announcement of and (y) the closing of: (a) a merger,
reorganization or consolidation involving the Affected Founding Investor in which its shareholders
immediately prior to such transaction would hold less than 50% of the securities or other ownership
or voting interests representing the equity of the surviving entity immediately after such merger,
reorganization or consolidation, or (b) a sale to a Third Party of all or substantially all of the
Affected Founding Investor’s assets or business relating to this Agreement. Any Founding Investor
will notify each other Founding Investor within two (2) Business Days of entering into an agreement
which, if consummated, would result in a Change of Control.



     1.3 “Common Stock” means the Common Stock of the Company.



     1.4 “Exchange Act” means the Securities Exchange Act of 1934, as amended.



     1.5 “Form S-3” means such form under the Securities Act as in effect on the date hereof or any
successor or similar registration form under the Securities Act subsequently adopted by the SEC
which permits inclusion or incorporation of substantial information by reference to other documents
filed by the Company with the SEC.



     1.6 “Holder” means any person owning of record Registrable Securities that have not been sold
to the public or any assignee of record of such Registrable Securities in accordance with
Section 6.7 hereof.



     1.7 “Independent Director” means a Director who is not an (i) Affiliate, director or officer
of, or an immediate family member of, any director or officer of the Founding Investor designating
such Director, or (ii) an officer or employee of, or immediate family member of any officer or
employee of, the Company.



     1.8 “Initial Offering” means the Company’s first firm commitment underwritten public offering
of its Common Stock registered under the Securities Act.



     1.9 “License Agreement” means that certain Amended and Restated License and Collaboration
Agreement by and among the Company, Alnylam and Isis dated January 1, 2008, as amended from time to
time.



     1.10 “Person” means a natural person, company, corporation, partnership, trust or other
organization or legal entity of any type, whether or not formally organized.



 









 





     1.11 “Register,” “registered,” and “registration” refer to a registration effected by
preparing and filing a registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or document.



     1.12 “Registrable Securities” means (a) Common Stock issuable or issued upon conversion of the
Shares and (b) any Common Stock issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such above-described securities. Notwithstanding the
foregoing, Registrable Securities will not include any securities (i) sold by a person to the
public either pursuant to a registration statement or Rule 144, (ii) sold in a private transaction
in which the transferor’s rights under Section 6 of this Agreement are not assigned or (iii)
eligible for resale pursuant to Rule 144 without volume limitations.



     1.13 “Registrable Securities then outstanding” will be the number of shares of Common Stock
that are Registrable Securities and either (a) are then issued and outstanding or (b) are issuable
pursuant to then exercisable or convertible securities.



     1.14 “Registration Expenses” will mean all expenses incurred by the Company in complying with
Sections 6.1 or 6.2, including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements not
to exceed ten thousand dollars ($10,000) of a single special counsel for the Holders, if
applicable, blue sky fees and expenses and the expense of any special audits incident to or
required by any such registration (but excluding the compensation of regular employees of the
Company which will be paid in any event by the Company).



     1.15 “SEC” or “Commission” means the Securities and Exchange Commission.



     1.16 “Securities Act” will mean the Securities Act of 1933, as amended.



     1.17 “Selling Expenses” will mean all underwriting discounts and selling commissions
applicable to the sale.



     1.18 “Shares” will mean the Company’s Preferred Stock issued pursuant to the Purchase
Agreement held from time to time by the Founding Investors and their permitted assigns.



     1.19 “Special Registration Statement” will mean (i) a registration statement relating to any
employee benefit plan or (ii) with respect to any corporate reorganization or transaction under
Rule 145 of the Securities Act, any registration statements related to the issuance or resale of
securities issued in such a transaction or (iii) a registration related to stock issued upon
conversion of debt securities.



 









 





EXHIBIT B




INITIAL DIRECTORS

AND

INITIAL SAB MEMBERS




     Board of Directors:



	 	 	 
	Name	 	Title
	Kleanthis G. Xanthopoulos, Ph.D.

	 	President, Regulus Therapeutics LLC
	David Baltimore, Ph.D.

	 	Independent Director nominated by Alnylam
	Stelios Papadopoulos, Ph.D.

	 	Independent Director nominated by Isis
	John M. Maraganore, Ph.D.

	 	Alnylam Director
	Barry E. Greene

	 	Alnylam Director
	Stanley T. Crooke, M.D., Ph.D.

	 	Isis Director
	B. Lynne Parshall, J.D.

	 	Isis Director






     SAB Members:



	 	 	 
	Name	 	Title
	David Baltimore, Ph.D.

	 	Member and Chairperson
	David Bartel, Ph.D.

	 	Member
	Scott Hammond, Ph.D.

	 	Member
	Markus Stoffel, M.D., Ph.D.

	 	Member
	Thomas Tuschl, Ph.D.

	 	Member
	Philip Zamore, Ph.D.

	 	Member






 









 






EXHIBIT C




OPERATING PLAN




[***]




 









 








EXHIBIT D




TERMS OF BUY-OUT



Capitalized terms used but not otherwise defined herein will have the meaning ascribed to them in
the Agreement or the License Agreement.




     1.1 Negotiated Resolution. Following the Company’s receipt of the Buy-Out Notice, the
Founding Investors will take all actions necessary to cause the sale of the Company to a Third
Party or a Founding Investor (whether through merger, acquisition of 100% of the Equity Securities
or purchase of all or substantially all of the assets of the Company) (a “Sale”). The Company
promptly thereafter will retain a reputable investment bank chosen by mutual agreement (such
agreement not to be unreasonably withheld, conditioned or delayed) of the Founding Investors and
the Company (the “Investment Banker”) to assist with the valuation and possible Sale of the
Company; provided, however, that in the event that due to then-current market conditions a Sale
would be impractical because it would be reasonably like to result in proceeds from such Sale to
either Founding Investor that are substantially below such Founding Investor’s cost basis in its
investment in the Company, as determined based on the written advice of the Investment Banker
(“Poor Market Conditions”), then the Founding Investors will mutually determine whether
notwithstanding such market conditions to attempt to Sell the Company to a Third Party or a
Founding Investor; and, provided, further however, that, notwithstanding anything in this Exhibit D
or Section 4.2 to the contrary, neither Founding Investor will be required to agree to enter into,
or to approve the Company’s entering into, such a Sale. Any such Sale will be subject to all other
terms agreed upon by the Founding Investors and the Company, which will be documented in a separate
written agreement among the parties (a “Sale Agreement”).



     1.2 Non-Negotiated Resolution.



          (a) If (i) Poor Market Conditions exist and the Founding Investors do not determine pursuant
to Section 1.1 to attempt a Sale of the Company, or (ii) the Founding Investors have not within
[***] ([***]) days after the Company’s receipt of the Buy-Out Notice, or such longer period as
mutually agreed to by the Founding Investors (such period, the “Buy-Out Negotiation Period”),
executed a Sale Agreement, the Company will, except as otherwise set forth in this Section 1.2,
distribute and assign to the Founding Investors, or their designated Affiliate, jointly, in
accordance with Pro Rata Share, all of the Company’s rights, interests and assets, other than any
contracts and/or arrangements between the Company and Third Parties that the Board determines
cannot or should not be assigned (“Third Party Contracts”) (provided that the Parties agree to use
commercially reasonable efforts to provide for the assignment of all Third Party Contracts), and
the provisions of this Section 1.2 will apply. For purposes of this Exhibit D, “Pro Rata Share”
means, with respect to each Investor at any particular moment, the ratio of (a) the number of
shares of the Company’s Common Stock (not including any shares of Common Stock issuable or issued
upon conversion of the Shares or upon the exercise of outstanding warrants or options) of which
such Investor is deemed to be a holder immediately prior to the moment in question to (b) the total
number of shares of the Company’s outstanding




 









 







Common Stock (not including any shares of Common Stock issued or issuable upon conversion of
the Shares or upon the exercise of any outstanding warrants or options) immediately prior to the
moment in question.




          (b) Distribution of Intellectual Property.




               (i) Upon the distribution of the Company’s assets pursuant to this Section 1.2, each Founding
Investor or its designated Affiliate will receive, subject to Third Party Rights and Third Party
Contracts, (1) a co-exclusive license under Company Intellectual Property Controlled by the Company
at the end of the Buy-Out Negotiation Period, for any and all purposes, and (2) a co-exclusive
license under Licensed IP licensed to the Company at the end of the Buy-Out Negotiation Period, for
any and all purposes within the scope of the license granted to the Company (collectively, the
“Distributed IP”); provided, however, that (y) to the extent that one Founding Investor has
obtained a license in connection with an Opt-In Election or obtains a license pursuant to Section
1.2(d) or 1.2(e), the licenses to the Distributed IP under this Section 1.2(b) will not include the
right to Develop, Manufacture or Commercialize the Program/Project Compounds or Program/Project
Therapeutics subject to such Opt-In election or license pursuant to Section 1.2(d) or 1.2(e); and
(z) to the extent that a Founding Investor has obtained a license in connection with Section 2.3 of
the License Agreement, the licenses to the Distributed IP under this Section 1.2(b) will be subject
to such license granted to such Founding Investor. For purposes of this Section 1.2(b)(i),
“co-exclusive” means that such license is exercisable by each Founding Investor or its designated
Affiliate, and that the Company retains no rights to exercise any such licensed Intellectual
Property.



               (ii) The rights granted to each Founding Investor in this Section 1.2(b) will be (1)
royalty-bearing, as set forth in Section 1.2(b)(iii) below, and (2) sublicenseable solely (A) to
such Founding Investor’s Affiliates or (B) by such Founding Investor or its Affiliates to a Third
Party pursuant to a Bona Fide Collaboration; provided that, (x) each such sublicense will be
subject and subordinate to, and consistent with, the terms and conditions of the License Agreement
and this Exhibit D, and will provide that any such sublicensee will not further sublicense except
on terms consistent with this clause; (y) such Founding Investor will remain responsible for the
performance of its sublicensees, and will ensure that all such sublicensees comply with the
relevant provisions of the License Agreement and this Exhibit D and (z) in the event of a material
default by any of its sublicensees under a sublicense agreement, such Founding Investor will inform
the Company and the other Founding Investor and will take such action, after consultation with such
other parties, which, in such Founding Investor’s reasonable business judgment, will address such
default.



               (iii) Each Founding Investor will, to the extent it, its Affiliates and/or Sublicensees
develop a Royalty-Bearing Product under Intellectual Property distributed from the Company to the
Founding Investor pursuant to this Section 1.2(b) that does not become subject to Section 1.2(d) or
1.2(e): (x) pay to the other Founding Investor (or its designated Affiliate) a royalty of [***]% on
Net Sales of such Royalty-Bearing Products sold by the selling Founding Investor, its Affiliates
and/or Sublicensees, on a Royalty-Bearing Product-by-Royalty-Bearing Product and a
country-by-country basis, during the Royalty Term (provided, however, that, for the remainder of
the relevant Royalty Term following the end of both the relevant Exclusivity Period, the royalty
rate will be [***]%), and (y) be responsible for all milestones, royalties and



 









 







other payments payable to Third Parties in respect of the exercise of such license by such
selling Founding Investor, its Affiliates and/or Sublicensees, including without limitation any
amounts payable by either Founding Investor or the Company to its Third Party licensors with
respect to the license and sublicense granted to such Founding Investor pursuant to this Section
1.2(b). The royalty-paying Founding Investor will use Commercially Reasonable Efforts to benefit
from offsets to the amounts payable to such Founding Investor’s Third Party licensors.



          (c) Retained Assets and Rights. Following the distribution of the Company’s assets pursuant
to this Section 1.2, the Company will not maintain any interest in or right to any assets of the
Company, including Intellectual Property, except to the extent the Board determines is necessary to
maintain Third Party Contracts or its obligations to Opt-In Parties or Founding Investors pursuant
to the Buy-Out. Notwithstanding the foregoing, the Parties will use their Commercially Reasonable
Efforts to remove any restrictions on, and facilitate the distribution of, the Company’s assets
pursuant to this Section 1.2.




          (d) Research Program Selection and Transfer.




               (i) Within [***] ([***]) Business Days following the distribution of the Company’s assets in
accordance with Section 1.2(a) and (b), the non-Initiating Founding Investor will submit a bid,
consisting [***] (“First Selection Right Bid”), to the Initiating Founding Investor to obtain the
first right to select a Research Program from the most recent Program/Project List with respect to
which such Founding Investor desires to acquire exclusive rights; provided, however, that in the
event the non-Initiating Founding Investor does not submit such a bid with [***] ([***]) Business
Days, the Initiating Founding Investor may assume the rights of the non-Initiating Founding
Investor set forth in this Section 1.2(d) with respect to the First Selection Right Bid. The
Initiating Founding Investor will have [***] ([***]) Business Days to notify the non-Initiating
Founding Investor of its acceptance or rejection of such First Selection Right Bid.



               (ii) If the Initiating Founding Investor accepts such First Selection Right Bid,



                    (1) The non-Initiating Founding Investor will have the right, upon payment to the Initiating
Founding Investor of the [***] set forth in the First Selection Right Bid (which [***] will be due
and payable within [***] ([***]) Business Days after acceptance of such bid), to select one
Research Program (“Selected Program”). Upon such selection, the non-Initiating Founding Investor
will obtain the license set forth in clause (vi) below under Intellectual Property directed to such
Selected Program; and.



                    (2) Each of the Founding Investors, starting with the Initiating Founding Investor, will then
take turns selecting (by written notice within [***] ([***]) Business Days following the last
selection by the other Founding Investor) a Research Program (other than the Selected Program),
until all Research Programs on the Program/Project List have been selected by the Founding
Investors (and each such selected Research Program is a “Selected Program” hereunder), and each
Founding Investor will obtain the rights set forth in clause (vi) below under Intellectual Property
directed to the Research Program selected by such Founding Investor.



 









 





               (iii) If the Initiating Founding Investor rejects such First Selection Right Bid, such
Founding Investor will submit to the non-Initiating Founding Investor, concurrently with such
notice of rejection, a counterbid which is higher than such First Selection Right Bid by at least
[***]% or $[***] (whichever is higher). The non-Initiating Founding Investor will have [***]
([***]) Business Days to accept or reject such counterbid.



               (iv) If the non-Initiating Founding Investor accepts such counterbid, the Initiating Founding
Investor will have the right, upon payment to the non-Initiating Founding Investor of the amount
set forth in such counterbid (which amount will be due and payable within [***] ([***]) Business
Days after acceptance of such counterbid), to select a Research Program (other than a Selected
Program) and each such selected Research Program is a “Selected Program” hereunder. Upon
completion of the Buy-Out, the Initiating Founding Investor will obtain from the non-Initiating
Founding Investor the rights set forth in clause (vi) below with respect to the Research Program
selected by such Founding Investor.



               (v) If the non-Initiating Founding Investor rejects such counterbid, then such non-Initiating
Founding Investor will submit, concurrently with such notice of rejection, its counterbid to the
Initiating Founding Investor’s counterbid, which counterbid must be higher than the Initiating
Founding Investor’s counterbid by at least [***]%, and the process will repeat itself until a bid
is accepted or no counterbid exceeds the prior bid or counterbid by at least [***]%.



               (vi) Each Founding Investor will grant to the other Founding Investor which purchased a
Selected Program hereunder (the “Buy-Out Party”), subject to Third Party Rights, an exclusive (to
the fullest extent possible) license under Distributed IP (which, with respect to Licensed IP
therein, is within the scope of the license granted to the Founding Investor by the Company), to
Develop, Manufacture and/or Commercialize the miRNA Compound(s) and miRNA Therapeutics included in
such Selected Program in the Field.



               (vii) Such licenses to Distributed IP will be (1) royalty-bearing as set forth in Section
1.2(d)(viii) below, and (2) sublicenseable; provided that, (x) each such sublicense will be subject
and subordinate to, and consistent with, the terms and conditions of this Exhibit D, and will
provide that any such Sublicensee will not further sublicense except on terms consistent with this
clause; (y) such Founding Investor will remain responsible for the performance of its Sublicensees,
and will ensure that all such Sublicensees comply with the relevant provisions of the License
Agreement and this Exhibit D and (z) in the event of a material default by any of its Sublicensees
under a sublicense agreement, such Founding Investor will inform the Company and the other Founding
Investor and will take such action, after consultation with such other Parties, which, in such
Founding Investor’s reasonable business judgment, will address such default.



               (viii) Each Founding Investor selecting a Selected Program will (1) pay to the other Founding
Investor (or its designated Affiliate) a royalty of [***]% on Net Sales of any Royalty-Bearing
Product with respect to such Selected Program, on a Royalty-Bearing Product-by-Royalty-Bearing
Product and a country-by-country basis, during the Royalty Term (provided, however, that, for the
remainder of the relevant Exclusivity Period, the royalty rate will be [***]%, and (2) be
responsible for milestones, royalties and other payments payable to



 









 







Third Parties in respect of the exercise of such license by such selling Founding Investor,
its Affiliates and/or Sublicensees, including without limitation any amounts payable by either
Founding Investor or the Company to its Third Party licensors with respect to the licenses granted
to such Founding Investor pursuant to Section 1.2(a). The royalty-paying Founding Investor will
use Commercially Reasonable Efforts to benefit from offsets to the amounts payable to such Founding
Investor’s Third Party licensors.



               (ix) Each Founding Investor will assign or exclusively license to the other Founding Investor,
to the fullest extent possible, all of its rights and obligations in assets, other than
Intellectual Property, distributed by the Company to the Founding Investors pursuant to Section
1.2(a), to the extent such assets are solely related to any of the other Founding Investor’s
Selected Programs. In the event any such assets are related to Selected Programs of both Founding
Investors, each Founding Investors will assign to or exclusively license the other, to the fullest
extent possible, the rights to such assets as they relate to the other Founding Investor’s Selected
Programs.



          (e) Development Project Selection and Transfer.




               (i) Within [***] ([***]) Business Days following the completion of the distribution of the
Company’s assets pursuant to Section 1.2(a), the non-Initiating Party (the “Bidding Party”) will
have the right to submit to the other Founding Investor a bid, which need not be limited to a [***]
(“Project Bid”), with respect to one or more Development Projects included in the most recent
Program/Project List; provided that, a separate Project Bid must be submitted for each and every
Development Project for which the Party is bidding. Notwithstanding the foregoing, in the event
the non-Initiating Party does not submit such a bid within [***] Business Days, the Initiating
Party may assume the rights of the non-Initiating Party set forth in this Section 1.2(e) with
respect to a Project Bid. The non-Bidding Party will have [***] ([***]) Business Days to notify
the Bidding Party of its acceptance or rejection of a Project Bid made by the Bidding Party, on a
Project Bid-by-Project Bid basis.



               (ii) If the non-Bidding Party accepts a Project Bid or does not reject a Project Bid and
provide a counterbid in accordance with clause (iii) below (in which case the Project Bid is deemed
accepted) within such [***] ([***]) Business Day period, the Bidding Party, subject to compliance
with its payment obligations under the terms of such Project Bid (including, without limitation,
payment of any upfront fees to the non-Bidding Party), will obtain the rights set forth in clause
(vi) below with respect to the Development Project covered by such accepted Project Bid.



               (iii) If the non-Bidding Party rejects a Project Bid, the non-Bidding Party (“Counterbidding
Party”) will submit to the Bidding Party, concurrently with its notice of rejection, a counterbid
with terms which are more favorable, when taken as a whole, to the Bidding Party than the terms set
forth in the Project Bid, by at least the greater of (1) [***]% (as measured by industry standards)
or (2) $[***] (if the Project Bid is less than or equal to $[***]). The Bidding Party will have
[***] ([***]) Business Days to accept or reject such counterbid.



               (iv) If the Bidding Party accepts such counterbid or does not reject such counterbid and
provide a counterbid in accordance with clause (v) below (in which case the



 









 







Counterbidding Party’s counterbid is deemed accepted) within such [***] ([***]) Business Day
period, the Counterbidding Party, subject to compliance with its payment obligations under the
terms of such counterbid (including, without limitation, payment of any upfront fees to the Bidding
Party), will obtain the rights set forth in clause (vi) below with respect to the Development
Project covered by such accepted counterbid.



               (v) If the Bidding Party rejects such counterbid, such Bidding Party will submit, concurrently
with its notice of rejection, its counterbid to the Counterbidding Party’s counterbid, which
counterbid must be higher than the Counterbidding Party’s counterbid by at least [***]% (as
measured by industry standards), and the process will repeat itself until a bid for a Development
Project is accepted; provided, however, that, if a Founding Investor to which a counterbid is
submitted determines in good faith that the terms of such counterbid are not more favorable to such
Founding Investor, taken as a whole, than the terms offered in such Founding Investor’s most-recent
prior bid, by at least [***]% (as measured by industry standards), then at any time within the
[***] ([***]) day period during which such Founding Investor may accept or reject such counterbid,
such Founding Investor (the “Contesting Party”) may notify the other Parties thereof and will have
the right to submit such matter to a reputable investment bank (“Qualified Third Party”) chosen by
mutual agreement of the Founding Investors. If the Founding Investors are unable to agree upon a
Qualified Third Party within [***] ([***]) Business Days after receipt of the Contesting Party’s
notice, the Company (through a vote of its Board) will select a Qualified Third Party within [***]
([***]) Business Days after the end of such initial [***] ([***]) Business Day period and will
promptly notify the Founding Investors of the Qualified Third Party selected. The Founding
Investors will then submit the dispute to such Qualified Third Party and will instruct such
Qualified Third Party to determine whether the counterbid most-recently proposed by the
non-Contesting Party is more favorable, taken as a whole, than the terms proposed by the Contesting
Party, by at least [***]% (as measured by industry standards) and to deliver a written report to
both Founding Investors within [***] ([***]) Business Days following submission of such dispute to
such Qualified Third Party. Such Qualified Third Party’s determination will be binding on the
Founding Investors. If such Qualified Third Party determines that the counterbid proposed by the
non-Contesting Party constitutes a sufficient counterbid, such counterbid will be deemed accepted
by the Contesting Party. If such Qualified Third Party determines that the counterbid proposed by
the non-Contesting Party does not constitute a sufficient counterbid, then the immediately
preceding bid or counterbid terms proposed by the Contesting Party will be deemed accepted by the
non-Contesting Party. The Founding Investor against whom the Qualified Third Party finds will bear
the costs of such Qualified Third Party.



               (vi) Each Founding Investor will grant to the other Founding Investor that purchased a
Development Project hereunder (the Buy-Out Party), subject to Third Party Rights, an exclusive (to
the fullest extent possible) sublicense under Distributed IP (which, with respect to Licensed IP
therein, is within the scope of the license granted to the Founding Investor by the Company), to
Develop, Manufacture and/or Commercialize miRNA Compounds and miRNA Therapeutics included in the
Development Project in the Field.



               (vii) Such license to such Development Project will be (1) royalty-bearing in accordance with
the terms of the accepted bid covering such Development Project, and (2) sublicenseable; provided
that, (1) each such sublicense will be subject and subordinate to,



 









 







and consistent with, the terms and conditions of this Exhibit D, and will provide that any
such Sublicensee will not further sublicense except on terms consistent with this clause; (2) such
Founding Investor will remain responsible for the performance of its Sublicensees, and will ensure
that all such Sublicensees comply with the relevant provisions of the License Agreement and this
Exhibit D and (3) in the event of a material default by any of its Sublicensees under a sublicense
agreement, such Founding Investor will inform the Company and the other Founding Investor and will
take such action, after consultation with such other Parties, which, in such Founding Investor’s
reasonable business judgment, will address such default.



               (viii) Each Founding Investor will assign or exclusively license to the other Founding
Investor, to the fullest extent possible, all of its rights and obligations in assets, other than
Intellectual Property, distributed by the Company to the Founding Investors pursuant to Section
1.2(a) to the extent such assets are solely related to any of the other Founding Investor’s
Selected Development Projects. In the event any such assets are related to Development Programs of
both Founding Investors, each Founding Investor will assign to the other, to the fullest extent
possible, the rights to such assets as they relate to the other Founding Investor’s Development
Programs.



               (ix) The Parties will promptly negotiate in good faith and execute a written agreement
substantially in accordance with the terms of the accepted bid covering each such Development
Project.



          (f) Company Following Buy-Out. In the event of a Buy-Out pursuant to this Section 1.2, the
Company will not be dissolved if, in the discretion of the Board, it should continue to exist for
the purpose of maintaining Third Party Contracts and/or receiving payments from Third Parties that
may become due to the Company following the completion of the Buy-Out, making tax and other
distributions, filing tax and other required reports and conducting any activity necessary for the
purpose of dissolving the Company pursuant to Section 10 (the “Post Buy-Out Activities”). In the
event the Company is not dissolved following the completion of a Buy-Out pursuant to this Section
1.2, the Company will be prohibited from engaging in any activities other than the Post Buy-Out
Activities, and any assets acquired by the Company after the completion of the Buy-Out will be
distributed as determined by the Managing Board, unless otherwise distributable under then-existing
agreements.




          (g) Diligence. Each Founding Investor will use Commercially Reasonable Efforts to Develop and
Commercialize the miRNA Compounds and miRNA Therapeutics covered by the Research Program or
Development Project purchased by such Founding Investor under this Section 1.2, at such Founding
Investor’s own expense, in the Field, either by itself or with or through its Affiliates or
Sublicensees.




          (h) Non-Compete. With respect to any Research Program or Development Project, the non-Opt-In
Party or non-Buy-Out Party will not, itself or through its Affiliates or with Third Parties,
Discover, Develop, Manufacture or Commercialize the relevant Opt-In Products or Buy-Out Products
during the period (i) prior to first commercial sale of an Opt-In Product or Buy-Out Product with
respect to such Research Program or Development Project anywhere in the world, as long as the
relevant Opt-In Party or Buy-Out Party reasonably believes that the Opt-In Product or Buy-Out
Product would be a Royalty-Bearing Product upon first




 









 







commercial sale, and (ii) after first commercial sale of a Royalty-Bearing Product with
respect to such Research Program or Development Project anywhere in the world, until the expiration
of all Royalty Terms for all Royalty-Bearing Products for such Research Program or Development
Project; provided, however, that each Party will be entitled to grant Permitted Licenses.




     1.3 Section 365(n) of the Bankruptcy Code. All rights and licenses granted under this Exhibit
D and Section 4 of this Agreement are and will otherwise be deemed to be for purposes of Section
365(n) of the United States Bankruptcy Code (Title 11, U.S. Code), as amended (the “Bankruptcy
Code”), licenses of rights to “intellectual property” as defined in Section 101(35A) of the
Bankruptcy Code. The Parties will retain and may fully exercise all of their respective rights and
elections under the Bankruptcy Code. The Parties agree that each Party, as licensee of such rights
under this Agreement, will retain and may fully exercise all of its rights and elections under the
Bankruptcy Code or any other provisions of Applicable Law outside the United States that provide
similar protection for ‘intellectual property.’ The Parties further agree that, in the event of
the commencement of a bankruptcy proceeding by or against a Party under the U.S. Bankruptcy Code or
analogous provisions of applicable law outside the United States, the Party that is not subject to
such proceeding will be entitled to a complete duplicate of (or complete access to, as appropriate)
such intellectual property and all embodiments of such intellectual property, which, if not already
in the non subject Party’s possession, will be promptly delivered to it upon the non subject
Party’s written request thereof. Any agreements supplemental hereto will be deemed to be
“agreements supplementary to” this Agreement for purposes of Section 365(n) of the Bankruptcy Code.



 









 





EXHIBIT E




Financial Requirement for Equity Accounting



Once Regulus is no longer consolidated into Isis’ financials and is not using Isis’
financial systems, then Regulus may hire its own auditors subject to the requirements
below that are necessary to ensure that Isis and Alnylam receive in a timely manner
the information each needs to record its share of Regulus’ income/losses.





	1.	 	Regulus’ auditors will be an independent registered public
accounting firm of recognized national standing.






	2.	 	Regulus will provide Isis and Alnylam the audited annual financial
statements of Regulus no later than [***] ([***]) weeks after the end of each
fiscal year, including the related notes thereto. The financial statements
include the following:






	 	a.	 	A balance sheet of Regulus as of the close of such
fiscal year.
	 
	 	b.	 	A statement of net income for such fiscal year.
	 
	 	c.	 	A statement of cash flows for such fiscal year.
	 
	 	d.	 	The related notes thereto.
	 
	 	e.	 	These financial statements will contain in comparative
form the figures for the previous fiscal year.
	 
	 	f.	 	An opinion of Regulus’ auditors that the above
financial statements present fairly, in all material respects, the
financial position of Regulus and its results of operations and cash
flows. Also, that the financial statements have been prepared in
conformity with GAAP and that the audit by Regulus’ auditors has been made
in accordance with generally accepted auditing standards and that audit
provides a reasonable basis for the auditors’ opinion.






	3.	 	Regulus will provide Isis and Alnylam an unaudited balance sheet of
Regulus as of the end of each quarter and unaudited statements of income and cash
flows of Regulus for such quarter and for the current fiscal year to the end of
such fiscal quarter within [***] ([***]) calendar days after the end of each
fiscal quarter of Regulus, including the related notes thereto.






	 	a.	 	The financial statements will be those outlined in
2(a) — (f) above.
	 
	 	b.	 	These financial statements will be reviewed by
Regulus’ auditors, which review will be complete prior to Regulus
providing the above financial statements to Isis and Alnylam.
	 
	 	c.	 	These financial statements will include a certificate
signed by the CEO and CFO of Regulus stating that these financial
statements were prepared in conformity with GAAP from the books and
records of Regulus and that there were no changes in the internal control
environment of Regulus that would materially affect the integrity of these
statements.






	4.	 	Regulus will provide Isis and Alnylam with an unaudited balance
sheet of Regulus as of the end of each month and unaudited statements of income
and of cash flows of Regulus for such month and for the current fiscal year to
the end of such month promptly following Regulus’ completion of the review of its
financial statements for such month (other than the last month of any fiscal
quarter).




 









 












	 	a.	 	The financial statements will be those outlined in
2(a) — (f) above, excluding 2(d).






	5.	 	The financial statements referred to above will be accompanied by
the report thereon of the independent accountants engaged by Regulus as described
in 2(f) above. Additionally, Regulus will provide to Isis and/or Alnylam any
supplemental schedules reasonably required by either company, and Regulus will
make its management available to Isis and/or Alnylam for reasonable inquiries
regarding its financials.






	6.	 	Regulus will provide Isis and Alnylam with any certificate that may
be reasonably necessary to meet Isis’ and Alnylam’s SOX 404 requirements.






	7.	 	If Isis’ and/or Alnylam’s filing requirements change, all three
companies together will review the timing outlined above. If filing requirements
for either Isis or Alnylam are accelerated, Regulus agrees to provide the
information in #2 and #3 above on the timeline that Isis and/or Alnylam
reasonably determines is necessary to meet its filing requirements.