Louisiana Administrative Code › Title 10 - FINANCIAL INSTITUTIONS, CONSUMER CREDIT, INVESTMENT SECURITIES AND UCC › Part XIII - Investment Securities › Subpart 1 - Securities › Chapter 5 - Standards of Qualification › Section XIII-507 - Options, Warrants and Convertible Debenture

Current through Register Vol. 50, No. 6, June 20, 2024
A. Warrants or stock purchase options,
				  conversion privileges and other rights to acquire stock or other securities
				  must be justified by the applicant. The following standards will be followed in
				  determining whether the issuance of such warrants and stock options is
				  justified.
1. Fifteen Percent Limitation.
				  Unless good cause for an exception is shown, authorized warrants and options to
				  purchase shares (excluding those specified in §507. A.3 shall not be in
				  excess of 15 percent of the common shares to be outstanding if the entire
				  public offering is sold, except as may otherwise be permitted under §507.
				  A.7 g
2. Five-Year Limitation.
				  Except as otherwise permitted under §507. A.7 a, or unless good cause for
				  an exception is shown, a warrant or option to purchase shares shall not be
				  exercisable after the expiration of five years from the date such warrant or
				  option is granted.
3. Pro-Rata
				  Offerings. Prorate issuance of options or warrants to all purchasers in
				  connection with a public offering will be considered justified if reasonable in
				  number and method of exercise.
4.
				  Employee Options. Options to employees shall be considered justified if
				  reasonable in number and method of exercise.
a. Qualified stock options, as defined in
				  Section 422(b) of the United States Internal Revenue Code of 1954, issued in
				  accordance with the terms of a qualified stock option plan will be considered
				  reasonable in number when the total number of shares subject to such options
				  (and any restricted stock options outstanding) at any one time does not exceed
				  10 percent of the then outstanding common shares of the issuer.
b. Options granted to employees of the issuer
				  which are not qualified stock options will be considered on an individual
				  basis, provided, however, that the total number of shares subject to such stock
				  options (and any options outstanding pursuant to a qualified stock option plan)
				  shall not exceed 10 percent of the then outstanding common shares of the
				  issuer, and further provided that, in determining whether such options are
				  justified, consideration shall be given to whether such options contain a
				  step-up provision similar to the one set forth in §507. A.5 c
5. Options and Warrants to
				  Underwriters. Ordinarily, warrants or options to underwriters will be
				  considered with disfavor, unless all of the following conditions are met:
a. the warrants or options are issued to a
				  managing underwriter in connection with a firm underwriting and are not
				  exercisable for 11 months after the date of the offering, or, in connection
				  with a best efforts basis, and are not issued and are not exercisable for 11
				  months following the sale of the entire issue or such lesser amount as is
				  approved by the commissioner;
b.
				  the warrants or options are nontransferable other than by will or pursuant to
				  the laws of descent and distribution, except to a partner of the underwriter
				  when the underwriter is a partnership or to a person who is both a stockholder
				  and officer of the underwriter when the underwriter is a corporation;
c. the initial exercise price of the options
				  is at least equal to the public offering price plus a step-up of said public
				  offering price of either:
i. 7 percent each
				  year they are outstanding, commencing one year after issuance, so that the
				  exercise price throughout the second year is 107 percent; throughout the third
				  year 114 percent; throughout the fourth year 121 percent; and throughout the
				  fifth year 128 percent; or in the alternative;
ii. 20 percent at any time after one year
				  from the date of issuance; provided that an election as to either alternative
				  must be made by the underwriters at the time the options are issued to the
				  underwriters;
d. the
				  options and warrants are issued by a relatively small company which is in the
				  promotional stage or which, because of its size, lack of public ownership of
				  its shares or other facts and circumstances, makes it appear to the
				  commissioner that the issuance of options is necessary to obtain competent
				  investment banking services, and the direct commissions to the underwriters are
				  lower than the usual and customary commissions would be in the absence of such
				  options;
e. the prospectus issued
				  in connection with the registration statement contains a full disclosure as to
				  the terms and the reason for the issuance of the warrants and options, and if
				  such reason is in connection with future advisory services to be performed by
				  the underwriter without compensation in consideration of the issuance of the
				  options, a statement to that effect shall be placed in the
				  prospectus;
f. the same tests shall
				  be applied to options issued by the selling shareholders unless evidence
				  indicates that the selling shareholders are so separated from the corporate
				  entity and so lacking in control of the corporate entity as to require more
				  liberal treatment;
g. the number of
				  shares or units called for by such warrants or options does not exceed 5
				  percent of the number of shares or units to be sold, or in fact, sold for the
				  issuer in the offering;
h. selling
				  expenses, commissions and discounts, including the value of such options to be
				  issued, do not exceed the limitations contained in §505
6. No Options to Issuer's Agents.
				  No options or warrants shall be issued to an agent of the issuer.
7. Options, Warrants and Convertible
				  Debentures Issued in Connection with Financing Arrangements. Ordinarily,
				  options, warrants and convertible debentures issued in connection with
				  financing arrangements made by the corporation will be considered with disfavor
				  unless all of the following conditions are met.
a. The options, warrants or convertible
				  debentures are issued to the lender for valuable consideration. "Valuable
				  consideration" shall be deemed to have been given if the requirements of
				  §507. A.7.g are satisfied in respect to the percentage limitation set
				  forth therein.
b. The options or
				  warrants shall expire not later than the original maturity date of the loan and
				  the convertible debenture shall expire upon payment of the loan.
				  Notwithstanding the limitation of §507. A.2 and §507. A.7 b, if the
				  requirements of §507. A.7.g are met, the options or warrants may have an
				  expiration date up to, but not exceeding 10 years from the date such option or
				  warrants are granted, even if the maturity date of the loan is less than 10
				  years from the date the loan is made.
c. The options, warrants and convertible
				  debentures shall have been issued as a result of bona fide negotiations between
				  the corporation and the lender.
d.
				  At the date of issuance, the lender shall not be affiliated with the
				  corporation nor be a party to an agreement which creates or contemplates
				  creating an affiliation. For the purposes of this provision, a lender will be
				  considered affiliated with the corporation if it directly, or indirectly,
				  controls, or is controlled by, or is under common control with the corporation.
Control
means the power to exercise a controlling influence
				  over the management or policies of a company, unless such power is solely the
				  result of an official position with such company. Any person who owns
				  beneficially (either directly or through one or more controlled companies) more
				  than 25 percent of the issued and outstanding voting securities of any company
				  shall be presumed not to control such company.
e. The exercise or conversion price of such
				  options, warrants or convertible debentures shall not be less than the fair
				  market value of the shares into which they are exercisable or convertible on
				  the date the corporation receives a commitment in writing from the lender to
				  make the loan. "Fair market value" shall be deemed to be the trading price of
				  the stock if there is a public market therefor and if such public market is
				  broadly based, meaningful and significant. Otherwise, "fair market value" will
				  be deemed to be the price determined through bona fide negotiation of the
				  parties. The existence of a public market shall not in itself be a presumption
				  that it is broadly based, meaningful and significant.
f. Upon exercise of the options or warrants
				  or conversion of the convertible debentures, both of the following conditions
				  shall be satisfied.
i. The number of shares
				  issuable shall be fair and reasonable both in number and method of exercise at
				  the time of issuance of the options, warrants or convertible debentures. The
				  standard required by the preceding sentence shall be deemed to be satisfied if
				  the conditions set forth in §507. A.7 are met.
ii. At the time of issuance, the product
				  obtained by multiplying the number of shares issuable by the exercise or
				  conversion price did not exceed the face amount of the loan.
g. Notwithstanding any percentage
				  limitation applicable to options, warrants and convertible debentures set forth
				  in this Section, options, warrants and convertible debentures issued in
				  connection with financing arrangements may cover shares which total in number
				  20 percent of the common shares to be outstanding, if the entire public
				  offering is sold or if either of the following conditions is satisfied.
i. The issuance thereof to the lender was in
				  conjunction with the lender's unconditionally guaranteeing the payment of a
				  loan or loans being made to the company, provided, however, that as of the date
				  of issuance of warrants, options or convertible debentures, the product
				  obtained by multiplying the number of shares issuable by the exercise or
				  conversion price thereof did not exceed an amount equal to that portion of the
				  loan unconditionally guaranteed by the lender.
ii. If issued to the lender in conjunction
				  with a loan by the lender of cash funds to the company and if:
(a). the loan is subordinated (including any
				  security interest against the assets of the company) by its terms to all
				  borrowing of the company from banks and other institutional lenders;
(b). no part of such loan was required by its
				  term to be amortized during the first three years. The company may prepay such
				  loan, however, without adversely affecting the exception granted by this
				  Subparagraph; and
(c). as of the
				  date of issuance of the warrants, options or convertible debentures, the
				  product obtained by multiplying the number of shares issuable by the exercise
				  of conversion price thereof did not exceed the face amount of the
				  loan.
h.
				  Options, warrants or convertible debentures held by other than the original
				  holder, which options, warrants or convertible debentures were issued by the
				  corporation in connection with financing arrangements, will be subject to the
				  conditions provided by this Section.