83 FR 7269 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Modify the Listing Requirements Contained in Listing Rule 5635(d) To Change the Definition of Market Value for Purposes of the Shareholder Approval Rules and Eliminate the Requirement for Shareholder Approval of Issuances at a Price Less Than Book Value but Greater Than Market Value

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 34 (February 20, 2018)

Page Range		7269-7274
FR Document		2018-03311
Federal Register, Volume 83 Issue 34 (Tuesday, February 20, 2018)
[Federal Register Volume 83, Number 34 (Tuesday, February 20, 2018)]
[Notices]
[Pages 7269-7274]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-03311]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82702; File No. SR-NASDAQ-2018-008]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Modify the Listing 
Requirements Contained in Listing Rule 5635(d) To Change the Definition 
of Market Value for Purposes of the Shareholder Approval Rules and 
Eliminate the Requirement for Shareholder Approval of Issuances at a 
Price Less Than Book Value but Greater Than Market Value

February 13, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 30, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify the listing requirements contained 
in Listing Rule 5635(d) to change the definition of market value for 
purposes of the shareholder approval rules and eliminate the 
requirement for shareholder approval of issuances at a price less than 
book value but greater than market value.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

[[Page 7270]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq shareholder approval requirements were adopted in 1990.\3\ 
Among other circumstances, the rule requires shareholder approval for 
security issuances for less than the greater of book or market value 
(other than in the context of a public offering) if either (a) the 
issuance equals 20% of the outstanding stock or voting power or (b) if 
a smaller issuance coupled with sales by the officers, directors or 
substantial security holders meets the 20% threshold.\4\ This provision 
has remained substantively unchanged for the last 28 years. On the 
other hand, the capital markets and securities laws, as well as the 
nature and type of share issuances, have evolved significantly in that 
time.
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    \3\ Securities Exchange Act Release No. 28232 (July 19, 1990), 
55 FR 30346 (July 25, 1990) (adopting [sic] the predecessor to 
Listing Rule 5635(d)).
    \4\ Id.
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    In 2016, Nasdaq requested comments from, and held discussions with, 
market participants regarding whether, given these changes, Nasdaq 
could update its shareholder approval rules to enhance the ability for 
capital formation without sacrificing investor protections. Based on 
the feedback received, in June 2017, Nasdaq launched a formal comment 
solicitation on a specific proposal to amend Listing Rule 5635(d) (the 
``2017 Solicitation''). Based on Nasdaq's experience and the comments 
received, Nasdaq proposes to amend Rule 5635(d) to change the 
definition of market value for purposes of the shareholder approval 
rules and eliminate the requirement for shareholder approval of 
issuances at a price less than book value but greater than market 
value.
I. Definition of Market Value
    Listing Rule 5635(d) requires a Nasdaq-listed company to obtain 
shareholder approval when issuing common stock or securities 
convertible into common stock, which alone or together with sales by 
officers, directors or Substantial Shareholders of the Company, equal 
to 20% or more of the shares or 20% or more of the voting power 
outstanding at a price less than the greater of the book value or 
market value of that stock. Listing Rule 5005 defines ``market value'' 
as the closing bid price.
    Market participants often express to Nasdaq their concern that bid 
price may not be transparent to companies and investors and does not 
always reflect an actual price at which a security has traded. 
Generally speaking, the price of an executed trade is viewed as a more 
reliable indicator of value than a bid quotation; and the more shares 
executed, the more reliable the price is considered. Further, it was 
noted by commenters in the 2017 Solicitation that in structuring 
transactions, investors and companies often rely on an average price 
over a prescribed period of time for pricing issuances because it can 
smooth out unusual fluctuations in price.
    Accordingly, Nasdaq proposes to modify the measure of market value 
for purposes of Listing Rule 5635(d) from the closing bid price to the 
lower of: (i) The closing price (as reflected on Nasdaq.com); or (ii) 
the average closing price of the common stock (as reflected on 
Nasdaq.com) for the five trading days immediately preceding the signing 
of the binding agreement.
A. Closing Price
    The closing price reported on Nasdaq.com is the Nasdaq Official 
Closing Price, which is derived from the closing auction on Nasdaq and 
reflects actual sale prices at one of the most liquid times of the day. 
The Nasdaq closing auction is designed to gather the maximum liquidity 
available for execution at the close of trading, and to maximize the 
number of shares executed at a single price at the close of the trading 
day. The closing auction promotes accurate closing prices by offering 
specialized orders available only during the closing auction and 
integrating those orders with regular orders submitted during the 
trading day that are still available at the close. The closing auction 
is made highly transparent to all investors through the widespread 
dissemination of stock-by-stock information about the closing auction, 
including the potential price and size of the closing auction. Nasdaq 
believes its closing auction has proven to be a valuable pricing tool 
for issuers, traders, and investors alike; and Nasdaq continually works 
to enhance the experience for those that rely upon it. For these 
reasons, Nasdaq believes that the closing price reported on Nasdaq.com 
is a better reflection of the market price of a security than the 
closing bid price. This proposal is consistent with the approach of 
other exchanges.\5\
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    \5\ See Section 312.04(i) of the NYSE Listed Company Manual 
(``Market value'' of the issuer's common stock means the official 
closing price on the [NYSE] as reported to the Consolidated Tape 
immediately preceding the entering into of a binding agreement to 
issue the securities.).
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    In addition, because prices are displayed from numerous data 
sources on different websites, to provide transparency within the rule 
to the appropriate price, and assure that companies and investors use 
the Nasdaq Official Closing Price when pricing transactions, Nasdaq 
proposes to codify within the rule that Nasdaq.com is the appropriate 
source of the closing price information.\6\
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    \6\ The closing price is published on Nasdaq.com with a 15 
minute delay and is available without registration or fee and Nasdaq 
does not currently intend to charge a fee for access to this data or 
otherwise restrict availability and, in the event that Nasdaq 
subsequently determines to do so, it will file a proposed rule 
change under Section 19(b) of the Act with respect to such change if 
necessary to address the impact of compliance with this rule.
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B. Five-Day Average Price
    Several commenters supported the use of a five-day average in their 
responses to the 2017 Solicitation. For example, one commenter 
suggested that ``[i]nvestors view a 5 day average as a more fair method 
of determining `market value' (in a non-technical sense)'' and 
continued that ``[u]sing the closing bid on the closing date is more 
prone to unanticipated and inequitable results based on market 
fluctuations.'' \7\ Another commenter stated that they believe that a 
``five-day trailing average of the closing price is more representative 
of actual market value than the closing bid price.'' \8\
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    \7\ See Letter from Michael Grundei, Wiggin and Dana LLP, dated 
June 16, 2017 (Grundei Letter).
    \8\ Letter from Linda Zwobota, CPA, CFO, Lightbridge 
Corporation, dated June 27, 2017 (Lightbridge Letter).
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    While investors and companies sometimes prefer to use an average 
when pricing transactions, Nasdaq notes that there are potential 
negative consequences to using a five-day average as the sole measure 
of whether shareholder approval is required. For example, in a 
declining market, the five-day average price will always be above

[[Page 7271]]

current market price, thus making it difficult for companies to close 
transactions because investors could buy shares in the market at a 
price below the five-day average price. Conversely, in a rising market, 
the five-day average price will appear to be a discount to the closing 
price. In addition, if material news is announced during the five-day 
period, the average could be a worse reflection of the market value 
than the closing price after the news is disclosed. Nonetheless, Nasdaq 
believes that these risks are already accepted in the market, as 
evidenced by the use of an average price in transactions that do not 
require shareholder approval under Nasdaq's rules, such as where less 
than 20% of the outstanding shares are issuable in the transaction, 
notwithstanding the risk of price movement during the period to the new 
investor, the company and its current shareholders, each of which has 
potential risk and benefit depending on how the price ultimately 
changes during that period.
    Other commenters in the 2017 Solicitation believed that the five-
day average price may be inappropriate as a measure of market value of 
listed securities in certain circumstances and suggested that it 
therefore should only be used as an optional alternative to closing 
price. In that regard, one commenter, while agreeing that a five-day 
trailing average is a useful alternative measure of market price, 
pointed out that:

    [T]he Rule 144A convertible bond market and the related call 
spread overlay market (whether entered into in connection with a 
Rule 144A or registered convertible bond) currently benefit from 
certain synergies that arise from the use of the one-day closing 
price in light of the complex regulatory, tax and accounting 
analysis of these transactions and the related hedging activities of 
market participants.\9\
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    \9\ Letter from Greg Rogers, Latham and Watkins LLP, dated July 
27, 2017 (Latham Letter).

    Other commenters raised similar concerns.\10\ Nasdaq believes these 
concerns are justified and as such, Nasdaq proposes to amend Listing 
Rule 5635(d) to define market value as the lower of the closing price 
at the time of the transaction or the five-day average of the closing 
price as the measure of market value for purposes of the shareholder 
approval rules. This means that the issuance would not require an 
approval by company's shareholders, so long as it is at a price that is 
greater than the lower of those measures.\11\ To improve the 
readability of the rule, Nasdaq proposes to define this new concept as 
the ``Minimum Price'' and eliminate references to book value and market 
value from Listing Rule 5635(d).
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    \10\ Letter from Michael Adelstein, Kelley Drye & Warren LLP, 
dated July 28, 2017 (Kelley Drey Letter); Letter from Michael 
Nordtvedt, Wilson Sonsini Goodrich & Rosati, P.C., dated July 31, 
2017 (Wilson Sonsini Letter); Joseph A. Smith, Ellenoff Grossman & 
Schole LLP, dated July 31, 2017 (Ellenoff Grossman Letter).
    \11\ Issuances below Market Value to officers, directors, 
employees, or consultants are, and will continue to be, subject to 
Listing Rule 5635(c). See Nasdaq's FAQ #275 at https://listingcenter.nasdaq.com/Material_Search.aspx?materials=275&mcd=LQ&criteria=2.
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II. Book Value
    Nasdaq proposes to eliminate the requirement for shareholder 
approval of issuances at a price less than book value but greater than 
market value. Book value is an accounting measure and its calculation 
is based on the historic cost of assets, not their current value. As 
such, market participants have indicated, and Nasdaq agrees, that book 
value is not an appropriate measure of whether a transaction is 
dilutive or should otherwise require shareholder approval. Nasdaq has 
also observed that when the market price is below the book value, the 
rule becomes a trap for the unwary. In that regard, the existing book 
value test can appear arbitrary and have a disproportionate impact on 
companies in certain industries and at certain times. For example, 
during the financial crisis in 2008 and 2009, many banks and 
finance[hyphen]related companies temporarily traded below book value. 
Similarly, companies that make large investments in infrastructure may 
trade below the accounting carrying value of those assets. In these 
situations companies are often frustrated when they learn that they 
cannot quickly raise capital on terms that are favorable to the market 
price. Based on conversations with investors, Nasdaq also believe that 
book value is not considered by shareholders to be a material factor 
when they are asked to vote to approve a proposed transaction. Most 
commenters in the 2017 Solicitation supported the elimination of the 
book value requirement from the shareholder approval rules.\12\ The 
only support for retaining the book value limitation, came from one 
commenter who appeared to believe that issuances below book value would 
result in negative investor perception of the issuer and that book 
value was an alternative measure not subject to market 
manipulation.\13\ The commenter did not elaborate or provide any 
evidence of price manipulation surrounding the pricing of transactions 
(which would be investigated by Nasdaq Regulation and FINRA) and Nasdaq 
does not believe this hypothetical and unsubstantiated concern 
justifies retaining the book value requirement in light of the other 
concerns raised about its arbitrary and disproportionate impact on 
certain companies and the lack of importance placed on this requirement 
by investors.
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    \12\ Comments supporting the change could be summarized through 
words of one commenter who suggested that ``investors don't view 
book value as the equivalent (or even a reasonable substitute for) 
market value.'' Grundei Letter.
    \13\ Letter from Heather Koziara, Chief Risk Officer, Conifer 
Holdings Inc., dated June 16, 2017 (Conifer Letter).
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III. Other Changes
    To improve the readability of Listing Rule 5635(d) Nasdaq proposes 
to define ``20% Issuance'' as ``a transaction, other than a public 
offering as defined in IM-5635-3, involving the sale, issuance or 
potential issuance by the Company of common stock (or securities 
convertible into or exercisable for common stock), which alone or 
together with sales by officers, directors or Substantial Shareholders 
of the Company, equals 20% or more of the common stock or 20% or more 
of the voting power outstanding before the issuance.'' This definition 
combines the situations described in existing Rule 5635(d)(1) and 
(d)(2) and makes no substantive change but for the change to the 
pricing tests, as described above, such that shareholder approval would 
be required under the same circumstances for a 20% Issuance as under 
existing Listing Rule 5635(d).
    Nasdaq also proposes to amend the title of Listing Rule 5635(d) and 
the preamble to Listing Rule 5635 to replace references to ``private 
placements'' to ``transactions other than public offerings'' to conform 
the language in the title of Listing Rule 5635(d) and the preamble to 
the language in the rule text and that of IM-5635-3, which provides the 
definition of a public offering.
    Finally, Nasdaq proposes to amend Listing Rules IM-5635-3 and IM-
5635-4, which describe how Nasdaq applies the shareholder approval 
requirements, to conform references to book and market value with the 
new definition of Minimum Price, as described above, and to utilize the 
newly defined term 20% Issuance.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\14\ in general, and furthers the

[[Page 7272]]

objectives of Section 6(b)(5) of the Act,\15\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general to protect 
investors and the public interest. Nasdaq believes that the approach 
taken in the proposal strikes an appropriate balance between investor 
protection and impediments upon issuers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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Definition of Market Value
    The proposed rule change will modify the minimum price at which a 
20% Issuance would not need shareholder approval from the closing bid 
price to the lower of: (i) The closing price (as reflected on 
Nasdaq.com); or (ii) the average closing price of the common stock (as 
reflected on Nasdaq.com) for the five trading days immediately 
preceding the signing of the binding agreement.
    Nasdaq believes that allowing issuers to price transactions at the 
closing price (as reflected on Nasdaq.com) rather than closing 
consolidated bid price will perfect the mechanism of a free and open 
market and protect investors and the public interest because the 
closing price will represent an actual sale, which generally occurs at 
the same or greater price than the bid price.\16\ Further, the closing 
price displayed on Nasdaq.com is the Nasdaq Official Closing Price, 
which is derived from the closing auction on Nasdaq and reflects actual 
sale prices at one of the most liquid times of the trading day.
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    \16\ Sales typically take place between the bid and ask prices.
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    Allowing share issuances to be priced at the five-day average of 
the closing price will further align Nasdaq's requirements with how 
many transactions are structured, such as transactions where Listing 
Rule 5635(d) is not implicated because the issuance is for less than 
20% of the common stock and the parties rely on the five-day average 
for pricing to smooth out unusual fluctuations in price. In so doing, 
the proposed rule change will perfect the mechanism of a free and open 
market. Further, allowing a five-day average price continues to protect 
investors and the public interest because it will allow companies and 
investors to price transactions in a manner designed to eliminate 
aberrant pricing resulting from unusual transactions on the day of a 
transaction. Maintaining the allowable average at just a five-day 
period also protects investors by ensuring the period is not too long, 
such that it would result in the price being distorted by ordinary past 
market movements and other outdated events. In a market that rises each 
day of the period, the five-day average will be less than the price at 
the end of the period, but would still be higher than the price at the 
start of such period. Further, as some commenters indicated, aside from 
Nasdaq requirements, when selecting the appropriate price for a 
transaction company officers and directors also have to consider their 
state law structural safeguards, including fiduciary responsibilities, 
intended to protect shareholder interests.\17\
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    \17\ See Wilson Sonsini Letter.
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    In addition, because prices could be displayed from numerous data 
sources on different websites, to provide certainty about the 
appropriate price, Nasdaq proposes to codify within the rule that 
Nasdaq.com is the appropriate source of the closing price information, 
which is available with only 15 minute delay and without registration 
or fee. Because the closing bid price is not included in many public 
data feeds, this requirement will promote just and equitable principles 
of trade and remove impediments to and perfect the mechanism of a free 
and open market because it will improve the transparency of the rule 
and provide additional certainty to all market participants about the 
appropriate price to be used in determining if shareholder approval is 
required.
    Finally, Nasdaq believes that where two alternative measures of 
value exist that both reasonably approximate the value of listed 
securities, defining the Minimum Price as the lower of those values 
allows issuers the flexibility to use either measure because they can 
also sell securities at a price greater than the Minimum Price without 
needing shareholder approval. This flexibility, and the certainty that 
a transaction can be structured at either value in a manner that will 
not require shareholder approval, further perfects the mechanism of a 
free and open market without diminishing the existing investor 
protections of the Listing Rule 5635(d).
Book Value
    Nasdaq also believes that eliminating the requirement for 
shareholder approval of issuances at a price less than book value but 
greater than market value does not diminish the existing investor 
protections of Listing Rule 5635(d). Book value is primarily an 
accounting measure calculated based on historic cost and is generally 
perceived as an inappropriate measure of the current value of a stock. 
Nasdaq has also observed that the existing book value test can appear 
arbitrary and have a disproportionate impact on companies in certain 
industries and at certain times. For example, during the financial 
crisis in 2008 and 2009, many banks and finance[hyphen]related 
companies traded below book value. Similarly, companies that make large 
investments in infrastructure may trade below the accounting carrying 
value of those assets. Because book value is not an appropriate measure 
of the current value of a stock, the elimination of the requirement for 
shareholder approval of issuances at a price less than book value but 
greater than market value will remove an impediment to, and perfect the 
mechanism of, a free and open market, which currently unfairly burdens 
companies in certain industries, without meaningfully diminishing 
investor protections of Listing Rule 5635(d).
Other Changes
    To improve the readability of Listing Rule 5635(d) Nasdaq proposes 
to define ``20% Issuance'' as ``a transaction, other than a public 
offering as defined in IM-5635-3, involving the sale, issuance or 
potential issuance by the Company of common stock (or securities 
convertible into or exercisable for common stock), which alone or 
together with sales by officers, directors or Substantial Shareholders 
of the Company, equals 20% or more of common stock or 20% or more of 
the voting power outstanding before the issuance.'' This definition 
combines the situations described in existing Rule 5635(d)(1) and 
(d)(2) but makes no substantive change. Under the proposed rule, but 
for the separate change to the pricing test, shareholder approval would 
be required under the same circumstances for a 20% Issuance as under 
existing Listing Rule 5635(d). Nasdaq believes that the improved 
readability of the rule will perfect the mechanism of a free and open 
market by making the rule easier to understand and apply.
    Nasdaq also believes that amending the title of Listing Rule 
5635(d) and the preamble to Listing Rule 5635 to replace references to 
``private placements'' to ``transactions other than public offerings'' 
to conform the language in the title of Listing Rule 5635(d) and the 
preamble to the language in the rule text and that of IM-5635-3, which 
provides the definition of a public offering, will perfect the 
mechanism of a free and open market by making the rule easier to 
understand and apply.

[[Page 7273]]

    Finally, Nasdaq believes that amending Listing Rules IM-5635-3 and 
IM-5635-4, which describe how Nasdaq applies the shareholder approval 
requirements, to conform references to book and market value with the 
new definition of Minimum Price, as described above, and to utilize the 
newly defined term 20% Issuance will perfect the mechanism of a free 
and open market by eliminating confusion caused by references to a 
measure that is no longer applicable and by making the rule easier to 
understand and apply.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change would 
revise requirements that burden issuers by unnecessarily limiting the 
circumstances where they can sell securities without shareholder 
approval All listed companies would be affected in the same manner by 
these changes. As such, these changes are neither intended to, nor 
expected to, impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In the 2017 Solicitation, Nasdaq solicited comments on a specific 
proposal to amend Listing Rule 5635(d) to:
    (1) Change the definition of market value for purposes of the 
shareholder approval rules from closing bid price to a five-day 
trailing average;
    (2) require that any issuance of 20% or more be approved by the 
independent directors where shareholder approval is not required; and
    (3) eliminate the requirement for shareholder approval of issuances 
at a price less than book value but greater than market value.
    In an effort to seek the broadest response, Nasdaq widely 
distributed the 2017 Solicitation to investors, issuers, legal 
professionals and other interested parties. In addition, the proposal 
was posted on the Nasdaq Listing Center^TM.\18\ In total, 12 
comments were received. A copy of the 2017 Solicitation is attached to 
the rule filing as Exhibit 2a. Copies of the comments received are 
attached to the rule filing as Exhibit 2b.
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    \18\ https://listingcenter.nasdaq.com/assets/Shareholder%20Approval%20Comment%20Solicitation%20June%2014%202017.pdf.
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    With regard to the proposal to change the definition of market 
value for purposes of the shareholder approval rules from closing bid 
price to a five-day trailing average, of the 12 commenters, seven 
supported the change,\19\ one expressed no opinion,\20\ while the 
remaining four suggested the five-day average price should be used as 
an alternative to the closing price rather than being an exclusive 
measure of value of listed securities.\21\ Nasdaq determined to adopt 
this suggestion and now proposes to amend Listing Rule 5635(d) to allow 
companies the flexibility [sic] of using either the closing price at 
the time of the transaction or the five-day average of the closing 
price when pricing 20% Issuances. Transactions could be structured to 
use either price knowing that neither the lower price nor the higher 
one would result in the transaction needing shareholder approval under 
the proposed rule because each will be at or above the new measure of 
market value for purposes of the shareholder approval rules, which is 
now defined as Minimum Price.
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    \19\ See Letter from Dickerson Wright, Chairman and CEO of NV5, 
dated June 15, 2017 (NV5 Letter); Grundei Letter; Letter from 
Kenneth A. Bertsch, Executive Director, Council of Institutional 
Investors, dated June 26, 2017 (CII Letter); Lightbridge Letter; 
Letter from Penny Somer-Greif, et al., Chair, the Committee on 
Securities Law of the Business Law Section of the Maryland State Bar 
Association, dated July 31, 2017 (Md Bar Letter); Letter from Harvey 
Kesner, Sichenzia Ross Ference Kesner LLP, dated July 31, 2017 
(Sichenzia Letter); Letter from Anne Sheehan, Director of Corporate 
Governance, California State Teachers' Retirement System, dated 
August 1, 2017 (CALSTRS letter).
    \20\ See Conifer Letter (addressing only the proposal to 
eliminate the requirement for shareholder approval of issuances at a 
price less than book value but greater than market value).
    \21\ See Latham Letter, Kelley Drey Letter, Wilson Sonsini 
Letter, and Ellenoff Grossman Letter.
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    Two commenters suggested the use of the volume weighted average 
price (VWAP) instead of the five-day average price because VWAP 
includes a broader array of trades, such as trades outside the Nasdaq 
closing auction that forms the closing price, and because VWAP gives 
greater weight to the price at which a greater number of shares is 
traded.\22\ However, the commenters acknowledged that VWAP methodology 
generally requires a paid subscription to providers of financial 
information, such as Bloomberg, to obtain the VWAP.\23\ Given the 
complexity of the VWAP methodology and the potential resulting lack of 
transparency among retail investors who do not have access to financial 
data that includes VWAP, at this time, Nasdaq is proposing to change 
the definition of market value for purposes of the shareholder approval 
[sic], as described above, by incorporating the concept of the five-day 
average closing price, rather than VWAP, as the alternative to the 
closing price at the time of the transaction.
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    \22\ See Kelley Drye Letter and Ellenoff Grossman Letter.
    \23\ Id.
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    Two commenters suggested that the Nasdaq should amend its rules 
such that shareholder approval is required for any issuance a [sic] 
price that is below market price and for any 20% Issuance.\24\ Nasdaq 
is concerned that under their proposal even de minimis issuances below 
market price and 20% Issuances at substantial premium to market price 
would require shareholder approval. As such, given the expense and 
delay associated with obtaining shareholder approval, Nasdaq does not 
propose amending the rule as these commenters requested at this time.
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    \24\ See CALSTERS Letter and CII Letter.
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    In the 2017 Solicitation, Nasdaq noted some potential negative 
consequences to using a five-day average as the measure of whether 
shareholder approval is required and suggested a potential new 
safeguard that would have required that any transaction of more than 
20% of the company's shares outstanding also be approved by either a 
committee of independent directors (as defined in Listing Rule 
5605(a)(2)) or a majority of the independent directors on the board, 
unless it is approved by the company's shareholders (the ``Independent 
Director Approval Requirement'').
    The Independent Director Approval Requirement was not embraced by 
the commenters, many of whom doubted the utility of the Independent 
Director Approval Requirement.\25\ Some commenters saw the Independent 
Director Approval Requirement as a new burden on listed companies that 
largely duplicates the existing state corporate law requirements and 
thus outweighs any offsetting benefits to shareholders.\26\ In that 
regard,

[[Page 7274]]

commenters noted state law protections, such as the fiduciary duties of 
care and loyalty imposed on management and directors to act in the best 
interest of the company and its shareholders.\27\ Thus, given the cool 
reception received from investors, who did not believe the addition of 
this listing requirement would meaningfully add to investor 
protection,\28\ and the belief of commenters that the Independent 
Director Approval Requirement is ``solving the problem that does not 
exist,'' \29\ Nasdaq is not proposing to adopt the Independent Director 
Approval Requirement at this time.
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    \25\ One commenter supported the proposed Independent Director 
Approval Requirement. See Md Bar Letter (``[W]e believe the 
[Independent Director Approval Requirement] is reasonable, as it 
adds an additional protection for investors without unduly burdening 
Nasdaq-listed companies seeking to raise capital.''). Some 
commenters supported this proposal without discussing the specific 
burdens and benefit of this proposal. See Lightbridge Letter; Latham 
Letter. Some commenters did not address this issue. See Kelley Drye 
Letter, Sichenzia Letter, and Conifer Letter. The remaining six 
commenters opposed this proposal. See Footnotes 26 and 28 below.
    \26\ See Wilson Sonsini Letter (``Rather than ensuring adequate 
consideration of shareholder interests, we respectfully submit that 
the [Independent Director Approval Requirement] would be duplicative 
of, and already more effectively addressed by, the corporate law 
requirements of an issuer's jurisdiction of incorporation in the 
vast majority of cases.''). See also, Grundei Letter (``. . . there 
are already state law requirements regarding such approvals.'').
    \27\ See Wilson Sonsini Letter.
    \28\ See CALSTERS Letter (``[W]e genuinely believe and 
appreciate that a majority of independent directors should always 
screen and vote on any stock issuances . . .''). Yet, CALSTERS 
Letter suggested removal the Independent Director Approval 
Requirement for the proposed rule. See also, CII Letter (suggesting 
removal the Independent Director Approval Requirement for the 
proposed rule and the imposition of shareholder approval 
requirements for any issuance a price that is below market price and 
any 20% Issuances). See also, Ellenoff Grossman Letter 
(``[Independent Director Approval Requirement] may not prove helpful 
to outside shareholders, in practice''). See also, NV5 Letter.
    \29\ Grundei Letter.
---------------------------------------------------------------------------

    With regard to the proposal to eliminate the requirement for 
shareholder approval of issuances at a price less than book value but 
greater than market value, of the 12 commenters, only one specifically 
opposed the proposed rule change.\30\ The commenter that opposed the 
proposed rule change seemed to have been concerned with potentially 
negative market perception of issuances below book value and with 
potential stock price manipulations by suggesting that the ``. . . 
proposed rule change compromises Nasdaq's commitment to protect 
investors . . . by allowing companies the potential power to materially 
affect the stock price without prior approval of current 
stockholders.'' \31\ The commenter did not elaborate and did not 
provide any evidence of price manipulation (which would be investigated 
by Nasdaq Regulation and FINRA) and Nasdaq does not believe this single 
hypothetical and unsubstantiated concern justifies retaining the book 
value requirement in light of the other concerns raised about its 
arbitrary and disproportionate impact on certain companies and the lack 
of importance placed on this requirement by investors.
---------------------------------------------------------------------------

    \30\ One commenter indicated that he disagreed with the proposed 
change, but did not address the issue directly. See NV5 Letter.
    \31\ Conifer Letter.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2018-008 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2018-008. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2018-008, and should be submitted 
on or before March 13, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03311 Filed 2-16-18; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 83, No. 34 / Tuesday, February 20, 2018 / Notices 7269

leverage. While a Fund may invest in (B) institute proceedings to determine For the Commission, by the Division of
inverse ETFs, a Fund will not invest in whether the proposed rule change Trading and Markets, pursuant to delegated
leveraged (e.g., 2X, –2X, 3X or –3X) should be disapproved. authority.46
ETFs. Eduardo A. Aleman,
The proposed rule change is designed IV. Solicitation of Comments
Assistant Secretary.
to perfect the mechanism of a free and Interested persons are invited to [FR Doc. 2018–03313 Filed 2–16–18; 8:45 am]
open market and, in general, to protect submit written data, views, and BILLING CODE 8011–01–P
investors and the public interest in that arguments concerning the foregoing,
it will facilitate the listing and trading including whether the proposed rule
of an additional type of actively- change is consistent with the Act. SECURITIES AND EXCHANGE
managed exchange-traded product that Comments may be submitted by any of COMMISSION
will enhance competition among market the following methods:
participants, to the benefit of investors
and the marketplace. As noted above, Electronic Comments [Release No. 34–82702; File No. SR–
the Exchange has in place surveillance NASDAQ–2018–008]
• Use the Commission’s internet
procedures relating to trading in the comment form (http://www.sec.gov/
Shares and may obtain information via Self-Regulatory Organizations; The
rules/sro.shtml); or Nasdaq Stock Market LLC; Notice of
ISG from other exchanges that are
• Send an email to rule-comments@ Filing of Proposed Rule Change To
members of ISG or with which the
sec.gov. Please include File Number SR– Modify the Listing Requirements
Exchange has entered into a
CboeBZX–2018–010 on the subject line. Contained in Listing Rule 5635(d) To
comprehensive surveillance sharing
agreement. In addition, as noted above, Paper Comments Change the Definition of Market Value
investors will have ready access to for Purposes of the Shareholder
information regarding the VIIV and • Send paper comments in triplicate Approval Rules and Eliminate the
quotation and last sale information for to Secretary, Securities and Exchange Requirement for Shareholder Approval
the Shares. Commission, 100 F Street NE, of Issuances at a Price Less Than
For the above reasons, the Exchange Washington, DC 20549–1090. Book Value but Greater Than Market
believes that the proposed rule change All submissions should refer to File Value
is consistent with the requirements of Number SR–CboeBZX–2018–010. This February 13, 2018.
Section 6(b)(5) of the Act. file number should be included on the
subject line if email is used. To help the Pursuant to Section 19(b)(1) of the
B. Self-Regulatory Organization’s Securities Exchange Act of 1934
Statement on Burden on Competition Commission process and review your
comments more efficiently, please use (‘‘Act’’) 1 and Rule 19b–4 thereunder,2
The Exchange does not believe that only one method. The Commission will notice is hereby given that on January
the proposed rule change will impose post all comments on the Commission’s 30, 2018, The Nasdaq Stock Market LLC
any burden on competition that is not internet website (http://www.sec.gov/ (‘‘Nasdaq’’ or the ‘‘Exchange’’) filed with
necessary or appropriate in furtherance rules/sro.shtml). Copies of the the Securities and Exchange
of the purpose of the Act. The Exchange submission, all subsequent Commission (‘‘SEC’’ or ‘‘Commission’’)
notes that the proposed rule change, amendments, all written statements the proposed rule change as described
rather will facilitate the listing and with respect to the proposed rule in Items I, II, and III below, which Items
trading of additional actively-managed change that are filed with the have been prepared by the Exchange.
exchange-traded products that will Commission, and all written The Commission is publishing this
enhance competition among both communications relating to the notice to solicit comments on the
market participants and listing venues, proposed rule change between the proposed rule change from interested
to the benefit of investors and the Commission and any person, other than persons.
marketplace. those that may be withheld from the I. Self-Regulatory Organization’s
C. Self-Regulatory Organization’s public in accordance with the Statement of the Terms of Substance of
Statement on Comments on the provisions of 5 U.S.C. 552, will be the Proposed Rule Change
Proposed Rule Change Received From available for website viewing and
Members, Participants or Others printing in the Commission’s Public The Exchange proposes to modify the
Reference Room, 100 F Street NE, listing requirements contained in
The Exchange has neither solicited
Washington, DC 20549, on official Listing Rule 5635(d) to change the
nor received written comments on the
business days between the hours of definition of market value for purposes
proposed rule change.
10:00 a.m. and 3:00 p.m. Copies of the of the shareholder approval rules and
III. Date of Effectiveness of the filing also will be available for eliminate the requirement for
Proposed Rule Change and Timing for inspection and copying at the principal shareholder approval of issuances at a
Commission Action office of the Exchange. All comments price less than book value but greater
Within 45 days of the date of received will be posted without change. than market value.
publication of this notice in the Federal Persons submitting comments are The text of the proposed rule change
Register or within such longer period cautioned that we do not redact or edit is available on the Exchange’s website at
personal identifying information from
sradovich on DSK3GMQ082PROD with NOTICES

up to 90 days (i) as the Commission may http://nasdaq.cchwallstreet.com, at the
designate if it finds such longer period comment submissions. You should principal office of the Exchange, and at
to be appropriate and publishes its submit only information that you wish the Commission’s Public Reference
reasons for so finding or (ii) as to which to make available publicly. All Room.
the self-regulatory organization submissions should refer to File
consents, the Commission will: Number SR–CboeBZX–2018–010 and 46 17 CFR 200.30–3(a)(12).
(A) By order approve or disapprove should be submitted on or before March 1 15 U.S.C. 78s(b)(1).
such proposed rule change, or 13, 2018. 2 17 CFR 240.19b–4.

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Federal Register / Vol. 83, No. 34 / Tuesday, February 20, 2018 / Notices 7273

Finally, Nasdaq believes that received are attached to the rule filing financial data that includes VWAP, at
amending Listing Rules IM–5635–3 and as Exhibit 2b. this time, Nasdaq is proposing to change
IM–5635–4, which describe how Nasdaq With regard to the proposal to change the definition of market value for
applies the shareholder approval the definition of market value for purposes of the shareholder approval
requirements, to conform references to purposes of the shareholder approval [sic], as described above, by
book and market value with the new rules from closing bid price to a five-day incorporating the concept of the five-
definition of Minimum Price, as trailing average, of the 12 commenters, day average closing price, rather than
described above, and to utilize the seven supported the change,19 one VWAP, as the alternative to the closing
newly defined term 20% Issuance will expressed no opinion,20 while the price at the time of the transaction.
perfect the mechanism of a free and remaining four suggested the five-day Two commenters suggested that the
open market by eliminating confusion average price should be used as an Nasdaq should amend its rules such that
caused by references to a measure that alternative to the closing price rather shareholder approval is required for any
is no longer applicable and by making than being an exclusive measure of issuance a [sic] price that is below
the rule easier to understand and apply. value of listed securities.21 Nasdaq market price and for any 20%
determined to adopt this suggestion and Issuance.24 Nasdaq is concerned that
B. Self-Regulatory Organization’s now proposes to amend Listing Rule under their proposal even de minimis
Statement on Burden on Competition 5635(d) to allow companies the issuances below market price and 20%
The Exchange does not believe that flexibility [sic] of using either the Issuances at substantial premium to
the proposed rule change will impose closing price at the time of the market price would require shareholder
any burden on competition not transaction or the five-day average of the approval. As such, given the expense
necessary or appropriate in furtherance closing price when pricing 20% and delay associated with obtaining
of the purposes of the Act. The Issuances. Transactions could be shareholder approval, Nasdaq does not
proposed rule change would revise structured to use either price knowing propose amending the rule as these
requirements that burden issuers by that neither the lower price nor the commenters requested at this time.
unnecessarily limiting the higher one would result in the In the 2017 Solicitation, Nasdaq noted
circumstances where they can sell transaction needing shareholder some potential negative consequences to
securities without shareholder approval approval under the proposed rule using a five-day average as the measure
All listed companies would be affected because each will be at or above the new of whether shareholder approval is
in the same manner by these changes. measure of market value for purposes of required and suggested a potential new
As such, these changes are neither the shareholder approval rules, which is safeguard that would have required that
intended to, nor expected to, impose now defined as Minimum Price. any transaction of more than 20% of the
Two commenters suggested the use of company’s shares outstanding also be
any burden on competition.
the volume weighted average price approved by either a committee of
C. Self-Regulatory Organization’s (VWAP) instead of the five-day average independent directors (as defined in
Statement on Comments on the price because VWAP includes a broader Listing Rule 5605(a)(2)) or a majority of
Proposed Rule Change Received From array of trades, such as trades outside the independent directors on the board,
Members, Participants, or Others the Nasdaq closing auction that forms unless it is approved by the company’s
the closing price, and because VWAP shareholders (the ‘‘Independent Director
In the 2017 Solicitation, Nasdaq gives greater weight to the price at
solicited comments on a specific Approval Requirement’’).
which a greater number of shares is The Independent Director Approval
proposal to amend Listing Rule 5635(d) traded.22 However, the commenters
to: Requirement was not embraced by the
acknowledged that VWAP methodology commenters, many of whom doubted
(1) Change the definition of market generally requires a paid subscription to
value for purposes of the shareholder the utility of the Independent Director
providers of financial information, such
approval rules from closing bid price to Approval Requirement.25 Some
as Bloomberg, to obtain the VWAP.23
a five-day trailing average; commenters saw the Independent
Given the complexity of the VWAP
(2) require that any issuance of 20% Director Approval Requirement as a
methodology and the potential resulting
or more be approved by the new burden on listed companies that
lack of transparency among retail
independent directors where largely duplicates the existing state
investors who do not have access to
shareholder approval is not required; corporate law requirements and thus
and 19 See Letter from Dickerson Wright, Chairman
outweighs any offsetting benefits to
and CEO of NV5, dated June 15, 2017 (NV5 Letter); shareholders.26 In that regard,
(3) eliminate the requirement for
Grundei Letter; Letter from Kenneth A. Bertsch,
shareholder approval of issuances at a Executive Director, Council of Institutional 24 See CALSTERS Letter and CII Letter.
price less than book value but greater Investors, dated June 26, 2017 (CII Letter); 25 One commenter supported the proposed
than market value. Lightbridge Letter; Letter from Penny Somer-Greif, Independent Director Approval Requirement. See
et al., Chair, the Committee on Securities Law of the Md Bar Letter (‘‘[W]e believe the [Independent
In an effort to seek the broadest Business Law Section of the Maryland State Bar Director Approval Requirement] is reasonable, as it
response, Nasdaq widely distributed the Association, dated July 31, 2017 (Md Bar Letter); adds an additional protection for investors without
2017 Solicitation to investors, issuers, Letter from Harvey Kesner, Sichenzia Ross Ference unduly burdening Nasdaq-listed companies seeking
legal professionals and other interested Kesner LLP, dated July 31, 2017 (Sichenzia Letter); to raise capital.’’). Some commenters supported this
Letter from Anne Sheehan, Director of Corporate proposal without discussing the specific burdens
parties. In addition, the proposal was Governance, California State Teachers’ Retirement and benefit of this proposal. See Lightbridge Letter;
posted on the Nasdaq Listing System, dated August 1, 2017 (CALSTRS letter). Latham Letter. Some commenters did not address
sradovich on DSK3GMQ082PROD with NOTICES

CenterTM.18 In total, 12 comments were 20 See Conifer Letter (addressing only the
this issue. See Kelley Drye Letter, Sichenzia Letter,
received. A copy of the 2017 proposal to eliminate the requirement for and Conifer Letter. The remaining six commenters
shareholder approval of issuances at a price less opposed this proposal. See Footnotes 26 and 28
Solicitation is attached to the rule filing than book value but greater than market value). below.
as Exhibit 2a. Copies of the comments 21 See Latham Letter, Kelley Drey Letter, Wilson 26 See Wilson Sonsini Letter (‘‘Rather than
Sonsini Letter, and Ellenoff Grossman Letter. ensuring adequate consideration of shareholder
18 https://listingcenter.nasdaq.com/assets/ 22 See Kelley Drye Letter and Ellenoff Grossman
interests, we respectfully submit that the
Shareholder%20Approval%20Comment% Letter. [Independent Director Approval Requirement]
20Solicitation%20June%2014%202017.pdf. 23 Id. Continued

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Document Created: 2018-02-17 02:29:40
Document Modified: 2018-02-17 02:29:40
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		83 FR 7269