Whether a proposed standby purchase agreement entered into between affiliate of a member and an issuer in connection with a public offering of the issuer's common stock could constitute an option.
February 24, 1993
This letter is in response to your letter dated February 17, 1993, on behalf of [Broker/dealer], to [NASD Employee] concerning a proposed purchase standby commitment entered into between [Fund], an investment fund whose general partner (the "General Partner") is [Parent of Broker/dealer], and a bank holding company (the "Company") in connection with a proposed public offering by the Bank of $170,000,000 of its common stock. Specifically, you have sought the concurrence of the NASD staff that the standby purchase commitment does not constitute an option subject to Section 33 of Article III of the National Association of Securities Dealers' ("NASD") Rules of Fair Practice and Appendix E thereto.
Section 3 of Appendix E provides, among other things, that no NASD member "shall effect for any account in which such member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, an opening transaction through the NASDAQ System, the over-the-counter market, or on any exchange in a stock option contract of any class of stock options if the member has reason to believe that as a result of such transaction the member, or partner, officer, director, or employee thereof, or customer would, acting alone or in concert with others, directly or indirectly, hold or control or be obligated in respect of an aggregate option position in excess of" certain parameters. Sections 3 (a)(1)-(3) of Appendix E set forth the specific position limits applicable to equity options.
Based on your letter, we understand the facts to be as follows:
The Company is a bank holding company which has three bank subsidiaries operating in [State], [State], and [State]. The Company is seeking to acquire selected assets of a bank (the "Bank"), the common shares of which are currently held in a federal government controlled trust. The Company, along with other interested buyers, have submitted bids to a federal government trustee to acquire the Bank. The Company is proposing to fund the acquisition through the public offering in order to maintain adequate Federal Reserve Board capital ratios pro forma for the acquisition.
The Company believes the likelihood of acquiring the Bank will be significantly reduced if its bid is subject to a financing contingency. In order to eliminate the financing contingency, [Fund] is proposing to enter into a standby purchase commitment with the Company in connection with the public offering. The General Partner's pro rata share in this investment will be 1% and another wholly-owned subsidiary of [Parent of Broker/dealer] will have at least an 11% interest in the transaction. The remainder of the interests in the transaction will be held by persons or entities with no NASD affiliation.
As of December 31, 1993, there were approximately [Number] million shares (the "Shares") of the Company's common stock (the "Common Stock") outstanding. Based on an assumed offering price of [$] per share (the closing price of the Common Stock on the NASDAQ National Market System on February 12, 1993), approximately [Number] million Shares will be offered in the public offering. [Broker/dealer] expects that the standby purchase commitment will be designed to yield the same aggregate proceeds to the Company, but at a lower assumed price per Share.
If the standby commitment is triggered, [Fund's] Shares are likely to be resold pursuant to a public offering. [Broker/dealer] is a market maker in the Company's Common Stock and [Parent of Broker/dealer] is the parent of [Broker/dealer].
Based on the facts and representations set forth above and after consultation with the staff of the Securities and Exchange Commission, the staff of the NASD does not believe that the proposed standby purchase commitment between and the Company would constitute an equity option for purposes of Section 33 of Article III of the NASD's Rules of Fair Practice and Appendix E thereto. Specifically, the staff believes that the standby purchase commitment is distinguishable from an option contract because the standby purchase commitment results in the creation of executory bilateral obligations between the parties, whereas the formation of an option contract gives the "long" side to the transaction the right but not the obligation to exercise the option and purchase (in the case of a call option) or sell (in the case of a put option) the underlying security at the exercise price of the option.
Please note that the foregoing is a staff opinion only. Under NASD procedures, any final determinations regarding the application of NASD Rules rest with the District Business Conduct Committees, the NASD Market Surveillance Committee, the National Business Conduct Committee, and, ultimately, the NASD Board of Governors.
Very truly yours,
Thomas R. Gira
Office of the General Counsel