Bruce E. Lee, Esq.
The staff granted an exemption from NASD Rule 2790 in connection with new issue offering where all decisions regarding the allocation of shares in the offering are determined at the sole discretion of the issuer.
February 3, 2006
Bruce E. Lee, Esq.
208 North 29th Street
P.O. Box 1222
Billings, MT 59103
Re: Request for Exemption from Rule 2790
Dear Mr. Lee:
This is in response to your letter dated November 23, 2005, in which you request an exemption from NASD Rule 2790 in connection with the proposed initial public offering ("IPO") of the Beartooth Bank ("Bank") common stock.
Pursuant to paragraph (h) of Rule 2790, the staff, for good cause shown after taking into consideration all relevant factors, may conditionally or unconditionally exempt any person, security or transaction (or any class or classes of persons, securities or transactions) from Rule 2790 to the extent that such exemption is consistent with the purposes of the Rule, the protection of investors, and the public interest. For the reasons set forth below, the staff exempts from Rule 2790 purchases of the Bank's shares by "broker-dealer personnel" as defined in the Rule.
Based upon your letter and our subsequent telephone conversations, we understand the facts to be as follows. The Bank is a proposed Montana-chartered bank that is in the process of organizing. The organizers of the Bank have contributed approximately $2.4 million in initial capital, and they are seeking to raise an additional $8 to $10 million in capital through a forthcoming IPO of the Bank's common stock on a subscription basis. The stock will be marketed directly by the Bank's organizers and executive officers, primarily to Montana residents.
Unlike a traditional IPO, there is no broker-dealer underwriter involved in the offering of the Bank's shares. The shares of the Bank are exempted securities under Section 3(a)(2) of the Securities Act of 1933. All decisions regarding the sale, allocation and pricing of the shares in the offering will be determined at the sole discretion of the Bank. No underwriter or any other broker-dealer, nor any associated person of any broker-dealer, would solicit, sell or market any shares of the IPO, would have the right, power, or authority to designate the allocation of any shares in the offering, would otherwise influence the allocation of the IPO shares, or would have any involvement in the offering process. Additionally, no member or any other broker-dealer would purchase any shares in the offering.
Upon completion of the offering, the Bank's common stock will not be traded on the Nasdaq Stock Market or any national securities exchange, and the Bank does not expect that there will be significant trading, at least for an extended time.
You are concerned that based on the application of Rule 2790(d)(1) the Bank would not be able to allocate shares of its IPO to certain "broker-dealer personnel" as defined in Rule 2790. You represent that purchases by such persons can be critical to the success of the Bank's offering. Therefore, you are requesting an exemption in connection with the Bank's forthcoming IPO so that the Bank can direct shares of its common stock to investors who may be "broker-dealer personnel."
Rule 2790 is designed to protect the integrity of the public offering process by ensuring that: (1) members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members; and (3) industry insiders, including members and their associated persons, do not take advantage of their insider position to purchase "new issues" for their own benefit at the expense of public customers. The Rule plays an important part in maintaining investor confidence in the capital raising and public offering process.
Rule 2790(d)(1) provides that the prohibitions on the purchase and sale of "new issues" in Rule 2790 generally do not apply to "new issue" securities that are specifically directed by the issuer to "restricted persons" as defined in the Rule. However, issuer-directed securities cannot be sold to or purchased by an account in which "broker-dealer personnel"1 have a beneficial interest, unless such persons, or members of their immediate family, are employees or directors of the issuer, the issuer's parent, or a subsidiary of the issuer or the issuer's parent. The term "broker-dealer personnel" includes, among others, any officer, director, general partner, associated person, and employee of a broker-dealer, as well as certain immediate family members of such persons.
The inclusion of this additional condition in Rule 2790(d)(1) (i.e., that "broker-dealer personnel" or members of their immediate family, must be employees or directors of the issuer, the issuer's parent, or a subsidiary of the issuer or the issuer's parent before they can receive issuer-directed securities) is designed to ensure that such persons, who typically have the greatest potential to influence the IPO allocation process, have a demonstrated basis for being selected to purchase shares in the IPO.
With respect to the proposed IPO of the Bank, the staff believes that the additional protections afforded by paragraph (d)(1) are not necessary in view of the fact that no underwriter or any other broker-dealer, nor any associated person of any broker-dealer, would solicit, sell or market any shares of the IPO, would have the right, power, or authority to designate the allocation of any shares in the offering, would otherwise influence the allocation of the IPO shares, or would have any involvement in the offering process, and all decisions regarding the sale, allocation and pricing of shares will be at the sole discretion of the Bank.
Based on the unique facts and circumstances of the Bank's proposed IPO, the staff finds that granting an exemption is consistent with the purposes of Rule 2790, the protection of investors, and the public interest. For these reasons and subject to the terms and conditions discussed above, the staff exempts from Rule 2790 purchases of the Bank's shares by "broker-dealer personnel" as defined in the Rule.
If you have any questions on this matter, please do not hesitate to contact me at (202) 728-8902.
Very truly yours,
Gary L. Goldsholle
Associate Vice President and
Associate General Counsel
James G. Dawson
Seattle District Office
1 In addition, while broker-dealers are not expressly subject to the limitations applicable to "broker-dealer personnel" in Rule 2790(d)(1), to the extent that "broker-dealer personnel" have a beneficial interest in a broker-dealer, the broker-dealer would be subject to the limitations in Rule 2790(d)(1). Consequently, the broker-dealer could not purchase any issuer-directed "new issues" unless each "broker-dealer personnel" that has a beneficial interest in the broker-dealer, or a member of their immediate family, also is an employee or director of the issuer, the issuer's parent, or a subsidiary of the issuer or the issuer's parent.