3 AAC 08.160. Cheap stock (promotional shares)

(a) The administrator will presume securities to be cheap stock if they are sold or issued within two years before the public offering date to promoters, finders, underwriters, or controlling persons for a consideration lower than the proposed public offering price of those securities, including options and warrants exercised, in the absence of any

(1) public market for those securities; or

(2) substantial change in the earnings or financial position of the issuer.

(b) In applications for the registration of securities by qualification or coordination, in which cheap stock has been previously issued or is to be issued, the following conditions must be met in order to avoid a requirement to escrow or lock-in promotional shares under 3 AAC 08.180 - 3 AAC 08.186:

(1) the issuance of the cheap stock must be fully justified;

(2) only a promotional or development stage company may issue cheap stock;

(3) the number of shares of cheap stock issued may not exceed 25 percent of the securities to be outstanding at the completion of the proposed public offering;

(4) the consideration paid for the shares of cheap stock must be at least 50 percent of the proposed public offering price.

(c) If the shares of cheap stock were or are to be acquired by the underwriters, the difference between the consideration for the shares and the proposed public offering price, when added to the other discounts, commissions, and fees in connection with the offering may not exceed the limitation imposed by 3 AAC 08.130(a) .

(d) The provisions of (a) of this section apply to cheap stock acquired from selling shareholders unless those shareholders are so lacking in control of the issuer as to require different treatment.

(e) This section applies to applications for registration of equity securities or securities convertible into equity securities. For securities that are convertible into equity securities, the administrator will consider the conversion price to be the public offering price.

(f) The administrator will, in the administrator's discretion, require that cheap stock be, in accordance with 3 AAC 08.180 - 3 AAC 08.186,

(1) deposited, in whole or in part, in escrow; or

(2) subject to a lock-in agreement.

(g) The administrator will, in the administrator's discretion, waive a provision of (a) or (b) of this section for a registration application being reviewed under a multi-jurisdictional review procedure.

History: Eff. 2/20/72, Register 41; am 4/19/2000, Register 154

Authority: AS 45.55.110

AS 45.55.120

AS 45.55.950

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