6.10.207    WARRANTS AND OPTIONS

(1) The commissioner will consider the granting of warrants or options, to persons other than purchasers of securities, as grounds for denial of an application for registration, with the exception of:

(a) options to management in the nature of restricted options for incentive purposes, if reasonable in number and method of exercise;

(b) options to employees or their nominees pursuant to stock purchase plans or profit sharing plans, if reasonable in number and method of exercise; and

(c) options or warrants issued to underwriters or other persons as compensation, in whole or in part, for the sale of securities if:

(i) the issuer does not have:

(A) a public market for its securities; or

(B) previously issued options or warrants to an underwriter in connection with more than one public offering of its securities;

(ii) the options or warrants are issued only to a managing underwriter and no options or warrants are issued in connection with a best efforts underwriting unless the entire issue is sold, except that options or warrants may be issued in connection with a minimum-maximum offering if the amount to be issued is prorated depending on the amount of the underwriting which is sold;

(iii) the options or warrants may not be exercised for a period of one year from the completion of the public offering;

(iv) the options or warrants are nontransferable except by will, by intestate succession, or by operation of law, except that the options or warrants may be transferred without payment thereto to:

(A) partners of the underwriter if the underwriter is a partnership;

(B) persons who are both officers and shareholders of the underwriter if the underwriter is a corporation; or

(C) employees of the underwriter;

(v) the initial exercise price of the options or warrants is at least equal to the public offering price plus either:

(A) 7% each year they are outstanding, commencing one year after issuance, so that the exercise price throughout the second year is 107%, throughout the third year is 114%, throughout the fourth year is 121%, and throughout the fifth year is 128%; or

(B) 20% at any time after one year from the date of issuance;

(vi) the term of an option or warrant is not longer than five years; and

(vii) units of securities underlying the options or warrants acquired by an underwriter and related persons, whether acquired prior to, at the time of, or after the offering (but which is determined to be in connection with, or related to, the offering) are not, in the aggregate, more than 10% of the total number of shares that are outstanding at the conclusion of the offering. For purposes of this limitation, over-allotment units and units underlying options, warrants, or convertible securities that are a part of the proposed public offering are not to be counted as part of the aggregate number of shares being offered against which the 10% limitation is to be applied.

(2) The commissioner may, upon a showing of good cause, approve an application even though warrants or options have been granted that do not meet the conditions specified in (1). However, the burden of justifying issuance rests upon the applicant.

History: 30-10-107, MCA; IMP, 30-10-107, 30-10-207, MCA; EMERG, NEW, Eff. 7/5/75; AMD, 1988 MAR p. 1803, Eff. 8/12/88; AMD, 1999 MAR p. 56, Eff. 1/15/99; TRANS and AMD, from ARM 6.10.111, 2008 MAR p. 2046, Eff. 9/26/08.