PURPOSE: This rule prescribes standards for determining when the amounts and kinds of options and warrants are reasonable.

1. (1) Options or warrants to purchase securities issued or sold to persons other than pro rata to all of the purchasers of the securities shall be reasonable in amount and kind (section 409.306(a)(2)(F), RSMo) and shall be justified by the applicant. The following policies shall be applicable in determining whether those options or warrants are reasonable and justified:

   1. (A) Options in the nature of restricted or qualified stock options for incentive purposes shall be considered justified if reasonable in number and method of exercise;
   2. (B) Options to nonexecutive management and other employees of the issuer that are part of an employee incentive plan, to third parties in conjunction with previous arms length financing arrangements or to the public as part of a public offering are excluded from the fifteen percent (15%) restriction if these options are otherwise reasonable in amount and exercise price;
   3. (C) Securities sold on a deferred payment plan or basis which denies the purchaser possession of the securities and any participation or profits from the securities may be created as an option to purchase subject to the policies of this rule;

   4. (D) Options or warrants to underwriters shall be considered justified if all of the following conditions are met:

      1. 1. The options or warrants are issued to

managing underwriters under a firm underwriting agreement, provided they are not transferable except in cases where the managing underwriter is a partnership and then only within the partnership, and in cases where the managing underwriter is a corporation and then only among the officers of the corporation who are also shareholders;

1. 2. The number of shares covered by all

options or warrants does not exceed fifteen percent (15%) of the shares to be outstanding upon completion of the offering, the percentage including options and warrants to employees, and the number of shares covered by options and warrants granted or to be granted to underwriters does not exceed fifteen percent (15%) of the securities proposed to be sold to the public in the offering under consideration;

1. 3. The options or warrants do not exceed

five (5) years in duration and are exercisable no sooner than one (1) year after issuance;

1. 4. The initial exercise price of the

options or warrants is at least equal to the public offering price plus a step-up of the public offering price of either seven percent (7%) each year they are outstanding, so that the exercise price throughout the second year is one hundred seven percent (107%), throughout the third year one hundred fourteen percent (114%), throughout the fourth year one hundred twenty-one percent (121%), throughout the fifth year one hundred twenty-eight percent (128%), or in the alternative, twenty percent (20%) at any time after one (1) year from the date of issuance; provided, that the selected alternative must be specified in the options or warrants when issued;

1. 5. The options or warrants are issued by

a relatively small company, which is in the promotional stage, or which, because of its size, lacks public ownership of its shares, or other facts and circumstances make it appear that the issuance of options is necessary to obtain competent investment banking services; provided, that the direct commissions to the underwriters are lower than the usual and customary commissions in the absence of the options or warrants;

1. 6. The prospectus used in connection

with the offering fully discloses the terms and the reason for the issuance of the options or warrants; provided that if the reason relates to future advisory services to be performed by the underwriter without compensation in consideration for the issuance of the options or warrants, a statement to that effect is placed in the prospectus;

1. 7. Where it is necessary to include the

value of the options or warrants in the computation of underwriting commissions, the market value of the options or warrants, if any, shall be used. In cases where no market value exists, a presumed fair value of twenty percent (20%) of the public offering price of the shares to which the options or warrants pertain shall be used, unless evidence indicates that a contrary valuation exists; and

1. 8. The same conditions shall be applied

to options or warrants by selling shareholders, unless evidence indicates that the selling shareholders are so separated from the issuer and so lacking in control of the issuer as to require different treatment;

1. (E) Options and warrants shall not be issued to finders;

2. (F) Incentive options issued by an insurance company or by the parent of a majorityowned subsidiary to agents, employees or representatives of the insurance company, parent or majority-owned subsidiary, based on the amount of paid-for insurance business submitted to, approved and issued by the insurance company or majority-owned subsidiary, will be considered justified if all of the following conditions are met:

   1. 1. The number of shares represented by

all options does not exceed fifteen percent (15%) of the securities to be outstanding at any given time;

1. 2. The options do not exceed five (5)

years in duration;

1. 3. The option price is not less than the

fair market value of the stock at the time the option is granted; provided, that in those cases where no market value exists, the last public offering price of the securities to which the options pertain may be used as the option price, unless evidence indicates that a contrary valuation exists;

1. 4. No options can be exercised until

receipt by the insurance company of two (2) full years premiums on the underlying insurance or until a death benefit is paid on the insurance, whichever occurs first;

1. 5. The criteria for determining the num-

ber of shares for which the options may be exercised, that is, amount of paid-for insur- 15 CSR 30-52

ance, type of policy, total insurance in force at the date of grant of the options, is reasonably related to the incentive objectives of the option plan;

1. 6. The option plan is approved by the

stockholders of the corporation adopting the plan prior to its effectiveness;

1. 7. The options must be granted within

ten (10) years after the adoption of the option plan;

1. 8. Any overriding options to district or

regional managers or officers are reasonable in number and subject to the same conditions in this rule;

1. 9. The options are not transferable

except by will or the laws of descent and distribution;

1. 10. The options can only be exercised if

the agent or employee was in the continuous employ of the insurance company, or the parent of a majority-owned subsidiary from the date of the grant of the option until the date of exercise;

1. 11. The option plan contains provisions

as may be necessary to assure that the granting of the options, the exercise of the options and any sale of the shares pursuant to that exercise shall be in conformity with the Act and the corresponding rules; and

1. 12. The prospectus filed in connection

with any application for registration of securities of the corporation granting these options contains a full disclosure as to the terms and reasons for the issuance of the options;

1. (G) Options or warrants issued to financing institutions, other than the underwriter, in connection with financing arrangements made by the issuer shall be considered justified if all of the following conditions are met:

   1. 1. The options or warrants are issued

contemporaneously with the issuance of the evidence of indebtedness of the loan;

1. 2. The options or warrants expire not

later than the final maturity date of the loan;

1. 3. The options or warrants are issued as

a result of bona fide negotiations between the issuer and parties not affiliated with the issuer;

1. 4. The exercise price of the options or

warrants is not less than the fair market value of the shares into which they are exercisable on the date the loan is approved; and

1. 5. The number of shares issuable upon

exercise of the options or warrants multiplied by the exercise price of the shares does not exceed the face amount of the loan;

1. (H) Options or warrants issued in connection with acquisitions, reorganizations, consolidations or mergers made by the issuer will be considered justified if all of the following conditions are met:

   1. 1. They are reasonable in number and

method of exercise;

1. 2. They are issued to parties not affiliat-

ed with the issuer prior to the acquisition, reorganization, consolidation or merger; and

1. 3. The earnings per share of the issuer,

after giving effect to the acquisition, reorganization, consolidation or merger, would not be materially diluted by the issuance of shares pursuant to the exercise of the options or warrants;

1. (I) The total amount of options and warrants issued or reserved for issuance at the date of the public offering shall be reasonable. The amount of options and warrants shall be presumed reasonable if the number of shares represented by these options or warrants, excluding options and warrants to financing institutions and options and warrants in connection with acquisitions (provided, the conditions of subsections (1)(G) and (H), respectively are met), does not exceed a number equal to fifteen percent (15%) of the number of shares to be outstanding upon completion of the offering or fifteen percent (15%) of the number of shares outstanding during the period the registration is in effect. The number of options and warrants reserved for issuance may be disregarded if the issuer files an undertaking or states in the prospectus that the amount of outstanding options and warrants shall not exceed the above limitation during the period the registration is in effect;
2. (J) All options and warrants other than those issued to financing institutions shall be issued at not less than eighty-five percent (85%) of fair market value on the date of issuance, or where no market exists, at not less than eighty-five percent (85%) of book value on the date of issuance; and
3. (K) This policy shall apply to applications for registration of equity securities or securities convertible into equity securities.

AUTHORITY: sections 409.306 and 409.413(a), RSMo (1986).* Original rule filed June 25, 1968, effective Aug. 1, 1968. Amended: Filed May 21, 1969, effective Aug. 1, 1969. Amended: Filed July 21, 1972, effective Aug. 1, 1972. Amended: Filed Nov. 15, 1974, effective Nov. 25, 1974. Amended: Filed Aug. 1, 1984, effective Nov. 11, 1984. Amended: Filed June 2, 1986, effective Oct. 27, 1986. Amended: Filed Oct. 16, 1986, effective Feb. 12, 1987. Amended: Filed Oct. 15, 1987, effective Jan. 29, 1988. *Original authority: 409.306, RSMo (1967), amended 1977 and 409.413, RSMo (1967).