Blue Holdings' fashion service arrangement with William Adams, aka will.i.am of the Black Eyed Peas, was designed to generate excitement with consumers, but it garnered a bit more attention than intended with a less forgiving audience - the Nasdaq Stock Market.

According to a filing with the US Securities and Exchange Commission, Nasdaq notified the company that its stock-for-services deal with Adams, which will earn him 500,000 shares of Blue Holdings stock over a five-year period, was in violation of Nasdaq regulations because it failed to win shareholder approval before a letter of intent with Adams was executed on 11 May.

Nasdaq rules require shareholder approval before one of its listed companies enters into a compensation arrangement with a consultant involving the acquisition of stock.

Blue said that it was notified of the problem by Nasdaq on 18 June, six days after it had unilaterally acted to regain compliance by delaying transfer of the initial 175,000 shares to Adams until shareholder approval is conferred on the deal. A vote on the arrangement is scheduled for Blue's annual meeting on Thursday (21 June).

Blue said that Nasdaq had informed it that the delay would return the company to compliance with the market's regulations and that the matter was closed.

However, the noncompliance notification was sensitive because Adams can terminate his deal with Blue if it is delisted by Nasdaq, or if a court finds that Blue has violated SEC rules and regulations.

The agreement calls for a co-branded denim and denim-related collection called I.am Antik to launch in August. It also includes a provision involving the design, development, marketing, manufacturing and distribution of apparel products under the I.Am trademark through a joint venture.

Adams can also cancel the deal if Blue fails to launch the I.Am collection within a year of the execution of a joint venture agreement.

The initial deal called for Adams to receive 175,000 shares of stock within 30 days of the execution of a letter of intent and an additional 81,250 shares of Blue stock on each of the four subsequent anniversaries of the agreement.

At Blue's closing price of $1.31 on Tuesday (19 June), the 500,000 shares would have a worth of US$655,000. Shares have dropped 21.1% since details of the Adams arrangement were made public on 17 May.

By Arnold J Karr.