UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Check the appropriate box:

PAULSON CAPITAL (DELAWARE) CORP.   

(Name of Registrant as Specified in Its Charter)

Not applicable  

(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

PROPOSED MERGER – YOUR VOTE IS IMPORTANT

PAULSON CAPITAL (DELAWARE) CORP.

At the Special Meeting, you will be asked to consider and vote upon a proposal to approve the issuance of Paulson common stock, par value $0.0001 per share (referred to as “Paulson Common Stock”), in connection with the merger contemplated by the Agreement and Plan of Merger (referred to as the “merger agreement”) dated May 8, 2014, among Paulson, Variation Biotechnologies (US), Inc., a Delaware corporation (referred to as “VBI”) and VBI Acquisition Corp., a Delaware corporation (referred to as “Merger Sub”), and the change of control of Paulson which will result from the merger. We refer to this proposal as the “merger proposal.” Under the merger agreement, Merger Sub will be merged with and into VBI, with VBI surviving the merger as a subsidiary of Paulson. At the effective time of the merger and after giving effect to the other transactions described in this proxy statement (other than the private placement described below), the former stockholders of VBI will receive shares of Paulson Common Stock which, together with options to purchase shares of VBI stock that will be converted into options to purchase shares of Paulson Common Stock (and will be assumed by Paulson at the effective time of the merger pursuant to the merger agreement), will represent approximately 41.5% of the shares of Paulson Common Stock on a fully diluted basis after the merger, subject to adjustment as provided in the merger agreement. Concurrently with the consummation of the merger, Paulson intends to consummate a separate private placement, which we refer to as the “private placement,” of up to 25,640,318 shares of Paulson Common Stock with gross proceeds of at least $11,000,000 (rounded up to the nearest thousand), to certain institutional stockholders of VBI and to an institutional investor that has already been identified, which will represent approximately 19% of the shares of Paulson Common Stock on a fully diluted basis after the merger and the private placement.

The Paulson board of directors, referred to as the “Paulson Board,” has determined that the merger agreement and the transactions contemplated thereby, including the issuance of shares pursuant to the merger and the corresponding change of control of Paulson, are fair to, advisable and in the best interests of Paulson and its stockholders. The Paulson Board recommends that Paulson stockholders vote “FOR” the merger proposal, and “FOR” the other proposals described in this proxy statement.

The enclosed proxy statement describes the merger agreement, the merger and related agreements and provides specific information concerning the Special Meeting. In addition, you may obtain information about us from documents we file with the Securities and Exchange Commission (the “SEC”). You should read the entire proxy statement carefully, including the appendices, because it sets forth the details of the merger agreement and other important information related to the merger.

  YOUR VOTE IS IMPORTANT. PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING IN PERSON. IF YOU ATTEND THE MEETING, YOU MAY CONTINUE TO HAVE YOUR SHARES VOTED AS INSTRUCTED IN THE PROXY OR YOU MAY WITHDRAW YOUR PROXY AT THE MEETING AND VOTE YOUR SHARES IN PERSON.

On behalf of the Paulson Board, I thank you for your support and appreciate your consideration of this matter.

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

PROPOSED MERGER – YOUR VOTE IS IMPORTANT

PAULSON CAPITAL (DELAWARE) CORP.

SUMMARY

This summary discusses the material information contained in this proxy statement, including with respect to the merger agreement, the merger and the other transactions and agreements contemplated in connection with the merger. You should carefully read this entire proxy statement, its annexes and the documents referred to or incorporated by reference in this proxy statement, as this summary may not contain all of the information that may be important to you. The items in this summary include page references directing you to a more complete description of that topic in this proxy statement.

Parties to the Merger (Page 41)

Paulson Capital (Delaware) Corp. Paulson Capital (Delaware) Corp., referred to as “Paulson,” “we,” “our” or “us,” is a Delaware corporation. Paulson is a holding company whose operating subsidiary, Paulson Investment Company, Inc. (“PIC”), is a full service brokerage firm. Substantially all of our business has historically consisted of the securities brokerage and corporate finance activities conducted through PIC, which currently has operations in four principal categories, all of them in the financial services industry. These categories are: (i) corporate finance revenues consisting principally of underwriting discounts and underwriter warrants; (ii) securities trading from which we record profit or loss, depending on trading results; (iii) investment income resulting from earnings on, and increases or decreases in the value of, our investment portfolio; and (iv) securities brokerage activities for which we earn commission revenues. In February 2012, we announced we had reached an agreement with JHS Capital Advisors, LLC (“JHS”) of Tampa, Florida to sell substantially all of our retail brokerage operations, including many of our branch and non-branch offices as well as registered personnel (employees and independent contractors), to JHS. In connection with the transactions described in this proxy statement, Paulson’s ownership interest in PIC will be reduced to a negligible amount as a result of the issuance of equity securities to holders of convertible promissory notes of PIC and to members of PIC’s management team. See “Parties to the Merger – Paulson Capital (Delaware) Corp.” on page 41 and “The Merger – Effect of the Merger – Restructuring of PIC” on page 43. Additional information about Paulson is contained in its public filings, some of which are incorporated by reference herein as described in “Where You Can Find Additional Information” beginning on page 121. The contact information for Paulson’s principal executive offices is:

1331 N.W. Lovejoy Street, Suite 720

Portland, Oregon 97209

Telephone: (503) 243-6000

Variation Biotechnologies (US), Inc. Variation Biotechnologies (US), Inc., referred to as “VBI,” is a Delaware corporation. VBI is a privately held company dedicated to the innovative formulation, development and delivery of safe and effective vaccines that are designed to expand and enhance vaccine protection in both established and emerging markets. VBI’s innovative approach to vaccine development and growing pipeline of vaccine programs address significant market opportunities and are designed to answer critical unmet medical needs. See “Parties to the Merger – Variation Biotechnologies (US), Inc.” on page 41. Additional information about VBI is contained in this proxy statement. See “VBI’s Business” on page 92. The contact information for VBI’s principal executive offices is:

222 3 ^rd Street, Suite 2241

Cambridge, Massachusetts 02142

Telephone: (617) 830-3031

VBI Acquisition Corp. VBI Acquisition Corp., referred to as “Merger Sub,” is a Delaware corporation and is currently a wholly owned subsidiary of Paulson that was formed solely for the purpose of entering into the merger agreement and completing the merger. Upon the consummation of the merger, Merger Sub will be merged with and into VBI and will cease to exist. See “Parties to the Merger – VBI Acquisition Corp.” on page 41. The contact information for Merger Sub is:

c/o Paulson Capital (Delaware) Corp.

1331 NW Lovejoy Street, Suite 720

Portland, Oregon 97209

(503) 243-6000

The Merger (Page 42)

Paulson, Merger Sub and VBI agreed to consummate a merger under the terms of the merger agreement that is described in this proxy statement and attached hereto as Annex A. Pursuant to the merger agreement, Merger Sub will merge with and into VBI, with VBI surviving the merger and continuing as a wholly owned subsidiary of Paulson. At the effective time of the merger, the stockholders of VBI will receive shares of Paulson Common Stock which, together with options to purchase shares of VBI common stock that will be converted into options to purchase shares of Paulson Common Stock (and will be assumed by Paulson at the effective time of the merger pursuant to the terms of the merger agreement), will represent approximately 41.5% of the shares of Paulson Common Stock on a fully diluted basis after the merger (not including shares issued to VBI stockholders in the $11 million private placement contemplated to be completed concurrently with the merger), subject to adjustment as provided in the merger agreement. The parties to the merger agreement intend the merger to qualify as a “ reorganization ” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and that Paulson, Merger Sub and VBI will each be a “ party to a reorganization ” within the meaning of Section 368(b) of the Code.

The merger agreement is attached as Annex A to this proxy statement. We encourage you to carefully read the merger agreement in its entirety because it is the legal document governing the merger.

Reasons for the Merger and Recommendation of the Paulson Board (Page 46)

As part of Paulson’s ongoing strategic planning process, the Paulson Board and its executive officers have over time regularly reviewed and evaluated Paulson’s strategic direction and alternatives in light of the performance of its business and operations and market, economic, competitive, and other conditions and developments. This strategic planning process resulted in the Paulson Board’s decision to enter into a series of transactions that required the approval of the stockholders of Paulson, which was obtained at the Annual Meeting of Shareholders on November 8, 2013.

On July 25, 2013, Paulson entered into agreements for the private investment by two investors (the “July 2013 Investors”) of $5.25 million in exchange for a combination of shares of Paulson Common Stock, Paulson Series A Preferred Stock convertible into Paulson Common Stock, a Class A Warrant exercisable for shares of Paulson Series B Preferred Stock, and a Class B Warrant exercisable for shares of Paulson Series B Preferred Stock (the “PIPE Financing”). The PIPE Financing was described in the Current Report on Form 8-K/A filed with the SEC by Paulson on August 30, 2013. The securities to be issued and the funds to be received by Paulson in this financing have been placed in escrow pending satisfaction of the conditions for closing of the transactions, most of which have now been satisfied, including the stockholder approval obtained at Paulson’s 2013 Annual Meeting of Shareholders (the “Annual Meeting of Shareholders” or the “Annual Meeting”).  In connection with the PIPE Financing, the Paulson Board approved a plan whereby an irrevocable liquidating trust (the “Trust”) would be created, and the Paulson stockholders of record as of October 11, 2013, the record date of the Annual Meeting of Shareholders (the “Legacy Shareholders”), would be given non-transferable beneficial interests in the Trust in proportion to their pro rata ownership interest in the Paulson Common Stock. The Trust would hold the non-operating assets of PIC, which would be liquidated and distributed to the Legacy Shareholders over time, likely within two or three years of the Trust’s formation. These Trust assets would include primarily underwriter warrants, trading and investment securities, the proceeds of the sale of insurance policy on the life of the founder of Paulson, and cash and accounts receivable (the “Trust Assets”). The Trust Assets were valued at approximately $8.8 million at March 31, 2014 and $11.7 million at December 31, 2013.  

The proposals approved by the Paulson stockholders on November 8, 2013 were designed to provide Paulson with flexibility for future corporate action, including but not limited to possible acquisitions of, or mergers with, other companies in various industries, financings, investment opportunities, stock splits, and dividends. In evaluating a number of alternatives, the Paulson Board consulted with Paulson’s management and legal and financial advisors, reviewed a significant amount of information, and considered a number of factors, including, among others, the following factors that the Paulson Board viewed as supporting its decision ultimately to approve a merger with VBI, as well as the restructuring of PIC’s ownership that is a condition to closing the VBI merger, as being in the best interests of the Paulson stockholders:

•  Paulson’s estimated near- and long-term operations and performance on an independent stand-alone basis;

•  the substantial additional financing that would be needed to achieve the desired performance and the risk that such additional financing may not be obtained on terms favorable to Paulson or at all;

•  the competitive industry in which Paulson operates, including the fact that many competitors have greater resources, financial and otherwise, than Paulson;

•  historical and current information concerning VBI’s business, technology and scientific personnel, and management; its financial performance, condition, and prospects as presented by VBI  to Paulson’s  Board, management team, and advisors, and results of a due diligence investigation of VBI conducted by the Company’s management and advisors;

•  the process undertaken to explore strategic alternatives available to Paulson to maximize stockholder value, and the review and assessment of the possible outcomes of such alternatives, including the possibility of remaining independent, combinations with other merger partners, the possibility of being acquired, and the possibility of equity or debt being issued in public or private offerings;

•  the number of shares of Paulson Common Stock to be issued to VBI’s stockholders pursuant to the merger agreement and the fact that, following the completion of the merger, Paulson stockholders and option holders would participate in approximately 24% of the future growth and earnings of the combined company. In the case of the Legacy Shareholders who continue to hold Paulson Common Stock, this participation in future growth and earnings of the combined company would be in addition to the value of their interests in the Trust;

•  the other economic terms of the merger agreement; and

•  the fact that two individuals designated by Paulson will be directors of Paulson after the merger.

The Paulson Board also carefully considered and discussed a number of risks, uncertainties, and other countervailing factors in its deliberations regarding entering into the merger agreement and consummating the merger, including, among others, the following:

•  the risk that the conditions to the merger will not be satisfied, including the condition that Paulson raise $11 million in capital pursuant to a private placement completed before the closing of the merger;

•  the risks and substantial costs, including public company costs, and the difficulty of obtaining additional financing on terms favorable to Paulson or at all to cover such costs of Paulson remaining a stand-alone publicly traded company, instead of agreeing to a transaction with VBI;

•  the uncertainty of the trading price of Paulson Common Stock after announcing the merger and after closing the merger transaction;

•  the possibility that the anticipated benefits of the merger may not be realized or may be lower than expected;

•  the potential limitations on Paulson’s operations due to pre-closing covenants in the merger agreement;

•  the effect of the public announcement of the merger on Paulson’s operations, stock price, customers, and employees;

•  the disruption that may be caused by failure to complete the merger;

•  the substantial fees and expenses incurred by Paulson in connection with the merger, which will be incurred whether or not the merger is completed; and

•  other risks described in the “Risk Factors” and “Forward-Looking Statements” sections of this proxy statement.

The Paulson Board believes that, overall, the potential benefits to Paulson stockholders of the merger agreement and the transactions contemplated thereby outweigh the risks and uncertainties.

Although this discussion of the information and factors considered by the Paulson Board is believed to include the material factors it considered, it is not intended to be exhaustive and may not include all of the factors considered by the Paulson Board. The Paulson Board did not find it useful and did not attempt to quantify or assign any relative or specific weights to the various factors that it considered in reaching its determination that the merger agreement and the transactions contemplated thereby are fair to, advisable, and in the best interests of Paulson and its stockholders. The Paulson Board based its determination on the totality of the information presented to and factors considered by it. In addition, individual members of the Paulson Board may have given differing weights to different factors.

For a further discussion of Paulson’s reasons for the merger, as well as risks and uncertainties related thereto, see “The Merger – Reasons for the Merger” on page 46.

Treatment of VBI Capital Stock in the Merger (Page 51)

Common Stock and Series A Preferred Stock. At the effective time of the merger, each share of VBI common stock and Series A Preferred Stock will be converted into the right to receive 1.226 shares of Paulson Common Stock (as may be adjusted under the merger agreement, the “Exchange Ratio”). No fraction of a share of Paulson Common Stock will be issued, but instead each holder of shares of VBI common stock and Series A Preferred Stock who would otherwise be entitled to a fraction of a share of Paulson Common Stock will receive from Paulson one full share of Paulson Common Stock (i.e., rounded up to the nearest whole share). The total number of shares of Paulson Common Stock to be issued to the former holders of VBI common stock and Series A Preferred Stock at the effective time of the merger would be 42,772,713. These newly issued shares, together with the options to purchase shares of VBI common stock that will be converted into options to purchase shares of Paulson Common Stock (and will be assumed by Paulson at the effective time of the merger), would represent approximately 41.5% of the shares of Paulson Common Stock on a fully diluted basis after the effective time of the merger (not including shares issued to VBI stockholders in the $11 million private placement contemplated to be completed concurrently with the merger).

Treatment of VBI Convertible Notes and Equity-Based Awards in the Merger (Page 52)

Convertible Notes . Subject to, and immediately prior to the effective time of the merger, all outstanding convertible debt securities issued by VBI will be converted into capital stock of VBI, and at the effective time of the merger VBI shall have no convertible notes or other indebtedness outstanding (other than the Venture Debt, as defined in the merger agreement).

Stock Options. At the effective time of the merger, each outstanding option to purchase a share of VBI common stock, whether vested or unvested, and so long as such option has not, prior to the effective time of the merger, been exercised, cancelled, terminated or expired, will be deemed to constitute an option to purchase, on the same terms and conditions, a number of shares of Paulson Common Stock (rounded down to the nearest whole share) equal to the product of (i) the number of shares of VBI common stock subject to such option multiplied by (ii) the Exchange Ratio (defined above), at an exercise price per share of Paulson Common Stock equal to the quotient of (i) the exercise price per share of VBI common stock (rounded up to the nearest cent) subject to such option divided by (ii) the “Exchange Ratio.” See “Summary – Treatment of VBI Capital Stock in the Merger” above.

Special Meeting of Stockholders

 1. To consider and vote upon a proposal to approve the issuance of Paulson Common Stock, par value $0.0001 per share, in connection with the merger contemplated by the Agreement and Plan of Merger (referred to as the “merger” and the “merger agreement”) dated May 8, 2014, among Paulson, Variation Biotechnologies (US), Inc., a Delaware corporation (referred to as “VBI”) and VBI Acquisition Corp., a Delaware corporation (referred to as “Merger Sub”), and the corresponding change of control of Paulson, which proposal we refer to as the “merger proposal”;

2. To consider and vote upon a proposal to approve the issuance of Paulson Common Stock in a non-public offering in accordance with NASDAQ Listing Rule 5635, which proposal we refer to as the “non-public offering proposal”;

3. To consider and vote upon a proposal to approve the issuance of Paulson Common Stock as a placement agent fee in connection with the non-public offering referred to above in Proposal 2, which proposal we refer to as the “placement agent fee proposal”;

4. To consider and vote upon a proposal to approve the issuance of Paulson Common Stock, in accordance with NASDAQ Listing Rule 5635, to Bezalel Partners LLC (“Bezalel”) pursuant to a consulting agreement entered into between VBI and Bezalel, which proposal we refer to as the “consulting agreement fee proposal”;

5. To consider and vote upon a proposal to approve the amendment and restatement of our Certificate of Incorporation to effect an increase in the authorized amount of Paulson Common Stock, from 90,000,000 shares of Paulson Common Stock, to 200,000,000 shares of Paulson Common Stock, which proposal we refer to as the “authorized shares increase proposal”;

6. To consider and vote upon a proposal to approve an amendment and restatement of our Certificate of Incorporation that would declassify our Board of Directors, such that it would be comprised of a single class of directors elected on an annual basis, rather than be comprised of three classes of directors serving staggered three-year terms, which we refer to as the “declassification proposal”;

7. To consider and vote upon a proposal to approve the amendment and restatement of our Certificate of Incorporation to change the name of Paulson from “Paulson Capital (Delaware) Corp.” to “VBI Vaccines Inc.”, which proposal we refer to as the “name change proposal”;

8. To consider and vote upon a proposal to approve the VBI Vaccines Inc. 2014 Equity Incentive Plan (the “VBI Equity Plan”), which proposal we refer to as the “VBI Equity Plan proposal”;

9. To consider and vote upon a proposal to effect a reverse stock split, to the extent required, of our issued and outstanding capital stock by the ratio required for the Paulson Common Stock market price on the NASDAQ Capital Market to be at least $4.00 per share at the closing of the merger or for such longer period as is required by the listing rules of the NASDAQ Capital Market, which proposal we refer to as the “reverse split proposal”;

11. To consider and vote upon a proposal to adjourn the Special Meeting to a later date, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the merger proposal, which proposal we refer to as the “adjournment proposal”; and

12. To transact such other business as may properly come before the Special Meeting or any adjournment of the Special Meeting.  

We refer to the authorized shares increase proposal, declassification proposal, name change proposal and reverse split proposal collectively as the “new certificate of incorporation proposals” and each individually as a “new certificate of incorporation proposal.” The merger agreement provides that the requisite Paulson stockholder approval of each new certificate of incorporation proposal is a condition to closing the transaction, as more fully described in “Proposal 1—The Merger Proposal—Conditions to the Merger” beginning on page 56 .

Record Date and Voting Power . You are entitled to vote at the Special Meeting if you held shares of Paulson Common Stock at the close of business on June 25, 2014, the record date for the Special Meeting. You will have one vote at the Special Meeting for each share of Paulson Common Stock you owned at the close of business on the record date. A total of 7,793,258 shares of Paulson Common Stock are entitled to be voted at the Special Meeting.

Vote Required to Approve the Merger Proposal and each New Certificate of Incorporation Proposals . The affirmative vote of the holders of a majority of Paulson Common Stock outstanding on the record date (assuming a quorum is present in person or by proxy) is required for approval of the merger proposal and each new certificate of incorporation proposal. If you vote to abstain, or if you fail to vote or fail to instruct your bank, broker, custodian or other record holder how to vote, it will have the same effect as voting against these proposals.

Vote Required to Approve the Other Proposals . Approval of all other proposals to be voted on at the Special Meeting requires the affirmative vote of the holders of a majority of Paulson Common Stock present at the Special Meeting and entitled to vote on such proposals (assuming a quorum is present in person or by proxy), excluding abstentions. If you vote to abstain, or if you fail to vote or fail to instruct your bank, broker, custodian or other record holder how to vote, it will have no effect on the voting outcome of these proposals.

Voting Agreements of Certain VBI Stockholders and Certain Paulson Stockholders (Page 48)

Concurrently with the execution of the merger agreement, certain stockholders of VBI and a holder of approximately 40% of the Paulson Common Stock, respectively, have entered into Voting Agreements, referred to as the “voting agreements,” pursuant to which those VBI stockholders and Paulson stockholders have, among other matters, agreed to support the merger and the other transactions contemplated by the merger.

Under the voting agreements, in addition to agreeing to vote in favor of approval of the merger and the merger agreement and the transactions contemplated thereby, each VBI stockholder and the Paulson stockholders party to a voting agreement have agreed to not transfer, sell, offer to sell, exchange, assign, pledge or otherwise dispose of or encumber any of the VBI stock or Paulson stock held by such stockholders prior to the merger becoming effective, the termination of the merger agreement or the amendment of the voting agreement a manner adverse to the stockholder, whichever occurs first.

Leak-Out and Lock-Up Agreements (Page 48)

Under the leak-out agreement entered into by each of the July 2013 Investors, each July 2013 Investor has agreed to certain sale and transfer restrictions with respect to Paulson stock acquired from Paulson in connection with the PIPE Financing.

Specifically, pursuant to the leak-out agreement, each July 2013 Investor individually agrees as follows:

The foregoing leak-out restrictions shall not apply as to any sale by the selling entity at a price per share of Paulson Common Stock equal to or greater than $3.00.

These leak-out restrictions apply to securities convertible into or exchangeable for approximately 22.8 million shares of Paulson Common Stock. Of these securities, 287,773 shares were shares of Paulson Common Stock and the balance were warrants and convertible securities that could be exercised or converted into shares of Paulson Common Stock.

In connection with the issuance of shares of Paulson Common Stock to Middlebury Securities, LLC (“Middlebury”) and Evolution Venture Partners, LLC (“Evolution”) if the placement agent fee proposal receives the requisite stockholder approval, Middlebury and Evolution will each be required to enter into a lock-up agreement for a period of two years in form and substance acceptable to VBI covering such number of shares of Paulson Common Stock as is acceptable to VBI.

Registration Rights Granted to VBI Stockholders (Page 49)

Following the merger, upon the written request of the former VBI stockholders who hold at least 25% of the shares of Paulson Common Stock held by all former VBI stockholders after the merger, including shares issued in the merger, in the private placement or issuable upon the exercise or conversion of any options, warrants or convertible securities, Paulson will be required to file with the Securities and Exchange Commission (the “SEC”), and thereafter to use its commercially reasonable efforts, to have declared effective as soon as practicable and in any event within 90 days after the initial filing thereof with the SEC, a registration statement under the Securities Act covering the resale of the Paulson Common Stock owned by the former VBI stockholders.

FINRA Filing Agreement

Concurrently with the execution of the merger agreement, Paulson, PIC and VBI entered into a FINRA filing agreement, pursuant to which PIC is obligated, among other things, to file a continuing membership application with FINRA pursuant to FINRA Conduct Rule 1017 no later than 3 business days following the date of the merger agreement to seek approval of the merger and the restructuring of PIC contemplated by the Existing Sub Ownership Plan discussed below.

Market Prices and Dividend Data (Page 34)

Conditions to the Merger (Page 56)

The merger is subject to the satisfaction or waiver of various conditions, at or prior to the effective time, which include the following with respect to each party:

Additionally, Paulson is not obligated to effect the merger unless the following conditions are satisfied or waived, at or prior to the effective time:

VBI is not obligated to effect the merger unless the following conditions are satisfied or waived, at or prior to the effective time:

We refer to the authorized shares increase proposal, declassification proposal, name change proposal and reverse split proposal collectively as the “new certificate of incorporation proposals” and each individually as a “new certificate of incorporation proposal.” The merger agreement provides that the requisite Paulson stockholder approval of each new certificate of incorporation proposal is a condition to closing the transaction, as more fully described in “Proposal 1—The Merger Proposal—Conditions to the Merger” beginning on page 56 .

Neither Paulson nor VBI can give any assurance that all of the conditions of the merger will be either satisfied or waived or that the merger will occur.

Termination of the Merger Agreement (Page 62)

In general, the merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after the approval of merger proposal by Paulson stockholders, in the following ways:

Anticipated Accounting Treatment (Page 50)

Material U.S. Federal Income Tax Consequences of the Merger (Page 50)  

The merger agreement and transactions contemplated thereby, including the merger and issuance of shares pursuant to the merger agreement, is intended to be tax free to holders of Paulson Common Stock. The merger agreement provides that Paulson, Merger Sub and VBI intend that for U.S. federal income tax purposes, the merger will constitute a tax free reorganization with the meaning of Internal Revenue Code Section 368(a)(1)(B). None of the parties to the merger agreement is seeking tax or legal or accounting opinions or rulings on whether the merger agreement qualifies for tax-free treatment and tax-free treatment is not a condition precedent to the obligations of the parties to the merger agreement.

Dissenter’s Right of Appraisal

No action proposed in the proposals described in this Proxy Statement will provide a right of a stockholder to dissent and obtain appraisal of or payment for such stockholder’s shares under Delaware law.

Risk Factors (Page 23)

In evaluating the proposals set forth in this proxy statement, you should carefully read this proxy statement, including the annexes, and especially consider the factors discussed in the section entitled “Risk Factors” on page 23.

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER 

The following questions and answers briefly address some commonly asked questions regarding the Special Meeting, the merger agreement and the merger. These questions and answers may not address all questions that may be important to you. Please refer to the more detailed information contained elsewhere in this proxy statement, the appendices to this proxy statement and the other documents Paulson refers to, or incorporated by reference into, this proxy statement.

We refer to the authorized shares increase proposal, declassification proposal, name change proposal and reverse split proposal collectively as the “new certificate of incorporation proposals” and each individually as a “new certificate of incorporation proposal”. The merger agreement provides that the requisite Paulson stockholder approval of each new certificate of incorporation proposal is a condition to closing the transaction, as more fully described in “Proposal 1—The Merger Proposal—Conditions to the Merger” beginning on page 56 .

If your shares are held in “street name” (held in the name of a bank, broker or other holder of record), you will receive voting instructions from the holder of record. You must follow the instructions of the holder of record in order for your shares to be voted. Telephone and Internet voting also will be offered to stockholders owning shares through certain banks and brokers. If your shares are not registered in your own name and you plan to vote your shares in person at the Special Meeting, you should contact your broker or agent to obtain a legal proxy or broker’s proxy card and bring it to the Special Meeting in order to vote.

Following the merger, the executive officers of Paulson are anticipated to include the following individuals:

For more information about Paulson’s anticipated directors and executive officers following the merger and related corporate governance matters, see “Management of Paulson Following the Merger” on page 112.

Broker non-votes occur when shares held by a broker are not voted with respect to a proposal because (i) the broker has not received voting instructions from the beneficial owner of the shares and (ii) the broker lacks the authority to vote the shares at the broker’s discretion. Broker non-votes will be counted as shares present and entitled to vote for the purposes of determining the presence of a quorum on each of the proposals to be voted on at the Special Meeting.

Q.	Why am I being asked to approve adjourning the Special Meeting to a later date, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the merger proposal ?

Your most current vote, whether by telephone, Internet or proxy card, is the one that will be counted.

If you have instructed a broker or other nominee to vote your shares, you must follow the procedures provided by your broker or nominee to change those instructions.

FORWARD-LOOKING STATEMENTS

This proxy statement contains or incorporates both historical and “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Words such as “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. Any such forward-looking statements in this report reflect our and VBI’s current views with respect to future events and financial performance and are subject to a variety of factors that could cause our actual results to differ materially from historical results or from anticipated results expressed or implied by such forward-looking statements. There may be events in the future that cannot be accurately predicted or over which Paulson has no control. Stockholders should be aware that the occurrence of the events described in this proxy statement or in the documents incorporated herein by reference could have a material adverse effect on our business, operating results and financial condition or ability to consummate the transaction. Examples of these risks include, without limitation:

The forward-looking statements are not guarantees of future performance, events or circumstances, and actual results may differ materially from those contemplated by the forward-looking statements. Forward-looking statements herein or in documents incorporated herein by reference speak only as of the date of this proxy statement or the applicable document incorporated herein by reference (or such earlier date as may be specified therein), as applicable, are based on current assumptions and expectations or assumptions and expectations as of the date of the document incorporated herein by reference, and are subject to the factors above, among other things, and involve risks, events, circumstances, uncertainties and assumptions, many of which are beyond our ability to control or predict. You should not place undue reliance on these forward-looking statements. We do not intend to, and do not undertake an obligation to, update these forward-looking statements in the future to reflect future events or circumstances, except as required by applicable securities laws and regulations. For more information, see the section entitled “Where You Can Find Additional Information” beginning on page 121. The results presented for any period may not be reflective of results for any subsequent period.

You should carefully read and consider the cautionary statements contained or referred to in this section in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf, and all future written and oral forward-looking statements attributable to us, VBI, the combined company, the merger or any other matters, are expressly qualified in their entirety by the foregoing cautionary statements.

RISK FACTORS

You should consider carefully the following risk factors, as well as the other information set forth in this proxy statement, before making a decision on the merger or the other proposals presented. The value of your investment may increase or may decline and could result in a loss. You should carefully consider the following factors as well as the other information contained in this proxy statement.

Risk Factors Related to Paulson and the Merger 

Although Paulson and VBI expect that the merger will result in benefits to the combined company, the combined company may not realize those benefits because of various challenges.

Paulson and VBI believe that the merger will result in greater returns for the Paulson stockholders than if Paulson remained as a standalone entity. However, the integration of a new company is a complex, costly and time-consuming process. This process may disrupt the business of either or both of the companies, and may not result in the full benefits expected by Paulson and VBI. There can be no assurance that the combination of Paulson with VBI will result in the realization of the anticipated benefits from the merger.

The announcement and pendency of the merger could have an adverse effect on our stock price and/or our business, financial condition, results of operations or business prospects.

The announcement and pendency of the merger could have an adverse effect on our stock price and increase the price volatility and risk of trading in our stock. Our business, financial condition, results of operations or business prospects could also be adversely affected. In addition, the attention of our management may be directed toward the completion of the merger and related matters and may be diverted from the day-to-day business operations, including from other opportunities that otherwise might be beneficial to us.

Failure to complete the merger could impact negatively our business, financial condition or results of operations or our stock price.

The completion of the merger is subject to a number of conditions and there can be no assurance that the conditions to the completion of the merger will be satisfied. If the merger is not completed, Paulson will be subject to several risks, including:

If the merger is not completed, these risks may materialize and materially and adversely affect our business, financial condition, results of operations or stock price.

If the merger is not completed, we will continue to be subject to the risks related to the business of PIC, our operating subsidiary.

If the merger is not completed, our business will continue in its present form, which is PIC’s brokerage and investment banking business. There are several risks related to PIC’s business, including the following:

The issuance of shares of Paulson Common Stock to VBI stockholders in connection with the merger and in the private placement will dilute substantially the voting power of our current stockholders.

Pursuant to the merger agreement, at the effective time of the merger, Paulson will issue shares of Paulson Common Stock to the former VBI stockholders which, together with options to purchase shares of VBI common stock that will be converted into options to purchase shares of Paulson Common Stock (and will be assumed by us at the effective time of the merger) and the Paulson Common Stock to be issued in the private placement, will represent approximately 41.5% of the shares of Paulson Common Stock on a fully diluted basis after the merger (not including shares issued to VBI stockholders in the $11 million private placement to be completed concurrently with the merger), subject to adjustment pursuant to the merger agreement. Accordingly, the issuance of shares of Paulson Common Stock to VBI stockholders in connection with the merger will reduce significantly the relative voting power of each share of Paulson Common Stock held by our current stockholders. Consequently, our stockholders as a group will have significantly less influence over the management and policies of the combined company after the merger than prior to the merger.

The Exchange Ratio is not adjustable based on the market price of Paulson Common Stock and if the market price of Paulson Common Stock fluctuates, the market value of the shares of each party to the merger can change prior to the completion of the merger.

The Exchange Ratio, as calculated in the merger agreement, which determines the number of shares to be issued to the former VBI stockholders pursuant to the merger and the number of shares of Paulson Common Stock to be subject to options held by former VBI option holders, is based on the fully diluted number of shares of Paulson Common Stock and VBI capital stock outstanding as of immediately prior to the completion of the merger, subject to adjustment as provided in the merger agreement. No adjustments to the Exchange Ratio will be made based on changes in the trading price of Paulson Common Stock or the value of VBI capital stock prior to the completion of the merger. Changes in the trading price of Paulson Common Stock or the value of VBI capital stock may result from a variety of factors, including, among others, general market and economic conditions, changes in our or VBI’s respective businesses, operations and prospects, market assessment of the likelihood that the merger will be completed as anticipated or at all, and regulatory considerations. Many of these factors are beyond our control or VBI’s control. As a result, the value of the shares of Paulson Common Stock issued to VBI stockholders in connection with the merger could be substantially less or substantially more than the current market value of Paulson Common Stock. Likewise, such factors including those related to VBI could affect the value of Paulson Common Stock prior to closing of the merger.

We have incurred and will continue to incur significant transaction costs in connection with the merger, some of which will be required to be paid even if the merger is not completed.

We have incurred and will continue to incur significant transaction costs in connection with the merger. These costs are primarily associated with the fees of attorneys and accountants and our financial advisors. Many of these costs will be paid even if the merger is not completed.

Because the lack of a public market for VBI’s outstanding shares makes it more difficult to evaluate the value of such shares, VBI stockholders may receive consideration in the merger that is greater than the fair market value of the VBI shares.

VBI is privately held and its outstanding capital stock is not traded in any public market. The lack of a public market makes it difficult to determine the fair market value of VBI or its shares of capital stock. Since the percentage of our equity to be issued to the VBI stockholders was determined based on negotiations between the parties, it is possible that the value of the Paulson Common Stock to be issued in connection with the merger will be greater than the fair market value of VBI.

The merger will result in changes to the Paulson Board and Paulson will pursue different strategies after the merger than we have pursued independently.

If the merger is completed, the composition of the Paulson Board will change in accordance with the merger agreement. Following completion of the merger, the Paulson Board is expected to consist of seven members. Initially, the Board is expected to be comprised of two directors appointed by us and five directors appointed by former VBI stockholders. Because a majority of the Paulson Board after the merger will initially be comprised of directors selected by VBI, following the merger we will pursue certain business strategies that we would not have pursued had the merger not taken place. In addition, if the merger is completed, we will restructure PIC as described below (see “The Merger – Effect of the Merger – Restructuring of PIC”). If the merger does not close, the restructuring of PIC as currently contemplated in connection with the merger would not immediately occur.

Following the merger, sales of shares of Paulson Common Stock into the market in the future could cause the market price of Paulson Common Stock to drop significantly, even if our business is doing well.

Concurrently with the execution of the merger agreement, certain Paulson stockholders entered into identical leak-out agreements. Under the leak-out agreements, these stockholders have agreed to a leak-out restriction whereby they will not sell or otherwise transfer certain of the shares of Paulson Common Stock beneficially owned by them (or subsequently acquired by them) for a period before and following the closing of the merger. These leak-out restrictions apply to securities convertible into or exchangeable for approximately 22.8 million shares of Paulson Common Stock. Sales of these shares in the public market, either before or after the merger, could cause the trading price of Paulson Common Stock to decline.

In addition, the merger agreement provides that, following the merger, upon the written request of the former VBI stockholders who hold at least 25% of the shares of Paulson Common Stock held by all former VBI stockholders after the merger, including shares issued in the merger, in the private placement or issuable upon the exercise or conversion of any options, warrants or convertible securities, Paulson will be required to file with the SEC, and thereafter to use its commercially reasonable efforts, to have declared effective as soon as practicable and in any event within 90 days after the initial filing thereof with the SEC, a registration statement under the Securities Act covering the resale of the Paulson Common Stock owned by the former VBI stockholders. Regardless of whether these shares are registered, VBI stockholders will be permitted to sell these shares six months after the effective date of the merger pursuant to exemptions available under applicable securities law, including Rule 144 under the Securities Act with respect to certain VBI stockholders.

If the shares held by the aforementioned stockholders are sold, or if it is perceived that they will be sold in the public market, the trading price of Paulson Common Stock could decline. For more information on the leak-out restrictions set forth in the leak-out agreements see “The Merger – Restrictions on Sales of Paulson Common Stock Before and After the Merger” on page 48.

Risks Factors Related to VBI

Risks Related to the Business

VBI’s business is not currently profitable, and it may not be able to achieve profitability even if it is able to generate significant revenue.

VBI’s income generating activities have been limited to research and development services pursuant to certain governmental research and development grants. No revenues have been recorded from the sale of products in connection with VBI’s planned principal business activity. Accordingly, VBI is classified as a development stage company. VBI has also incurred significant net losses and negative operating cash flows since inception. As of March 31, 2014, VBI had an accumulated deficit of approximately $52.2 million and stockholders’ deficit of approximately $18.9 million.  

VBI does not expect to advance its first product candidate into Phase 1 clinical trials prior to 2015. VBI will require significant additional funds to conduct clinical and non-clinical trials, achieve regulatory approvals, and, subject to such approvals, commercially launch its products. VBI cannot predict if and when it will achieve profitability. VBI’s failure to achieve and sustain profitability could negatively impact the market price of its common stock and may require it to seek additional financing for its business.

VBI depends on skilled and experienced personnel to operate its business effectively. If VBI is unable to recruit, hire and retain these employees, its ability to manage and expand its business will be harmed, which would impair its future revenue and profitability.

VBI’s success largely depends on the skills, experience and efforts of its officers and other key employees. While VBI has employment contracts with many of its officers and other key employees, its officers and other key employees may terminate their employment at any time. The loss of any of VBI’s senior management team members could weaken its management expertise and harm its business.

VBI’s ability to retain its skilled labor force and its success in attracting and hiring new skilled employees will be a critical factor in determining whether VBI will be successful in the future. VBI may not be able to meet its future hiring needs or retain existing personnel. Failure to attract and retain personnel, particularly technical and sales and marketing personnel, would materially harm VBI’s ability to compete effectively and grow its business.

Product Development Risks

Because VBI’s vaccine product development efforts depend on new and rapidly evolving technologies, it cannot be certain that its efforts will be successful.

VBI’s vaccine development efforts depend on new, rapidly evolving technologies and on the marketability and profitability of VBI products. Commercialization of VBI vaccines could fail for a variety of reasons, and include the possibility that:

VBI has not completed the development of vaccine products and may not succeed in obtaining the FDA approval necessary to sell such vaccine products.

The development, manufacture and marketing of VBI’s pharmaceutical and biological products are subject to government regulation in the U.S. and other countries. In the U.S. and most foreign countries, VBI must complete rigorous pre-clinical testing and extensive clinical trials that demonstrate the safety and efficacy of a product in order to apply for regulatory approval to market the product. None of VBI’s vaccine candidates have yet gained regulatory approval in the U.S. or elsewhere. VBI also has vaccine candidates in clinical trials and pre-clinical laboratory or animal studies.

The steps required by the FDA before VBI’s proposed investigational products may be marketed in the U.S. include:

The processes are expensive and can take many years to complete, and VBI may not be able to demonstrate the safety and efficacy of its vaccine candidates to the satisfaction of regulatory authorities. The start of clinical trials can be delayed or take longer than anticipated for many and varied reasons, many of which are out of VBI’s control. Safety concerns may emerge that could lengthen the ongoing clinical trials or require additional clinical trials to be conducted. Promising results in early clinical trials may not be replicated in subsequent clinical trials. Regulatory authorities may also require additional testing, and VBI may be required to demonstrate that its proposed products represent an improved form of treatment over existing therapies, which it may be unable to do without conducting further clinical trials. Moreover, if the FDA or a foreign regulatory body grants regulatory approval of a product, the approval may be limited to specific indications or limited with respect to its distribution. Expanded or additional indications for approved products may not be approved, which could limit VBI’s revenue. Foreign regulatory authorities may apply similar limitations or may refuse to grant any approval. Consequently, even if VBI believes that pre-clinical and clinical data are sufficient to support regulatory approval for its vaccine candidates, the FDA and foreign regulatory authorities may not ultimately grant approval for commercial sale in any jurisdiction. If VBI’s vaccine candidates are not approved, its ability to generate revenue will be limited and its business will be adversely affected.

Because VBI depends on third -parties to conduct some of its laboratory testing, clinical trials, and manufacturing, VBI may encounter delays in or lose some control over its efforts to develop products.

VBI is dependent on third-party research organizations to conduct some of its laboratory testing, clinical trials and manufacturing activities. If VBI is unable to obtain any necessary services on acceptable terms, its may not complete its product development efforts in a timely manner. VBI may lose some control over these activities and become too dependent upon these parties. These third parties may not complete testing or manufacturing activities on schedule, within budget, or when VBI requests. VBI may not be able to secure and maintain suitable research organizations to conduct its laboratory testing, clinical trials and manufacturing activities. VBI has not manufactured any of its vaccine candidates at a commercial level and may need to identify additional third-party manufacturers to scale-up and manufacture its products.

VBI is responsible for confirming that each of its clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require VBI to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the clinical trial participants are adequately protected. The FDA and foreign regulatory agencies also require VBI to comply with good manufacturing practices. VBI’s reliance on third parties does not relieve it of these responsibilities and requirements. These third parties may not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines. In addition, these third parties may need to be replaced or the quality or accuracy of the data they obtain may be compromised or the product they manufacture may be contaminated due to the failure to adhere to VBI’s clinical and manufacturing protocols, regulatory requirements or for other reasons. In any such event, VBI’s pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and VBI may not be able to obtain regulatory approval of, or commercially manufacture, its vaccine candidates.

If VBI is unable to manufacture its vaccines in sufficient quantities, at sufficient yields or is unable to obtain regulatory approvals for a manufacturing facility for its vaccines, VBI may experience delays in product development, clinical trials, regulatory approval and commercial distribution.

Completion of VBI’s clinical trials and commercialization of its vaccine candidates requires access to, or development of, facilities to manufacture its vaccine candidates at sufficient yields and at commercial-scale. VBI has limited experience manufacturing any of its vaccine candidates in the volumes that will be necessary to support large-scale clinical trials or commercial sales. Efforts to establish these capabilities may not meet initial expectations as to scheduling, scale-up, reproducibility, yield, purity, cost, potency or quality.

If VBI is unable to manufacture its vaccine candidates in clinical quantities or, when necessary, in commercial quantities and at sufficient yields, then VBI must rely on third parties. Other third-party manufacturers must also receive FDA approval before they can produce clinical material or commercial products. VBI’s vaccines may be in competition with other products for access to these facilities and may be subject to delays in manufacture if third parties give other products greater priority. VBI may not be able to enter into any necessary third-party manufacturing arrangements on acceptable terms, or on a timely basis. In addition, VBI has to enter into technical transfer agreements and share its know-how with the third-party manufacturers, which can be time-consuming and may result in delays.

As a result, any delay or interruption could have a material adverse effect on VBI’s business, financial condition, results of operations and cash flows.

VBI must identify vaccines for development with its technologies and establish successful third -party relationships.

The near and long-term viability of VBI’s vaccine candidates will depend in part on its ability to successfully establish new strategic collaborations with pharmaceutical and biotechnology companies, non-profit organizations and government agencies. Establishing strategic collaborations and obtaining government funding is difficult and time-consuming. Potential collaborators may reject collaborations based upon their assessment of VBI’s financial, regulatory or intellectual property position or based on their internal pipeline; government agencies may reject contract or grant applications based on their assessment of public need, the public interest, VBI’s products’ ability to address these areas, or other reasons beyond VBI’s expectations or control. If VBI fails to establish a sufficient number of collaborations or government relationships on acceptable terms, it may not be able to commercialize its vaccine candidates or generate sufficient revenue to fund further research and development efforts.

Even if VBI establishes new collaborations or obtains government funding, these relationships may never result in the successful development or commercialization of any vaccine candidates for several reasons, including the fact that:

VBI’s collaborators will be subject to the same regulatory approval of their manufacturing facility and process as VBI. Before VBI could begin commercial manufacturing of any of its vaccine candidates, it and its collaborators must pass a pre-approval inspection before FDA approval and comply with the FDA’s cGMP. If VBI’s collaborators fail to comply with these requirements, its vaccine candidates would not be approved. If its collaborators fail to comply with these requirements after approval, VBI would be subject to possible regulatory action and may be limited in the jurisdictions in which it is permitted to sell its products.

If VBI or its collaborators fail to maintain its existing agreements or in the event VBI fails to establish agreements as necessary, VBI could be required to undertake research, development, manufacturing and commercialization activities solely at its own expense. These activities would significantly increase VBI’s capital requirements and, given its lack of sales, marketing and distribution capabilities, significantly delay the commercialization of its vaccine candidates.

Risks Related to VBI Intellectual Property

VBI’s success depends on its ability to maintain the proprietary nature of its technology.

VBI’s success in large part depends on its ability to maintain the proprietary nature of its technology and other trade secrets. To do so, VBI must prosecute and maintain existing patents, obtain new patents and pursue trade secret and other intellectual property protection. VBI also must operate without infringing the proprietary rights of third parties or allowing third parties to infringe its rights. VBI currently has or has rights to over 100 U.S. patents and corresponding foreign patents and patent applications covering its technologies. However, patent issues relating to pharmaceuticals and biologics involve complex legal, scientific and factual questions. To date, no consistent policy has emerged regarding the breadth of biotechnology patent claims that are granted by the U.S. Patent and Trademark Office or enforced by the federal courts. Therefore, VBI does not know whether its patent applications will result in the issuance of patents, or that any patents issued to VBI will provide it with any competitive advantage. VBI also cannot be sure that it will develop additional proprietary products that are patentable. Furthermore, there is a risk that others will independently develop or duplicate similar technology or products or circumvent the patents issued to VBI.

There is a risk that third parties may challenge VBI’s existing patents or claim that VBI is infringing their patents or proprietary rights. VBI could incur substantial costs in defending patent infringement suits or in filing suits against others to have their patents declared invalid or claim infringement. It is also possible that VBI may be required to obtain licenses from third parties to avoid infringing third-party patents or other proprietary rights. VBI cannot be sure that such third-party licenses would be available to it on acceptable terms, if at all. If VBI is unable to obtain required third-party licenses, it may be delayed in or prohibited from developing, manufacturing or selling products requiring such licenses.

Although VBI’s patent filings include claims covering various features of its vaccine candidates, including composition, methods of manufacture and use, VBI’s patents do not provide it with complete protection against the development of competing products. Some of VBI’s know- how and technology is not patentable. To protect VBI’s proprietary rights in unpatentable intellectual property and trade secrets, it requires employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for VBI’s trade secrets, know-how or other proprietary information.

VBI holds a time limited, exclusive license to intellectual property from third parties that, once expired, may limit its competitive positioning within the field and prevent it from defending its proprietary position.

VBI expects that it will need to license intellectual property from third parties in the future and that these licenses will be material to its business. VBI will not own the patents or patent applications that underlie these licenses, and will not control the enforcement of the patents. VBI will rely upon its licensors to properly prosecute and file those patent applications and prevent infringement of those patents.

VBI’s license agreement with University of Paris, Marie-Currie, which gives them exclusive rights to a family of patents and patent applications that are expected to expire in 2020, covers eVLP technology for use in human vaccines. These applications are very significant to VBI’s business. Once expired, VBI may be open to competitive eVLP-like products and others may gain VBI’s proprietary position in the development of new products based on the eVLP platform.

If patent laws or the interpretation of patent laws change, VBI’s competitors may be able to develop and commercialize its discoveries.

Important legal issues remain to be resolved as to the extent and scope of available patent protection for biopharmaceutical products and processes in the U.S. and other important markets outside the U.S., such as Europe and Japan. Foreign markets may not provide the same level of patent protection as provided under the U.S. patent system. Litigation or administrative proceedings may be necessary to determine the validity and scope of certain of VBI’s and others’ proprietary rights. Any such litigation or proceeding may result in a significant commitment of resources in the future and could force VBI to do one or more of the following: cease selling or using any of its products that incorporate the challenged intellectual property, which would adversely affect its revenue; obtain a license from the holder of the intellectual property right alleged to have been infringed, which license may not be available on reasonable terms, if at all; and redesign its products to avoid infringing the intellectual property rights of third parties, which may be time-consuming or impossible to do. In addition, changes in, or different interpretations of, patent laws in the U.S. and other countries may result in patent laws that allow others to use VBI’s discoveries or develop and commercialize its products. VBI cannot provide assurance that the patents it obtains or the unpatented technology it holds will afford it significant commercial protection.

Risks Related to Regulatory Matters

VBI may fail to obtain regulatory approval for its products on a timely basis or comply with its continuing regulatory obligations after approval is obtained.

Delays in obtaining regulatory approval can be extremely costly in terms of lost sales opportunities, losing any potential marketing advantage resulting from being early to market and increased clinical trial costs. The speed with which VBI begins and completes its pre-clinical studies necessary to begin clinical trials, the clinical trials themselves and VBI’s applications for marketing approval will depend on several factors, including the following:

VBI has limited experience in conducting and managing the pre-clinical studies and clinical trials necessary to obtain regulatory marketing approvals. VBI may not be permitted to continue or commence additional clinical trials. VBI also faces the risk that the results of its clinical trials may be inconsistent with the results obtained in pre-clinical studies or clinical trials of similar products or that the results obtained in later phases of clinical trials may be inconsistent with those obtained in earlier phases. A number of companies in the biopharmaceutical and product development industry have suffered significant setbacks in advanced clinical trials, even after experiencing promising results in early animal and human testing.

Regulatory agencies may require VBI or its collaborators to delay, restrict or discontinue clinical trials on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. In addition, VBI or its collaborators may be unable to submit applications to regulatory agencies within the time frame it currently expects. Once submitted, applications must be approved by various regulatory agencies before VBI or its collaborators can commercialize the product described in the application. All statutes and regulations governing the conduct of clinical trials are subject to change in the future, which could affect the cost of such clinical trials. Any unanticipated costs or delays in VBI’s clinical trials could delay its ability to generate revenue and harm its financial condition and results of operations.

VBI’s vaccine candidates may never achieve market acceptance even if VBI obtains regulatory approvals.

Even if VBI receives regulatory approvals for the commercial sale of its vaccine candidates, the commercial success of these vaccine candidates will depend on, among other things, their acceptance by physicians, patients, third-party payers such as health insurance companies and other members of the medical community as a vaccine and cost-effective alternative to competing products. If VBI’s vaccine candidates fail to gain market acceptance, VBI may be unable to earn sufficient revenue to continue its business. Market acceptance of, and demand for, any product that VBI may develop and commercialize will depend on many factors, including:

In particular, there are significant challenges to market acceptance for cytomegalovirus (“CMV”) vaccines related to the target market (pre-pregnant women and eventually toddlers) for the CMV vaccines and a relatively low tolerance for risk to these populations. The risk-benefit analysis undertaken by FDA and other regulators will be high relative to other vaccines and biologic products.

If VBI’s vaccine candidates do not become widely accepted by physicians, patients, third-party payers and other members of the medical community, its business, financial condition and results of operations would be materially and adversely affected.

If reforms in the health care industry make reimbursement for VBI’s potential products less likely, the market for VBI’s potential products will be reduced, and it could lose potential sources of revenue.

VBI’s success may depend, in part, on the extent to which reimbursement for the costs of vaccines will be available from third-party payers such as government health administration authorities, private health insurers, managed care programs and other organizations. Over the past decade, the cost of health care has risen significantly, and there have been numerous proposals by legislators, regulators and third-party health care payers to curb these costs. Some of these proposals have involved limitations on the amount of reimbursement for certain products. Similar federal or state health care legislation may be adopted in the future and any products that VBI or its collaborators seek to commercialize may not be considered cost-effective. Adequate third-party insurance coverage may not be available for VBI to establish and maintain price levels that are sufficient for realization of an appropriate return on its investment in product development. Moreover, the existence or threat of cost control measures could cause VBI’s corporate collaborators to be less willing or able to pursue research and development programs related to its vaccine candidates.

Risks Related to VBI’s Capital Requirements and Finances

Any acquisitions that VBI makes could disrupt its business and harm its financial condition.

VBI expects to evaluate potential strategic acquisitions of complementary businesses, products or technologies. VBI may also consider joint ventures and other collaborative projects. VBI may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate acquisitions of any businesses, products or technologies. Furthermore, the integration of any acquisition and management of any collaborative project may divert management’s time and resources from VBI’s core business and disrupt its operations. VBI has limited experience with acquiring companies or products. If it decides to expand its product offerings beyond vaccine technologies, VBI may spend time and money on projects that do not increase its revenue. While VBI from time to time evaluates potential collaborative projects and acquisitions of businesses, products and technologies, and anticipates continuing to make these evaluations, VBI has no present understandings, commitments or agreements with respect to any acquisitions or collaborative projects.

VBI will likely need additional financing to continue its operations. If VBI is unable to obtain additional financing on acceptable terms, it may have to curtail or cease its development plans and operations.

From VBI’s incorporation in 2006 to December 31, 2013, VBI has received $49.3 million in total equity and debt financing. VBI’s income generating activities have been limited to research and development services pursuant to certain governmental research and development grants. No revenues have been recorded from the sale of products in connection with VBI’s planned principal business activity. In addition, VBI has incurred significant net losses and negative operating cash flows since inception. As of March 31, 2014, VBI had an accumulated deficit of approximately $52.2 million and stockholders’ deficit of approximately $18.9 million. VBI’s long-term success and ability to continue as a going concern is dependent upon obtaining sufficient capital to fund the research and development of its products, to bring about their successful commercial release, if approved, to generate revenue and, ultimately, attain profitable operations or alternatively advance the products and technology to such a point that an acquirer would find attractive. There is substantial doubt as to the appropriateness of the going concern assumptions and long-term success of VBI since it has accumulated significant start-up losses and faces substantial demand on its cash resources to fund operations and its growth plans.  

To date, VBI has been able to obtain financing; however, there is no assurance that financing will be available in the future, or if it is, that it will be available at terms acceptable to management and its existing stockholders. Additional financings may be effected through debt financing and/or the issuance of equity securities, there being no assurance that any type of financing on terms acceptable to VBI will be available or otherwise occur. Debt financing must be repaid regardless of whether VBI generates revenues or cash flows from operations and may be secured by substantially all of VBI’s assets. Any equity financing or debt financing that requires the issuance of warrants or other equity securities to the lender would cause the percentage ownership of VBI’s stockholders after the merger to be diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights, preferences or privileges senior to those of existing stockholders. If such financing is not available when required or is not available on acceptable terms, VBI may be required to reduce or eliminate certain product candidates and development activities, and it may ultimately require VBI to suspend or cease operations, which could cause investors to lose the entire amount of their investment.

* Paulson’s Common Stock was suspended from trading on The NASDAQ Capital Market from November 21, 2013 until January 8, 2014 while Paulson was subject to a listing review. On February 19, 2014, the NASDAQ Listing Qualifications Panel granted Paulson’s request for continued listing of Paulson Common Stock on The NASDAQ Capital Market.

On May 7, 2014, the last full trading day before the public announcement of the merger agreement, the closing price for Paulson Common Stock was $1.22 per share and on June 25, 2014, the latest practicable trading day before the printing of this proxy statement, the closing price for Paulson Common Stock was $0.93 per share.

Holders of Paulson Common Stock 

As of the close of business on June 25, 2014, the record date for the Special Meeting, there were 57 holders of record of Paulson Common Stock. The number of holders of record is based on the actual number of holders registered on the books of our transfer agent and does not reflect holders of shares in “street name” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.

Description of Paulson Common Stock

As of June 25, 2014, the record date for the Special Meeting, there were 7,793,258 shares of Paulson Common Stock outstanding. The following summarizes the rights of holders of Paulson Common Stock:

Anti-Takeover Effects of Certain Provisions of Delaware Law and Paulson’s Certificate of Incorporation and Bylaws

Paulson is subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless either:

For purposes of Section 203, “interested stockholder” is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation’s voting stock. A “business combination” includes a merger, asset sale, or other transaction resulting in a financial benefit to such interested stockholder.

In addition, certain provisions of Paulson’s Certificate of Incorporation and bylaws may be deemed to have an anti-takeover effect and may delay, defer, or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. Paulson’s Certificate of Incorporation and bylaws currently provide for the Paulson Board to be divided into three classes, with staggered three-year terms. Only one class of directors is elected at each annual meeting of Paulson stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because Paulson’s stockholders do not have cumulative voting rights, Paulson stockholders representing a majority of the shares of common stock outstanding will be able to elect all of the Paulson directors. If Proposal 6 as set forth in this proxy statement is approved, however, Paulson’s Certificate of Incorporation and bylaws will be amended to declassify our board, thereby eliminating this possible anti-takeover effect.

Paulson’s Certificate of Incorporation also permits the Paulson Board to issue up to 30,000,000 shares of preferred stock, with any rights, preferences, and privileges as it may designate. Furthermore, our bylaws provide that all stockholder action must be effected at a duly called meeting of stockholders, and that only the Paulson Board, any officer instructed by the board or stockholders owning not less than 75% of all our voting stock may call a special meeting of stockholders. In addition, Paulson’s bylaws require advance notice for stockholders to nominate directors or to submit proposals for consideration at meetings of stockholders.

The combination of the classification of our board of directors (if Proposal 6 is not approved), the lack of cumulative voting and the authorization to issue “blank check” preferred stock will make it more difficult for Paulson’s existing stockholders to replace the Paulson Board as well as for another party to obtain control of Paulson by replacing the Paulson Board. Since the Paulson Board has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for the Paulson Board to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.

These provisions may have the effect of deterring hostile takeovers or delaying changes in Paulson’s control or management. These provisions are intended to enhance the likelihood of continued stability in the composition of Paulson’s Board and in the policies it implements, and to discourage certain types of transactions that may involve an actual or threatened change of control of Paulson. These provisions are designed to reduce Paulson’s vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for Paulson’s shares and, as a consequence, they also may inhibit fluctuations in the market price of Paulson stock that could result from actual or rumored takeover attempts.

Dividends on Paulson Common Stock 

Paulson did not pay any dividends in fiscal year 2013 or during the interim periods of fiscal year 2014 through the date of this proxy statement. During fiscal year 2012, Paulson paid two special cash dividends to holders of Paulson Common Stock. In March 2012, the Paulson Board approved a special cash dividend of $0.05 per common share payable April 16, 2012 to stockholders of record April 4, 2012. In December 2012, the Paulson Board approved a special cash dividend of $0.15 per share payable December 28, 2012 to stockholders of record December 14, 2012. Paulson does not have a policy regarding a regular dividend payment and any future dividends declared will be at the discretion of the Paulson Board.

Under the merger agreement, Paulson is prohibited from paying any dividend or other distribution on Paulson Common Stock prior to the completion of the merger. After the completion of the merger, other than distributions to the Legacy Shareholders pursuant to the Trust, it is not anticipated that there will be any dividends paid on the Paulson Common Stock for the foreseeable future. It is expected that future earnings, if any, will be retained by Paulson and used to fund the development and commercialization of products.

Information Regarding VBI

VBI is a private company and shares of its capital stock are not publicly traded.

Dividends on VBI Preferred Stock and Common Stock 

VBI did not pay any dividends in fiscal years 2013 or 2012, or during the interim periods of fiscal year 2014 through the date of this proxy statement. VBI does not have a policy regarding a regular dividend payment and any future dividends declared will be at the discretion of the VBI board of directors.

Holders of VBI Preferred Stock and Common Stock

As of June 25, 2014, the latest practicable date before the printing of this proxy statement, VBI had eight holders of record of its Series A Preferred Stock and 19 holders of record of its common stock. At the effective time of the merger, pursuant to the merger agreement, each share of VBI common stock and VBI Series A Convertible Preferred Stock will be cancelled and converted into the right to receive a number of shares of Paulson Common Stock, as further described in the “The Merger – Effect of the Merger” section on page 42.