The SEC recently published Release No. 33-8878 adopting amendments to Form S-3 and Form F-3 of the Securities Act of 1933. These amendments, which are based on the recommendations of the SEC’s Advisory Committee on Smaller Public Companies, are part of the SEC’s attempt to alleviate some of the barriers to public capital markets for smaller public companies. These amendments will allow certain domestic and foreign private issuers that did not previously meet the public float requirements of Form S-3 and Form F-3 to use the forms to conduct primary securities offerings, opening the shelf registration process to approximately 1,400 additional issuers. These changes are designed to afford smaller companies greater flexibility and efficiency in registering public offerings without jeopardizing investor protection. The amendments became effective on January 28, 2008.
Amendments to Form S-3 and F-3
The SEC’s amendments to the eligibility requirements of Form S-3 and Form F-3 allow a company with a public float of less than $75 million to use Form S-3 (the form for domestic issuers) or Form F-3 (the form for foreign private issuers) to register primary offerings provided it:
- has a class of common equity securities registered under the Securities Exchange Act of 1934 and listed on a national securities exchange;
- does not sell securities with a market value in excess of one-third of its public float in primary offerings during any 12-month period;
- has not been a shell company at any time during the preceding 12 months; and
- satisfies the other registrant eligibility conditions for the use of those forms.
To determine the amount of securities that may be sold in a primary offering on Form S-3 or Form F-3, the new rules require a two-step calculation. First, the issuer must determine its public float (the market value of its shares held by non-affiliates) immediately prior to the intended sale. Second, the issuer must aggregate the gross sales price for all sales of its securities pursuant to primary offerings under the new rules during the previous 12 months. Based on those calculations, an issuer will be able to sell securities with a value up to, but not greater than, the difference between one-third of its public float and the value of securities sold in primary offerings under the new rules during the previous 12 months.
Issuers May Take Advantage of Increasing Public Float
While the new rules restrict the amount of securities that may be sold in any 12–month period, an issuer will be permitted to register on a shelf registration statement an amount of securities greater than the amount it is permitted to sell. As an issuer’s public float increases it will be able to issue additional securities on Form S-3 or Form F-3 provided that is does not exceed the one-third cap at any time. In the event that an issuer’s public float exceeds $75 million after it has filed a shelf registration statement, the issuer may sell an unlimited amount of securities in a primary offering under Form S-3 or Form F-3 until the issuer next updates the registration statement by filing its Form 10-K, regardless of whether its public float subsequently falls below $75 million. If the issuer’s public float as of the date of its Form 10-K filing is less than $75 million, the one-third cap will be imposed for all subsequent sales made before the issuer’s float again equals or exceeds $75 million.
Derivative Securities: Look to the Price of Underlying Equity
The new rules apply to issuances of all types of securities, including common equity, debt securities and derivative securities, and the rules for calculating the amount of securities that may be sold can be complicated, particularly for derivative securities. When an issuer elects to sell derivative securities under the new rules, the amount of securities sold will be measured by reference to the value of the underlying common stock rather than the amount for which the securities are sold. Therefore, a conversion price that is lower than the market price of the common stock underlying a convertible instrument (such as convertible debt) will not increase the amount of securities that may be sold.
After an offering of derivative securities has been completed, the calculation of the amount of securities that were previously sold becomes more complicated. The value of derivative securities that have been converted will be calculated by multiplying the number of common shares into which the securities are converted by the market price on the day of conversion. The value of derivative securities that are not converted will be calculated by multiplying the maximum number of common shares into which the derivative securities may be converted by the per share market price of the issuer’s equity used for determining its public float.
Over-the-Counter Companies Not Eligible
To be eligible to utilize Form S-3 or Form F-3 for a primary offering, smaller public companies are required to have a class of common equity securities registered under the Securities Exchange Act of 1934 and listed on a national securities exchange. Under the SEC’s original proposal, smaller companies traded on the OTC Bulletin Board or the Pink Sheets could have been eligible to use Form S-3 or Form F-3. Under the adopted rules, however, companies with a public float of less than $75 million that trade in the over-the-counter market are not eligible to use Form S-3 or Form F-3 for primary offerings. As a result, these issuers will likely continue to rely on PIPE transactions and other methods to raise capital.
The SEC cited the additional measure of protection provided by the stock exchanges’ listing rules and procedures as the reason for denying S-3 and F-3 eligibility to companies traded in the over-the-counter market. At the SEC’s open meeting at which the amendments were approved, Commissioner Atkins suggested that the SEC monitor the use of Form S-3 and Form F-3 by smaller public companies and later, if appropriate, reconsider whether to make shelf registration available to companies traded in the over-the-counter market.
Shell Companies Must Wait
A company that is a shell company or that has been a shell company during the 12 months preceding a proposed shelf offering is only eligible to use Form S-3 or Form F-3 12 months after it ceases to be a shell company provided that it has filed with the SEC information that would be required in a Form 10, Form 10-SB or Form 20-F registration statement and it has timely filed all required reports for at least the prior 12 months.