On February 9, 2011, the SEC proposed rule amendments that would revise the transaction eligibility criteria to replace the “investment grade ratings” standard for registering primary offerings of nonconvertible securities on Forms S-3 and F-3. These changes are being proposed to comply with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act which requires that the SEC "remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as [the SEC] shall determine as appropriate for such regulations." Note that the proposed amendment does not affect a registrant's ability to use Form S-3 or Form F-3 for debt offerings if it meets the alternate transaction eligibility criterion of having at least $75 million of common equity held by non-affiliated shareholders. As a result, the proposed amendment would generally only impact investment grade issuers that cannot meet the public float test.
Current SEC rules allow an issuer to use "short-form" registration on Form S-3 or Form F-3 for an offering of non-convertible securities, such as debt securities, if (in addition to meeting the registrant eligibility requirements), the securities are rated investment grade by at least one credit rating agency that is a nationally recognized statistical rating organization. The proposed rule amendments would replace the investment grade ratings criterion with the requirement that the issuer has issued over $1 billion of non-convertible securities, other than common equity, for cash in registered, primary offerings within the previous three years. The new test for eligibility would be similar to the test for determining "well-known seasoned issuer" or WKSI status. The three-year period would be measured as of a date within 60 days of the filing of the registration statement and calculating the amount of non-convertible securities issued that counts toward the $1 billion threshold would be consistent with the manner of calculation used in determining whether an issuer is a WKSI.
The proposed rules are substantially similar to rule changes first proposed in 2008, prior to adoption of the Dodd-Frank Act. At that time, the SEC received a substantial number of comment letters, mostly in opposition to the proposal to replace the investment grade criterion. Although the Dodd-Frank Act requires removal of the investment grade criterion, no specific replacement standard is mandated. In its proposal, the SEC has included a comprehensive list of questions to solicit comments on and urged interested parties to comment on the proposed approach, its potential impact and, in particular, whether there are any other alternatives to the SEC proposal that should be considered. Comments on the proposed rule changes should be submitted to the SEC by March 28, 2011. A complete copy of SEC Release No.33-9186 can be found at sec.gov/rules/proposed/2011/33-9186.pdf.