On July 26, 2011, the SEC adopted new rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that remove credit ratings from consideration in a registrant’s eligibility to use Forms S-3 and F-3. Prior to the enactment of the new rules, one of the categories of transactions allowed for use of Forms S-3 and F-3 permitted eligible issuers to register primary offerings of non-convertible securities (such as debt securities) for cash if such securities were rated investment grade by at least one “nationally recognized statistical rating organization.”

The new rules replace the investment grade category with four alternative eligible issuer categories. A registrant will be eligible to use Form S-3 or F-3 if it:

  • has issued (as of a date within 60 days prior to filing), at least $1 billion in non-convertible securities, other than common equity, in primary offerings for cash (not exchange) registered under the Securities Act over the prior three years;
  • has outstanding (as of a date within 60 days prior to filing) at least $750 million of non-convertible securities, other than common equity, issued in primary offerings for cash (not exchange) registered under the Securities Act;
  • is a wholly-owned subsidiary of a well-known seasoned issuer, or WKSI, as defined under the Securities Act; or
  • is a majority-owned operating partnership of a real estate investment trust that qualifies as a WKSI.

The new rules include a three-year grandfather provision. The provision will allow an otherwise ineligible registrant to use Form S-3 or F-3 during the grandfather period if the registrant reasonably believes that it would have been eligible to use the applicable form under the previously available investment grade category so long as the registrant discloses in the applicable form the basis for such belief.

The SEC expects substantially all issuers currently relying on the investment grade category to also qualify under the alternative categories. However, it is likely that at least some previously eligible issuers will find themselves ineligible. For instance, following the expiration of the three-year grandfather provision, an investment grade rated company that does not have outstanding, or has not issued during the preceding three years, the requisite amount of SEC registered debt and/or non-convertible preferred stock, may be unable to use a short-form registration statement for an issuance that previously would have been eligible under the investment grade category. Although this should be a small group of issuers, it could present a significant hindrance to those companies because they may need to use a longer form registration statement, such as a Form S-1, that does not permit forward incorporation by reference. The new rules, however, will not impact the ability of issuers that otherwise meet the public float requirements of at least $75 million of common equity held by non-affiliates, such as WKSIs, to use a short-form shelf registration statement.

The new rules also affect certain other forms and rules related to the short form registration statements:

  • Forms S-4 and F-4. These forms previously allowed a registrant to incorporate information by reference if it met the registration requirements of Form S-3 or Form F-3 and was registering non-convertible investment grade debt or preferred equity securities. The investment grade category is replaced by the alternative categories.  
  • Schedule 14A for proxy statements. Previously, Schedule 14A allowed a reporting entity to incorporate information by reference if the proxy statement was being used for a solicitation in respect of non-convertible investment grade debt or preferred equity securities. The investment grade category is replaced by the alternative categories.
  • Rule 134 under the Securities Act. Rule 134 allows certain communications made in connection with an offering of securities. Previously, Rule 134 allowed communications of credit ratings assigned or expected to be assigned by a “nationally recognized securities rating organization,” or NRSRO, to not be deemed a prospectus or free-writing prospectus for purposes of the Securities Act. The new rules remove this safe harbor. However, the SEC noted that the removal of the safe harbor will not necessarily mean that a communication that includes such information will be deemed a prospectus or a free-writing prospectus.  
  • Rules 138, 139 and 168 under the Securities Act. These rules previously allowed certain communications not to be deemed an offer to sell a security if the related security was a nonconvertible investment grade security. The investment grade category with respect to these rules is replaced by the alternative categories.  

The new rules will become effective on September 2, 2011.