On July 26, 2011, the U.S. Securities and Exchange Commission (the “Commission”) unanimously approved final rules that remove credit ratings as eligibility criteria for “Short Form” registration statements (e.g., Form S-3 and F-3) and replace such criteria with new eligibility requirements.1 Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”)2 mandates that the Commission review Commission rules, regulations and forms that rely upon credit-worthiness and credit ratings, and remove and replace such references with a standard of credit-worthiness that the Commission deems appropriate. In addition, the final rules rescind Form F-9 (a form used by certain Canadian issuers) due to regulatory developments in Canada. The final rules also amend several other rules and forms to refer to the new Short Form eligibility requirements.
Chairman Shapiro noted in her opening remarks that “[t]he new rules provide an appropriate and workable alternative to credit ratings for determining whether an issuer should be able to use Short Form registration and have access to the shelf offering process.”3 The Chairman also stated that the Commission expects that “all issuers that currently could rely on the existing test would be able to qualify for the revised forms.” 4
During the Open Meeting, the Commission also re-proposed new shelf eligibility requirements for asset-backed securities. The Commission also requested additional comment on certain proposed rules that were part of its April 2010 Proposing Release.5 A summary of the rules re-proposed is the subject of a separate Alston & Bird advisory entitled “SEC Re-Proposes Transaction and Registrant Shelf Eligibility Requirements for Asset-Backed Securities and Requests Comment on Other Outstanding Rule Proposals.”6
The final rules will become effective 30 days after they have been published in the Federal Register, but the Commission has posted the text of the final rules on its website at http://www.sec.gov/rules/ proposed/2011/33-9244.pdf.
Short Form Registration
Eligible domestic and foreign private issuers use Forms S-3 and F-3 to register offerings of securities issued under the Securities Act of 1933 (each a “Short Form”). An issuer may use the Short Form if it meets the form’s registrant requirements and at least one of the transaction requirements. One transaction requirement that issuers often satisfy is the requirement that the securities issued are non-convertible (e.g., debt securities) and have been rated “investment grade” by at least one nationally recognized statistical rating organization (NRSRO).
New Short Form Eligibility Criteria
The final rules revise General Instruction I.B.2 of Form S-3 and F-3 by replacing the credit ratings eligibility criteria with new requirements. As revised, General Instruction I.B.2 will provide that an offering of nonconvertible securities, other than common equity, is eligible to be registered on Form S-3 and Form F3, if the issuer:
- has issued (as of a date within 60 days prior to the filing of the registration statement) at least $1 billion in non-convertible securities (other than common equity) in primary offerings for cash, not exchange (e.g., Form S-4 and Form F-4), registered under the Securities Act, over the prior three years;
- has outstanding (as of a date within 60 days prior to the filing of the registration statement) 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 (WKSI) as defined in Rule 405 under the Securities Act; or
- is a majority-owned operating partnership of a real estate investment trust (REIT) that qualifies as a WKSI.7
One of the existing criteria that the Commission is replacing with the adoption of these new eligibility criteria allows issuers to meet the transaction requirement of the Form if the non-convertible debt securities to be issued were deemed “investment grade” by at least one nationally recognized statistical rating organization. The Commission had proposed replacing the criteria with a test that required the issuer to have issued at least $1 billion of registered debt securities in primary offerings for cash over the prior three years. During the comment period, the Commission received a number of comment letters expressing the concern that this would result in some issuers who can currently register securities on Form S-3 or F-3 being no longer able to do so. The Commission noted that it did not believe that Congress intended to change the type of issuer that had access to Short Form registration, but rather to lessen reliance on ratings. The Commission believes that the modifications reflected in the final rules “should preserve Short Form eligibility for widely followed issuers.”8
The final rules also include a temporary “grandfather” provision. The provision permits issuers that are currently eligible to use a Short Form to continue to use such forms if such issuer (i) has a “reasonable” belief that they would have been eligible to rely upon the investor grade criteria in existence prior to the effectiveness of the final rules and (ii) they file a final prospectus in connection with an offering of securities registered on a Form S-3 and Form F-3 within three years from the new rules’ effective date.
The Commission notes factors that indicate an issuer had a “reasonable” belief of eligibility would include:
- an investment grade issuer credit rating;
- a prior investment grade credit rating on a security issued in an offering similar to the one the issuer intends to register, provided that such rating has not been downgraded or put on a watch-list since its issuance; or
- a prior assignment of a preliminary investment grade rating.
In determining whether an issuer complies with the first eligibility requirement based on the $1 billion threshold, the final rules permit the issuer to:
- aggregate the amount of non-convertible securities (other than common equity) issued in registered primary offerings that were issued within the prior three years9 or, for the non-convertible securities (other than common equity) outstanding threshold, that are outstanding as of a date within 60 days prior to the filing of the registration statement;
- include such non-convertible securities (other than common equity) that were issued in registered primary offerings for cash only and not registered exchange offers (e.g., Form S-4 or F-4); and
- include in their calculation if they are a parent company issuer, the principal amount of their full and unconditional guarantees, within the meaning of Rule 3-10 of Regulation S-X, of non-convertible securities (other than common equity) of their majority-owned subsidiaries issued in registered primary offerings for cash over the prior three years or, for the non-convertible securities (other than common equity) outstanding threshold, that are outstanding as of a date within 60 days prior to the filing of the registration statement.10
In calculating the $1 billion or the $750 million thresholds, the final rules permit issuers to include “the principal amount of any debt and the greater of liquidation preference or par value of any non-convertible preferred stock that were issued in [a] primary registered offering for cash.”11 Pursuant to the final rules, instructions to Form S-3 and F-3 will be amended to include specific guidance to insurance company issuers. The instructions will clarify how such issuers should calculate the $1 billion issued and $750 million outstanding thresholds.
Issuers using Form S-3 and Form F-3 will still need to satisfy the other eligibility requirements set forth in the instructions to each form. The final rules also remove references to “investment grade securities” in the General Instructions I.B.5 to Form S-3 for asset-backed securities.
Amendments to Rule 134(a)(17) under the Securities Act
Under Rule 134(a)(17), the disclosure of security ratings issued or expected to be issued by an NRSRO in certain communications will not deem such communication to be a prospectus or free writing prospectus. The Commission has amended Rule 134, in light of Section 939A of the Act, to remove the safe harbor for disclosure of credit ratings assigned by NRSROs. The Commission believes that removing the safe harbor will not “have a material impact on the information available to investors because issuers will (as is common now) be able to disclose a credit rating in a free writing prospectus.”12
Additional Final Rules Adopted
The Commission also adopted final rules that conform to the new eligibility requirements. Such rules revise and replace references in Commission rules and forms that relied on criteria similar to the investment grade criteria set forth in Form S-3 and F-3. The final rules revise the following rules and forms to refer to the new eligibility criteria set forth in Form S-3 and Form F-3:
- Form S-4 and Form F-4 under the Securities Act;
- Schedule 14A under the Exchange Act of 1934; and
- Rules 138, 139 and 168 under the Securities Act.