Changes to the eligibility requirements for Forms S-3 and F-3 became effective on Sept. 2, 2011. The new requirements changed the test that previously allowed primary offerings of non-convertible investment grade securities. These changes, and the corresponding changes to various SEC rules also effected by the adopting release, were adopted in response to Dodd Frank requirements that the SEC remove from its rules any references to credit ratings. The SEC’s adopting release is available at http://www.sec.gov/rules/ final/2011/33-9245.pdf.

The SEC’s recent actions are consistent with the Dodd-Frank’s repeal of Rule 436(g), eliminating a rule that facilitated the use of credit ratings by providing that rating agencies would not be considered experts under Sections 7 and 11 of the Securities Act. That repeal, and the rating agencies’ subsequent unwillingness to consent to be named in a registration statement as experts, has effectively curtailed the use of credit ratings in public offerings, and the newly effective amendments continue that trend.

The newly adopted, multipart test is designed to permit issuers with a wide market following, but that do not have a $75 million public float, to continue to access the public markets. Nonetheless, the changes will likely mean that some issuers that met the old eligibility requirement will no longer qualify under the new test, and will be unable to use Forms S-3 or F-3 once the grandfather provision discussed below expires in 2014. Conversely, the SEC expects that certain issuers that had not been eligible may now become so. Companies who relied upon or considered relying upon the old test, should review the new standards to assess their continued eligibility to use these forms.

Background

Form S-3 is a “short form” registration statement that allow issuers to efficiently incorporate periodic reports (e.g., forms 10-K and 10-Q), including future reports, into a registration statement for the issuance of securities under the Securities Act of 1933. For this reason it is frequently used in shelf registration statements that allow issuers to file portions of the registration statement (the “core prospectus”) and have that registration statement become effective. Issuers can later provide additional required information (in a prospectus supplement) regarding a specific offering when a market opportunity arises, a process referred to as a shelf takedown. Shelf registration statements typically contemplate the potential selling of a wide array of previously described securities. Form F-3, for foreign issuers, is similar to Form S-3, but does not require that registrants be organized under the laws of the United States, or any state, territory, or the District of Columbia, or have a principal place of business in the United States as required by Form S-3.

The eligibility requirements for both Forms S-3 and F-3 fall in two general categories, those that relate to the issuer and those that relate to the type of transaction to be registered. Both types of criteria must be satisfied. Before Sept. 2, 2011, one of the transaction-based eligibility requirements under General Instruction I.B provided that non-convertible securities could be offered for cash, so long as such securities at the time of sale were “investment grade securities,” defined as being so rated by at least one nationally recognized statistical rating organization. It is this provision that has been replaced by the recent SEC action.

The Changes to Forms S-3 and F-3

The new test, included as General Instruction I.B.2, provides that an offering of nonconvertible securities, other than common equity, is eligible to be registered on Form S-3 or F-3 if:

  1. the issuer has issued (as of a date within 60 days before 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, registered under the Securities Act, over the prior three years; or
  2. the issuer has outstanding (as of a date within 60 days before 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; or
  3. the issuer is a wholly-owned subsidiary of a well-known seasoned issuer (WKSI) as defined in Rule 405 under the Securities Act; or
  4. the issuer is a majority-owned operating partnership of a real estate investment trust (REIT) that qualifies as a WKSI.

The transaction requirement is satisfied if any of these four conditions are met. Remember, however, that the other issuer-related requirements of for eligibility must also be met for Form S-3 or F-3 to be used. These other requirements were not changed by the recent SEC action.

In addition, the SEC adopted a grandfather provision to ease the transition for issuers who have relied on the investment grade securities test. Under this provision, an issuer may also meet the transaction requirement of Section I.B if (i) the issuer discloses in the registration statement that it has a reasonable belief that it would have been eligible under the pre-existing rules to register the securities proposed to be registered, (ii) discloses the basis for such belief, and (iii) files the final prospectus for any such offering by Sept. 2, 2014. In meeting the second prong of the test, the SEC indicated that (i) an investment grade issuer credit rating, (ii) a previous investment grade rating on a similar offering of securities (that has not since been downgraded or put on a watch-list), or (iii) a previous assignment of a preliminary investment grade rating would be appropriate factors to consider, though not the only ones.

Corresponding Changes to Other Forms and Rules

Forms S-4, F-4 and Schedule 14A: Form S-4 and Form F-4 are the forms used to register securities in connection with certain business combinations, exchange offers or reclassifications. These formerly provided that one of their eligibility requirements could be met, and certain information could be incorporated by reference, if non-convertible debt or preferred securities were being offered pursuant to the registration statement and were “investment grade securities” as defined in old General Instruction I.B.2 of Form S-3. That language has been conformed to the new criteria discussed above for Forms S-3 and F-3. Schedule 14A of the proxy rules also permitted certain incorporation by reference if action was being taken as described in Items 11, 12 or 14 of Schedule 14A with respect to non-convertible debt or preferred securities that were “investment grade securities.” The language of Schedule 14A has been similarly conformed. The grandfather provision discussed above also applies to these forms.

Form F-9: Form F-9 permits certain Canadian issuers to register investment grade debt or preferred securities. One of the primary advantages to using Form F-9 instead of Form F-10 is that Form F-9 does not require a reconciliation of Canadian financials with United States generally accepted accounting principles (GAAP). With the advent of International Financial Reporting Standards (IFRS) for Canadian reporting companies, however, the requirements of the two forms have became more similar because IFRS financials also are not required to be reconciled to United States GAAP. Therefore, the SEC decided to rescind Form F-9 instead of revising it. No amendments have been proposed for Form F-10, which requires $75 million of public float as an eligibility requirement — a provision that is not included in Form F-9. The amendments rescinding Form F-9 become effective Dec. 31, 2012, after the transition to IFRS for Canadian reporting companies is complete.

Rules 138, 139 and 168: Each of Rules 138, 139 and 168 to the Securities Act provide a safe harbor that certain communications will not be regarded as an offer for sale or an offer to sell securities when such communications relate to non-convertible investment grade securities. Each of these rules has been amended to incorporate the new criteria at General Instruction I.B.2 of Form S-3 or F-3, as appropriate.

Rule 134(a)(17): Rule 134(a)(17) had permitted the disclosure of security ratings or expected ratings and created a safe harbor by deeming such disclosure not to be a prospectus. For this rule, no amendment of the rule to incorporate the new standards would have preserved its efficacy, which expressly contemplated the disclosure of security ratings for particular transactions. Consistent with the congressional intent of reducing the reliance on credit ratings, expressed in connection with the passage of Dodd-Frank, the SEC decided to eliminate the 134(a)(17) safe harbor entirely. Removal of this safe harbor provision does not forbid the mention of securities ratings, but issuers will now need to determine whether the communication containing such disclosure is a prospectus based on a facts and circumstances analysis, instead of relying on the safe harbor provision.

Registration of Asset-Backed Securities Not Affected

Because a separate SEC proposal addresses the elimination of credit ratings as a requirement for shelf eligibility for offerings of asset-backed securities, and that proposal is still under consideration, the SEC has retained the references to “investment grade securities” in General Instruction I.B.5 (pertaining to asset-backed securities) until that proposal process resolves. Asset-backed issuers should continue to look to this General Instruction I.B.5, but should be aware that modification of the instruction to remove the reference to “investment grade securities” is expected in the near future.