The SEC has expanded the class of issuers that may use Form S-3 for primary offerings to include certain issuers that do not meet the $75 million public float requirement. As a result, we expect the newly eligible issuers will find that the rules provide access to less expensive capital. Steep liquidity discounts for private offerings will no longer be necessary because publicly registered securities may be taken off of the shelf. In addition, we expect that these issuers will incur lower transaction costs in preparing offering documents since Form S-3 permits incorporation by reference of reports filed under the Securities Exchange Act of 1934.
The new general instructions to Form S-3 allow companies with less than $75 million in public float to register primary offerings of their securities on Form S-3, provided they:
- Meet the other registrant eligibility conditions for the use of Form S-3;
- Have a class of common equity securities that is listed and registered on a national securities exchange;
- Do not sell more than the equivalent of one-third of their public float in primary offerings under Form S-3 over the previous period of 12 calendar months; and
- Are not shell companies and have not been shell companies for at least 12 calendar months before filing the registration statement.
The SEC included the requirement that the issuer have a class of common equity securities that is listed and registered on a national securities exchange because of a perception that this would minimize potential abuse from expanded shelf registration. The SEC believes the listing requirements, which include a corporate governance component, provide an additional measure of protection for investors. This requirement excludes availability of the new rules to Over-the-Counter Bulletin Board and Pink Sheet issuers. This requirement is satisfied, however, if the issuer has a class of common equity securities that is listed and registered on any of the following 10 securities exchanges registered with the SEC:
- New York Stock Exchange
- American Stock Exchange
- Boston Stock Exchange
- Chicago Board Options Exchange
- Chicago Stock Exchange
- International Securities Exchange
- National Stock Exchange (formerly the Cincinnati Stock Exchange)
- NYSE Arca (formerly the Pacific Exchange)
- Philadelphia Stock Exchange
To ascertain the amount of securities that may be sold pursuant to Form S-3 by registrants with a public float below $75 million, the new rule requires a two-step process:
- Determination of the registrant’s public float immediately prior to the intended sale; and
- Aggregation of all sales of the registrant’s securities pursuant to primary offerings under the new general instructions of Form S-3 in the previous 12 month period (including the intended sale) to determine whether the one-third cap would be exceeded.
The new rule requires registrants to compute their public float by reference to the price at which their common equity was last sold, or the average of the bid and asked prices of their common equity, in the principal market for the common equity as of a date within 60 days prior to the date of sale. For purposes of calculating the aggregate market value of securities sold during the preceding period of 12 calendar months, the rule requires registrants to add together the gross sales price for all primary offerings made by the registrant pursuant to the new rules during the preceding period of 12 calendar months. Based on the foregoing calculations, registrants will be permitted to sell securities with a value up to, but not greater than, the difference between one-third of their public float and the value of securities sold in primary offerings on Form S-3 under the new rules in the prior period of 12 calendar months.