The SEC, consistent with the mandate under the Dodd-Frank Act to remove references to credit ratings from its rules and forms under the Securities Act in order to reduce investors’ reliance on such ratings, has adopted rule changes to replace investment-grade credit ratings with new alternative eligibility requirements for companies seeking to use the “short form” registration when registering certain securities for public sale.
Under the prior rules, companies could register and offer non-convertible securities under the Securities Act on an “off the shelf” or expedited basis through the use of abbreviated, simplified “short form” registrations on Forms S-3 and F-3 so long as, in addition to satisfying the registrant requirements, the securities were rated investment-grade by at least one credit rating agency.
The SEC has replaced the investment-grade credit rating requirement with four new alternative requirements (one of which must be satisfied) for “short form” registration eligibility:
- 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 debt securities in primary registered offerings for cash over the prior three years;
- the issuer has outstanding (as of a date within 60 days prior to the filing of the registration statement) at least $750 million of non-convertible debt securities issued in primary registered offerings for cash;
- the issuer is a wholly-owned subsidiary of a “well-known seasoned issuer” (as defined under the Securities Act); or
- the issuer is a majority-owned operating partnership of a real estate investment trust that qualifies as a “well-known seasoned issuer.”
The SEC believes that the new alternative requirements will preserve “short form” registration eligibility for most companies that previously relied on their investment-grade credit ratings. In order to ease the transition to the new rules and allow the affected companies time to adjust, the SEC included a temporary grandfathering provision that permits an issuer that is unable to satisfy one of the new requirements to use “short form” registration for a final prospectus filed before September 2, 2014, if the issuer reasonably believes that it would have been eligible to do so under the investment-grade ratings test and the issuer discloses that belief and the basis for it in the registration statement.