As part of the 2005 Securities Offering Reform, the Securities and Exchange Commission (the “SEC”) adopted a provision requiring issuers to re-file certain shelf registration statements filed under the Securities Act of 1933, as amended (the “Securities Act”), at least every three years. On December 1, 2008, the provision will begin to phase in, and certain shelf registration statements will no longer be available for offers and sales of securities. It is therefore necessary for all companies to review their currently effective registration statements and consult legal counsel to determine whether or not this provision will affect them.
Conducting this review on a timely basis is advisable because eligibility to be a well-known seasoned issuer (“WKSI”) and to use Forms S-3 and F-3 without offering size limitations are based, in part, on the worldwide market value of the issuer’s common equity (voting and non-voting) held by non-affiliates (“Public Float”) on a day of the issuer’s choice during a 60-day look-back period. Although an issuer’s Public Float may currently be depressed, it can utilize the look-back period to choose a day when market conditions were more favorable in order to meet the Public Float requirements for WKSI status and to use Forms S-3 and F-3 without offering size limitations. WKSI eligibility is, however, reassessed each time an issuer files its annual report on Form 10-K or Form 20-F, and an issuer who fails to qualify at that time will need to amend its automatic shelf registration statement on a form that it is then eligible to use.1
In December 2005, the SEC adopted significant reforms to the securities offering process. Prior to the reforms, the SEC limited the amount of the securities that could be registered on a shelf registration statement to the amount reasonably expected to be offered and sold within two years of effectiveness, regardless of whether such securities were actually sold during that two-year period. The reforms eliminated the two-year limitation on the amount of securities to be registered for most shelf registration statements, but imposed a three-year sunset period on the use of certain shelf registration statements.2 Three years was chosen for the sunset period, in part, to conform to the three-year cycle mandated by Sarbanes-Oxley for the SEC’s review of an issuer’s periodic reports pursuant to the Securities Exchange Act of 1934.
The three-year sunset period under Rule 415(a)(5) applies only to the following shelf registration statements:
- automatically effective shelf registration statements;
- shelf registration statements registering securities registered (or qualified to be registered) on a Form S-3 or Form F-3 that are to be offered and sold on an immediate, continuous or delayed basis by or on behalf of the issuer, a majority owned subsidiary of the issuer or a person of which the issuer is a majority-owned subsidiary;
- shelf registration statements registering securities that will be offered promptly after effectiveness of the registration statement on a continuous basis and may continue to be offered more than 30 days after the date of initial effectiveness; and
- shelf registration statements registering offerings of mortgage related securities, including such securities as mortgage-backed debt and mortgage participation or pass-through certificates.
The sunset period does not apply to any registration statements other than those listed above.
Measuring the Three-Year Sunset Period
Rule 415 (a)(5)3 divides registration statements into two categories:
- Registration Statements that became effective before December 1, 20054—All shelf registration statements that are subject to the sunset provision will no longer be permitted to be used for offers or sales of securities on or after December 1, 2008. The three-year period began to run for these registration statements on December 1, 2005, regardless of how long they were effective prior to that date.
- Registration Statements that became effective on or after December 1, 2005—The three-year sunset period begins on the initial effective date of the registration statement. Subsequently-filed post-effective amendments do not extend the three-year sunset period.
Transitional Relief—Grace Period for Issuers Not Filing Automatic Shelf Registration Statements
An issuer who did not qualify for, or chose not to use, an automatic shelf registration statement may continue to use a registration statement beyond the three-year limit imposed by Rule 415(a)(5) in two situations. In both situations, the issuer must file a new registration statement covering the securities offered by the prior registration statement within three years of the effective date of the expiring registration statement. Once that new registration statement has been filed:
- an issuer may continue to offer and sell securities covered by a prior registration statement until the earlier of the effective date of the new registration statement or 180 days after the third anniversary of the initial effective date of the prior registration statement; and
- in the case of a continuous offering of securities that commenced within three years of the initial effective date of the prior registration statement, an issuer may continue with that offering until the effective date of the new registration statement if such offering is permitted under the new registration statement.
WKSIs do not have the protection of a grace period. Therefore, they can address the problems of an expiring shelf registration statement by filing a shelf registration statement that becomes effective automatically upon filing.
Action Items for Issuers
Timing is the critical factor. All issuers, in consultation with counsel, should review existing registration statements and replace any expiring shelf registration statements. Proper planning will enable issuers with registration statements that are subject to the sunset period to ensure that there is no disruption with respect to ongoing offerings or access to capital markets.
Shelf registration statements that were effective before December 1, 2005, will expire on December 1, 2008, and shelf registration statements with effective dates on or after December 1, 2005, will expire three years after the initial effective date.4 The first step of any issuer’s planning process should be to review currently effective shelf registration statements to determine whether any of these registration statements are subject to the sunset period under Rule 415(a)(5). The issuer should then determine the specific dates on which any of these registration statements will expire. Finally, the issuer will need to develop a plan, considering various timing factors such as obtaining consents, updating necessary information, and any potential review delays, to ensure timely filing of a new shelf registration statement prior to the sunset date.6
Both eligibility to be a WKSI and to use Forms S-3 and F-3 without offering size limitations are based, in part, on an issuer’s Public Float. WKSI status requires a Public Float of US$700 million or more.7 Issuers filing using Form S-3 or Form F-3 with a Public Float of $75 million or more are not subject to offering limitations on primary offerings.8 An issuer is permitted to calculate its Public Float as of any date within 60 days prior to the filing of a new registration statement. Given the recent market turmoil, issuers should consider filing a new registration statement to replace an expiring shelf registration statement sooner rather than later in order to take advantage of 60-day look-back provisions, which give issuers the opportunity to choose the day with the most favorable market price. For example, an issuer filing on November 15, 2008, may use its share price as of October 17, 2008.