If your company is considering a public offering of securities—whether in connection with an initial public offering, a follow-on offering, the registration of securities on a shelf for an eventual takedown, or in connection with a merger or acquisition—you may face the task of preparing a Securities Act registration statement on Forms S-1, S-3, or S-4. This article discusses the steps you can take to simplify the SEC review process for a registration statement on Form S-3. Our prior guidance for offerings registered on Form S-1 can be found here: http://www.nelsonmullins.com/newsletters/form_s-1 and guidance for offerings registered on Form S-4 will be released September 24.
The Division of Corporation Finance of the Securities and Exchange Commission selectively reviews filings made on Forms S-1, S-3, or S-4 to ensure compliance with disclosure requirements. The Division issues comment letters where disclosures appear to be inconsistent with SEC rules or applicable standards, or appear to be materially deficient in their rationale or in clarity.
Filing a registration statement is a complex process that can result in a long and costly review by the SEC. Some registration statements are always reviewed, such as filings on Form S-1 for an initial public offering. Other registration statements are rarely or never reviewed. For example, registration statements filed on Form S-3 are much less likely to receive a full review, and registration statements filed by well-known seasoned issuers (WKSIs) in connection with a shelf takedown are not reviewed at all.
A Form S-3 registration statement is a short-form registration statement available to eligible public reporting companies. The Division of Corporation Finance first “screens” all Form S-3 registration statements to determine whether the Form S-3 should be reviewed in depth, receive a limited review, or be quickly cleared without further review. This Client Alert outlines some of the steps that a registrant can take to improve the chances of receiving a “no review” of its Form S-3 by the SEC Staff (the “Staff”) or, if there is a review, to keep the number or types of comments received to a minimum.
The Form S-3 must comply with the item requirements contained in the instructions to Form S-3, as well as Regulations S-K and S-X. In addition, the Staff may also provide comments to address disclosure issues that are not obvious from a reading of these rules and regulations. The SEC publishes its comment letters on EDGAR after its review of the filing has ended, thereby providing some insight into the more nuanced comments the Staff is likely to issue and how the Staff expects registrants to address them. Before filing its registration statement, a company and its counsel should review comment letters relating to offerings within its industry, as well as comment letters relating to offerings that are similar in type and size.
Form S-3 Eligibility
Not all registrants are eligible to use Form S-3. To be eligible to use the short-form registration on Form S-3, a company must meet certain registrant requirements. For example, the company must be organized under the laws of the United States or any state or territory and have its principal business operations in the United States, be a public reporting company under the Securities Exchange Act of 1934 (the “Exchange Act”), and for a period of twelve months have timely filed all reports required under the Exchange Act. In addition, the registrant must meet certain transaction requirements. For example, if a registrant has an unaffiliated public float of $75 million or more, it can use Form S-3 to register any offering of debt or equity for cash. If it has a public float of less than $75 million, it can use Form S-3 on a more limited basis, such as for secondary offerings of securities listed on a national securities exchange (i.e., sales by selling shareholders) and primary offerings where the securities issued do not exceed one-third of the registrant’s public float.
Because Form S-3 is not available to all registrants, one of the first things the Staff will do is ensure the registrant is eligible to file a registration statement on Form S-3. Common reasons for the Staff’s rejection of a Form S-3 registration statement at the screening stage include the registrant’s failure to timely file its Exchange Act reports (Forms 10-Q, 8-K, etc.) and failure to meet the public float requirements.
Items of Particular Interest to the Staff
Our experience advising companies during the SEC review process, our attorneys’ experience while working at the SEC, and a review of SEC comment letters over the past decade reveal that some disclosure points tend to receive greater attention from the Staff than others.
For Form S-3 registration statements, the Staff has a history of issuing comments regarding (1) selling security holders and identification of broker-dealers as underwriters, (2) incorporation by reference, (3) legal opinions, and (4) in the case of a “universal” shelf, the description of securities.
Proactive Steps to Minimize Comments
- Selling Security Holders and Identification of Broker-Dealers as Underwriters. The Staff has several areas relating to selling security holders and broker-dealers on which they often comment. First, they routinely issue comments where a selling security holder is an entity but the registrant has not disclosed the natural person(s) who exercise voting or dispositive power over the securities of that entity. Second, where it appears the selling security holder may be a broker-dealer, or an affiliate of a broker-dealer, the Staff may ask that the company disclose this fact. Third, if the selling security holder is a broker-dealer, but is not identified as an underwriter, the Staff will issue a comment advising the registrant to list the broker-dealer as an underwriter. Unless the securities being registered for the broker-dealer on the Form S-3 were received as compensation for underwriting activities, the Staff will not declare the registration statement effective until the broker-dealer is identified as an underwriter.
- Incorporation by Reference. One of the many benefits of using a Form S-3 registration statement is the ability to incorporate by reference subsequently filed Exchange Act reports, which is known as “forward incorporation.” Forward incorporation by reference eliminates the time and expense associated with filing post-effective amendments to the Form S-3 to update it for fundamental changes, for Section 10(a)(3) purposes and for changes to the plan of distribution. Registrants often forget to include the Form S-3 Item 12(b) forward incorporation language in the registration statement, drawing an SEC comment as a result.
- Legal Opinions. The Staff frequently issues comments regarding the legal opinions issued in connection with offerings on Form S-3. Recognizing that registrants and counsel needed additional guidance, the Staff released Staff Legal Bulletin 19 on October 14, 2011, a copy of which can be found at https://www.sec.gov/interps/legal/cfslb19.htm. The most common mistakes with regard to legal opinions include:
- making statements in the opinion letter implying that it may not be relied upon by anyone other than the registrant (purchasers of the securities are entitled to rely upon the opinion);
- stating that debt securities, guarantees, options, warrants and rights are validly issued, fully paid and non-assessable (when a registrant issues these securities, counsel must opine that they will be or are “binding obligations of the registrant”);
- stating with respect to resale registration statements that shares “will” be validly issued, fully paid and non-assessable (because the shares are already outstanding, the opinion should state that they “are” validly issued, fully paid, and non-assessable); and
- including overly broad assumptions, such as an assumption that the registrant is legally incorporated, has sufficient authorized shares, or has taken all corporate actions necessary to authorize the issuance of the securities. These are facts that go to the essence of counsel’s due diligence responsibilities in issuing its legal opinion and, therefore, may not be assumed away.
- “Universal” Shelf - Description of Securities. The universal shelf will often register several different types of securities, such as common stock, preferred stock, convertible notes, debentures, warrants, and rights. SEC rules permit the base prospectus of the universal shelf to include a general description of the securities to be registered, with a more detailed description to be included with prospectus supplements, and Item 16 of Form S-3 requires the filing of any contracts or instruments that will be used in connection with the offering, e.g., warrant agreement, indenture, etc. The Staff will review the description of the securities in the prospectus and the exhibits to ensure consistency and accuracy. Accordingly, where a registrant has elected to file as exhibits contracts or instruments that may be used in connection with the offering, the registrant should ensure that the description of the securities in the prospectus is consistent with the exhibits it files.
Helpful Tips in Dealing with the Staff During the Review Process
Generally speaking, the Staff will not comment on a registration statement until the registration statement has been filed through EDGAR. However, registrants may request a pre-filing conference with the Staff for unique issues that must be addressed before filing. If the Staff agrees to review pre-filing issues, it will ordinarily request a letter from the registrant or its counsel explaining the issues. When engaging in calls with the Staff, registrants should ensure that they include all necessary parties to address Staff questions. If the issues pertain to the interpretation of legal or accounting rules, then the registrant’s professional advisors can lead the call with the Staff on behalf of the registrant. If the call will require company-specific information, then the Staff will not object to participation of the appropriate company officer.
Once the registration statement has been filed, the Staff will usually try to contact the registrant or counsel within five to six business days to advise whether there will be (a) a full review of the registration statement, (b) a “monitor” (or targeted/limited review) of the registration statement, or (c) a “no review” of the registration statement. A full review of the registration statement typically means that the Staff will assign two attorneys and two accountants to review the whole document. A monitor, or targeted review, means that the Staff will only conduct a limited review of the document focused on certain specific sections.
If you haven’t heard from the Staff within the five- to six-day period, you can always call the number for the Assistant Director Office that corresponds with the registrant’s industry. Assistant Director Offices are generally composed of between four and eight staff attorneys, four and eight staff accountants, an assistant chief accountant, two accounting branch chiefs, a special counsel, a legal branch chief, a senior assistant chief accountant, and an assistant director. A list of the Assistant Director Offices and their phone numbers is available on the sec.gov website at: http://www.sec.gov/corpfin/Article/contact-us.html#.VBBas7cnLcs
Once the registration statement has been assigned for review, the Staff generally tries to provide comments within 27 calendar days of the filing date. For subsequent amendments to the registration statement, the Staff generally tries to respond within 10 business days. There may be circumstances in which the registrant disagrees with a position taken by the Staff in charge of reviewing its filing. In this situation, registrants may request to have a conference with the supervisors of that particular Assistant Director Office. The highest ranking attorneys in each Assistant Director Office are the associate director and the legal branch chief. The highest ranking accountants in each Assistant Director Office are the senior assistant chief accountant and the accounting branch chiefs. Associate directors oversee the Assistant Director Offices, which in turn report to the deputy director and director of the Division of Corporation Finance. When making a request for a higher level review of the point or points of disagreement, the registrant or its counsel should be sure to inform the Staff members who performed the initial review of the registrant’s request.