On February 9, 2011, the U.S. Securities and Exchange Commission (SEC), pursuant to Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, proposed rule amendments that would remove references to credit ratings in rules and forms promulgated under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The SEC proposed substantially similar changes in 2008, but received significant negative feedback during the comment period and ultimately did not act on the proposal. As SEC Chairman Mary L. Schapiro explained, the proposal comes from an understanding that "over-reliance on credit ratings has been one of the factors cited as contributing to the financial crisis." The proposal is just the first in a series of upcoming SEC proposals that will remove references to credit ratings and replace them with alternative criteria in accordance with the Dodd-Frank Act. The proposal is particularly significant, as it may result in loss of Form S-3 or F-3 eligibility for issuers currently eligible to use those forms.
The focus of the proposal is to eliminate the use of credit ratings as a condition of "short-form" eligibility, which enables issuers to register securities "on the shelf" on a Form S-3 or F-3. Specifically, the proposed rules would revise the Form S-3 and F-3 transaction eligibility criteria so that issuers of non-convertible debt securities would no longer be eligible to use Form S-3 or F-3 by issuing investment grade securities. Currently, an issuer can use a Form S-3 or F-3 if it meets certain registrant requirements, including a requirement that, for at least one year, it has been a reporting company and has been filing its periodic reports in a timely manner, in addition to at least one of the applicable form's transaction requirements. One such transaction requirement allows an issuer to use a short-form registration statement for an offering of non-convertible securities, such as debt securities, provided that such securities be rated "investment grade" by at least one credit rating agency that is a nationally recognized statistical rating organization.
Under the proposed rules, the transaction eligibility requirement relating to the offering of non-convertible securities would be replaced with a new requirement, which would permit use of a short-form registration statement for primary offerings of non-convertible securities if the issuer has issued (as of a date within 60 days prior to the filing of the registration statement), for cash, more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the last three years and otherwise meets the registrant requirements. Notably, the proposed standard is modeled on the standard for determining whether an issuer is a "well-known seasoned issuer" based on its debt issuances, where it does not meet the public equity float requirement. The SEC estimates that the proposed changes will result in the loss of Form S-3 or F-3 eligibility for approximately 45 issuers currently eligible to use those forms. However, this estimate is based on a review of non-convertible securities issued in the United States from January 1, 2006, through August 15, 2008, and could increase if a different period is examined. The number also does not account for issuers who did not make a registered offering during that period but who were eligible to use a Form S-3 or F-3 at the time.
Public comments on the proposed amendments are due by March 28, 2011. The SEC is soliciting comment on whether the proposal is appropriate, what the impact on issuers and other market participants would be, and whether there are alternatives that it should consider. To the extent the proposal may result in loss of Form S-3 or F-3 eligibility for issuers currently eligible to use those forms, the SEC is also requesting comment on other or additional eligibility criteria that may be appropriate to retain eligibility.