Form S-3 is the “short form” registration statement used by eligible domestic public companies to register securities offerings under the Securities Act of 1933. The form also allows these companies to rely on their reports filed under the Securities Exchange Act of 1934 to satisfy most of the form’s disclosure requirements. To use Form S-3, a company must meet the Form’s registrant requirements, which generally pertain to reporting history under the Exchange Act, as well as at least one of the Form’s transaction requirements. These transaction requirements provide that companies may register primary offerings (that is, securities offered by or on behalf of the registrant for its own account) on Form S-3 only if their non-affiliate equity market capitalization, or “public float,” is of a certain size. Form S-3 currently requires a public float of at least $75 million for primary offerings. The public float requirement currently excludes a significant number of small issuers, significantly increasing their costs in conducting primary offerings.
The ability to conduct primary offerings on Form S-3 confers significant advantages on eligible companies. Form S-3 permits the incorporation of required information by reference to a company’s disclosures in its Exchange Act filings, including Exchange Act reports that were previously filed, as well as those that will be filed in the future. The ability of Form S-3 registrants to incorporate their subsequently filed Exchange Act reports, often called “forward incorporation,” allows for automatic updating of a registration statement. By contrast, a registrant without the ability to forward incorporate must file a new registration statement or post-effective amendment to its registration statement to prevent information in the registration statement from becoming outdated and to update the information set forth in the registration statement to include revisions to account for fundamental changes.
Form S-3 eligibility for primary offerings also enables companies to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act. Rule 415 provides considerable flexibility in accessing the public securities markets from time to time in response to changes in the market and other factors. Companies that are eligible to register these primary “shelf” offerings under Rule 415 are permitted to register securities offerings prior to planning any specific offering and, once the registration statement is effective, offer securities in one or more tranches without waiting for further SEC action. In general, post-effective amendments and new registration statements may be subject to selective review by the SEC staff and must be declared effective by the SEC or its staff through delegated authority before the registration statement may be used again to offer and sell securities.
The shelf eligibility resulting from Form S-3 eligibility and the ability to forward incorporate on Form S-3 allows companies to avoid additional delays and interruptions in the offering process and can reduce, or even eliminate, the costs associated with preparing and filing post-effective amendments to the registration statement. By having more control over the timing of their offerings, these companies can take advantage of desirable market conditions, allowing them to raise capital on more favorable terms (such as pricing) or to obtain lower interest rates on debt. As a result, the ability to take securities off the shelf as needed gives issuers a significant financing alternative to other widely available methods, such as private placements of stock, usually priced at discounted values based in part on their relative illiquidity.
The SEC proposes to amend the instructions to Form S-3 to 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;
- They are not shell companies and have not been shell companies for at least 12 calendar months before filing the registration statement; and
- They do not sell more than the equivalent of 20% of their public float in primary offerings under General Instruction I.B.6. of Form S-3 over any period of 12 calendar months.
As a result, even companies not traded on a national securities exchange could potentially avail themselves of this new eligibility rule so long as they were able to satisfy the registrant eligibility requirements provided in General Instruction I.A of Form S-3. This would include companies whose stock is quoted on the Over-the-Counter Bulletin Board and Pink Sheets quotation services.