On December 11, 2007, the Securities and Exchange Commission voted to adopt amendments that expand the universe of companies eligible for use of the abbreviated Form S-3 and F-3 registration statements for primary securities offerings. As a result of the amendments, issuers with at least one class of equity securities listed on a national securities exchange will be permitted to register primary securities offerings on these forms without regard to the size of their public float, as long as they do not sell more than one-third (1/3) of their public float over any 12-month period, and as long as they meet certain other eligibility requirements. The amendments are intended to allow smaller companies (with less than $75 million in public float) to benefit from the greater flexibility and efficiency of these forms, and to facilitate their access to capital markets without compromising investor protection.
Form S-3 is the “short form” registration statement used by eligible domestic companies to register securities offerings under the Securities Act of 1933. The advantages provided by Form S-3 include (i) the allowance for issuers to satisfy certain disclosure requirements by incorporating their past reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as well as (ii) “forward incorporation,” which provides for automatic updating of the registration statement as a result of the incorporation of reports filed by the issuer with the SEC following the effectiveness of the registration statement. Form S-3 eligibility for securities offerings made by or on behalf of the issuer also enables an issuer to conduct a primary offering on a continuous or delayed basis (“off the shelf”) under Rule 415 of the Securities Act as and when it desires to obtain financing. These advantages eliminate the need for filing a new registration statement or a post-effective amendment each time the prospectus contained within the registration statement would otherwise go stale, thereby easing the capital raising process. To use Form S-3, an issuer must meet both (i) the form’s registrant eligibility requirements, which generally pertain to reporting history under the Exchange Act, and (ii) at least one of the form’s transaction eligibility requirements. With certain exceptions, the existing transaction requirements for the form (last updated in 1992) permit issuers to register securities offerings made by or on behalf of the issuer on Form S-3 only if their non-affiliate equity market capitalization (“public float”) equals or surpasses $75 million.
Form F-3 is the Form S-3 equivalent “short form” registration statement available for use by foreign private issuers to register securities offerings under the Securities Act. Form F-3 is available to foreign private issuers that satisfy the form’s registrant eligibility requirements and at least one of the form’s transaction eligibility requirements. The registrant and transaction eligibility requirements for Form F-3 are substantively similar to those for Form S-3.
Expansion of Eligibility for Primary Offerings
At its open meeting on December 11, 2007, the SEC voted to extend eligibility under the transaction requirements of Form S-3 (set forth under General Instruction I.B. of Form S-3) to include primary offerings of a public company with less than $75 million in public float, provided that at least one class of common equity securities of the company is listed on a national securities exchange and so long as the company meets certain other requirements, including:
- Satisfaction of the other registrant eligibility requirements for the use of Form S-3, such as having filed in a timely manner all material required to be filed pursuant to Section 13, 14 or 15(d) of the Exchange Act for at least 12 calendar months immediately preceding the filing of the S-3 registration statement (except for reports required solely pursuant to certain items of Form 8-K).
- The registrant is not a “shell company” and has not been a “shell company” for at least 12 calendar months immediately preceding the filing of the S-3 registration statement. (“Shell companies” continue to be prohibited from registering securities in primary offerings on Form S-3 unless they meet the $75 million float threshold of General Instruction I.B.1. of Form S-3.)
- The registrant does not sell more than the equivalent of one-third of its public float in primary offerings under the new rules over any period of 12 calendar months.
Departures from Original SEC Proposals
One aspect of the SEC’s original proposal, which was not adopted, would have enabled smaller public companies not listed on a national securities exchange (including companies whose securities are quoted in the OTC-BB and Pink Sheets quotation services) to register primary offerings on Form S-3 so long as they met the other criteria described above. Instead, the SEC, citing the protections for investors provided by the orderly markets of national securities exchanges, decided to limit the expanded S-3 eligibility to companies listed on such exchanges, with further review as to whether to extend eligibility to unlisted companies to be undertaken in the future. In addition, the limit for use of Form S-3 for primary offerings, which was set at one-third of a company’s public float, differed from the proposed 20 percent limit, as the SEC indicated that it sought to provide greater relief to smaller companies seeking to raise a substantial amount of capital.
Adjustable One-Third of Public Float Limit for Primary Offerings in 12-Month Period
In order to assure compliance with the eligibility requirement concerning the one-third limit on securities sold via primary offerings in a 12-month period, a company with less than $75 million in public float needs to:
- Determine its public float immediately prior to the intended sale of the offered securities (as of a date within 60 days prior to the intended date of sale) – The method and timing for calculating public float is designed to provide flexibility. Because the restriction on the amount of securities that can be sold over a period of 12 calendar months is calculated by reference to an issuer’s public float immediately prior to an intended sale, as opposed to the time of the initial filing of the registration statement, the amount of securities that an issuer is permitted to sell under a given Form S-3 registration statement can continue to grow over time if the issuer’s public float increases. Conversely, the amount of securities that an issuer is permitted to sell at any given time under the S-3 may also decrease if the issuer’s public float contracts.
- Aggregate all primary offering sales during the previous 12-month period to determine whether the one-third limitation would be exceeded – A company must aggregate the gross sales price for all primary offerings of its debt and equity securities under the new rules in the previous 12-month period, including the intended sale. The SEC has included debt securities in the calculation in order to avoid inadvertently encouraging issuances of debt securities over equity securities. Issuers who meet the requirements of the amended rules would be eligible to offer non-investment grade debt securities on Form S-3 in addition to the non-convertible investment grade debt securities allowed under the current instructions for Form S-3. For purposes of the one-third limit, securities that are convertible into or exercisable for equity securities (such as convertible debt or warrants) are to be included in calculation by reference to the aggregate market value of the underlying equity security, instead of the market value of the derivative securities themselves.
Transitions from and to the $75 Million Public Float Threshold
Irrespective of the new amendments, companies with more than $75 million in public float (whether listed on a national securities exchange or not) remain eligible for unlimited use of Form S-3 for primary offerings (assuming the other eligibility requirements are met). The new rules provide that just as Form S-3 registrants that meet the $75 million public float threshold at the time of filing their Form S-3 are not required to decrease the amount of securities sold under the Form S-3 in the event their public float falls below $75 million subsequent to the effective date of the Form S-3, so too the one-third restriction on additional sales by a smaller issuer is lifted if the issuer's public float increases to $75 million or more subsequent to the effective date.
As is currently the case pursuant to Rule 401 under the Securities Act, companies are also required to recompute their public float each time an amendment to a Form S-3 is filed for the purpose of updating the registration statement in accordance with Section 10(a)(3) of the Securities Act, which is typically when an annual report on Form 10-K is filed. In the event that the company’s public float as of the date of the filing of the amendment is less than $75 million, the one-third restriction is reimposed for all subsequent sales made pursuant to the new rules, and would remain in place until the company’s public float equals or exceeds $75 million.
Form F-3 Revisions
The amendments to Form F-3 are comparable to the changes to Form S-3. Specifically, foreign private issuers with less than $75 million in worldwide public float will be allowed to register primary offerings on Form F-3, provided such companies:
- Meet the other registrant eligibility conditions for the use of Form F-3;
- Are not “shell companies” and have not been shell companies for at least 12 calendar months before filing the registration statement; and
- Do not sell more than the equivalent of one-third (1/3) of their worldwide public float in primary offerings registered on Form F-3 over any period of 12 calendar months.
No Other Effects Intended
The SEC has stated that the revisions to the eligibility requirements of Form S-3 and F-3 for smaller companies are not intended to have broader implications under its other rules and regulations. Therefore, smaller companies qualifying to use Form S-3 or F-3 under these revisions would not otherwise be deemed “S-3 eligible” or “F-3 eligible” for purposes of any other rules of the SEC, except for Rule 415 relating to shelf registration.
These amendments are one in a series of measures adopted by the SEC aimed at increasing the ability of smaller public companies to efficiently access the capital markets, including the creation of the expanded “smaller reporting company” category, the reduction of the holding period requirements under Rule 144, and the introduction of electronic filing of Form D for private placements. The approximately 1,400 or so smaller companies qualifying for use of Forms S-3/F-3 under the new rules can now take advantage of the forward incorporation feature of these forms, thereby reducing costs and eliminating delays caused by reviews by the SEC of new registration statements, or post-effective amendments to previously filed registration statements that would be required if they were not Form S-3/F-3-eligible.
Allowing more smaller companies to conduct primary offerings “off the shelf” via Form S-3/F-3 registration will also provide such companies greater flexibility over the timing of their offerings, enabling them to take advantage of desirable market conditions promptly and thereby raise capital on more favorable terms, or secure lower interest rates on debt. The amendments will therefore provide an attractive alternative to financing efforts through PIPEs and equity lines of credit, where terms are often more onerous for issuers than in registered offerings. In addition, for the first time, non-investment grade debt will be permitted to be sold using a Form S-3/F-3. Previously, only investment grade debt (in addition to equity) could be sold using a Form S-3/F-3.
The amendments will be effective for 30 days after publication in the Federal Register. Because this bulletin has been prepared solely on the basis of the proposed rule release and the SEC’s open meeting held December 11, 2007, the details described herein may be subject to final revision in the SEC’s adopting release (once it becomes available).