On July 26, 2011, the Securities and Exchange Commission (“SEC”) adopted new rules to remove credit ratings as an eligibility criteria for companies to use the “short form” registration on Forms S-3 and F-3 when registering securities for public sale.1 Companies that are eligible to use these “short forms” can offer securities “off the shelf” or on an expedited basis. Prior to adoption of the new rules, companies that offered non-convertible investment grade securities and met certain other criteria could use the short forms. Although the new rules will result in some companies no longer qualifying to use the short forms, the rules were expanded from those originally proposed to allow more issuers to continue to qualify under the new criteria.  

The consequences of no longer being eligible to conduct a delayed offering “off the shelf” are significant – it means a substantial increase in the cost and time involved in issuing debt. If ineligible to use the short forms, an issuer may be unable to conduct offerings quickly at advantageous times and would incur additional costs in preparing a longer form registration statement on Form S-1 and preparing and filing post-effective amendments to keep the registration statement current.

The rules were adopted in response to requirements in Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to remove references to credit ratings from the SEC’s rules and forms in order to reduce reliance on credit ratings. The new rules replace the current criteria that allows use of the short forms if an issuer is offering investment grade debt securities with four alternative tests. The alternative tests were designed to allow widely followed issuers access to the short form registration process. Satisfying any one of the following tests, together with certain company criteria (such as being a reporting company and filing periodic reports in a timely manner for at least one year), will allow issuers to use Forms S-3 and F-3:

  1. The issuer has issued (as of a date within 60 days prior to the filing of the registration statement) at least $1 billion in non-convertible securities other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act of 1933 (“Securities Act”), over the prior three years.
  2. The issuer has outstanding (as of a date within 60 days prior to the filing of the registration statement) at least $750 million of non-convertible securities other than common equity, issued in primary offerings for cash, not exchange, registered under the Securities Act.
  3. The issuer is a wholly-owned subsidiary of a well-known seasoned issuer (“WKSI”) as defined under the Securities Act.
  4. The issuer is a majority-owned operating partnership of a real estate investment trust that qualifies as a WKSI.

As originally proposed, the current rule referencing credit ratings would have been replaced solely with the first test. In expanding the rule to four alternatives, the SEC sought to allow companies that have irregular issuances of non-convertible securities (other than common equity), but that still have significant amounts of such securities issued in primary, registered offerings outstanding, to continue to have access to short-form registration and the shelf offering process. In addition, the last two criteria recognize that wholly owned subsidiaries of WKSIs are likely to be followed by analysts as part of the WKSI’s operations and recognizes the unique structure of REITs which generally do not wholly own their operating partnerships but rather control the operating partnership as the general partner.  

The final rules also include a temporary grandfather provision that allows an issuer to use Form S-3 or Form F-3 for a period of three years from the effective date of the amendments if it would have been eligible to register the securities offerings under the old provision.

The revised thresholds were designed to be calculated consistent with the standards used to determine WKSI status. In calculating whether an issuer has satisfied the $1 billion of non-convertible securities issued and the $750 million of nonconvertible securities outstanding thresholds the following principles will apply:

  • Issuers can aggregate the amount of nonconvertible securities, other than common equity, issued in registered primary offerings that were issued within the previous three years (measured as of a date within 60 days prior to the filing of the registration statement) or, for the nonconvertible securities (other than common equity) outstanding threshold, that are outstanding as of a date within 60 days prior to the filing of the registration statement.
  • Issuers can include only such non-convertible securities, other than common equity, that were issued in registered primary offerings for cash and not registered exchange offers.
  • Parent company issuers only can include in their calculation the principal amount of their full and unconditional guarantees, within the meaning of Rule 3-10 of Regulation S-X, of non-convertible securities, other than common equity, of their majority-owned subsidiaries issued in registered primary offerings for cash over the prior three years or, for the non-convertible securities (other than common equity) outstanding threshold, that are outstanding as of a date within 60 days prior to the filing of the registration statement.
  • Issuers can generally include the principal amount of any debt and the greater of liquidation preference or par value of any non-convertible preferred stock that were issued in primary registered offerings for cash.
  • Issuers will not be allowed to include securities issued in unregistered offerings, registered exchange offerings (including Rule 144A A-B exchange offers whereby an issuer conducts an offering of registered securities in exchange for previously issued unregistered securities), or Regulation S offerings.

The new rules will be effective 30 days after publication in the Federal Register.