Recent market turmoil has dramatically impacted the market value of many public companies’ securities. At the same time, beginning on December 1, 2008, some shelf registration statements will begin to expire under a “sunset” provision adopted by the Securities and Exchange Commission (SEC) as part of the securities offering reforms enacted by the SEC in 2005, limiting the offer and sale of certain securities registered on shelf registration statements to a three-year period. Because eligibility for primary offerings on both short form registration statements (Form S-3) and automatically effective registration statements (Form S-3ASR) is tied in part to a company’s public float,1 there could not be a worse time for the first wave of registration statements to be expiring under this three-year sunset provision.

Fortunately, quick action may avoid loss of short form eligibility. For the purposes of determining form eligibility, companies calculate public float as of a date within 60 days prior to the filing of a new registration statement. Thus, a company that files today could look back up to 60 days in determining its float and pick a date prior to the recent dramatic decreases in stock prices. We therefore recommend that issuers whose existing registration statements are impacted by the sunset provision consider filing new registration statements sooner rather than later if the market value of their stock has been adversely impacted by recent market conditions.

Sunset Provisions on Shelf Registration Statements

For shelf registration statements that became effective on or before December 1, 2005, the three-year sunset period began on December 1, 2005, and those registration statements will expire on December 1, 2008. Registration statements subject to the provision that became effective after that date will expire three years from their effective date.

Pursuant to SEC Rule 415(a)(5), the sunset provision applies to registration statements for the following types of offerings:

  • Form S-3ASRs; 
  • continuous offerings of securities where the offering will be commenced promptly, will be made on a continuous basis and may continue for a period in excess of 30 days from the date of initial effectiveness. This includes dividend reinvestment plans that are not offered solely to the existing shareholders of the registrant;2 
  • delayed and continuous offerings of securities registered (or qualified to be registered) on Form S-3 or Form F-3 which are to be offered and sold on an immediate, continuous or delayed basis by or on behalf of the registrant, a majority owned subsidiary of the registrant or a person of which the registrant is a majority-owned subsidiary (including offerings commonly known as “shelf takedowns”);3 and 
  • offerings of mortgage related securities, including such securities as mortgage backed debt and mortgage participation or pass through certificates.4

The sunset provision does not apply to, among other things, the following offerings not registered on a Form S-3ASR:

  • offerings under dividend reinvestment plans that fit within the definition of Dividend Reinvestment Plan in Rule 405 of Regulation C and Rule 415(a)(1)(ii)5; 
  • offerings of securities issued pursuant to employee benefit and compensation plans; 
  • the issuance of securities upon the exercise of outstanding options, warrants or upon the conversion of outstanding convertible securities; and 
  • the resale of securities by selling security holders.

Blackout Provision

As part of securities offering reform, the SEC did include a limited six-month extension within the sunset provision that may be critical to a company’s continued ability to raise capital on these short form registration statements. The provision allows companies that have filed a new registration statement, other than a Form S-3ASR, to continue to offer and sell securities from the existing registration statement for the earlier of 180 days from the expiration of the three-year period or the date on which the new registration statement is declared effective. This provision, which addresses the possibility of a delay in the effectiveness of the new registration statement due to the SEC review and comment process, is conditioned upon the issuer having filed the new registration statement prior to the expiration date of the old registration statement. It is also conditioned upon the new registration statement and prospectus including all of the information that would be required at the time in a prospectus relating to the offering it covers.

For WKSIs who will be eligible to file a new Form S-3ASR, this extension does not apply, but it is also unnecessary because the new Form S-3ASR will go effective automatically, without the risk of delay posed by SEC review and comment. WKSIs who lose Form S-3ASR eligibility will have to file a Form S-3, but they can continue to use their existing Form S-3ASR until the earlier of the date the new Form S-3 is declared effective or 180 days from the third anniversary of the effectiveness of the existing Form S-3ASR. For Form S-3 issuers who may lose their Form S-3 eligibility, the 180-day extension will only be helpful for so long as the existing Form S-3 has unsold securities that remain available for sale. Despite the 180-day extension, the existing registration statement, whether it is a Form S-3ASR or a Form S-3, will be automatically updated upon the filing of the company’s Form 10-K, at which point the company will have to reassess form eligibility. At that time, an issuer that is no longer a WKSI or eligible to use Form S-3 for a primary offering will have to amend its Securities Act filings in order to take advantage of a form that the issuer is then eligible to use.6

Recommendation

Although December 1, 2008, is a little over a month away, issuers should consider assessing their need to file a new shelf registration statement in the next several months, whether as a result of the sunset provision or otherwise. This recommendation applies to

  • issuers that have a Form S-3ASR or Form S-3 expiring on December 1, 2008 or shortly after that date; 
  • issuers that want to file a Form S-3ASR for the first time; and  issuers that want to file a new Form S-3 registration statement.

Additionally, companies with existing Form S-3 registration statements that are not expiring in the near future but that have limited remaining capacity should also consider filing a new registration statement as quickly as possible. The ability to raise capital in the current market environment may seem aspirational at the moment, but it is important to maintain maximum flexibility in the coming months to address any capital needs.

Filing a Form S-3ASR or a Form S-3 registration statement now could provide a cushion between now and March when the issuer’s Form 10-K is filed (for calendar year-end filers) in the event the markets do not recover quickly or continue to worsen. Large accelerated filer, accelerated filer and smaller reporting company status also have a “public float” component, but they are determined as of the last business day of a company’s second fiscal quarter during the preceding fiscal year. Thus, although the recent market turmoil of September and October 2008 may impact form eligibility for calendar year end issuers, it will not impact the due dates of Forms 10-K to be filed in 2009.