Maintaining Eligibility for Automatic Shelf Registration Statement for the Offer and Sale of Securities
The shelf registration process allows and issuer to file a registration statement on Form S-3 (for U.S. issuers) or Form F-3 (for foreign issuers) with the Securities and Exchange Commission (SEC) in order to register a public offering, when the issuer has no present intention to sell the securities being registered. A shelf registration statement permits multiple offerings off of the same shelf registration statement, can cover different types of securities, and can be used for the sale of new securities by the issuer (“primary offerings”), the resale of outstanding securities held by security holders (“secondary offerings”), or a combination of both. With an effective shelf registration statement when the issuer wants to offer securities, it takes them “off the shelf.” These “shelf takedowns” are usually offered pursuant to a base prospectus (contained in the registration statement) and a prospectus supplement. An issuer that is a “well-known seasoned issuer” (WKSI) may file an automatic shelf registration statement on Form S-3/Form F-3 and has more flexibility with the shelf offering process.
The Form S-3/Form F-3 Registration Statement is a short-form registration statement that can be used by an issuer that meets certain company and transaction requirements established by the SEC. In general, to be eligible to use a Form S-3/Form F-3 Registration Statement, the issuer (i0 must have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (or must be required to file reports under Section 15(d) of the Exchange Act), (ii) must have been subject to the reporting requirements of Section 12 or Section 15(d) of the Exchange Act for at least 12 calendar months immediately preceding the filing of the registration statement and have timely filed all required reports with the SEC during that period; and (iii) since the end of the last year covered by its audited financial statements, cannot have failed to pay dividends or sinking fund installments on preferred stock or defaulted on installments on indebtedness for borrowed money or on material leases.
An issuer is considered “primarily eligible” to use Form S-3/Form F-3 to offer securities on its own behalf for cash if the aggregate market value of its voting and non-voting common equity held by non-affiliates (its “public float”) is at least $75 million. As an alternative to the $75 million public float requirement, issuers may use Form S-3/Form F-3 for offering of nonconvertible securities (other than common equity), if the issuer satisfies any one of the following criteria:
The issuer has issued (as of a date within 60 days prior to the filing of the registration statement) at least $1 billion in nonconvertible securities, other than common equity, in primary offerings for cash registered under the Securities Act of 1933, as amended (the “Securities Act”), over the prior three years;
The issuer has outstanding (as of a date within 60 days prior to the filing of the registration statement) at least $750 million of nonconvertible securities, other than common equity, issued in primary offerings for cash registered under the Securities Act;
The issuer is a wholly-owned subsidiary of a WKSI; or
The issuer is a majority-owned operating partnership ion a real estate investment trust that qualifies as a WKSI.
The Form S-3/Form F-3 Registration Statement allows an issuer to incorporate by reference certain required in formation about the issuer from documents it previously filed with the SEC under the Exchange Act, and also Exchange Act reports that are filed after the effective date of the shelf registration statement. The ability to forward incorporate information allows the issuer to ensure that the shelf registration statement remains current, without having to file amendments. Takedowns (i.e., offerings of securities) from an effective shelf registration can be made without SEC Staff or delay. Unlike a post-effective amendment, a prospectus supplement does not have to be declared effective by the SEC Staff. Because of the reduced amount of information required, Form S-3/Form F-3 is the most cost- and time-efficient registration statement to use.
The primary advantages of a shelf registration statement are timing and certainty. An effective shelf registration enables an issuer to access the capital markets quickly when necessary or when market conditions are optimal. When a specific offering is planned, a prospectus supplement that describes the terms of the offering must be filed with the SEC pursuant to Rule 424(b) under the Securities Act within the time period specified in the relevant provision of Rule 424(b) that is being relied on in connection with the supplement filing.
A WKSI has the greatest flexibility in conducting securities offerings, on the theory that it is a large, established issuer known to the market than has been a reporting company for at least one year. To qualify as a WKSI, an issuer must meet all the registrant requirements for the Form S-3/Form F-3 and as of t date within 60 days of the determination date either: (1) have a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700 million or more; or (2) has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act.
A WKSI is able to offer and sell securities pursuant to a more flexible automatic shelf registration statement. Such a registration statement (i) becomes effective immediately upon filing and is not subject to the SEC review process, (ii) permits the registration of an unspecified amount of different types of securities, with filing fees on a “pay-as-you-go” basis, and (iii) provides for the ability to file automatically effective post-effective amendments to register additional classes of securities. Furthermore, a WKSI is also able to communicate more freely than a non-WKSI during the offering process, including through the use of a free writing prospectus that provides more information than just the terms of the securities or the offering. In contrast, a Form S-3/Form F-3 Registration Statement filed by a non-WKSI is not automatically effective and may be reviewed by the SEC, must register a specific dollar value of securities, must be accompanied by a filing fee at the time of filing, and must be declared effective by the SEC.
A WKSI may lose its status as a result of the reduction in its market capitalization or as a result of becoming an “ineligible issuer,” Securities Act Rule 405 (Rule 405) defines an ineligible issuer and lists the situations that cause an issuer to become ineligible. Included in the list is an issuer that has (or whose subsidiary has) been convicted of a felony or misdemeanor specified in four provisions under Section 15 of the Exchange Act or an issuer that has violated (or whose subsidiary has violated) the ant-fraud provisions of the federal securities laws (or that are the subject of a judicial or administrative decree or other prohibiting certain conduct or activities involving the anti-fraud provisions of the federal securities laws).
Under Rule 405, the SEC may grant waivers of ineligible issuer status “upon a showing of good cause, that it is not necessary under the circumstances that the issuer be considered an ineligible issuer.” Authority to act on applications for waivers from ineligible issuer status has been delegated by the SEC to the Director of the Division of Corporation Finance. The factors that the SEC will consider when an issuer requests a waiver are set forth in the SEC’s Revised Statement on Well-Known Seasoned Issuer Waivers. The SEC’s Division of Corporation Finance will assess the waiver application to determine whether the issuer has shown good cause that ineligible issuer status is not necessary for the public interest or the protection of investors and will focus on how the conduct that gave rise to the ineligibility relates to the reliability of the issuer’s current and future disclosure and, if it does, what steps the issuer has taken to remediate any deficiencies.
An issuer that loses its WKSI status will have to convert its WKSI shelf to a non-WKSI shelf, which requires registering a specific dollar value of securities and paying the filing fee, and implementing a process to track offers and sales of securities off of the shelf to ensure that no securities in excess of the amount registered are offered or sold.
An issuer that qualifies as a WKSI has the greatest flexibility in conducting securities offerings and should take efforts to ensure that it retains its WKSI status and the ability to use an automatic shelf registration statement. However, if the issuer loses its WKSI status and must convert its Form S-3/Form F-3 to a non-automatic shelf registration statement, the issuer must take steps to identify the changes to the process for issuing securities using the converted Form S-3/Form F-3 and put in place controls to ensure that the dollar value of securities sold using the Form S-3/F-3 does not exceed the dollar amount that has been registered.