SEC Permits Smaller Public Companies to Use Form S-3 Registration Statements for Primary Offerings of Securities
The SEC recently amended the eligibility requirements for companies to use Form S-3 registration statements to facilitate more efficient capital market access by smaller public companies. The SEC has changed the eligibility requirements for Form S-3 for "primary" offerings of securities (by an issuer of its own securities on its own behalf) for cash to make the $75 million minimum issuer public float requirement inapplicable if companies meet other existing and a few new eligibility criteria.
This Update summarizes the SEC's amendments to the eligibility requirements for Form S-3 (and corresponding Form F-3 for foreign private issuers) and offers practical guidance.
The SEC's amendments to Form S-3 registration statements became effective on January 28, 2008.
Benefits of Form S-3 Eligibility
Form S-3 is a so-called "short-form" registration statement that allows the issuer to update disclosure prospectively through incorporation by reference into the registration statement of the issuer's subsequently filed current reports on Form 8-K and periodic reports on Form 10-Q and Form 10-K. This "evergreen" feature means that a company generally will not need to file any post-effective amendments to the registration statement, which amendments, for public companies other than "well-known seasoned issuers," are potentially subject to SEC review—a time-consuming and potentially expensive proposition. Companies often use Form S-3 registration statements for ongoing or "shelf" registrations of securities, in which the company typically registers a relatively large amount of different types of securities that it may then issue (or "take down" from the shelf) from time to time as needed. A key advantage of a shelf offering is that once the Form S-3 registration statement becomes effective, the take-downs typically do not require SEC approval, which expedites issuance of the securities.
Form S-3 Eligibility Criteria for Smaller Public Companies
The amended eligibility criteria for smaller public companies to use Form S-3 include some existing and some new requirements.
Relief From the $75 Million Minimum Public Float Requirement. Until the recent SEC amendments, a company could only use Form S-3 to register primary offerings of securities for cash if the company had a "public float" (the market value of all common equity held by non-affiliates of the company) of at least $75 million. The market value of the common equity is calculated based on the closing price (or the average of the bid and asked prices) in the principal market for the common equity as of a date within 60 days prior to the filing of the Form S-3 registration statement.
The recent SEC amendments provide that companies with a public float below $75 million may use Form S-3 for primary offerings if they meet the generally applicable criteria and the three additional new criteria described below.
Generally Applicable Criteria for Form S-3. Although the SEC has relaxed Form S-3's public float requirement for smaller public companies, the other requirements for eligibility to use Form S-3 generally still apply to all public companies. These requirements include, among others, that the company:
Additional Form S-3 Requirements for Smaller Public Companies. Smaller public companies must also meet the following requirements to be eligible to use Form S-3 for primary offerings of securities for cash:
- has been a public reporting company under the Securities Exchange Act of 1934 for at least 12 months;
- has timely filed all reports and materials required to be filed under the Securities Exchange Act during the 12 months preceding the date of the registration statement; and
- has not failed to pay any dividend or sinking fund installment on preferred stock, or defaulted on any material debt or long term lease.
A company that is subject to this one-third limit must disclose in each prospectus it files with the SEC the company's updated calculation of its public float and the amount of securities sold in the 12 months ending on the date of that prospectus.
- Must Not Sell More Than One-Third of Public Float in the Prior 12 Months. The company may not issue securities representing more than one-third of the company's public float during any 12-month period. A company must follow a two-step process to calculate the amount of securities that may be sold. First, the company will determine the value of its public float prior to any proposed sale of securities under the Form S-3 and calculate the one-third limitation based on this amount. (This calculation is made in the same manner as the $75 million minimum public float requirement described above, but as of a date within 60 days prior to the anticipated date of sale.) Second, the company will aggregate the value of all primary sales of securities (including the proposed sale under Form S-3) during the 12 months preceding the proposed sale to determine whether the value would exceed the one-third limit. In making this calculation, the company must
- include any over-allotment option relating to the proposed sale,
- aggregate the gross proceeds from any prior sales of debt or equity securities, and
- apply special provisions if the company is issuing or has issued any derivative or convertible securities, such as warrants or convertible notes.
Equivalent Amendments Made to Form F-3
- Listed on a National Securities Exchange. Only companies that have a class of common equity securities listed and registered on a national securities exchange may take advantage of the recent amendments to the Form S-3 eligibility requirements. There are currently 10 securities exchanges in the United States that qualify as national securities exchanges. Companies whose equity securities are only traded over-the-counter (e.g., on the Pink Sheets or the OTC Bulletin Board) are not eligible to benefit from the recent amendments.
- Not a Shell Company at the Time of the Offering or in the Previous 12 Months. Any company that is a "shell company" at the time of the offering under Form S-3, or that was a "shell company" at any time in the previous 12 months, is not eligible to benefit from the recent amendments to Form S-3. The term "shell company" generally refers to a company, other than an asset-backed issuer, that has no or nominal operations and no or nominal assets other than cash and cash equivalents.
The SEC also adopted equivalent changes to the eligibility requirements for Form F-3, which may be used by foreign private issuers.
Additional Requirements Cease to Apply When a Small Company's Public Float Increases Above $75 Million. If a company's public float increases above $75 million, the additional eligibility requirements provided in the recent Form S-3 no longer apply. If a company's market float then decreases below $75 million, the eligibility requirements will again apply only once the company files a Form 10-K reflecting this change or otherwise amends its registration statement.
The One-Third Limitation Only Affects Subsequent Sales. A company may choose to register more than one-third of its then-current public float on Form S-3. The one-third limitation applies only to the size of the subsequent sales of securities under the registration statement.
Form S-3 Eligibility Under These Amendments May Not Make a Smaller Company "Form S-3 Eligible" for Other Purposes Under SEC Rules and Regulations. Many SEC rules and regulations provide different requirements for companies depending on whether a company is "eligible" to use Form S-3. A company's ability to use Form S-3 pursuant to these amendments does not mean that the company is deemed "eligible" to use Form S-3 for purposes of any other SEC rule or regulation, except for Rule 415(a)(1)(x), which permits shelf registrations.
You can find a copy of the SEC's press release regarding these amendments at http://www.sec.gov/news/press/2007/2007-259.htm. You can find the full text of these amendments at http://www.sec.gov/rules/final/2007/33-8878.pdf. You can find discussions of other recent cases, laws, regulations and rule proposals of interest to public companies on our web site.