• SEC Permits the Use of Forms S-3 and F-3 by Small Businesses
  • April 2, 2008
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • Introduction

    The Securities and Exchange Commission (“SEC”) recently amended the eligibility requirements for use of the registration statement on Form S-3 (and Form F-3 for foreign private issuers) as part of its initiatives to increase access to the capital markets by smaller companies.1 Form S-3 is the “short form” registration statement used by companies to register primary offerings under the Securities Act of 1933, as amended (the “Securities Act”), which allows these companies to rely on their reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to satisfy disclosure and updating requirements. These amendments permit certain companies with a public float of less than $75 million to take advantage of the benefits of Form S-3, including “short form” registration and shelf registration in connection with certain limited primary offerings of securities, without compromising investor protection. The amended rules were effective on January 28, 2008.

    The amended rules would allow certain domestic public and foreign private issuers to conduct primary securities offerings regardless of the size of their public float or the rating of the debt they are offering, as long as they satisfy the eligibility conditions of the forms, have a class of common equity securities listed and registered on a national exchange, and the issuer does not sell more than the equivalent of one-third of its public float in primary offerings registered on Form S-3 or Form F-3 within a 12-month period. In order to use Form S-3, a company and the offering must meet certain registrant and transaction requirements. The registrant requirements generally deal with a company’s reporting history under the Exchange Act. The transaction requirements provide, among other things, that companies can use Form S-3 for primary offerings of nonconvertible investment-grade securities, non-investment-grade debt, certain rights offerings, dividend reinvestment plans, and conversions.

    Benefits to Smaller Public Companies

    The amended rules liberalize the eligibility requirements for use of the Form S-3 in order to benefit smaller public companies who wish to increase their flexibility and efficiency in taking advantage of desirable market conditions. These companies would be able to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act. This would permit the registration of securities offerings prior to planning any specific offering and, once the registration statement is effective, companies utilizing Form S-3 could offer securities in one or more tranches without waiting for further SEC action. Having more control over the timing of an offering could allow companies to raise capital on more favorable terms and obtain lower interest rates on debt.

    The amendment also allows smaller public companies to “forward incorporate,” by reference in the registration statement on Form S-3 to reports filed with the SEC subsequent to the filing of the Form S-3. Without this ability, registrants would have to file a new registration statement or post-effective amendment to its registration statement to prevent information in its registration statement from becoming outdated and to update fundamental changes to the information set forth in the registration statement.

    Revised Eligibility Requirements of Form S-3

    The revised eligibility requirements now allow a public company with less than $75 million in public float to register primary offerings of its securities using Form S-3 if:

    • The company meets all existing registrant eligibility requirements for the use of Form S-3, such as:
      • Being organized under the laws of a jurisdiction in the United States;
      • Having its principal place of business located in the Untied States;
      • Having a class of securities registered under Sections 12(b) or 12(g) of the Exchange Act or be required to file reports pursuant to Section 15(d) of the Exchange Act; and
      • Having timely filed all required reports under the Exchange Act during the last 12 months preceding the filing of the registration statement (and during the portion of the calendar month immediately preceding the filing of the registration statement), subject to certain limited exceptions;
    • The company is not a shell company (as defined by Rule 405 of the Securities Act) and has not been a shell company for a minimum of 12 calendar months prior to filing the registration statement;
    • The company has a class of common equity securities listed on a national securities exchange; and
    • The company does not sell more than the equivalent of one-third of its public float in primary offerings under General Instruction I.B.6 of Form S-3 over the previous period of 12 calendar months.

    In order to determine the amount of securities that could be sold by a public company with less than $75 million in public float, the company would have to:

    • Determine its public float immediately prior to the intended sale. Public float is calculated by multiplying the price at which the company’s common equity was last sold—or the average of the bid and asked prices of its common equity, in the principal market for the common equity, as of a date within 60 days prior to the date of sale—by the number of shares of common equity outstanding held by nonaffiliates of the company; and
    • Aggregate all sales of its securities, including equity and debt, pursuant to primary offerings in the previous 12-month period on Form S-3 (including the intended sale) to determine whether the one-third limitation would be exceeded. To calculate the aggregate market value of securities sold during the preceding 12-month period, a company would add together the gross sales price for all primary offerings pursuant to amended Instruction I.B.6 to Form S-3 during the preceding 12-month period. For the registration of convertible securities which are exercisable into or for equity shares, the company must calculate the aggregate market value of the underlying equity shares, rather than the market value of the convertible securities.

    The amendments make offerings above the one-third cap a violation of the form requirements of Form S-3 and a violation of proper form under amended Rule 401, even though the registration statement was previously declared effective. However, the amended Instruction I.B.6 to Form S-3 lifts the one-third cap on additional sales if the registrant’s float increases to $75 million or more after the effective date of the registration statement.

    Revised Eligibility Requirements of Form F-3

    The revised eligibility requirements for Form F-3 mirror those for Form S-3. As such, foreign private companies wishing to use Form F-3 and lacking the $75 million in worldwide public float would have to:

    • Meet the other registrant eligibility conditions for the use of Form F-3;
    • Have the class of securities listed on a national securities exchange;
    • Not be a shell company or have been a shell company for at least 12 calendar months before filing the registration statement; and
    • Not sell more than the equivalent of one-third of their public float in primary offerings under General Instruction I.B.5 on Form F-3 over any period of 12 calendar months.

    Conclusion

    The amended rules provide many smaller public companies increased flexibility to conduct certain limited public offerings of securities at times and under conditions that are best suited for them, with fewer regulatory requirements. The amended rules also streamline the offering process, potentially lowering the cost of capital for smaller companies. In short, the revised rules will make it easier for smaller public companies meeting the revised criteria to access the public securities markets for sales of their securities in a timely, efficient, and cost-effective manner.

    FOOTNOTES

    1. See SEC Rel. No. 33-8878 (December 19, 2007). Available on the SEC’s website at www.sec.gov/rules/final/2007/33-8878.pdf.