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February 17, 2011

SEC Proposes to Cancel S-3 Availability for Non-WKSI Debt Issuers Once Eligible Because of Investment Grade Ratings

On Feb. 9, 2011, the SEC proposed, for the third time, amendments to Form S-3 to eliminate reliance on investment grade ratings alone as a means to eligibility to use Form S-3 for registration of non-convertible debt securities. As a replacement, the SEC proposes a debt issuance-based criteria that mirrors the current requirement to satisfy the Well-Known Seasoned Issuer (WKSI) standard. To be S-3 eligible, an issuer lacking the requisite public float will have to have issued at least $1 billion of non-convertible debt securities for cash in registered primary offerings over the past three years. Those who do not satisfy this test will be required to use Form S-1 with its more voluminous requirements. They will effectively be foreclosed from shelf registrations.

Non-WKSI subsidiary registrants of publicly held companies could be profoundly impacted by the proposed rules, many of whom had been frequent debt issuers in the past but perhaps not in the chilled capital markets in the most recent three years.

The SEC proposed substantially similar changes in July 2008, and in October 2009 reopened the comment period for the 2008 release. The difference between the 2008 and 2009 releases and the 2011 release is the interim passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This requires regulatory agencies to conduct a review and thereafter to modify any regulations to “remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness” determined to be appropriate.

The current SEC rules require an issuer to meet two main criteria to benefit from short-form registration on Form S-3:

  • Issuer requirement: when the issuer has been subject to the SEC’s reporting requirements for at least one year prior to filing its registration statement and has timely filed all required reports; and
  • Transaction requirement: most commonly, either:
    • The issuer has at least $75 million of publicly held common equity, or
    • The issuer is proposing to offer non-convertible debt which is rated investment grade by at least one nationally recognized statistical rating organization.

If an issuer cannot meet these standards, then the issuer must register securities on Form S-1 and is not permitted to incorporate by reference any of the voluminous information from its previously filed quarterly, annual and other reports.

The proposed amendments in the 2011 release would remove the second alternative under the transaction requirement – eligibility for issuers registering non-convertible debt where the debt is rated investment grade. The SEC proposes, in its place, a debt issuance criteria that mirrors the current requirement to satisfy the Well-Known Seasoned Issuer standard. The transaction requirement alternative would be for an issuer to have issued at least $1 billion of non-convertible debt securities for cash in registered primary offerings over the past three years. The definition of WKSI (which would make an S-3 registration statement automatically effective, among other benefits), has as an alternative to the debt issuance criteria a requirement to have a public float of at least $700 million in equity. Interestingly, this higher public float requirement would not replace the $75 million public float requirement for Form S-3, which would stay in place.

The 2011 Release sets forth the substance of the 49 comments it received on the previous releases, as well as some of the alternative proposals put forth in those comment letters.

The SEC estimates that the proposed changes will result in the loss of Form S-3 or F-3 eligibility for approximately 45 issuers, but admits that this is based on a review of non-convertible securities issued in the U.S. from Jan. 1, 2006 through Aug. 15, 2008, and does not account for issuers who did not make a registered offering during that period but who were eligible to do so. This omission may obfuscate the true impact of the proposed rules, since many issuers were not in a growth mode during the recent recession and thus, did not need to access the capital markets, but will require access in the future.

Public comments on the proposed amendments are due by March 28, 2011. The SEC is soliciting comment on whether the proposal is appropriate, as well as what the impact on issuers would be, and whether there are alternatives that it should consider. The SEC is also requesting comment on other or additional eligibility criteria that may be appropriate.

McGuireWoods LLP assists large and small public companies in connection with registration and disclosure matters under the federal securities laws, and is actively engaged in monitoring developments in this area.

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