Ride on the Peace Train: New S-3 Eligibility Rules Reconcile Proposed Rules and Comments

July 29, 2011

On July 26, 2011, the SEC unanimously voted to adopt rule changes to remove references to credit ratings from certain of its rules and forms, including those addressing eligibility for shelf and short-form registration on Forms S-3 and F-3. The SEC issued a press release and a fact sheet following its adoption during the open meeting on July 26, 2011, and provided the final rules on its website on July 27, 2011. The final amendments will enable far more registrants to continue their use of shelf and short-form registration than originally contemplated by the rules proposed by the SEC on three previous occasions. The final rules appear to be very responsive to the alternative measures for eligibility advanced in the numerous comment letters received by the SEC.

The final Form S-3/F-3 eligibility requirement removes the condition of an investment grade rating and permits the use of these forms if the issuer satisfies one of the following four tests:

  1. The issuer has issued (as of a date within 60 days prior to the filing of the registration statement) at least $1 billion in non-convertible securities other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act, over the prior three years (identical to the Well-Known Seasoned Issuer, or WKSI, standard).
  2. The issuer has outstanding (as of a date within 60 days prior to the filing of the registration statement) at least $750 million of non-convertible securities other than common equity, issued in primary offerings for cash, not exchange, registered under the Securities Act.
  3. The issuer is a wholly-owned subsidiary of a well-known seasoned issuer as defined under the Securities Act. A wholly-owned subsidiary means a subsidiary substantially all of whose outstanding voting securities are owned by its parent and/or the parent’s other wholly-owned subsidiaries.
  4. The issuer is a majority-owned operating partnership of a real estate investment trust that qualifies as a WKSI.

In 2008, 2009 and 2011, the SEC proposed rules amending shelf and short-form registration to eliminate reliance on investment grade ratings, but offered in its place only a debt issuance criteria that mirrored the current requirement to satisfy the WKSI standard. We commented on the SEC’s proposed and published a legal update titled “ Who’s Got a Ticket To Ride? SEC Proposes to Cancel S-3 Availability for Non-WKSI Debt Issuers Once Eligible Because of Investment Grade Ratings” highlighting our strong view that non-WKSI subsidiary registrants of publicly held companies could be profoundly impacted by the proposed rule. While the SEC had estimated that the proposed adoption of the WKSI standard would only result in the loss of Form S-3 or F-3 eligibility for approximately 45 issuers, commentators widely concluded that the true impact of the proposed rules was far greater, since many registrants were not in a growth mode during the recent recession and thus were not included in the SEC’s analysis.

SEC Chairman Mary Schapiro said that she expected just about all issuers that currently rely on the existing test also to continue to qualify under the new criteria.

In his vote in favor of the adoption of the final rule, Commissioner Paredes gave nod to its meaningful improvement over the proposed rule and the significant effort spent reviewing the comments received and revising the rulemaking to mitigate the risk that the rule amendments would end up shrinking the pool of eligible Form S-3 issuers. The Staff committed itself to keep apprised of the actual impact of the rule change so that appropriate steps can be taken, if warranted, upon learning of impeded capital formation.

The new rule also contains a temporary grandfather provision that allows an issuer to use Form S-3 or Form F-3 for a period of three years from the effective date of the amendments if it would have been eligible to register the securities offerings under the old provision. A registrant will need to disclose the basis for its belief that it would have been eligible in its registration statement.

The SEC also adopted an amendment to Securities Act Rule 134(a)(17) to remove the safe harbor to be deemed not to be a prospectus or a free writing prospectus for the disclosure of security ratings in certain communications, such as “tombstone ads” or press releases announcing offerings. As a result, the determination of whether such information constitutes a prospectus or free writing prospectus will be made in light of all circumstances of the communication.

The amendments take effect 30 days after publication in the Federal Register.

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.