Securities & Corporate Governance - SEC Permits Smaller Listed Companies to Register Primary Offerings on Form S-3
Beginning January 28, 2008, approximately 1,400 issuers will become newly eligible to use Form S-3 to register “primary offerings” - of their own shares (but not secondary offerings on behalf of selling shareholders) - making available to them a more efficient way to raise money in the public markets. Under the new rules, 1 during any 12 calendar month period, a listed company with a “public float” of less than $75 million is now permitted to register primary offerings of up to one-third of its public float using the “short-form” registration statement on Form S-3 (or Form F-3 for foreign private issuers). Previously, a listed company was only permitted to register primary offerings on Form S‑3 if its public float equaled or exceeded $75 million. The public float of a Company is the market value of its publicly held securities – excluding securities held by affiliates.
The disclosure requirements when registering an offering on Form S-3 are significantly less onerous than those when registering on other available SEC forms. Moreover, using a registration statement on Form S-3 should permit a smaller listed company relatively quicker and more economical access to the capital markets than it has previously enjoyed.
Form S-3 eligibility also enables a smaller listed company to conduct an offering “off the shelf” under Rule 415 of the Securities Act of 1933. Rule 415 provides considerable flexibility in accessing the public securities markets from time to time in response to changes in the market and other factors. Shelf eligibility on Form S-3 and the related opportunity for a company to incorporate by reference its future SEC filings should allow a smaller listed company to avoid some delays and interruptions in the offering process and should reduce the costs associated with preparing and filing post-effective amendments to the registration statement. A Form S-3 registration will permit a smaller listed company to incorporate by reference both previously filed and future filed SEC reports, thereby eliminating the requirement that a smaller listed company separately supplement or amend its registration statement each time material future developments occur.
By having more control over the timing of its offerings through this “off the shelf” eligibility, a smaller listed company can take advantage of desirable market conditions, thus allowing it to raise capital on more favorable terms (for example, pricing) or to obtain lower interest rates on debt. As a result, the ability to take securities off the shelf as needed gives a smaller listed company a significant financing alternative to other widely available methods, such as private placements or PIPEs offerings which usually price at discounted values based in part on their relative illiquidity.
Under the new rules, any company – other than a shell company – is permitted to conduct its primary offerings on Form S-3 regardless of the size of its public float provided that it meets the following requirements:
- it must either have a class of securities registered pursuant to Sections 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or be required to file reports pursuant to Section 15(d) of the Exchange Act;
- it must have been public for a period of at least 12 calendar months immediately preceding the filing of the Form S-3 registration statement;
- it must have timely filed its periodic reports (10-Ks, 10-Qs and certain 8-Ks) with the SEC for a period of at least 12 calendar months immediately preceding the filing of its registration statement on Form S-3;
- it must have a class of common equity securities that is listed on a national securities exchange. This includes securities listed on the NYSE, the AMEX and NASDAQ but not the OTC Bulletin Board or the Pink Sheets; and
- it is not permitted to sell more than the equivalent of one-third of its public float in primary offerings using Form S-3 over any period of 12 calendar months.
The “one-third of public float” limitation is designed to allow a smaller listed company the flexibility to raise relatively significant amounts of capital when it perceives a market opportunity, but to also limit the company from making transformative offerings without SEC review and without a longer period for underwriter due diligence. Under the new rules, the one-third cap is calculated based on a smaller listed company’s share price as of any date within the 60 days before the proposed offering. It also would include both debt and equity offerings, with convertible debt securities being valued based on the underlying equity shares into which they convert.
One final note – the one-third restriction on the amount of securities a company may sell would not apply to a listed company whose public float exceeds the $75 million threshold. Thus, a smaller listed company may – during the course of a 12 calendar month period – issue one-third of its public float in a primary offering and then, should its public float exceed $75 million, make additional offerings using Form S-3.
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This is only a summary of one of the many significant recent SEC rule changes affecting smaller listed companies. If you have any questions about this rule change or about the other SEC small business initiatives, please direct them to your regular contact at Troutman Sanders LLP or to any of the persons listed in the sidebar to this release.