Alert November 14, 2008

Last Call Before S-3s Begin Expiring

As previously described in our Public Company Advisory “Shelf Registration Statements Begin Expiring in December” (July 14, 2008), some Form S-3 registration statements will begin to expire at the end of November under SEC Rule 415(a)(5), which limits the “shelf life” of some shelf registration statements to three years.

As a related issue, many companies’ stock prices have fallen significantly. As a result, some companies that previously qualified as a Well-Known Seasoned Issuer (“WKSI”) may soon fail to qualify as a WKSI and therefore become ineligible to use the automatically effective Form S‑3ASR. Other companies that were previously eligible for unrestricted use of Form S-3 for primary offerings may soon fail to be eligible for such use. This alert summarizes the steps that should be taken to assess the need for action and the considerations that will apply if action must be taken.

With the three-year sunset approaching, we suggest that companies that have not already done so should (1) review the status of their currently effective Form S-3 registration statements, (2) assess the continued likely availability of those registration statements over the coming quarters based on a variety of possible scenarios, (3) formulate a strategy to minimize the risk that access to the capital markets through shelf registration will be interrupted during this period of high volatility, and (4) to the extent necessary, file replacement registration statements after considering their likely future eligibility to use Form S‑3ASR or Form S-3.

As companies formulate action plans in response to these changes, they should consider a variety of factors, such as (1) the ability to calculate their public common equity float using a common stock price as much as 60 days prior to the date of filing, (2) the possibility that the company may fail to qualify as a WKSI or to qualify for use of Form S-3 for primary offerings on an unrestricted basis if its public float is not at least $700 million[i] or $75 million,[ii] respectively, when the company files its next Form 10-K annual report (when eligibility to continue using then-effective Form S-3ASR and Form S-3 registration statements will be retested under SEC rules) and (3) the company’s anticipated need to access the public capital markets over the short and medium term. In some circumstances, a company that could qualify as a WKSI now might choose to file a traditional “universal shelf” Form S-3 in order to avoid the delays that could result from the need to convert a Form S-3ASR to a traditional Form S-3 after the company files its next Form 10-K, as discussed below.

Reviewing Existing Form S-3 Registration Statements

Whether or when a Form S-3 registration statement will expire depends on two facts. First, is the Form S-3 one of those to which the sunset applies?  Second, if the sunset does apply, when will the three-year period expire?

Which Form S-3s Will Expire?

Rule 415(a)(5) applies to securities offered under a limited number of Form S-3 registration statements. Rule 415(a)(5) provides that the following securities are subject to the sunset: 

  • Securities registered by a WKSI on a Form S-3 automatic shelf registration statement. Any automatic shelf registration statement (SEC EDGAR form type S-3ASR) filed by a WKSI, for any type of offering, is subject to the three-year sunset. These registration statements typically cover securities offerings by the company (such as universal shelf registration statements), but may also cover resales by selling security holders and other types of offerings that could have been registered on other types of registration statements.
  • Securities offered on a delayed or continuous basis by the company (Rules 415(a)(1)(ix) and (x)). Registration statements registering any delayed or continuous shelf offering by the company under Rule 415(a)(1)(ix) or (x) are also subject to the three-year sunset. This includes universal, equity and debt registration statements for primary offerings filed under Rule 415(a)(1)(x) that many companies rely on for rapid capital raising transactions through shelf takedowns. In addition, registration statements covering continuous offerings such as combined dividend reinvestment/direct stock purchase plans that were not properly eligible under Rule 415(a)(ii) because they are open to new investors (i.e., purchasers who were not previously security holders of the company) are subject to the three-year sunset.
  • Mortgage-related securities (Rule 415(a)(1)(vii)). Registration statements registering offerings of mortgage-related securities, including such securities as mortgage-backed debt and mortgage participation or pass through certificates, under Rule 415(a)(1)(vii), are also subject to the three-year sunset.

These are the only registration statements subject to the Rule 415(a)(5) sunset.

How is the Three-Year Sunset Computed?

The three-year sunset period is computed as follows:

  • For shelf registration statements that were effective before
    December 1, 2005,
    the SEC’s transitional interpretation provides that the three-year period began on December 1, 2005, without regard to how long the registration statement had been effective before that date. Therefore, any of these shelf registration statements that are subject to the three-year sunset will expire on November 30, 2008.[iii]
  • For shelf registration statements with effective dates on or after December 1, 2005, the three-year period begins on the initial effective date of the registration statement.

Filing Replacement Registration Statements

Correct Form. If replacement registration statements must be filed, the company must confirm that it is eligible to use the relevant form. Many companies have seen the market price of their common stock fall significantly in recent weeks and months. This may affect a company’s eligibility to use Form S-3ASR or to use Form S-3 on an unrestricted basis.

  • Form S-3ASR - in order to use this form, among other requirements, the worldwide market value of the company’s outstanding equity held by non-affiliates must be $700 million or more within the 60 days preceding the filing of the Form S-3
  • Form S-3 - in order to use this form for primary offerings of securities for cash on an unrestricted basis, among other requirements, the worldwide market value of the company’s outstanding equity held by non-affiliates must be $75 million or more within the 60 days preceding the filing of the Form S-3

Note that even if the company is currently eligible to file a Form S-3ASR or a regular Form S-3 for primary offerings, its ability to use the registration statement will cease (or, for Form S-3s, become restricted) if it does not satisfy the tests described above when it files its next annual report on Form 10-K. If the company is no longer eligible for Form S-3ASR, it will have to make a filing to convert the Form S-3ASR to Form S-3, and that filing will be subject to SEC review and need to be declared effective before it can be used for a take-down. For this reason, and to avoid a possible gap in continued access to the public capital markets via shelf registration, it is possible that a company that qualified as a WKSI earlier this year but either no longer qualifies or is concerned that it will not qualify when it files its next Form 10-K might choose to file a traditional “universal shelf” Form S-3. Although the company would give up the advantages of a Form S-3ASR registration statement (such as the ability to add new types and classes of securities without any action on the part of the SEC staff and the ability to pay filing fees on a “pay-as-you-go” basis), the company would also avoid the delays that would likely result from converting a Form S-3ASR to satisfy the requirements of a regular Form S-3 in the event that the company does not qualify as a WKSI when it files its next Form 10-K.

Fee Carryforwards. WKSIs are eligible for pay-as-you-go fee payments under SEC rules. Companies that are not WKSIs must pay a registration fee at the time of filing, but may apply the unused portion of filing fees paid in connection with registration statements previously filed within five years. Additionally, under Rule 415(a)(6), companies do not need to repay the filing fee for unused securities that are carried forward from an expiring registration statement. Note that SEC registration fees for securities will increase from the current rate of $39.30 per million dollars of securities registered to $55.80 per million when the President signs the final SEC budget appropriation for the 2009 fiscal year.

Securities to be Registered. If the company is not filing a Form S-3ASR, consideration should be given to the types of securities to be registered. This will permit maximum speed and efficiency for future offerings under circumstances where market windows may be very brief. It bears emphasis that adding new types of securities to a traditional “universal shelf” Form S-3 requires filing a separate registration statement relating to the additional securities that is subject to SEC review and must be declared effective by the SEC before the securities may be offered.

Using “Expired” Registration Statements

Under certain circumstances, a company may continue to use a registration statement after the third anniversary of its original effective date. Rule 415(a)(5) provides two different scenarios for use of a registration statement after the three-year sunset. In both cases, the company must have filed a new registration statement covering the securities offered by the prior registration statement prior to the end of the three-year period described in Rule 415(a)(5). The SEC staff has stated that, in the case of registration statements that became effective before December 1, 2005, the new registration statement must be filed before 5:30 p.m. EST on Friday, November 28, 2008.

  • First - a company may continue to offer and sell securities covered by the prior registration statement for up to 180 days after the third anniversary of the effective date of the prior registration statement (or, if earlier, until the new registration statement becomes effective).
  • Second - in the case of a continuous offering of securities that began within three years of the initial effective date of the prior registration statement, the company may continue that offering until the effective date of the new registration statement if such offering is permitted under the new registration statement.
It is important for the company to be aware of upcoming expiration dates and to plan – and file new registration statements – accordingly, allowing sufficient time to incorporate scheduling for third parties such as the company’s independent accountants, selling security holders and other offering participants, as well as for the possibility of SEC staff review and other events that may delay effectiveness of the new registration statement.