Alert January 27, 2009

Using Existing Registration Statements After a Decline in Market Capitalization

Substantial decreases in the trading prices of many companies’ common stock in recent months have left these companies with reduced market capitalization. This may have a variety of effects, such as failure to satisfy continued stock exchange listing standards or to meet covenants based on market capitalization in debt obligations. Significant effects can be loss of status as a well-known seasoned issuer (“WKSI”) and/or eligibility to use Form S-3 for unlimited primary offerings of securities, both of which are based in part on the value of the company’s public float1 on any day selected by the company during the 60 days prior to the date on which the company files its Form 10-K. A company’s ability to access public securities markets, raise capital and meet its contractual securities registration obligations may be significantly affected by its WKSI status and its eligibility to use Form S-3. This Public Company Alert discusses how a decline in market capitalization may affect WKSI status and Form S-3 eligibility and the steps that companies may take to address the loss of WKSI status or the ability to use Form S-3 for unlimited primary offerings of securities.

Losing WKSI Status

What is a WKSI?


For domestic companies, Rule 405 of Regulation C of the Securities Act of 1933 (the “Securities Act”) defines a WKSI as a company that meets the following requirements:

  • satisfies the registrant requirements for use of Form S-32;
  • either:
    • as of a date within 60 days of its eligibility determination date, has a public float of $700 million or more; or
    • as of a date within 60 days of its eligibility determination date, has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act3; and
    • is not an ineligible issuer (as defined in Rule 405), an asset-backed issuer, an investment company registered under the Investment Company Act of 1940 (the “1940 Act”) or a business development company under the 1940 Act.

    What are the benefits of WKSI status?

    Under General Instruction I.D. to Form S-3, WKSIs may file automatically effective shelf registration statements on Form S-3, also known as Form S-3ASRs. This provides a number of benefits in conducting offerings. Form S-3ASR permits a WKSI to:

    • avoid the delay associated with SEC staff review and the requirement that the SEC declare the registration statement effective, which can take anywhere from a few days (if the SEC staff decides not to review the filing) to as much as several months (if the SEC staff comments on the filing);
    • register unspecified amounts of specified types or classes of securities, and to do so  without allocating among securities or between primary and secondary offerings;
    • pay filing fees on a “pay-as-you-go” basis at the time of each takedown from the shelf registration statement, rather than when the registration statement is filed;
    • exclude more information from the base prospectus than permitted for other shelf registration statements, including descriptions of securities (other than identifying type or class), the plan of distribution, whether the offering is a primary or secondary and the identity of selling security holders; and
    • file immediately effective post-effective amendments to add additional classes or securities to an effective shelf registration statement.

    Additionally, under Rule 163 of the Securities Act, WKSIs may engage in unrestricted oral and written offers at any time before a registration statement is filed without violating the gun-jumping provisions of the Securities Act, subject to rules regarding free writing prospectuses. These communications must be made by or on behalf of the company and are subject to liability standards applicable to such offers, Regulation FD and the anti-fraud provisions of the federal securities laws.

    When is WKSI status determined?

    For new registration statements, WKSI status is determined at the time of filing. For existing registration statements, WKSI status is in most cases determined each year when the company files its Form 10-K (or on the Form 10-K due date, if earlier). As a result, unless a company’s public float is at least $700 million on at least one date within the 60 days prior to the filing of its Form 10-K, then the company will no longer be a WKSI (unless it qualifies under the alternative test based on issuance of at least $1 billion of non-convertible securities other than common stock).

    What are the results of losing WKSI status?

    A company that loses WKSI status will no longer be eligible to file new Form S-3ASR registration statements. Additionally, subject to the SEC relief discussed below, the company will no longer be able to use any of its existing Form S-3ASR shelf registration statements. For example, a selling stockholder could no longer use a resale shelf registration statement that had been filed on Form S-3ASR to resell shares. Similarly, a company that had registered the issuance of shares upon the exercise of outstanding warrants or upon conversion of outstanding securities on Form S-3ASR could no longer use the registration statement for such issuances. Depending on the contractual commitments made, the company could be exposed to liability if it was not able to maintain an effective registration statement covering these sales or issuances of securities.

    How does a company that loses WKSI status maintain effective registration statements?

    A company that loses WKSI status as a result of a decline in the company’s public float may maintain effective registration statements by taking the following two steps.  

    1. Prior to Form 10-K filing, file a post-effective amendment on Form S-3ASR, if necessary . Prior to filing its Form 10-K (and losing its WKSI status), each of the company’s existing Form S-3ASRs that the company wishes to continue to use must include all of the information that would be required in a regular Form S-3 filed by a non-WKSI. To the extent an existing Form S‑3ASR does not already include this information, the company will need to amend that registration statement before it files its Form 10-K. Each amendment should be filed as a post-effective amendment on Form S-3ASR, which will become automatically effective when filed. Examples of information the amendment may need to contain include (i) a specified maximum amount of securities to be registered, (ii) payment of the registration fee at the time of filing (“pay-as-you-go” registration statements are permitted only for WKSIs), (iii) specific allocation of the securities among primary and secondary offerings, (iv) a plan of distribution and description of the securities to be offered and (v) identification of selling security holders. Additionally, in the event that a company has one or more continuous offerings ongoing using a single shelf registration statement, in the absence of SEC guidance to the contrary, the post-effective amendment must also contain information relating to each continuing offering. Companies filing post-effective amendments will also need to comply with the SEC rules regarding the age of financial statements. These rules will require a company to file any such post-effective amendments within 45 days after the end of the year if the company either (i) does not reasonably and in good faith expect to report income for the most recent fiscal year or (ii) did not report income in at least one of the two fiscal years preceding the most recent fiscal year.4  In addition, in order to file this type of post-effective amendment, the company will need to file any required auditors’ consents, and in some cases a legal opinion, as exhibits.
    2. File a new registration statement on Form S-3 . Either before the company files its Form 10-K, or promptly thereafter, it would have to file a new registration statement on Form S-3 covering the securities previously registered on the Form S-3ASR.5  The new registration statement would be subject to the SEC staff review process and would need to be declared effective before it could be used. Additionally, because the SEC will not declare a filing effective until the Part III information6 for the most recent Form 10-K is filed, companies that incorporate this information into their Form 10-Ks from their proxy statements will not be in a position to have a new filing declared effective until they file that information. However, a company does not have to include the Part III information in its Form 10-K in order to rely on this relief.

    If a company follows these two steps, then the company can continue to use the Form S‑3ASR, as amended, until the replacement registration statement/post-effective amendment is declared effective. In practical terms, the Form S-3ASR as amended will be the equivalent of a standard Form S-3 that would be filed by a non-WKSI. This relief was provided by the SEC staff on January 26, 2009, in Question 198.06 of the Securities Act Rules Compliance and Disclosure Interpretations.

    Companies with a public float under $75 million

    For companies that are not WKSIs but have effective Form S-3 shelf registration statements on file that they wish to continue using for primary offerings, public float as of a date within 60 days of the date on which the Form 10-K is filed (or its due date, if earlier) is also important. As in the case of a Form S-3ASR, a company’s eligibility to use a Form S-3 is also redetermined each time the company files a Form 10-K. Historically, if a company had a public float under $75 million when it filed its Form 10-K it was precluded from conducting primary offerings on Form S-3. However, effective January 28, 2008, SEC amendments to the Form S-3 eligibility requirements permit a company with a public float of less than $75 million to use Form S-3 for public offerings that do not exceed one-third of the company’s public float in a 12‑month period.7  Pursuant to General Instruction B.6. to Form S-3, a company with less than $75 million in public float may register primary offerings of its securities on Form S-3, provided that the company:

    • has filed its Exchange Act reports on a timely basis for at least one year prior to the filing of the registration statement and satisfies the other applicable eligibility conditions for the use of Form S-3;
    • has a class of common equity securities that is listed on a national securities exchange; and
    • is not a “shell company” and has not been a shell company for at least one year before filing the registration statement.
    As a result, if a company has an effective Form S-3 on file at the time it files its Form 10-K and does not have a public float of $75 million or more at any time within 60 days of the Form 10-K filing date, it would still be able to use that Form S-3 subject to the one-third of public float limitation.8  The company would not have to file a post-effective amendment to amend the Form S-3 once it becomes subject to General Instruction B.6. Instead, the company would simply disclose in any prospectus supplement filed for an offering under that Form S-3 that the company is subject to General Instruction B.6. and include additional required disclosure setting forth the company’s public float and the aggregate amount of all securities offered pursuant to General Instruction B.6. during the prior 12 months. However, it should be noted that if the company’s public float equals or exceeds $75 million after the filing of the Form 10‑K, then the one-third of public float limitation on sales will no longer apply to additional sales made pursuant to the registration statement on or subsequent to that date until the next Form 10-K filing when Form S‑3 eligibility is again redetermined.