Client Alert

The SEC recently proposed amendments that would expand the eligibility requirements of Form S-3, the "short form" used by certain issuers to register offerings under the Securities Act of 1933.¹ Under the proposals, eligible issuers would be permitted to conduct primary securities offerings without regard to the size of their public float as long as they do not sell more than 20% of their public float over any 12-month period. The proposed changes are intended to allow more companies to benefit from the greater flexibility and efficiency of Form S-3 without compromising investor protection.

Unlike Form S-1, Form S-3 provides a more simplified means to conduct registered offerings since it permits incorporation by reference from existing and future SEC filings and allows companies to conduct "shelf" offerings under Rule 415 of the Securities Act.² Under the current Form S-3 instructions, a company desiring to use Form S-3 must have a class of securities registered under the Securities Exchange Act of 1934 and have timely made all filings required under the Exchange Act for at least the 12 months preceding the filing of the registration statement. In addition, the company must meet one of the form's transaction requirements, depending on the type of offering to be conducted. In order to conduct a primary offering (that is, securities offered by or on behalf of the registrant for its own account), a company must have a non-affiliate equity market capitalization, or "public float," of at least $75 million.³

The proposed amendments would add a new General Instruction I.B.6 to Form S-3, which would allow companies with a public float of less than $75 million to register primary offerings on Form S-3 provided:

• The company meets the other registrant eligibility conditions for the use of Form S-3;
• The company is not a shell company and has not been a shell company⁴ for at least 12 calendar months before filing the registration statement; and
• The company does not sell more than the equivalent of 20% of its public float in primary offerings under General Instruction I.B.6 over any period of 12 calendar months.

Because the 20% cap on the amount of securities that may be sold over a period of 12 calendar months is calculated by reference to an issuer’s public float immediately prior to a contemplated sale, as opposed to the time of the initial filing of the registration statement, the amount of securities that the issuer is permitted to sell may increase over time if the issuer’s public float increases. Conversely, the amount of securities that may be sold may also decrease if the issuer’s public float contracts (although previous offerings will not be affected as long as the 20% limitation was not exceeded at the time of the previous sale). In addition, if the company’s public float exceeds $75 million at any point after the effective date of the registration statement, the 20% restriction would no longer be applicable as long as the public float remains above $75 million.

Under the proposals, even companies that are not traded on a national securities exchange (e.g., companies with securities quoted on the over-the-counter bulletin board or pink sheet quotation services) would be permitted to use Form S-3 if they meet the other Form S-3 requirements. In addition, the proposals would apply the 20% limit to offerings of both debt and equity and thus would allow companies to offer non-investment grade debt on Form S-3.

The Form S-3 proposals are subject to comment and final rulemaking action by the SEC. Comments are due August 27, 2007. If you have any questions regarding the Form S-3 proposals, please contact either the Womble Carlyle attorney with whom you usually work or one of our Corporate and Securities attorneys.

Notes
[1] Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3, Securities Act Release No. 33-8812 (June 20, 2007) (available at (http://www.sec.gov/rules/proposed/2007/33-8812.pdf). The release also addresses similar proposed revisions to Form F-3, the equivalent short-form registration statement for foreign private issuers.

[2] Companies that are eligible to register primary shelf offerings under Rule 415 can register offers before planning a specific offering and, after the registration statement becomes effective, they may take advantage of favorable market opportunities by offering the securities in one or more tranches without the need for further SEC action.

[3] Transactions involving primary offerings of non-convertible investment grade securities; certain rights offerings, dividend reinvestment plans and conversions; and offerings by selling shareholders of securities registered on a national securities exchange do not require a minimum public float.

[4] As defined in Rule 405 of the Securities Act.