November 5, 2008
The SEC’s Securities Offering Reform of December 2005 set the clock ticking for shelf registration statements on Form S-3; as a result, many shelf registration statements that were in effect on December 1, 2005 will expire on December 1, 2008. Upon adoption of the reform, certain types of shelf registration statements then in effect were set to expire three years from December 1, 2005. Similarly, these types of shelf registration statements, if filed on or after December 1, 2005, were given a three-year lifespan.
Companies should determine now whether their shelf registration statements will expire on December 1, 2008 or soon thereafter and what to do next in order to ensure maximum flexibility when the opportunity or need to access the capital markets next arises.
This client alert summarizes the effects of the reform on different types of shelf registration statements and different types of issuers. It also offers guidance as to the next steps companies should take in light of the reform.
First Step: Assess status of shelf registration statement
Although some types of shelf registration statements are exempt, many of the most commonly used types are subject to the three-year rule. The following is a brief outline of the principal types of shelf registration statements that are and are not affected by the new rules. Companies should determine now whether any of their shelf registration statements on Form S-3 currently on file with the SEC are affected by the three-year rule.
- The three-year rule covers the following types of shelf registration statements:
- Automatic shelf registration statements. All automatic shelf registration statements expire after three years, regardless of the type of offering.
- Registrations of offerings on a continuous or delayed basis. This includes the “universal shelf” registration statements that many issuers rely on to efficiently access the capital markets.
- Registrations of mortgage-related securities. This includes registration statements covering mortgage-backed debt as well as mortgage participation or pass-through certificates.
- The three-year rule does not cover the following types of shelf registration statements:
- Selling securityholder registration statements. Registrations of securities for resale by selling securityholders, except for automatic shelf registration statements, are exempt from the three-year rule.
- DRIPs. Registration statements covering securities offered pursuant to a dividend reinvestment plan (DRIP) are generally exempt from the three-year rule.
- Securities issuable upon conversion. Registrations of securities to be issued on conversion of options, warrants or rights are exempt from the three-year rule.
- Acquisition shelf registration statements. Registrations of securities to be used in connection with business combination transactions are exempt from the three-year rule.
Next Step: Determine eligibility to use S-3 or to file as a WKSI
After a company has determined that it must file a new shelf registration statement, it should next confirm that it is eligible to file using Form S-3 and determine whether it can take advantage of well-known seasoned issuer (“WKSI”) status. To be eligible to use Form S-3, a company must have made its SEC filings on a timely basis for the previous twelve months and satisfied other eligibility requirements. WKSI status is dependent in part upon a company’s capitalization. It is available to public companies that meet the Form S-3 registrant and other eligibility requirements and either:
- have had a worldwide market value of outstanding equity held by non-affiliates of $700 million or more at any point in the 60 days preceding the filing of the shelf registration statement, or
- have issued $1 billion or more in non-convertible debt over the past three years.
WKSI S-3:
WKSIs have certain advantages when filing shelf registration statements, including the following:
- Automatic effectiveness. A WKSI can file automatic shelf registration statements, which are effective immediately upon filing. Automatic effectiveness means a filing is not subject to review by the SEC, which avoids a potential source of delay in registration. This is particularly helpful with the December 1 deadline fast approaching, as WKSIs can avoid a gap between effective shelf registration statements simply by filing a new automatic shelf registration statement.
- Unlimited amount. While a traditional shelf registration statement must specify a maximum aggregate dollar amount of securities offered, a WKSI may file a shelf registration statement for an unlimited amount of securities. A WKSI is not required to pay a fee upon filing a new shelf registration statement, but instead pays a filing fee only upon conducting an offering. Furthermore, by filing for an unlimited amount, a company avoids signaling any capital raising expectations to the market.
Because WKSI status can be dependent on the value of a company’s equity, some companies that currently enjoy WKSI status should consider filing a new registration statement as soon as possible in order to take advantage of WKSI status. Recent market turmoil has caused unprecedented declines in the market value of some stocks, even without regard for the underlying strength of the issuing company, and may jeopardize WKSI status for some issuers.
Non-WKSI S-3:
If not a WKSI, the inconvenience of any delay attributable to SEC staff review can be avoided or mitigated by promptly preparing and filing a new registration statement.
- SEC declaration of effectiveness. Shelf registration statements of non-WKSIs are not immediately effective. As a result, non-WKSIs are subject to a potential delay for SEC review pending a declaration of effectiveness. This delay can make it hard to predict precisely when the first offering under a new shelf registration statement can commence or could lead to a gap between effective periods of shelf registration statements.
- Use of expired registration statements. SEC rules permit a non-WKSI to continue to offer securities under an expired registration statement in two situations:
- Replacement shelf. If a company files a new registration statement for securities identical to those registered under an expiring, but still effective, registration statement, the lifespan of the old registration statement will be extended by up to 180 days or until the new registration statement becomes effective, whichever comes first.
- Continuous offering. If a company is engaged in a continuous offering that began within three years of the effective date of an expiring shelf registration statement, and the company files a new shelf registration statement permitting the same offering, the company may continue to sell securities under the old registration statement in the continuous offering until the new registration statement is declared effective.
- Carryover of unused fees. A non-WKSI filing a traditional shelf registration statement must pay a filing fee based on the maximum aggregate dollar amount of securities that may be offered under that registration statement. However, the unused portion of previously paid filing fees may be applied toward a new registration statement filed within five years of the earlier registration statement.
In addition to assessing S-3 and WKSI eligibility, a company planning to file a registration statement must determine that its financial statements comply with Regulation S-X. For example, a company that has recently announced a segment realignment must recast the financial statements that are to be incorporated by reference into a shelf registration statement before or in connection with filing the registration statement rather than waiting until the next annual report on Form 10-K. In other instances, a company that recently has completed a large acquisition or series of acquisitions may be required to present pro forma financial information in connection with the filing.
Implementation: Revise and update shelf registration statement and ancillary documents
The Securities Offering Reform changed many aspects of US securities laws and affected practical aspects of shelf takedowns in particular. Companies should work with advisors familiar with current market practice and the changes implemented in the reform to ensure that their new shelf registration statements are properly updated and equipped for future offerings.
- Consider the range of securities listed. Difficult market conditions require speed and flexibility to take advantage of fleeting market windows. Successful offerings conducted under recent market conditions often have included a more diverse range of securities, such as warrants and secured debt, than many issuers previously have considered offering. Under these conditions, it may be prudent to expand a shelf registration to cover a wider range of securities than was appropriate three years ago.
- Consider the terms of securities offered. Companies should consider whether the indenture filed with a new registration statement should be revised to reflect the latest developments attributable to indenture case law as well as bondholder activism, which has increased dramatically since 2005. For instance, recent decisions relating to SEC reporting covenants in indentures suggest that a carefully drafted reporting covenant may reduce the risk that a failure to file SEC reports in a timely fashion will result in an event of default. Similarly, companies should use new shelf registration statement filings as opportunities to ensure that their forms of underwriting agreements on file are up to date and reflect market standard terms for offerings. Taking these steps now may help avoid delays from protracted negotiation at the time of an offering and help facilitate quick shelf takedowns.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Gibson Dunn attorney with whom you work or any of the following:
Amy L. Goodman – Washington, D.C. (202-955-8653, [email protected])
Brian J. Lane – Washington, D.C. (202-887-3646, [email protected])
James J. Moloney – Orange County (949-451-4343, [email protected])
Ronald O. Mueller – Washington, D.C. (202-955-8671, [email protected])
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, [email protected])
Andrew Fabens – New York (212-351-4034, [email protected])
David C. Lee – Orange County (949-451-4069, [email protected])
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