SEC's Final Rules Modify Form S-3 and F-3 Transaction Eligibility Criteria for Debt Issuances

July 26, 2011

To be eligible to file short-form registration statements on Form S-3 or Form F-3, a company must meet (1) registrant requirements (for example, a company must have been a reporting company for at least a year and be timely in meeting these reporting requirements), and (2) at least one of several alternate transaction requirements. Currently, companies can meet the form's transaction eligibility requirements by offering investment grade debt securities. Companies often rely upon this investment grade criterion to establish their Form S-3 or Form F-3 eligibility for issuances of corporate debt securities when they do not meet the alternate transaction requirement that they have at least $75 million in common equity held by unaffiliated shareholders. 

In response to requirements in the Dodd-Frank Act, the SEC issued final rules today that revise the Form S-3 and Form F-3 transaction eligibility criteria so that issuers of non-convertible debt securities that do not otherwise satisfy Form S-3 or Form F-3 transaction eligibility rules (based on public equity float or other criteria) can no longer qualify to use these forms by issuing investment grade securities. Under the rules adopted today, this investment grade criterion will be replaced with four alternative criteria which will allow issuers that meet the Form S-3 or Form F-3 registrant requirements to register primary offerings of non-convertible debt securities on these forms if they: 

  1. have issued, for cash, more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the prior three years, 
  2. have outstanding at least $750 million of non-convertible securities, other than common equity, that were issued through registered primary offerings for cash, 
  3. are a wholly-owned subsidiary of a well-known seasoned issuer (WKSI) as defined under the Securities Act or 
  4. are a majority-owned operating partnership of a real estate investment trust that qualifies as a WKSI. 

This is an improvement upon the proposed rules, which would have replaced the investment grade criterion solely with the first criterion. Unfortunately, however, the final rules still will likely leave out some issuers who previously qualified to use Form S-3 or Form F-3. 

Grandfathering Permitted

Another significant improvement upon the proposed rules is the addition of a three-year grandfathering provision. This provision will allow issuers to continue to qualify to use Form S-3 or Form F-3 for a period of three years from the effective date of the amendments if the issuer would have been eligible to register the securities offering under the old investment grade provision. 

Applicability and Effective Date of New Rules

According to SEC Chairman Mary Schapiro, the SEC expects just about all issuers that currently rely on the existing test also to continue to qualify under the new criteria. While this may be the case, there are issuers of investment grade debt securities that do not meet the Form S-3 or Form F-3 public equity requirements and will not meet the new criteria adopted today. Once the grandfathering period is over, these issuers will lose access to Form S-3 or Form F-3 until they issue substantial amounts of registered debt. We expect, however, that most of these issuers will issue debt pursuant to Securities Act Rule 144A if they are not able to use Form S-3 or Form F-3, given the potential time delay in making registered offerings using a long form registration statement, and thus will likely never satisfy the new criteria adopted today. 

The new rules will be effective 30 days after publication in the Federal Register, which we expect to occur shortly. 

See the SEC's press release and fact sheet describing the new rules.

If you have questions regarding this newsflash, please contact any of the lawyers listed below or your regular Davis Polk contact.

Julia K. Cowles650 752
Joseph A. Hall212 450
Michael Kaplan212 450
Janice Brunner212 450
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