On July 26, 2011, the SEC approved amendments to eligibility criteria for use of the short form registration statement on Form S-3.
To use the short form registration statement, a proposed offering must meet both the issuer eligibility requirements and a transaction eligibility requirement. While there are several available transaction eligibility standards, a frequently relied on standard had been for the issuer to issue “investment grade securities,” which meant that at least one of the nationally recognized statistical rating organizations had rated the offered security as investment grade. Pursuant to Section 939A of the Dodd-Frank Act, all federal agencies must remove references to credit ratings in their regulations to avoid any inference that the U.S. government is giving a “seal of approval” on the quality of any particular credit rating or rating agency. The amendment eliminates the use of credit ratings as a transaction eligibility standard and replaces it with an alternative set of standards. The new standards allow an eligible issuer to meet the transaction test if it has either (i) issued at least $1 billion in non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act, over the prior three years or (ii) outstanding at least $750 million of non-convertible securities, other than common equity, issued in primary offerings for cash, not exchange, registered under the Securities Act. Securities of wholly-owned subsidiaries of a well-known seasoned issuer or of a majority-owned operating partnership of a REIT that qualifies as a well-known seasoned issuer would also be eligible. The amendment will be effective in mid-September (30 days after the rule is published in the federal register).
The SEC has also provided for a three year grandfathering provision. For three years after the amendment is effective, issuers that would have been eligible to use Form S-3 as of the effective date of the amendment may use Form S-3 to register a primary offering of investment grade non-convertible securities if:
- The issuer had a reasonable belief that it would have been eligible to use Form S-3 prior to the amendment becoming effective;
- The issuer discloses this belief and the basis for its reasonable belief in its registration statement (examples of evidence of an issuer’s reasonable belief include, but are not limited to, an investment grade issuer credit rating, a preliminary investment grade credit rating, or an investment grade credit rating on a security that the issuer offered earlier in a similar offering and that has not been downgraded or put on a watch list since its issuance); and
- The issuer files a prospectus for the offering prior to three year anniversary of the effective date of the amendment.