SEC’s Proposed Amendments to Form S-3 and Rule 144

07.09.2007

“Opening Up the Shelf” to Smaller Public Companies and Shortening the Holding Period for Restricted Securities

Form S-3

On June 20, 2007, the SEC published proposed amendments to Form S-3, seeking to make available the short-form registration statement for primary offerings by smaller public companies, including those quoted on the OTCBB and Pink Sheets.  Currently, companies must have at least $75 million of public float (i.e, market capitalization of shares held by non-affiliates) in order to use Form S-3 to register primary offerings.  This public float requirement does not apply to the use of Form S-3 for resales.

The proposed amendments would allow companies with less than $75 million of public float to use Form S-3 so long as they:  (1) meet the other eligibility conditions for use of the form (such as timely filing of all Exchange Act reports for 12 months); (2) are not shell companies and have not been shell companies for at least 12 months before filing the registration statement; and (3) only sell securities off the shelf equal to a maximum of 20% of their public float over any 12-month period.

Additional features of the SEC’s proposals include: 

• The company’s public float is to be calculated immediately prior to the contemplated sale of securities (as opposed to the time of the filing of the registration statement).  This means that the public float “cap” is a flexible one:  The amount of securities an issuer is able to sell will increase if the issuer’s public float increases. 
• If an issuer crosses the $75 million public float threshold subsequent to the effective date of its Form S-3, the 20% cap will be lifted.

Impact on Capital-Raising Efforts of Smaller Public Companies

These amendments, if enacted, could significantly increase the ability of smaller public companies to raise capital.  First, companies will be able to take advantage of efficiencies provided by Form S-3, which permits incorporation by reference of information from the company’s Exchange Act reports (e.g., Forms 10-K, 10-Q, 8-K) and provides for automatic updating of the registration statement when new reports are filed .  Companies that are not eligible to use Form S-3 must update information by filing a new registration statement or a post-effective amendment to a previously filed registration statement, which then must be declared effective by the SEC before securities may be sold.  The costs associated with preparing and filing a new registration statement or an amendment, and the additional delays in the offering process, can be substantial.  Permitting smaller companies to use Form S-3 would reduce these costs because, once the registration statement is effective, the company would be able to continuously offer the securities without waiting for further action by the SEC.

Second, the use of Form S-3 by smaller public companies would improve their access to the public securities markets and provide these companies a new measure of flexibility in raising capital.  Form S-3 eligibility enables companies to conduct primary offerings “off the shelf.”  This means that companies need only register for the offering once and then take securities off the shelf as needed.  By exercising greater control over the timing of their offerings, companies can take advantage of desirable market conditions promptly and thereby raise capital on more favorable terms or secure lower interest rates on debt.  In addition, for the first time, non-investment grade debt would be permitted to be sold using a Form S-3.  Previously, only investment grade debt (in addition to equity) could be sold using a Form S-3.

Form S-3 would thus provide an attractive alternative to financing efforts through PIPEs and equity lines of credit, where terms are often not as favorable for the issuers as in registered offerings.  In short, Form S-3 eligibility would significantly improve the capital raising efforts of smaller public companies.
Analagous proposed amendments were issued regarding Form F-3, the equivalent short-form registration statement available to foreign private issuers. 

Read the SEC’s proposed amendments to Forms S-3 and F-3 at: http://www.sec.gov/rules/proposed/2007/33-8812.pdf

Rule 144

In addition, on May 23, 2007, the SEC proposed amendments to Rule 144 that would, among other things, shorten the holding period for resales of restricted securities held by affiliates and non-affiliates from one year to six months.  Non-affiliates would be permitted to resell restricted securities under Rule 144 beginning six months after the holder acquired the securities (subject to tolling if engaged in hedging transactions), provided the company is current in its securities filings for one year after the purchase of the securities.  After one year, non-affiliates would be able to sell these securities without restriction.

Read the SEC’s proposed amendments to Rule 144 at: http://www.sec.gov/rules/proposed/2007/33-8813.pdf