Yesterday, the SEC proposed big changes to the rules and forms governing registered offerings. The amendments – as set forth in this 511-page proposing release – are intended to encourage public capital formation by increasing efficiency, flexibility, and cost savings for public companies – while making it easier for broker-dealers to provide research coverage for a broader universe of public companies and maintaining robust investor protections. These excerpts from the SEC’s fact sheet explain the key points:

Form S-3 eligibility:

– The proposed amendments would revise Form S-3’s eligibility requirements by, among other changes, removing the requirement that issuers be subject to the reporting requirements of the Securities Exchange Act of 1934 (Exchange Act) for 12 months before using the form and eliminating all of the form’s transaction requirements, including the instruction that requires issuers to have at least $75 million in public float to register an unlimited amount of securities on the form. Form S-3 would continue to require that issuers be current and timely in their Exchange Act reporting requirements and would prohibit certain “ineligible issuers” from using the form.

– Taken together, the proposed amendments are intended to allow a greater number of issuers flexibility to access the public securities markets quickly by using Form S-3 while also ensuring that investors remain appropriately protected. The release states that, under the proposed amendments, there could be an increase of over 60 percent in the number of issuers eligible to offer an unlimited amount of securities on Form S-3. These newly eligible issuers would benefit from the cost savings and capital raising efficiencies and flexibilities associated with the ability to use Form S-3 and conduct shelf offerings.

Enhanced Registration and Communication Benefits:

– Currently, certain registration and communication benefits are reserved for “well-known seasoned issuers” (WKSIs). In order to qualify as a WKSI, an issuer must have at least $700 million in public float or have issued at least $1 billion of debt securities in registered offerings. Under the proposed amendments, issuers would not be required to meet either of these metrics in order to qualify for the enhanced registration and communication benefits. Instead, under the proposed amendments, issuers would qualify for all of those benefits — other than the ability to use an automatic shelf registration statement — if they are eligible to use Form S-3 and have at least one class of common equity securities listed on a national securities exchange. Issuers would have to be subject to the Exchange Act’s reporting requirements for 12 months before being able to use an automatic shelf registration statement.

– These proposed amendments are intended to provide a greater number of issuers the flexibility to access the public securities markets on demand using automatic shelf registration statements and to benefit from other offering-related flexibilities while also ensuring that investors remain appropriately protected. The release states that, under the proposed amendments, there could be an increase of over 200 percent in the number of issuers eligible for all of the enhanced registration and communication benefits.

Preemption of State Securities Law Registration and Qualification Requirements:

– The proposed amendments would define “qualified purchaser” under Section 18(b)(3) of the Securities Act and preempt state securities law registration and qualification requirements with respect to any registered offering. Such preemption currently applies to registered offerings in which the securities being offered and sold are listed or approved for listing on a national securities exchange. Preemption currently does not, however, apply to registered offerings of unlisted securities.

– The proposed amendments, therefore, would eliminate the costs associated with complying with numerous states’ registration and qualification requirements for registered offerings of unlisted securities. The proposed amendments are intended to lower the cost of a registered offering of unlisted securities and, as a result, facilitate capital formation in a manner that is consistent with investor protection.

Incorporation by Reference on Form S-1:

– The ability to incorporate by reference information into Form S-1 filed before the effective date of the registration statement (backward incorporate) currently is limited to issuers that, among other things, have filed an annual report for their most recently completed fiscal year. Further, the ability to incorporate by reference information filed after the effective date of a Form S-1 (forward incorporate) currently is limited to issuers that are smaller reporting companies (SRCs). Under the proposed amendments, issuers would be able to backward incorporate regardless of whether they had filed an annual report for their most recently completed fiscal year and forward incorporate regardless of whether they are an SRC. The proposed amendments would, therefore, allow a greater number of issuers to enjoy the cost savings associated with incorporation by reference, with an estimated increase of up to 106 percent in the number of issuers eligible to forward incorporate on Form S-1.

The SEC’s press release touts the proposal as “the most significant modernization of the registered offering framework in more than 20 years.” If adopted, the amended rules would also maintain parity between certain Form N-2 filers and operating companies across registration, offering, and communication provisions, and expand access to broad-based advertising for certain non-variable annuity insurance products.

Comments are due 60 days after publication of the proposal in the Federal Register (which usually takes about 30 days). For more color on the proposal and its potential impact, members can check out the memos that we’ll be posting in our “Securities Act Reform” Practice Area.

– Liz Dunshee