What the Proposal Could Mean for Capital Raising, Market Access, and Offering Practices

The SEC recently proposed significant amendments to the registered offering framework under the Securities Act of 1933 (the “Securities Act”) which, if adopted, could materially expand access to shelf registration and other streamlined capital-raising accommodations for a broad range of public companies.

The proposal would significantly expand Form S-3 eligibility, eliminate key limitations under the current “baby shelf” framework, broaden offering and communication accommodations, and expand federal preemption from certain state blue sky registration requirements.

If adopted, the proposal could have particularly significant implications for smaller and mid-sized public companies, including issuers that currently face limitations on shelf registration eligibility or financing flexibility.

The Proposal

The proposing release includes a broad set of amendments intended to modernize the registered offering framework and broaden access to streamlined offering accommodations under the Securities Act. Most significantly, the proposal would substantially revise eligibility requirements for Form S-3 and shelf registration.

Under the current framework, primary offerings on Form S-3 generally require at least 12 months of Exchange Act reporting history and either:

• at least $75 million in public float; or
• compliance with the limited “baby shelf” framework applicable to certain exchange-listed issuers with less than $75 million in public float.

The existing baby shelf rules permit eligible issuers to conduct primary offerings on Form S-3, but generally limit sales to no more than one-third of the issuer’s public float during any rolling 12-month period. As a practical matter, these limitations can significantly constrain financing flexibility for smaller issuers.

The SEC’s proposal would significantly broaden access to Form S-3 by:

• eliminating the 12-month reporting history requirement;
• eliminating the $75 million public float threshold for primary shelf eligibility; and
• eliminating the one-third public float limitation under the current baby shelf framework.

As proposed, any issuer that is subject to Exchange Act reporting requirements and is current and timely in its Exchange Act reports generally would become eligible to use Form S-3 for primary offerings, regardless of public float size.

The proposal would also:

• expand forward incorporation by reference for Form S-1 registration statements;
• broaden offering communication accommodations beyond traditional well-known seasoned issuer (WKSI) eligibility standards;
• simplify certain registration statement updating requirements; and
• revise aspects of the current registration statement and offering communications framework that the SEC views as unnecessarily restrictive or outdated.

The SEC estimates in the release that the proposed rule changes could increase by more than 60% the number of issuers eligible to offer an unlimited amount of securities on Form S-3, significantly expanding the number of companies able to access streamlined capital-raising tools that historically have been available primarily to larger seasoned issuers.

Expanded Shelf Access Could Be Particularly Significant for Smaller and Mid-Sized Issuers

The proposed expanded shelf access amendments would be particularly significant for smaller and mid-sized issuers that currently are ineligible to use Form S-3 or are constrained by the existing “baby shelf” framework. If adopted, these issuers could gain substantially greater flexibility to access capital markets opportunistically, maintain at-the-market (or “ATM”) programs (which generally permit issuers to raise capital incrementally by offering equity securities into an existing trading market for those securities at market price), and pursue other financing opportunities that historically may have been constrained by Form S-3 eligibility requirements or the existing baby shelf limitations.

This may be particularly meaningful for OTCQX and OTCQB issuers, which historically have had limited access to shelf registration and ATM financing alternatives. For these companies, the proposal could expand the range of financing structures available to support growth initiatives, acquisitions, and other capital needs.

For companies newly gaining broad shelf registration access, financing activities may become more closely integrated with routine disclosure planning and investor communications.

Incorporation by Reference Flexibility Could Reduce Administrative Burdens

The proposal’s expansion of incorporation-by-reference accommodations for Form S-1 registration statements also could have meaningful practical implications.

Currently, many companies that do not qualify to use Form S-3 face additional burdens associated with maintaining effective registration statements and updating disclosures through post-effective amendments. Expanded incorporation-by-reference flexibility could reduce those burdens by permitting companies to automatically update disclosures through subsequently filed Exchange Act reports.

As a result, some issuers may experience lower transaction costs, fewer registration statement amendments, reduced SEC review timing considerations, and greater flexibility in maintaining continuous offering programs.

Proposed Preemption of State “Blue Sky” Registration Requirements for Certain Offerings

The proposal also includes amendments that could significantly expand federal preemption from state securities law registration and qualification requirements.

Specifically, the SEC proposed defining a “qualified purchaser” for purposes of Section 18(b)(3) of the Securities Act as any person to whom securities are offered or sold pursuant to an offering registered under the Securities Act. If adopted, the proposed amendments would extend covered-security treatment to registered offerings generally and substantially reduce the need for separate state registration and qualification in many transactions.

As a practical matter, these changes could materially reduce offering costs, timing, and execution complexity for issuers that currently must navigate multiple state securities law regimes in connection with registered offerings. The proposed may be particularly significant for transactions that historically have been subject to substantial multi-state qualification burdens, including certain IPOs, smaller public offerings, and mutual-to-stock conversions conducted by community-based financial institutions. For these issuers, state registration and qualification requirements can add meaningful cost, complexity, and timing considerations to offering transactions.

Because the proposed amendments would expand federal preemption in areas traditionally subject to state securities law regulation, the proposed amendments may generate significant comment from state securities regulators and other market participants.

If adopted substantially as proposed, the amendments could represent one of the most significant expansions of federal preemption under the Securities Act since the enactment of the National Securities Markets Improvement Act of 1996.

Offering Communications

Under the current rules, many offering communication benefits are available only to WKSIs, which generally must have at least $700 million in public float or have issued at least $1 billion of registered non-convertible debt over the prior three years. The proposed rules would replace much of the existing WKSI framework with two new categories of issuers:

• “Eligible Listed Issuers” (“ELIs”), consisting generally of exchange-listed issuers that satisfy the proposed Form S-3 eligibility requirements; and
• “Seasoned Eligible Listed Issuers” (“SELIs”), consisting generally of ELIs that also have at least 12 months of Exchange Act reporting history.

Under the proposal, ELIs and SELIs would gain access to many accommodations currently reserved for WKSIs, including broader flexibility to use free writing prospectuses and expanded ability to communicate with investors before and during registered offerings. SELIs also would gain access to additional accommodations associated with automatic shelf registration statements.

If adopted, these changes could significantly expand offering flexibility for a much broader range of exchange-listed issuers, including many companies that currently do not qualify for WKSI status.

At the same time, expanded communication flexibility would not eliminate traditional securities law concerns surrounding offering communications and investor interactions. Companies making greater use of these accommodations still would need to consider Regulation FD, gun-jumping restrictions, and the consistency of public statements made in proximity to securities offerings.

Which Companies Are Most Likely to Benefit?

The proposed amendments are likely to be most meaningful for smaller and mid-sized reporting companies that currently face limitations under the existing Form S-3 and “baby shelf” framework.

In particular, issuers that periodically access the capital markets – or that value the ability to raise capital opportunistically – could benefit significantly from expanded shelf registration eligibility and the elimination of the current one-third public float limitation.

The proposed amendments also may be particularly meaningful for issuers that currently face significant state securities law compliance burdens in connection with registered offerings, including certain community-based financial institutions and mutual-to-stock conversion transactions. In contrast, many established WKSIs and large accelerated filers may experience less practical change because they already operate with many of the offering flexibilities that the proposed amendments would extend to a broader group of issuers.

Looking Ahead

The proposing release solicits comment on a broad range of questions relating to investor protection, market efficiency, shelf registration eligibility, offering communications, and the practical operation of the registered offering framework, underscoring that significant issues remain unresolved and that the ultimate form and scope of any final rule remain uncertain.

Even if adopted substantially as proposed, the practical impact likely would vary significantly across issuers and transaction types. For some companies, the proposed amendments could materially improve access to the capital markets and reduce financing friction. For others, market expectations and existing financing practices may limit the practical significance of certain proposed accommodations.

Nevertheless, the proposal signals that the SEC is reconsidering longstanding assumptions regarding the balance between investor protection, disclosure obligations, and efficient access to the public markets.

For more information on the proposed amendments, or to learn how Godfrey & Kahn can help, contact a member of our Corporate & Securities practice.