The ability to use an S-3 registration statement is significant for exchange traded companies. An S-3 allows forward incorporation by reference and can be used for a shelf registration among other benefits. S-3 eligibility is comprised of both registrant or company requirements and transaction requirements. In this blog I will discuss the general company and transaction requirements for a Form S-3. In a separate blog I will drill down on shelf offerings.
Registrant Requirements
Companies that meet the following requirements are eligible to use a Form S-3 for a transaction that meets one of the transaction requirements:
               (1) The company must be organized under the laws of the United States and must have its principal business operations in the United States or its territories;
               (2) The company has a class of securities registered pursuant to either Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) or is required to file reports pursuant to Section 15(d) of the Exchange Act;
               (3) The company (i) has been required to file Exchange Act reports and has filed all such Exchange Act reports for a period of 12 months; and (ii) has timely filed all Exchange Act reports required by Sections 13(a), 15(d) and Section 14(a) and 14(c) materials for a period of 12 calendar months, except for reports under Item 1.01 (entry into a material definitive agreement), 1.02 (termination of a material definitive agreement), 1.04 (mine safety – reporting shutdowns and patterns of violations), 2.03 (creation of a direct financial obligation or an obligation under an off-balance sheet arrangement), 2.04 (triggering events that accelerate or increase a direct financial obligation or off-balance sheet obligation), 2.05 (costs associated with exit or disposal activities), 2.06 (material impairments), 4.02(a) (non-reliance on previously issued financial statements or related audit report where the company makes the non-reliance determination) or 5.02(e) (compensatory arrangements with certain officers) of Form 8-K.
This eligibility rule specifically refers to reports required to be “filed” under the Exchange Act. Certain Items in a Form 8-K may be “furnished” and not “filed,” including disclosures pursuant to Items 2.02 (results of operations and financial conditions) and 7.01 (Regulation FD disclosure) and accordingly, the failure to timely file an 8-K under these Items will not affect Form S-3 eligibility. For more information on Form 8-K filing requirements, see HERE. If a company files for an extension of a Form 10-Q or 10-K on Form 12b-25 and files its report within the extension time frame, that report will be deemed timely filed.
Eligibility requires that a company have been required to file reports under the Exchange Act and as such, the voluntary filing of reports generally does not count. However, in the Lamar Advertising Co. no-action letter issued in 2009, the SEC set out nine factors that, if satisfied, would allow a voluntary filer to use form S-3. In short, the company must have been required to file Exchange Act reports because of an effective Securities Act registration statement, at some point thereafter become a voluntary filer as they had less than 300 shareholders, did not file a Form 15, had a contractual obligation to file reports and continued to do so, and then again became required to file reports either because of a newly filed Securities Act or Exchange Act registration statement.  A company can request relief from the timeliness requirement; however, such relief is only granted in very limited circumstances;
               (4) Since the filing of its last Exchange Act report, neither the company nor any of its subsidiaries has: (i) failed to pay a dividend or sinking fund installment or a cumulative dividend on preferred stock; or (ii) defaulted on any installment on indebtedness for borrowed money or on any rental on a long-term lease if the default is material to the financial position of the company or its subsidiaries on a consolidated basis. Furthermore, regardless of the fact that a disqualifying default is either cured or waived after it occurs, the form may not be used between the date of the default and the audit at the end of the fiscal year in which such material default occurred. However, if a prospective default never occurs because the lenders have waived payment in advance of the due date, the form may still be used;
               (5) A foreign company that meets all of the other eligibility requirements and files regular U.S. Exchange Act reports;
               (6) A company will not lose eligibility if it is a successor registrant as long as the succession was for the purpose of changing state of domicile or creating a holding company structure and the assets and liabilities of the successor are substantially the same as the predecessor;
               (7) If a company is subject to the electronic filing requirements of Rule 101 of Regulation S-T, which all reporting companies are, it must have made all required electronic filings and posted on its website all XBRL data files within the prior 12 months. I note, however, that effective September 17, 2018, the SEC no longer requires that companies post XBRL data on their websites. See HERE.
Transaction Requirements
               Primary Offerings – Instruction 1.B.1
Form S-3 can be used for primary offerings of a company whose market value of voting and non-voting common equity held by non-affiliates is $75 million or more, including for the sale and issuance of new securities or for the resale of already issued and outstanding securities held by third parties (indirect primary or resale), including offerings by subsidiaries and standby underwriters in connection with the call or redemption of warrants or a class of convertible securities. Common equity is defined as “any class of common stock or an equivalent interest, including but not limited to a unit of beneficial interest in a trust or a limited partnership interest.” Only outstanding common equity is used in the calculation and not convertible securities or common equity underlying convertible securities.
An affiliate of a Company is a person that “controls, or is controlled by, or is under common control with, such issuer.” The SEC defines “control” as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” Determining affiliate status is a facts and circumstances determination, and the SEC has indicated many times that it will not provide guidance on affiliate status. Clearly, executive officers and directors are affiliates. However, whether stockholders that do not otherwise have board representation are affiliates or not can be a troublesome analysis. A beneficial owner of 10% or more of the voting securities of a company is presumed to be a control person/affiliate. Further, 5% stockholders are required to disclose in a Schedule 13D or 13G filed with the SEC whether their shares are held for the purposes of influencing or changing control. Companies should review their known beneficial owners and consider all factors relating to affiliate status, including but not limited to: (i) distribution of voting shares among all stockholders; (ii) impact of possible resale; (iii) relationship between the stockholder and management; (iv) influence as a stockholder; and (v) voting agreements.
For purposes of determining the value threshold, market value is computed by using the last sale price or the average of the bid and asked prices as of a date within 60 days prior to the date of filing. The number of shares held by non-affiliates is usually determined as of the date of filing but can be any day within the 60-day look-back period. It is not necessary to calculate the number of shares held by non-affiliates for the same day on which the average price of the stock is determined. For example, the number of shares outstanding on the date of filing might be used, together with the average price of stock for any day within the 60-day period.
A company must meet this eligibility requirement each time it files an update to the registration statement. Accordingly, if the market value drops between updates, a company would need to switch to an S-1 (or other form it is qualified to use) when filing an update. Furthermore, as Form S-3 incorporates Exchange Act reports by reference, the filing of a Form 10-K is the equivalent to filing a post-effective amendment. This means that if the company is not eligible to use Form S-3 at the time of filing its 10-K, it would be required to file a post-effective amendment on whatever other form would be available at the time. However, a company can use the same Form S-3 (as updated and amended through subsequent Exchange Act reports or post effective amendments) to switch between a baby shelf and full shelf based on the fluctuating market value of voting and non-voting common equity held by non-affiliates.
Prior to the recent change in the definition of a smaller reporting company (SRC) (see HERE), the threshold for use of a Form S-3 for a full shelf offering was the same as that for an SRC. That is, prior to June 2018, SRCs did not qualify to use Form S-3 for primary offerings except for under the baby shelf rule. Following the amended definition of an SRC, companies that qualify as an SRC and to use Form S-3 (i.e., with a public float in excess of $75 million but under $250 million) will be able to take advantage of the SRC scaled disclosures in their shelf offerings.
Unlike the baby shelf rule, companies eligible to use Form S-3 for a primary offering are not required to have a class of equity registered on a national exchange. In other words, a company whose market value of voting and non-voting common equity held by non-affiliates is $75 million or more and that trades on the over the counter market, would be eligible to use Form S-3 assuming it met the other eligibility requirements (such as the timely filing of all Exchange Act reports).
A company that qualifies to use Form S-3 for primary offerings under Instruction 1.B.1 may use that form to register the offer and sale of both an immediately convertible security and the underlying security. The fact that subsequent conversions may occur at a time when the company does not meet the transaction requirement for conversions described below, would not affect the initial registration of the offer of the underlying securities. Â If it becomes necessary to update the registration statement, the company may accomplish the update by incorporation by reference or post-effective amendment only if it meets the conditions for the use of the form at that time.
A Form S-3 cannot be used for exchange offers or other business combination transactions. Although securities registered on Form S-3 cannot be sold in exchange for other securities, the consideration is not strictly limited to cash. Form S-3 would be available, for example, for transactions in which the consideration for the securities consists of promissory notes or services performed for the issuer by the recipient of the securities.
               Other Limited Primary Offerings (the “Baby Shelf Rule”) – Instruction 1.B.6
For companies that have an aggregate market value of voting and non-voting common stock held by non-affiliates of less than $75 million, Instruction 1.B.6(a) limits the amount that the company can offer to up to one-third of that market value in any trailing 12-month period. This one-third limitation is referred to as the “baby shelf rule.” The baby shelf rule is only available to companies that have at least one class of securities listed on a national exchange.
To calculate the non-affiliate float for purposes of S-3 eligibility, a company may use the last sale price or the average of the bid and asked prices on any date within the last 60 days. The registration capacity for a baby shelf is measured immediately prior to the offering and re-measured on a rolling basis in connection with subsequent takedowns. The availability for a particular takedown is measured as the current allowable offering amount less any amounts actually sold relying on the baby shelf rule in prior takedowns.  Accordingly, the available offering amount will increase as a company’s stock price increases, and decrease as a stock price decreases. Moreover, if the aggregate market value of voting and non-voting common stock held by non-affiliates equals or exceeds $75 million after the effective date of the S-3, the one-third limit will not apply to additional sales and instead the registration statement will be considered filed under the full shelf registration provisions.
In making the calculation where derivative securities had been sold, the company should multiply the aggregate market value of the underlying equity by the maximum number of common shares that the derivative securities can be converted into. The market value of the underlying common equity can be determined using the same per share price used to determine the market value of the non-affiliate float. If the derivative securities have been converted or exercised, the aggregate market value of the underlying equity shall be calculated by multiplying the actual number of shares into which the securities were converted or received upon exercise, by the market price of the shares on the date of conversion or exercise.
To rely on this instruction to conduct an offering, the company cannot be a shell company and must not have been a shell company for at least 12 calendar months prior to utilizing Form S-3. In addition, if the company has been a shell company at any time previously, it must have filed current Form 10 information with the SEC at least 12 calendar months previously reflecting its status as an entity that is not a shell company.
On November 2, 2016, the SEC issued a C&DI clarifying the calculation of the one-third limitation under the baby shelf rule. In particular, some companies were effecting an S-3 shelf takedown with an investor while simultaneously completing a private placement with the same investor and registering the private placement securities via a new resale S-3 filing. Although the shelf takedown was a primary direct issuance from the company and the resale registration filed on behalf of the selling shareholder, the combined effect was the use of S-3 for an amount of securities in excess of the $75 million limitation.
This workaround had become somewhat commonplace until the SEC issued the new C&DI on November 2, 2016 clarifying that this will no longer be allowed. The C&DI provides in total:
Question: An issuer with less than $75 million in public float is eligible to use Form S-3 for a primary offering in reliance on Instruction I.B.6, which permits it to sell no more than one-third of its public float within a 12-month period. May it sell securities to the same investor(s), with a portion coming from a takedown from its shelf registration statement for which it is relying on Instruction I.B.6 and a portion coming from a separate private placement that it concurrently registers for resale on a separate Form S-3 in reliance on Instruction I.B.3, if the aggregate number of shares sold exceeds the Instruction I.B.6 limitation that would be available to the issuer at that time?
Answer: No. Because we believe that this offering structure evades the offering size limitations of Instruction I.B.6, the securities registered for resale on Form S-3 should be counted against the issuer’s available capacity under Instruction I.B.6. Accordingly, an issuer may not rely on Instruction I.B.3 to register the resale of the balance of the securities on Form S-3 unless it has sufficient capacity under Instruction I.B.6 to issue that amount of securities at the time of filing the resale registration statement. If it does not, it would need to either register the resale on Form S-1 or wait until it has sufficient capacity under that instruction to register the resale on Form S-3.
Although the SEC has made it clear that the private placement and shelf takedown shares will both count towards the $75 million baby shelf limit, a company can still conduct concurrent shelf takedowns and private placements with the same investor. In such case, the investor can either hold the private placement shares for the applicable Rule 144 holding period, or the shares can be registered for resale on Form S-1.
               Primary Offerings of Non-Convertible Securities Other than Common Equity – Instruction 1.B.2
Form S-3 can be used for the primary offering of non-convertible securities other than common equity (such as debt or preferred stock), to be offered by cash, if the company (i) has issued at least $1 billion in non-convertible securities in registered primary offerings over the prior three years; or (ii) has outstanding at least $750 million of non-convertible securities, issued in primary offerings for cash; or (iii) is a wholly owned subsidiary of a well-known seasoned issuer; or (iv) is a majority owned operating partnership of a real estate investment trust that qualifies as a well-known seasoned issuer.
               Secondary Offerings – Instruction 1.B.3
A Form S-3 can be used to register the resale of outstanding securities held by a shareholder as long as the company meets the registrant qualifications and already has securities of the same class listed and registered on a national securities exchange or quoted on the automated quotation system of a national securities association. The OTC Markets does not qualify as an automated quotation system for purposes of this eligibility requirement. When registered warrants, the warrants themselves do not have to be trading on the national exchange as long as the underlying common stock is listed.
Instruction 1.B.3 is not the exclusive way to use Form S-3 for secondary offerings. That is, if a company meets the eligibility requirement for a primary offering under Instruction 1.B.1 (i.e., market value of voting and non-voting common equity held by non-affiliates is $75 million or more), it can use Form S-3 to register a secondary offering under that provision, regardless of whether it has a class of securities registered on a national exchange.
Earnout shares to be issued in connection with a consummated merger may be registered on Form S-3, even though the shares have not been earned and are not outstanding at the time the registration statement. Likewise, securities to be issued in an exchange relying on Section 3(a)(9) of the Securities Act may be registered for resale on Form S-3 even though the exchange has not yet been completed.
A Form S-3 may be used under Instruction 1.B.3 to register the resale of securities to be issued upon the conversion of a convertible security such as a convertible note or preferred stock prior to the actual conversion. However, the company may not register an indeterminate number of shares. Accordingly, if the conversion formula is floating such as a discount to market price, the company must make a good-faith estimate of the maximum number of shares that it may issue on conversion to determine the number of shares to register for resale.  If the number of registered shares is less than the actual number issued, the company would need to file a new registration statement to register the additional shares. Furthermore, if the number of shares to be registered is in excess of thirty percent (30%) of the outstanding public float at the time of registration, it will be considered an indirect primary offering and a company may only use Form S-3 if it qualifies to use the form for a primary offering under Instruction 1.B.1.
Instruction 1.B.3 may not be relied on for the “resale” of securities held by a parent or subsidiary as a parent or subsidiary is generally considered an alter ego of the company itself. That is, a resale in that case would be considered a primary offering and the company would have to rely on Instruction 1.B.1 to use Form S-3. However, there are circumstances where affiliates may make offerings that are deemed to be genuine secondaries.
               Rights Offerings, Dividend or Interest Reinvestment Plans, and Conversions of Warrants and Options – Instruction 1.B.4
Form S-3 is available for securities to be offered (i) upon the exercise of outstanding rights granted by the issuer of the securities to be offered, if such rights are granted on a pro rata basis to all existing security holders of the class of securities to which the rights attach, (ii) under a dividend or interest reinvestment plan, or (iii) upon the conversion of outstanding convertible securities or the exercise of outstanding warrants or options issued by the issuer of the securities to be offered, or by an affiliate of the issuer. To utilize Form S-3 for one of these transactions, the company must have, within the prior 12 calendar months, sent an annual report complying with Rule 14a-3(b) to all record holders of the rights, all participants in the plan or all record holders of the convertible securities. Similarly, the company must have, within the prior 12 calendar months, provided certain information about management, management compensation, securities ownership and corporate governance under Regulation S-K.
               Asset-backed Securities – Instruction 1.B.5
Form S-3 is not available to register offerings of asset-backed securities.
Equity Line Transactions
Depending on the amount of securities to be issued in an equity line transaction, a company that meets the eligibility requirements could use a Form S-3 to register the put shares as a primary indirect offering (Instruction 1.B.1), a baby shelf offering (Instruction 1.B.6) or a secondary offering (Instruction 1.B.4).
The Author
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
LAnthony@AnthonyPLLC.com
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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