The SEC proposed two sets of rule and form amendments on May 19 that, if adopted, would implement significant changes to the registered offering and public company reporting frameworks. The registered offering reform proposal (the Registered Offering Proposal) focuses on how issuers access the public markets, particularly through Form S-3, shelf offerings, automatic shelf registration, and related communications. The enhancement of EGC accommodations and simplification of filer status proposal (the Filer Status Proposal) focuses on simplifying the current public company filer status framework, raising the threshold and seasoning requirements for LAF status, extending scaled disclosure and other accommodations, and granting the smallest public companies extended deadlines to file their periodic reports. Taken together, the proposals would implement constructive and meaningful changes for public companies, especially technology and life science companies that need recurring access to capital.
This alert summarizes the key provisions of the Registered Offering and Filer Status proposals.
The proposal would expand Form S-3 eligibility by eliminating the requirement that an issuer must have been subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the Exchange Act), for at least 12 months and by removing 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. Reporting companies would still need to be current and timely in their Exchange Act reports and would remain subject to the existing “ineligible issuer” limitations.
This proposed change would allow companies greater access to recurring capital, including for product development, research and development, capital expenditures, and other long-term strategic initiatives.
The SEC estimates that these changes could increase the number of issuers eligible to offer an unlimited amount of securities on Form S-3 by more than 60%.
The proposal would extend registration and communication benefits to issuers that are Form S-3-eligible and have at least one class of common equity securities listed on a national securities exchange. These benefits are currently available only to well-known seasoned issuers with at least $700 million in public float or at least $1 billion of registered debt securities. Automatic shelf registration would only be available to issuers that have reported under the Exchange Act for at least 12 months.
The SEC estimates that these changes could increase the number of issuers eligible for all enhanced registration and communication benefits by more than 200%.
The proposal would modernize Form S-1 by relaxing the current restrictions on incorporation by reference. As proposed, companies would be permitted to “backward incorporate” regardless of whether they have filed an annual report for the most recently completed fiscal year and “forward incorporate” regardless of whether they are a smaller reporting company (SRC). As a result, a greater number of companies using Form S-1 could avoid restating or repeating previously filed disclosure, which likely would reduce compliance costs.
The proposal would define “qualified purchaser” under § 18(b)(3) of the Securities Act of 1933, as amended (the Securities Act), to preempt state securities law registration and qualification requirements for all registered offerings, including offerings of unlisted securities. This change would reduce state-by-state compliance costs for registered offerings of unlisted securities.
The proposal would amend Rule 473 to provide that the effectiveness of a registration statement, other than one that becomes automatically effective under SEC rules and forms, would be deemed delayed unless the company affirmatively includes a legend stating that the registration statement is to become effective in accordance with § 8(a) of the Securities Act. As a result, companies would no longer need to include a delaying amendment to prevent a registration statement from becoming effective automatically on the 20th day after filing. This change would reduce the risk of inadvertent omissions that could cause premature effectiveness, trigger § 15(d) reporting obligations, or require additional filings or stop order proceedings.
The proposal would eliminate the income-related conditions that currently limit a company’s ability to use the extended grace periods for including audited annual financial statements in registration statements and proxy statements. As proposed, an SRC that is either a non-reporting company or a reporting company that has filed all required Exchange Act reports would have 90 days after fiscal year-end to provide audited annual financial statements for its most recently completed fiscal year, unless such financial statements become available earlier. A non-SRC Exchange Act reporting company that has filed all required reports would be required to include audited annual financial statements no later than its Form 10-K due date. The SEC believes these changes would reduce costs and delays for companies conducting registered offerings or certain proxy solicitations.
The proposal would increase the public float threshold for becoming an LAF from $700 million to $2 billion, calculated based on the average stock price over the last 10 trading days of the second fiscal quarter, and would require that threshold to be met for two consecutive years. As a result, a one-year swing in a company’s public float would not be sufficient to change its filer status, potentially resulting in greater predictability and consistency for a company’s filer status.
In addition, the proposal would require at least 60 consecutive calendar months of reporting before a company can become an LAF, essentially creating a five-year on-ramp before newly public companies become subject to LAF requirements.
The SEC estimates that these proposed changes would result in 19.2% of existing reporting companies being LAFs, as compared to 35.4% currently.
The proposal would streamline filer statuses for reporting companies into two primary categories: LAFs and NAFs. The SEC proposes eliminating the categories of accelerated filer and SRC so that all companies that are not LAFs would become NAFs.
NAFs would be subject to the same scaled disclosure requirements and accommodations that are currently available to SRCs and EGCs, including scaled executive compensation disclosure, no say-on-pay or say-when-on-pay shareholder advisory votes, and fewer years of financial statements. Most notably, NAFs would not be required to obtain an auditor’s attestation on the company’s internal control over financial reporting, which would significantly reduce compliance costs for most reporting companies.
The proposal would create a new subcategory of small NAFs for companies with total assets of $35 million or less for the two most recent years. Small NAFs would have an additional 30 days to file Form 10-K annual reports and an additional five days to file Form 10-Q quarterly reports.
Under the proposal, existing registrants would be required to assess their LAF or NAF status as of the end of their fiscal year prior to the final rules taking effect.
Although the proposals remain subject to a 60-day comment period and final adoption, public companies and companies considering going public should begin assessing how the proposed changes could affect their capital-raising plans, disclosure controls and procedures, and reporting calendars. In particular, companies should evaluate whether they could become eligible for Form S-3, shelf or ATM offerings, enhanced registration and communication benefits, or scaled disclosure and reporting accommodations under the proposed rules. They should also consider whether current financing plans, IPO readiness workstreams, or public company compliance budgets may need to be adjusted.
Companies expecting to access the capital markets in the near term should continue to plan under the existing rules until final rules are adopted, while monitoring whether any transition provisions or changes in the final rules could affect offering timing, financial statement requirements, or filer status determinations.