In a prior entry, we discussed how to upsize a shelf offering, and focused on using an immediately effective, short-form Rule 462(b) registration statement to add additional shares or additional transaction size. We’re returning to the same scenario – upsizing a non-WKSI Form S-3 shelf. But this time we are going to illustrate that the choice you make upfront in calculating the fee table has an interesting impact at the moment of upsizing truth. Incidentally, for a comprehensive discussion of upsizing (and downsizing) in the IPO context, see our Client Alert on Upsizing and Downsizing.

Some background on Rule 457The starting point for calculating the fee is Rule 457, which lists a number of specific guidelines for calculating the required fee in a variety of specific situations (for example, Rule 457(n) tells us that no separate fee is due for registering the guarantee of a security). In our case – a shelf offering of common stock – the choices are between Rule 457(a) and Rule 457(o). When a company uses Rule 457(a), it registers (and pays fees for) a specific number of shares and not a specific dollar amount; by contrast, when a company uses Rule 457(o), it registers the dollar amount of gross proceeds, no matter how many shares it takes to generate those gross proceeds.

The choice of Rule 457(a) or 457(o) seems simple enough at first glance. But it winds up having some surprising implications if you are looking to increase the size of your deal later on. Here’s why.

Under Rule 457(a), the company does not have to pay additional fees if the market price of its common stock increases between the date the registration statement was filed (and the fee was paid) and the date of the take-down of the shelf. However, if the market price of the company’s common stock decreases, the company cannot increase the number of shares of common stock to be sold in the offering without filing another registration statement to register the additional shares and paying additional fees. See C&DI 240.01.

The result under Rule 457(o) is the reverse. The company would have to file a new registration statement if the price per share increases but the number of shares stays the same – i.e., the maximum aggregate offering price goes up. At the same time, it would not have to file a new registration statement if price decreases and the number of shares increases leaving the maximum aggregate offering price the same. This is not a problem for an issuer that knows how much money it wants to raise, but is not a good answer for a company (or selling stockholder) that is focused on selling a particular number of shares.

How do I register the additional shares or additional deal size?As we mentioned above, you will need to file a new registration statement – non-WKSIs cannot add register additional securities any other way. See Rule 413.

The simplest way to do this would be via an immediately effective, short-form Rule 462(b) registration statement to add additional shares or additional transaction size. This is a very short document, and contains little more than the cover page, a page incorporating the earlier registration statement and required exhibits and consents as exhibits. See C&DI 244.02. (Don’t forget to pay the fee for the additional shares or deal size, calculated under Rule 457. You have until the next business day to get it done. See SEC Informal and Other Procedures 2023a, Note to Paragraph (c)).

In order to use Rule 462(b), among other things, the new registration statement must register additional shares in an amount and at a price that together represent no more than 20% of the maximum aggregate offering price of the shares on the fee table – in other words, 20% of the shares remaining on the shelf immediately prior to the final take-down. See C&DI 244.03.
Why does this matter? Is there a goat behind door number 1 or door number 2?This should be simple, right? Assuming the first two conditions are met, all you should need to do is to figure out the maximum aggregate offering price of the remaining shares (let’s call that the Remaining Dollar Amount) and multiply that by 20%. Presto, you have your answer.

I’m sorry Contestant Number One – not so fast. Here’s why. In the case of a registration fee that was initially paid for under Rule 457(o), the Remaining Dollar Amount is calculated the way you would think it would be. You take the maximum aggregate offering amount listed in the calculation of registration fee table of the initial registration statement and subtract the aggregate amount of gross proceeds received from prior offerings off the shelf.

However, it gets trickier when the initial registration fee was paid under Rule 457(a). In that case, the Remaining Dollar Amount is calculated by multiplying the number of shares remaining on the shelf by the price per share that was used to calculate the maximum aggregate offering amount listed in the calculation of registration fee table at the time the initial registration statement was filed. This is the key point: when upsizing a shelf for which fees were paid under Rule 457(a), you calculate the Remaining Dollar Amount by multiplying the number of shares remaining on the shelf by the per‑share price set forth on the original fee table (and not the price per share to be paid in the final take-down).

Your head may be hurting at this stage, so let’s tackle some examples. Assume that the actual offering price per share in the final take-down is $15.00:

Registration Fee Paid by Number of Shares Under Rule 457(a)

• The shelf originally registered 1,000,000 shares. The price per share of the stock at that point was $10.00 per share, so the proposed maximum aggregate offering price was $10,000,000 (1,000,000 shares times $10.00 per share).
• 900,000 shares of common stock have been sold off the shelf to date.
• The Remaining Dollar Amount equals 100,000 shares times $10.00 (not $15.00) per share, or $1,000,000.
• So, 20% of the Remaining Dollar Amount equals $200,000. How many shares can you sell? If you guessed 20,000 shares, you got it wrong. 20,000 shares times $15.00 per share would equal $300,000. That is more than 20% of the Remaining Dollar Amount. Instead, 20% of the Remaining Dollar Amount actually yields 13,333 shares (i.e., $200,000 divided by $15 per share).

Registration Fee Paid by Aggregate Dollar Amount Under Rule 457(o)

• The shelf originally registered the sale of shares of common stock with a proposed maximum aggregate offering price of $10,000,000.
• 900,000 shares of common stock have been sold off the shelf to date at a price of $10.00 per share.
• The Remaining Dollar Amount equals $1,000,000 ($10,000,000 minus $9,000,000).
• 20% of the Remaining Dollar Amount equals $200,000, which at $15.00 per share yields 13,333 shares.

Why are we going through all of this brain damage to tell you that in each case you can take down an additional 13,333 shares? Because in our example, the aggregate amount of remaining shares you can sell under the shelf is different.

Huh?

Let’s go back over the examples.

Registration Fee Paid by Number of Shares Under Rule 457(a)

• The shelf originally registered 1,000,000 shares.
• 900,000 shares of common stock have been sold off the shelf to date.
• That leaves an additional 100,000 shares to sell off the shelf, plus 13,333 in the upsizing (113,333 shares, collectively).

Registration Fee Paid by Aggregate Dollar Amount Under Rule 457(o)

• The shelf originally registered the sale of shares of common stock with a proposed maximum aggregate offering price of $10,000,000.
• 900,000 shares of common stock have been sold off the shelf to date at a price of $10.00 per share.
• That leaves an additional 66,667 shares to sell off the shelf ($1,000,000 divided by $15 per share) plus 13,333 in the upsizing (80,000 shares, collectively).

Like the “Monty Hall Problem“ – a curious logical paradox based on the game show “Let’s Make A Deal” – the answer seems somewhat counterintuitive and surprising. The life lesson here: it’s generally better to go with Rule 457(a) if you anticipate share price is going to rise.