Judge Smails, Chairman of Gopher Corporation, is on the phone, and he’s not happy. Gopher is about to file its Form 10-K, and market volatility has sent Gopher’s public float to the subterranean level of about $650 million. Judge Smails blames speculators, short sellers and the loud and obnoxious Al Czervik. “Is Gopher out of the WKSI club?” he bellows. What do you say?
Remember from a prior installment that a WKSI must, as of a date within 60 days of the “determination date,” have at least a $700 million worldwide float (i.e., worldwide market value of outstanding voting and nonvoting common equity held by non-affiliates), and that the filing of Gopher’s Form 10-K creates a new determination date. See the definition of WKSI in Securities Act Rule 405 and C&DI 203.11. So, the question is whether Gopher’s public float was at least $700 million at any point during the 60-day period before the 10-K filing date.
What if Gopher’s public float keeps popping up above $700 million and then disappearing below that threshold? What if Gopher’s public float exceeded $700 million only a few times during the 60 days before the determination date?
One day is enough. Rule 405 and the 2005 Securities Offering Reform Adopting Release do not suggest that the test needs to be met on more than a single day during the 60-day period. The SEC Staff’s answers to a related question – how to measure public float when determining shelf eligibility – also lends support to the view that you can look to a single day in the period. See C&DI 116.06 and C&DI 116.07.
What if Gopher chokes and double bogeys the WKSI test–can it still continue to use a previously effective WKSI shelf?
The SEC Staff has explained what to do here in C&DI 198.06.
First, the SEC Staff takes the position that, before filing the upcoming 10-K, Gopher must file a post-effective amendment to the WKSI shelf so that the shelf meets the transaction requirements of General Instruction I.B.1 or I.B.2 of Form S-3. This post-effective amendment (or “PEA,” also colloquially called a “PE”) will become immediately effective upon filing by virtue of Rule 462(e) – remember that Gopher is still a WKSI until it files its 10-K.
In that PEA, Gopher must include:
- a prospectus that registers a specific amount of securities (and Gopher must pay the requisite filing fee). In other words, it can no longer continue to register an unspecified number of securities and rely on “pay as you go,” since those accommodations are available only for a WKSI shelf (see Rules 456(b) and 457(r));
- information that, as a WKSI, it was permitted to exclude in its WKSI shelf in reliance on Rule 430B. For example, Gopher will have to indicate whether the shelf covers primary or secondary offerings; describe the securities offered; describe the plan of distribution; etc. See paragraphs (a) and (b) of Rule 430B.
Second, Gopher must continue to satisfy General Instruction I.B.1 or I.B.2 at the time of filing its 10-K.
Third, “promptly” after filing its 10-K, Gopher must file either a new non-WKSI shelf on Form S-3, or another PEA to its existing WKSI shelf to convert the WKSI shelf into a non-WKSI shelf.
With Gopher’s expulsion from the WKSI club, Gopher’s new shelf, or its second PEA, will be subject to SEC review rather than immediately effective. However, during the interim period between filing of the new shelf or PEA and the effective date, the SEC Staff will let Gopher continue to issue securities from its original WKSI shelf.
What happens if Gopher stays in the WKSI club at the time of filing the 10-K, but later slices into the woods and loses WKSI status, can Gopher continue to use its existing WKSI shelf?
The answer is a Cinderella story: Yes, after effectiveness of a WKSI shelf, the issuer may continue to use that WKSI shelf until its next Section 10(a)(3) update is due. See C&DI 198.03.