Form S-3: The Form of 1,000 Uses

Form S-3 has many uses1 – primary sales, secondary resales, WKSI shelves. This installment tackles the “Transaction Requirements” of General Instruction I.B.1 and I.B.6.

Background: what is the difference between I.B.1 and 1.B.6 anyway?General Instruction I.B.1 permits an S-3-eligible public company to conduct a primary offering for cash without limitation as to the amount of the securities sold in the offering. But I.B.1 is only available to a company that, among other things, has an aggregate market value of its voting and non-voting common equity held by non-affiliates (i.e., a public float) of $75 million or more.

Unlike I.B.1, the limited primary offering exemption of General Instruction I.B.6 does not require a company to meet a minimum public float threshold to conduct a primary offering. But I.B.6 comes at a cost – in particular, it limits the aggregate market value of the securities a company can sell during the trailing 12-month period immediately prior to, and including, the current offering to an amount equal to one-third of the issuer’s public float.2 Bear in mind that the one-third cap is computed at the time of each sale. Take the case of a company that, within the last 12 months, sells an amount of securities equal to one-third of its public float at the time of the offering. If that company’s public float later increases, it will be able to sell an additional amount of securities under I.B.6 equal to the difference between one-third of its public float at the time of its prior offering and one-third of the public float at the time of the subsequent offering. See Example A of Release No. 33-8878 at 28-30.

There are subtle differences between the public float calculations required by I.B.1 and I.B.6. In both cases, public float is computed by multiplying the amount of all of the company’s outstanding common equity held by non-affiliates by the price at which that equity was last sold, or the average of the bid and asked prices of its common equity, in the principal market for the securities as of a date within an immediately preceding 60-day period. See Instruction to I.B.1 and Instruction 1 to I.B.6. However, the beginning and end date of the period for calculating public float is not the same. Public float under I.B.6 is calculated on any date selected by the company within the 60-day period commencing 60 days prior to the date of sale. The relevant period for the purposes of I.B.1 is any date selected by the company within the 60-day period commencing 60 days prior to the date of filing the registration statement. The date used to determine the amount of shares held by non-affiliates and the price of the common equity need not be the same. See C&DI 116.06.

Can a company that was in I.B.6 land at the time its Form S-3 was filed subsequently conduct a primary offering using the same registration statement under I.B.1 if its public float at the time of the offering exceeds $75 million?

Yes. If the company’s public float equals or exceeds $75 million after the original effective date of the registration statement, then the one-third limitation on sales specified in I.B.6 does not apply to additional sales made under the registration statement on or subsequent to that date and the registration statement is deemed filed under 1.B.1. See Instruction 3 to I.B.6. In other words, once the company’s public float hits $75 million, the lid is off the jar and the issuer is in I.B.1 land.

What about the opposite situation? What happens if the company was eligible to conduct a primary offering under I.B.1 either because at the time the registration statement was filed or at a subsequent time its public float equaled or exceeded $75 million but, at the time of the offering, its public float is below $75 million?The company may continue to use the registration form until the time of its next required update to the registration statement under Section 10(a)(3) of the Securities Act, which update typically takes place upon filing its annual report on Form 10-K containing audited financial statements for its most recently completed fiscal year. See C&DIs 198.02 and 198.03. So, regardless of whether the company was eligible to conduct a primary offering under I.B.1 or I.B.6 (with the one-third cap lifted as a result of public float meeting or exceeding $75 million after effectiveness), the company will generally be able to conduct primary offerings under I.B.1 until the date it files its next 10-K. At that point, under Rule 401, the company will be required to recompute its public float for the purposes of assessing its ability to use Form S-3. If a company’s public float is below $75 million at the time it files its 10-K, the one-third cap is reimposed for all subsequent sales using the registration statement and remains in place until its public float equals or exceeds $75 million. See Release No. 33-8878 at 27.

What steps does a company need to take with respect to its effective Form S-3 if, at the time of its Section 10(a)(3) update, its public float is below $75 million?Instruction 7 to I.B.6 provides that, for offerings conducted under I.B.6, a company “must set forth on the outside front cover of the prospectus the calculation of the aggregate market value of the registrant’s outstanding voting and nonvoting common equity pursuant to General Instruction I.B.6 and the amount of all securities offered pursuant to General Instruction I.B.6 during the prior 12-calendar-month period that ends on, and includes, the date of the prospectus.” This information can be included on the outside from cover of the prospectus via a prospectus supplement filed pursuant to Rule 424; a post-effective amendment is not required solely for this purpose. See C&DI 216.13.

What about a WKSI automatic shelf of a company that no longer qualifies as a WKSI at the time of its Section 10(a)(3) update?

In order to make subsequent sales under a WKSI automatic shelf, the company formerly known as a WKSI must convert that registration statement from a WKSI automatic shelf filed in reliance on General Instruction I.D to a traditional registration statement on Form S-3 filed in reliance on I.B.1 or I.B.6 (as applicable). This conversion can be done by means of a post-effective amendment to the WKSI shelf or, alternatively, by filing a new Form S-3. Regardless of whether the company files a post-effective amendment to the WKSI shelf or a new Form S-3, the filing must comply with the form requirements of Form S-3 applicable to non-WKSI filer. See C&DI 198.06.

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1   With apologies to Mel Blanc, the Man of 1,000 Voices, including the voice of Bugs Bunny (among many, many other cartoon characters).

2   While not related to the public float determination, keep in mind that primary offerings under I.B.6 are only available to issuers with at least one class of common equity listed on a “national securities exchange” (i.e., an exchange that has registered with the SEC under Section 6 of the Exchange Act). Click here for a list of national securities exchanges. See General Instruction I.B.6(c) and Instruction 8. The OTCBB and Pink Sheets are not national securities exchanges registered with the SEC, so if either of these platforms are the exclusive means to trade a company’s equity, it would not be eligible to conduct a primary offering under I.B.6.

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