The Shelf Crashers

Your good client William Cleary is on the line. Cleary – or to be precise, Hon. William Cleary, the former Secretary of the Treasury – is now running a successful public company that provides security for high-profile weddings. The company has an effective shelf registration statement, but two of his shareholders, John and Jeremy, now want to crash the party and get themselves added as selling shareholders. Secretary Cleary explains, “I tried to call our GC Chaz Reinhold, but his assistant says he’s at a funeral. What do we have to do to add John and Jeremy?”

In order to conduct an offering on behalf of a shareholder off of a shelf, an issuer must have listed that security holder in its shelf registration statement and disclosed the information about selling security holders required by Item 507 of Regulation S-K. If an issuer that has not listed a selling security holder in its shelf registration statement later decides to sell securities on that security holder’s behalf, the issuer must add that security holder to the effective shelf.

In C&DI 220.04, the SEC Staff explained that an issuer’s ability to add a selling security holder to a shelf depends on whether the issuer was eligible to rely on Securities Act Rule 430B to omit certain information about selling security holders when it originally filed its shelf registration statement. If it could rely on Rule 430B at that time, then it may later add selling security holders to the registration statement by filing a prospectus supplement under Rule 424(b)(7).

If the issuer could not rely on Rule 430B originally, then it must file a post-effective amendment to the registration statement if it wants to add a selling security holder, with one exception: an issuer may use a Rule 424(b) prospectus supplement to reflect a transfer from a previously identified selling shareholder if the new investor’s shares were acquired from that shareholder and the aggregate number of securities or dollar amount registered does not change. The benefit of a prospectus supplement is that it will update the prospectus immediately, whereas a PEA (other than a PEA to WKSI automatic shelf) will be subject to review by the SEC Staff.

How does Rule 430B work?

Rule 430B draws a fundamental distinction between WKSIs and non-WKSIs.

For a WKSI, adding a selling security holder to registration statement is simple. Rules 430B(a) and 430B(b)(1) allow WKSIs to omit virtually all of the information about selling security holders in the base prospectus filed as part of the WKSI shelf. Under Rule 430B, a WKSI can add a selling security holder to a WKSI shelf by filing a prospectus supplement under Rule 424(b)(7).

For a non-WKSI, life is more complicated. For starters, Rule 430B covers non-WKSI shelf registrations only for secondary offering under Rule 415(a)(1)(i) for companies that are eligible to use Form S-3 or F-3 for a primary offering under Instruction I.B.1 (i.e., the issuer must be current and timely in its Exchange Act reporting and have at least $75 million in unaffiliated public float). Specifically, the non-WKSI shelf must cover securities to be sold on behalf of persons “other than the registrant, a subsidiary of the registrant, or a person of which the registrant is a subsidiary.”

For non-WKSIs, Rule 430B(b)(2) also requires that:

  • The initial offering of the securities being registered for resale must have been completed;
  • The securities (or securities convertible into such securities) must be issued and outstanding before the initial filing date of the shelf;
  • The registration statement must refer to selling security holders in at least a generic way and describe the initial offering in which the securities were originally sold; and
  • The issuer must not have been a blank check company, a shell company, or an issuer of penny stock during the last three years.

My WKSI shelf contemplated only primary sales and did not mention secondary resales. Can I still take advantage of Rule 430B to add selling secondary shareholders?

Yes, based on our informal discussions with the SEC Staff. In other words, Rule 430B doesn’t cover just a universal WKSI shelf that contemplates secondary resales or a mix of primary and secondary.

Can a non-WKSI rely on Rule 430B to add selling shareholders who are buying in a PIPE transaction even though the deal has not closed?

No. The 2005 adopting release for securities offering reform makes clear that Rule 430B is not available if the securities are not yet issued, even if the investors are contractually bound to acquire the securities. See Release No. 33-8591, text at note 456.

Can a non-WKSI file a resale registration statement for a dollar amount of common stock and make a general statement that the shelf covers common stock previously sold by the issuer in unregistered transactions?

No. Under C&DI 228.03, an issuer cannot register the resale of unspecified shares and must instead register specific securities by identifying the specific transaction.

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