You thought we were going stop at Episode VI, didn’t you? While we agree that some things are hard to improve, just like the creative minds behind a certain space opera we are adding a prequel – in this case, to our three-part series on how to “go dark” and exit the SEC reporting system.

The reason for this prequel is Staff Legal Bulletin No. 18 on Exchange Act Rule 12h-3, issued March 15, 2010. SLB 18 provides welcome guidance on how to suspend Section 15(d) reporting obligations using Rule 12h-3. If you meet the conditions of SLB 18, then you will no longer need to attempt the Jedi mind trick of a no-action letter request. SLB 18 is particularly useful in the M&A context in suspending the target’s Section 15(d) reporting obligations after a merger, if the target had a Form S-3 or Form S-8 that was updated during the fiscal year.

In case you no longer recall clearly the plot of Episodes IV-VI, a company acquires a Section 15(d) reporting obligation when it has an effective Securities Act registration statement. Section 15(d) reporting is suspended, however, while the company’s securities are registered under Section 12 of the Exchange Act. After the securities are no longer registered under Section 12, the Section 15(d) reporting obligation springs back into life. So, if you are trying to do away with a company’s Exchange Act reporting altogether, you must figure out a way to deal with Section 15(d).

There are two ways in which a company’s Section 15(d) reporting obligation may be suspended once it no longer has a class of Section 12-registered securities.

• First, Section 15(d) provides for an automatic statutory suspension if, on the first day of any fiscal year other than the fiscal year in which its Securities Act registration statement became effective, there are fewer than 300 record holders of the class of securities offered under the Securities Act registration statement.
• Second, instead of waiting for the first day of the fiscal year, an issuer may suspend its Section 15(d) reporting obligations using Rule 12h-3 at any time during the issuer’s fiscal year if the issuer:

1. Is current in its Exchange Act reporting obligations;
2. Has (i) fewer than 300 record holders of the class of securities offered under the Securities Act registration statement; or (ii) fewer than 500 record holders and its assets must not have exceeded $10 million on the last day of each of the issuer’s three most recent fiscal years; and
3. Does not have a Securities Act registration statement relating to the securities which became effective in the fiscal year for which the issuer seeks to suspend reporting, or have had a registration statement that was required to be updated by Section 10(a)(3) of the Securities Act during the fiscal year for which the issuer seeks to suspend reporting. (If the issuer is relying on the fewer than 500 record holders and $10 million in assets threshold in (2), the relevant period is the two preceding fiscal years.)

The third requirement (which is codified in Rule 12h-3(c)), is often troublesome. Let’s take an example. A calendar year issuer has an effective Form S-3 shelf, as well as a Form S-8 for employee share offerings. It files its 2009 Form 10-K during 2010. The annual Section 10(a)(3) update of the Forms S-3 and S-8 established a new effective date for those registration statements, and so the 2010 Form 10-K will be due even if the issuer is acquired in February 2011 and can otherwise cease reporting. See C&DI 151.03.

Needless to say, acquirors are not keen to keep filing Exchange Act reports for wholly owned subsidiaries once the M&A deal has closed.
SLB 18 to the rescue

Prior to SLB 18, a company in the situation we just described would have to submit a no-action request with the SEC Staff to suspend Section 15(d) reporting. SLB 18 now streamlines this process in two specific situations:

• Acquired Issuer. Under SLB 18, Rule 12h-3 no-action relief is not needed if a company has been acquired by another entity, resulting in the class or classes of securities for which the company has a Section 15(d) reporting obligation being either: (i) extinguished; or (ii) held or assumed by only one recordholder, the acquiring entity.
• Abandoned IPO. Rule 12h-3 no-action relief is also not needed under SLB 18 if a company with no Exchange Act reporting obligations has a Securities Act registration statement become effective, but does not sell any securities pursuant to the registration statement. The company would file an application to withdraw the registration statement pursuant to Securities Act Rule 477, and the Staff would consent to the withdrawal.

Conditions, conditions...

In order to take advantage of SLB 18, a company must satisfy the following four conditions:

1. It must not have a class of securities registered under Section 12 of the Exchange Act. A Form 25 (for Section 12(b) securities) or Form 15 (for Section 12(g) securities) to terminate registration must be properly filed before Section 15(d) reporting obligations may be suspended under Rule 12h-3.
2. It must comply with the other requirements of Rule 12h-3 (for example, it may not exceed the recordholder thresholds in Rule 12h-3(b)(1)). The company must also file a Form 15 and be current in its Exchange Act reporting obligations as of the date of filing the Form 15.
3. It must file post-effective amendments to deregister any unsold securities from Securities Act registration statements and withdraw any registration statements if there were no sales. The company must have terminated all registered securities offerings and cannot have any unsold securities remaining on any Securities Act registration statement. It also cannot have any pre-effective Securities Act registration statements on file that have not been withdrawn.
4. The company must not otherwise file Exchange Act reports during the time period in which it suspends its Section 15(d) reporting obligations. For example, if it has any outstanding debt, the indenture cannot require the company to file Exchange Act reports with the SEC or the indenture trustee.

If a company fits the two situations and four conditions identified above, no Rule 12h-3(c) no-action relief is necessary. Instead, SLB 18 provides that the company may file a certification of termination on Form 15 to suspend its Section 15(d) reporting obligation in reliance on Rule 12h-3. (No-action requests are still needed for other “going dark” fact patterns.)

One last point about Section 15(d)Note that Section 15(d) reporting obligations cannot be terminated, only suspended. If the Form 15 is subsequently withdrawn or denied, the issuer must file all reports that would have been required if the Form 15 had not been filed. Similarly, if in the future the issuer no longer satisfies the requirements under which it was able to cease reporting under Section 15(d), the suspension ends and the reporting obligation returns without any action by the issuer.So, just like Han solo being frozen in carbonite, this suspended animation may end with our company returning to life to fight – and file Exchange Act reports – another day.