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&D 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));
• Include 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.

To determine whether Gopher qualifies as a WKSI, you begin with Securities Act Rule 405, which defines "well-known seasoned issuer" and contains the requirements for WKSI status.

Under Rule 405, a WKSI includes a company that:

1. Meets the registrant requirements of General Instruction I.A of Form S-3 or Form F-3, meaning essentially that the issuer:

• Has been an SEC-reporting company for at least 12 calendar months and has timely filed all material required to be filed with the SEC during the preceding 12 calendar months; and
• Since the end of the last fiscal year has not had any material defaults on indebtedness or long-term leases.

2. As of a date within 60 days of the "determination date" (discussed below) has:

• a worldwide float of at least $700 million (i.e., market value of outstanding voting and nonvoting common equity held by non-affiliates); or
• issued for cash during the past three years at least $1 billion in aggregate principal amount of non-convertible debt securities in primary offerings registered under the Securities Act.

3. Is not an "ineligible issuer" (discussed below) or an asset-backed issuer.

Determination Date

The "determination date" is the later of:

• The date that Gopher filed its most recent shelf registration statement;
• The date that Gopher most recently amended its shelf registration statement for purposes of complying with Securities Act Section 10(a)(3) (a step typically done by filing its Annual Report on Form 10-K or 20-F, since that filing operates as a Section 10(a)(3) update to an effective shelf registration statement); and
• the filing date of Gopher's most recent Form 10-K or Form 20-F if Gopher has not filed (or amended) a shelf registration statement within the last 16 months.

What if Gopher has never filed a registration statement but now wants to file a new WKSI shelf? In that case, the determination date would be the time of filing of its new shelf registration statement. See C&DI 203.09. Similarly, the determination date is the date of filing the new WKSI shelf registration statement if Gopher has a non-automatic shelf registration statement on file but now thinks it can qualify for WKSI status. See C&DI 203.10.

Ineligible Issuer

There are many ways to make yourself ineligible. For membership at Bushwood, obnoxious behavior on the first tee will do the trick. For WKSIs, you get excluded from the club if you:

• Are not current in Exchange Act reporting obligations (other than certain Form 8-Ks);
• Are a blank check company, shell company or penny stock issuer;
• Are a limited partnership offering other than through a firm commitment underwriting; or
• Within the past three years: 1) Have filed for bankruptcy; 2) Have been convicted of a felony or misdemeanor under certain provisions of the Exchange Act; 3) Were made the subject of any judicial or administrative decree or order arising out of a government action that (a) prohibits certain conduct or activities regarding (including future violations of) the federal securities laws, (b) requires you to cease and desist from violating the antifraud provisions of the federal securities laws or (c) determines that you have violated those antifraud provisions; or 4) Have had any registration statement subject to a refusal order or stop order.

Note that in each case, the three-year period ceases on the date immediately following the third anniversary date of the condition that created the ineligibility (i.e., the SEC Staff has advised us informally that they interpret “three years" literally for this purpose, in contrast to the counting methodology used for 12 calendar months in the case of Form S-3 or Form F-3 eligibility discussed here).

Two additional practice tips on ineligible issuers:

• Master limited partnerships (MLPs) are a popular form of offering in energy deals.  If an MLP is doing a firm commitment underwriting, it is an eligible issuer (i.e., is only an ineligible issuer to the extent it sells securities other than through a firm commitment underwriting).  See C&DI 203.06.
• A WKSI’s newly formed finance subsidiary (even one with only nominal assets and operations) is not a shell company if, before a given offering, the subsidiary meets the conditions described in C&DI 203.04.

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.  

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 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 S-3.  Regardless of whether the company files a post-effective amendment to the WKSI shelf or a new S-3, the filing must comply with the form requirements of Form S-3 applicable to non-WKSI filer. See C&DI 198.06.

_____________ 

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

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.

At the initial filing of a WKSI shelf, the filing fees for all of the securities that could be offered off the WKSI shelf need not be paid. Under Rule 456(b), a WKSI may pay the filing fee for securities sold in a takedown at any time from the date the WKSI shelf is filed until the date the related final prospectus supplement is required to be filed. Payment of the filing fee at the time of each completed takedown, commonly referred to as pay-as-you-go registration, is available only to WKSIs. See Release No. 33-8591 at 230-32 (discussing pay-as-you-go registration generally). Even if the WKSI takedown involves a preliminary prospectus supplement, the fee need not be paid until the due date for filing the final prospectus supplement under Rule 424(b)(2) (i.e., no later than the second business day after the earlier of pricing or first use — in other words, file by Wednesday for a deal that priced on Monday morning). C&DI 639.02. This is helpful because the issuer may not know the aggregate offering amount when the preliminary prospectus supplement is filed.

How should a WKSI complete the fee table for the initial filing of a WKSI shelf using the pay-as-you-go program contemplated by Rule 456(b)?

No matter when the registration fee is paid, the initial WKSI shelf filing should list each type of security being registered in the fee table on the cover page of the registration statement and state when the registration fee is being paid in a footnote to that table. If the registration fee is paid with the initial filing of the WKSI shelf, the table should include the dollar amount of the fee for each type of security registered. By contrast, if the registration fee will be paid subsequently in advance of any takedown or on a pay-as-you-go basis, the issuer should include “$0” or a blank in the fee table on the cover page of the registration statement for the amount of registration fee for each type of security to be registered and indicate deferral of fee payment in a footnote to the fee table. See C&DI 240.14 and this Example.

Unless previously indicated in a filed fee table, when the final prospectus supplement is filed in connection with the takedown, the cover page of the prospectus supplement must include the fee table reflecting payment of the fee. Release No. 33-8591 at 231. The SEC staff has indicated that a WKSI may file a prospectus supplement that includes the fee table reflecting payment of the fee and subsequently file another prospectus supplement without the fee table. C&DI 239.01.

How is the fee calculated and paid?

Regardless of when the fee is paid (whether in advance, with a post-effective amendment, or at takedown), the fee is calculated in accordance with Rule 457(r) based on the SEC filing fee schedule in place at the time of payment. Filing fees are normally paid by wire transfer to the SEC’s account at US Bank. Wire transfers should always include a notation with the issuer’s SEC-assigned CIK number. See Fee Payment Instructions (effective Feb. 2008).

A WKSI that initially relied on the pay-as-you-go provisions of Rule 456(b) inadvertently failed to pay the filing fee at the time of a takedown. What should the issuer do?

The issuer may pay the fee within four business days of the original due date and file a revised prospectus supplement with the fee table on the cover page reflecting payment of the fee, if it fails “after a good faith effort” to pay the filing fee on time. Rule 456(b)(1)(i); see also Release No. 33-8591 at 231.

Even if the fee is not paid within the cure period (i.e., more than four business days have passed since the filing fee due date), if the relevant class of securities was identified in the WKSI shelf, the issuer should file an additional prospectus supplement with a corrected fee table and pay the filing fee. Under these circumstances, Rule 456(b)(2) provides that a pay-as-you-go registration statement will be considered filed for Section 5 purposes when it is received by the SEC (if it complies with all other requirements of the Securities Act). That takes care of the Section 5 issue, and the corrective filing and fee payment will address the potential Section 6 violation resulting from nonpayment of the registration fee. C&DI 140.02.  If the securities sold in the takedown were not identified in the shelf registration statement at all, let’s talk.