Public companies that engage in capital raising activities from time to time must consider whether it is advisable to have an effective shelf registration statement on Form S-3 on file in advance of raising capital, or whether to simply wait to file a Form S-3 until such time that the company desires to raise capital.
As background, shelf registration statements may be utilized by public companies eligible to use Form S-3 (which generally requires, among other things, that an issuer have at least $75 million in non-affiliate common equity public float and have filed all required SEC reports over the last 12 months), to register the issuance of various classes of the company’s securities on a delayed or continuous basis, to be issued in public offerings from time to time, either by the issuer or selling security holders. At the time of an offering, these securities are then sold in a “take down” off the shelf utilizing a prospectus supplement describing (among other things) the terms of the offering and incorporating by reference information about the issuer. Shelf registration statements generally only remain effective for three years.
Assuming that an issuer is eligible to file a Form S-3, a baseline question in relation to whether an issuer desires to have an effective shelf registration statement is whether the issuer is a well-known seasoned issuer (WKSI). WKSIs – generally, issuers with $700 million or more of non-affiliate common equity public float or that have issued public debt securities for cash in excess of $1 billion over the last three years – may file shelf registration statements that become automatically effective upon filing. WKSIs are also afforded greater flexibility in various other respects in connection with utilizing Form S-3s in comparison to non-WKSIs (which discussion is beyond the scope of this blog).
In contrast, a Form S-3 filed by an issuer that is not a WKSI is not effective upon filing. In this regard, while the filing of shelf registration statements on Form S-3 does not, in most cases, result in SEC review, and the time it takes to receive SEC clearance following the filing of a Form S-3 is relatively short (often, 10 days or less), this gap period between the public filing of a Form S-3 and its subsequent effectiveness is generally suboptimal for companies that want to move quickly and opportunistically to raise capital. As such, in order to potentially avoid this gap between filing and effectiveness, non-WKSIs may want to have an effective Form S-3 on file in the event that they contemplate making a public equity or debt offering in the foreseeable future.
Benefits and Limitations of WKSIs Filing a Form S-3
Given the flexibility afforded to WKSIs in connection with being able to file automatically effective registration statements, WKSIs must consider somewhat different considerations with respect to whether to have a Form S-3 on file in advance of engaging in a public equity or debt offering versus simply waiting to file an automatically effective Form S-3 at the time of the public offering, and practice is mixed among WKSIs in this regard. The pros and limitations with respect to WKSIs filing a Form S-3 in advance of a capital raise include the following (some of which are applicable to non-WKSIs as well):
- By completing the registration statement filing process in advance, there will be some decrease in the amount of work and coordination required at the time of an actual offering.
- Given the fact that filing a registration statement has the potential to trigger financial statement filing requirements (such as the potential need to file retrospectively revised financials in connection with a change in business segments, the occurrence of discontinued operations, or probable or completed significant acquisitions or dispositions), filing a registration statement on a clear day at a time when such filing does not trigger financial statement filing requirements may prove beneficial in comparison to waiting to file a registration statement at the time of a future public offering when such financial statement filing requirements could be triggered.
- In this regard, if a registration statement has already been filed, in the event there is a “fundamental change” between the time of the filing of the registration statement and the time of a public offering, this may trigger the requirement to file additional financial information at the time of the offering, but this is a higher threshold than the financial statement filing requirements associated with filing a registration statement.
- If an issuer files a registration statement and then subsequently loses its WKSI status in the future (for example, as the result of missing a Form 8-K filing deadline), the issuer may (depending on the facts) still be able to use such registration statement to make a public offering until the filing of its next Form 10-K as long as there is no need to update such shelf registration statement.
- By not filing, the costs associated with preparing a registration statement are deferred until the time when the issuer is engaging in a public offering (or avoided altogether, if the issuer does not engage in a public offering).
- Even if filed, a Form S-3 is not utilized in connection with many offerings of debt securities given that many such debt offerings occur via a Rule 144A private placement (often coupled with registration rights whereby these private placement debt securities are required to be subsequently exchanged for registered debt securities via an exchange offer registered on Form S-4).
- Even if filed, Form S-3s are not available in connection with the public offering of securities in certain scenarios, such as in connection with exchange offers or the primary issuance of securities in connection with acquisitions.
- Even if an issuer does elect to effect a public debt offering utilizing a previously filed Form S-3, if the debt offering involves subsidiary guarantors, and subsidiary guarantors have been added since the last filing of the registration statement, a post-effective amendment (which will be automatically effective, in the case of WKSIs) will need to be filed prior to such debt offering adding such subsidiary guarantors, which to some degree limits the utility of having made a prior Form S-3 filing.
- The filing of a shelf registration statement outside of the context of an offering has the possible effect of adversely impacting the trading price of an issuer’s securities through its potential signal to the market that a take-down offering may be contemplated (this is less of a concern in the event that an issuer files a new shelf registration statement at or around the time that its existing shelf registration statement expires).