S-3 Eligibility – Part 2




Posted by on April 23, 2019

S-3 Eligibility- Part 2 – Today is the continuation of a LawCast series talking about S-3 eligibility. Instruction 1.B.1 sets for the requirements for primary offerings. Form S-3 can be used for primary offerings of a company whose market value of voting and non-voting common equity held by non-affiliates is $75 million or more, including for the sale and issuance of new securities or for the resale of already issued and outstanding securities held by third parties, including offerings by subsidiaries and standby underwriters in connection with the call or redemption of warrants or a class of convertible securities. Common equity is defined as “any class of common stock or an equivalent interest, including but not limited to a unit of beneficial interest in a trust or a limited partnership interest.” Only outstanding common equity is used in the calculation and not convertible securities or common equity underlying convertible securities.

An affiliate of a Company is a person that “controls, or is controlled by, or is under common control with, such issuer.” The SEC defines “control” as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” Determining affiliate status is a facts and circumstances determination, and the SEC has indicated many times that it will not provide guidance on affiliate status. Clearly, executive officers and directors are affiliates. However, whether stockholders that do not otherwise have board representation are affiliates or not can be a troublesome analysis.

A beneficial owner of 10% or more of the voting securities of a company is presumed to be a control person/affiliate. 5% stockholders are required to disclose in a Schedule 13D or 13G filed with the SEC whether their shares are held for the purposes of influencing or changing control. Companies should review their known beneficial owners and consider all factors relating to affiliate status, including but not limited to: (i) distribution of voting shares among all stockholders; (ii) impact of possible resale; (iii) relationship between the stockholder and management; (iv) influence as a stockholder; and (v) voting agreements.

For purposes of determining the value threshold, market value is computed by using the last sale price or the average of the bid and asked prices as of a date within 60 days prior to the date of filing. The number of shares held by non-affiliates is usually determined as of the date of filing but can be any day within the 60-day look-back period. It is not necessary to calculate the number of shares held by non-affiliates for the same day on which the average price of the stock is determined. For example, the number of shares outstanding on the date of filing might be used, together with the average price of stock for any day within the 60-day period.

A company must meet this eligibility requirement each time it files an update to the registration statement. Accordingly, if the market value drops between updates, a company would need to switch to an S-1 (or other form it is qualified to use) when filing an update. Also, as Form S-3 incorporates Exchange Act reports by reference, the filing of a Form 10-K is the equivalent to filing a post-effective amendment. This means that if the company is not eligible to use Form S-3 at the time of filing its 10-K, it would be required to file a post-effective amendment on whatever other form would be available at the time. A Form 10-Q does not require a new eligibility determination. However, a company can use the same Form S-3 (as updated and amended through subsequent Exchange Act reports or post effective amendments) to switch between a baby shelf and full shelf based on the fluctuating market value of voting and non-voting common equity held by non-affiliates.

Prior to the recent change in the definition of a smaller reporting company (SRC) the threshold for use of a Form S-3 for a full shelf offering was the same as that for an SRC. That is, prior to June 2018, SRCs did not qualify to use Form S-3 for primary offerings except for under the baby shelf rule. Following the amended definition of an SRC, companies that qualify as an SRC and to use Form S-3 (i.e., with a public float in excess of $75 million but under $250 million) will be able to take advantage of the SRC scaled disclosures in their shelf offerings.

Unlike the baby shelf rule, companies eligible to use Form S-3 for a primary offering are not required to have a class of equity registered on a national exchange. In other words, a company whose market value of voting and non-voting common equity held by non-affiliates is $75 million or more and that trades on the over the counter market, would be eligible to use Form S-3 assuming it met the other eligibility requirements.