Proposed Rule: Securities: Primary Securities Offerings On Forms S-3 and F3 Eligibility Requirements

Tuesday,
June 26, 2007
Part III
Securities and
Exchange
Commission
17 CFR Part 239
Revisions to the Eligibility Requirements
for Primary Securities Offerings on
Forms S–3 and F–3; Proposed Rule
pwalker on PROD1PC71 with PROPOSALS3
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35118 Federal Register / Vol. 72, No. 122 / Tuesday, June 26, 2007 / Proposed Rules
SECURITIES AND EXCHANGE if e-mail is used. To help us process and I. Discussion

COMMISSION review your comments more efficiently,
A. Background
please use only one method. The
17 CFR Part 239 Commission will post all comments on 1. Form S–3
[Release No. 33–8812; File No. S7–10–07] the Commission’s Internet Web site
(http://www.sec.gov/rules/ Form S–3 is the ‘‘short form’’ used by
RIN 3235–AJ89 proposed.shtml). Comments are also eligible domestic companies to register
available for public inspection and securities offerings under the Securities
Revisions to the Eligibility copying in the Commission’s Public Act of 1933. The form also allows these
Requirements for Primary Securities Reference Room, 100 F Street, NE., companies to rely on their reports filed
Offerings on Forms S–3 And F–3 Washington, DC 20549. All comments under the Securities Exchange Act of
received will be posted without change; 1934 4 to satisfy the form’s disclosure
AGENCY: Securities and Exchange
we do not edit personal identifying requirements. Although there have been
Commission.
information from submissions. You amendments to Form S–3 since it was
ACTION: Proposed rule. first adopted in 1982,5 the basic
should submit only information that
SUMMARY: We are proposing to amend you wish to make available publicly. framework still remains. To use Form
the eligibility requirements of Form S– S–3, a company must meet the form’s
FOR FURTHER INFORMATION CONTACT: registrant requirements,6 which
3 and Form F–3 to allow domestic and Daniel Greenspan, at (202) 551–3430, in
foreign private issuers to conduct generally pertain to reporting history
the Division of Corporation Finance, under the Exchange Act,7 as well as at
primary securities offerings on these U.S. Securities and Exchange
forms without regard to the size of their least one of the form’s transaction
Commission, 100 F Street, NE., requirements.8 These transaction
public float or the rating of debt they are Washington, DC 20549–3010.
offering, so long as they satisfy the other requirements provide that companies
SUPPLEMENTARY INFORMATION: We are may register primary offerings (that is,
eligibility conditions of the respective
form and do not sell more than the proposing to amend Form S–3 1 and securities offered by or on behalf of the
equivalent of 20% of their public float Form F–3 2 under the Securities Act of registrant for its own account) on Form
in primary offerings pursuant to the new 1933.3 S–3 only if their non-affiliate equity
instructions on these forms over any Table of Contents market capitalization, or ‘‘public float,’’
period of 12 calendar months. The is a certain size.9 Transactions involving
I. Discussion
amendments are intended to allow more primary offerings of non-convertible
A. Background
companies to benefit from the greater 1. Form S–3 investment grade securities; certain
flexibility and efficiency in accessing 2. 1992 Amendments to Form S–3 rights offerings, dividend reinvestment
the public securities markets afforded 3. Advisory Committee on Smaller Public plans and conversions; and offerings by
by Form S–3 and Form F–3 without Companies selling shareholders of securities
compromising investor protection. The 4. Reasons for Proposal registered on a national securities
B. Proposed Revisions to Form S–3 exchange do not require that the
proposal would not extend to shell C. Proposed Revisions to Form F–3
companies, however, which would be company has a minimum public float.10
D. Request for Comment
prohibited from using Form S–3 and II. Paperwork Reduction Act 2. 1992 Amendments to Form S–3
Form F–3 for primary offerings until 12 A. Background
calendar months after they cease being B. Summary of Information Collections As originally adopted, the ‘‘public
shell companies. C. Paperwork Reduction Act Burden float’’ requirement for companies
DATES: Comments should be received on
Estimates eligible to use Form S–3 to register
D. Request for Comment primary offerings was $150 million.11 In
or before August 27, 2007. III. Cost-Benefit Analysis 1992, the Commission reduced the
ADDRESSES: Comments may be A. Summary of Proposals minimum float threshold to the current
submitted by any of the following B. Benefits $75 million, based on its analysis of the
methods: C. Costs
trading markets and market following of
Electronic Comments IV. Consideration of Burden on Competition registrants in various capitalization
• Use the Commission’s Internet and Promotion of Efficiency,
comment form (http://www.sec.gov/ Competition and Capital Formation 4 15 U.S.C. 78a et seq.
V. Initial Regulatory Flexibility Act Analysis 5 Most notably, the Commission adopted a set of
rules/proposed.shtml); comprehensive amendments in 2005 known as
A. Reasons for the Proposed Action
• Send an e-mail to rule- B. Objectives ‘‘Securities Offering Reform.’’ See Securities
comments@sec.gov. Please include File C. Legal Basis Offering Reform, Release No. 33–8591 (Jul. 19,
Number S7–10–07 on the subject line; 2005) (70 FR 44722). See also Simplification of
D. Small Entities Subject to the Proposed Registration Procedures for Primary Securities
or Amendments Offerings, Release No. 33–6964 (Oct. 22, 1992) [57
• Use the Federal Rulemaking Portal E. Reporting, Recordkeeping and Other FR 48970], which is discussed further at n. 12.
(http://www.regulations.gov). Follow the Compliance Requirements 6 See General Instruction I.A. of Form S–3.
instructions for submitting comments. F. Duplicative, Overlapping or Conflicting 7 For example, the form is available only to
Federal Rules issuers that have complied with the reporting
Paper Comments G. Significant Alternatives requirements of the Exchange Act for at least one
H. Solicitation of Comment year. However, issuers of investment grade asset-
• Send paper comments in triplicate backed securities do not need to have a reporting
VI. Small Business Regulatory Enforcement
to Nancy M. Morris, Secretary,
Fairness Act history. See General Instruction I.A.4. of Form

Securities and Exchange Commission, VII. Statutory Authority and Text of the
S–3.
100 F Street, NE., Washington, DC Amendments
8 See General Instruction I.B. of Form S–3.
9 General Instruction I.B.1. of Form S–3.
20549–1090.
10 See General Instructions I.B.2. through I.B.4. of
All submissions should refer to File 1 17 CFR 239.13. Form S–3.
Number S7–10–07. This file number 2 17 CFR 239.33. 11 Adoption of Integrated Disclosure System,
should be included on the subject line 3 15 U.S.C. 77a et seq. Release No. 33–6383 (Mar. 3, 1982) [47 FR 11380].
Federal Register / Vol. 72, No. 122 / Tuesday, June 26, 2007 / Proposed Rules 35119
ranges.12 When it reduced the required securities exchange, NASDAQ or of Form S–3 registrants to incorporate
public float to $75 million, the trading on the Over-the-Counter their subsequently filed Exchange Act
Commission stated that a large majority Bulletin Board electronic quotation reports, often called ‘‘forward
of the companies that would become service to be eligible to use Form S–3 if incorporation,’’ allows for automatic
eligible to use Form S–3 for primary they have been reporting under the updating of the registration statement.
offerings as a result of the reduction in Exchange Act for at least one year and By contrast, a registrant without the
required float had securities traded on are current in their reporting at the time ability to forward incorporate 20 must
either a national securities exchange or of filing.17 The Advisory Committee file a new registration statement or post-
authorized for inclusion on the noted that many smaller public effective amendment to its registration
NASDAQ National Market System 13 companies currently are not eligible to statement to prevent information in the
and that approximately two-thirds of the use Form S–3 to register primary registration statement from becoming
companies were followed by at least offerings because they do not meet the outdated and to update for fundamental
three research analysts.14 This, minimum public float requirement and changes to the information set forth in
combined with the success of the 10- are, therefore, not able to take advantage the registration statement.21
year-old integrated disclosure system of the efficiencies associated with the Form S–3 eligibility for primary
and shelf registration process, use of the form. As a consequence, the offerings also enables companies to
persuaded the Commission that it could Advisory Committee argued that this conduct primary offerings ‘‘off the
extend the benefits of Form S–3 for restriction placed limits on the ability of shelf’’ under Rule 415 of the Securities
primary offerings to a larger class of such companies to raise capital. The Act.22 Rule 415 provides considerable
issuers without compromising the Advisory Committee also expressed its flexibility in accessing the public
investing public’s access to sufficient view that the reporting obligations of securities markets from time to time in
and timely information about such smaller public companies, combined response to changes in the market and
issuers.15 with the widespread accessibility over other factors. Companies that are
the Internet of documents filed with the eligible to register these primary ‘‘shelf’’
3. Advisory Committee on Smaller offerings under Rule 415 are permitted
Commission, have lessened the need to
Public Companies to register securities offerings prior to
retain the public float standard in Form
Recently, the issue of Form S–3 S–3. In the Advisory Committee’s view, planning any specific offering and, once
eligibility for primary offerings was the Exchange Act reporting obligations the registration statement is effective,
addressed by the Commission’s of smaller public companies are offer securities in one or more tranches
Advisory Committee on Smaller Public comparable today to even the largest without waiting for further Commission
Companies (the ‘‘Advisory Committee’’), reporting companies and, therefore, action. In general, post-effective
an advisory committee chartered by the compliance with these disclosure amendments and new registration
Commission in 2005 to assess the requirements ‘‘should be sufficient to statements may be subject to selective
current regulatory system for smaller protect investors and inform the review by the Commission staff and
companies under U.S. securities laws.16 marketplace about developments in must be declared effective by the
In its April 23, 2006 Final Report to the these companies.’’ 18 Commission or our staff through
Commission, the Advisory Committee delegated authority before the
recommended that we allow all 4. Reasons for Proposal registration statement may be used again
reporting companies listed on a national The ability to conduct primary to offer and sell securities.23 The shelf
offerings on Form S–3 confers eligibility resulting from Form S–3
12 Release No. 33–6964. In that release, the significant advantages on eligible eligibility and the ability to forward
Commission estimated that, as a result of the companies. Form S–3 permits the incorporate on Form S–3, therefore,
reduction in required float, 450 additional
companies with an aggregate float of $88 billion
incorporation of required information allow companies to avoid additional
would be eligible to register primary offerings of by reference to a company’s disclosure
their securities on Form S–3. This is compared to in its Exchange Act filings, including 20 For example, Forms S–1 and SB–2 do not allow
the Commission’s estimate, in Release No. 33–6943, Exchange Act reports that were registrants to forward incorporate their Exchange
of 370 companies that registered approximately Act filings.
$200 billion of securities on Form S–3 for delayed
previously filed as well as those that 21 See Section 10(a)(3) of the Securities Act
primary shelf offerings during calendar year 1991. will be filed in the future.19 The ability (requiring that the information contained in a
As part of this rulemaking, the Commission also prospectus used more than nine months after the
reduced the reporting history necessary to register 17 Recommendation IV.P.3. of the Final Report of effective date be as of a date not more than sixteen
on Form S–3 from 36 to 12 months for most issuers the Advisory Committee on Smaller Public months prior to the effective date) and Item
and eliminated the alternative eligibility test for Companies (Apr. 23, 2006) (the ‘‘Final Report’’), at 512(a)(1)(i) and (ii) of Regulation S–K (requiring the
primary offerings requiring registrants to have a 68–72. The Final Report is available at http:// inclusion by the company of an undertaking to file
public float of at least $100 million and an annual www.sec.gov/info/smallbus/acspc/acspc- a post-effective amendment to comply with Section
trading volume of at least 3 million shares. finalreport.pdf. In addition to elimination of the 10(a)(3) of the Securities Act and to reflect the
13 There is no longer a distinction between public float requirement, Recommendation IV.P.3. occurrence of facts or events arising after the
Nasdaq and national securities exchanges. On also called for (1) Elimination of General Instruction effective date that, individually or in the aggregate,
January 13, 2006, the Commission approved I.A.3.(b) to Form S–3 requiring that the issuer has represent a fundamental change in the information
Nasdaq’s application for conversion from a national timely filed all required reports in the last year and set forth in the registration statement).
securities association to a national securities (2) extending Form S–3 eligibility for secondary 22 Rule 415 [17 CFR 230.415] provides that:
exchange. The NASDAQ Stock Market commenced transactions to issuers quoted on the Over-the- (a) Securities may be registered for an offering to
operations on August 1, 2006. Counter Bulletin Board. be made on a continuous or delayed basis in the
14 Simplification of Registration Procedures for 18 The Final Report, at 69. The Advisory future, Provided, That:
Primary Securities Offerings, Release No. 33–6943 Committee also noted: (1) The registration statement pertains only to:
(July 16, 1992) [57 FR 32461], at p. 6. In this The Sarbanes-Oxley Act has required more * * *
discussion, the Commission stated that ‘‘one indicia frequent SEC review of periodic reports as well as (x) Securities registered (or qualified to be
of market interest and following of a company is the enhanced processes, such as disclosure controls registered) on Form S–3 or Form F–3 which are to
number of research analysts covering the and procedures and certifications by the chief be offered and sold on an immediate, continuous
company.’’ executive and chief financial officers, which further or delayed basis by or on behalf of the registrant,
15 Id. enhance investor protection. a majority owned subsidiary of the registrant or a
16 More information about the Advisory Id. at 70. person of which the registrant is a majority-owned
Committee is available at http://www.sec.gov/info/ 19 See Item 12 of Form S–3: ‘‘Incorporation of subsidiary.
smallbus/acspc.shtml. Certain Information by Reference.’’ 23 See Section 8(c) of the Securities Act.
delays and interruptions in the offering expanding the class of companies that • They meet the other registrant
process and can reduce or even are permitted to use Form S–3 for eligibility conditions for the use of Form
eliminate the costs associated with primary securities offerings is once S–3; 29
preparing and filing post-effective again warranted. In contrast to 1992, • They are not shell companies 30 and
amendments to the registration when the Commission last adjusted the have not been shell companies for at
statement. issuer eligibility requirements for Form least 12 calendar months before filing
By having more control over the S–3,27 all filings on Form S–3 now are the registration statement; and
timing of their offerings, these filed on the Commission’s Electronic • They do not sell more than the
companies can take advantage of Data Gathering, Analysis and Retrieval equivalent of 20% of their public float
desirable market conditions, thus system (‘‘EDGAR’’) and, therefore, are in primary offerings under General
allowing them to raise capital on more available at little or no cost to anyone Instruction I.B.6. of Form S–3 over any
favorable terms (such as pricing) or to interested in obtaining the information. period of 12 calendar months.31
obtain lower interest rates on debt. As While we believe that retaining some As a result, even companies not
a result, the ability to take securities off restrictions on Form S–3 eligibility is traded on a national securities exchange
the shelf as needed gives issuers a still advisable, we nevertheless agree could potentially avail themselves of
significant financing alternative to other with the Advisory Committee that more this new eligibility rule so long as they
widely available methods, such as companies should benefit from the were able to satisfy the registrant
private placements with shares usually greater flexibility and efficiency in eligibility requirements provided in
priced at discounted values based in accessing the capital markets afforded General Instruction I.A.32 This would
part on their relative illiquidity.24 by Form S–3. Accordingly, we are include companies quoted on the Over-
Registration of an offering on Form S– proposing to amend the Form S–3 the-Counter-Bulletin Board and Pink
1, the form available to many companies eligibility requirements to permit Sheets quotation services. We note that
ineligible to use Form S–3, permits registrants other than shell companies to the Over-the-Counter-Bulletin Board
certain issuers 25 to incorporate by use Form S–3 for primary offerings, requires quoted issuers to be registered
reference previously filed Exchange Act whether or not they satisfy the
reports, but it does not permit minimum $75 million float threshold, 29 See General Instruction I.A. of Form S–3.
registrants to automatically update so long as they stay within certain Among other things, General Instruction I.A.
information in the prospectus by requires that the registrant:
offering size limitations and otherwise • Has a class of securities registered pursuant to
forward incorporation of their Exchange satisfy the eligibility requirements of the Section 12(b) or 12(g) of the Exchange Act or is
Act filings. Further, issuers filing form, such as timely Exchange Act required to file reports pursuant to Section 15(d) of
registration statements on Form S–1 reporting for at least the prior year. the Exchange Act; and
because they are not eligible to file on • Has been subject to the requirements of Section
Form S–3 are not permitted to register B. Proposed Revisions to Form S–3 12 or 15(d) of the Exchange Act and has filed in
a timely manner all the material required to be filed
primary shelf offerings under Rule 415. pursuant to Section 13, 14 or 15(d) for a period of
Specifically, we are proposing new
Thus, it is harder for Form S–1 at least twelve calendar months immediately
General Instruction I.B.6. to Form S–3 to
registrants to take advantage of favorable preceding the filing of the Form S–3 registration
allow companies with less than $75 statement.
market opportunities. Consequently, we
million in public float to register 30 The term ‘‘shell company’’ is defined in Rule
believe that extending Form S–3 short-
primary offerings of their securities on 405 of the Securities Act [17 CFR 230.405]. See also
form registration to additional issuers Use of Form S–8, Form 8–K, and Form 20–F by Shell
Form S–3,28 provided:
should enhance their ability to access Companies, Release No. 33–8587 (July 15, 2005) [70
the public securities markets. FR 42233] (adopting definition of shell company).
their homes, and that this percentage is increasing 31 The meaning of the phrase ‘‘period of 12
Given the great advances in the steadily among all age groups. As a result we calendar months’’ is intended to be consistent with
electronic dissemination and believe that investor protection would not be the way in which the phrase ‘‘12 calendar months’’
accessibility of company disclosure materially diminished if all reporting companies on is used for purposes of the registrant eligibility
transmitted over the Internet over the a national securities exchange, NASDAQ or the requirements in Form S–3. A ‘‘calendar month’’ is
Over-the-Counter Bulletin Board were permitted to a month beginning on the first day of the month and
last several years,26 we believe that utilize Form S–3 and the associated benefits of ending on the last day of that month. For example,
incorporation by reference. for purposes of Form S–3 registrant eligibility, if a
24 See, for example, Susan Chaplinsky and David 27 See Release No. 33–6964. registrant were not timely on a Form 10–Q due on
Haushalter, Financing Under Extreme Uncertainty: 28 As mentioned in n. 17 above, as part of September 15, 2006, but was timely thereafter, it
Contract Terms and Returns to Private Investments Recommendation IV.P.3 of the Final Report, the would first be eligible to use Form S–3 on October
in Public Equity (May 2006), available at: http:// Advisory Committee also recommended that the 1, 2007. Similarly, for purposes of proposed General
papers.ssrn.com/sol3/ Commission extend S–3 eligibility for secondary Instruction I.B.6. of Form S–3, if a registrant relies
papers.cfm?abstract_id=907676 (discussing the transactions to issuers quoted on the Over-the- on this Instruction to conduct a shelf takedown
typical contractual terms of PIPEs (Private Counter Bulletin Board. General Instruction I.B.3. to equivalent to 20% of its public float on September
Investments in Public Equities) financings, where Form S–3 limits the use of the form for secondary 15, 2007, it will next be eligible to do another
the average purchase discount is between 18.5% to offerings to securities ‘‘listed and registered on a takedown (assuming no change in its float) on
19.7%, depending on the types of contractual rights national securities exchange or * * * quoted on the October 1, 2008.
embedded in the securities). automated quotation system of a national securities 32 Form S–3 eligibility under proposed General
25 See General Instruction VII. to Form S–1,
association,’’ a restriction that excludes the Instruction I.B.6 and Form F–3 eligibility under
‘‘Eligibility to Use Incorporation by Reference,’’ for securities of Over-the-Counter Bulletin Board and proposed General Instruction I.B.5. is not intended
the criteria that registrants on Form S–1 must meet Pink Sheet issuers. Notwithstanding the Advisory to have broader implications under our rules
in order to incorporate information by reference. Committee’s recommendation, we are not at this beyond an issuer’s ability to conduct a primary
26 See, for example, Internet Availability of Proxy
time proposing to amend the Form S–3 eligibility offering on Form S–3 or Form F–3, as applicable.
Materials, Release No. 34–52926 (Dec. 8, 2005) [70 rules for secondary offerings because of the That is, an issuer’s eligibility to use Form S–3 or
FR 74597] and the Final Report of the Advisory potential for abusive primary offerings disguised as Form F–3 under those proposed additional form
Committee, at 69: secondary offerings. As such, this rulemaking instructions does not mean that the issuer meets the
The Commission has recently taken several steps proposal pertains only to Form S–3 eligibility for requirements of Form S–3 or Form F–3 for purposes
acknowledging the widespread accessibility over primary securities offerings and is not intended to of any other rule or regulation of the Commission
the Internet of documents filed with the encompass or otherwise impact existing (apart from Rule 415(a)(1)(x), which pertains to
Commission. In its recent release concerning requirements for secondary offerings on Form S–3. shelf registration). See Instruction 6 to proposed
Internet delivery of proxy materials, the In this regard, we also are not revising the General Instruction I.B.6. of Form S–3 and
Commission notes that recent data indicates that up interpretive positions on secondary offering Instruction 6 to proposed General Instruction I.B.5.
to 75% of Americans have access to the Internet in eligibility under General Instruction I.B.3. of Form F–3.
under Section 12 of the Exchange Act 33 primary offerings on Form S–3 under rule at the time the warrants were sold,
and filing Exchange Act reports or proposed Instruction I.B.6. in the prior but would not impede the purchaser’s
otherwise filing periodic reports with period of 12 calendar months.35 We later exercise of the warrants.
the appropriate regulatory agency. have placed the cap of 20% in order to Consistent with our desire to ensure
Moreover, we have built into our allow an offering that is large enough to that the expansion of Form S–3
proposed rule the condition that an help an issuer meet its financing needs eligibility does not diminish the
eligible company must be required to when market opportunities arise but protection of investors, the proposal
file Exchange Act reports and has timely small enough to take into account the specifically excludes shell companies,
filed all such reports for the 12 calendar effect such new issuance may have on which will be prohibited from
months and any portion of a month the market for a thinly traded security. registering securities in primary
preceding the filing of the registration This aggregate gross sales price offerings on Form S–3 unless they meet
statement. includes the sales of equity as well as the minimum $75 million float
To ascertain the amount of securities debt offerings. Therefore, these threshold of General Instruction
that may be sold pursuant to Form S– registrants would now be eligible to I.B.1.37 While we are not passing on the
3 by registrants with a public float offer non-investment grade debt on relative merits of shell companies and
below $75 million, the proposal Form S–3.36 In the case of securities that we recognize that these entities are used
contemplates a two-step process: are convertible into or exercisable for for many legitimate business purposes,
• Determination of the registrant’s equity shares, such as convertible debt we have repeatedly stated our belief that
public float immediately prior to the or warrants, however, we are proposing these entities may give rise to disclosure
intended sale; and that registrants calculate the amount of abuses.38 Under the proposal, a former
• Aggregation of all sales of the securities they may sell in any period of shell company that cannot meet the $75
registrant’s securities pursuant to 12 calendar months by reference to the million float criterion but otherwise
primary offerings under General aggregate market value of the underlying satisfies the registrant requirements of
Instruction I.B.6. of Form S–3 in the equity shares in lieu of the market value Form S–3 will become eligible to use
previous 12-month period (including of the convertible securities. The Form S–3 to register primary offerings of
the intended sale) to determine whether aggregate market value of the underlying its securities:
the 20% limitation would be exceeded. equity would be based on the maximum • 12 calendar months after it ceases
The proposal would require being a shell company;
number of shares into which the
registrants to compute their public float • Has filed information that would be
securities sold in the prior period of 12
by reference to the price at which their required in a registration statement on
calendar months are convertible as of a
common equity was last sold, or the Form 10, Form 10–SB or Form 20–F, as
date within 60 days prior to the date of
average of the bid and asked prices of applicable, to register a class of
sale, multiplied by the same per share
their common equity, in the principal securities under Section 12 of the
market price of the registrant’s equity
market for the common equity as of a Exchange Act; and
used for purposes of calculating its • Has been timely reporting for 12
date within 60 days prior to the date of
public float pursuant to Instruction 1 to calendar months.39
sale.34 Then, for purposes of calculating
proposed General Instruction I.B.6. of
the aggregate market value of securities Form S–3. We believe calculating the 37 This prohibition is intended to apply equally
sold during the preceding period of 12 20% cap based on the market value of to ‘‘blank check companies,’’ as such entities are
calendar months, the proposal would the underlying securities makes it less defined in Rule 419 of the Securities Act. However,
require that registrants add together the likely that convertible securities would because we believe that the definition of ‘‘shell
gross sales price for all primary offerings be structured and offered in a manner
company’’ under Rule 405 is expansive enough to
pursuant to proposed Instruction I.B.6. encompass blank check companies for purposes of
designed to avoid the effectiveness of excluding them from S–3 eligibility under proposed
to Form S–3 during the preceding the cap. General Instruction I.B.6., we do not exclude them
period of 12 calendar months. Based on It is important to note that the separately. See Use of Form S–8 and Form 8–K by
that calculation, registrants would be proposed 20% limit on sales is not
Shell Companies, Release No. 33–8407 (Apr. 15,
permitted to sell securities with a value 2004) [69 FR 21650], at n. 20:
intended to impact a holder’s ability to We believe that under today’s proposals all blank
up to, but not greater than, the convert or exercise derivative securities check companies as defined in Rule 419 would be
difference between 20% of their public purchased from the company. For considered shell companies until they acquire an
float and the value of securities sold in example, the 20% limit would apply to operating business or more than nominal assets. Not
all shell companies, however, would be classified
33 15
the amount of common stock warrants as blank check companies under Rule 419.
U.S.C. 78l.
34 The determination of public float is based on
that a company could sell under Form 38 See, for example, Release No. 33–8591; Release
a public trading market for the registrant’s common S–3, and the number of common shares No. 33–8587; Delayed Pricing for Certain
equity. This is the same requirement in General into which the warrants are exercisable Registrants, Release No. 33–7393 (Feb. 20, 1997) [62
Instruction I.B.1. of Form S–3 and Form F–3 that FR 9276]; and Penny Stock Definition for Purposes
would be relevant for determining the of Blank Check Rule, Release No. 33–7024 (Oct. 25,
a registrant have a $75 million market value and in
the definition of accelerated filer in Exchange Act
company’s compliance with the 20% 1993) [58 FR 58099].
Rule 12b–2 [17 CFR 240.12b2]. Therefore, an entity 39 Similarly, Form S–8 is not available to shell
35 As proposed, the method of calculating the
with common equity securities outstanding but not companies or to former shell companies until 60
trading in any public trading market would not be 20% limit on sales is the same whether the days after they have ceased being shell companies
entitled to sell securities in a primary offering on registrant is selling equity or debt securities, or a and have filed information that would be required
Form S–3 under this proposal. Note that the combination of both. If the proposed 20% limitation in a registration statement on Form 10, Form 10–
determination of public float for purposes of form excluded debt, there is some concern that we would SB or Form 20–F, as applicable, to register a class
eligibility in current General Instruction I.B.1 of be inadvertently encouraging issuances of debt of securities under Section 12 of the Exchange Act.
Form S–3 is based on the price of the registrant’s securities over equity. Because we do not intend for See Release No. 33–8587. Unlike the eligibility
common equity within 60 days prior to the date of the rule to dictate or otherwise influence the overall rules of Form S–8, however, a company must be
filing the registration statement. The determination form of security that companies offer, we have reporting for at least 12 calendar months before it
of ‘‘aggregate market value’’ for purposes of drafted the 20% limit on sales to include both is eligible under any criteria to use Form S–3.
determining an issuer’s status as an accelerated filer equity and debt. Therefore, instead of the 60-day delay required by
under Rule 12b–2 is based on the market price of 36 Currently, registrants may offer non-convertible Form S–8, it is more appropriate for a shell
the issuer’s equity as of the last business day of the investment grade debt securities on Form S–3 company to be prohibited from using the proposed
issuer’s most recently completed second fiscal regardless of the size of their public float. See new provisions of S–3 and F–3 until at least 12
quarter. General Instruction I.B.2. to Form S–3. Continued
Ordinarily, this information would be would not violate proposed Instruction General Instruction I.A. of Form S–3
filed in a current report on Form 8–K I.B.6. to Form S–3 even if the and are not shell companies.
reporting completion of the transaction registrant’s public float later drops to a
Example A
that causes it to cease being a shell level such that the prior sale now
company. 40 In other cases, the accounts for over 20% of the new lower On January 1, 2008, a registrant with
information may be filed in a Form 10, float.41 a public float of $50 million files a shelf
Form 10–SB or Form 20–F. Consistent Because Form S–3 registrants who registration statement on Form S–3
with the current registrant eligibility meet the $75 million float threshold of pursuant to proposed General
rules of Form S–3 and Form F–3 that General Instruction I.B.1. at the time Instruction I.B.6. intending to register
require at least 12 calendar months of their registration statement is filed are the registrant’s offer and sale of up to
timely reporting, the proposed 12 not subject to restrictions on the amount $20 million of debt and equity securities
calendar-month delay is intended to of securities they may sell under the over the next three years from time to
provide investors in the former shell registration statement even if their float time as market opportunities arise.43
company with the benefit of 12 full falls below $75 million subsequent to The registration statement is
months of disclosure in the newly the effective date of the Form S–3, we subsequently declared effective. In
structured entity prior to its use of Form believe it is appropriate to provide March 2008, the registrant decides to
S–3 or Form F–3 for primary securities issuers registering on Form S–3 sell common stock off the registration
offerings. pursuant to proposed General statement. To determine the amount of
As proposed, the 20% limitation is Instruction I.B.6. the same flexibility if securities that it may sell in connection
designed to allow issuers flexibility. their float increases to a level that with the intended takedown, the
Because the restriction on the amount of equals or exceeds $75 million registrant calculates its public float as of
securities that can be sold over a period subsequent to the effective date of their a date within 60 days prior to the
of 12 calendar months is calculated by Form S–3 without the additional burden anticipated date of sale, pursuant to
reference to a registrant’s public float of filing a new Form S–3 registration Instruction 1 to proposed General
immediately prior to a contemplated statement. Therefore, we are proposing Instruction I.B.6. Calculating that its
sale, as opposed to the time of the initial an instruction to I.B.6. that lifts the 20% public float is now $55 million, the
filing of the registration statement, the restriction on additional sales in the registrant determines that the total
amount of securities that an issuer is event that the registrant’s float increases market value of all sales effected
permitted to sell can continue to grow to $75 million or more subsequent to the pursuant to Instruction I.B.6. over the
over time as the issuer’s public float effective date. Of course, pursuant to past year, including the intended sale,
increases. Therefore, the value of 20% Rule 401, registrants would also be may not exceed $11 million, or 20% of
of a registrant’s float during the period required to recompute their public float the registrant’s float. Since the registrant
that a shelf registration statement is each time an amendment to the Form S– has not previously filed on Form S–3
effective may, at any given time, be 3 is filed for the purpose of updating the and has made no prior sales off the
much greater than at the time the registration statement in accordance subject Form S–3, it is able to sell the
registration statement was initially filed. with Section 10(a)(3) of the Securities entire $11 million off the subject Form
Registrants may therefore benefit from Act—typically when an annual report S–3.
increases in the size of their public float on Form 10–K is filed. In the event that Assuming that it sold the entire $11
during the time the registration the registrant’s public float as of the date million of securities in March 2008, the
statement is effective. Conversely, the of the filing of the annual report is less registrant in September 2008 once again
amount of securities that an issuer is than $75 million, the 20% restriction contemplates a takedown off the shelf.
permitted to sell at any given time may would be reimposed for all subsequent It determines that its public float (as
also decrease if the issuer’s public float sales made pursuant to General calculated pursuant to Instruction 1 to
contracts. It is important to note, Instruction I.B.6. and would remain in proposed General Instruction I.B.6.) has
however, that a contraction in a place until the registrant’s float equaled risen to $60 million. Because 20% of
registrant’s float, such that the value of or exceeded $75 million. $60 million is $12 million, the registrant
20% of the float decreases from the time The following examples illustrate is now able to sell additional securities
the registration statement was initially how the proposed Instruction would in accordance with proposed General
filed, would not necessarily run afoul of operate.42 For purposes of these Instruction I.B.6(a), even though in
the 20% limitation because the relevant examples, we are assuming that the March 2008 it took down the equivalent
point in time for determining whether a hypothetical registrants satisfy the of what was then the entire 20% of its
registrant has exceeded the threshold registrant eligibility requirements in float. However, because the registrant
would be the time of sale. If the sale of has already sold $11 million worth of its
securities, together with all securities
41 Along these lines, under the proposal securities within the 12 calendar
registrants would be able to sell up to the months prior to the contemplated sale,
sold in the preceding period of 12 equivalent of the full 20% of their public float
calendar months, does not exceed 20% immediately following the effective date of their
the registrant may sell no more than $1
of the registrant’s float calculated within registration statement, provided that there were no million of additional securities at this
60 days of the sale, then the transaction prior sales pursuant to proposed General time.
Instruction I.B.6. of Form S–3. This is consistent In December 2008, the registrant
with Rule 415(a)(1)(x), which was amended in 2005
calendar months after it ceases being a shell to allow primary offerings on Form S–3 or Form F–
determines that its public float has risen
company. 3 to occur immediately after effectiveness of a shelf to $85 million. To this point, assuming
40 Items 2.01(f) and 5.01(a)(8) of Form 8–K require in registration statement. See Release No. 33–8591. it has only sold an aggregate of $12
a company in a transaction where the company Assuming that the sale of the entire 20% allotted million of its securities pursuant to the
ceases being a shell company to file a current report under the proposal complied with the rule at the
time of the takedown, the subsequent contraction in
subject Form S–3 as described above, it
on Form 8–K containing the information (or
identifying the previous filing in which the the registrant’s public float would not invalidate has $8 million of securities remaining
information is included) that would be required in this prior sale.
a registration statement on Form 10 or Form 10–SB 42 The examples that follow are for illustrative 43 Although only 20% of the public float may be
to register a class of securities under Section 12 of purposes only and are not intended to be indicative sold in any year, a company may register a larger
the Exchange Act. of market activity. amount.
on the registration statement and Form S–3 pursuant to General of $11,105,555 having been issued
potentially available for takedown (the Instruction I.B.6. Instruction 2 to under this Form S–3.
total amount registered of $20 million, proposed General Instruction I.B.6. To determine the amount of
less the $12 million previously sold). requires that the registrant compute the additional securities that the registrant
Because 20% of $85 million is $17 market value of convertible debt may sell under General Instruction I.B.6,
million, and the registrant has already securities sold under I.B.6. by reference the registrant would add the value of the
sold $12 million within the previous to the value of the underlying common notes issued ($11,105,555) plus the
year, Instruction I.B.6.(a) would, in most stock rather than the amount for which value of all other securities sold by the
circumstances, prohibit the registrant the debt securities were sold. With registrant pursuant to Instruction I.B.6.
from selling more than an additional $5 respect to the notes that were sold and during the preceding year. If this
million of securities in the latest have been converted, the aggregate amount is less than 20% of the
offering. However, under Instruction 3 market value of the underlying common registrant’s current public float, it may
to proposed General Instruction I.B.6., stock is calculated by multiplying the sell additional securities with a value
the registrant is no longer subject to the number of common shares into which up to, but not greater than, the
20% limitation on annual sales because the outstanding convertible securities difference between 20% of its current
its float has exceeded $75 million. If it were converted times the market price public float and the value of all
chooses, the registrant may sell the on the day of conversion. With respect securities sold by it pursuant to
entire remaining $8 million of securities to the notes that were sold but have not Instruction I.B.6. during the preceding
all at once or in separate tranches at any yet been converted, the aggregate market year.
time until the company updates the value of the underlying common stock Example C
registration statement pursuant to is calculated by multiplying the
Section 10(a)(3) by filing a Form 10–K. maximum number of common shares A registrant has an effective
This will be the case even if the registration statement on Form S–3
into which the notes are convertible as
registrant’s float subsequently falls through which it intends to conduct
of a date within 60 days 44 prior to the
below $75 million until it files that shelf offerings of its securities. The
anticipated sale by the per share market
Form 10–K. Form S–3 was filed pursuant to
price of the registrant’s equity used for
proposed General Instruction I.B.6. At
Example B purposes of determining its current
the time of its first shelf takedown, the
float.
A registrant has 12 million shares of registrant’s public float is equal to $20
voting common equity outstanding held In this example, assume that the million (which means that the
by nonaffiliates. The market price of this registrant has a current per share stock maximum amount available to be sold
stock is $5, so the registrant has a public price of $5.55. If half of the notes under the 20% cap would be $4
float of $60 million. The registrant has converted into common stock while the million). Based on proposed General
an effective Form S–3 shelf registration per share market price was $5.00 ($4.50 Instruction I.B.6(a), the registrant sells
statement filed in reliance on proposed discount), then, for purposes of $3 million available of its debt
General Instruction I.B.6. of Form S–3 Instruction 2 to proposed General securities. Six months later, the
pursuant to which the registrant wants Instruction I.B.6., the value of that prior registrant’s public float has decreased to
to issue $10 million of convertible debt issuance is $5,555,555 (half of the notes $10 million. The registrant wishes to
securities which will be convertible into divided by the discounted conversion conduct an additional takedown off the
common stock at a 10% discount to the price of $4.50 and then multiplied by shelf but, because of the reduction in its
market price of the common stock. $5, the market price on the day of float, it is prohibited from doing so. This
Pursuant to Instruction 2 to proposed conversion). is because with a public float of $10
General Instruction I.B.6., the amount of As for the notes that have not yet been million, General Instruction I.B.6(a)
securities issued is measured by converted, the aggregate market value of would only allow the registrant to sell
reference to the value of the underlying the underlying common stock is a maximum of $2 million worth of
common stock rather than the amount determined by calculating the number securities (20% of $10 million) pursuant
for which the debt securities will be of shares that may be received upon to the registration statement during the
sold. At the 10% discount, the conversion and multiplying that by the prior period of 12 calendar months that
conversion price is at $4.50 and, as a current market value of $5.55. ends on the date of the contemplated
result, 2,222,222 shares currently Therefore, the outstanding note amount sale. However, the registrant has already
underlie the $10 million of convertible ($5 million) is divided by the discount sold securities valued (for purposes of
debt. Because the current market price conversion price ($5), resulting in proposed General Instruction I.B.6.) at
of those underlying shares is $5, the 1,000,000 shares and this is then $3 million in the 6 months prior to the
value of the securities being offered for multiplied by the current market value contemplated sale and so must wait
purposes of General Instruction I.B.6. is of $5.55. Thus, for purposes of until at least a full year has passed since
$11,111,110 (2,222,222 shares at $5 per Instruction 2 to proposed General the $3 million sale of debt securities to
share), which is less than the $12 Instruction I.B.6., $5,550,000 is the undertake another offering off the Form
million allowed by the 20% cap (20% value of the outstanding notes that have S–3 unless its float increases. Note that,
of $60 million). not yet been converted. Adding this to although the registrant’s float would not
After the convertible debt securities the value of the notes that have already allow additional sales, the $3 million
are sold and are outstanding, the been converted results in a total value takedown of securities 6 months prior
registrant contemplates an additional does not violate the 20% restriction
takedown. To determine the amount of because, at the time of that prior sale,
44 Note that the date chosen by the registrant for

securities that the registrant may sell determination of the maximum number of shares the registrant’s float was $20 million.
under General Instruction I.B.6. in the underlying the convertible notes must be the same Because allowing smaller public
anticipated offering, the registrant must date that the registrant chooses for determining its companies to take advantage of shelf
market price in connection with the calculation of
know its current public float and must public float pursuant to proposed General
primary offerings on Form S–3 would
calculate the aggregate market value of Instruction I.B.6. See Instruction 5 to proposed permit such companies to avail
all securities sold in the last year on General Instruction I.B.6. themselves of periodic takedowns
without further Commission action or obligations and liability of smaller We note that the Advisory Committee,
prior staff review, some concerns have public companies under the federal in its May 2006 Final Report to the
been raised.45 Although the securities laws are sufficiently Commission, expressed support for a
Commission staff may review comparable for these purposes to the more expansive rule change, with no
registration statements before they are largest reporting companies such that suggestion of a limitation on Form S–3
declared effective, individual the proposed expansion of Form S–3 eligibility other than current required
takedowns are not subject to prior primary offering eligibility should not Exchange Act reporting and listed on a
selective staff review. Under the current adversely impact investors.46 national securities exchange or the
rules, if these issuers were instead using Although we believe that the public Over-the-Counter Bulletin Board.
Form S–1 or Form SB–2, they would be securities markets have benefited from However, we are not at this time
required to file separate registration advances in both technology and proposing such a less restrictive
statements for each new offering, which corporate disclosure requirements, we eligibility requirement. We believe that
would be subject to pre-offering are nevertheless mindful that companies by restricting the applicability of the
selective staff review before going with a smaller market capitalization as revised eligibility rule to companies that
effective. a group have a comparatively smaller are not shell companies and by
While we recognize that extending the market following than larger, well- imposing the 20% limitation on the
benefits of shelf registration to an seasoned issuers and are more thinly amount of securities that smaller public
expanded group of companies will, by traded. Securities in thinly traded companies may sell pursuant to primary
necessity, limit the staff’s direct prior markets may be more vulnerable to offerings on Form S–3, as described, the
involvement in takedowns of securities potential manipulative practices. In this proposal strikes the appropriate balance
off the shelf, we believe that the risks regard, to ensure that shelf eligibility is between helping to facilitate capital
will be justified by the benefits that will expanded with appropriate moderation formation through the securities markets
accrue by facilitating the capital and attention to the continued and our objective of investor protection.
formation efforts of smaller public protection of investors, we have If the amendment is adopted as
companies. As we have discussed proposed to exclude shell companies proposed, this would not foreclose the
elsewhere in this release, the risks to from eligibility and to impose a 20% possibility that we may revisit the
investor protection by expanding the restriction on the amount of securities appropriateness of this 20% restriction
base of companies eligible for primary that can be sold into the market on Form at a later time. However, we believe that
offerings on Form S–3 have been S–3 in any period of 12 calendar months limiting the expanded use of S–3 as
significantly mitigated by technological by issuers with a public float below $75 proposed will allow us to consider the
advances affecting the manner in which million.47 By placing such restrictions impacts of the expansion in an
companies communicate with investors, on the expansion of Form S–3 environment where there are limitations
allowing widespread, direct, and eligibility, we believe we are mitigating so that investor protection concerns are
contemporaneous accessibility to the potential for abuse that could result addressed.
company disclosure at little or no cost. as a function of the increase in the
Moreover, the scope of disclosure volume of smaller public company C. Proposed Revisions to Form F–3
securities sold in primary offerings on
45 For example, see Report of the Task Force on Form S–3. At the same time, we believe Form F–3, which was designed to
Disclosure Simplification (Mar. 5, 1996) (the ‘‘Task that the 20% limit will be sufficient to parallel Form S–3,49 is the equivalent
Force’’), available at http://www.sec.gov/news/ short-form registration form available
studies/smpl.htm. Among other things, the Task
accommodate the capital raising needs
Force made several recommendations to amend the of the large majority of smaller public for use by ‘‘foreign private issuers’’ 50 to
shelf registration procedure ‘‘so as to provide companies.48 register securities offerings under the
increased flexibility to a wider array of companies Securities Act. Similar to Form S–3,
with respect to their capital-raising activities.’’ 46 We acknowledge that the companies Form F–3 is available to foreign private
These recommendations included a ‘‘modified form
of shelf registration’’ that would have allowed
implicated in this rulemaking are not yet subject to issuers that satisfy the form’s registrant
Section 404 of Sarbanes-Oxley. See Internal Control requirements and at least one of the
smaller companies to price their securities on a Over Financial Reporting in Exchange Act Periodic
delayed basis for up to one year in order to time Reports of Non-Accelerated Filers and Newly Public
securities offerings more effectively with Companies, Release No. 33–8760 (Dec. 15, 2006) needs of these companies and investor protection
opportunities in the marketplace. The Task Force [71 FR 76580]. We have taken steps to implement concerns.
stated: a plan to improve the efficiency and effectiveness 49 See Integrated Disclosure System for Foreign
While this recommendation will afford small of Section 404 implementation, including its Private Issuers, Release No. 33–6360 (Nov. 20, 1981)
companies time and cost savings, the Task Force scalability to smaller companies. See Commission [46 FR 58511], at 7:
appreciates concerns raised about possible adverse Guidance Regarding Management’s Report on The three forms proposed under the Securities
effects shelf registration may have on the adequacy Internal Control Over Financial Reporting Under Act roughly parallel proposed Forms S–1, S–2 and
and accuracy of disclosures provided to investors, Section 13(a) or 15(d) of the Securities Exchange S–3 in the domestic integration system, but the
on Commission oversight of the disclosures and on Act of 1934, Release No. 34–55929 (June 20, foreign system is based on the Form 20–F instead
the role of underwriters in the registration process. 2007). of the Form 10–K and annual report to shareholders
These concerns are similar to those raised when the 47 Under the proposal, offerings above the 20%
as the uniform disclosure package.
shelf registration rule was first being considered on limitation would violate the form requirements, and 50 The term ‘‘foreign private issuer’’ is defined in
a temporary basis and was made available to any may have implications under Section 5.
offering including an initial public offering. Rule 405 of the Securities Act to mean any foreign
48 In connection with this rulemaking, the
issuer other than a foreign government except an
See also, Delayed Pricing for Certain Registrants, Division of Corporation Finance undertook a review issuer meeting the following conditions:
Release No. 33–7393 (Feb. 20, 1997) [62 FR 9276]. of shelf registration takedowns in 2006 by
Following on the Task Force’s recommendations, (1) More than 50 percent of the outstanding
companies with a public float of moderate size. voting securities of such issuer are directly or
the Commission proposed to permit certain smaller Specifically, the Division looked at all prospectus
companies to price registered securities offerings on indirectly owned of record by residents of the
supplements filed pursuant to shelf registration
a delayed basis for up to one year after United States; and

statements in calendar year 2006 by companies
effectiveness. The Commission noted, however: with a public float between $75 million and $140 (2) Any of the following:
Concerns have been raised that the expedited million. While we observed a wide range of (i) The majority of the executive officers or
access to the markets that would be provided by variously sized shelf takedowns (from less than 1% directors are United States citizens or residents;
these proposals could make it difficult for of float to greater than 80% of float), the data (ii) More than 50 percent of the assets of the
gatekeepers, particularly underwriters, to perform suggests that limiting smaller public companies to issuer are located in the United States; or
adequate due diligence for the smaller companies 20% of their public float in any 12-month period (iii) The business of the issuer is administered
that would be eligible to use expanded Rule 430A. strikes the appropriate balance between the capital principally in the United States.
form’s transaction requirements.51 The As a result, the Commission believed • Is the proposed change in the
Form F–3 registrant requirements are that expanding Form F–3 eligibility by public float eligibility criteria for Forms
similar to Form S–3 and generally relate lowering the float standard to $75 S–3 and F–3 appropriate? Is our
to a registrant’s reporting history under million would give foreign issuers the assumption correct that it is appropriate
the Exchange Act.52 In addition, like the same capital raising advantages enjoyed to lift the public float restrictions in a
Form S–3 registration statement, Form by domestic issuers on Form S–3 limited manner given advances in the
F–3 limits the ability of registrants to without compromising investor electronic dissemination and
conduct primary offerings on the form protection.58 accessibility of company disclosure
unless their public float equals or In order to maintain the rough transmitted over the Internet?
exceeds a particular threshold.53 equivalency between Form S–3 and • In this regard, in what way is
Form F–3, which have had the same market following an important criteria
As with Form S–3, the Commission
public float criteria for primary offering in light of these technological
has attempted to limit the availability of
eligibility since 1994,59 we are changes? 60
Form F–3 for primary offerings to a class • The Form S–3 eligibility
of companies believed to provide a proposing amendments to Form F–3
that are comparable to our proposed requirement for primary offerings which
steady stream of corporate disclosure requires minimum public float was last
that is broadly digested and changes to Form S–3. Specifically,
proposed General Instruction I.B.5. to set in 1992 at $75 million. Based on the
disseminated to the marketplace. When Personal Consumption Expenditures
the Commission adopted Form F–3 in Form F–3 would allow foreign private
issuers with less than $75 million in Price Index (PCEPI) and the Consumer
1982,54 it set the public float test for Price Index (CPI), if this threshold were
foreign issuers at $300 million in worldwide public float to register
primary offerings of their securities on adjusted for inflation, it would equal
response to public comment between $100–110 million, respectively,
recommending that the numerical test Form F–3, provided:
• They meet the other registrant in today’s dollars. Does this suggest that
for foreign issuers be much greater than we should not adopt this proposal and
for domestic registrants.55 In 1994, eligibility conditions for the use of Form
F–3; leave the form eligibility requirements
however, the Commission reduced this unchanged, since by retaining $75
threshold to $75 million in order to • They are not shell companies and
million as the minimum and not raising
extend to foreign issuers the benefits of have not been shell companies for at
it to at least $100 million to account for
short-form registration ‘‘to the same least 12 calendar months before filing
inflation, we are in effect allowing a
extent available to domestic the registration statement; and
lower threshold than was established in
companies.’’ 56 In explaining its • They do not sell more than the
1992?
rationale, the Commission stated: equivalent of 20% of their public float • Should the Commission retain the
in primary offerings under General float test in all cases for primary
[Our] experience with foreign issuers, as
Instruction I.B.5. on Form F–3 over any offerings, but set it below $75 million?
well as the internationalization of securities
period of 12 calendar months. Should the float test be higher than $75
markets, indicates that foreign issuers with a
public float of $75 million or more have a D. Request for Comment million?
degree of analyst following in their world- • Should we make parallel changes to
wide markets comparable to similarly-sized We request and encourage any Forms S–3 and F–3, as proposed? If not,
domestic companies.57 interested person to submit comments in what way should they be different?
on the proposal and any other matters For example, are there special
51 See General Instruction I. of Form F–3: that might have an impact on the conditions relating to foreign issuers
‘‘Eligibility Requirements for Use of Form F–3.’’ proposal. With respect to any that would make any of the proposed
52 One difference is that, unlike Form S–3, comments, we note that such comments amendments not appropriate or should
General Instruction I.A.1. of Form F–3 requires that are of greatest assistance to our they be tailored in any way?
registrants have previously filed at least one annual rulemaking initiative if accompanied by
report on Form 20–F, Form 10–K or, in certain • Is there a more appropriate criteria
cases, Form 40–F under the Exchange Act. For an supporting data and analysis of the to determine eligibility for primary
explanation of this difference, see Simplification of issues addressed in those comments. In offerings on Forms S–3 and F–3 than
Registration and Reporting Requirements for addition to general comment, we public float? Given the more limited
Foreign Companies; Safe Harbors for Public encourage commenters to address the
Announcements of Unregistered Offerings and liquidity of companies with a public
Broker-Dealer Research Reports, Release No. 33– following specific questions: float less than $75 million, would a
7029 (Nov. 3, 1993) at 3; and Simplification of more appropriate criteria for eligibility
Registration and Reporting Requirements for 58 In the release adopting this change to the Form
relate to Average Daily Trading Volume
Foreign Companies; Safe Harbors for Public F–3 eligibility requirements, the Commission
Announcements of Unregistered Offerings and
for the prior year? If so, is 25% of
stated:
Broker-Dealer Research Reports, Release No. 33– Average Daily Traded Volume an
These provisions are part of the ongoing efforts
7053 (Apr. 19, 1994), at 2 (explaining that the of the Commission to ease the transition of foreign appropriate cap (for ADTV) per year?
requirement was adopted ‘‘in order to ensure that companies into the U.S. disclosure system, enhance Should the cap be based on dollar
information regarding the issuer is available to the
market’’).
the efficiencies of the registration and reporting volume traded per day? If not, how
processes and lower costs of compliance, where would the criteria be evaluated for
53 See General Instruction I.B.1. of Form F–3.
consistent with investor protection.
Note that, unlike Form S–3, the Instruction makes Release No. 33–7053, at 2.
purposes of determining issuances other
reference to the registrant’s ‘‘worldwide’’ public 59 The Commission’s adoption of the ‘‘Securities than common stock? If Average Daily
float. Trading Volume is used as the criteria
54 Adoption of Foreign Issuer Integrated
Offering Reform’’ amendments in July 2005 is a
recent instance where parallel changes were made instead of public float, over what period
Disclosure System, Release No. 33–6437 (Nov. 19, to Form S–3 and Form F–3. See Release No. 33– should the average be calculated?
1982) [47 FR 54764]. 8591. For example, the 2005 amendments provided
55 See Release No. 33–7029, at 2.
that the ability to conduct an automatic shelf
• Is the proposed 20% limitation on
56 Release No. 33–7053, at 2. In the same
offering under both Form S–3 and Form F–3 is the amount of securities that can be sold
rulemaking, the Commission also reduced the limited to registrants that qualify as ‘‘well-known
reporting history requirement in Form F–3 from 36 seasoned issuers’’ under Rule 405 of the Securities 60 See Release No. 33–6383, at 8 (discussing the
to 12 months to match the eligibility criteria Act. We note the minimum public float threshold objective of relating short-form registration to the
applicable to domestic companies using Form S–3. required to be a well-known seasoned issuer is the existence of widespread following in the
57 Release No. 33–7029, at 2. same for both Form S–3 and Form F–3. marketplace).
over any period of 12 calendar months would otherwise need to use for these million, should the calculation of 20%
appropriate? Should this restriction be offerings, would. Likewise, the filing of take into consideration the value of all
broader or more narrow? For example the prospectus will not be a new securities sold pursuant to Form S–3 (or
should 20% be higher or lower or effective date for auditors who provided Form F–3, as applicable) in primary
should the one-year period be longer or consent in an existing registration offerings in the preceding year; only
shorter? Is this the right amount to statement for their report on previously securities sold pursuant to General
provide smaller public companies with issued financial statements as the filing Instruction I.B.6. of Form S–3 (or
a realistic financing alternative? If the of a new Form S–1 would. Is this General Instruction I.B.5. of Form F–3,
restriction is not appropriate as potential ‘‘gap’’ in liability appropriate as applicable), in the preceding year; or,
proposed, what alternatives are in the situations allowed under the should the calculation ignore the value
preferable and why? proposed revisions? of securities sold prior to the date of the
• Proposed General Instruction I.B.6. • Should the 20% limitation be update when the float was last
of Form S–3 would restrict the amount calculated only with respect to measured?
of securities that can be sold by a securities sold pursuant to the proposed • In the event that a registrant’s
registrant over a period of ‘‘12 calendar amendment or should it include all public float equals or exceeds $75
months.’’ This parallels the way in securities sold pursuant to registered million, is it appropriate for the
which the phrase ‘‘12 calendar months’’ public offerings on Form S–3, S–1, SB– transformation of the filing from a
is used for purposes of the registrant 2, etc.? Should the 20% also include primary shelf filing under General
eligibility requirements in Form S–3. securities sold pursuant to private Instruction I.B.6. of Form S–3 (or
Therefore, if a registrant relies on offerings? Should it include securities General Instruction I.B.5. of Form F–3,
General Instruction I.B.6. to conduct a sold pursuant to registered public as applicable) to a primary shelf filing
shelf takedown equivalent to 20% of its offerings on any form by selling under General Instruction I.B.1. of Form
public float on September 15, 2007, it shareholders? S–3 (or General Instruction I.B.1. of
will next be eligible to do another • Should the calculation of 20% of Form F–3, as applicable) to be made
takedown (assuming no change in its the registrant’s public float reflect without there being a new effective date
float ) on October 1, 2008. Instead of ‘‘12 increases and decreases in the for the registration statement? If we
calendar months,’’ would it be registrant’s public float during the should have a new effective date for the
preferable if the relevant measurement period that its shelf registration registration statement, how would that
period was ‘‘one year,’’ so that a statement is effective, as is currently date be set and should there be any
registrant who conducted a shelf proposed? Do concerns relating to filing made with the Commission?
takedown equal to 20% of its float on investor protection and potential market
• Should the calculation of a
September 15, 2007 would next be manipulation weigh in favor of a
registrant’s public float for purposes of
eligible to do another takedown different method of calculating the 20%
the amendments be made by reference
(assuming no change in its float ) under limitation, such as determining the 20%
to the price of the registrant’s common
General Instruction I.B.6. on September limit at the time the registration
equity within 60 days prior to the date
15, 2008? statement is filed rather than at the time
of sale, or should the reference period
• Should we allow non-investment of each sale under the registration
for the price of the registrant’s common
grade debt to be offered under this statement? Would an annual limitation
provision? Should we have a cap for the on the number of offerings on Forms S– equity be as of a date closer to the date
amount of non-investment grade debt 3 and F–3 that a registrant may conduct of sale?
that may be sold? If so, is it appropriate under proposed General Instruction • What should be the consequence of
to tie the cap to public float? If not, what I.B.6. strike the appropriate balance an issuer exceeding the 20% restriction
would be a more appropriate criteria? between investor protection and capital on sales? If the consequences of
• In the case of securities that are formation facilitation? violating the 20% are significant, would
convertible into or exercisable for equity • Should the calculation of a the risks of doing so adversely affect the
shares, such as convertible debt registrant’s public float for purposes of willingness of issuers to use the
securities, we are proposing that the the amendment be based on an average, proposal? If so, what, if anything,
registrant calculate the amount sold by such as the average weekly float during should be done to ameliorate those
reference to the aggregate market value the four calendar weeks preceding the risks?
of the underlying equity shares in lieu sale in question? • Should the issuer’s intent be a
of the market value of the convertible • As proposed, General Instruction factor in determining the consequences
securities. Should we also include in I.B.6. of Form S–3 and General of a violation of the 20% restriction?
the amount the value of the overlying Instruction I.B.5. of Form F–3 provide • Should we amend Rule 401(g) 61 of
securities? Should derivative securities that the 20% restriction on sales will be the Securities Act to provide that
be calculated in a different manner? lifted in the event that the registrant’s violations of the 20% restriction would
• Under Rule 430B, except for an public float equals or exceeds $75 also violate the requirements as to
effective date resulting from the filing of million subsequent to the effective date. proper form under Rule 401 even
a form of prospectus for purposes of However, registrants would be required though the registration statement has
updating the registration statement to recompute their public float each been declared effective previously?
pursuant to Section 10(a)(3) or reflecting time they filed an amendment to update • The proposal does not exclude any
fundamental changes in the information the registration statement pursuant to type of offerings, such as at-the-market
in the registration statement pursuant to Rule 401 and, if the float measured less offerings. Should we impose restrictions
the issuer’s undertakings, the than $75 million, the 20% restriction on on the manner of sale under proposed
prospectus filing will not create a new sales could be reimposed until the float General Instruction I.B.6. to Form S–3
effective date for directors or signing equaled or exceeded $75 million. If the (and, on Form F–3, proposed General
officers of the issuer, whereas the filing 20% restriction is lifted because the Instruction I.B.5.), so that only certain
of a registration statement on Form S– registrant’s public float surpasses $75 kinds of distributions, such as firm
1, which issuers with a market million, but is subsequently reimposed
capitalization of less than $75 million because the float falls below $75 61 17 CFR 230.401(g).
commitment underwritten offerings, are may be registered on Forms S–3 and F– with the Paperwork Reduction Act.65
permitted? 3 pursuant to this expansion? The titles for this information are:
• We recently eliminated restrictions • If the eligibility standards for Form ‘‘Form S–3’’ (OMB Control No. 3235–
on primary ‘‘at-the-market’’ offerings of S–3 and Form F–3 are expanded as 0073);
equity securities for primary shelf proposed, will allowing this larger class ‘‘Form S–1’’ 66 (OMB Control No. 3235–
eligible issuers because we felt they of companies to conduct limited 0065);
were not necessary to provide primary offerings of their securities on ‘‘Form SB–2’’ 67 (OMB Control No.
protection to markets or investors for these forms provide them with a 3235–0418);
seasoned issuers.62 Given that the meaningful source of financing? How ‘‘Form F–3’’ (OMB Control No. 3235–
proposal allows smaller companies to might this proposal impact the private 0256); and
do primary offerings, should registrants markets for these companies’ securities? ‘‘Form F–1’’ 68 (OMB Control No. 3235–
utilizing proposed General Instruction • If the proposal is adopted, what 0258)
I.B.6. to Form S–3 (and, on Form F–3, types of financings are issuers likely to We adopted existing Forms S–3, S–1,
proposed General Instruction I.B.5.) be make on the expanded eligibility on SB–2, F–3 and F–1 pursuant to the
prohibited from conducting at-the- Form S–3 and F–3? Securities Act. These forms set forth the
market offerings under Rule 415(a)(4)? 63 • If the proposal is adopted, it is disclosure requirements for registration
If at-the-market offerings are allowed, foreseeable that some companies with a statements that are prepared by eligible
should we nevertheless require that public trading market but with issuers to provide investors with the
such offers and sales be made only securities not listed or authorized for information they need to make informed
through registered broker-dealers and listing on a national securities exchange investment decisions in registered
require such broker-dealers to be named may be eligible to offer such securities offerings.
as underwriters in the prospectus? in primary offerings on Form S–3 or Our proposed amendments to Forms
• Should all companies with a public Form F–3. Since the proposal is not S–3 and F–3 are intended to allow
trading market, including companies intended to alter the exemption from issuers that are currently ineligible to
traded on the Pink Sheets, be allowed to state regulation of securities offerings use Forms S–3 and F–3 for primary
use the amended form as proposed or under Section 18 of the Securities Act, offerings because they do not meet the
should we limit it to just interdealer will the effect of state blue sky law make forms’ public float requirements to
quotations systems with some level of it prohibitively difficult for companies nevertheless register a limited amount
oversight and operated by a self- without ‘‘covered’’ securities (as defined of securities in primary offerings on
regulatory organization? by Section 18(b)) to register such Form S–3 or Form F–3, as applicable, so
• Is the proposal not to extend securities in primary offerings on Form long as they are not shell companies and
expanded Form S–3 and F–3 eligibility S–3 and F–3 pursuant to the proposal? meet the other eligibility requirements
to shell companies appropriate? If not, If the answer is yes, what steps can we of the forms.
take to make the amendments more The hours and costs associated with
why?
useful to companies? preparing disclosure, filing forms, and
• Are there other restraints on the retaining records constitute reporting
proposed expansion of Form S–3 and F– • Are there any market practices that
may arise as a result of this proposal and cost burdens imposed by the
3 eligibility that should be considered, collection of information. An agency
such as restricting the classes of issuers that we should be concerned about?
• Is there any investor protection loss may not conduct or sponsor, and a
that may utilize this expansion or the person is not required to respond to, a
types and amounts of securities that the proposal does not address? If so,
how can we address it? Are there any collection of information unless it
additional disclosures that are displays a currently valid control
62 See Release No. 33–8591.
63 Prior appropriate? For instance, are there any number.
to the adoption of Securities Offering
Reform in July 2005, Rule 415 prohibited registrants disclosures required in Forms S–1 or F– The information collection
from making at-the-market offerings on Form S–3 or 1 that should be included in Forms S– requirements related to registration
Form F–3 unless certain conditions were met. The 3 or F–3 filed under General Instruction statements on Forms S–3, S–1, SB–2, F–
conditions were that: The amount of securities 3 and F–1 are mandatory. There is no
could not exceed ten percent of the registrant’s I.B.6. of Form S–3 or General Instruction
public float; the securities had to be sold through I.B.5. of Form F–3, respectively? Should mandatory retention period for the
an underwriter or underwriters acting as issuers have to disclose in the information disclosed, and the
principal(s) or agent(s) for the registrant; and the prospectus their calculation of the information disclosed would be made
underwriter(s) must be named in the prospectus. publicly available on the EDGAR filing
Among other things, the 2005 amendments amount of securities being offered, the
eliminated these restrictions for primary shelf amount offered pursuant to these system.
eligible issuers. In the Securities Offering Reform Instructions for the last 12 calendar B. Summary of Information Collections
adopting release, the Commission stated: months and of the amount of securities
The restrictions on primary ‘‘at-the-market’’ Because the amendments that we are
that may be offered under the filing
offerings of equity securities currently set forth in proposing in this release pertain only to
Rule 415(a)(4) were adopted initially to address during the year?
Forms S–3 and F–3 eligibility and not
concerns about the integrity of trading markets. As
discussed in the Proposing Release, we are II. Paperwork Reduction Act to the disclosure required by these
eliminating these restrictions for primary shelf forms, we do not believe that the
A. Background
eligible issuers because they are not necessary to amendments will impose any new
provide protection to markets or investors. The The proposed amendments to Forms
market today has greater information about
seasoned issuers than it did at the adoption of the
S–3 and F–3 contain ‘‘collection of 65 44 U.S.C. 3507(d) and 5 CFR 1320.11.
information’’ requirements within the
66 Because our amendments to Form S–3 and

‘‘at-the-market’’ limitations, due to enhanced
Exchange Act reporting. Further, trading markets meaning of the Paperwork Reduction Form F–3 are anticipated to affect the annual
for these issuers’ securities have grown significantly number of Forms S–1, Forms SB–2 and Forms F–
Act of 1995.64 We are submitting these 1 filed, we are required to include them in the titles
since that time. Requiring the involvement of
underwriters and limiting the amount of securities
to the Office of Management and Budget of information collections even though we are not
that can be sold imposes artificial limitations on for review and approval in accordance proposing to amend them in this release.
67 See n. 66 above.
this avenue for these issuers to access capital.
Release No. 33–8591, at 213–214. 64 44 U.S.C. 3501 et seq. 68 Id.
recordkeeping or information collection advantages of shelf registration on Form eligibility requirements of Form S–3 70
requirements. On a per-response basis, S–3 and Form F–3 will encourage or Form F–3,71 as applicable, but had a
this proposal would not increase or financings on these forms that would public float of less than $75 million at
decrease existing disclosure burdens for otherwise have been carried out through the end of their last fiscal year. In all,
Form S–3 or Form F–3. However, exempt offerings or perhaps not at all. we estimate that there were 4,901 such
because we expect that many companies Therefore, we believe the proposal companies at the end of calendar year
newly eligible for primary offerings on would result in a net increase in the 2006 and that they filed a total of 815
Forms S–3 and F–3 as a result of these annual aggregate number of filings on registration statements on Forms S–1,
amendments will choose to file short- all Forms S–3, S–1, SB–2, F–3 and F– SB–2 and F–1 during the twelve months
form Form S–3 and Form F–3 1 taken together, since the increased ending December 31, 2006.72 To
registration statements in lieu of Forms number of Form S–3 and F–3 filings determine the effect of our proposal on
S–1, SB–2 or F–1, as applicable, we should exceed the decreased number of the overall paperwork burden, we have
believe there will be an aggregate Form S–1, SB–2 and F–1 filings. assumed that these filings on Forms S–
decrease in the disclosure burdens Accordingly, we believe the overall net 1, SB–2 and F–1 would have been made
associated with Forms S–1, SB–2 and F– decrease in disclosure burden that instead on Form S–3 or Form F–3, as
1 and an increase in the disclosure should result from companies changing applicable, to the extent that the issuers
burdens associated with Forms S–3 and to the more streamlined Forms S–3 and would not be limited by the proposed
F–3. The shift in aggregate disclosure F–3 will be offset to some extent by 20% restriction on the amount of
burden among these forms will be due newly eligible companies filing Forms securities they may offer in any period
entirely to the change in the number of S–3 and F–3 more frequently than they of 12 calendar months. Therefore, we
annual responses expected with respect did Forms S–1, SB–2 or F–1. However, assume that the Forms S–1, SB–2 and
to each form as companies previously this offset could be lessened in part by F–1 filed by the subject companies will
ineligible to use Form S–3 and Form F– the proposed 20% limitation on the decrease from the number filed in 2006,
3 switch to these forms for their public amount of securities that companies but because of the proposed 20%
offerings and away from Forms S–1, SB– may sell on Form S–3 and Form F–3 in restriction on sales, will not decrease to
2 and F–1. In addition, because of the any period of 12 calendar months. 0. Instead, we believe that some Forms
anticipated benefits to issuers associated Companies that require more capital but S–1, SB–2 and F– will continue to filed
with Forms S–3 and F–3, in particular are prohibited by this 20% restriction annually by these companies. To reflect
the lower costs of preparing and filing from using Form S–3 and Form F–3 for this, we have taken the number of
the registration statements and the primary offerings may, as a result, Forms S–1, SB–2 and F–1 that were
ability to make delayed and continuous continue to conduct some offerings on filed by these companies in calendar
offerings in response to changing market Forms S–1, SB–2 or F–1 or through the year 2006 and decreased this number by
conditions, we think that this will private markets even though Form S–3 85% for each form, for a total decrease
increase the demand for and lead to and F–3 are preferable. of 694 filings.73 Therefore, we assume
more company filings on Forms S–3 and that approximately 694 fewer Forms S–
C. Paperwork Reduction Act Burden
F–3 than would otherwise have been 1, SB–2 and F–1 will be filed by all
Estimates
made on Forms S–1, SB–2 and F–1. issuers in calendar year 2006. The
That is, we think that the opportunity For purposes of the Paperwork actual number could be more or less
for capital raising will be more robust Reduction Act, we estimate the annual depending on various factors, including
for many companies because of the decrease in the paperwork burden for future market conditions.
availability of shelf registration on Form companies to comply with our proposed Furthermore, we believe that the
S–3. We also anticipate that many collection of information requirements 4,901 companies that we estimate will
companies will choose to offer their to be approximately 39,952 hours of in- be affected by the rule change would
securities directly to the public through house company personnel time and to have conducted more registered
registration on Forms S–3 and F–3 be approximately $47,942,000 for the securities offerings had they been able
instead of through private placements services of outside professionals.69 to use Forms S–3 and F–3 because of the
and therefore, if the proposal is adopted, These estimates include the time and benefits of forward incorporation and
we expect comparatively more Form S– the cost of preparing and reviewing the ability to utilize shelf registration to
3 and F–3 registration statements to be disclosure, filing documents and maximize market opportunities. We
filed as companies forego private retaining records. Our methodologies for assume that the inability of these
offerings in favor of the public markets. deriving the above estimates are companies to utilize Forms S–3 and F–
In order to provide an estimate of the discussed below. 3 limited their capacity to access the
change in the collection of information Our estimates represent the burden public securities markets and, because
burden for purposes of the Paperwork for all issuers, both large and small. As of the cost and lack of flexibility
Reduction Act, our assumption is that mentioned, however, the estimated associated with Forms S–1, SB–2 and F–
the proposed amendments to Forms S– decreases are wholly attributable to our 1, either did not file registration
3 and F–3 will result in an overall assumptions, discussed in Section B. statements on Forms S–1 SB–2 or F–1,
increase in the number of such forms above, about how the amendments will or were limited in the number that they
filed annually and an overall decrease influence the behavior of certain issuers
in the number of Forms S–1, Forms SB– who were formerly ineligible to conduct 70 See n. 29 above.
2 and Forms F–1 filed annually. As primary offerings on Forms S–3 and F– 71 See n. 51 above.
72 The total of 815 filings is comprised of 138
discussed, however, we do not expect 3. These issuers are non-shell
Forms S–1; 674 Forms SB–2; and 3 Forms F–1.

that the incremental increase in the companies who satisfy the registrant 73 This number deducts 85% from the totals for
number of all Forms S–3 and F–3 filed each of the three registration forms, as follows:
69 For administrative convenience, the Form S–1 (85% of 138, rounded up, equals 118);
will be roughly equal to the incremental
presentation of the totals related to the paperwork Form SB–2 (85% of 674, rounded up, equals 573);
decrease in the number of Forms S–1, burden hours have been rounded to the nearest and Form F–1 (85% of 3, rounded up, equals 3).
Forms SB–2 and Forms F–1 filed, whole number and the cost totals have been Adding these together, the combined reduction
because our assumption is that the rounded to the nearest thousand. totals 694 filings.
filed. We therefore believe that the form, for a total increase of 765 filings.74 the hours and cost burden associated
annual number of responses on Forms Therefore, we assume that with preparing, reviewing and filing
S–3 and F–3 for purposes of the approximately 765 additional Forms S– each of these forms.
Paperwork Reduction Act will increase 3 and F–3 will be filed over and above Consistent with current Office of
by an increment greater than simply the the number of total Forms S–3 and F– Management and Budget estimates and
total of 694 fewer registration statements 3 filed by all issuers, large and small, in recent Commission rulemaking,75 we
on Forms S–1, SB–2 and F–1 that we calendar year 2006. The actual number estimate that 25% of the burden of
estimate will be filed going forward by could be more or less depending on preparation of Forms S–3, S–1, SB–2, F–
the 4,901 companies who would qualify various factors, including future market 3 and F–1 is carried by the company
for primary offerings on Forms S–3 and conditions. internally and that 75% of the burden
F–3 as a result of our proposal. We To calculate the total effect of the is carried by outside professionals
further assume that this increase in proposed amendments on the overall retained by the issuer at an average cost
Forms S–3 and F–3 will be mitigated to compliance burden for all issuers, large of $400 per hour.76 The portion of the
some degree by the proposed 20% and small, we subtracted the burden burden carried by outside professionals
restriction on securities sold in any associated with the 694 fewer Forms S– is reflected as a cost, while the portion
period of 12 calendar months, which 1, SB–2 and F–1 registration statements of the burden carried by the company
may limit the frequency and volume of that we expect will be filed annually in internally is reflected in hours.
additional securities offerings on Form the future and added the burden The table below illustrates our
S–3 and Form F–3. To reflect this, we associated with our estimate of 765 estimates concerning the incremental
have taken the 694 Forms S–1, SB–2 additional Forms S–3 and F–3 filed annual compliance burden in the
and F–1 that were filed by these annually as a result of the proposal. We collection of information in hours and
companies in calendar year 2006 and used current Office of Management and cost for Forms S–3, S–1, SB–2, F–3 and
increased this number by 10% for each Budget estimates in our calculation of F–1 as a result of this proposal.
Estimated change Incremental $400/hr

Form in Hours/form77 burden 25% Issuer 75% Professional Professional cost
annual responses
(A) (B) (C)=(A)*(B) (D)=(C)*0.25 (E)=(C)*0.75 (F)=(E)*$400
S–3 ....................... 761 459 349,299 87,324.75 261,974.25 $104,789,000

S–1 ....................... (118) 1,176 (138,768) (34,692) (104,076) (41,630,400)
SB–2 .................... (573) 638 (365,574) (91,393.5) (274,180.5) (109,672,200)
F–3 ....................... 4 166 664 166 498 199,200
F–1 ....................... (3) 1,809 (5,427) (1,356.75) (4,070.25) (1,628,100)
Total .............. .............................. .............................. (159,806) (39,951.5) (119,854.5) (47,941,800)
D. Request for Comment Requests for materials submitted to the III. Cost-Benefit Analysis
OMB by us with regard to this collection A. Summary of Proposals
We request comment in order to of information should be in writing,
evaluate the accuracy of our estimate of We are proposing revisions to the
refer to File No. S7–10–07, and be
the burden of the collections of transaction eligibility requirements of
submitted to the Securities and
information.78 Any member of the Forms S–3 and F–3 that would allow
public may direct to us any comments Exchange Commission, Office of Filings
companies to take advantage of these
concerning the accuracy of these burden and Information Services, Branch of
forms for primary offerings regardless of
estimates. Persons who desire to submit Records Management, 6432 General
the size of their public float. Whereas
comments on the collection of Green Way, Alexandria, VA 22312. secondary offerings may be registered
information requirements should direct Because the OMB is required to make a on Forms S–3 and F–3 irrespective of
their comments to the OMB, Attention: decision concerning the collections of float, the current instructions to Forms
Desk Officer for the Securities and information between 30 and 60 days S–3 and F–3 restrict the use of these
Exchange Commission, Office of after publication, your comments are forms for primary securities offerings to
Information and Regulatory Affairs, best assured of having their full effect if companies that have a minimum of $75
Washington, DC 20503, and should send the OMB receives them within 30 days million in public float calculated within
a copy of the comments to Nancy M. of publication. 60 days prior to the date the registration
Morris, Secretary, Securities and statement is filed. To expand the
Exchange Commission, 100 F Street, availability of Forms S–3 and F–3 for
NE., Washington, DC 20549–1090, with primary offerings to more companies,
reference to File No. S7–10–07. we propose to allow companies with
74 This number adds a 10% premium to the 75 For discussions of the relative burden of firms to estimate an hourly rate of $400 as the
individual totals for each of the three registration preparation of registration statements under the average cost of outside professionals that assist
forms, as follows: Form S–1 (10% of 118, rounded Securities Act allocated between issuers internally issuers in preparing disclosures and conducting
up, equals 12); Form SB–2 (10% of 573, rounded and their outside advisers, see Executive registered offerings.
up, equals 58); and Form F–1 (10% of 3, rounded Compensation and Related Person Disclosure, 77 This reflects current Office of Management and
up, equals 1). The sum of these increases, which is Release No. 33–8732A (Aug. 29, 2006) [71 FR
equal to 71, is then added to the total of 694 Forms 56225] and Release No. 33–8591. Budget estimates.
78 Comments are requested pursuant to 44 U.S.C.
S–1, SB–2 and F–1 filed by the subject companies 76 In connection with other recent rulemakings,
in 2006. we have had discussions with several private law 3506(c)(2)(B).
less than $75 million in public float to and to be approximately $47,942,000 for value of their shares if the companies in
register primary offerings of their the services of outside professionals. If which they invest are able to meet more
securities on Forms S–3 and F–3, our assumptions regarding these costs of their capital needs in the public
provided: and current practices are not correct or markets. By selling into the public
• They meet the other registrant complete, then the decreased costs we markets, these companies may be able to
eligibility conditions for the use of Form anticipate may prove to be either higher avoid the substantial pricing discounts
S–3 or Form F–3, as applicable; or lower than our current estimate. that private investors often demand to
• They are not shell companies and In addition to the benefits associated compensate them for the relative
have not been shell companies for at with the estimated reduction in the time illiquidity of the restricted shares they
least 12 calendar months before filing required to prepare Forms S–3 and F– are purchasing.82
the registration statement; and 3 in lieu of Forms S–1, SB–2 and F–1, The public registration of securities
• They do not sell more than the and a company’s ability to forward also provides additional benefits to
equivalent of 20% of their public float incorporate prospectus disclosure by investors over alternative forms of
in primary offerings under General reference, Forms S–3 and F–3 provide capital raising. To the extent that the
Instruction I.B.6. of Form S–3 or under substantial flexibility to companies amendments, if adopted, lead to an
General Instruction I.B.5. of Form F–3 raising money in the capital markets, increase in the use of Form S–3 and
over any period of 12 calendar months. which ultimately may reduce the cost of Form F–3 as a source of financing and
capital for such companies and facilitate a decrease in private market
B. Benefits their access to additional sources of alternatives, investors in those offerings
The ability to conduct primary investment. Companies that are eligible will benefit from the additional investor
offerings on Forms S–3 and F–3 confers to use Form S–3 or Form F–3 for protections associated with public
significant advantages on eligible primary offerings are able to conduct registration.
companies in terms of cost savings and delayed and continuous registered Notwithstanding our belief regarding
capital formation. The time required to offerings under Rule 415 of the the beneficial effects of the proposed
prepare Form S–3 or Form F–3 is Securities Act, which provides amendments, however, any resulting
significantly lower than that required considerable flexibility in accessing the benefits that accrue to companies and
for Forms S–1, F–1 and SB–2.79 This public securities markets from time to their investors as a result of these
difference is magnified by the fact that time in response to changes in the amendments will depend on future
Form S–3 and Form F–3, unlike Forms market and other factors. Eligible market conditions and circumstances
S–1, SB–2 and F–1, permit registrants to companies are permitted to register unique to each company.
forward incorporate required securities prior to planning any offering C. Costs
information by reference to disclosure and, once the registration statement is
in their Exchange Act filings. Therefore, As discussed in Section B. above, we
effective, offer these securities in one or
Form S–3 and Form F–3 registration do not expect that the proposed
more tranches without waiting for
statements can be automatically amendments to Forms S–3 and F–3 will
further Commission action. By having
updated. This allows such companies to materially increase companies’ overall
more control over the timing of their
avoid additional delays and compliance costs associated with
offerings, these companies can take
interruptions in the offering process and preparing, reviewing and filing these
advantage of desired market conditions,
can reduce the costs associated with registration statements, although there
thus allowing them to raise capital on
preparing and filing post-effective may be some additional costs incurred
more favorable terms (such as pricing)
amendments to the registration by companies to monitor their ongoing
or to obtain lower interest rates on debt.
statement. compliance with the 20% sales
In addition, they can vary certain terms
Overall, we anticipate that the restriction imposed by the amendments.
of the securities being offered upon
proposed expansion of Form S–3 and At the same time, the amendments
short notice, enabling them to more
Form F–3 eligibility will decrease the could result in certain additional market
efficiently meet the competitive
aggregate costs of complying with the costs that are difficult to quantify. For
requirements of the public securities
Commission’s rules by allowing example, it has been suggested that
markets. We believe that extending shelf
companies previously eligible to use there are risks inherent in allowing
registration benefits to more companies,
only Form S–1, Form SB–2 or Form F– smaller public companies to take
as we have proposed, will facilitate the
1 the use of short-form registration on advantage of shelf primary offerings on
capital-raising efforts of smaller public
Form S–3 or Form F–3, as applicable. Forms S–3 and F–3: because this would
companies who currently have fewer
Using our estimates prepared for permit such companies to avail
financing options than their larger
purposes of the Paperwork Reduction themselves of periodic takedowns
counterparts.81 Consequently, we
Act, we estimate that under the proposal without further Commission action or
anticipate that the proposal, if adopted,
the annual decrease in the compliance prior staff review, concerns have been
would result in smaller issuers raising
burden for companies to comply with raised about the increased potential for
more capital through the public markets
our proposed collection of information fraud and market manipulation.83
rather than through exempt offerings
requirements to be approximately Although the Commission would retain
conducted in the domestic and offshore
39,952 hours of in-house company the authority to review registration
markets. Investors in these companies
personnel time (valued at $6,992,00080) statements before declaring them
will benefit by such companies’
effective, individual takedowns are not
improved access to capital on more
79 The Office of Management and Budget subject to prior staff review. Under the
favorable terms. In particular, investors
currently estimates the time required to prepare current rules, if issuers are instead using
in smaller public companies may be less
Form S–3 and Form F–3 as 459 hours and 166 Forms S–1, SB–2 or F–1, they would be
hours, respectively. This is contrasted with current subject to the risk of dilution in the
required to file separate registration
estimates for Form S–1, F–1 and SB–2 as 1,176
hours, 1,809 hours and 638 hours, respectively. 81 See generally, Chaplinsky and Haushalter,
statements for each new offering, which
80 Consistent with recent rulemaking releases, we Financing Under Extreme Uncertainty: Contract
82 Id.
estimate the value of work performed by the Terms and Returns to Private Investments in Public
company internally at a cost of $175 per hour. Equity. 83 See n. 45 above.
would be subject to selective staff market in any period of 12 calendar dilution in the value of their shares if
review before going effective. If these months by eligible issuers on Forms S– the companies in which they invest are
issuers can instead conduct shelf 3 and F–3. We note, however, that able to meet more of their capital needs
offerings on Form S–3 and Form F–3, monitoring compliance with this 20% in the public markets. By selling into
there may be some loss of the deterrent limitation may be more difficult given the public markets, these companies
effect on the companies’ disclosures in the lack of prior staff review before a may be able to avoid the substantial
connection with each takedown off the shelf offering. pricing discounts that private investors
shelf because of the lack of prior staff often demand to compensate them, in
review. In addition, the short time part, for the relative illiquidity of the
horizon of shelf offerings may also We solicit comments, including restricted shares they are purchasing.85
reduce the time that participating quantitative data, to assist our We therefore believe that extending
underwriters have to apply their assessment of the costs and benefits of shelf registration benefits to more
independent scrutiny and judgment to the proposal that we have identified, or companies as we have proposed will
an issuer’s prospectus disclosure. We any other costs or benefits that we have facilitate the capital-raising efforts of
have also considered the effect the not addressed but ought to consider. smaller public companies who currently
amendments may have on market Commenters are encouraged to address have fewer financing options than their
demand in the securities of smaller any potentially material costs and larger counterparts.86 Consequently, we
public companies offered on Form S–3 benefits, whether direct or indirect. anticipate that the proposal, if adopted,
and Form F–3. If there is a perception IV. Consideration of Burden on would lead to efficiencies in capital
that smaller public company securities Competition and Promotion of formation, as smaller issuers would be
offered through shelf registration Efficiency, Competition and Capital able to raise more capital through the
statements are more prone to abuse Formation public markets rather than through
because of the lack of involvement by exempt offerings conducted in the
Securities Act Section 2(b) 84 requires domestic and offshore markets.
the Commission staff, this may erode us, when engaging in rulemaking where
investor confidence in these offerings At the same time, we have also
we are required to consider or considered the potential that the
generally. This could, in turn, make it determine whether an action is
more difficult for these companies to amendments might result in certain
necessary or appropriate in the public additional market costs that could limit
raise capital and significantly negate the interest, to consider, in addition to the
benefits of the rule. any efficiencies realized. For example, it
protection of investors, whether the has been suggested that extending the
While we recognize that extending the action will promote efficiency, benefits of shelf registration to an
benefits of shelf registration to an competition, and capital formation. expanded group of companies will limit
expanded group of companies will, by We expect the proposed amendments, the staff’s direct involvement in
necessity, limit the staff’s direct if adopted, to increase efficiency and takedowns of securities off the shelf and
involvement in takedowns of securities enhance capital formation, and thereby could therefore pose some risk to
off the shelf and could therefore pose benefit investors, by facilitating the investors. In addition, the short time
some risk to investors, we believe that ability of smaller public companies to horizon of shelf offerings also may
the costs will be justified by the benefits access the capital markets consistent reduce the time that participating
that will accrue by facilitating the with investor protection. Currently, underwriters have to apply their
capital formation efforts of smaller many companies are ineligible to use independent scrutiny and judgment to
public companies. As we have Forms S–3 and F–3 to register primary an issuer’s prospectus disclosure. By
discussed elsewhere in this release, the offerings of their securities because the reducing this staff and underwriter
risks to investor protection by size of their public float does not satisfy oversight, there is a risk that these
expanding the base of companies the $75 million threshold required by securities offerings may be more
eligible for primary offerings on Forms these forms. Consequently, they are vulnerable to abuses. Moreover, because
S–3 and F–3 have been significantly unable to take advantage of the companies with a smaller market
mitigated by technological advances important benefits enjoyed by eligible capitalization, as a group, have a
affecting the manner in which companies, the most significant of comparatively smaller market following
companies communicate with investors, which is the ability to conduct primary than larger, well-seasoned issuers and
allowing widespread, direct, and offerings on a delayed and continuous are more thinly traded, smaller
contemporaneous accessibility of basis. The ability to register securities companies’ securities may be more
company disclosure at little or no cost. that may be taken off the shelf as vulnerable to potential manipulative
Moreover, the scope of heightened needed, without prior staff review, practices. We also have considered the
disclosure obligations and liability of provides a powerful tool for capital effect the amendments may have on
smaller public companies under the formation because it allows companies market demand in the securities of
Federal securities laws are sufficiently the flexibility to take advantage of smaller public companies offered on
comparable for these purposes to the desired market conditions efficiently Form S–3 and Form F–3. If there is a
largest reporting companies such that and upon short notice. Companies may perception that smaller public company
the proposed expansion of Form S–3 be able to raise capital more cheaply, securities offered through shelf
and Form F–3 primary offering quickly, and on more favorable terms registration statements are more prone
eligibility should not adversely impact than would otherwise be the case. We to abuse because of the lack of prior
investors. In this regard, to ensure that believe that investors in these involvement by the Commission staff,
the expansion of eligibility is carried out companies will benefit by such
this may erode investor confidence in

with appropriate moderation and companies’ improved access to capital these offerings generally. This could, in
attention to the continued protection of on more favorable terms. In particular, turn, make it more difficult for these
investors, we have proposed to exclude investors in smaller public companies companies to raise capital and
shell companies from eligibility and to may be less subject to the risk of
impose a 20% restriction on the amount 85 See n. 82.
of securities that can be sold into the 84 15 U.S.C. 77b(b). 86 See n. 81.
significantly negate the benefits of the difficult to predict, but it is possible that currently have fewer, and less favorable,
rule. making it easier for smaller public financing options than their larger Form
We do not believe that the potential issuers to access the domestic public S–3 and F–3-eligible counterparts.
efficiencies and benefits to capital securities markets will lead to a
formation resulting from the reallocation of capital, as companies B. Objectives
amendments will be substantially that previously had little choice but to The proposed amendments aim to
lessened by these potential costs. We offer their securities in private offerings amend Forms S–3 and F–3 to extend the
believe that the risks to investor or in offshore markets because of their benefits of incorporation by reference
protection by expanding the base of S–3 and F–3 ineligibility will now find and shelf registration to more
companies eligible for primary offerings it cost-effective to offer their securities companies, which in turn will facilitate
on Forms S–3 and F–3 have been domestically in primary offerings on the ability of smaller public companies
significantly mitigated by technological Form S–3 and Form F–3. If such a to access the capital markets.
advances affecting the manner by which reallocation occurs, it may also impact
companies communicate with investors, securities market professionals, such as C. Legal Basis
allowing widespread, direct, and finders, brokers and agents, who
contemporaneous accessibility of specialize in facilitating private We are proposing these amendments
company disclosure at little or no cost. securities offerings. The demand for pursuant to Sections 6, 7, 8, 10 and
Moreover, the scope of heightened these services may shift to the public 19(a) of the Securities Act, as amended.
disclosure obligations and the liability markets, where other professionals, D. Small Entities Subject to the
of smaller public companies under the such as investment banks that Proposed Amendments
federal securities laws are sufficiently underwrite public offerings, have a
comparable for these purposes to the comparative advantage. The Regulatory Flexibility Act defines
largest reporting companies, such that We request comment on whether the ‘‘small entity’’ to mean ‘‘small
the proposed expansion of Form S–3 proposals, if adopted, would promote business,’’ ‘‘small organization,’’ or
and Form F–3 primary offering efficiency, competition, and capital ‘‘small governmental jurisdiction.’’ 88
eligibility should not adversely impact formation or have an impact or burden The Commission’s rules define ‘‘small
investors. In this regard, to provide that on competition. Commenters are business’’ and ‘‘small organization’’ for
the expansion of eligibility is carried out requested to provide empirical data and purposes of the Regulatory Flexibility
with appropriate moderation and other factual support for their views, if Act for each of the types of entities
attention to the continued protection of possible. regulated by the Commission.89 Roughly
investors, we have proposed to exclude speaking, a ‘‘small business’’ and ‘‘small
V. Initial Regulatory Flexibility Act
shell companies from eligibility and to organization,’’ when used with
Analysis
impose a 20% restriction on the amount reference to an issuer other than an
of securities that can be sold into the This Initial Regulatory Flexibility Act
investment company, means an issuer
market in any period of 12 calendar Analysis has been prepared in
with total assets of $5 million or less on
months by eligible issuers on Forms S– accordance with 5 U.S.C. 603. It relates
the last day of its most recent fiscal year.
3 and F–3. to proposed revisions to the eligibility
We estimate that there are
In addition to the salutary effects that requirements for the use of registration
approximately 1,100 issuers, other than
we anticipate with respect to capital statements on Forms S–3 and F–3 to
investment companies, that may be
formation, companies may also realize register primary offerings of securities.
considered reporting small entities.90
cost efficiencies stemming from the A. Reasons for the Proposed Action
enhanced ability to incorporate by The proposal would affect small
reference disclosure information from Currently, many smaller public entities that are not shell companies and
their Exchange Act filings. Because companies are ineligible to use Forms satisfy the registrant eligibility
Forms S–3 and F–3 allow a company S–3 and F–3 to register primary requirements for the use of Form S–3 or
maximum reliance on its Exchange Act offerings of their securities because the Form F–3, which generally pertain to a
filings to satisfy required prospectus size of their public float does not satisfy company’s reporting history under the
disclosure, these registration statements the $75 million threshold required by Exchange Act.91 Based on these
can be more abbreviated than alternative these forms. Consequently, they are registrant eligibility requirements, we
registration forms and are updated unable to take advantage of the estimate that there are approximately
automatically by the company’s future important benefits enjoyed by eligible 990 small entities that would be affected
Exchange Act filings. This translates companies, the most significant of by the proposal and would therefore
into a reduction in the time and the cost which is the ability to conduct primary become eligible to use Form S–3 or
of preparing and reviewing disclosure, offerings on a delayed and continuous
filing documents, and retaining records. basis. The ability to register securities 88 5 U.S.C. § 601(6).
We estimate that under the proposal the that may be taken off the shelf as 89 Rules 157 under the Securities Act [17 CFR
annual decrease in the compliance needed, without prior staff review, 230.157], 0–10 under the Exchange Act [17 CFR
240.0–10] and 0–10 under the Investment Company
burden for companies who previously provides a powerful tool for capital Act [17 CFR 270.0–10] contain the applicable
were ineligible to use Forms S–3 and F– formation because it allows companies definitions.
3 for primary offerings to be the flexibility to take advantage of 90 The estimated number of reporting small
approximately 39,952 hours of in-house desired market conditions efficiently entities is based on 2007 data, including the
and on short notice. As such, eligible Commission’s EDGAR database and Thomson
company personnel time (valued at Financial’s Worldscope database. This represents
companies may be able to raise capital
$6,992,000 87) and to be approximately an update from the number of reporting small
$47,942,000 for the services of outside more cheaply, quickly, and on more entities estimated in prior rulemakings. See, for
professionals. favorable terms than would otherwise example, Executive Compensation and Related
be the case. Without this source of Disclosure, Release No. 33–8732A (Aug. 29, 2006)
The effects of the proposed [71 FR 53158] (in which the Commission’s
amendments on competition are financing, smaller public companies estimated a total of 2,500 small entities, other than
that are not eligible to register primary investment companies).
87 See n. 80 above. offerings on Form S–3 or From F–3 91 See n. 29 and n. 51 above.
Form F–3 for primary securities December 31, 2006.94 We then assumed qualify for primary offerings on Forms
offerings. that these filings on Forms S–1, SB–2 S–3 and F–3 as a result of our proposal.
and F–1 would have been made instead We further assume that this increase in
E. Reporting, Recordkeeping and Other
on Forms S–3 or Form F–1, as Forms S–3 and F–3 will be mitigated to
Compliance Requirements
applicable, to the extent that the issuers some degree by the proposed 20%
The proposed amendments to the would not be limited by the proposed restriction on securities sold in any
transaction eligibility requirements of 20% restriction on the amount of period of 12 calendar months, which
Forms S–3 and F–3 would affect only securities they may offer in any period may limit the frequency and volume of
small entities that meet the registrant of 12 calendar months. Therefore, we additional securities offerings on Form
eligibility requirements of Form S–3 or assume that the Forms S–1, SB–2 and S–3 and Form F–3. To reflect this, we
Form F–3, as applicable, are not shell F–1 filed by the subject small entities have taken the 165 Forms S–1, SB–2
companies and choose voluntarily to will decrease from the number filed in and F–1 that were filed by these small
register one or more primary securities 2006 but, because of the proposed 20% entities in calendar year 2006 and
offerings on Form S–3 or Form F–3. restriction on sales, this number will not increased this number by 10% for each
Because Forms S–3 and F–3 are decrease to 0. Instead, we believe that form, for a total increase of 182 filings.96
abbreviated registration forms that can some Forms S–1, SB–2 and F–1 will Therefore, we assume that
be updated automatically through continue to be filed annually by these approximately 182 additional Forms S–
incorporation by reference of a small entities. As such, we have taken 3 and F–3 will be filed over and above
registrant’s Exchange Act filings, we the number of Forms S–1, SB–2 and F– the number of total Forms S–3 and F–
believe use of the forms by eligible 1 that were filed by these small entities 3 filed by small entities in calendar year
small entities would decrease their in calendar year 2006 and decreased 2006. The actual number could be more
existing compliance burden. Because this number by 85% for each form, for or less depending on various factors,
the proposal does not affect the a total decrease of 165 filings.95 including future market conditions.
information disclosure requirements of Therefore, we assume that To calculate the total effect of the
Form S–3 or Form F–3, we do not approximately 165 fewer Forms S–1, proposed amendments on the overall
believe that the costs of complying with SB–2 and F–1 will be filed by all small compliance burden for small entities,
the amendments for small entities will entities in calendar year 2006. The we subtracted the burden associated
be disproportionate to that of large actual number could be more or less with the 165 fewer Forms S–1, SB–2
entities.92 We recognize, however, that depending on various factors, including and F–1 registration statements that we
there will be some additional costs future market conditions. expect will be filed annually by small
associated with an issuer’s need to Furthermore, we believe that the 990 entities in the future and added the
continually monitor its compliance with small entities that we estimate will be burden associated with our estimate of
the proposed 20% limitation on sales in affected by the rule change would have 182 additional Forms S–3 and F–3 filed
any period of 12 calendar months, but conducted more registered securities annually by small entities as a result of
we believe that any such costs will be offerings had they been able to use the proposal. We used current Office of
insignificant. Forms S–3 and F–3 because of the Management and Budget estimates in
For purposes of the Paperwork benefits of forward incorporation and our calculation of the hours and cost
Reduction Act, we estimate the annual the ability to utilize shelf registration to burden associated with preparing,
decrease in the paperwork burden for maximize market opportunities. We reviewing and filing each of these forms.
small entities to comply with our assume that the inability of these small We estimate that 25% of the burden
proposed collection of information entities to utilize Forms S–3 and F–3 of preparation of Forms S–3, S–1, SB–
requirements to be approximately 7,854 limited their capacity to access the 2, F–3 and F–1 is carried by the small
hours of in-house company personnel public securities markets and, because entity internally and that 75% of the
time (valued at $1,375,000 93) and to be of the cost and lack of flexibility burden is carried by outside
approximately $9,425,000 for the associated with Forms S–1, SB–2 and F– professionals retained by the small
services of outside professionals. To 1, either did not file registration entity at an average cost of $400 per
arrive at these estimates, we applied the statements on Forms S–1, SB–2 or F–1, hour. The portion of the burden carried
same methodology to small entities that or were limited in the number that they by outside professionals is reflected as
we described in Section II.C. above for filed. We therefore believe that the a cost, while the portion of the burden
large and small companies combined. annual number of responses on Forms carried by the small entity internally is
Assuming that 990 small entities would S–3 and F–3 for purposes of the reflected in hours.
be eligible for primary offerings on Paperwork Reduction Act will increase The table below illustrates our
Forms S–3 and F–3 if the proposal is by an increment greater than simply the estimates concerning the incremental
adopted, we estimated that these total of 165 fewer registration statements annual compliance burden in hours and
entities filed a total of 193 registration on Forms S–1, SB–2 and F–1 that we cost for Forms S–3, S–1, SB–2, F–3 and
statements on Forms S–1, SB–2 and F– estimate will be filed going forward by F–1 for small entities as a result of this
1 during the twelve months ending the 990 small entities who would proposal.
92 It should be noted, however, that General between filers subject to Regulation S–K and filers together, the combined reduction is equal to 165
Instruction II.C. of Form S–3 currently requires subject to Regulation S–B, we have not made such filings.
‘‘small business issuers’’ (as defined in Rule 405 of a distinction in this Initial Regulatory Flexibility 96 This number adds a 10% premium to the
the Securities Act [17 CFR 230.405]) to refer to the Analysis. individual totals for each of the three registration
disclosure items in Regulation S–B [17 CFR 228.10
93 See n. 80 above. forms, as follows: Form S–1 (10% of 18, rounded

et seq.] and not Regulation S–K. Since Regulation 94 The total of 193 filings is comprised of 21 up, equals 2); Form SB–2 (10% of 147, rounded up,
S–B disclosure requirements generally are less
extensive than Regulation S–K, small business Forms S–1; 172 Forms SB–2; and 0 Forms F–1. equals 15); and Form F–1 (10% of 0 equals 0). The
issuers that file on Form S–3 may have a 95 This number deducts 85% from the totals for sum of these increases, which is equal to 17, is then
comparatively lesser compliance burden than larger each of the three registration forms, as follows: added to the total of 165 Forms S–1, SB–2 and F–
issuers. However, because the Office of Form S–1 (85% of 21, rounded up, equals 18); Form 1 filed by the subject companies in 2006.
Management and Budget does not provide average SB–2 (85% of 172, rounded up, equals 147); and 97 This reflects current Office of Management and
compliance estimates for Form S–3 that distinguish Form F–1 (85% of 0 equals 0). Adding these Budget estimates.
Estimated change Incremental $400/hr

Form in annual Hours/form77 25% Issuer 75% Professional
burden Professional cost
responses
(A) (B) (C)=(A)*(B) (D)=(C)*0.25 (E)=(C)*0.75 (F)=(E)*$400
S–3 ....................... 182 459 83,538 20,884.5 62,653.5 $25,061,400

S–1 ....................... (18) 1,176 (21,168) (5,292) (15,876) (6,350,400)
SB–2 .................... (147) 638 (93,786) (23,446.5) (70,339.5) (28,135,800)
F–3 ....................... 0 166 0 0 0 0
F–1 ....................... 0 1,809 0 0 0 0
Total .............. .............................. .............................. (31,416) (7,854) (23,562) (9,424,800)
We encourage written comments proposing. As discussed above in this • An annual effect on the U.S.
regarding this analysis. We solicit release, some have advocated in favor of economy of $100 million or more;
comments as to whether the proposed allowing primary offerings on Form S– • A major increase in costs or prices
amendments could have an effect that 3 by all companies that have been for consumers or individual industries;
we have not considered. We request that reporting under the Exchange Act for at or
commenters describe the nature of any least one year and are current in their • Significant adverse effects on
impact on small entities and provide Exchange Act reporting at the time of competition, investment or innovation.
empirical data to support the extent of filing. As we stated, however, we We request comment on whether our
the impact. decline at this time to propose a less proposal would be a ‘‘major rule’’ for
restrictive eligibility requirement. We purposes of the Small Business
F. Duplicative, Overlapping or
believe that imposing the 20% Regulatory Enforcement Fairness Act.
Conflicting Federal Rules
limitation on the amount of securities We solicit comment and empirical data
We believe that there are no Federal that smaller public companies may sell on:
rules that conflict with or completely pursuant to primary offerings on Forms • The potential effect on the U.S.
duplicate the proposed amendments. S–3 and F–3, as described, strikes the economy on an annual basis;
appropriate balance between helping to
G. Significant Alternatives • Any potential increase in costs or
facilitate capital formation through the
The Regulatory Flexibility Act directs prices for consumers or individual
securities markets and our primary
us to consider significant alternatives industries; and
objective of investor protection.
that would accomplish the stated • Any potential effect on competition,
objectives, while minimizing any H. Solicitation of Comment investment, or innovation.
significant adverse impact on small We encourage the submission of VII. Statutory Authority and Text of the
entities. In connection with the comments with respect to any aspect of Amendments
proposal, the Regulatory Flexibility Act this Initial Regulatory Flexibility
requires that we consider the following The amendments described in this
Analysis. In particular, we request
alternatives: release are being proposed under the
comments regarding:
1. Establishing different compliance authority set forth in §§ 6, 7, 8, 10 and
• The number of small entity issuers 19(a) of the Securities Act, as amended.
or reporting requirements which take that may be affected by the proposed
into account the resources available to revisions to Forms S–3 and F–3; List of Subjects in 17 CFR Part 239
smaller entities;
2. The clarification, consolidation or • The existence or nature of the Reporting and recordkeeping
simplification of disclosure for small potential impact of the proposed requirements, Securities.
entities; revisions on small entity issuers
discussed in the analysis; and For the reasons set out in the
3. Use of performance standards preamble, the Commission proposes to
rather than design standards; and • How to quantify the impact of the
amend title 17, chapter II, of the Code
4. Exempting smaller entities from proposed revisions.
of Federal Regulations as follows:
coverage of the disclosure requirements, Commenters are asked to describe the
or any part thereof. nature of any impact and provide PART 239—FORMS PRESCRIBED
Of these alternatives, only the last empirical data supporting the extent of UNDER THE SECURITIES ACT OF 1933
appears germane to this proposal. the impact. Such comments will be
Alternative 3 is not applicable, as the considered in the preparation of the 1. The authority citation for part 239
distinction between performance Final Regulatory Flexibility Analysis, if is revised to read in part as follows:
standards and design standards has no the proposed revisions are adopted, and Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
bearing on the proposed amendments. will be placed in the same public file as 77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n,
Alternatives 1 and 2, because they comments on the proposed 78o(d), 78u–5, 78w(a), 78ll(d), 77mm, 80a–
pertain to establishing different or amendments. 2(a), 80a–3, 80a–8, 80a–9, 80a–10, 80a–13,
simplified reporting requirements for 80a–24, 80a–26, 80a–29, 80a–30, and 80a–37,
VI. Small Business Regulatory unless otherwise noted.
smaller entities, also would not seem Enforcement Fairness Act
helpful in this instance because our * * * * *
proposal, if adopted, would reduce the For purposes of the Small Business 2. Amend Form S–3 (referenced in
compliance burden on eligible smaller Regulatory Enforcement Fairness Act of § 239.13) by adding General Instruction
entities. Regarding Alternative 4, we 1996,98 a rule is ‘‘major’’ if it has I.B.6. to read as follows:
considered relaxing the transaction resulted, or is likely to result in: Note: The text of Form S–3 does not, and
eligibility requirements for Forms S–3 this amendment will not, appear in the Code
and F–3 to a greater degree than we are 98 Pub. L. 104–121, Title II, 110 Stat. 857 (1996). of Federal Regulations.
Form S–3—Registration Statement Under exercise, by the market price of such shares Instructions
The Securities Act of 1933 on the date of conversion or exercise. 1. ‘‘Common equity’’ is as defined in
* * * * * 3. If the aggregate market value of the Securities Act Rule 405 (§ 230.405 of this
registrant’s outstanding voting and non- chapter). For purposes of computing the
General Instructions voting common equity computed pursuant to aggregate market value of the registrant’s
I. Eligibility Requirements for Use of Form S– General Instruction I.B.6. equals or exceeds outstanding voting and non-voting common
3* * * $75 million subsequent to the effective date equity pursuant to General Instruction I.B.5.,
of this registration statement, then the 20% registrants shall use the price at which the
B. Transaction Requirements * * * limitation on sales specified in General common equity was last sold, or the average
6. Limited Primary Offerings by Certain Instruction I.B.6(a) shall not apply to of the bid and asked prices of such common
Other Registrants. Securities to be offered for additional sales made pursuant to this equity, in the principal market for such
cash by or on behalf of a registrant; provided registration statement on or subsequent to common equity as of a date within 60 days
that: such date and instead the registration prior to the date of sale. See the definition
(a) The aggregate market value of securities statement shall be considered filed pursuant of ‘‘affiliate’’ in Securities Act Rule 405
sold by or on behalf of the registrant pursuant to General Instruction I.B.1. (§ 230.405 of this chapter).
to this Instruction I.B.6. during the period of 4. The term ‘‘Form 10 information’’ means 2. For purposes of computing the aggregate
12 calendar months immediately prior to, the information that is required by Form 10, market value of all securities sold by or on
and including, the sale is no more than 20% Form 10–SB, or Form 20–F (§ 249.210, behalf of the registrant in offerings pursuant
of the aggregate market value of the voting § 249.210b, or § 249.220f of this chapter), as to General Instruction I.B.5. during any
and non-voting common equity held by non- applicable to the registrant, to register under period of 12 calendar months, registrants
affiliates of the registrant; and the Securities Exchange Act of 1934 each shall aggregate the gross proceeds of such
(b) The registrant is not a shell company class of securities being registered using this sales; provided, that, in the case of derivative
(as defined in § 230.405 of this chapter) and form. A registrant may provide the Form 10 securities convertible into or exercisable for
has not been a shell company for at least 12 information in another Commission filing shares of the registrant’s common equity,
calendar months previously and if it has been with respect to the registrant. registrants shall calculate the aggregate
a shell company at any time previously, has 5. The date used in Instruction 2 to General market value of any underlying equity shares
filed current Form 10 information with the Instruction I.B.6. shall be the same date used in lieu of the market value of the derivative
Commission at least 12 calendar months in Instruction 1 to General Instruction I.B.6. securities. The aggregate market value of the
previously reflecting its status as an entity 6. A registrant’s eligibility to register a underlying equity shall be calculated by
that is not a shell company. primary offering on Form S–3 pursuant to multiplying the maximum number of
General Instruction I.B.6. does not mean that common equity shares into which the
Instructions
the registrant meets the requirements of Form derivative securities are convertible or for
1. ‘‘Common equity’’ is as defined in S–3 for purposes of any other rule or which they are exercisable as of a date within
Securities Act Rule 405 (§ 230.405 of this regulation of the Commission apart from Rule 60 days prior to the date of sale, by the same
chapter). For purposes of computing the 415(a)(1)(x) (§ 230.415(a)(1)(x)) of this per share market price of the registrant’s
aggregate market value of the registrant’s chapter). equity used for purposes of calculating the
outstanding voting and non-voting common aggregate market value of the registrant’s
equity pursuant to General Instruction I.B.6., * * * * * outstanding voting and non-voting common
registrants shall use the price at which the 3. Amend Form F–3 (referenced in equity pursuant to Instruction 1 to General
common equity was last sold, or the average § 239.33) by adding General Instruction Instruction I.B.5. If the derivative securities
of the bid and asked prices of such common I.B.5. to read as follows: have been converted or exercised, the
equity, in the principal market for such aggregate market value of the underlying
common equity as of a date within 60 days Note: The text of Form F–3 does not, and equity shall be calculated by multiplying the
prior to the date of sale. See the definition this amendment will not, appear in the Code actual number of shares into which the
of ‘‘affiliate’’ in Securities Act Rule 405 of Federal Regulations. securities were converted or received upon
(§ 230.405 of this chapter). exercise, by the market price of such shares
2. For purposes of computing the aggregate Form F–3—Registration Statement Under the on the date of conversion or exercise.
market value of all securities sold by or on Securities Act of 1933 3. If the aggregate market value of the
behalf of the registrant in offerings pursuant * * * * * registrant’s outstanding voting and non-
to General Instruction I.B.6. during any voting common equity computed pursuant to
period of 12 calendar months, registrants General Instructions General Instruction I.B.5. equals or exceeds
shall aggregate the gross proceeds of such I. Eligibility Requirements for Use of Form F– $75 million subsequent to the effective date
sales; provided, that, in the case of derivative 3* * * of this registration statement, then the 20%
securities convertible into or exercisable for limitation on sales specified in General
shares of the registrant’s common equity, B. Transaction Requirements * * * Instruction I.B.5(a) shall not apply to
registrants shall calculate the aggregate 5. Limited Primary Offerings by Certain additional sales made pursuant to this
market value of any underlying equity shares Other Registrants. Securities to be offered for registration statement on or subsequent to
in lieu of the market value of the derivative cash by or on behalf of a registrant; provided such date and instead the registration
securities. The aggregate market value of the that: statement shall be considered filed pursuant
underlying equity shall be calculated by (a) The aggregate market value of securities to General Instruction I.B.1.
multiplying the maximum number of sold by or on behalf of the registrant pursuant 4. The term ‘‘Form 10 information’’ means
common equity shares into which the to this Instruction I.B.5. during the period of the information that is required by Form 10,
derivative securities are convertible or for 12 calendar months immediately prior to, Form 10–SB, or Form 20–F (§ 249.210,
which they are exercisable as of a date within and including, the sale is no more than 20% § 249.210b, or § 249.220f of this chapter), as
60 days prior to the date of sale, by the same of the aggregate market value worldwide of applicable to the registrant, to register under
per share market price of the registrant’s the voting and non-voting common equity the Securities Exchange Act of 1934 each
equity used for purposes of calculating the held by non-affiliates of the registrant; and class of securities being registered using this
aggregate market value of the registrant’s (b) The registrant is not a shell company form. A registrant may provide the Form 10
outstanding voting and non-voting common (as defined in § 230.405 of this chapter) and information in another Commission filing
equity pursuant to Instruction 1 to General has not been a shell company for at least 12 with respect to the registrant.
Instruction I.B.6. If the derivative securities calendar months previously and if it has been 5. The date used in Instruction 2 to General
have been converted or exercised, the a shell company at any time previously, has Instruction I.B.5. shall be the same date used
aggregate market value of the underlying filed current Form 10 information with the in Instruction 1 to General Instruction I.B.5.
equity shall be calculated by multiplying the Commission at least 12 calendar months 6. A registrant’s eligibility to register a
actual number of shares into which the previously reflecting its status as an entity primary offering on Form F–3 pursuant to
securities were converted or received upon that is not a shell company. General Instruction I.B.5. does not mean that
the registrant meets the requirements of Form 415(a)(1)(x) (§ 230.415(a)(1)(x)) of this By the Commission.
F–3 for purposes of any other rule or chapter. Nancy M. Morris,
regulation of the Commission apart from Rule * * * * * Secretary.
Dated: June 20, 2007. [FR Doc. E7–12301 Filed 6–25–07; 8:45 am]
BILLING CODE 8010–01–P

Proposed Rule: Securities: Primary Securities Offerings On Forms S-3 and F3 Eligibility Requirements

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Proposed Rule: Securities: Primary Securities Offerings On Forms S-3 and F3 Eligibility Requirements

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Tuesday,

June 26, 2007

SECURITIES AND EXCHANGE if e-mail is used. To help us process and I. Discussion

Fairness Act history. See General Instruction I.A.4. of Form

44 Note that the date chosen by the registrant for

a delayed basis for up to one year after United States; and

66 Because our amendments to Form S–3 and

Forms S–1; 674 Forms SB–2; and 3 Forms F–1.

Estimated change Incremental $400/hr

(A) (B) (C)=(A)(B) (D)=(C)0.25 (E)=(C)0.75 (F)=(E)$400

S–3 ....................... 761 459 349,299 87,324.75 261,974.25 $104,789,000

Total .............. .............................. .............................. (159,806) (39,951.5) (119,854.5) (47,941,800)

in 2006. we have had discussions with several private law 3506(c)(2)(B).

this may erode investor confidence in

93 See n. 80 above. forms, as follows: Form S–1 (10% of 18, rounded

Estimated change Incremental $400/hr

(A) (B) (C)=(A)(B) (D)=(C)0.25 (E)=(C)0.75 (F)=(E)$400

S–3 ....................... 182 459 83,538 20,884.5 62,653.5 $25,061,400

Total .............. .............................. .............................. (31,416) (7,854) (23,562) (9,424,800)

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