Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054 Page: 46,606

46606 Federal Register/Vol. 76, No. 149/Wednesday, August 3, 2011 /Rules and Regulations

certain insurance contracts to continue
to use Form S-3 and Form F-3; 44 and
* Adding an exception that would
allow operating partnership subsidiaries
of REITs to continue to use Form S-3
and Form F-3.45
Several commentators did not believe
that the new eligibility criteria for Form
S-3 and Form F-3 for primary offerings
of non-convertible securities, other than
common equity, should be based on the
WKSI standard because it is
disproportional to the criteria in Form
S-3 and Form F-3 for primary offerings
made in reliance on General Instruction
I.B.1 of Form S-3 and Form F-3.46
Commentators noted that the WKSI
standard should be more stringent than
the criteria for Form S-3 and Form F-
3 eligibility because of the benefits, such
as automatic shelf registration, that
WKSI status confers.47 Some
commentators suggested that we should
provide additional, alternative criteria
for Form S-3 and Form F-3 eligibility.48
In addition, some commentators
believed the three-year look back for the
$1 billion threshold in the 2011
Proposing Release was arbitrary and
could have significant consequences.
One commentator believed that the
volume standard could be "volatile"
particularly in times of financial
uncertainty.49 One commentator did not
believe its following in the marketplace
would be affected by the timing of its
debt issuances and would not be
significantly affected if it did not issue
$1 billion in three years.50 One
commentator did not believe Form S-3
and Form F-3 eligibility should be
based on the frequency of debt
issuances and believed issuers would be
4 See letters from Sutherland, Roundtable, and
ACLI. Issuers of certain insurance contracts (e.g.,
contracts with so-called "market value adjustment"
features and contracts that provide insurance
benefits in connection with assets held in an
investor's mutual fund, brokerage, or investment
advisory account) are currently eligible to use Form
S-3 and Form F-3 under General Instruction I.B.2.
if these contracts have investment grade ratings.
Market value adjustment ("MVA") features have
historically been associated with annuity and life
insurance contracts that provide a specified rate of
return to purchasers. In order to protect the insurer
against the risk that a purchaser may take
withdrawals from the contract at a time when the
market value of the insurer's assets that support the
contract has declined due to rising interest rates,
insurers sometime impose an MVA upon surrender.
Under an MVA feature, the insurer adjusts the
proceeds a purchaser receives upon early surrender
to reflect changes in the market value of its portfolio
securities supporting the contract.
45 See letter from NAREIT.
46 See letters from Davis Polk, Cleary, McGuire
Woods, Debevoise, UnionBanCal and NAREIT.
47 Id.
48 See letters from SIFMA, BCC and Exelon.
49 See letter from Orchard Street Partners LLC

dated February 10, 2011 (Orchard Street).
5o See letter from BCC.

followed on the basis of their debt
outstanding.51 Several utility company
commentators noted that debt issuances
within their industry are done on an
irregular basis in connection with large
capital projects, which would make the
three-year test difficult to satisfy on a
consistent basis.52
Commentators generally believed that
if issuers were unable to satisfy the
proposed standard, they would seek to
raise capital in the private markets
instead of registering offerings on Form
S-1.53 Commentators believed that
private offerings would be more
efficient and take less time than a
registered offering on Form S-1.54
Commentators noted that using the
private markets would make it difficult
for issuers to ever gain eligibility for
Form S-3 because the amount of non-
convertible securities (other than
common equity) issued in private
offerings is not included in calculating
the $1 billion threshold under the
proposal.55 Commentators also noted
that if issuers were to use the private
markets, it would be inconsistent with
the Commission's policy preference for
registered offerings.56
We have reviewed and considered all
of the comments we received on the
proposed amendments. The adopted
amendments reflect changes made in
response to many of these comments.
These changes are discussed in more
detail below.
4. Amendments
(i) Replace Investment Grade Rating
Criterion With Alternative Criteria
(a) Overview
Today we are adopting amendments
to revise the transaction eligibility
criteria for registering primary offerings
of non-convertible securities on Forms
S-3 and F-3. After considering the
comments we received on the 2011
Proposing Release, we believe that the
amendments we are adopting today
provide an appropriate and workable
alternative to credit ratings for
determining whether an issuer should
be able to use Form S-3 and Form F-
3 and have access to the shelf offering
process.
51 See letter from Exelon.
52 See letters from Entergy, Exelon, Dominion,
Wisconsin Energy, Alliant, Oglethorpe, DTE and
EEI.
53 See letters from NAREIT, Davis Polk, Central
Hudson, Entergy, Exelon, Oglethorpe, PSEG, DTE,
Laclede and AGA.
54 See letters from Central Hudson, Entergy and
Exelon.
5 See letters from Central Hudson, SIFMA,

Oglethorpe and DTE.
56 See letters from Davis Polk, NAREIT and EEI.

The instructions to Forms S-3 and F-
3 will no longer refer to security ratings
by an NRSRO as a transaction
requirement to permit issuers to register
primary offerings of non-convertible
securities for cash. Instead, these forms
will be available to register primary
offerings of non-convertible securities
other than common equity if:
(i) The issuer has issued (as of a date
within 60 days prior to the filing of the
registration statement) at least $1 billion
in non-convertible securities, other than
common equity, in primary offerings for
cash, not exchange, registered under the
Securities Act, over the prior three
years; or
(ii) The issuer has outstanding (as of
a date within 60 days prior to the filing
of the registration statement) at least
$750 million of non-convertible
securities, other than common equity,
issued in primary offerings for cash, not
exchange, registered under the
Securities Act; or
(iii) The issuer is a wholly-owned
subsidiary of a WKSI as defined in Rule
405 under the Securities Act; or
(iv) The issuer is a majority-owned
operating partnership of a REIT that
qualifies as a WKSI; or
(v) The issuer discloses in the
registration statement that it has a
reasonable belief that it would have
been eligible to register the securities
offerings proposed to be registered
under such registration statement
pursuant to General Instruction I.B.2 of
Form S-3 or Form F-3 in existence
prior to the new rules, discloses the
basis for such belief, and files the final
prospectus for any such offering on or
before the date that is three years from
the effective date of the amendments.57
We are modifying eligibility criteria
for use of Form S-3 and Form F-3 from
the proposal because we are persuaded
by commentators' arguments that the
criteria from the 2011 Proposing Release
could result in some issuers who should
be eligible to use Form S-3 or Form F-
3 because of their wide market
following and who are currently eligible
to no longer be eligible. As we noted in
the 2011 Proposing Release, we are not
aware of anything in the legislative
history to indicate that Congress
intended to substantially alter the pool
of issuers eligible for short-form
57 See revised General Instruction I.B.2. of Forms
S-3 and F-3. We are also deleting the reference to
General Instruction I.B.2 in Instruction 3 to the
signature block of Forms SF3 and F-3. Instruction
3 to the signature block of Form 5-3 and Form F-
3 provides that a registrant may sign the registration
statement even if a final credit rating has not been
issued so long as the registrant states its reasonable
belief that the rating will be issued by the time of
sale. See Section II.B. below for a discussion of

General Instruction I.B.5.