Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054

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

"grandfather" provision that would
allow issuers that are currently eligible
to use Form S-3 and Form F-3 to
continue to use those forms for a period
of time even if the issuers would not be
eligible under the new rules.76 As noted
above, we are not aware of anything in
the legislative history to indicate that
Congress intended for Section 939A of
the Dodd-Frank Act to substantially
alter access to our short forms or the
shelf registration process. Although we
believe that the revisions to the proposal
described above would not result in
significant numbers of issuers losing
access to those forms, we are
nevertheless concerned that there could
be some issuers that would no longer be
eligible to use Form S-3 or Form F-3.
In order to ease transition to the new
rules and allow companies affected by
the amendments time to adjust, we are
adopting a temporary "grandfather"
clause that will allow issuers who
reasonably believe they would have
been eligible to rely on General
Instruction I.B.2. of Form S-3 or Form
F-3 based on the criteria in existence
prior to the new rules and who disclose
that belief and the basis for it in the
registration statement, to be able to use
Form S-3 and Form F-3 if they file a
final prospectus for an offering on Form
S-3 or Form F-3 within three years
from the effective date of the new
rules.77 We are adopting a "reasonable
belief" standard because of the way in
which some credit ratings work.
Because some issuers would likely not
obtain a credit rating until a deal is
relatively certain (unless the issuer has
an issuer rating), those issuers would
not have a bright-line way of
determining whether they were eligible
to use Form S-3 and Form F-3 based on
the criteria in effect prior to the new
rules. We believe requiring the issuer to
disclose its reasonable belief will
prompt issuers to consider carefully
whether the disclosure is accurate since
they will be responsible for the
disclosure under the Securities Act. As
a result, as long as the issuer has a
reasonable belief that it would have
been eligible and discloses that belief
(and the basis for it) in the registration
statement, the issuer will be able use
Form S-3 and Form F-3 for a period of
three years from the effective date of the
new rules. We believe three years will
provide issuers with enough time to
adjust to the new rules, including
76 See letters from SIFMA, Entergy, Davis Polk,
Cleary, AEP, Roundtable, Wisconsin Energy,
Oglethorpe, DTE, MGE and Vectren.
77 Under this eligibility standard, issuers will be
able to file new Forms S-3 or F-3, but any offerings

would need to have a final prospectus filed within
three years of the effective date of the new rules.

modifying how they might choose to
offer securities. Factors that indicate a
reasonable belief of eligibility would
include, but not be limited to:
* An investment grade issuer credit
rating;
* A previous investment grade credit
rating on a security issued in an offering
similar to the type the issuer seeks to
register that has not been downgraded
or put on a watch-list since its issuance;
or
* A previous assignment of a
preliminary investment grade rating.
(ii) Impact of Amendments
We noted in the 2011 Proposing
Release that we anticipated that under
the proposed threshold, which was
intended to capture widely followed
issuers based on the amount of recently
issued non-convertible securities other
than common equity, some high yield
debt issuers and issuers without credit
ratings that are not currently eligible to
use Form S-3 would become eligible
and some issuers currently eligible to
use Form S-3 and Form F-3 would
become ineligible. We believe the
changes we have made to the proposals,
which include also considering the
amount of outstanding non-convertible
securities other than common equity,
will reduce the likelihood of
unnecessarily excluding issuers that are
currently eligible to use Form S-3 and
Form F-3. In the proposing release,
based on a review of non-convertible
securities, other than common equity,
issued in the United States from January
1, 2006 through August 15, 2008, we
estimated that approximately 45 issuers
who were previously eligible to use
Form S-3 (and who had made an
offering during the review period)
would no longer be able to use Form S-
3 for offerings of non-convertible
securities other than common equity
securities.78 We further estimated in the
2011 Proposing Release that
approximately eight issuers who were
previously ineligible to use Form S-3 or
Form F-3 would be eligible to use those
forms if the proposals were adopted. In
connection with the changes to the
proposals that we are adopting today,
we reviewed the 45 companies we
believed would become ineligible to use
Form S-3 or Form F-3 under the
proposals to determine how many
companies would remain eligible to use
Form S-3 and Form F-3. Based on our
review, we estimate that of the 45
companies we previously estimated
would be excluded under the proposal,
39 would remain eligible because they

78 See the 2011 Proposing Release at note 58 and
related text.

are wholly-owned subsidiaries of WKSIs
and two would remain eligible because
they have at least $750 million in non-
convertible securities (other than
common equity) outstanding. Thus,
from the sample of 45 companies that
would have lost their eligibility based
on the standards in the proposing
release, four companies would remain
ineligible to use Form S-3 or Form F-
3 with the changes we are making in
this adopting release. Based on the
review of offerings described above, we
estimate that 16 issuers who have
recently used Form S-1 will become
newly eligible to use Form S-3 and
Form F-3. The number of issuers who
may become newly eligible to use Form
S-3 or Form F-3 includes insurance
company issuers of certain insurance
contracts, a number of whom now file
on Form S-1 but that will become
eligible to use Form S-3 as a result of
the changes made to the eligibility
requirements being adopted.79 As a
result, we believe that the amendments
will result in a net increase of 12
additional issuers becoming eligible to
use Form S-3 and Form F-3.
Some commentators believed that our
estimates in the proposing release
understated the number of companies
that would be affected by the
proposals.80 Another commentator
reviewed data from March 2008 to
March 2011 in the utility industry and
believes that at least 60 utility
companies would have been affected.81
We acknowledged in the 2011
Proposing Release that reviewing
offerings during a different time period
would give different results. We also
acknowledged that our data did not
capture issuers who were eligible to use
Form S-3 and Form F-3 but did not
make offerings during the review
period. However, we believe that the
changes we are making to the proposals
will reduce the impact on certain
issuers, particularly utility companies,
REITs and insurance company issuers of
certain insurance contracts. We believe
the provision to allow wholly-owned
subsidiaries of WKSIs (or, in the case of
REITs, majority owned operating
partnerships of WKSIs) to continue to
have access to Form S-3 and Form F-
3 and the other changes we are making
will allow these types of issuers
continued access to short form
registration and the shelf offering
process. Because we do not believe
9 See note 44 above.
8o See letters from SIFMA, Entergy and EEI.
81 See letter from SIFMA. See also letter from
Entergy, who argued that the potential number of
utility companies affected may have been

understated because utility companies did not make
offerings due to market conditions.

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United States. Office of the Federal Register. Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054. Washington D.C.. UNT Digital Library. http://digital.library.unt.edu/ark:/67531/metadc52326/. Accessed September 17, 2014.