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What Are a Non-WKSI's Options for Upsizing Its Offering?

Publisher: Day Pitney Alert
June 9, 2011

Well-known seasoned issuers ("WKSIs")[1] benefit from their status in numerous ways, including the automatic effectiveness of their shelf registration statements, the absence of any requirement to specify dollar value or number of shares in registration statements, and their ability to take advantage of "pay as you go" fee flexibility. In contrast, non-WKSI issuers must specify the maximum aggregate dollar amount of securities offered or a specific number of shares (including a bona fide estimate of the proposed maximum aggregate offering price)[2] when filing a shelf registration statement on Form S-3, thus limiting the amount of securities that can be offered during the three-year life span of the shelf. In addition, non-WKSIs must pay the applicable registration fees at the time of filing and are subject to review by the Securities and Exchange Commission ("SEC") prior to effectiveness. Many non-WKSI companies may be faced with shelf registration statements which, due to earlier concerns about "market overhang" or a lower stock price at the time of filing, are insufficient to meet current capital needs. For example, an issuer filing an S-3 in late 2008 may have mostly exhausted the shelf registration statement by the end of 2010 yet still want to take advantage of capital-raising opportunities. Fortunately, options exist to upsize a non-WKSI shelf S-3 without the need to discard the original shelf completely.

The Problem - Rule 413 Bar Against Post-Effective Amendments

As noted, WKSIs can register unspecified amounts of securities on shelf registration statements and may add new classes of securities in post-effective amendments.[3] For WKSIs, both the original and post-effective filings are automatically effective and provide "pay as you go" fee flexibility; this flexibility is not available to non-WKSIs, who are required to pay registration fees when the shelf filing is made. Further, pursuant to Rule 413(a), non-WKSI issuers may not use post-effective amendments to register additional securities to be included in an offering.[4] Thus, aside from terminating the existing shelf and filing a new registration statement, two options exist to ameliorate the issues caused by these rules and to upsize a non-WKSI shelf: (1) a short-form Rule 462(b) automatically effective registration statement is available to upsize the offering by up to 20 percent, or (2) a new registration statement on Form S-3 is available that may be combined with the earlier registration statement pursuant to Rule 429, acting as a post-effective amendment to the earlier-filed registration statement and an exception to the Rule 413(a) prohibition noted above. As discussed below, each method provides its own unique benefits and is subject to conditions limiting its usefulness to specific issuers.

Additional Registration by Means of a Rule 462(b) Upsize

A fast and efficient way to increase the size of an effective registration statement by up to 20 percent is to use Rule 462(b).[5] Rule 462(b) is particularly useful in an underwritten deal where underwriters agree to sell more than the registered amount and upsizing for a modest increase in securities must be effected quickly. The 462(b) registration statement is a new registration statement, but importantly, it is automatically effective, avoiding time-consuming additional SEC review. The Rule 462(b) registration statement is brief, containing only the cover page, the page incorporating the earlier registration statement by reference, and required signatures and any additional opinions and consents required as exhibits.[6] The Rule may be used to upsize a registration statement up to a maximum of only 20 percent of the remaining capacity on the shelf, and may only be used immediately prior to a final takedown from the shelf that exhausts all shelf-registered securities.[7] Although up to 20 percent of the amount originally registered may be registered under Rule 462(b), the amount available for registration is reduced to the extent that securities have already been taken down. Specifically, when calculating the available dollar amount to be registered under Rule 462(b), issuers must base the 20 percent increase on the amount remaining on the shelf immediately prior to the final takedown from the shelf that depletes all shelf-registered securities. By way of example: An issuer's registration statement goes effective, registering $100 million shares of common stock pursuant to Rule 457(o).[8] In an earlier takedown under the shelf, shares are sold with aggregate gross proceeds of $50 million. The Rule 462(b) limit for registering additional shares is calculated by taking 20 percent of the remaining $50 million, or $10 million.

Other important conditions limiting the use of Rule 462(b) also exist, and include:

  • the 462(b) registration statement may register only additional securities of the same class(es) included in the original registration statement;
  • the new 462(b) registration statement must be filed prior to the time confirmations are sent or given;
  • a Rule 462(b) registration statement may not be used for material updates required to be made to the original effective registration statement;[9] and
  • new accountant consents and legal opinions must be included with the filing.

All these conditions on Rule 462(b) make its usage limited.

A More Fulsome Alternative - Registration Statement Using Rule 429 for a Superseding Combined Prospectus

If Rule 462(b) is too limited, another alternative is to file a new registration statement on Form S-3 to upsize the offering and/or to add additional securities and utilize the combined prospectus technique provided for under Rule 429.

Rule 429 allows an issuer to file a base prospectus in a later-filed shelf registration statement that also covers the securities registered on the earlier shelf registration statement. The combined base prospectus in the latest shelf registration statement must include all of the information that currently would be required in a base prospectus relating to all offering(s) it covers. The combined base prospectus may be filed with the new registration statement or in a pre-effective amendment. Upon effectiveness, the base prospectus for the new registration statement also functions as a base prospectus for the earlier registration statement.[10] The new base prospectus covers the amount of securities newly registered and the remaining number of securities under the previous registration statement as long as that registration statement remains effective.[11]

Key Advantages and Disadvantages of Rule 429 and Rule 462(b) Approaches

As detailed above, the paths available to a non-WKSI issuer looking to upsize a shelf registration statement are few, and in each case limited by specific conditions. Each method also has its own benefits, and it is important to analyze those conditions and benefits in choosing the proper course of action. An important difference between Rule 429 and the Rule 462(b) approach is that the 429 combined prospectus technique provides the opportunity for SEC review. While the Rule 462(b) registration statement is automatically effective, the new registration using Rule 429 must be declared effective by the SEC. Thus the Rule 429 process requires more time and creates an additional possible speed bump. In addition, issuers should keep in mind that the prior registration statement remains in effect, and thus its termination date is not extended by the filing of the new registration statement.

Although using the Rule 429 combined prospectus technique requires more time, non-WKSIs are not subject to the Rule 462(b) 20 percent limit on the amount of securities. In addition, there may be market reasons why an issuer prefers to register a smaller dollar amount of securities under the new registration statement by using the Rule 429 combined prospectus technique rather than terminating the prior registration statement and filing a new registration statement with a higher aggregate dollar amount declared on the cover page for the new shelf.

The application of these Rules must be considered in light of the facts and circumstances applicable to the issuer. Matters including the desired speed of the offering, the amount of capital to be raised, the type of securities to be issued and the need for additional consents are all factors management and its advisors must consider in choosing which course of action serves their interests best in upsizing the non-WKSI shelf registration statement.

What is most important to take away is that a non-WKSI has two options other than filing a completely new registration statement and base prospectus when faced with the desire or need to upsize its existing shelf registration statement.

[1] Defined in Rule 405 of the Securities Act of 1933, as amended, issuers having a worldwide market value of its outstanding voting and non-voting common equity held by nonaffiliates of $700 million or more.

[2] Financial institutions generally offer a dollar amount of common stock while non-financial institutions offer a number of shares of common stock (the latter approach can create concerns about whether the registration statement is sufficient, depending on the offering price).

[3] Pursuant to Rule 413(b), a WKSI may add new classes of securities and certain securities of their majority-owned subsidiaries to automatically effective shelf registration statements at any time, through a post-effective amendment that is also immediately effective.

[4] See SEC Compliance and Disclosure Interpretation ("C&DI") 210.01

[5] Rule 424(b) prospectus supplements must be filed under the registration number for the initial registration statement. The cover page of the prospectus supplement should set forth the registration numbers of both the Rule 462(b) registration statement and the original registration statement. (See C&DI 644.06).

[6] See C&DI 244.02.

[7] See C&DI 244.03.

[8] Under Rule 457(o), an issuer registers the dollar amount of securities being offered, whereas under Rule 457(a), the issuer registers the number of securities offered, not the dollar amount.

[9] See C&DI 244.02.

[10] The registrant must identify any earlier registration statement to which the combined prospectus relates by setting forth the Commission file number at the bottom of the facing page of the latest registration statement.

[11] It is important to note that filing fees that were paid for unsold securities under the earlier registration statement may not be offset against the fees for new securities registered under the new registration statement if the issuer is using Rule 429. Filing fees that were paid for unsold securities under an earlier registration statement may only be offset against the fees for securities registered under a new registration statement under Rule 457(p) if the offering under the prior registration statement is completed or terminated or the registration statement is withdrawn and the new registration statement is filed within five years of the earlier registration statement. Under Rule 429 both registration statements are active, and thus the filing fees paid represent those due on the proportion of securities covered by each. Good issuer counsel appear not to have contemplated the necessary interaction of these two rules when they filed a new registration statement claiming an offset of the registration fee for the unsold securities while asserting the use of Rule 429 and a post-effective amendment of the prior registration statement.