As a result of the precipitous decline in the stock market resulting from the global economic impact of the COVID-19 pandemic, many issuers may find that they are at risk of losing their status as a “well-known seasoned issuer” (a “WKSI”) under the U.S. federal securities laws.
Under the Securities Act of 1933, as amended (the “Securities Act”), an issuer that qualifies as a WKSI is able to sell securities pursuant to an automatic shelf registration statement. Such a registration statement becomes effective automatically upon filing and permits the registration of an unlimited amount of securities, with filing fees paid on a “pay‐as you go” basis. A WKSI is an issuer that, among other things, has a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700 million or more, as of any date within 60 days of the determination date. The “determination date” that is used to assess an issuer’s WKSI eligibility is the later of:
- the filing date of the issuer’s most recent shelf registration statement; or
- the time of the most recent amendment to the issuer’s shelf registration statement or update pursuant to Section 10(a)(3) of the Securities Act (which is the date of the filing of the issuer’s annual report on Form 10-K).
Unless an issuer would otherwise qualify as a WSKI under the debt issuance prong of Rule 405,1 in order to maintain its WKSI status an issuer must have a $700 million public float as of any day within the 60-day period prior to the date it files its annual report with the SEC. Such filing date would include the date an issuer may file its annual report during the 15-day extension period provided by Rule 12b-25 or the 45-day extension period provided by the SEC’s exemptive order issued on March 4, 2020,2 and extended on March 25, 2020,3 for those issuers that are unable to file their reports on time due to difficulties arising from the COVID-19 pandemic.4
Due to the stock market’s recent downturn, an issuer that previously qualified as a WKSI may lose its WKSI status and therefore its ability to use its existing automatic shelf registration statement or to file a new automatic shelf registration statement when it files its annual report with the SEC. At that time, the former WKSI will be required to either file a new non-automatic shelf registration statement (a regular shelf registration statement) or amend its automatic shelf registration statement by filing a post-effective amendment to convert the automatic shelf registration statement to a regular shelf registration statement. Such regular shelf registration statements and post-effective amendments do not become effective automatically upon filing, but instead must be declared effective by the SEC.
In order to permit uninterrupted access to the public capital markets for an issuer that expects to lose its WKSI status upon the filing of its annual report, the SEC set forth procedures by which such issuer may continue to use its automatic shelf registration statement while it converts such registration statement to a non-automatic shelf registration statement on Form S-3. These procedures are set forth in Question No. 198.06 of the SEC’s Compliance Discussion & Interpretations on Securities Act Rules (CDIs) which include:
- Prior to filing the Form 10-K, the issuer must file a post-effective amendment (on EDGAR submission type POSASR) to the automatic shelf registration statement to register a specific amount of securities and to pay the associated filing fee;
- The prospectus included in the post-effective amendment may not omit information in reliance on the provisions of Securities Act Rule 430B that are available only to automatic shelf registration statements, but must instead contain all information required to be included in a Form S-3 filed for primary offerings5;
- The issuer must remain eligible to use Form S-3 for primary offerings at the time it files its Form 10-K; and
- At least promptly after the Form 10-K is filed, the issuer must file either a post-effective amendment (EDGAR submission type POS AM) or a new Form S-3 registration statement (EDGAR submission type S-3) to convert the Form S-3ASR to a non-automatic shelf registration statement on Form S-3, which must then be declared effective by the SEC. Pending the effectiveness of the filing, issuers may continue to offer and sell securities using the amended automatic shelf registration statement.
In summary, if an issuer has delayed the filing of its 2019 annual report (or does not have a calendar year fiscal year), has an automatic shelf registration statement on file and is at risk of losing its WKSI status as a result of a decrease in the worldwide market value of its common equity below the $700 million threshold for the 60 days preceding the anticipated filing date of its annual report, it should get ready to make two separate filings. First, it should draft a post‐effective amendment to the existing automatic shelf registration statement that will register a specified amount of securities. The issuer will need to pay the registration fee for these securities at or prior to the time this post‐effective amendment is filed. The base prospectus that must be included in this post‐effective amendment needs to provide more extensive information than is required in a WKSI prospectus, including:
- disclosing whether the securities are being offered by the issuer or by selling security holders;
- including a plan of distribution; and
- containing a description of the offered securities that goes beyond the name or class of the securities.
This new base prospectus may also need to disclose the names of any selling security holders and the amounts registered on their behalf. The amendment, including the new base prospectus, must be filed prior to the filing of the Form 10‐K. Second, an issuer in danger of losing WKSI status also must be prepared to file a post‐effective amendment or a non-automatic shelf registration statement promptly after it files its Form 10‐K, which in each case will need to be declared effective by the SEC.
It is important to remember that the necessary steps prescribed by CDI 198.06 require action before the filing of the annual report. Therefore, it is very important that issuers determine as soon as possible if they are at risk of losing their WKSI status. If they are, they should begin preparing the filings that will be necessary to ensure that they will continue to have uninterrupted access to the capital markets through an effective shelf registration statement.
An issuer that has already filed its 2019 annual report and has an automatic shelf registration statement expiring this year has two options if it is at risk of losing its WKSI status (and does not otherwise qualify as a WKSI under the debt issuance prong of Rule 405):
- If it satisfied the public float test on any day within the past 60 days, the issuer should consider filing a new automatic shelf registration statement while it can still satisfy the public float test. Such a filing would extend the issuer’s ability to use an automatic shelf registration statement at least through the filing of its 2020 annual report (at which time it would have to reassess whether it meets the public float requirement).
- If it has not satisfied the public float test on any day within the past 60 days and fails to satisfy the public float test prior to the expiration of its automatic shelf registration statement, the issuer may only file a non-automatic shelf registration statement to replace its expiring automatic shelf registration statement, which must be declared effective by the SEC. In such case, the issuer would not be eligible to comply with CDI 198.06 to use its automatic shelf registration statement after the expiration date while the non-automatic shelf registration statement is pending effectiveness. Therefore, in order to avoid a gap in having an effective registration statement available, the issuer should be mindful to file the non-automatic shelf registration statement well in advance of the expiration date of its existing shelf registration statement to allow time for any potential review by the SEC before it is declared effective.
1 A company may also qualify as a WKSI if, as of a date within 60 days of the determination date, the issuer has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act of 1933, as amended (the "Securities Act"). See Securities Act Rule 405.
4 For a discussion of this relief see Mayer Brown's Legal Update – SEC Extends Conditional Reporting Relief and Issues COVID-19 Guidance for Public Companies, dated March 26, 2020, https://www.mayerbrown.com/en/perspectives-events/publications/2020/03/sec-extends-conditional-reporting-relief-and-issues-covid19-guidance-for-public-companies
5 Securities Act Rule 430B allows WKSIs to omit in their registration statements: information as to whether the offering is a primary offering or a secondary offering or a combination; the plan of distribution; a description of the securities registered, other than the name or class of the securities; and the identity of other issuers such as majority-owned subsidiaries that may be added later as issuers or guarantors. The information required for a registration statement on Form S-3 for secondary offerings is more detailed for non-WKSI, issuers which must include all the information required by Item 507 of Regulation S-K.