Chapter 5
Registration Statements

Learning objectives

  • Identify the commonly used forms for registration statements.
  • Identify exemptions from the registration requirements under the Securities Acts of 1933 and 1934.

Notice to readers: Links are included throughout the text to direct participants to relevant websites. If these websites do not appear when typed into a web browser, copy the links into a search engine to be redirected to the proper web page.

Introduction

When a company first undertakes the decision to become a registrant or when a registrant decides to raise additional funds through an equity or debt offering, the company and its legal counsel must first decide which form to use. Depending on which type of form is chosen, varying types and amounts of information will be required to be disclosed. Much of the required information is similar to that required in the Annual Report or Form 10-K. There are also, however, further disclosure requirements that are applicable only to registration statements.

Extensive examples of registration statements can be located on the SEC’s website. Facebook, Inc.’s Form S-1 can be found at: www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm

Registration statement forms

The company should consult with its attorney about which registration form to use. The accountant should also be involved in the discussion in order to be prepared to submit the financial statements required by the particular form selected.

The following are the most commonly used forms for registration under the 1933 Act:

  • S-1. General form to be used when no other form is specifically prescribed. Disclosures are similar to those required for Form 10-K. This form is generally used for a domestic company’s initial public offering, including an IPO for a smaller reporting company and an emerging growth company.
  • S-3. For companies that have been reporting to the SEC for 12 or more months and have filed on a timely basis all reports required to be filed during the 12 calendar months preceding the filing. If the company meets the “float test” that follows, there is no cap on annual security sales. If the company does not meet the “float test,” it cannot sell more than the equivalent of one-third of its public equity float in primary offerings in any 12-month period. To satisfy the float test, the aggregate market value of the voting and nonvoting common stock held by non-affiliates must be $75 million or more. Form S-3 allows maximum incorporation by reference of company information and requires the least disclosure in the prospectus. Also, Form S-3 may be used by smaller reporting companies to register shares for a secondary offering, for conversion of outstanding convertible securities, dividend or interest reinvestment plans, or for the exercise of warrants and rights.
  • S-4. For securities to be issued in certain business combinations that involve a public offering.
  • S-8. For securities to be offered to employees under certain stock option, stock purchase, or similar plans. Form S-8 may also be used in certain circumstances to register shares issuable upon the exercise of stock options or warrants given to employees, directors, and consultants that were not granted under a stock compensation plan.
  • S-11. For registration of securities issued by certain real estate investment trusts and by companies whose primary business is acquiring and holding real estate.
  • F-1, F-3, and F-4. For registration of securities of certain foreign private issuers.
  • F-7, F-8, F-10, and F-80. For registration of offerings by certain Canadian issuers that are entitled to sell securities in the U.S. on the basis of the prospectus prepared under Canadian requirements.

Note: Blank registration forms and regulations are available on the SEC’s website; however, these forms merely provide a basic framework.

Information required in a registration statement

Regulations S-X and S-K provide guidance on the majority of the information that is required to be disclosed in a registration statement, but there are certain requirements that apply only to registration statements that may involve different or more extensive information.

Summary information, risk factors and ratio of earnings to fixed charges (Item 503 of Regulation S-K)

Furnish the information required by Item 503 of Regulation S-K.

Risk factors

This section requires a discussion of the most significant factors that could make the offering speculative or risky. The company should address risks that are specific to the company, its industry, and the particular offering; it should not supply boilerplate disclosures that could apply to any company or any offering. Although risk factors are included in certain periodic reports, the factors related to the offering are unique to a registration statement.

For each risk factor, the company should provide a caption that adequately describes the risk, then explain concisely and clearly how the risk affects the company or the securities being offered. Such factors could include the following:

  • The nature of the business in which the company is engaged
  • Factors relating to the countries in which it operates
  • Factors relating to the currencies that the company utilizes
  • The absence of profitable operations in recent periods
  • The absence of profit in the foreseeable future
  • The absence of a liquid trading market for the company’s securities
  • Reliance on the expertise of management
  • Potential dilution of the security holders
  • Unusual competitive conditions
  • Pending expiration of material patents or trademarks
  • Requirements to comply with certain governmental or other regulatory guidelines
  • Dependence on a limited number of customers or suppliers

Use of proceeds (Item 504 of Regulation S-K)

A company is required to disclose the purpose for which the estimated amount of proceeds received from the offering of the securities are intended to be used. This disclosure should include the following:

  • In order of priority, separate disclosure of the amounts of estimated proceeds intended to be used for each purpose
  • A description of any assets to be acquired, their related costs, and the name of any affiliates the assets will be acquired from, if applicable
  • A description of any businesses to be acquired
  • The terms of any indebtedness that will be reduced and if the indebtedness was incurred within one year, a description of the use of proceeds of the debt
  • The amount and sources of further funds that will be required for each specified purpose

Capitalization table

Capitalization tables present in tabular form the total debt and equity components of a company. They are typically included in the registration statement at the request of the underwriters, except for foreign private issuers who are required by Item 3B of Form 20-F to include the table in their registration statements. The tables disclose the company’s capitalization on an actual basis and, if applicable, as adjusted to reflect the sale of the securities being issued and the intended use of the net proceeds received. The SEC will expect any pro forma amounts to be presented in accordance with Article 11 of Regulation S-X.

Dilution (Item 506 of Regulation S-K)

Companies are required to provide certain information when dilution occurs as a result of an IPO or when common equity securities are being registered by a company that has had losses in each of the last three fiscal years and there is a material dilution of the purchasers’ equity interests. Dilution occurs when the offering price exceeds the tangible net book value of the company.

The following information is required to be disclosed:

  • The net tangible book value per share before and after the distribution
  • The amount of the increase in the net tangible book value per share attributable to the cash payment made by the purchasers of the newly registered shares
  • The amount of the immediate dilution from the public offering price that will be absorbed by the purchasers

Knowledge check

  1. Which is not an example of most commonly used forms for registration under the 1933 Act?
    1. S-1.
    2. S-3.
    3. S-4.
    4. 10-K.
  2. Information regarding use of proceeds from a securities offering should include disclosure of use of estimated proceeds
    1. In the aggregate.
    2. For each purpose, in order of priority.
    3. But should not include information regarding other sources of funds that will be required.
    4. But should not include terms of any indebtedness that will be repaid.
  3. The information required to be disclosed when dilution occurs as a result of an IPO is
    1. The net tangible book value per share before and after the distribution.
    2. The ratio of earnings to fixed charges.
    3. The average net tangible book value per share before distribution.
    4. A capitalization table.

Securities offering reform

Although the securities offering process has not significantly changed over time, in 2005, the SEC modernized the securities offering process under the Securities Act of 1933. The primary focus of the 2005 rules is on three aspects of the offering process: (1) communications about registered offerings, (2) the registration process, and (3) the delivery of information to investors. Certain additional disclosures in annual reports on Form 10-K and other Exchange Act reports were adopted as well. The rules do not apply to securities offerings involving business combinations.

The Securities Offering Reform Act of 2005 established a category of issuers called “well-known seasoned issuers” (WKSIs). A WKSI is (1) eligible to register a primary offering of its securities on Form S-3 or Form F-3, and (2) has either a worldwide market value of outstanding voting and nonvoting common equity held by non-affiliates of $700 million or more or during the past three years issued at least $1 billion aggregate principal amount of non-equity, non-convertible securities in primary offerings for cash (not counting securities issued in registered exchange offerings). Eligibility determination, other than determination of the public float, is made as of the later of the time of filing of the issuer’s most recent shelf registration statement or the time of its most recent Section 10(a)(3) amendment (requiring updates to a prospectus that is used more than nine months after the effective date of the registration statement). If no shelf registration statement has been filed, the determination date is made at the time of filing of the issuer’s most recent annual report on Form 10-K or 20-F. The public float criteria must be met within 60 days of the determination date.

In addition to WKSIs, the rules created four other categories of issuers:

  • Seasoned issuers. An issuer eligible to use Form S-3 or Form F-3 to register certain primary offerings of securities. Seasoned issuers are distinguished from WKSIs primarily by the size of their public float.
  • Unseasoned issuer. An issuer that is required to file Exchange Act reports but does not satisfy the requirements of Form S-3 or Form F-3 for a primary offering of securities. In addition, a WKSI that is not current and timely in its Exchange Act filings and hence loses S-3 or F-3 eligibility is considered an unseasoned reporting issuer.
  • Non-reporting issuers. An issuer that is not required to file Exchange Act reports. Voluntary filers are considered to be non-reporting issuers.
  • Ineligible issuers. Issuers that are not current in their Exchange Act reports required to be filed during the prior 12 months; issuers who are or have been during the past three years blank check companies, shell companies, or penny stock issuers, financially distressed issuers; issuers that have been or are the subject of stop orders under the Securities Act during the past three years or are the subject of a pending proceeding under Sections 8 or 8A of the Securities Act; and issuers that have violated the anti-fraud provisions of the federal securities laws.

    Ineligible issuers will not be permitted to avail themselves of WKSI status or other benefits of the amendments. In addition, investment companies and business development companies, as well as merger and acquisition transactions, are not covered by many of the amendments, as they are subject to separate regulatory frameworks.

Communications about registered securities offerings

Background

Section 5(c) of the Securities Act prohibits all “offers,” in whatever form, prior to the filing of a registration statement. The term “offer” is interpreted broadly. As a result, prior to the filing of a registration statement, an issuer may only (1) continue to advertise products and issue press releases regarding factual business information and financial developments in accordance with past practice and (2) release a limited notice regarding a proposed registered offering under Securities Act Rule 135.

Between the filing of a registration statement and the date the registration statement goes effective, Securities Act Section 5(b) (1) requires that any prospectus used in connection with a securities offering be limited to one that meets the definition of a statutory prospectus. Accordingly, before Securities Offering Reform, the only written information that was permitted in connection with a registered securities offering between the time the registration statement is filed and its effective date was (1) a preliminary statutory prospectus that meets the requirements of Section 10 of the Securities Act, (2) product advertisements and press releases regarding factual business information and financial developments as described, and (3) limited public notices permitted in accordance with Rule 134 (otherwise known as “tombstone” ads).

Offers in violation of these restrictions are often referred to as gun-jumping. See the chapter “Going Public: An Overview” for further discussion on gun-jumping.

Rules for communications about registered offerings

The amended Securities Act rules relaxed the gun-jumping and quiet period provisions previously described related to registered offerings. The degrees to which these provisions have been relaxed vary depending on the type of issuer:

  • A non-exclusive exemption from the prohibition on pre-filing offers applies for WKSIs. In short, WKSIs are permitted to engage at any time in oral and written communications, including the use at any time of a type of written communication called a free writing prospectus (discussed further in the following).
  • Communications made more than 30 days before the filing of a registration statement by all issuers (whether WKSIs, seasoned issuers, unseasoned issuers or non-reporting issuers) will not be considered prohibited gun-jumping so long as they do not reference the offering.
  • Reporting issuers (and certain non-reporting foreign private issuers) are permitted to continue to publish, at any time, regularly released factual business information and forward-looking information, and such communications will not be deemed to constitute offers.
  • Non-reporting issuers (including companies conducting IPOs and voluntary filers) are permitted to continue to publish, at any time, factual business information, but not forward-looking information, that is regularly released to persons other than in their capacity as investors or potential investors and not have such communications deemed an offer.
  • A broader category of routine communications regarding issuers, offers, and procedural matters is permitted without the communications being deemed an offer for which a statutory prospectus must be filed.

Use of free writing prospectus

Issuers and underwriters are permitted to make written offers by way of a free writing prospectus. A free writing prospectus is any written communication offer outside of the statutory prospectus. The term written communication includes any written or printed communication, any radio or TV broadcast (regardless of how transmitted), or any graphic communication. It does not include communications that, at the time of the communication, originate live, in real-time, to a live audience.

As noted, WKSIs can use free writing prospectuses even before filing a registration statement. Non- reporting and unseasoned issuers (including voluntary filers) and other offering participants may use a free writing prospectus after a statutory prospectus — including a price range in the case of an IPO — is on file with the SEC. In addition, the statutory prospectus must accompany or precede the free writing prospectus.

A free writing prospectus may include information “the substance of which is not included in the registration statement.” But this information must not conflict with the information contained in the registration statement or, in the case of a reporting issuer, with any information in the issuer’s Exchange Act reports that are incorporated by reference to the registration statement.

The free writing prospectus must also contain a prescribed legend. In addition, disclaimers of responsibility or liability that are impermissible in a statutory prospectus are also impermissible in a free writing prospectus. Inclusion of information in a free writing prospectus that conflicts with information in the registration statement or inclusion of a prohibited disclaimer would be considered a prohibited offer in violation of Section 5 of the Securities Act.

Free writing prospectus filing requirements

With certain limited exceptions, an issuer or offering participant must file a free writing prospectus with the SEC no later than the day the free writing prospectus is first used.

Free writing prospectus liability issues

A free writing prospectus will not be considered part of a registration statement. As a result, it will not be subject to liability under Section 11 of the Securities Act. But every free writing prospectus, regardless of whether it is filed, will be subject to liability under Section 12(a) (2) of the Securities Act (and other anti- fraud provisions of the federal securities laws).

Securities reform changes to the registration process

Most of the changes in the registration process were aimed at streamlining the shelf registration process. Shelf registration is a process by which an issuer can register an offering of securities that will be made on a delayed or continuous basis (in contrast to an offering that will commence immediately and be completed within a short period of time). After the SEC staff declares a registration statement effective, the securities can generally be taken “off the shelf” and offered without further clearance by the SEC staff. The rules streamlined the shelf registration process in the following ways:

  • The information that can be excluded from the base prospectus (the prospectus included in the effective registration statement) has been codified into a single rule (Rule 430B).
  • Rule 430B substantially reduces the amount of information required in a base prospectus filed as part of a shelf registration statement. The types of information that can be omitted include (1) whether the offering is a primary or secondary offering, (2) the description of the securities to be offered other than an identification of the name or class of securities, (3) the names of any other issuers, and (4) disclosure regarding any plan of distribution.
  • In addition to omitting the aforementioned information, Rule 430B permits a seasoned issuer to omit from a prospectus filed as part of a resale registration statement the identity of the selling security holders and the amount of securities registered on their behalf, provided certain conditions are met.
  • Information omitted from a base prospectus may subsequently be included in the prospectus by (1) filing a post-effective amendment, (2) filing a prospectus supplement or (3) including the information in a current or periodic Exchange Act report that is incorporated by reference to the prospectus (provided that the issuer files a prospectus identifying the current or periodic report incorporated by reference to the prospectus).
  • For WKSIs, a more flexible version of shelf registration, referred to as “automatic shelf registration,” has been established. Under Rule 462, registration statements and post-effective amendments filed under the automatic shelf registration process are automatically effective upon filing (that is, without the possibility of SEC staff review). The process permits pay-as-you-go registration fees and the ability under certain conditions to cure a failure to pay a fee timely.
  • WKSIs will be allowed to add new classes of securities to an automatically effective shelf registration statement at any time through a post-effective amendment.
  • Immediate takedowns of securities covered by shelf registration statements are permitted, eliminating the so-called 48-hour waiting period for using a shelf registration statement once it becomes effective.
  • The requirement applicable to certain shelf registrations that an issuer register only securities it intended to sell within a two-year period has been amended to require an issuer to file an updated registration statement once every three years.
  • The restrictions on primary “at the market” offerings of equity securities have been eliminated for seasoned issuers. An “at the market” offering is made into an existing trading market at other than a fixed price.

As a result of these rules, issuers can incorporate previously filed Exchange Act reports by reference into Forms S-1 and F-1, as long as the reports are available on the issuers’ websites and the prospectus identifies all reports and materials incorporated by reference.

The rules codify the SEC’s view that, for purposes of evaluating whether adequate information was delivered to an investor to avoid liability under Section 12(a)(2) of the Securities Act (that is, whether the information includes a material misstatement or omission), the assessment of the information delivered is made at the time an investment decision is made — not later, when a revised prospectus or prospectus supplement is filed. The rules also extend the date to which issuers are subject to Section 11 liability to make it consistent with the date to which underwriters are subject to such liability. A prospectus supplement creates a new effective date and extends Section 11 liability for issuers (but not for officers and directors or experts, such as independent auditors).

Delivery of final prospectuses to investors

The rules modernized the final prospectus delivery process by creating an “access equals delivery” model. Under the model, the filing of a final prospectus with the SEC and complying with other conditions satisfies the final prospectus delivery requirements. Issuers are not required to print and deliver final prospectuses.

To preserve an investor’s ability to trace securities to a registered offering, the new rules include a separate requirement to notify investors that they purchased securities in a registered offering.

Knowledge check

  1. The criteria for classification as a WKSI includes
    1. Public float of at least $75 million but no more than $700 million.
    2. Public float of $700 million or more.
    3. Public float of $ 1 billion or more.
    4. Public float of $1 billion or more within the past three years.
  2. The public float test for WKSI eligibility determination is made
    1. At the end of the registrant’s most recently completed fiscal year.
    2. By determining the average public float over the past three years.
    3. At the time of filing of the issuer’s most recent shelf registration statement.
    4. Within 60 days of the issuer’s eligibility determination date.
  3. A free writing prospectus is
    1. A public notice permitted in accordance with Rule 134.
    2. Any written communication offer outside of the statutory prospectus.
    3. Any written prospectus.
    4. Available to all issuers before a statutory prospectus is filed.
  4. The free writing prospectus must also contain
    1. A prescribed legend and disclaimers of responsibility or liability that are impermissible in a statutory prospectus.
    2. A prescribed legend.
    3. A disclaimer of responsibility.
    4. Additional information. It is permissible for this information not to be in agreement with the information in the registration statement.
  5. The securities offering reform rules created a more flexible version of shelf registration for WKSIs called
    1. Automatic shelf registration.
    2. Pay-as-you-go registration.
    3. Well-known seasoned registration.
    4. Take-down of securities covered by shelf registration statements permitted after the 48-hour waiting period.
  6. The securities offering reform rules included rules that now allow certain information to be incorporated by reference in Form
    1. S-1.
    2. S-3.
    3. S-8.
    4. S-4.
  7. For the purposes of evaluating whether adequate information was delivered to an investor to avoid liability under Section 12(a)(2) of the Securities Act, an assessment of the information delivered is made at the time an investment decision is made — not later, when a revised prospectus or prospectus supplement is filed. A prospectus supplement creates a new effective date and extends the Section 11 liability for issuers to make it consistent with the date to which _______ are subject to such liability
    1. Underwriters.
    2. Experts, officers, and directors.
    3. Independent auditors.
    4. Underwriters and experts.

Smaller reporting company regulatory relief

Availability of shelf offerings to smaller reporting companies — S-3 changes

The securities offering rules were amended to allow smaller reporting companies to use Forms S-3 and F-3 to register primary offerings of securities. Using these forms is desirable because offerings registered on these forms can be conducted on a delayed basis. In addition, they incorporate by reference periodic reports filed after the effective date, thereby eliminating the need for post-effective amendments to address developments after the effective date. These features provide issuers with the flexibility to take securities “off the shelf” and offer them when they choose to. To be eligible to use these forms, a registrant must meet the periodic reporting requirements under the Securities Exchange Act of 1934 and must have timely filed all required periodic reports for a period of at least one year immediately preceding the filing of the registration statement.

Prior to the amendments, a registrant was also required to have a public equity float of over $75 million to use Form S-3 or F-3 to register a primary offering of equity or unrated debt securities. The amendments extended delayed primary shelf offerings to smaller companies by allowing companies that do not have $75 million of public equity float to register primary offerings using these forms, if they have a class of common equity securities listed and registered on a national exchange such as NYSE or NASDAQ (Pink Sheet and Over-the-Counter Bulletin Board companies do not qualify); do not sell more than one-third of their public equity float in primary offerings in any 12-month period; are not shell companies or have not been one for the past 12 months; and meet the other registrant eligibility conditions. The SEC has released small business guides, which are available on the SEC’s website at www.sec.gov/info/smallbus/secg.shtml.

Knowledge check

  1. The smaller reporting company regulatory relief act removed the requirement to have a public equity float of over ____ to use Forms S-3 and F-3 to register a primary offering of equity.
    1. $25 million.
    2. $50 million.
    3. $100 million.
    4. $75 million.

Emerging Growth Companies

Refer to the “Emerging Growth Companies” chapter for registration requirements, scaled disclosure provisions, and interpretive guidance issued by the SEC for companies qualifying as emerging growth companies.

Exempt offerings

Many offerings of securities are exempt from the 1933 Act’s registration requirement. Determining whether an offering is exempt is a legal matter. Offerings may be exempt from registration because of the nature of the entity, the nature of the offering, the type of security, or the amount of the offering. Entities such as U.S. government bodies, banks, nonprofits, and certain employee benefit plans are exempt from registration under the 1933 Act.

Certain offerings are exempt from the 1933 Act registration based on the following rules and regulations:

  • Section 4(2) of the 1933 Act. Under this section, offerings that are not “public offerings” are exempt from registration requirements. The nature of a “public offering” for Section 4(2) is a legal matter and should be addressed by qualified legal counsel.
  • Regulation A offerings, Regulation A+ offerings, and crowdfunding offerings. Refer to earlier chapters for further information relating to these types of offerings.
  • Private placements. Private placements of debt or equity securities are exempt from registration if they are offered in small issues or to a limited number of specially defined investors. Regulation D provides a safe harbor; companies that meet its requirements have certainty that an offering is a private offering that is exempt from registration. The various underlying rules are complex. A private placement is generally less expensive than an IPO and does not require as much disclosure or preparation time. It also does not require periodic reporting to regulatory agencies, but there are restrictions on subsequent resale of the securities sold, so the proceeds will typically be at a lower value than in a registered offering.

Different levels of disclosures to investors are required by Regulation D, based on the size of the offering and the nature of the purchasers, as follows:

  • Rule 504. Relates to offerings not over $5 million in a 12-month period. The following companies are not eligible to use Rule 504: companies that already are Exchange Act reporting companies, investment companies, blank check companies, and companies that are disqualified under Rule 504’s “bad actor” disqualification provision. No specific disclosures are required by the SEC, although they may be required by state law.
  • Rule 505. Repealed effective May 22, 2017. Related to offerings up to $5 million in any 12-month period to an unlimited number of “accredited investors” (for example, institutional investors, wealthy individuals) and no more than 35 other purchasers. Disclosures were generally the same as would be required in an IPO; however, if only accredited investors were involved, there were no SEC-required disclosures — although state laws may have required certain information.
  • Rule 506. Permits offerings of an unlimited amount to no more than 35 purchasers meeting various financial “sophistication” standards, and an unlimited number of accredited investors. Disclosures generally would be similar to those in an IPO, but if only accredited investors are involved, there are no SEC-required disclosures — although state laws may require certain information. See the chapter, “Going Public: An Overview,” for further information on Rule 506(c) of Regulation D, which allows companies to expand their pool of potential investors without SEC registration.
  • Rules 144 and 144A. If companies comply with Rule 144, they can issue restricted (unregistered) securities that can be resold without registration under the 1933 Act. Issuers, underwriters, and dealers cannot sell securities under this rule. Under Rule 144A, securities can be resold to institutions that are qualified institutional buyers without registering the securities under the 1933 Act. Under Rule 144A, the original sale of securities by the issuer is not exempt.

Intrastate offerings

  • Rule 147. Exempts from registration offerings restricted to residents of the state in which the company is organized and does business, provided
    • The company has at least 80% of its revenues and assets within the state; and
    • At least 80% of the net proceeds of the offering are used within the state. This exemption is available regardless of the size of the offering or the sophistication of the investors. There are no specific disclosure requirements in this type of offering.
  • Rule 147A. Rule 147A is similar to Rule 147, but has no restrictions on offers and allows issuers to be incorporated or organized outside of the state in which the intrastate offering is conducted provided certain conditions are met.

Form D

Form D serves as the official notice of an offering of securities made without registration under the Securities Act in reliance on an exemption provided by Regulation D. Form D also applies to Section 4(6) offerings. Form D is required to be filed electronically. The information can be filed through an online filing system that is accessible from any computer with internet access. The system captures and tags data items and makes the filed information available on the SEC’s website in a format that can be viewed in an easy-to-read format.

The information requirements of Form D are as follows:

  • Permit filers to identify all issuers in a multiple-issuer offering in one Form D filing
  • Do not require owners of 10% or more of a class of equity securities to be identified as “related persons”
  • Require providing industry group information from a pre-established list of industries rather than business information
  • Require revenue range information for the issuer and net asset value information for hedge funds (subject to an option to decline to disclose)
  • Require reporting the date of first sale in the offering
  • Specify when amendments to a previously filed Form D notice are required because of mistakes of fact or errors in a previously filed form or because one calendar year has passed since the notice was filed
  • Require reporting of whether the offering is expected to last over a year
  • Limit reporting of the minimum investment amount accepted in the offering to specify that it relates to outside investors only, so as not to affect employee stock ownership adversely
  • Require the disclosure of expenses only concerning amounts paid for sales commissions and, separately stated, finders' fees; and use of proceeds only as to the amount of gross proceeds used or proposed to be used for payments to executive officers, directors, and promoters
  • Permit a limited amount of free writing to the extent necessary to clarify responses

Rule 144

The holding periods that must be met before restricted securities can be resold under Securities Act Rule 144 is six months for non-affiliated investors in reporting companies and 12 months for non- affiliated investors in non-reporting companies.

Restrictions for shell companies

Rule 144 imposes restrictions on public resale of securities initially issued by a shell company. A shell company is a company with nominal or no operations and nominal or no assets (or assets consisting solely of cash and cash equivalents). The Rule 144 shell company restrictions apply to both reporting and non-reporting shell companies. Any securities (that is, both restricted and unrestricted securities) that were initially issued by a reporting or non-reporting shell company cannot be resold into the public markets in reliance on Rule 144 unless the issuer

  • has ceased to be a shell company;
  • is subject to Exchange Act reporting obligations; and
  • has filed all required Exchange Act reports during the preceding 12 months (other than Form 8-K reports).

In addition, a selling security-holder (whether an affiliate or a non-affiliate) cannot use Rule 144 for resale of securities initially issued by shell companies until one year has elapsed from the date that the issuer filed the “Form 10 information” (that is, the same information it would be required to file to register a class of securities on Exchange Act Form 10 with the SEC, generally filed on Form 8-K) and has filed current Form 10 information.

Exemption of compensatory employee stock options from registration under Section 12(g) of the Securities Exchange Act of 1934

The SEC adopted two exemptions from the registration requirements of the Securities Exchange Act of 1934 for compensatory stock options issued under employee stock options plans for private non- reporting issuers and for public issuers. The exemptions apply only to an issuer’s compensatory employee stock options and do not extend to the class of securities underlying those options.

Prior to these exemptions becoming effective, private companies with a large group of option holders faced the possibility of having to register under Section 12(g) of the Exchange Act as a result of having more than the maximum option holders and over $10 million in assets.1 After having provided relief from this requirement on a case-by-case basis through no-action letters, the SEC adopted rules that exempt all companies from registration under Section 12(g) of the Exchange Act for compensatory employee stock options. Public companies also benefited from these new exemptions, because they will no longer need to register their stock options after they have registered the underlying class of equity securities.

The release is available on the SEC’s website at www.sec.gov/rules/final/2007/34-56887.pdf.

Review questions

  1. To be eligible as a WKSI’s, an issuer must have
    1. A worldwide market value of outstanding voting and nonvoting common equity held by non-affiliates of $500 million or more.
    2. During the past three years, issued at least $1 billion in aggregate principal amount of non-equity, non-convertible securities in primary offerings for cash.
    3. A worldwide market value of outstanding voting and nonvoting common equity held by non-affiliates of $75 million or more.
    4. During the past three years, issued at least $1 billion in aggregate amount of equity or convertible securities in primary offerings for cash.
  2. When is the public equity float test for WKSI eligibility determination made?

Note

  1. 1   Under Exchange Act Section 12(g), an issuer with 2,000 or more holders of record of a class of equity security and assets in excess of $10 million at the end of its most recent fiscal year must register that class of equity security, unless there is an available exemption from registration. Stock options, including options issued to employees under stock option plans, are a separate class of equity security for purposes of the Exchange Act.
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