SEC adopts amendments to Form S-3 to Remove Reference to Credit Rating Agencies

By Cydney Posner

At an open meeting this morning, the SEC adopted amendments to rules and forms under the Securities Act and to Schedule 14A to replace references to credit ratings with alternative criteria. The changes were made to implement Section 939A of Dodd-Frank, which required the SEC to reduce reliance on credit ratings. These changes primarily modify the transaction eligibility requirements of Form S-3 and then make corresponding changes in Form S-4, Schedule 14A and various other rules and forms. In crafting the alternatives, the SEC recognized that, in adopting Section 939A, Congress did not intend to alter the pool of eligible issuers, and the staff sought to craft the rules to reflect that intent. The staff encouraged issuers that do find they are no longer eligible under the amendments to contact the staff.

Currently, General Instruction I.B.2 provides that one type of transaction that may be registered on Form S-3 is a primary offering of non-convertible securities for cash, so long as those securities at the time of sale are "investment grade securities," that is, non-convertible securities rated investment grade by at least one nationally recognized statistical rating organization. Under the amendments, that instruction will be eliminated and replaced with four alternatives for the registration of primary offerings of non-convertible securities, other than common equity, for cash: 

•  The company has issued over $1 billion in aggregate principal amount of non-convertible securities, other than common equity, for cash (not exchange) in registered, primary offerings within the previous three years, measured as of a date within 60 days prior to the filing of the registration statement.
• The company has outstanding, as of a date within 60 days prior to the filing of the registration statement, at least $750 million in aggregate principal amount of non-convertible securities, other than common equity, that were issued for cash in registered primary offerings. 
• The company is a wholly owned subsidiary of a WKSI.
• The company is a majority owned operating partnership of a REIT that is a WKSI.

To ease the transition, the SEC also adopted a temporary three-year grandfathering provision that allows an issuer with a reasonable belief that it would have been eligible to register on Form S-3 using the pre-amendment instruction to use Form S-3 so long as it discloses in the registration statement the basis for its reasonable belief.

These alternatives expand upon the SEC's original proposal by adding the last three alternatives, apparently in response to public comments. All of the commissioners approved and appeared satisfied with the rules as adopted, but both Commissioners Casey and Paredes recommended that the amendments be monitored to ensure that issuers would not suffer any significant loss of shelf eligibility as a result of the change.

The SEC also rescinded Form F-9 and Rule 134(a) (17), which provided a safe harbor exclusion from the definition of prospectus for a communication regarding securities offered that stated a credit rating from an NRSRO. This rescission does not necessarily meant that a communication that includes a rating will automatically be considered a prospectus. Instead, that determination should be based on all the relevant facts and circumstances.

The SEC was originally scheduled to consider adoption of rules requiring an institutional investment manager that is subject to Section 13(f) of the Exchange Act to report annually how it voted proxies relating to certain executive compensation matters, but that item was removed from the agenda yesterday.