By Cydney Posner
The SEC has posted a number of new CDIs on a variety of topics (none, unfortunately, that relates to conflict minerals). Summaries below.
Securities Act Sections
Securities Act Section 5
In many equity line financings, the company will rely on a private placement exemption to sell the securities under the equity line and will then seek to register the "resale" of the securities sold in the equity line financing. The staff often frowns on that effort, viewing them instead as indirect primary offerings because of the delayed nature of the puts and the lack of market risk resulting from the formula price (in contrast to PIPEs). However, the staff will permit the company to register the resale of the securities prior to exercise of the put if the transactions meet the following conditions:
- the company must have "completed" the private transaction of all of the securities it is registering for resale prior to the filing of the registration statement;
- the resale registration statement must be on the form that the company is eligible to use for a primary offering; and
- in the prospectus, the investors must be identified as underwriters, as well as selling shareholders.
The staff will not object that a private transaction is not "completed" based on the lack of a fixed price if the agreement provides for pricing based on a formula tied to market price and there is an existing market for the securities as evidenced by trading on a national securities exchange or through the facilities of the OTC Bulletin Board or the OTCQX or OTCQB marketplaces of OTC Link ATS.
Securities Act Rules
Rule 144(a) – Definitions
Here's a CDI that should finally make Jesse Brill happy, being a favorable response to the longest-standing item on his Corporate Counsel wish list (apparently dating back to 1985 http://www.electronicthecorporatecounsel.com/Issues/CC_files/1022-0004-10.htm). Where an affiliate donor transfers, by bona fide gift, "control" stock (e.g., stock acquired in the open market and not "restricted securities" in the affiliate's hands) to a donee in a non-public transaction, these securities are "restricted securities" in the donee's hands because they have been "acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering." BUT, "[a]s these securities were not subject to any holding period requirement in the affiliate donor's hands, however, the donee need not comply with the holding period requirement in Rule 144(d) for subsequent sales. If the donee is a non-affiliate and has not been an affiliate during the preceding three months, then the donee may resell the securities pursuant to Rule 144(b)(1) subject only to the current public information requirement in Rule 144(c)(1), as applicable." (Note that, prior to this CDI, under Rule 144, even if the shares were control stock with no holding period applicable to the affiliate donor, the donee had a holding period, a very strange result.)
Rule 144(e) – Limitation on Amount of Securities Sold
When calculating the amount of securities that may be sold by the affiliate under Rule 144, an affiliate's sales of securities back to the issuer in a non-public transaction are excludable. Under Rule 144(e)(3)(vii)(C), securities sold in a transaction that is exempt pursuant to Securities Act Section 4 and does not involve any public offering need not be included in determining the amount of securities that may be sold under Rule 144, including an affiliate's non-public sales of securities back to the issuer.
Rule 413 – Registration of Additional Securities and Additional Classes of Securities
An issuer that has filed an automatic (WKSI) shelf registration statement on Form S-3 to register the offer and sale of a specified number of securities of a specified class may add to the automatic shelf, by post-effective amendment, more securities of the same class already registered.
Rule 430B – Prospectus in a Registration Statement After Effective Date
Under a non-automatic shelf registration statement, even if the issuer is entitled to rely on Rule 430B(b) to omit information required by Item 507 of Reg S-K regarding "the identities of selling security holders and amounts of securities to be registered on their behalf" until after effectiveness of the registration statement, the prospectus for the non-automatic shelf registration statement must still disclose the aggregate number of shares being registered for resale before effectiveness.
Rule 502 – General Conditions to be Met
Where an acquiror seeks written consents from the target's shareholders, which include non-accredited investors, to approve a business combination transaction involving the issuance of securities in reliance on Rule 505 or 506 of Reg D, under Rule 502(b)(1), the financial statements and other information specified in Rule 502(b)(2) must be delivered to the target shareholders who are non-accredited investors in "a reasonable amount of time prior to sale." The delivery of a written consent constitutes the "sale" of securities in an offer conducted in reliance on Rule 505 or 506. Accordingly, the disclosure must be provided to any non-accredited investors in a reasonable amount of time prior to obtaining their written consents.
Rule 144(d) – Holding Period for Restricted Securities
[This is a CDI that has been revised consistent with the CDI above regarding donees.] A pledgor who is an affiliate defaults on a loan that is secured, either with or without recourse, by a bona fide pledge of company shares that are not "restricted securities" in the pledgor's hands (e.g., they were acquired on the open market). In the pledgee's hands, these securities are "restricted securities" because they have been "acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering." If the pledgee is a non-affiliate and has not been an affiliate during the preceding three months, the pledgee may resell such securities pursuant to Rule 144(b)(1) without regard to the holding period requirement in Rule 144(d) but subject to the current public information requirement in Rule 144(c)(1), as applicable. No other requirements in Rule 144 are applicable to the pledgee's resale.
Securities Act Forms
Form S-3 – General Instructions I.B.1 to I.B.6 – Transaction Requirements
General Instruction I.B.6 to Form S-3 allows limited primary offerings by non-shell, listed registrants with public floats below $75 million. One of the requirements is that the registrant not sell more than the equivalent of 33% of the market value of its public float in primary offerings under this general instruction over any period of 12 calendar months. Instruction 2 provides that, for purposes of computing the aggregate market value of securities sold by the registrant in offerings under the instruction, the registrant must aggregate the gross proceeds of the sales, and, in the case of derivative securities, the registrant must calculate the aggregate market value of any underlying equity shares in lieu of the market value of the derivative securities. In calculating whether the size of an offering consisting of common stock and warrants exceeds the one-third cap in General Instruction I.B.6(a), the registrant is required to follow Instruction 2 to General Instruction I.B.6 to calculate the market value of warrants even if the warrants were not exercisable for common stock within 12 calendar months.
If a registrant "meets the requirements for use of Form S-3," as set forth in General Instruction B of Form S-4, and incorporates by reference registrant information into the Form S-4 pursuant to General Instruction B and either Item 11 or 13 of Form S-4, the registrant may incorporate the risk factors from its latest Form 10-K in response to Item 3 of Form S-4, even though Item 3 does not expressly contemplate incorporation by reference. The offering-specific risks, however, would be required to be disclosed in the Form S-4 itself.
Item 402(b) – Executive Compensation; Compensation Discussion and Analysis
Instruction 5 to Item 402(b) provides that "[d]isclosure of target levels that are non-GAAP financial measures will not be subject to Regulation G and Item 10(e) of Regulation S-K; however, disclosure must be provided as to how the number is calculated from the registrant's audited financial statements." This instruction extends to the disclosure of the actual results of the non-GAAP financial measure that is used as a target, provided that this disclosure is made in the context of a discussion about target levels.
Item 501 – Forepart of Registration Statement and Outside Front Cover Page of Prospectus
Instruction 1 to Item 501(b)(3) requires a preliminary prospectus for an IPO to include a bona fide estimate of the range of the maximum offering price. The range of disclosed prices may not be too wide: for IPOs, a price range in excess of $2, for offerings up to $10 per share, or in excess of 20% of the high end of the range, for offerings over $10 per share, will not be considered bona fide. For example, if the high end of the range is $20, then the price range may be as wide as $16 to $20. If an auction clearing price will be used as the primary factor in establishing the final offering price, a price range in excess of $4, for offerings up to $20 per share, or in excess of 20% of the high end of the range, for offerings over $20 per share, will not be considered bona fide.
Item 601 – Exhibits
A reporting issuer plans to rely on Securities Act Rule 430A to omit pricing information from its prospectus until after effectiveness of the registration statement. Item 601(b)(101)(i) provides that an interactive data file is "required for a registration statement under the Securities Act only if the registration statement contains a price or price range." However, Item 601(b)(101)(i) does not provide an exemption from the interactive data requirements for reporting issuers that plan to rely on Rule 430A. In general, disclosure that satisfies the requirements in Item 501(b)(3) of Reg S-K to state the "offering price" will be considered a "price or price range" for purposes of the interactive data rules, and thus trigger the requirement to submit interactive data. Accordingly, registration statements for shelf offerings, at-the-market offerings, exchange offers and secondary offerings must comply with the interactive data filing requirement even though they generally do not include a specific offering price at the time of effectiveness, unless the financial statements are incorporated by reference into the registration statement.
Exchange Act Form 8-K
Item 2.06 Material Impairments
The Instruction to Item 2.06 of Form 8-K indicates that a filing is not required if an impairment conclusion is made "in connection with" the preparation, review or audit of financial statements required to be included in the next periodic report due to be filed under the Exchange Act, the periodic report is filed on a timely basis and the impairment conclusion is disclosed in the report. If an impairment conclusion is made at a time that coincides with the preparation, review or audit of financial statements required to be included in the next periodic report due to be filed under the Exchange Act and the other conditions of the Instruction to Item 2.06 are satisfied, an Item 2.06 Form 8-K is not required, even if the conclusion was not in connection with that preparation, review or audit.
Oil and Gas Rules