Reforms to the registered securities offering process adopted by the SEC in August of this year go in effect tomorrow (click here for the adopting release). I’m not going to describe all the reforms here; there are many law firm memos on the web that do. See, e.g., here. I do, however, want to discuss the new “well-known seasoned issuer” (WKSI) category.
Up until now, there have been three categories of issuers: seasoned, unseasoned and non-reporting. A seasoned issuer is a public company that is current and timely (with limited exceptions) in its ’34 Act periodic filings for the previous 12 months and has a worldwide common equity float of at least $75 million. An unseasoned issuer is a public company that is required to make ’34 Act periodic filings but has a worldwide common equity float of less than $75 million. A non-reporting issuer is a company that is not required to make ’34 Act periodic filings. The chief advantage of qualifying as a seasoned issuer is the availability of short-form shelf registration for primary offerings. A short-form shelf registration allows an issuer to quickly tap the public markets when funding needs or perceived favorable market conditions arise because the necessary registration statement is already in place and is automatically updated by the filing of subsequent ’34 Act reports.
The concept of short-form shelf registration is based in part on the Efficient Capital Market Hypothesis, so the $75 million threshold is presumably a proxy for market efficiency with respect to the stock of a particular company. The new WKSI category applies to a public company that is current and timely (with limited exceptions) in its ’34 Act filings for the previous 12 months and either has (1) a worldwide public common equity float of at least $700 million or (2) registered and issued for cash as least $1 billion in debt or non-convertible securities within the previous three years.
The offering process reforms affect registered offerings by all four types of issuers. The most liberalizing aspects of the reforms, however, are available only to WKSIs. In particular, only WKSIs can take advantage of a new streamlined shelf registration process that provides automatic effectiveness of registration statements upon filing (i.e., no SEC review), pay-as-you-go registration fees, and expanded use of prospectus supplements. These are welcomed changes as they make the capital formation process more efficient for WKSIs. My questions is why not make them available to all seasoned issuers? Here’s what the SEC says on that point:
Overall, the issuers that will meet our thresholds for well-known seasoned issuers are the most active issuers in the U.S. public capital markets. In 2004, those issuers, which represented approximately 30% of listed issuers, accounted for about 95% of U.S. equity market capitalization. They have accounted for more than 96% of the total debt raised in registered offerings over the past eight years by issuers listed on a major exchange or equity market. These issuers, accordingly, represent the most significant amount of capital raised and traded in the United States. As a result of the active participation of these issuers in the markets and, among other things, the wide following of these issuers by market participants, the media, and institutional investors, we believe that it is appropriate to provide communications and registration flexibilities to these well-known seasoned issuers beyond that provided to other issuers, including other seasoned issuers.
I would have liked an explanation of why these factors make it appropriate to provide greater flexibility to WKSIs but not seasoned issuers, especially considering that the factors go to market efficiency which, as noted above, underlies the short-form shelf registration process available to seasoned issuers. Presumably, it is because WKSI securities trade in more efficient markets. But why is this essential for these particular changes? Maybe the explanation is in the portions of the 468 page release that I chose to skim.
Originally posted by Prof. Larry Ribstein on Ideoblog
