Last week, the Securities and Exchange Commission (SEC) issued
final rule amendments to remove references to credit ratings in the
SEC's rules and forms and replace them with other appropriate
criteria, as required under the Dodd-Frank Wall Street Reform
and Consumer Protection Act. Specifically, the new rules
revise the eligibility criteria for registering primary offerings
of non-convertible securities, other than common equity (i.e., debt
or preferred securities), on Forms S-3 and F-3, the short form
registration statements under the U.S. Securities Act of
1933, as amended (the "Securities Act").
Additionally, and of particular significance to Canadian companies,
the SEC rescinded Form F-9, the primary MJDS form for registered
offerings of non-convertible debt and preferred securities.
By way of background, for a reporting company to be eligible to
file a short form registration statement on Form S-3 or F-3, it
must satisfy (A) the registrant requirements specified in the form
(principally, having been a reporting company for at least 12
calendar months prior to filing the registration statement and
timely filing all SEC reports during that period) and (B) one of
the form's transaction requirements. Currently, to use Form S-3
or Form F-3 for primary offerings a reporting company must either
have a $75 million public equity float or, if it does not satisfy
that requirement (e.g., in the case of a wholly owned subsidiary),
then any non-convertible securities (other than common equity) to
be registered must be rated "investment grade"
(typically, one of the four highest generic rating categories) by
at least one nationally recognized statistical rating
organization.
In February, the SEC proposed to replace the investment grade
eligibility requirement of Forms S-3 and F-3 with a requirement
that the a reporting company have issued (as of a date within 60
days prior to the filing of the registration statement) at least $1
billion in non-convertible securities (other than common equity) in
primary offerings for cash, not exchange, registered under the
Securities Act over the prior three years. This is the same
criteria used under the Securities Act to define issuers of
non-convertible securities as "well-known seasoned
issuers" or "WKSIs."
In the final rules, the SEC adopted the $1 billion criteria as
proposed but, in response to letters received from various
commentators, added alternative criteria to allow other widely
followed issuers continued access to the short form registration
statements. The new criteria are: (i) the issuer has outstanding
(as of a date within 60 days prior to the filing of the
registration statement) $750 million of non-convertible securities,
other than common equity, issued in primary offerings for cash, not
exchange, registered under the Securities Act; (ii) the issuer is a
wholly owned subsidiary of a WKSI; or (iii) the issuer is a
majority-owned operating partnership of a REIT that is a WKSI. In
addition, the final rules include a temporary grandfather provision
under which an issuer that has a reasonable belief that it would
have been eligible to register an offering of non-convertible
securities under the current investment grade criteria, and
discloses the basis for this belief in the registration statement
filed for the offering, may use Form S-3 or F-3 to register such
offering without complying with the new requirements, so long as
the final prospectus for the offering is filed within the three
years after the effective date of the new rules.
The SEC had also proposed to rescind Form F-9, the MJDS form used
specifically for registration of investment grade debt or preferred
securities that are offered for cash or in connection with an
exchange offer, and which are non-convertible or not convertible
for a period of one year from the issuance date. Use of Form F-9
was often preferred by issuers because it does not (as does Form
F-10, the general MJDS form) require reconciliation of the
issuer's financial statements to U.S. GAAP. Because, however,
Canadian public companies are now generally required to prepare
their financial statements in accordance with international
financial reporting standards, or IFRS, the SEC was of the view
that Form F-9 was dispensable. Unlike Form F-9, however, Form F-10
requires that either the issuer of the registered securities have a
public equity float of $75 million or that any debt securities of a
majority-owned subsidiary being registered be fully and
unconditionally guaranteed by the parent company, which itself must
meet all the F-10 requirements.
In the final rules, the SEC rescinded Form F-9 with a delayed
effective date of December 31, 2012, in order to accommodate
Canadian reporting companies that do not become subject to IFRS
reporting until after January 1, 2011 (e.g., issuers with a
non-calendar fiscal year). In addition, in recognition of the
different eligibility requirements for Form F-9 and Form F-10, the
new rules include a temporary grandfather provision in Form F-10
that will allow an issuer that discloses in the registration
statement that it has a reasonable belief (and discloses the basis
for that belief) that it would have been eligible to file a Form
F-9 as of the effective date of the new rules, to use Form F-10 for
an offering over a period of three years following the effective
date, even if it does not satisfy the parent guarantee or public
float requirements of Form F-10.
Finally, as proposed by the SEC, elimination of Form F-9 would have
required issuers with a reporting obligation under the
Securities Exchange Act of 1934, as amended, resulting
solely from the completion of a registered offering of investment
grade securities on Form F-9 to file annual reports on Form 20-F,
rather than being permitted, as they are under existing rules, to
file on MJDS Form 40-F. Canadian MJDS filers using Form 40-F file
with the SEC their Canadian annual disclosure documents filed with
Canadian securities regulators. In contrast, other reporting
foreign private issuers must file annual reports on Form 20-F,
which requires preparation of separate disclosure to comply with
the requirements of that form. In response to a comment submitted
by our firm, the SEC acknowledged that it would not be appropriate
to change the annual reporting requirements for issuers that had
previously registered and sold securities using Form F-9. As a
result, the new rules include a permanent grandfather provision
allowing currently eligible Form 40-F filers to continue to file
annual reports on Form 40-F with respect to any securities
previously registered on Form F-9.
The new rules will become effective 30 days after publication in
the Federal Register.
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