Canada: SEC Removes Security Rating Eligibility Criteria From Securities Act Registration Statements And Rescinds MJDS Form F-9

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 Additionally, and of particular significance to Canadian companies, the SEC rescinded Form F-9, the primary MJDS form for registered offerings of non-convertible debt and preferred securities.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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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