SEC Removes Credit Rating Criteria from Form S-3 andF-3 and from Certain SEC Rules
August 31, 2011
The Securities and Exchange Commission recently adopted amendments to remove investment
grade criteria from the transaction eligibility requirements of Form S-3 and F-3. The SEC also
adopted corresponding amendments to modify certain SEC rules that reference credit ratings. 1
These form and rule changes will generally become effective on September 2, 2011.2 Thesechanges were made in light of Section 939A of the Dodd-Frank Wall Street Reform andConsumer Protection Act (“Dodd-Frank Act”), which requires that the SEC review its
regulations with a credit ratings component and “remove any reference to or requirement ofreliance on credit ratings and to substitute in such regulations such standard of creditworthiness.”A.

FORM S-3 AND F-3 ELIGIBILITY REQUIREMENTS

For an issuer to use the short-form registration statement Form S-3 or F-3, two eligibility tests
must be satisfied — namely, registrant eligibility under General Instruction I.A and transaction
eligibility under General Instruction I.B of these forms. The registrant eligibility requirements
generally address the issuer’s reporting status and reporting history under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). For example, under General
Instruction I.A, registrant eligibility requires, among other things, that the registrant have aclass of securities registered pursuant to Section 12(b) of the Exchange Act, a class of equity
securities registered pursuant to Section 12(g) of the Exchange Act or otherwise be required tofile reports pursuant to the Exchange Act. In addition, registrant eligibility generally requiresthat the issuer be current and timely its Exchange Act filings for the twelve months prior to thefiling of the registration statement and not have defaulted on any debt payments since the last
fiscal year for which financial statements have been filed.
In addition to meeting the registrant eligibility requirement, issuers wishing to use Form S-3 or
F-3 must satisfy one of the transaction eligibility requirements. In the past, any one of thefollowing offerings could be registered on these short-form registration statements: (1) primaryofferings for cash where the registrant’s aggregate market value of voting and non-voting
equity held by non-affiliates is at least $75 million as of a date within 60 days prior to the date offiling the registration statement; (2) primary offerings of non-convertible investment grade securities
where at least one nationally recognized statistical rating organization (“NRSRO”) rated the securities
1Securities and Exchange Commission Release No. 33-9245; 34-64545, available at
http://www.sec.gov/rules/final/2011/33-9245.pdf.

2

The rescission of Form F-9 discussed below will be effective December 31, 2012.

Memorandum – August 31, 2011

investment grade at the time of sale (also referred to herein as “General Instruction I.B.2”); (3)secondary offerings; (4) rights offerings, dividend or reinvestment plans, conversions orwarrants and options; (5) offerings of investment-grade asset backed securities; and (6) limited
primary offerings by certain other registrants.3
B.

SUMMARY OF THE CHANGES TO FORM S-3 AND F-3 ADOPTED BY THE SEC

The SEC’s amendments address transaction eligibility described under General Instruction I.B.2,
involving primary offerings of non-convertible investment grade securities. Under the revised
instructions to Form S-3 and F-3, an offering of non-convertible securities (other than commonequity), is registrable on Form S-3 and F-3 without regard to the rating of the offered securities
in five circumstances summarized below. The announced regulatory objective of thesealternative criteria is to preserve the ability of issuers with a wide market following to continue
to access Form S-3 and F-3 while reducing reliance on credit ratings.
1.

$1 Billion Non-Convertible Securities (Other than Common Equity) Issued

Under the revised transaction eligibility test for issuances of non-convertible securities (otherthan common equity), an issuer may meet the transaction eligibility requirement for use of
short-form registration statement Form S-3 or F-3 for an issue of such securities if the issuer has
issued, as of a date within 60 days prior to the filing of the registration statement, at least $1billion in non-convertible securities (other than common equity), in registered primary offeringsfor cash, not exchange, over the prior three years. This measure is similar to the corresponding
test for determining an issuer’s status as a “well-known seasoned issuer,” or “WKSI,” asdefined under Rule 405 under the Securities Act of 1933, as amended (the “Securities Act”).
2.

$750 Million in Non-Convertible Securities (Other than Common Equity)
Outstanding

Under the revised transaction eligibility criteria, an issuer may also meet the transaction
eligibility requirement for use of Form S-3 or F-3 in the case of an offering of non-convertible
securities (other than common equity), if the issuer has outstanding, as of a date within 60 days
prior to the filing of the registration statement, at least $750 million of non-convertible securities(other than common equity), issued in registered primary offerings for cash, not exchange.
Application of the $1 Billion and $750 Million Threshold Tests. Both the $1 billion and $750 million
thresholds are calculated in the same manner used to determine an issuer’s WKSI status.
Consequently, each threshold can be measured within the 60-day period prior to the filing of
the registration statement, and any applicable registered primary offerings for cash may beaggregated. In addition, a parent company issuer can include in its calculations the principal
amount of non-convertible securities (other than common equity), issued by its majority-owned

3

See General Instructions I.B to Form S-3 and F-3.
Page 2

Memorandum – August 31, 2011

subsidiaries in registered primary offerings for cash, provided that such non-convertible
securities are fully and unconditionally guaranteed by such parent company issuer.4
In calculating the $1 billion and $750 million amounts, issuers will be permitted to include theprincipal amount of debt securities, as well as the greater of the liquidation preference or parvalue of non-convertible preferred stock issued in registered primary offerings for cash. In
determining the dollar amount of securities issued in the prior three years, issuers will use thesame calculation used to determine the dollar amount of securities registered for purposes ofdetermining the fees under Rule 457 of the Securities Act.
3.

Wholly-Owned Subsidiaries of WKSIs

Issuers that are wholly-owned subsidiaries of WKSIs will be eligible to use Form S-3 or F-3 forofferings of non-convertible securities (other than common equity). For such issuers, the SEC
reasoned that wholly-owned subsidiaries are likely to be followed by analysts who follow theWKSI parent, making it appropriate to provide such subsidiaries with the ability to use shortform registration statements.
4.

Majority-Owned Operating Partnership of a REIT that Qualifies as a WKSIIn response to comments that less than wholly-owned subsidiaries of WKSIs should also bepermitted to use Form S-3 and F-3, the SEC created a new category of eligibility that permits
issuers that are majority-owned operating partnership subsidiaries of a real estate investment
trust (“REIT”) that qualifies as a WKSI to use Form S-3 or F-3. The rationale for this standard isthat REITs do not commonly wholly-own the related operating partnership but instead control
the related operating partnership as its general partner. As a result, investors following a REIT
parent entity will commonly analyze the operations of the related operating partnership as partof their analysis of such REIT parent.
5.

Temporary “Grandfathering” of Issuers Eligible Under Existing Rules

The final circumstance where an issuer can offer non-convertible, non-equity securities on aForm S-3 or F-3 is where the issuer believes that it meets the eligibility criteria based on aninvestment grade rating of its securities. An issuer that seeks to avail itself of this requirement
will be required to disclose in the registration statement that it has a reasonable belief that it
would have been eligible to register the securities pursuant to General Instruction I.B.2 of Form
S-3 or Form F-3 in existence prior to the new rules, disclose the basis for such belief and file thefinal prospectus for any such offering on or before the date that is three years from the effective
date of the rule amendments. This grandfathering is an effort to ease the transition to the new4

In response to comments received in relation to the rule changes as initially proposed, the SEC has also
included a new provision permitting insurance company issuers, when registering offerings ofinsurance contracts, to include in their calculation the purchase payments or premium payments forinsurance contracts, including variable insurance contracts, issued in registered offerings over the priorthree years, or for the non-convertible securities (other than common equity) outstanding threshold, thecontract value as of the measurement date, of any outstanding insurance contracts issued in registeredofferings.
Page 3

Memorandum – August 31, 2011

rules and provide companies affected by the amendments with a period to adjust to the newrules. Under this eligibility standard, issuers will be able to file a new Form S-3 or F-3, but the
final prospectus relating to any offering under a grandfathered Form S-3 or F-3 will need be
filed within three years of the effective date of the new rules.5C.

RATINGS REFERENCES IN CERTAIN OTHER FORMS AND RULES
1.

Form S-4 and F-4 and Schedule 14A

Form S-4 and F-4, which are used to register securities in connection with businesscombinations or exchange offers, provide that registrants that meet the Form S-3 or F-3
registrant eligibility requirements and are offering investment grade securities may incorporate
certain information by reference. Similarly, a Schedule 14A proxy statement permits an issuer
to incorporate information by reference if, among other things, the Form S-3 registrant
eligibility requirements are met and action is to be taken as described in Items 11, 12 and 14 ofSchedule 14A,6 concerning non-convertible debt or preferred securities that meet the investment
grade criteria of General Instruction I.B.2 of Form S-3.
As revised, Form S-4 and F-4 and Schedule 14A omit references to NRSROs, and issuers whowish to incorporate information by reference into these filings will need to (i) meet theregistrant eligibility requirements under General Instruction I.A. of Form S-3 or F-3 and (ii)meet one of the new transaction eligibility criteria. In addition, the action to be taken under theproxy statement will need to involve non-convertible securities (other than common equity),
and involve a matter described under Item 11, 12 or 14 of Schedule 14A.
2.

Securities Act Rules 138, 139 and 168

Securities Act Rules 138, 139 and 168 provide that certain communications are not deemed anoffer for sale or offer to sell a security within the meaning of Sections 2(a)(10) and 5(c) of theSecurities Act to the extent that the communication relates to an offering of non-convertible
investment grade securities. Rules 138 and 139 generally provide safe harbors for brokerdealers in their publication of certain research, and Rule 168 provides a safe harbor for thedissemination by or on behalf of issuers of ordinary course factual and forward-lookinginformation.
As revised, references to investment grade securities in these rules have been eliminated andreplaced with references to the new General Instruction I.B.2 of Form S-3 and F-3. These rulechanges mean that firms that previously relied on the investment grade rating of an issuer’s
5

In the adopting release, the SEC identified factors that could indicate a reasonable belief of eligibility,
which include, but are not limited to: (i) an investment grade issuer credit rating, (ii) a previous
investment grade rating on a security issued in an offering similar to the type the issuer seeks toregister that has not been downgraded or put on a watch-list since its issuance or (iii) a previous
assignment of a preliminary investment grade rating.

6

These Schedule 14A Items involve solicitations related to authorizations, issuances, modifications andexchanges of securities, as well solicitations for mergers, consolidations, acquisitions and similarmatters.
Page 4

Memorandum – August 31, 2011

securities will now need to determine each time they want to publish research if the issuer
meets one of the new transaction eligibility requirements, a process that may be more
complicated than simply checking the publicly available credit rating of an issuer.
3.

Securities Act Rule 134(a)(17)Securities Act Rule 134 provides a safe harbor shielding certain communications from being
deemed a prospectus. The rule enumerates types of information that may be included incommunication consistent with the safe harbor. Prior to the amendments, Rule 134(a)(17)permitted disclosure of security ratings issued or expected to be issued by NRSROs. With thenew rule changes, the SEC has eliminated credit ratings disclosure from the list of permissible
disclosures under the Rule 134 safe harbor. The SEC noted that it believes that providing a safe
harbor that explicitly permits the inclusion of credit ratings is inconsistent with the mandate ofSection 939A of the Dodd-Frank Act to reduce reliance on credit ratings. The SEC indicated thatit does not expect that this rule change will have a material impact on the information available
to investors because issuers will (as is common now) be able to disclose a credit rating in a freewriting prospectus, such as a pricing term sheet for a debt offering.
4.

Rescission of Form F-9

The amendments adopted by the SEC provide for the rescission of Form F-9. Form F-9 is a form
currently available to eligible Canadian issuers under the Multijurisdictional Disclosure System(“MJDS”). Form F-9 is used by such issuers to register investment grade debt and preferred
securities under the Securities Act, The main benefit of Form F-9 as compared to Form F-10,
another MJDS registration statement form, is that an issuer using Form F-9 is not required toinclude a U.S. GAAP reconciliation of the issuer’s Canadian GAAP financial statements.
However, in light of Canadian rule changes, Canadian reporting companies are transitioning toInternational Financial Reporting Standards (“IFRS”). Under SEC rules, foreign private issuersthat prepare their financial statements in accordance with IFRS are generally not required toprepare a U.S. GAAP reconciliation and hence, once the transition to IFRS is completed, thereconciliation requirement would generally cease to be relevant. The rescission of Form F-9
becomes effective as of December 31, 2012, a time frame intended to ensure that the transition
by Canadian issuers to IFRS is completed prior to elimination of Form F-9.
***

This memorandum is for general informational purposes and should not be regarded as legal advice. Furthermore,
the information contained in this memorandum does not represent, and should not be regarded as, the view of any
particular client of Simpson Thacher & Bartlett LLP. Please contact your relationship partner if we can be ofassistance regarding these important developments. The names and office locations of all of our partners, as well as
additional memoranda, can be obtained from our website, www.simpsonthacher.com.

The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it are
rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to
any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

Page 5

Memorandum – August 31, 2011

UNITED STATESNew York
425 Lexington Avenue
New York, NY 10017-3954+1-212-455-2000

Houston2 Houston Center – Suite 1475
Houston, TX 77010+1-713-821-5650

Los Angeles
1999 Avenue of the Stars
Los Angeles, CA 90067+1-310-407-7500

Palo Alto2550 Hanover StreetPalo Alto, CA 94304+1-650-251-5000

Washington, D.C.
1155 F Street, N.W.
Washington, D.C. 20004+1-202-636-5500

EUROPE
LondonASIA
Beijing3919 China World Tower
1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999

Hong Kong
ICBC Tower
3 Garden Road, Central
Hong Kong+852-2514-7600

TokyoArk Mori Building
12-32, Akasaka 1-Chome
Minato-Ku, Tokyo 107-6037
Japan+81-3-5562-6200

SOUTH AMERICA
São Paulo
Av. Presidente Juscelino Kubitschek, 1455
12th Floor, Suite 121
São Paulo, SP 04543-011
Brazil+55-11-3546-1000

CityPoint
One Ropemaker Street
London EC2Y 9HUEngland+44-(0)20-7275-6500

www.simpsonthacher.com