The SEC did not interpret Dodd-Franks Section 939A
requirement to remove credit ratings from short-form
eligibility criteria to decrease the number of short-form
issuers. New rules adopted on July 26 may do just the opposite
according to US counsel.
In response to 48 comment letters from law firms, companies
and others, the Securities and Exchange Commission (SEC)
amended its new rules on short form registration requirements
for non-convertible debt securities issuers (Form S-3 and Form
F-3) to make them less restrictive.
The original proposal made in February featured only one
alternative for the transaction requirement an issuance
of at least $1 billion in non-convertible securities for cash
in registered offerings over the prior three years.
The enacted rule includes three other alternatives:
possession of at least $750 million of outstanding
non-convertible registered securities, other than common
equity, issued in primary offerings for cash; being a
wholly-owned subsidiary of a well-known seasoned issuer; or
being a majority-owned operating partnership of a real estate
investment trust that qualifies as a well known seasoned
The new rules are due to come into effect on September 2.
They also include a three-year grandfather provision that
allows issuers to remain eligible based on an NRSRO investment
grade credit rating.
They wanted to make sure there wasnt such a jolt
to the system in implementing the new rules, said Sey-Hyo
Lee, partner with Chadbourne & Parke.
It would be sort of jarring for the issuers to be
eligible today and then not be eligible tomorrow.
The new rules only affect those investment grade
issuers who do not meet the public float test of having $75
million of common equity held by non-affiliated shareholders,
which is a sliver of the population, Lee says.
The Commission estimates a net increase of 12 short-form
issuers under the new rules, with four companies losing short
form eligibility and 16 companies becoming eligible for Forms
S-3 and F-3.
While the rules wont have a significant impact on the
number, or quality, of short form issuers, they do end the
Commissions endorsement of credit ratings and credit
Its important that they disentangle themselves
as they are required to under Dodd-Frank, and they no longer
appear to give a seal of approval to ratings, Gibson Dunn
& Crutcher partner Andrew Fabens says.
Thats not to say that ratings arent
important, but theres no reason to rely on them in this
area, he added.
While credit ratings have been removed from short-run
registration criteria for non-convertible debt securities, the
same cannot be said for asset-backed securities.
The Commission re-proposed a rule that would remove credit
ratings from consideration of asset-backed securities seeking
shelf eligibility. This proposal has not been approved, but
should make a greater impact than the new rule for debt
That market has been at the centre of all the
disruption over the last couple of years. There is still
uncertainty as to what the regulations are looking like,
Fabens says. Market participants, the SEC and other
regulators are still considering how that market should be
New rules on short form registration dont have much of
an effect on the market for non-convertible debt securities,
but they do symbolise a greater trend. The Commission does not
seek to legitimise credit ratings by using them as measuring
sticks for regulatory purposes.