Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3, 73534-73552 [E7-24968]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 72, Number 247 (Thursday, December 27, 2007)]
[Rules and Regulations]
[Pages 73534-73552]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24968]



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Part V





Securities and Exchange Commission





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17 CFR Parts 230 and 239



Revisions to the Eligibility Requirements for Primary Securities 
Offerings on Forms S-3 and F-3; Final Rule

Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / 
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 239

[Release No. 33-8878; File No. S7-10-07]
RIN 3235-AJ89


Revisions to the Eligibility Requirements for Primary Securities 
Offerings on Forms S-3 and F-3

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting amendments to the eligibility requirements of 
Form S-3 and Form F-3 to allow certain domestic and foreign private 
issuers to conduct primary securities offerings on these forms without 
regard to the size of their public float or the rating of debt they are 
offering, so long as they satisfy the other eligibility conditions of 
the respective form, have a class of common equity securities listed 
and registered on a national securities exchange, and the issuers do 
not sell more than the equivalent of one-third of their public float in 
primary offerings over any period of 12 calendar months. The amendments 
are intended to allow more companies to benefit from the greater 
flexibility and efficiency in accessing the public securities markets 
afforded by Form S-3 and Form F-3 without compromising investor 
protection. The expanded form eligibility does not extend to shell 
companies, however, which are prohibited from using the new provisions 
until 12 calendar months after they cease being shell companies. In 
addition, we are adopting an amendment to the rules and regulations 
promulgated under the Securities Act to clarify that violations of the 
one-third restriction will also violate the requirements as to proper 
registration form, even though the registration statement has been 
declared effective previously.

EFFECTIVE DATE: January 28, 2008.

FOR FURTHER INFORMATION CONTACT: Raymond A. Be, at (202) 551-3430, or 
the Office of Chief Counsel, at (202) 551-3500, in the Division of 
Corporation Finance, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-3010.

SUPPLEMENTARY INFORMATION: We are amending Form S-3,\1\ Form F-3 \2\ 
and Rule 401(g) \3\ under the Securities Act of 1933.\4\
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    \1\ 17 CFR 239.13.
    \2\ 17 CFR 239.33.
    \3\ 17 CFR 230.401(g).
    \4\ 15 U.S.C. 77a et seq.
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Table of Contents

I. Discussion
    A. Background
    1. Proposing Release and Public Comment Letters
    2. Form S-3
    3. Reasons for New Form S-3 Amendments
    4. Limited Expansion of Form Eligibility
    B. Amendments to Form S-3
    1. One-Third Cap and Listed Securities Only
    2. Calculation of Amount of Securities That May Be Sold
    3. Exclusion of Shell Companies
    C. Amendments to Form F-3
II. Paperwork Reduction Act
    A. Background
    B. Summary of Information Collections
    C. Summary of Comments and Revisions to Amendments
    D. Revised Paperwork Reduction Act Burden Estimates
III. Cost-Benefit Analysis
    A. Summary of Amendments
    B. Benefits
    C. Costs
IV. Consideration of Promotion of Efficiency, Competition and 
Capital Formation
V. Final Regulatory Flexibility Act Analysis
    A. Need for the Amendments
    B. Significant Issues Raised by Public Comment
    C. Small Entities Subject to the Amendments
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Agency Action to Minimize Effect on Small Entities
VI. Statutory Authority and Text of the Amendments

I. Discussion

A. Background

1. Proposing Release and Public Comment Letters
    On May 23, 2007, we proposed revisions to the eligibility 
requirements of Form S-3 and Form F-3 to allow domestic and foreign 
private issuers, respectively, to conduct primary securities offerings 
on these forms without regard to the size of their public float or the 
rating of debt they are offering, so long as they satisfy the other 
eligibility conditions of the applicable form and do not sell 
securities valued in excess of 20% of their public float in primary 
offerings pursuant to the new instructions on these forms over any 
period of 12 calendar months.\5\
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    \5\ Revisions to the Eligibility Requirements for Primary 
Securities Offerings on Forms S-3 and F-3, Release No. 33-8812 (June 
20, 2007) [72 FR 35118] (the ``Proposing Release'').
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    In response to our request for comment on the Proposing Release, we 
received comment letters from a variety of groups and constituencies, 
most of whom expressed their general support for the proposed form 
amendments and the objectives that we articulated in the Proposing 
Release. Notwithstanding their general support, however, several 
commenters thought that some modifications to the proposal were 
advisable, either to improve the usefulness of the form amendments to 
smaller public companies seeking capital,\6\ or to ensure that the rule 
changes are consistent with investor protection.\7\ After considering 
each of the comments, we are adopting amendments to Form S-3 and Form 
F-3 substantially in the form proposed, but with certain modifications 
as discussed more fully in this release.
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    \6\ See, for example, letters from the American Bar Association, 
Committees on Federal Regulation of Securities and State Regulation 
of Securities (``ABA''); Brinson Patrick Securities Corporation 
(``Brinson Patrick''); Feldman Weinstein and Smith LLP (``Feldman 
Weinstein''); Malizia Spidi & Fisch (``Malizia Spidi''); Morrison & 
Foerster LLP (``Morrison & Foerster''); Office of Advocacy, Small 
Business Administration (``SBA''); Roth Capital Partners, LLP 
(``Roth Capital''); Marshal Shichtman (``M. Shichtman''); and 
Williams Securities Law (``Williams Securities''). All comment 
letters are publicly available at https://www.sec.gov/comments/s7-10-
07/s71007.shtml.
    \7\ See letter from the Council of Institutional Investors 
(``CII'').
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    These amendments are intended to allow a larger number of public 
companies to benefit from the greater flexibility and efficiency in 
accessing the public securities markets afforded by Form S-3 and Form 
F-3 in a manner that is consistent with investor protection. 
Accordingly, we are placing certain restrictions on the class of 
issuers who will be eligible under the new rules and are adopting a 
ceiling on the amount of securities that eligible issuers may offer 
pursuant to these rules. In creating new opportunities to facilitate 
capital formation consistent with the protection of investors, we 
believe that a careful and modest expansion of Form S-3 and Form F-3 
eligibility is warranted at this time. However, as we indicated in the 
Proposing Release, we may revisit the appropriateness of the form 
restrictions at a later time if our experience with this revised 
requirement suggests issuer eligibility for primary offerings on Form 
S-3 and Form F-3 should be further revised.\8\
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    \8\ Proposing Release, at 35124.
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2. Form S-3
    Form S-3 is the ``short form'' used by eligible domestic companies 
to register securities offerings under the Securities Act of 1933. The 
form also allows these companies to rely on their reports filed under 
the Securities Exchange Act of

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1934 \9\ to satisfy the form's disclosure requirements. Prior to 
today's amendments, companies have been able to register primary 
offerings (that is, securities offered by or on behalf of the 
registrant for its own account) on Form S-3 only if their non-affiliate 
equity market capitalization, or ``public float,'' was $75 million or 
more.\10\ In contrast, transactions involving primary offerings of non-
convertible investment grade securities, certain rights offerings, 
dividend reinvestment plans and conversions, and offerings by selling 
shareholders of securities registered on a national securities exchange 
do not require the company to have a minimum public float.\11\
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    \9\ 15 U.S.C. 78a et seq.
    \10\ General Instruction I.B.1. of Form S-3. The history and use 
of Form S-3 are discussed in greater detail in the Proposing 
Release.
    \11\ See General Instructions I.B.2. through I.B.4. of Form S-3.
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    Recently, the issue of Form S-3 eligibility for primary offerings 
was addressed by the Commission's Advisory Committee on Smaller Public 
Companies (the ``Advisory Committee''), which the Commission chartered 
in 2005 to assess the current regulatory system for smaller companies 
under U.S. securities laws.\12\ In its April 23, 2006 Final Report to 
the Commission, the Advisory Committee recommended that we allow all 
reporting companies with securities listed on a national securities 
exchange or Nasdaq,\13\ or quoted on the Over-the-Counter Bulletin 
Board electronic quotation service, to be eligible to use Form S-3 if 
they have been reporting under the Exchange Act for at least one year 
and are current in their reporting at the time of filing.\14\
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    \12\ More information about the Advisory Committee is available 
at https://www.sec.gov/info/smallbus/acspc.shtml.
    \13\ There is no longer a distinction between Nasdaq and 
national securities exchanges. On January 13, 2006, the Commission 
approved Nasdaq's application to become a national securities 
exchange. The Nadsaq Stock Market commenced operations on August 1, 
2006.
    \14\ Recommendation IV.P.3. of the Final Report of the Advisory 
Committee on Smaller Public Companies (Apr. 23, 2006) (the ``Final 
Report''), at 68-72. The Final Report is available at https://
www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf. In addition 
to elimination of the public float requirement, Recommendation 
IV.P.3. also called for (1) elimination of General Instruction 
I.A.3.(b) to Form S-3 requiring that the issuer has timely filed all 
required reports in the last year and (2) extending Form S-3 
eligibility for secondary transactions to issuers quoted on the 
Over-the-Counter Bulletin Board. The Proposing Release also included 
additional discussion of the Advisory Committee and its 
recommendations.
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3. Reasons for New Form S-3 Amendments
    The ability to conduct primary offerings on Form S-3 confers 
significant advantages on eligible companies.\15\ Form S-3 permits the 
incorporation of required information by reference to a company's 
disclosure in its Exchange Act filings, including Exchange Act reports 
that were previously filed and those that will be filed in the 
future.\16\
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    \15\ See generally, Shelf Registration, Release No. 33-6499 
(Nov. 17, 1983) [48 FR 5289] (discussing the benefits of shelf 
registration).
    \16\ Item 12 of Form S-3: ``Incorporation of Certain Information 
by Reference.''
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    Form S-3 eligibility for primary offerings also enables companies 
to conduct primary offerings ``off the shelf'' under Rule 415 of the 
Securities Act.\17\ Rule 415 provides considerable flexibility in 
accessing the public securities markets from time to time in response 
to changes in the markets and other factors. The shelf eligibility 
resulting from Form S-3 eligibility and the ability to forward 
incorporate information on Form S-3, therefore, allow companies to 
avoid additional delays and interruptions in the offering process and 
can reduce or even eliminate the costs associated with preparing and 
filing post-effective amendments to the registration statement.
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    \17\ Rule 415 [17 CFR 230.415] provides that:
    (a) Securities may be registered for an offering to be made on a 
continuous or delayed basis in the future, Provided, That:
    (1) the registration statement pertains only to: * * *
    (x) Securities registered (or qualified to be registered) on 
Form S-3 or Form F-3 which are to be offered and sold on an 
immediate, continuous or delayed basis by or on behalf of the 
registrant, a majority owned subsidiary of the registrant or a 
person of which the registrant is a majority-owned subsidiary.
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    By having more control over the timing of their offerings, these 
companies can take advantage of desirable market conditions, thus 
allowing them to raise capital on more favorable terms (such as 
pricing) or to obtain lower interest rates on debt. As a result, the 
ability to take securities off the shelf as needed gives issuers a 
significant financing alternative to other widely available methods, 
such as private placements with shares usually priced at discounted 
values based in part on their relative illiquidity.\18\ Consequently, 
we believe that extending Form S-3 short-form registration to 
additional issuers should enhance their ability to access the public 
securities markets. Likewise, a significant proportion of commenters to 
the Proposing Release welcomed an expansion of Form S-3 eligibility, 
agreeing that such a measure would greatly enhance smaller public 
companies' access to capital in the securities markets, with far less 
burden and cost.\19 \
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    \18\ See, for example, Susan Chaplinsky and David Haushalter, 
Financing Under Extreme Uncertainty: Contract Terms and Returns to 
Private Investments in Public Equity (May 2006), available at: 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=907676 
(discussing the typical contractual terms of PIPEs (Private 
Investments in Public Equities) financings, where the average 
purchase discount is between 18.5% to 19.7%, depending on the types 
of contractual rights embedded in the securities).
    \19\ See, for example, letters from Feldman Weinstein; Malizia 
Spidi; and M. Shichtman.
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    Given the great advances in the electronic dissemination and 
accessibility of company disclosure transmitted over the Internet in 
the last several years,\20\ we believe that moderately expanding the 
class of transactions that are permitted on Form S-3 for primary 
securities offerings is warranted once again. In contrast to 1992, when 
the Commission last adjusted the issuer eligibility requirements for 
Form S-3,\21\ most public filings under the Securities Act and the 
Exchange Act, and all Forms S-3, are now filed on the Commission's 
Electronic Data Gathering, Analysis, and Retrieval system (``EDGAR''). 
The pervasiveness of the Internet in daily life and the advent of EDGAR 
as a central repository of company filings have combined to allow 
widespread, direct, and contemporaneous accessibility to company 
disclosure at little or no cost to those interested in obtaining the 
information. For this reason, we think it is appropriate to once again 
expand the class of companies who may register primary offerings on 
Form S-3 in a limited manner.
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    \20\ See, for example, Internet Availability of Proxy Materials, 
Release No. 34-52926 (Dec. 8, 2005) [70 FR 74597] and the Final 
Report of the Advisory Committee, at 69:
    The Commission has recently taken several steps acknowledging 
the widespread accessibility over the Internet of documents filed 
with the Commission. In its recent release concerning Internet 
delivery of proxy materials, the Commission notes that recent data 
indicates that up to 75% of Americans have access to the Internet in 
their homes, and that this percentage is increasing steadily among 
all age groups. As a result we believe that investor protection 
would not be materially diminished if all reporting companies on a 
national securities exchange, NASDAQ or the Over-the-Counter 
Bulletin Board were permitted to utilize Form S-3 and the associated 
benefits of incorporation by reference.
    \21\ Simplification of Registration Procedures for Primary 
Securities Offerings, Release No. 33-6964 (Oct. 22, 1992) [57 FR 
48970].
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4. Limited Expansion of Form Eligibility
    We are not prepared at this time to abandon our longstanding 
prerequisite contained in the instructions to Form S-3 and allow 
unlimited use of this form for primary offerings by companies who do 
not have at least $75 million in

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public float. Although the Advisory Committee recommended the qualified 
elimination of this requirement \22\ and some commenters supported 
removing the concept of float altogether as a criterion of 
eligibility,\23 \we believe that retaining some capitalization 
restrictions on Form S-3 eligibility is still advisable. We are 
persuaded that the technological advances that have revolutionized 
communications between companies and the market should allow us to ease 
the Form S-3 eligibility standards without undermining investor 
protection or the integrity of the markets. However, as explained more 
fully below, we believe this warrants only the limited expansion of 
certain offerings on Form S-3, not the wholesale elimination of public 
float as an important criterion of form eligibility. The Commission's 
system of integrated disclosure has, since its inception, been premised 
on the idea that a company's disclosure in its registration statement 
can be streamlined to the extent that the market has already taken that 
information into account.\24\ Public float has for many years been used 
as an approximate measure of a stock's market following and, 
consequently, the degree of efficiency with which the market absorbs 
information and reflects it in the price of a security.\25\ While 
current technology provides investors with access to information about 
publicly reporting companies at an unprecedented level of ease and 
speed, it does not guarantee that the market has fully absorbed and 
synthesized all of the available information of a given company. 
Technology can facilitate and enhance market following, but it does not 
ensure it. Therefore, we are retaining public float as a factor in 
determining the extent of short-form eligibility. While the purpose of 
these amendments is to give smaller companies added flexibility to 
quickly respond to favorable market conditions by conducting some 
primary shelf offerings on Form S-3, this objective must be balanced 
against the imperatives of investor protection.
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    \22\ The Advisory Committee's recommendation to expand Form S-3 
eligibility encompassed only companies whose securities are listed 
on a national securities exchange or Nasdaq (which, at the time, was 
not yet a national securities exchange), or quoted on the Over-the 
Counter Bulletin Board. Refer to Recommendation IV.P.3. of the Final 
Report.
    \23\ See letters from the ABA; Morrison & Foerster; and Roth 
Capital.
    \24\ See Release No. 33-6499, at 5:
    Forms S-3 and F-3 recognize the applicability of the efficient 
market theory to those companies which provide a steady stream of 
high quality corporate information to the marketplace and whose 
corporate information is broadly disseminated. Information about 
these companies is constantly digested and synthesized by financial 
analysts, who act as essential conduits in the continuous flow of 
information to investors, and is broadly disseminated on a timely 
basis by the financial press and other participants in the 
marketplace. Accordingly, at the time S-3/F-3 registrants determine 
to make an offering of securities, a large amount of information 
already has been disseminated to and digested by the marketplace.
    See also Harold S. Bloomenthal and Samuel Wolff, Securities and 
Federal Corporate Law, Sec.  9:30, available through Westlaw at 3B 
Sec. & Fed. Corp. Law Sec.  9:30 (2d. ed.) (``Form S-3 epitomizes 
the efficient market concept.''). See also Randall S. Thomas and 
James F. Cotter, Measuring Securities Market Efficiency in the 
Regulatory Setting, 63 Law & Contemp. Probs. 105 (2000) at 106.
    \25\ See Reproposal of Comprehensive Revision to System for 
Registration of Securities Offerings, Release No. 33-6331 (Aug. 6, 
1981) [46 FR 41902], at 9: ``The Commission views as significant the 
strong relationship between float and information dissemination to 
the market and following by investment institutions.'' See also 
Thomas and Cotter, Measuring Securities Market Efficiency in the 
Regulatory Setting, at 108 (stating that the numerical thresholds of 
Form S-3 were intended to be a rough proxy for which companies were 
widely followed by the investment community).
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    Concerns have been raised in the past when the Commission 
considered easing the restrictions of shelf registration eligibility to 
allow smaller public companies to use a modified form of shelf 
registration,\26\ and similar concerns were voiced again during the 
comment period.\27\ It has been observed that the securities of smaller 
public companies are comparatively more vulnerable to price 
manipulation than the securities of larger public companies,\28\ and 
may also be more prone to financial reporting error and abuses.\29\ As 
we stated in the Proposing Release, although we believe that the public 
securities markets have benefited from advances in both technology and 
corporate disclosure requirements, we are nevertheless mindful that 
companies with a smaller market capitalization as a group have a 
comparatively smaller market following than larger, well-seasoned 
issuers and are more thinly traded. In such markets, the potential for 
manipulative practices is more acute.\30\ As such, we are sensitive to 
the market effects of loosening the standards for shelf eligibility 
without limitation.
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    \26\ See, for example, Report of the Task Force on Disclosure 
Simplification (Mar. 5, 1996), available at https://www.sec.gov/news/
studies/smpl.htm. See also Delayed Pricing for Certain Registrants, 
Release No. 33-7393 (Feb. 20, 1997) [62 FR 9276].
    \27\ See letter from the CII.
    \28\ See, for example, Rajesh Aggarwal and Guojon Wu, Stock 
Market Manipulations, 79 Journal of Business, No. 4 (2006). The 
authors' data indicate that manipulative practices predominantly 
occur in the Over-the-Counter Bulletin Board, Pink Sheets and other 
regional or unidentified markets characterized by very low average 
trading volume and market capitalization. The authors conclude that 
stock manipulation is more likely to occur ``in relatively 
inefficient markets * * * that are small and illiquid.''
    \29\ In its letter commenting on the Proposing Release, the CII 
``strongly opposed any weakening of the proposed limitations on 
eligibility in the final rule,'' stating:
    We share the Commission's concerns that the Proposed Rule 
presents ``risks to investor protection by expanding the base of 
companies eligible for primary offerings'' on Forms S-3 and F-3 * * 
* In addition [to the risks discussed by the Commission in the 
Proposing Release], we believe that the final rule should explicitly 
acknowledge that smaller public companies have long been especially 
prone to financial reporting fraud. Consistent with the historical 
evidence, a recent analysis of the reporting by public companies in 
response to SEC Staff Accounting Bulletin 108 found that (1) 
reporting errors at smaller public companies ``tend to be more 
significant'' than those of larger companies; and (2) smaller public 
companies ``are more likely to sit on errors that decrease earnings 
than big companies.'' Thus, the Commission should ensure that the 
final rule avoids understating the significant risks that smaller 
public companies present to investors [emphasis in original].
    \30\ The Commission's staff has stated previously that, with 
respect to short sales in reliance on the safe harbor of Rule 144 
where the borrower closes out using the restricted securities, all 
the conditions of Rule 144 must be met at the time of the short 
sale. See Questions 80 through 82 of Resales of Restricted and Other 
Securities, Release No. 33-6099 (Aug. 2, 1979) [44 FR 46752, 46765]. 
In the Commission's view, the term ``sale'' under the Securities Act 
includes contract of sale. See Securities Offering Reform, Release 
No. 33-8591 (Jul. 19, 2005) [70 FR 44722, 44765] and Short Selling 
in Connection With a Public Offering, Release No. 34-56206 (Aug. 6, 
2007) [72 FR 45094]. The Commission has previously indicated that, 
in a short sale, the sale of securities occurs at the time the short 
position is established, rather than when shares are delivered to 
close out that short position, for purposes of Section 5 of the 
Securities Act. See, for example, Questions 3 and 5 of Commission 
Guidance on the Application of Certain Provisions of the Securities 
Act of 1933, the Securities Exchange Act of 1934, and Rules 
Thereunder to Trading in Security Futures Products, Release No. 33-
8107 (June 21, 2002) [67 FR 43234] and Release No. 34-56206 n. 46 
(Aug. 6, 2007) [72 FR 45094, 45096].
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    We also note that the disclosure obligations and liability imposed 
by the federal securities laws on smaller public companies are 
comparable, but not identical, to the largest reporting companies.\31\ 
We are comfortable that

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the scaled disclosure standards for smaller public companies are 
sufficiently comparable to those governing larger issuers such that the 
limited expansion of Form S-3 primary offering eligibility, as we are 
adopting it, will not adversely impact investors. However, the level of 
disclosure required of smaller public companies under the federal 
securities laws is yet another factor that we believe weighs against 
expanding Form S-3 eligibility further than we have in this 
release.\32\
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    \31\ Beginning with its introduction in 1992, Regulation S-B of 
the Securities Act provided for a scaled set of disclosure 
requirements for small business issuers. Small Business Initiatives, 
Release No. 33-6949 (July 30, 1992) [57 FR 36442]. Recent amendments 
to the disclosure regime for smaller companies maintain these scaled 
disclosure requirements, but integrate them into Regulation S-K. 
Smaller Reporting Company Regulatory Relief and Simplification, 
Release No. 33-8876 (Dec. 19, 2007).
    In addition, we acknowledge that the companies implicated in 
this rulemaking are not yet fully subject to Section 404 of 
Sarbanes-Oxley. See Internal Control Over Financial Reporting in 
Exchange Act Periodic Reports of Non-Accelerated Filers and Newly 
Public Companies, Release No. 33-8760 (Dec. 15, 2006) [71 FR 76580]. 
We have taken steps to implement a plan to improve the efficiency 
and effectiveness of Section 404 implementation, including its 
scalability to smaller companies. See Commission Guidance Regarding 
Management's Report on Internal Control Over Financial Reporting 
Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, 
Release No. 34-55929 (June 20, 2007) [72 FR 35323]. It is true, 
however, that, unlike ``large accelerated filers'' and ``accelerated 
filers,'' companies that are ``non-accelerated filers'' (companies 
with less than $75 million in float) will not need to comply with 
the auditor's attestation report requirements of Section 404 until 
they file their annual report for the fiscal year ending on or after 
December 15, 2008. For large accelerated filers and accelerated 
filers, the auditor's attestation report is required for all annual 
reports for fiscal years ending on or after November 15, 2004. In 
light of this fact, one commenter recommended that Form S-3 
eligibility be contingent on full implementation of both the 
management and auditor attestation report requirements of Section 
404. See letter from the CII. Because adding this condition would 
effectively delay the benefits of these Form S-3 amendments to 
smaller public companies for at least one year, and because the 
decision has been made to allow smaller public companies to phase in 
full compliance with Section 404, we have decided not to delay the 
effective date of this rulemaking. We may revisit the limitation on 
our expansion of Form S-3 after full compliance with Section 404 is 
complete.
    \32\ This is especially true given that, under recent 
amendments, the scaled detailed disclosure regime for smaller 
companies will now extend to issuers who have a public float between 
$25 and $75 million. Release No. 33-8876. Prior to such amendments, 
only companies with less than $25 million in public float were 
covered by the disclosure requirements of Regulation S-B.
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    In revising the shelf eligibility requirements, therefore, we must 
consider the unique set of investment risks posed by smaller public 
companies in the context of shelf registration, which provides speed 
and flexibility to issuers, but at the same time may limit Commission 
and underwriter involvement in the registration process. Extending the 
benefits of shelf registration to an expanded group of transactions 
will limit the staff's direct prior involvement in takedowns of 
securities off the shelf. Although the Commission's staff may review 
registration statements before they are declared effective, individual 
takedowns are not conditioned on further Commission action or subject 
to prior selective staff review.\33\ In addition, the short time 
horizon of shelf offerings may also reduce the time that participating 
underwriters have to apply their independent scrutiny and judgment to 
an issuer's prospectus disclosure. Historically, concerns such as these 
have been at the center of the debate when the Commission has 
previously considered expanding shelf registration eligibility.\34\
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    \33\ We note some commenters suggested that our concerns about 
expanding the base of companies eligible to use Form S-3 for primary 
offerings ``off the shelf'' could be alleviated by requiring more 
detailed disclosure from these companies. See letters from Feldman 
Weinstein and Morrison & Foerster. However, requiring additional 
disclosure would not address the fact that the staff does not have 
the ability to review, in advance, individual takedowns off an 
effective shelf registration statement. Prospectus supplements 
reflecting such takedowns are filed after the fact. Similarly, the 
fact that the Form S-3 filed by reporting companies with smaller 
public floats would not become automatically effective and would 
therefore remain subject to pre-effective review and comment by the 
Commission's staff does not satisfactorily address the lack of the 
staff's prior involvement in shelf takedowns. See letter from the 
ABA.
    \34\ Among other things, the Commission's 1996 Task Force on 
Disclosure Simplification made several recommendations to amend the 
shelf registration procedure ``so as to provide increased 
flexibility to a wider array of companies with respect to their 
capital-raising activities.'' These recommendations included a 
``modified form of shelf registration'' that would have allowed 
smaller companies to price their securities on a delayed basis for 
up to one year in order to time securities offerings more 
effectively with opportunities in the marketplace. The Task Force 
stated:
    While this recommendation will afford small companies time and 
cost savings, the Task Force appreciates concerns raised about 
possible adverse effects shelf registration may have on the adequacy 
and accuracy of disclosures provided to investors, on Commission 
oversight of the disclosures and on the role of underwriters in the 
registration process. These concerns are similar to those raised 
when the shelf registration rule was first being considered on a 
temporary basis and was made available to any offering including an 
initial public offering.
    Report of the Task Force on Disclosure Simplification, at 33. 
Following on the Task Force's recommendations, in 1997 the 
Commission proposed to permit certain smaller companies to price 
registered securities offerings on a delayed basis for up to one 
year after effectiveness. Release No. 33-7393. In that release, the 
Commission noted:
    Concerns have been raised that the expedited access to the 
markets that would be provided by these proposals could make it 
difficult for gatekeepers, particularly underwriters, to perform 
adequate due diligence for the smaller companies that would be 
eligible to use expanded Rule 430A.
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    Accordingly, since the Commission first introduced the system of 
integrated disclosure more than twenty-five years ago, the ability to 
use Form S-3 to conduct primary offerings ``off the shelf'' has been 
carefully tempered by restricting the class of companies eligible for 
this benefit. Consistent with this well-established approach, we are 
amending the Form S-3 eligibility requirements to enable more companies 
to use Form S-3 for primary offerings,\35\ but only to the extent that 
they are consistent with investor protection.
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    \35\ As part of Recommendation IV.P.3 of the Final Report, the 
Advisory Committee also recommended that the Commission extend S-3 
eligibility for secondary transactions to issuers with securities 
quoted on the Over-the-Counter Bulletin Board. General Instruction 
I.B.3. to Form S-3 limits the use of the form for secondary 
offerings to securities ``listed and registered on a national 
securities exchange or * * * quoted on the automated quotation 
system of a national securities association,'' a restriction that 
excludes the securities of Over-the-Counter Bulletin Board and Pink 
Sheets issuers. In addition, some commenters to the Proposing 
Release echoed the recommendation of the Advisory Committee and 
supported extending the use of Form S-3 for secondary offerings to 
additional issuers who are ineligible under current rules. See 
letters from the ABA; Feldman Weinstein; SBA; and Williams 
Securities. After considering the recommendation of the Advisory 
Committee and commenters, we are not at this time amending the Form 
S-3 eligibility rules for secondary offerings. As we made clear in 
the Proposing Release, this rulemaking pertains only to the limited 
issue of Form S-3 eligibility for primary securities offerings and 
is not intended to encompass or otherwise impact existing 
requirements for secondary offerings on Form S-3. Moreover, any 
amendment of the Form S-3 requirements for secondary offerings would 
have to be carefully weighed against the costs of further exposing 
the markets to the potential for abusive primary offerings disguised 
as secondary offerings. Therefore, at this time we are not revising 
secondary offering eligibility under General Instruction I.B.3.
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B. Amendments to Form S-3

    We are adopting new General Instruction I.B.6. to Form S-3 to allow 
companies with less than $75 million in public float to register 
primary offerings of their securities on Form S-3,\36\ provided they:
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    \36\ Form S-3 eligibility under new General Instruction I.B.6. 
(and Form F-3 eligibility under new General Instruction I.B.5.) 
applies only to an issuer's ability to conduct a limited primary 
offering on Form S-3 (or Form F-3, as applicable). That is, an 
issuer's eligibility to use Form S-3 or Form F-3 under these new 
form instructions does not mean that the issuer meets the 
requirements of Form S-3 or Form F-3 for purposes of any other rule 
or regulation of the Commission (apart from Rule 415(a)(1)(x), which 
pertains to shelf registration). Instruction 6 to new General 
Instruction I.B.6. of Form S-3 and Instruction 6 to new General 
Instruction I.B.5. of Form F-3.
    Rule 415(a)(1)(x) permits shelf offerings of securities 
``registered (or qualified to be registered)'' on Form S-3 or Form 
F-3 (emphasis added). We note that a closed-end investment company, 
including a business development company, (``closed-end fund'') that 
meets the eligibility standards enumerated in Form S-3, as revised 
by new General Instruction I.B.6., may register its securities in 
reliance on Rule 415(a)(1)(x) notwithstanding the fact that closed-
end funds register their securities on Form N-2 rather than Form S-
3.
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     Meet the other registrant eligibility conditions for the 
use of Form S-3; \37\
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    \37\ See General Instruction I.A. of Form S-3. Among other 
things, General Instruction I.A. requires that the registrant:
     Has a class of securities registered pursuant to 
Sections 12(b) or 12(g) of the Exchange Act or is required to file 
reports pursuant to Section 15(d) of the Exchange Act; and
     Has been subject to the requirements of Sections 12 or 
15(d) of the Exchange Act and has filed in a timely manner all the 
material required to be filed pursuant to Sections 13, 14 or 15(d) 
for a period of at least twelve calendar months immediately 
preceding the filing of the Form S-3 registration statement.

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[[Page 73538]]

     Have a class of common equity securities that is listed 
and registered on a national securities exchange; \38\
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    \38\ A ``national securities exchange'' is a securities exchange 
that has registered with the Commission under Section 6 of the 
Exchange Act [15 U.S.C. 78f]. There are currently ten securities 
exchanges registered under Section 6(a) of the Exchange Act as 
national securities exchanges. These are the New York Stock 
Exchange, American Stock Exchange and Nasdaq, as well as the Boston 
Stock Exchange, Chicago Board Options Exchange, Chicago Stock 
Exchange, International Securities Exchange, National Stock Exchange 
(formerly the Cincinnati Stock Exchange), NYSE Arca (formerly the 
Pacific Exchange) and the Philadelphia Stock Exchange. In addition, 
an exchange that lists or trades security futures products (as 
defined in Section 3(a)(56) of the Exchange Act [15 U.S.C. 78c(56)]) 
may register as a national securities exchange under Section 6(g) of 
the Exchange Act solely for the purpose of trading security futures 
products. For purposes of new General Instruction I.B.6., however, 
only exchanges registered under Section 6(a) of the Exchange Act 
will be deemed to be ``national securities exchanges.'' Instruction 
8 to new General Instruction I.B.6.
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     Do not sell more than the equivalent of one-third of their 
public float in primary offerings under General Instruction I.B.6. of 
Form S-3 over the previous period of 12 calendar months; \39\ and
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    \39\ The meaning of the phrase ``period of 12 calendar months'' 
is intended to be consistent with the way in which the phrase ``12 
calendar months'' is used for purposes of the registrant eligibility 
requirements in Form S-3. A ``calendar month'' is a month beginning 
on the first day of the month and ending on the last day of that 
month. For example, for purposes of Form S-3 registrant eligibility, 
if a registrant were not timely on a Form 10-Q due on September 15, 
2006, but was timely thereafter, it would first be eligible to use 
Form S-3 on October 1, 2007. Similarly, for purposes of new General 
Instruction I.B.6. of Form S-3, if a registrant relies on this 
Instruction to conduct a shelf takedown equivalent to one-third of 
its public float on September 15, 2007, it will next be eligible to 
do another takedown (assuming no change in its float) on October 1, 
2008.
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     Are not shell companies \40\ and have not been shell 
companies for at least 12 calendar months before filing the 
registration statement.
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    \40\ The term ``shell company'' is defined in Rule 405 of the 
Securities Act [17 CFR 230.405]. See also Use of Form S-8, Form 8-K, 
and Form 20-F by Shell Companies, Release No. 33-8587 (July 15, 
2005) [70 FR 42233] (adopting definition of shell company).
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1. One-Third Cap and Listed Securities Only
    As discussed above, we are sensitive to the risks associated with 
making shelf registration available to more issuers. At the same time, 
we are also sensitive to the possibility that constraining the rule too 
much may limit its utility to the companies that qualify for its use. 
Therefore, we have decided to increase the limitation on the amount of 
securities that can be offered by companies under the new rules from 
20% of public float to one-third of public float, while at the same 
time conditioning a company's eligibility under new General Instruction 
I.B.6. of Form S-3 on having a class of common equity securities listed 
and registered on a national securities exchange (often described as 
``listed'' securities).\41\
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    \41\ New General Instruction I.B.6(c) of Form S-3.
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    As proposed, new General Instruction I.B.6. of Form S-3 would have 
limited the amount of securities eligible companies could sell in 
accordance with its provisions to no more than the equivalent of 20% of 
their public float over any period of 12 calendar months. We proposed a 
cap of 20% in order to allow an offering that is large enough to help 
an issuer obtain financing when market opportunities arise, yet small 
enough to take into account the effect such new issuance may have on 
the market for a thinly traded security. As we stated in the Proposing 
Release, we believed that the 20% ceiling would help a large number of 
smaller public companies with their capital raising.\42\
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    \42\ As we noted in the Proposing Release, the Division of 
Corporation Finance undertook a study of shelf registration 
takedowns in 2006 by companies with a public float of moderate size 
in order to evaluate the appropriate public float ceiling for the 
new rule. Specifically, the Division looked at all prospectus 
supplements filed pursuant to shelf registration statements in 
calendar year 2006 by companies with a public float between $75 
million and $140 million. While we observed a wide range of 
variously sized shelf takedowns (from less than 1% of float to 
greater than 80% of float), the data indicated that 20% of float was 
approximately the median annual takedown for companies in the band 
considered. This suggested that limiting smaller public companies to 
20% of their public float in any 12-month period might increase the 
capital raising alternatives for these companies consistent with 
investor protection.
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    Some commenters, however, were critical of this proposed 
restriction and concerned that capping issuers at 20% of the value of 
their public float every twelve months would limit the usefulness of 
the rule.\43\ The commenters thought that the 20% ceiling would be of 
limited utility because they believed that the capital needs of small 
businesses would, in many cases, greatly exceed the amount of 
securities that could be sold under the rule.\44\ Several commenters 
also suggested various alternatives to a 20% limit,\45\ including 
raising the ceiling from 20% to at least one-third of a company's 
public float.\46\
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    \43\ See, for example, letters from the ABA; SBA; Feldman 
Weinstein; Malizia Spidi; Morrison & Foerster; M. Shichtman; and 
Roth Capital.
    \44\ See letters from the SBA; Brinson Patrick; Feldman 
Weinstein; Malizia Spidi; M. Shichtman; and Roth Capital. For an 
opposing viewpoint, see letter from the CII.
    \45\ See, for example, letters from Feldman Weinstein; Morrison 
& Foerster; and Williams Securities (commenters suggesting that a 
percentage of trading volume be used as an alternative to public 
float); Malizia Spidi and Roth Capital (commenters suggesting that 
shareholder approval be obtained for dilutive issuances constituting 
over 20% of public float); and letters from Feldman Weinstein and 
Morrison & Foerster (commenters suggesting that additional 
disclosure be required in lieu of imposing a 20% ceiling). Some 
commenters were also concerned that the Commission might amend Rule 
430B of the Securities Act to vary the application of Section 11 
liability to the various parties involved in a shelf registration 
statement based on the size of the issuer. See letters from BDO 
Seidman, LLP; Center for Audit Quality; Deloitte & Touche LLP; Ernst 
& Young LLP (``Ernst & Young''); and KPMG LLP (``KPMG''). These 
commenters maintained that the filing of a prospectus supplement to 
a shelf registration statement should not be considered a new 
effective date for purposes of Section 11 liability for auditors, 
regardless of the size of the issuer's public float. The set of 
comprehensive amendments in 2005, known as ``Securities Offering 
Reform,'' provide in Rule 430B that the effective date for auditors 
who previously provided consent in an existing registration 
statement for their report on previously issued financial statements 
or previous reports on management's assessment of internal control 
over financial reporting does not change upon the filing of a 
prospectus supplement unless the prospectus supplement (and any 
Exchange Act report incorporated by reference into the prospectus 
and registration statement) contains new audited financial 
statements or other information as to which the auditor is an expert 
and for which a new consent is required. Release No. 33-8591. Two of 
the commenters emphasized that taking a different approach for 
smaller issuers would run the risk of creating substantial delays in 
the filing process (as auditors would have to provide new consents) 
and issuers would likely lose a substantial amount of flexibility in 
accessing the public markets. See letters from Ernst & Young and 
KPMG. We agree with these commenters and are not modifying Rule 430B 
in connection with this rulemaking.
    \46\ See letters from the ABA; Feldman Weinstein; Morrison & 
Foerster; M. Shichtman; and Williams Securities. The SBA also 
suggested raising the threshold in its letter, but did not specify 
the size of the increase it favored. We note that some of the 
commenters who advocated increasing the threshold to one-third of a 
company's public float reasoned that doing so would harmonize the 
amount of securities which could be registered in a primary offering 
on Forms S-3 and F-3 under the proposed rule with a purported staff 
position in a different context. See letter from Feldman Weinstein. 
See also letters from Morrison & Foerster and Williams Securities. 
The purported staff position is not related to the instant Form S-3 
and Form F-3 amendments, which concern expanding the availability of 
these forms for primary offerings to more companies. Rather, the 
staff has indicated that some resale registration statements may 
raise a concern where, among other things, there is an unusually 
large number of shares being registered in relation to the number of 
the issuer's outstanding shares held by nonaffiliates. In these 
situations, the staff may question whether the offering is a bona 
fide secondary transaction or a disguised primary offering.
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    After considering these comments, we have decided to set the 
twelve-month offering threshold under new General Instruction I.B.6. of 
Form S-3 at one-third of an issuer's public float. We are comfortable 
making this adjustment in light of the additional protection afforded 
by the new requirement in General Instruction I.B.6(c) of Form S-3 that 
eligibility under this instruction is contingent upon the registrant 
having a class of common equity securities listed and registered on a 
national

[[Page 73539]]

securities exchange, as discussed below. We think raising the cap to 
one-third of public float will allow an offering that is large enough 
to help an issuer raise a relatively significant amount of capital when 
market opportunities arise, but still small enough for us to moderate 
the expansion of shelf eligibility with appropriate attention to the 
protection of investors, including the effect such new issuance may 
have on the market for a thinly traded security.
    Under these amendments, offerings above the one-third cap would 
violate the form requirements of Form S-3. In order to provide absolute 
clarity on this point, we are adopting a corresponding amendment to 
Rule 401(g) \47\ of the Securities Act to provide that violations of 
the one-third cap would also violate the requirements as to proper form 
under Rule 401 even though the registration statement previously has 
been declared effective.\48\
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    \47\ 17 CFR 230.401(g).
    \48\ See letter from the ABA (recommending that the Commission 
not revise current Rule 401(g) to provide that an issuer will be 
deemed to have used an incorrect registration form if it exceeds the 
one-third cap under new General Instruction I.B.6.).
---------------------------------------------------------------------------

    Our objective with this rulemaking is to provide smaller companies 
some additional financing flexibility that will aid them in their 
efforts to raise capital, but at the same time give the Commission an 
opportunity to consider the impact of this expansion in an environment 
where there are limitations in place to address investor protection. As 
a general proposition, the greater the magnitude of the offering, the 
more likely it is that the transaction will be transformative to the 
issuer rather than routine in nature, such as the incremental expansion 
of the issuer's business. At the current time, we believe that 
securities transactions exceeding one-third of the value of an issuer's 
public float are generally of such significance to the issuer that the 
opportunity for specific staff review of the transaction and a greater 
window for underwriter due diligence are advisable.
    We believe that the one-third cap will help a substantial number of 
smaller public companies with their capital raising needs, which is 
supported by our observations of market activity of recent shelf 
registrants.\49\ Moreover, it is important to understand that the one-
third cap imposed by new General Instruction I.B.6. to Form S-3 only 
relates to other primary offerings conducted pursuant to this 
instruction. Accordingly, an issuer that is temporarily prevented from 
utilizing Form S-3 for shelf offerings to raise capital would not be 
foreclosed from registering a primary offering of securities on Form S-
1 or in private placements. The new eligibility instruction that we are 
adopting today is not meant to be mutually exclusive. Rather, it is 
designed to provide added flexibility to smaller public companies by 
giving them supplemental avenues of capital formation. As we have 
stated previously, our adoption of this amendment does not foreclose 
the possibility that we may revisit the appropriateness of this one-
third cap at a later time. For now, however, we think that this 
limitation promotes small business capital formation consistent with 
the protection of investors.
---------------------------------------------------------------------------

    \49\ When we further narrowed the set of shelf registration 
takedowns reviewed (the original review is referenced in n. 42) to 
companies with at least one class of listed common equity, the data 
indicated that 75% of sample registrants took down the equivalent of 
one-third or less of their public float annually off the shelf. For 
the majority of these sample registrants, therefore, an offering 
ceiling of one-third would appear satisfactory.
---------------------------------------------------------------------------

    At the same time that we are adopting an offering ceiling under new 
General Instruction I.B.6. of one-third of an issuer's public float, we 
are also making eligibility under this new rule contingent on the 
issuer having a class of common equity securities listed and registered 
on a national securities exchange.\50\ In the Proposing Release, we 
requested comment as to whether we should allow all companies with a 
public trading market, including companies with securities traded in 
the over-the-counter market such as the Pink Sheets, to use the amended 
Form S-3 as proposed or whether we should limit eligibility to inter-
dealer quotations systems with some level of oversight and operated by 
a self-regulatory organization.\51\ In addition, we asked whether there 
were other restraints on the proposed expansion of Form S-3 eligibility 
that should be considered, such as restrictions on the class of issuers 
that could utilize the revised forms.\52\ Most commenters did not 
address these specific points directly, but their responses generally 
suggested that they would not favor further restrictions on a 
registrant's form eligibility in addition to those already 
proposed.\53\ However, one commenter expressed concern over the risks 
inherent in expanding the base of companies eligible for primary 
offerings on Forms S-3 and F-3 and, accordingly, recommended that Form 
S-3 and Form F-3 eligibility be contingent on full implementation of 
both the management and auditor attestation report requirements of 
Section 404.\54\ At a minimum, the commenter opposed any weakening of 
the proposed limitations on eligibility in the final rule.
---------------------------------------------------------------------------

    \50\ New General Instruction I.B.6(c) of Form S-3.
    \51\ The Proposing Release, at 35127.
    \52\ Id.
    \53\ See, for example, letters from the ABA; Feldman Weinstein; 
Malizia Spidi; Morrison & Foerster; SBA; M. Shichtman; and Williams 
Securities.
    \54\ See letter from the CII. See also nn. 29 and 31 discussing 
this letter.
---------------------------------------------------------------------------

    Allowing only companies with at least one class of listed common 
equity securities to avail themselves of new General Instruction I.B.6. 
should help to minimize potential abuses that may arise from expanded 
shelf registration. This is because the exchanges' listing rules and 
procedures, as well as other requirements, provide an additional 
measure of protection for investors.\55\ Exchanges have both 
quantitative and qualitative listing rules that are designed to 
evidence that their listed issuers meet specified minimum requirements 
when the issuer first lists on the exchange and thereafter. Initial 
listing standards serve as a means for an exchange to screen issuers 
and to provide listed status to issuers with sufficient public float, 
investor base, and trading interest to assure that the market for the 
issuer's security has the depth and liquidity necessary to maintain 
fair and orderly markets. Maintenance listing criteria help assure that 
the issuer continues to meet the exchange's standards for depth and 
liquidity. While the exchanges' listing standards with respect to 
common equity securities can vary,\56\ generally the exchanges require 
the issuer to meet minimum standards relating to number of public 
shareholders and shares outstanding, shareholder approval of specified 
matters, and, in certain cases, earnings or income. Moreover, the 
exchanges' listing standards generally require issuers of common equity 
securities to meet strong corporate governance standards, including the 
requirement that the issuer's board be composed of a majority of 
independent directors and that key committees be composed solely of 
independent directors.\57\ Exchange-listed securities

[[Page 73540]]

also are subject to real-time reporting of quotation and transaction 
information, which benefits investors by apprising them of current 
market information about the security. Together, these common 
attributes allow the exchanges to sustain efficient and liquid markets 
that should help monitor the expansion of shelf registration 
eligibility on Form S-3 and help mitigate any attendant risks posed by 
expansion.\58\
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    \55\ In contrast to the national securities exchanges, automated 
inter-dealer quotation systems such as the Over-the-Counter Bulletin 
Board and the Pink Sheets do not provide companies with the ability 
to list their securities, but, rather, serve as a medium for the 
over-the-counter securities market by collecting and distributing 
market maker quotes to subscribers. These automated inter-dealer 
quotation systems do not maintain or impose listing standards, nor 
do they have a listing agreement or arrangement with the companies 
whose securities are quoted through them.
    \56\ See, for example, Nasdaq Rules 4300 et seq., and NYSE 
Listed Company Manual (``LCM''), Sections 1 through 9.
    \57\ See, for example, Nasdaq Rule 4350 and NYSE LCM Section 3, 
which require listed issuers to comply with Rule 10A-3 under the 
Exchange Act, 17 CFR 240.10A-3, with regard to audit committee 
responsibility and independence, as well as an additional, broader 
array of corporate governance standards.
    \58\ See n. 28.
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    We also note that limiting eligibility under new General 
Instruction I.B.6. to companies with common equity securities listed on 
a national securities exchange is more consistent with our historical 
treatment of secondary offering eligibility on Form S-3.\59\ We think 
this parallel approach is sensible given that Form S-3 has for many 
years allowed registrants to conduct secondary offerings on the form 
irrespective of public float, so long as the securities offered thereby 
were listed securities.\60\
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    \59\ See General Instruction I.B.3. of Form S-3.
    \60\ In its comment letter, the ABA pointed out that, as 
proposed, the eligibility standards for primary offerings on Form S-
3 would have allowed both ``listed and unlisted'' reporting 
companies to make primary offerings on the form, while resale 
transactions on Form S-3 are limited to reporting companies whose 
securities are listed on a national securities exchange or quoted on 
the automated quotation system of a national securities association. 
In addition, the ABA noted that the staff of the Commission, through 
interpretive guidance, has historically permitted unlisted companies 
that are primarily eligible to use Form S-3 under the existing rules 
to register resale transactions on Form S-3 notwithstanding that the 
resale eligibility rules of Form S-3 require that the securities be 
listed on an exchange or quoted on the automated quotation system of 
a national securities association. We believe that the final rules, 
by limiting primary offering eligibility under new General 
Instruction I.B.6. to companies with equity securities listed on a 
national securities exchange, address these inconsistencies noted by 
the ABA in its comment letter.
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    Some commenters noted that, under the proposed amendments, 
companies with securities not listed or authorized for listing on a 
national securities exchange would nevertheless be eligible to offer 
such securities in primary offerings on Form S-3 or Form F-3 so long as 
there was a public trading market for their securities.\61\ Because 
such securities would not be ``covered securities,'' as defined by 
Section 18(b) of the Securities Act, commenters expressed concern that 
some companies registering transactions under new General Instruction 
I.B.6. might well be subject to state securities registration 
requirements, which would frustrate the speed and efficacy of shelf 
registration. However, because we are limiting eligibility under the 
new rules to companies with listed equity, in most cases issuers will 
not be subject to state securities registration requirements in their 
efforts to raise capital utilizing new General Instruction I.B.6. By 
requiring issuers to have at least one listed class of common equity 
securities, most securities offered pursuant to the new eligibility 
rules will be ``covered securities,'' as defined by Section 18(b) of 
the Securities Act, and therefore exempt from state Blue Sky 
regulation.\62\
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    \61\ See letters from the ABA; Feldman Weinstein; Morrison & 
Foerster; and Williams Securities Law.
    \62\ The exception would be a class of securities that are 
neither listed nor at least equal in seniority to a class of the 
issuer's listed securities. See Section 18(b)(1)(A) through (C) of 
the Securities Act [15 U.S.C. 77r(b)(1) (A) through (C)].
---------------------------------------------------------------------------

2. Calculation of Amount of Securities That May Be Sold
    To ascertain the amount of securities that may be sold pursuant to 
Form S-3 by registrants with a public float below $75 million, the new 
rule requires a two-step process:
     Determination of the registrant's public float immediately 
prior to the intended sale; and
     Aggregation of all sales of the registrant's securities 
pursuant to primary offerings under General Instruction I.B.6. of Form 
S-3 in the previous 12-month period (including the intended sale) to 
determine whether the one-third cap would be exceeded.

The new rule requires registrants to compute their public float by 
reference to the price at which their common equity was last sold, or 
the average of the b