A shelf registration statement (or form S-3, in SEC terminology), is a flexible registration with the SEC that allows an issuer to essentially “pre-register securities” without a specified issuance date or terms.
The issuer of a shelf registration is not required to specify the exact amount or offering price of each type of security in its registration statement, but includes only an aggregate dollar amount of securities to be offered. An S-3 has a three-year lifespan, during which time the securities are “put on the shelf,” so to speak, allowing securities to be sold at any point within the registration period. An effective shelf registration statement permits issuers to take securities “off the shelf” and offer them to the public on a continuous or delayed basis.
Shelf registrations are generally used when the issuer does not intend to immediately sell its securities. It can be used for both debt and equity offerings, which can be sold in one or more offerings from time to time. If utilized for equity, the shares in a shelf registration must be primary shares. There is no limit on the amount of securities that can be registered, and takedowns are communicated via a prospectus supplement.
To be S-3 eligible, a company must have been a public company for at least 12 months prior to filing the registration statement, have a timely reporting history for the last 12 months, and cannot not be in default on indebtedness or dividend payments since the end of its last fiscal year.
Shelf-eligible companies are divided into two classes based on the size of the issuer’s public float.
- A larger company can use a shelf if (1) within 60 days of filing the S-3, the aggregate market value of its public float is at least $75 million, or (2) only nonconvertible investment-grade securities are being offered.
- Smaller companies with a public float of less than $75 million can utilize a shelf registration if the company (1) meets all of the other eligibility requirements, (2) is not a shell company, (3) has a class of common equity securities listed on a national securities exchange, and (4) does not sell in a 12-month period more than the equivalent of one-third of its public float.
Although there is no limit on the number of shares an issuer may sell under a shelf registration statement, in certain circumstances the issuer may be required to obtain the consent of its stockholders.
Pros and Cons of a Shelf Registration:
As with any financing tool, there are pros and cons associated with a shelf registration. Some of the advantages of utilizing a shelf registration are outlined below:
- Allows immediate access to the market without the need to wait for SEC clearance, as the SEC will not review offering documents for a takedown under an existing shelf registration.
- Allows the issuer to opportunistically take advantage of strong capital market windows or strong company stock performance windows.
- Allows companies to incorporate by reference reports that are filed after the effective date of the S-3, thus eliminating the need to file post-effective amendments and prospectus supplements upon new business and financial developments.
- Lower cost than an S-1.
However, unfortunately the capital markets do not always appreciate the filing of a shelf registration as a positive event. Complaints arise primarily for some of the following reasons:
- Investors seek to avoid dilution, and as a precursor to a potential upcoming issuance of shares, a dilutive event, the filing of a shelf registration statement is viewed negatively. The hope, of course, is that if S-3 filers sell securities, they do so at a higher price to minimize shareholder dilution.
- Filing a shelf registration signals to the market that a financing is forthcoming, which creates an overhang on the stock and can depress its performance. Big institutions might opt not to buy shares in the open market when they can instead wait and buy in an upcoming follow-on financing.
- Some might view an active shelf registration as easy access to capital for management that can potentially be used haphazardly.
Capital Market Trends: Why Shelf Registrations Have Become More Popular
In recent years, access to capital markets has been very volatile, making it challenging for companies– particularly those in the growth stage – to fund their businesses via the public markets. Raising capital during these times has been difficult for multiple reasons including that available capital has decreased and doing public offerings can be costly, not to mention the negative impact to the price of a stock if an offering is announced but not completed.
As these trends have developed, less traditional approaches to raising public capital have emerged. These less traditional (or alternative) approaches – whether they are registered direct offerings, “at-the-market” offerings, “over-the-wall” offerings, or “overnight” offerings – have the intention of allowing companies to take advantage of an open “market window” on short notice, and to quickly and cost-effectively raise capital.
Regardless of the approach, to raise money as a public company – even via a not traditional method – requires a registration statement. Thus, the popularity of the shelf registration has grown.
Shelf registration statements are very useful tools that allow issuers to quickly and cost-effectively access the capital markets, providing the ability to opportunistically raise capital. Shelf registrations give issuers great flexibility in timing, structure, amount and terms of a financing and are a tool that should be understood and used appropriately by public companies. For more information on shelf registrations and other methods of raising capital, contact us.
Debbie Kaster, Managing Director