[Federal Register: December 27, 2007 (Volume 72, Number 247)]
[Rules and Regulations]
[Page 73533-73552]
[DOCID:fr27de07-15]

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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

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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<PHONE_NUMBER>, or
the Office of Chief Counsel, at<PHONE_NUMBER>, 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 http://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

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 http://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 http://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:
http://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

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 http://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

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.
---------------------------------------------------------------------------

     Meet the other registrant eligibility conditions for the
use of Form S-3; \37\
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------

     Have a class of common equity securities that is listed
and registered on a national securities exchange; \38\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     Are not shell companies \40\ and have not been shell
companies for at least 12 calendar months before filing the
registration statement.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \41\ New General Instruction I.B.6(c) of Form S-3.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

    \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

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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 bid and asked prices of their common equity, in the
principal market for the common equity as of a date within 60 days
prior to the date of sale.\63\ Then, for purposes of calculating the
aggregate market value of securities sold during the preceding period
of 12 calendar months, the rule requires registrants to add together
the gross sales price for all primary offerings pursuant to new General
Instruction I.B.6. to Form S-3 during the preceding period of 12
calendar months. Based on that calculation, registrants will be
permitted to sell securities with a value up to, but not greater than,
the difference between one-third of their public float and the value of
securities sold in primary offerings on Form S-3 under new General
Instruction I.B.6. in the prior period of 12 calendar months.
---------------------------------------------------------------------------

    \63\ Instruction 1 to new General Instruction I.B.6. of Form S-
3. This is modeled after the calculation of public float provided in
the instruction to General Instruction I.B.1. of Form S-3. However,
the relevant date for purposes of Instruction 1 to new General
Instruction I.B.6. is the date of sale, while the relevant date for
purposes of General Instruction I.B.1. is the date of filing.
---------------------------------------------------------------------------

    The aggregate gross sales price includes sales of equity as well as
debt offerings.\64\ Therefore, eligible registrants will also be able
to offer non-investment grade debt on Form S-3.\65\ In the case of
securities that are convertible into or exercisable for equity shares,
such as convertible debt or warrants, however, we are requiring that
registrants calculate the amount of securities they may sell in any
period of 12 calendar months by reference to the aggregate market value
of the underlying equity shares in lieu of the market value of the
convertible securities. The aggregate market value of the underlying
equity will be based on the maximum number of shares into which the
securities sold in the prior period of 12 calendar months are
convertible as of a date within 60 days prior to the date of sale,
multiplied by the same per share market price of the registrant's
equity used for purposes of calculating its public float pursuant to
Instruction 1 to new General Instruction I.B.6. of Form S-3. We believe
calculating the one-third cap based on the market value of the
underlying securities makes it less likely that convertible securities
would be structured and offered in a manner designed to avoid the
effectiveness of the cap.
---------------------------------------------------------------------------

    \64\ As adopted, the method of calculating the one-third cap on
sales is the same whether the registrant is selling equity or debt
securities, or a combination of both. As we discussed in the
Proposing Release, we had some concern that we would be
inadvertently encouraging issuances of debt securities over equity
if the proposed limitation on sales excluded debt. Because we do not
intend for the rule to dictate or otherwise influence the overall
form of security that companies offer, we have adopted the one-third
cap on sales to include both equity and debt.
    \65\ The provisions of Form S-3 in effect today allow
registrants to offer non-convertible investment grade debt
securities on Form S-3 regardless of the size of their public float.
General Instruction I.B.2. to Form S-3.
---------------------------------------------------------------------------

    It is important to note that the one-third cap on sales is not
intended to impact a holder's ability to convert or exercise derivative
securities purchased from the company. For example, this limit will
apply to the amount of common stock warrants that a company can sell
under Form S-3, and the number of common shares into which the warrants
are exercisable will be relevant for determining the company's
compliance with the one-third cap at the time the warrants were sold,
but the number will not impede the purchaser's later exercise of the
warrants.
    As adopted, the one-third cap is designed to allow issuers
flexibility. Because the restriction on the amount of

securities that can be sold over a period of 12 calendar months is
calculated by reference to a registrant's public float immediately
prior to a contemplated sale, as opposed to the time of the initial
filing of the registration statement, the amount of securities that an
issuer is permitted to sell can continue to grow over time as the
issuer's public float increases. Therefore, the value of one-third of a
registrant's float during the period that a shelf registration
statement is effective may, at any given time, be much greater than at
the time the registration statement was initially filed. Registrants
may therefore benefit from increases in the size of their public float
during the time that the registration statement is effective.
Conversely, the amount of securities that an issuer is permitted to
sell at any given time may also decrease if the issuer's public float
contracts. It is important to note, however, that a contraction in a
registrant's float, such that the value of one-third of the float
decreases from the time the registration statement was initially filed,
would not necessarily run afoul of the cap because the relevant point
in time for determining whether a registrant has exceeded the threshold
is the time of sale. If the sale of securities, together with all
securities sold in the preceding period of 12 calendar months, does not
exceed one-third of the registrant's float calculated within 60 days of
the sale, then the transaction would not violate new General
Instruction I.B.6. to Form S-3 even if the registrant's public float
later drops to a level such that the prior sale now accounts for over
one-third of the new lower float.\66\ To keep track of the securities
sold under General Instruction I.B.6., the revised instructions to Form
S-3 require registrants to disclose in each prospectus filed with the
Commission their updated calculation of public float and the amount of
securities offered pursuant to this instruction during the prior 12
calendar month period that ends on, and includes, the date of the
prospectus.\67\
---------------------------------------------------------------------------

    \66\ Along these lines, under the amendments registrants will be
able to sell up to the equivalent of the full one-third of their
public float immediately following the effective date of their
registration statement, provided that there were no prior sales
pursuant to new General Instruction I.B.6. of Form S-3. This is
consistent with Rule 415(a)(1)(x), which was amended in 2005 to
allow primary offerings on Form S-3 or Form F-3 to occur immediately
after effectiveness of a shelf registration statement. Release No.
33-8591. Assuming that the sale of the entire one-third of public
float allotted under the new form eligibility rules complied with
the rule at the time of the takedown, the subsequent contraction in
the registrant's public float will not invalidate this prior sale.
    \67\ Instruction 7 to new General Instruction I.B.6.
---------------------------------------------------------------------------

    Because Form S-3 registrants who meet the $75 million float
threshold of existing General Instruction I.B.1. at the time their
registration statement is filed are not subject to restrictions on the
amount of securities they may sell under the registration statement
even if their float falls below $75 million subsequent to the effective
date of the Form S-3 but prior to the update required under Section
10(a)(3) of the Securities Act, we believe it is appropriate to provide
issuers registering on Form S-3 pursuant to new General Instruction
I.B.6. the same flexibility if their float increases to a level that
equals or exceeds $75 million subsequent to the effective date of their
Form S-3 without the additional burden of filing a new Form S-3
registration statement. Therefore, we are adopting an instruction to
I.B.6. that lifts the one-third cap on additional sales in the event
that the registrant's float increases to $75 million or more subsequent
to the effective date of the registration statement.\68\ Of course,
pursuant to Rule 401 under the Securities Act, registrants are also
required to recompute their public float each time an amendment to the
Form S-3 is filed for the purpose of updating the registration
statement in accordance with Section 10(a)(3) of the Securities Act--
typically when an annual report on Form 10-K is filed. In the event
that the registrant's public float as of the date of the filing of the
annual report is less than $75 million, the one-third cap will be
reimposed for all subsequent sales made pursuant to new General
Instruction I.B.6. and will remain in place until the registrant's
float equals or exceeds $75 million.
---------------------------------------------------------------------------

    \68\ Instruction 3 to new General Instruction I.B.6. of Form S-
3.
---------------------------------------------------------------------------

    The following examples illustrate how the new Instruction will
operate.\69\ For purposes of these examples, we are assuming that the
hypothetical registrants satisfy the registrant eligibility
requirements in General Instruction I.A. of Form S-3, are not shell
companies, and have at least one class of common equity securities
listed and registered on a national securities exchange.
---------------------------------------------------------------------------

    \69\ The examples that follow are for illustrative purposes only
and are not intended to be indicative of actual market activity.
---------------------------------------------------------------------------

Example A

    On January 1, 2009, a registrant with a public float of $25 million
files a shelf registration statement on Form S-3 pursuant to new
General Instruction I.B.6. intending to register the offer and sale of
up to $50 million of debt and equity securities over the next three
years from time to time as market opportunities arise.\70\ The
registration statement is subsequently declared effective. In March
2009, the registrant decides to sell common stock off the registration
statement. To determine the amount of securities that it may sell in
connection with the intended takedown, the registrant calculates its
public float as of a date within 60 days prior to the anticipated date
of sale, pursuant to Instruction 1 to new General Instruction I.B.6.
Calculating that its public float has risen to $30 million, the
registrant determines that the total market value of all sales effected
pursuant to new General Instruction I.B.6. over the past year,
including the intended sale, may not exceed $10 million, or one-third
of the registrant's float. Since the registrant has conducted no prior
securities offerings on Form S-3 pursuant to new General Instruction
I.B.6., it is able to sell the entire $10 million off the Form S-3.
---------------------------------------------------------------------------

    \70\ Although only one-third of the public float may be sold in
any year, a company may register a larger amount. Release No. 33-
8591 at 44774-5 (discussing the adoption of an amendment to Rule 415
that eliminated limits on the amount of securities that may be
registered on Form S-3 or Form F-3 under Rule 415(a)(1)(x) and Rule
415(a)(1)(ix)).
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    Assuming that it sold the entire $10 million of securities in March
2009, the registrant in September 2009 once again contemplates a
takedown off the shelf. It determines that its public float (as
calculated pursuant to Instruction 1 to new General Instruction I.B.6.)
has again risen, this time to $54 million. Because one-third of $54
million is $18 million, the registrant is now able to sell additional
securities in accordance with new General Instruction I.B.6(a), even
though in March 2009 it took down the equivalent of what was then the
entire one-third of its float. However, because the registrant has
already sold $10 million worth of its securities within the 12 calendar
months prior to the contemplated sale, the registrant may sell no more
than $8 million of additional securities at this time ($18 million
minus $10 million of securities previously sold).
    In December 2009, the registrant determines that its public float
has risen to $78 million. To this point, assuming it has only sold an
aggregate of $18 million of its securities pursuant to the subject Form
S-3 as described above, it has $32 million of securities remaining on
the registration statement and potentially available for takedown (the
total amount registered of $50 million, less the $18 million previously
sold).

Because one-third of $78 million is $26 million, and the registrant has
already sold $18 million within the previous year, new General
Instruction I.B.6(a) will, in most circumstances, prohibit the
registrant from selling more than an additional $8 million of
securities in the latest offering. However, under Instruction 3 to new
General Instruction I.B.6., the registrant is no longer subject to the
one-third cap on annual sales because its float has exceeded $75
million. If it chooses, the registrant may sell the entire $32 million
of securities remaining on the registration statement all at once or in
separate tranches at any time until the company next updates the
registration statement pursuant to Section 10(a)(3) by filing its Form
10-K. This will be the case even if the registrant's float subsequently
falls below $75 million before it files that Form 10-K, at which time
the registrant is required to recompute its public float in accordance
with Rule 401. In the event that the registrant's public float as of
the date of that Form 10-K filing is less than $75 million, the one-
third cap will be reimposed for all subsequent sales made pursuant to
new General Instruction I.B.6. and will remain in place until the
registrant's float equals or exceeds $75 million.

Example B

    A registrant has 12 million shares of voting common equity
outstanding held by nonaffiliates. The market price of this stock is $5
per share, so the registrant has a public float of $60 million. The
registrant has an effective Form S-3 shelf registration statement filed
in reliance on new General Instruction I.B.6. of Form S-3, pursuant to
which the registrant wants to issue $10 million of convertible debt
securities which will be convertible into common stock at a 10%
discount to the market price of the common stock. Pursuant to
Instruction 2 to new General Instruction I.B.6., the amount of
securities issued is measured by reference to the value of the
underlying common stock rather than the amount for which the debt
securities will be sold. At the 10% discount, the conversion price is
$4.50 and, as a result, 2,222,222 shares currently underlie the $10
million of convertible debt. Because the current market price of those
underlying shares is $5 per share, for purposes of General Instruction
I.B.6. the value of the securities being offered is $11,111,110
(2,222,222 shares at $5 per share), which is less than the $20 million
allowed by the one-third cap (one-third of $60 million).
    After the convertible debt securities are sold and are outstanding,
the registrant contemplates an additional takedown. To determine the
amount of securities that the registrant may sell under General
Instruction I.B.6. in the anticipated offering, the registrant must
know its current public float and must calculate the aggregate market
value of all securities sold in the last year on Form S-3 pursuant to
General Instruction I.B.6. Instruction 2 to new General Instruction
I.B.6. requires that the registrant compute the market value of
convertible debt securities sold under I.B.6. by reference to the value
of the underlying common stock rather than the amount for which the
debt securities were sold. With respect to the notes that were sold and
have been converted, the aggregate market value of the underlying
common stock is calculated by multiplying the number of common shares
into which the outstanding convertible securities were converted times
the market price on the day of conversion. With respect to the notes
that were sold but have not yet been converted, the aggregate market
value of the underlying common stock is calculated by multiplying the
maximum number of common shares into which the notes are convertible as
of a date within 60 days prior to the anticipated sale by the per share
market price of the registrant's equity used for purposes of
determining its current float.\71\
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    \71\ The date chosen by the registrant for determination of the
maximum number of shares underlying the convertible notes must be
the same date that the registrant chooses for determining its market
price in connection with the calculation of public float pursuant to
new General Instruction I.B.6. See Instruction 5 to new General
Instruction I.B.6.
---------------------------------------------------------------------------

    In this example, assume that the registrant has a current per share
stock price of $5.55. If half of the notes converted into common stock
while the per share market price was $5.00 ($4.50 discount), then, for
purposes of Instruction 2 to new General Instruction I.B.6., the value
of that prior issuance is $5,555,555 (half of the notes divided by the
discounted conversion price of $4.50 and then multiplied by $5, the
market price on the day of conversion).
    As for the notes that have not yet been converted, the aggregate
market value of the underlying common stock is determined by
calculating the number of shares that may be received upon conversion
and multiplying that by the current market value of $5.55. Therefore,
the outstanding note amount ($5 million) is divided by the discount
conversion price ($5), resulting in 1,000,000 shares and this amount is
then multiplied by the current market value of $5.55. Thus, for
purposes of Instruction 2 to new General Instruction I.B.6., $5,550,000
is the value of the outstanding notes that have not yet been converted.
Adding this to the value of the notes that have already been converted
results in a total value of $11,105,555 having been issued under this
Form S-3.
    To determine the amount of additional securities that the
registrant may sell under General Instruction I.B.6., the registrant
should add the value of the notes issued ($11,105,555) plus the value
of all other securities sold by the registrant pursuant to Instruction
I.B.6. during the preceding 12 calendar months. If this amount is less
than one-third of the registrant's current public float, it may sell
additional securities with a value up to, but not greater than, the
difference between one-third of its current public float and the value
of all securities sold by it pursuant to Instruction I.B.6. during the
preceding 12 calendar months.

Example C

    A registrant has an effective registration statement on Form S-3,
filed pursuant to new General Instruction I.B.6., through which it
intends to conduct shelf offerings of its securities. At the time of
its first shelf takedown, the registrant's public float is equal to $21
million (which means that the maximum amount available to be sold under
the one-third cap would be $7 million). Based on new General
Instruction I.B.6(a), the registrant sells $3 million of its debt
securities. Six months later, the registrant's public float has
decreased to $9 million. The registrant wishes to conduct an additional
takedown of debt securities off the shelf but, because of the reduction
in its float, it is prohibited from doing so. This is because with a
public float of $9 million, General Instruction I.B.6(a) only allows
the registrant to sell a maximum of $3 million worth of securities
(one-third of $9 million) pursuant to the registration statement during
the prior period of 12 calendar months that ends on the date of the
contemplated sale. However, the registrant has already sold securities
valued (for purposes of new General Instruction I.B.6.) at $3 million
in the 6 months prior to the contemplated sale and so must wait until
at least one full year has passed since the $3 million sale of
securities to undertake another offering off the Form S-3 unless its
float increases. Note that although the registrant's float does not
allow additional sales, the $3 million takedown of securities 6 months
prior does not violate the one-third cap because, at the time of that
prior sale, the registrant's float was $21 million.

Example D

    Pursuant to new General Instruction I.B.6., a registrant with a
public float of $48 million files a Form S-3, which the registrant
intends to use as a universal shelf registration statement to sell up
to $100 million of debt or equity securities, or a combination of both
at any time or from time to time.
    After the registration statement is declared effective, the
registrant decides to do a takedown off the shelf comprised of
convertible promissory notes and warrants to purchase to common stock.
The notes are convertible into shares of common stock at a 50% discount
to the market price of the common stock. The warrants are exercisable
for shares of common stock at an exercise price equal to $5 per share.
Because the registrant's float is $48 million, it may sell up to $16
million of securities (one-third of $48 million) pursuant to General
Instruction I.B.6. The registrant wants to do a takedown of $1 million
in convertible promissory notes. The registrant intends to issue the
notes along with warrants to purchase an additional 10,000 shares of
its common stock.
    In order to determine if this sale is permissible under General
Instruction I.B.6., the registrant must calculate the amount of
securities it has sold pursuant to General Instruction I.B.6. in the
previous 12 months and add this to the value of the securities in the
intended sale. If the combined value is $16 million or less, it may
proceed with the sale.
    Assume that the registrant has not sold any securities pursuant to
the Instruction I.B.6. in the previous 12 months. To determine the
value of the convertible promissory notes, the registrant is required
by Instruction 2 to General Instruction I.B.6. to calculate the value
of the shares underlying the convertible notes. The notes are
convertible into shares of common stock at a 50% discount to the market
price of the common stock. Assuming that the market price of the common
stock is $2 per share, the notes are convertible as follows: $1 million
(the price of the notes) divided by 1 (50% of the market price of the
common stock) is equal to 1 million shares of common stock that the
purchasers will receive upon conversion. Since the market price of the
stock is $2 per share, the value of the 1 million shares is $2 million
(1 million shares at $2 per share). Therefore, the value of the
accompanying warrants for 10,000 shares must be less than $14 million
for the sale to be within the one-third cap (one-third of $48 million,
less the $2 million of common stock underlying the convertible notes).
    To calculate the value of the warrants, which are derivative
securities, Instruction 2 to General Instruction I.B.6. requires that
the registrant calculate the value of the shares underlying the
warrants in lieu of the market value of the warrants. Under the terms
of the warrants, the warrants are exercisable for 10,000 shares at an
exercise price of $5 per share.
    Instruction 2 to General Instruction I.B.6. states that the
aggregate market value of the underlying equity shall be calculated by
multiplying the maximum number of common equity shares into which the
derivative securities are convertible or for which they are
exercisable, as of a date within 60 days prior to the date of sale, by
the same per share market price of the registrant's equity used for
purposes of calculating the registrant's float. Assuming that the
market price of the registrant's stock is $2 per share, the value of
the shares underlying the warrants is $20,000 (10,000 shares multiplied
by $2 per share). Because the underlying value of the convertible notes
is $2 million and the underlying value of the warrants is $20,000, the
intended sale has a value of $2,020,000 and does not exceed the one-
third cap (of $16 million).
3. Exclusion of Shell Companies
    In accordance with our desire to expand Form S-3 eligibility
consistent with the protection of investors, the expanded eligibility
rules specifically exclude shell companies, which will be prohibited
from registering securities in primary offerings on Form S-3 unless
they meet the minimum $75 million float threshold of General
Instruction I.B.1.\72\ While we are not passing on the relative merits
of shell companies and we recognize that these entities are used for
many legitimate business purposes, we have repeatedly stated our belief
that these entities may give rise to disclosure abuses.\73\ Under the
final rules, a former shell company that cannot meet the $75 million
float criterion but otherwise satisfies the registrant requirements of
Form S-3 will become eligible to use Form S-3 to register primary
offerings of its securities, provided that:
---------------------------------------------------------------------------

    \72\ This prohibition is intended to apply equally to ``blank
check companies,'' as such entities are defined in Rule 419 of the
Securities Act. However, because we believe that the definition of
``shell company'' under Rule 405 is expansive enough to encompass
blank check companies for purposes of excluding them from S-3
eligibility under new General Instruction I.B.6., we do not exclude
them separately. See Use of Form S-8 and Form 8-K by Shell
Companies, Release No. 33-8407 (Apr. 15, 2004) [69 FR 21650], at n.
20:
    We believe that under today's proposals all blank check
companies as defined in Rule 419 would be considered shell companies
until they acquire an operating business or more than nominal
assets. Not all shell companies, however, would be classified as
blank check companies under Rule 419.
    \73\ See, for example, Release No. 33-8591; Release No. 33-8587;
Release No. 33-7393; and Penny Stock Definition for Purposes of
Blank Check Rule, Release No. 33-7024 (Oct. 25, 1993) [58 FR 58099].
---------------------------------------------------------------------------

     It has not been a shell company for at least 12 calendar
months;\74\
---------------------------------------------------------------------------

    \74\ Similarly, Form S-8 is not available to shell companies or
to former shell companies until 60 days after they have ceased being
shell companies and have filed information that would be required in
a registration statement on Form 10 or Form 20-F, as applicable, to
register a class of securities under Section 12 of the Exchange Act.
Release No. 33-8587. Unlike the eligibility rules of Form S-8,
however, a company must be reporting for at least 12 calendar months
before it is eligible under any criteria to use Form S-3. Therefore,
instead of the 60-day delay required by Form S-8, it is more
appropriate for a shell company to be prohibited from using the new
provisions of S-3 and F-3 until at least 12 calendar months after it
ceases being a shell company.
---------------------------------------------------------------------------

     It has filed information that would be required in a
registration statement on Form 10 or Form 20-F, as applicable, to
register a class of securities under Section 12 of the Exchange
Act;\75\ and
---------------------------------------------------------------------------

    \75\ This information is collectively described as ``Form 10
information.'' See Instruction 4 to new General Instruction
I.B.6(b).
---------------------------------------------------------------------------

     It has been timely reporting for 12 calendar months.\76\
---------------------------------------------------------------------------

    \76\ New General Instruction I.B.6(b) of Form S-3 addresses the
requirements pertaining to former shell companies.
---------------------------------------------------------------------------

    Ordinarily, the information required to be filed would be in a
current report on Form 8-K, reporting completion of the transaction
that caused it to cease being a shell company.\77\ In other cases, the
information may be filed in a Form 10 or Form 20-F. Consistent with the
current registrant eligibility rules of Form S-3 that require at least
12 calendar months of timely reporting, the 12 calendar-month delay
under the new rules is intended to provide investors in the former
shell company with the benefit of disclosure over a full 12-month
period in the newly structured entity prior to its use of Form S-3 for
primary securities offerings.
---------------------------------------------------------------------------

    \77\ Items 2.01(f) and 5.01(a)(8) of Form 8-K require a company
in a transaction where the company ceases being a shell company to
file a current report on Form 8-K containing the information (or
identifying the previous filing in which the information is
included) that would be required in a registration statement on Form
10 to register a class of securities under Section 12 of the
Exchange Act.
---------------------------------------------------------------------------

    Commenters held contrasting opinions of our proposal to exclude
shell companies \78\ and the requirement that former shell companies
may not rely on General Instruction I.B.6. to

Form S-3 until at least one year has elapsed since they ceased being
shell companies.\79\ Because of the limited and less comprehensive
public information available regarding shell companies, we are adopting
General Instruction I.B.6(b) as proposed to ensure that investors have
the benefit of one full year of disclosure once the entity ceases to be
a shell company. In this regard, requiring one year of timely reporting
puts our treatment of former shell companies on par with the
eligibility requirements of any other new company wishing to use Form
S-3.\80\
---------------------------------------------------------------------------

    \78\ See letters from the ABA and Morrison & Foerster
(supporting the exclusion of shell companies) and letter from M.
Baum (opposing the exclusion).
    \79\ See letters from the ABA and Morrison & Foerster
(supporting the one-year delay) and letters from Feldman Weinstein
and Williams Securities (objecting to the one-year delay and
contrasting it to the 90-day delay the Commission proposed in
Release No. 33-8813 (July 5, 2007) [72 FR 36822] in order for
shareholders of former shell companies to resell their securities in
reliance on Rule 144). This analogy to Rule 144 is inapposite. A
delay of at least 90 days under Rule 144, versus one year under Form
S-3, is not unique to shell companies. Form S-3 requires any issuer
to have been timely reporting for at least one year, while Rule 144
requires that an issuer be subject to the reporting requirements for
at least 90 days before an affiliate of a reporting issuer is able
to sell unrestricted securities under the rule.
    \80\ See General Instruction I.A.3. of Form S-3.
---------------------------------------------------------------------------

C. Amendments to Form F-3

    Form F-3, which was designed to parallel Form S-3,\81\ is the
equivalent short-form registration form available for use by ``foreign
private issuers''\82\ to register securities offerings under the
Securities Act. Similar to Form S-3, Form F-3 is available to foreign
private issuers that satisfy the form's registrant requirements and at
least one of the form's transaction requirements.\83\ The Form F-3
registrant requirements are similar to Form S-3 and generally relate to
a registrant's reporting history under the Exchange Act.\84\ In
addition, like the Form S-3 registration statement, Form F-3 limits the
ability of registrants to conduct primary offerings on the form unless
their public float equals or exceeds a particular threshold.\85\
---------------------------------------------------------------------------

    \81\ Integrated Disclosure System for Foreign Private Issuers,
Release No. 33-6360 (Nov. 20, 1981) [46 FR 58511], at 7:
    The three forms proposed under the Securities Act roughly
parallel proposed Forms S-1, S-2 and S-3 in the domestic integration
system, but the foreign system is based on the Form 20-F instead of
the Form 10-K and annual report to shareholders as the uniform
disclosure package.
    \82\ The term ``foreign private issuer'' is defined in Rule 405
of the Securities Act to mean any foreign issuer other than a
foreign government except an issuer meeting the following
conditions:
    (1) More than 50 percent of the outstanding voting securities of
such issuer are directly or indirectly owned of record by residents
of the United States; and
    (2) Any of the following:
    (i) The majority of the executive officers or directors are
United States citizens or residents;
    (ii) More than 50 percent of the assets of the issuer are
located in the United States; or
    (iii) The business of the issuer is administered principally in
the United States.
    \83\ General Instruction I. of Form F-3: ``Eligibility
Requirements for Use of Form F-3.''
    \84\ One difference is that, unlike Form S-3, General
Instruction I.A.1. of Form F-3 requires that registrants have
previously filed at least one annual report on Form 20-F, Form 10-K
or, in certain cases, Form 40-F under the Exchange Act. For an
explanation of this difference, see Simplification of Registration
and Reporting Requirements for Foreign Companies; Safe Harbors for
Public Announcements of Unregistered Offerings and Broker-Dealer
Research Reports, Release No. 33-7029 (Nov. 3, 1993) [58 FR 60307],
at 3; and Simplification of Registration and Reporting Requirements
for Foreign Companies; Safe Harbors for Public Announcements of
Unregistered Offerings and Broker-Dealer Research Reports, Release
No. 33-7053 (Apr. 19, 1994) [59 FR 21644], at 2 (explaining that the
requirement was adopted ``in order to ensure that information
regarding the issuer is available to the market'').
    \85\ General Instruction I.B.1. of Form F-3. Note that, unlike
Form S-3, the Instruction makes reference to the registrant's
``worldwide'' public float.
---------------------------------------------------------------------------

    As with Form S-3, the Commission has attempted to limit the
availability of Form F-3 for primary offerings to a class of companies
believed to provide a steady stream of corporate disclosure that is
broadly disseminated to, and digested by, the marketplace. When the
Commission adopted Form F-3 in 1982,\86\ it set the public float test
for foreign issuers at $300 million in response to public comment
recommending that the numerical test for foreign issuers be much
greater than for domestic registrants.\87\ In 1994, however, the
Commission reduced this threshold to $75 million in order to extend to
foreign issuers the benefits of short-form registration ``to the same
extent available to domestic companies.'' \88\ In explaining its
rationale, the Commission stated:
---------------------------------------------------------------------------

    \86\ Adoption of Foreign Issuer Integrated Disclosure System,
Release No. 33-6437 (Nov. 19, 1982) [47 FR 54764].
    \87\ Release No. 33-7029, at 2.
    \88\ Release No. 33-7053, at 2. In the same rulemaking, the
Commission also reduced the reporting history requirement in Form F-
3 from 36 to 12 months to match the eligibility criteria applicable
to domestic companies using Form S-3.

    [Our] experience with foreign issuers, as well as the
internationalization of securities markets, indicates that foreign
issuers with a public float of $75 million or more have a degree of
analyst following in their world-wide markets comparable to
similarly-sized domestic companies.\89\
---------------------------------------------------------------------------

    \89\ Release No. 33-7029, at 2.

    As a result, the Commission believed that expanding Form F-3
eligibility by lowering the float standard to $75 million would give
foreign issuers the same capital raising advantages enjoyed by domestic
issuers on Form S-3 consistent with investor protection.\90\
---------------------------------------------------------------------------

    \90\ The Commission stated:
    These provisions are part of the ongoing efforts of the
Commission to ease the transition of foreign companies into the U.S.
disclosure system, enhance the efficiencies of the registration and
reporting processes and lower costs of compliance, where consistent
with investor protection.
    Release No. 33-7053, at 2.
---------------------------------------------------------------------------

    In order to maintain the rough equivalency between Form S-3 and
Form F-3, which have had the same public float criteria for primary
offering eligibility since 1994,\91\ we are adopting amendments to Form
F-3 that are comparable to our changes to Form S-3. Specifically, new
General Instruction I.B.5. to Form F-3 will allow foreign private
issuers with less than $75 million in worldwide public float to
register primary offerings of their securities on Form F-3, provided:
---------------------------------------------------------------------------

    \91\ The Commission's adoption of the ``Securities Offering
Reform'' amendments in July 2005 is a recent instance where parallel
changes were made to Form S-3 and Form F-3. See Release No. 33-8591.
For example, the 2005 amendments provided that the ability to
conduct an automatic shelf offering under both Form S-3 and Form F-3
is limited to registrants that qualify as ``well-known seasoned
issuers'' under Rule 405 of the Securities Act. We note the minimum
public float threshold required to be a well-known seasoned issuer
is the same for both Form S-3 and Form F-3.
---------------------------------------------------------------------------

     They meet the other registrant eligibility conditions for
the use of Form F-3;
     The class of securities to be offered is listed and
registered on a national securities exchange;
     They do not sell more than the equivalent of one-third of
their public float in primary offerings under General Instruction
I.B.5. on Form F-3 over any period of 12 calendar months; and
     They are not shell companies and have not been shell
companies for at least 12 calendar months before filing the
registration statement.

II. Paperwork Reduction Act

A. Background

    The new rules and amendments to Forms S-3 and F-3 contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995.\92\ We published a notice requesting
comment on the collection of information requirements in the Proposing
Release and submitted these to the Office of Management and Budget for
review and approval in accordance with the Paperwork Reduction Act.\93\
The titles for the collection of information are:
---------------------------------------------------------------------------

    \92\ 44 U.S.C. 3501 et seq.
    \93\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    ``Form S-3'' (OMB Control No. 3235-0073);
    ``Form F-3'' (OMB Control No. 3235-0256);

    ``Form S-1'' \94\ (OMB Control No. 3235-0065); and
---------------------------------------------------------------------------

    \94\ Because our amendments to Form S-3 and Form F-3 are
anticipated to affect the annual number of Forms S-1 and Forms F-1
filed, we are including them in the titles of information
collections even though we are not amending the substance of the
collection in this release. Note that the Proposing Release also
included our estimates with respect to Form SB-2 (OMB Control No.
3235-0418), in addition to Forms S-3, F-3, S-1 and F-1. However,
Release No. 33-8876, which was adopted by the Commission on November
15, 2007, will eliminate Form SB-2 when it becomes effective.
Therefore, our revised Paperwork Reduction Act estimates do not
include new estimates for Form SB-2. As discussed in greater detail
below, we have taken the elimination of Form SB-2 into consideration
for purposes of revising our estimates of the burden associated with
Forms S-3, S-1 and F-1.
---------------------------------------------------------------------------

    ``Form F-1'' \95\ (OMB Control No. 3235-0258).
---------------------------------------------------------------------------

    \95\ Id.
---------------------------------------------------------------------------

    We adopted existing Forms S-3, S-1, F-3 and F-1 pursuant to the
Securities Act. These forms set forth the disclosure requirements for
registration statements that are prepared by eligible issuers to
provide investors with the information they need to make informed
investment decisions in registered offerings.
    Our amendments to Forms S-3 and F-3 are intended to allow issuers
that are ineligible to use Forms S-3 and F-3 for primary offerings
because they do not meet the forms' public float requirements to
nevertheless register a limited amount of securities in primary
offerings on Form S-3 or Form F-3, as applicable, so long as they are
not shell companies, they meet the other eligibility requirements of
the forms, and they have at least one class of common equity securities
listed and registered on a national securities exchange.
    The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collection of information. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
    The information collection requirements related to registration
statements on Forms S-3, S-1, F-3 and F-1 are mandatory. There is no
mandatory retention period for the information disclosed, and the
information disclosed would be made publicly available on the EDGAR
filing system.

B. Summary of Information Collections

    Because the amendments that we are adopting in this release pertain
principally to Forms S-3 and F-3 eligibility, rather than to the
disclosure required by these forms, we do not believe that the
amendments will impose any new recordkeeping or information collection
requirements, other than those that will be de minimis in nature.\96\
On a per-response basis, therefore, the amendments should not increase
or decrease existing disclosure burdens for Form S-3 or Form F-3.
However, because we expect that many companies newly eligible for
primary offerings on Forms S-3 and F-3 as a result of these amendments
will choose to file short-form Form S-3 and Form F-3 registration
statements in lieu of Forms S-1 or F-1, as applicable, we believe there
will be an aggregate decrease in the disclosure burdens associated with
Forms S-1 and F-1 and an increase in the disclosure burdens associated
with Forms S-3 and F-3. The shift in aggregate disclosure burden among
these forms will be due entirely to the change in the number of annual
responses expected with respect to each form, as companies previously
ineligible to use Form S-3 and Form F-3 switch to these forms for their
public offerings and away from Forms S-1 and F-1.
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    \96\ Instruction 7 to new General Instruction I.B.6. of Form S-3
and Instruction 7 to new General Instruction I.B.5. of Form F-3
require registrants to disclose in each prospectus filed with the
Commission their updated calculation of public float and the amount
of securities offered on Form S-3 or F-3, as applicable, pursuant to
this instruction during the prior 12 calendar months. Although this
is a new disclosure requirement for Forms S-3 and F-3, we think that
the registrant's determination of its public float and the amount of
securities offered in the prior twelve-month period should be
readily accessible and easily calculable. In addition, we note that
registrants are already required to ascertain their public float at
the time they file a registration statement for a primary offering
on Form S-3 or Form F-3. See General Instruction I.B.1. of Form S-3
and General Instruction I.B.1. of Form F-3. As such, we anticipate
that the total time, effort and financial resources to generate and
maintain this information will be insignificant for each registrant.
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    In addition, because of the anticipated benefits to issuers
associated with Forms S-3 and F-3, in particular the lower costs of
preparing and filing the registration statements and the ability to
make delayed and continuous offerings in response to changing market
conditions, we think that this will increase the demand for, and lead
to more, company filings on Forms S-3 and F-3 than would otherwise have
been made on Forms S-1 and F-1. That is, we think that the opportunity
for capital raising will be more robust for many companies because of
the availability of shelf registration on Forms S-3 and F-3. We also
anticipate that many companies newly eligible to use Forms S-3 or F-3
will choose to offer their securities directly to the public through
registration on these registration forms instead of through private
placements and, therefore, we expect comparatively more Forms S-3 and
F-3 registration statements to be filed as companies forego private
offerings in favor of the public markets.
    In order to provide an estimate of the change in the collection of
information burden for purposes of the Paperwork Reduction Act, our
assumption is that the amendments to Forms S-3 and F-3 will result in
an overall increase in the number of such forms filed annually by
eligible companies and an overall decrease in the number of Forms S-1
and Forms F-1 filed annually by these companies. As discussed, however,
we do not expect that the incremental increase in the number of all
Forms S-3 and F-3 filed will be roughly equal to the incremental
decrease in the number of Forms S-1 and Forms F-1 filed, because our
assumption is that the advantages of shelf registration on Form S-3 and
Form F-3 will encourage financings on these forms that would otherwise
have been carried out through exempt offerings or perhaps not at all.
Therefore, we believe the amendments will result in a net increase in
the annual aggregate number of filings on all Forms S-3, S-1, F-3 and
F-1 taken together, since the increased number of Form S-3 and F-3
filings should exceed the decreased number of Form S-1 and F-1 filings.
Accordingly, we believe the overall net decrease in disclosure burden
that should result from companies changing to the more streamlined
Forms S-3 and F-3 will be offset to some extent by newly eligible
companies filing Forms S-3 and F-3 more frequently than they did Forms
S-1 or F-1. However, this offset could be lessened in part by the one-
third cap on the amount of securities that eligible companies may sell
on Form S-3 and Form F-3 in any period of 12 calendar months pursuant
to the new form eligibility rules.\97\ Companies that require more
capital but are prohibited by this one-third cap from using Form S-3
and Form F-3 for primary offerings may, as a result, continue to
conduct some offerings on Forms S-1 or F-1 or through the private
markets even though Forms S-3 and F-3 are preferable.
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    \97\ As previously discussed, new General Instructions I.B.6. of
Form S-3 and I.B.5. of Form F-3 prohibit registrants from selling
more than the equivalent of one-third of their public float in any
period of 12-calendar months.
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C. Summary of Comments and Revisions to Amendments

    None of the commenters addressed our request for comment on the
Paperwork Reduction Act analysis contained in the Proposing Release. We

are nevertheless revising our Paperwork Reduction Act estimates in
light of certain modifications we have made to the final rules as
opposed to the proposal.
    As proposed, new General Instruction I.B.6. of Form S-3 and new
General Instruction I.B.5. of Form F-3 would have limited the amount of
securities eligible companies could sell in accordance with these
provisions to no more than the equivalent of 20% of their public float
over any period of 12 calendar months. In consideration of commenters
who were concerned that capping issuers at 20% of the value of their
public float every twelve months would limit the usefulness of these
new rules, we have decided to increase the twelve-month offering
threshold to one-third of an issuer's public float. In light of this
increase, however, we are adopting a further condition to eligibility
under new General Instruction I.B.6. of Form S-3 and new General
Instruction I.B.5. of Form F-3 that the issuer must have at least one
class of common equity securities listed and registered on a national
securities exchange. This additional restriction should help to
minimize the potential abuses arising from expanded shelf registration
because the securities exchanges, through their listing rules and
procedures, as well as other requirements, provide an additional
measure of protection for investors.

D. Revised Paperwork Reduction Act Burden Estimates

    As discussed in Section II.C. above, we are revising our Paperwork
Reduction Act burden estimates that were originally submitted to the
Office of Management and Budget. Our revised estimates reflect the
changes that we have made to the final rules as compared to the
proposal.
    For purposes of the Paperwork Reduction Act, we now estimate the
annual decrease in the paperwork burden for companies to comply with
our collection of information requirements to be approximately 10,375
hours of in-house company personnel time and to be approximately
$12,450,000 for the services of outside professionals.\98\ These
estimates include the time and the cost of preparing and reviewing
disclosure, filing documents and retaining records. Our methodologies
for deriving the above estimates are discussed below.
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    \98\ For administrative convenience, the totals related to the
paperwork burden hours have been rounded to the nearest whole number
and the cost totals have been rounded to the nearest thousand.
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    Our estimates represent the burden for all issuers, both large and
small. As mentioned, however, the estimated decreases are wholly
attributable to our assumptions, discussed in Section II.B. above,
about how the amendments will influence the behavior of certain issuers
who were formerly ineligible to conduct primary offerings on Forms S-3
and F-3. These issuers are non-shell companies who satisfy the
registrant eligibility requirements of Form S-3 \99\ or Form F-3,\100\
as applicable, have at least one class of common equity securities
listed and registered on a national securities exchange, and had a
public float of less than $75 million at the end of their last fiscal
year. In all, we estimate that there were approximately 1,400 such
companies at the end of calendar year 2006 and that they filed a total
of 66 registration statements on Forms S-1, SB-2 \101\ and F-1 during
the twelve months ending December 31, 2006.\102\ To determine the
effect of our amendments on the overall paperwork burden, we have
assumed that these filings on Forms S-1, SB-2 \103\ and F-1 would be
made instead on Form S-3 or Form F-3, as applicable, to the extent that
the issuers would not be limited by the one-third cap on the amount of
securities they may sell in any period of 12 calendar months under the
new rules. Therefore, we assume that the Forms S-1 and F-1 filed by the
subject companies will decrease from the number filed in 2006, but
because of the one-third cap on sales, will not decrease to 0.\104\
Instead, we believe that some Forms S-1 and F-1 will continue to be
filed annually by these companies. To reflect this, we have taken the
number of Forms S-1 and F-1 that were filed by these companies in
calendar year 2006 and decreased this number by 90% \105\ for each
form, for a total decrease of 60 filings.\106\ Therefore, we assume
that approximately 60 fewer Forms S-1 and F-1 will be filed by all
issuers annually as a result of the new amendments. The actual number
could be more or less depending on various factors, including future
market conditions.
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    \99\ See n. 37.
    \100\ See n. 83.
    \101\ As mentioned, the Commission voted to eliminate Form SB-2
on November 15, 2007. Release No. 33-8876. However, because some of
the companies who filed on Form SB-2 in 2006 will become eligible to
use Form S-3 under the new amendments to the form, we factor these
Form SB-2 filings into our estimate of the number of additional
Forms S-3 that will be filed in 2008 as a result of the rule change.
    \102\ The total of 66 filings is comprised of 37 Forms S-1; 26
Forms SB-2; and 3 Forms F-1.
    \103\ See n. 101.
    \104\ Because it has been eliminated, the number of new Forms
SB-2 will, in fact, decrease to 0 after Release No. 33-8876 goes
into effect. Therefore, companies that previously filed Forms SB-2,
but who are now eligible to use Form S-3 under new General
Instruction I.B.6. of the form, would not be able to fall back to
Form SB-2 in the event that they exceed the one-third cap on Form S-
3. Instead, to the extent they wanted to conduct an additional
registered public offering, they would likely have to file on Form
S-1. To reflect this, we have taken the number of 2006 Form SB-2
filings by companies that we estimate will become eligible on Form
S-3 under the new rules and added this to the number of Forms S-1
filed in 2006 by companies who qualify to use Form S-3 for primary
offerings under the new rules. This allows us to estimate how many
total Forms S-1 will be filed by domestic companies that exceed the
one-third cap but still wish to conduct registered public offerings.
So, for purposes of our baseline assumptions, the number of Forms S-
1 filed in 2006 by companies who will become eligible to use Form S-
3 under the new rules will include the number of Forms SB-2 filed in
2006 by qualifying companies (26) and will therefore total 63
filings (37 Forms S-1 plus 26 Forms SB-2).
    \105\ In the Proposing Release, this decrease was 85% for each
form but has been raised to 90% in light of the 12-month offering
restriction on sales being raised from 20% to one-third of a
company's public float. In other words, because the ceiling has been
raised, eligible companies will be able to expand the size and/or
frequency of their offerings on Forms S-3 and F-3 and, consequently,
will have less need to file alternate registration forms. Therefore,
the number of filings on these forms should decrease even more than
was predicted in the Proposing Release.
    \106\ This number deducts 90% from the totals for each of the
registration forms, as follows: Form S-1 (90% of 63, rounded up,
equals 57) and Form F-1 (90% of 3, rounded up, equals 3). Adding
these together, the combined reduction totals 60 filings.
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    Furthermore, we believe that the 1,400 companies that we estimate
will be affected by the rule change would have conducted more
registered securities offerings had they been able to use Forms S-3 and
F-3, because of the benefits of forward incorporation and the ability
to utilize shelf registration to maximize market opportunities. We
assume that the inability of these companies to utilize Forms S-3 and
F-3 limited their capacity to access the public securities markets and,
because of the cost and lack of flexibility associated with Forms S-1,
SB-2 and F-1, they either did not file registration statements on Forms
S-1 SB-2 or F-1, or were limited in the number that they filed. We
therefore believe that the annual number of responses on Forms S-3 and
F-3 for purposes of the Paperwork Reduction Act will increase by an
increment greater than simply the total of 60 fewer registration
statements on Forms S-1 and F-1 that we estimate will be filed in
future years by the 1,400 companies who would qualify for primary
offerings on Forms S-3 and F-3 as a result of our amendments. We
further assume that this increase in Forms S-3 and F-3 will be
mitigated to some degree by the one-third cap on securities sold in any
period of 12 calendar months under the new rules, which may limit the

frequency and volume of additional securities offerings on Form S-3 and
Form F-3. To reflect this, we have taken the total of 60 fewer Forms S-
1 and F-1 that we think will be filed by these companies in future
years as a result of the amendments (because of the availability of
Forms S-3 and F-3) and increased this number by 15% \107\ for each
form, for a total increase of 70 filings.\108\ Therefore, we assume
that approximately 70 additional Forms S-3 and F-3 will be filed
annually over and above the number of total Forms S-3 and F-3 filed by
all issuers, large and small, as a result of the new amendments. The
actual number could be more or less depending on various factors,
including future market conditions.
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    \107\ In the Proposing Release, this increase was 10% for each
form but has been raised to 15% in light of the 12-month offering
restriction on sales being raised from 20% to one-third of a
company's public float. That is, because the ceiling has been
raised, eligible companies will be able to conduct somewhat larger
and/or more frequent offerings on Form S-3 and F-3.
    \108\ This number adds a 15% premium to the individual totals
for each of the registration forms, as follows: Form S-1 (15% of 57,
rounded up, equals 9) and Form F-1 (15% of 3, rounded up, equals 1).
The sum of these increases, which is equal to 10, is then added to
the total of 60 Forms S-1 and F-1 filed by the subject companies in
2006 that we believe will be filed on Forms S-3 and F-3 by these
companies in future years. The total is an estimated increase of 70
Forms S-3 and F-3 (comprised of 66 additional Forms S-3 and four
additional Forms F-3).
---------------------------------------------------------------------------

    To calculate the total effect of the amendments on the overall
compliance burden for all issuers, large and small, we subtracted the
burden associated with the 60 fewer Forms S-1 and F-1 registration
statements that we expect will be filed annually in the future and
added the burden associated with our estimate of 70 additional Forms S-
3 and F-3 filed annually as a result of the amendments. We used current
Office of Management and Budget estimates in our calculation of the
hours and cost burden associated with preparing, reviewing and filing
each of these forms.
    Consistent with current Office of Management and Budget estimates
and recent Commission rulemaking,\109\ we estimate that 25% of the
burden of preparation of Forms S-3, S-1, F-3 and F-1 is carried by the
company internally and that 75% of the burden is carried by outside
professionals retained by the issuer at an average cost of $400 per
hour.\110\ The portion of the burden carried by outside professionals
is reflected as a cost, while the portion of the burden carried by the
company internally is reflected in hours.
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    \109\ For discussions of the relative burden of preparation of
registration statements under the Securities Act allocated between
issuers internally and their outside advisers, see Executive
Compensation and Related Person Disclosure, Release No. 33-8732A
(Aug. 29, 2006) [71 FR 56225] and Release No. 33-8591.
    \110\ In connection with other recent rulemakings, we have had
discussions with several private law firms to estimate an hourly
rate of $400 as the average cost of outside professionals that
assist issuers in preparing disclosures and conducting registered
offerings.
---------------------------------------------------------------------------

    The table below illustrates our estimates concerning the
incremental annual compliance burden in the collection of information
in hours and cost for Forms S-3, S-1, F-3 and F-1 as a result of these
amendments.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Estimated
                                                           change in    Hours/form    Incremental                           75%             $400/hr
                          Form                              annual        \111\          burden         25% Issuer      Professional   Professional cost
                                                           responses
                                                                  (A)          (B)              (C)=(A)*(B)      (D)=(C)*0.25     (E)=(C)*0.75       (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
S-3....................................................           66           459          30,294         7,573.50        22,720.50         $9,088,200