[Federal Register: June 26, 2007 (Volume 72, Number 122)]
[Proposed Rules]
[Page 35117-35136]
[DOCID:fr26jn07-13]

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Part III

Securities and Exchange Commission

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17 CFR Part 239

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

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 239

[Release No. 33-8812; 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: Proposed rule.

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SUMMARY: We are proposing to amend the eligibility requirements of Form
S-3 and Form F-3 to allow 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 and do not sell more than the equivalent of 20% of
their public float in primary offerings pursuant to the new
instructions on these forms 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 proposal would not extend to shell companies, however,
which would be prohibited from using Form S-3 and Form F-3 for primary
offerings until 12 calendar months after they cease being shell
companies.

DATES: Comments should be received on or before August 27, 2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
);     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number S7-10-07 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-10-07. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments

are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Daniel Greenspan, 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 proposing to amend Form S-3 \1\ and
Form F-3 \2\ under the Securities Act of 1933.\3\
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    \1\ 17 CFR 239.13.
    \2\ 17 CFR 239.33.
    \3\ 15 U.S.C. 77a et seq.
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Table of Contents

I. Discussion
    A. Background
    1. Form S-3
    2. 1992 Amendments to Form S-3
    3. Advisory Committee on Smaller Public Companies
    4. Reasons for Proposal
    B. Proposed Revisions to Form S-3
    C. Proposed Revisions to Form F-3
    D. Request for Comment
II. Paperwork Reduction Act
    A. Background
    B. Summary of Information Collections
    C. Paperwork Reduction Act Burden Estimates
    D. Request for Comment
III. Cost-Benefit Analysis
    A. Summary of Proposals
    B. Benefits
    C. Costs
    D. Request for Comment
IV. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
V. Initial Regulatory Flexibility Act Analysis
    A. Reasons for the Proposed Action
    B. Objectives
    C. Legal Basis
    D. Small Entities Subject to the Proposed Amendments
    E. Reporting, Recordkeeping and Other Compliance Requirements
    F. Duplicative, Overlapping or Conflicting Federal Rules
    G. Significant Alternatives
    H. Solicitation of Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Statutory Authority and Text of the Amendments

I. Discussion

 A. Background

1. 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 \4\ to satisfy the form's
disclosure requirements. Although there have been amendments to Form S-
3 since it was first adopted in 1982,\5\ the basic framework still
remains. To use Form S-3, a company must meet the form's registrant
requirements,\6\ which generally pertain to reporting history under the
Exchange Act,\7\ as well as at least one of the form's transaction
requirements.\8\ These transaction requirements provide that companies
may 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,'' is a
certain size.\9\ 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 that the company has a minimum public float.\10\
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    \4\ 15 U.S.C. 78a et seq.
    \5\ Most notably, the Commission adopted a set of comprehensive
amendments in 2005 known as ``Securities Offering Reform.'' See
Securities Offering Reform, Release No. 33-8591 (Jul. 19, 2005) (70
FR 44722). See also Simplification of Registration Procedures for
Primary Securities Offerings, Release No. 33-6964 (Oct. 22, 1992)
[57 FR 48970], which is discussed further at n. 12.
    \6\ See General Instruction I.A. of Form S-3.
    \7\ For example, the form is available only to issuers that have
complied with the reporting requirements of the Exchange Act for at
least one year. However, issuers of investment grade asset-backed
securities do not need to have a reporting history. See General
Instruction I.A.4. of Form S-3.
    \8\ See General Instruction I.B. of Form S-3.
    \9\ General Instruction I.B.1. of Form S-3.
    \10\ See General Instructions I.B.2. through I.B.4. of Form S-3.
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2. 1992 Amendments to Form S-3
    As originally adopted, the ``public float'' requirement for
companies eligible to use Form S-3 to register primary offerings was
$150 million.\11\ In 1992, the Commission reduced the minimum float
threshold to the current $75 million, based on its analysis of the
trading markets and market following of registrants in various
capitalization

ranges.\12\ When it reduced the required public float to $75 million,
the Commission stated that a large majority of the companies that would
become eligible to use Form S-3 for primary offerings as a result of
the reduction in required float had securities traded on either a
national securities exchange or authorized for inclusion on the NASDAQ
National Market System \13\ and that approximately two-thirds of the
companies were followed by at least three research analysts.\14\ This,
combined with the success of the 10-year-old integrated disclosure
system and shelf registration process, persuaded the Commission that it
could extend the benefits of Form S-3 for primary offerings to a larger
class of issuers without compromising the investing public's access to
sufficient and timely information about such issuers.\15\
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    \11\ Adoption of Integrated Disclosure System, Release No. 33-
6383 (Mar. 3, 1982) [47 FR 11380].
    \12\ Release No. 33-6964. In that release, the Commission
estimated that, as a result of the reduction in required float, 450
additional companies with an aggregate float of $88 billion would be
eligible to register primary offerings of their securities on Form
S-3. This is compared to the Commission's estimate, in Release No.
33-6943, of 370 companies that registered approximately $200 billion
of securities on Form S-3 for delayed primary shelf offerings during
calendar year 1991.
    As part of this rulemaking, the Commission also reduced the
reporting history necessary to register on Form S-3 from 36 to 12
months for most issuers and eliminated the alternative eligibility
test for primary offerings requiring registrants to have a public
float of at least $100 million and an annual trading volume of at
least 3 million shares.
    \13\ There is no longer a distinction between Nasdaq and
national securities exchanges. On January 13, 2006, the Commission
approved Nasdaq's application for conversion from a national
securities association to a national securities exchange. The NASDAQ
Stock Market commenced operations on August 1, 2006.
    \14\ Simplification of Registration Procedures for Primary
Securities Offerings, Release No. 33-6943 (July 16, 1992) [57 FR
32461], at p. 6. In this discussion, the Commission stated that
``one indicia of market interest and following of a company is the
number of research analysts covering the company.''
    \15\ Id.
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3. Advisory Committee on Smaller Public Companies
    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''), an advisory committee chartered
by the Commission in 2005 to assess the current regulatory system for
smaller companies under U.S. securities laws.\16\ In its April 23, 2006
Final Report to the Commission, the Advisory Committee recommended that
we allow all reporting companies listed on a national securities
exchange, NASDAQ or trading 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.\17\ The Advisory
Committee noted that many smaller public companies currently are not
eligible to use Form S-3 to register primary offerings because they do
not meet the minimum public float requirement and are, therefore, not
able to take advantage of the efficiencies associated with the use of
the form. As a consequence, the Advisory Committee argued that this
restriction placed limits on the ability of such companies to raise
capital. The Advisory Committee also expressed its view that the
reporting obligations of smaller public companies, combined with the
widespread accessibility over the Internet of documents filed with the
Commission, have lessened the need to retain the public float standard
in Form S-3. In the Advisory Committee's view, the Exchange Act
reporting obligations of smaller public companies are comparable today
to even the largest reporting companies and, therefore, compliance with
these disclosure requirements ``should be sufficient to protect
investors and inform the marketplace about developments in these
companies.'' \18\
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    \16\ More information about the Advisory Committee is available
at http://www.sec.gov/info/smallbus/acspc.shtml.

    \17\ 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.
    \18\ The Final Report, at 69. The Advisory Committee also noted:
    The Sarbanes-Oxley Act has required more frequent SEC review of
periodic reports as well as enhanced processes, such as disclosure
controls and procedures and certifications by the chief executive
and chief financial officers, which further enhance investor
protection.
    Id. at 70.
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4. Reasons for Proposal
    The ability to conduct primary offerings on Form S-3 confers
significant advantages on eligible companies. 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 as well as those that will be filed in the
future.\19\ The ability of Form S-3 registrants to incorporate their
subsequently filed Exchange Act reports, often called ``forward
incorporation,'' allows for automatic updating of the registration
statement. By contrast, a registrant without the ability to forward
incorporate \20\ must file a new registration statement or post-
effective amendment to its registration statement to prevent
information in the registration statement from becoming outdated and to
update for fundamental changes to the information set forth in the
registration statement.\21\
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    \19\ See Item 12 of Form S-3: ``Incorporation of Certain
Information by Reference.''
    \20\ For example, Forms S-1 and SB-2 do not allow registrants to
forward incorporate their Exchange Act filings.
    \21\ See Section 10(a)(3) of the Securities Act (requiring that
the information contained in a prospectus used more than nine months
after the effective date be as of a date not more than sixteen
months prior to the effective date) and Item 512(a)(1)(i) and (ii)
of Regulation S-K (requiring the inclusion by the company of an
undertaking to file a post-effective amendment to comply with
Section 10(a)(3) of the Securities Act and to reflect the occurrence
of facts or events arising after the effective date that,
individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement).
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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.\22\ Rule 415 provides considerable flexibility in
accessing the public securities markets from time to time in response
to changes in the market and other factors. Companies that are eligible
to register these primary ``shelf'' offerings under Rule 415 are
permitted to register securities offerings prior to planning any
specific offering and, once the registration statement is effective,
offer securities in one or more tranches without waiting for further
Commission action. In general, post-effective amendments and new
registration statements may be subject to selective review by the
Commission staff and must be declared effective by the Commission or
our staff through delegated authority before the registration statement
may be used again to offer and sell securities.\23\ The shelf
eligibility resulting from Form S-3 eligibility and the ability to
forward incorporate 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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    \22\ 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.
    \23\ See Section 8(c) of the Securities Act.
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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.\24\
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    \24\ 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).
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    Registration of an offering on Form S-1, the form available to many
companies ineligible to use Form S-3, permits certain issuers \25\ to
incorporate by reference previously filed Exchange Act reports, but it
does not permit registrants to automatically update information in the
prospectus by forward incorporation of their Exchange Act filings.
Further, issuers filing registration statements on Form S-1 because
they are not eligible to file on Form S-3 are not permitted to register
primary shelf offerings under Rule 415. Thus, it is harder for Form S-1
registrants to take advantage of favorable market opportunities.
Consequently, we believe that extending Form S-3 short-form
registration to additional issuers should enhance their ability to
access the public securities markets.
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    \25\ See General Instruction VII. to Form S-1, ``Eligibility to
Use Incorporation by Reference,'' for the criteria that registrants
on Form S-1 must meet in order to incorporate information by
reference.
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    Given the great advances in the electronic dissemination and
accessibility of company disclosure transmitted over the Internet over
the last several years,\26\ we believe that expanding the class of
companies that are permitted to use Form S-3 for primary securities
offerings is once again warranted. In contrast to 1992, when the
Commission last adjusted the issuer eligibility requirements for Form
S-3,\27\ all filings on Form S-3 now are filed on the Commission's
Electronic Data Gathering, Analysis and Retrieval system (``EDGAR'')
and, therefore, are available at little or no cost to anyone interested
in obtaining the information. While we believe that retaining some
restrictions on Form S-3 eligibility is still advisable, we
nevertheless agree with the Advisory Committee that more companies
should benefit from the greater flexibility and efficiency in accessing
the capital markets afforded by Form S-3. Accordingly, we are proposing
to amend the Form S-3 eligibility requirements to permit registrants
other than shell companies to use Form S-3 for primary offerings,
whether or not they satisfy the minimum $75 million float threshold, so
long as they stay within certain offering size limitations and
otherwise satisfy the eligibility requirements of the form, such as
timely Exchange Act reporting for at least the prior year.
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    \26\ 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.
    \27\ See Release No. 33-6964.
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B. Proposed Revisions to Form S-3

    Specifically, we are proposing 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,\28\
provided:
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    \28\ As mentioned in n. 17 above, 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 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 Sheet issuers. Notwithstanding the Advisory
Committee's recommendation, we are not at this time proposing to
amend the Form S-3 eligibility rules for secondary offerings because
of the potential for abusive primary offerings disguised as
secondary offerings. As such, this rulemaking proposal pertains only
to 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. In this regard, we also are not
revising the interpretive positions on secondary offering
eligibility under General Instruction I.B.3.
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     They meet the other registrant eligibility conditions for
the use of Form S-3; \29\
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    \29\ 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
Section 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 Section 12 or
15(d) of the Exchange Act and has filed in a timely manner all the
material required to be filed pursuant to Section 13, 14 or 15(d)
for a period of at least twelve calendar months immediately
preceding the filing of the Form S-3 registration statement.
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     They are not shell companies \30\ and have not been shell
companies for at least 12 calendar months before filing the
registration statement; and
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    \30\ The term ``shell company'' is defined in Rule 405 of the
Securities Act [17 CFR 230.405]. See also Use of Form S-8, Form 8-K,
and Form 20-F by Shell Companies, Release No. 33-8587 (July 15,
2005) [70 FR 42233] (adopting definition of shell company).
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     They do not sell more than the equivalent of 20% of their
public float in primary offerings under General Instruction I.B.6. of
Form S-3 over any period of 12 calendar months.\31\
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    \31\ 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 proposed
General Instruction I.B.6. of Form S-3, if a registrant relies on
this Instruction to conduct a shelf takedown equivalent to 20% of
its public float on September 15, 2007, it will next be eligible to
do another takedown (assuming no change in its float) on October 1,
2008.
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    As a result, even companies not traded on a national securities
exchange could potentially avail themselves of this new eligibility
rule so long as they were able to satisfy the registrant eligibility
requirements provided in General Instruction I.A.\32\ This would
include companies quoted on the Over-the-Counter-Bulletin Board and
Pink Sheets quotation services. We note that the Over-the-Counter-
Bulletin Board requires quoted issuers to be registered

under Section 12 of the Exchange Act \33\ and filing Exchange Act
reports or otherwise filing periodic reports with the appropriate
regulatory agency. Moreover, we have built into our proposed rule the
condition that an eligible company must be required to file Exchange
Act reports and has timely filed all such reports for the 12 calendar
months and any portion of a month preceding the filing of the
registration statement.
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    \32\ Form S-3 eligibility under proposed General Instruction
I.B.6 and Form F-3 eligibility under proposed General Instruction
I.B.5. is not intended to have broader implications under our rules
beyond an issuer's ability to conduct a 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 those proposed additional 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). See Instruction 6 to proposed General
Instruction I.B.6. of Form S-3 and Instruction 6 to proposed General
Instruction I.B.5. of Form F-3.
    \33\ 15 U.S.C. 78l.
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    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
proposal contemplates 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 20% limitation would be exceeded.
    The proposal would require 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.\34\ Then, for purposes of
calculating the aggregate market value of securities sold during the
preceding period of 12 calendar months, the proposal would require that
registrants add together the gross sales price for all primary
offerings pursuant to proposed Instruction I.B.6. to Form S-3 during
the preceding period of 12 calendar months. Based on that calculation,
registrants would be permitted to sell securities with a value up to,
but not greater than, the difference between 20% of their public float
and the value of securities sold in primary offerings on Form S-3 under
proposed Instruction I.B.6. in the prior period of 12 calendar
months.\35\ We have placed the cap of 20% in order to allow an offering
that is large enough to help an issuer meet its financing needs when
market opportunities arise but small enough to take into account the
effect such new issuance may have on the market for a thinly traded
security.
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    \34\ The determination of public float is based on a public
trading market for the registrant's common equity. This is the same
requirement in General Instruction I.B.1. of Form S-3 and Form F-3
that a registrant have a $75 million market value and in the
definition of accelerated filer in Exchange Act Rule 12b-2 [17 CFR
240.12b2]. Therefore, an entity with common equity securities
outstanding but not trading in any public trading market would not
be entitled to sell securities in a primary offering on Form S-3
under this proposal. Note that the determination of public float for
purposes of form eligibility in current General Instruction I.B.1 of
Form S-3 is based on the price of the registrant's common equity
within 60 days prior to the date of filing the registration
statement. The determination of ``aggregate market value'' for
purposes of determining an issuer's status as an accelerated filer
under Rule 12b-2 is based on the market price of the issuer's equity
as of the last business day of the issuer's most recently completed
second fiscal quarter.
    \35\ As proposed, the method of calculating the 20% limit on
sales is the same whether the registrant is selling equity or debt
securities, or a combination of both. If the proposed 20% limitation
excluded debt, there is some concern that we would be inadvertently
encouraging issuances of debt securities over equity. Because we do
not intend for the rule to dictate or otherwise influence the
overall form of security that companies offer, we have drafted the
20% limit on sales to include both equity and debt.
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    This aggregate gross sales price includes the sales of equity as
well as debt offerings. Therefore, these registrants would now be
eligible to offer non-investment grade debt on Form S-3.\36\ In the
case of securities that are convertible into or exercisable for equity
shares, such as convertible debt or warrants, however, we are proposing
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 would 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 proposed General Instruction I.B.6. of Form S-3. We
believe calculating the 20% 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.
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    \36\ Currently, registrants may offer non-convertible investment
grade debt securities on Form S-3 regardless of the size of their
public float. See General Instruction I.B.2. to Form S-3.
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    It is important to note that the proposed 20% limit on sales is not
intended to impact a holder's ability to convert or exercise derivative
securities purchased from the company. For example, the 20% limit would
apply to the amount of common stock warrants that a company could sell
under Form S-3, and the number of common shares into which the warrants
are exercisable would be relevant for determining the company's
compliance with the 20% rule at the time the warrants were sold, but
would not impede the purchaser's later exercise of the warrants.
    Consistent with our desire to ensure that the expansion of Form S-3
eligibility does not diminish the protection of investors, the proposal
specifically excludes 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.\37 \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.\38\ Under the
proposal, 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:
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    \37\ 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 proposed 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.
    \38\ See, for example, Release No. 33-8591; Release No. 33-8587;
Delayed Pricing for Certain Registrants, Release No. 33-7393 (Feb.
20, 1997) [62 FR 9276]; and Penny Stock Definition for Purposes of
Blank Check Rule, Release No. 33-7024 (Oct. 25, 1993) [58 FR 58099].
---------------------------------------------------------------------------

     12 calendar months after it ceases being a shell company;
     Has filed information that would be required in a
registration statement on Form 10, Form 10-SB or Form 20-F, as
applicable, to register a class of securities under Section 12 of the
Exchange Act; and
     Has been timely reporting for 12 calendar months.\39\

    \39\ 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, Form 10-SB or Form 20-F, as
applicable, to register a class of securities under Section 12 of
the Exchange Act. See 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 proposed new provisions of S-3 and F-3 until at least 12
calendar months after it ceases being a shell company.

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

Ordinarily, this information would be filed in a current report on Form
8-K reporting completion of the transaction that causes it to cease
being a shell company.\ 40\ In other cases, the information may be
filed in a Form 10, Form 10-SB or Form 20-F. Consistent with the
current registrant eligibility rules of Form S-3 and Form F-3 that
require at least 12 calendar months of timely reporting, the proposed
12 calendar-month delay is intended to provide investors in the former
shell company with the benefit of 12 full months of disclosure in the
newly structured entity prior to its use of Form S-3 or Form F-3 for
---------------------------------------------------------------------------
primary securities offerings.

    \40\ 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 or Form 10-SB to register a class of securities under Section 12
of the Exchange Act.
---------------------------------------------------------------------------

    As proposed, the 20% limitation 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 20% 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 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 20% of the float decreases from the time the registration
statement was initially filed, would not necessarily run afoul of the
20% limitation because the relevant point in time for determining
whether a registrant has exceeded the threshold would be 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 20% of the
registrant's float calculated within 60 days of the sale, then the
transaction would not violate proposed 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 20% of the new lower float.\41\
---------------------------------------------------------------------------

    \41\ Along these lines, under the proposal registrants would be
able to sell up to the equivalent of the full 20% of their public
float immediately following the effective date of their registration
statement, provided that there were no prior sales pursuant to
proposed 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 in registration statement. See Release No.
33-8591. Assuming that the sale of the entire 20% allotted under the
proposal complied with the rule at the time of the takedown, the
subsequent contraction in the registrant's public float would not
invalidate this prior sale.
---------------------------------------------------------------------------

    Because Form S-3 registrants who meet the $75 million float
threshold of 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, we believe it is appropriate to provide issuers registering
on Form S-3 pursuant to proposed 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 proposing an instruction to I.B.6. that lifts the 20%
restriction on additional sales in the event that the registrant's
float increases to $75 million or more subsequent to the effective
date. Of course, pursuant to Rule 401, registrants would also be
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 20% restriction would be
reimposed for all subsequent sales made pursuant to General Instruction
I.B.6. and would remain in place until the registrant's float equaled
or exceeded $75 million.
    The following examples illustrate how the proposed Instruction
would operate.\42\ 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 and are not shell
companies.
---------------------------------------------------------------------------

    \42\ The examples that follow are for illustrative purposes only
and are not intended to be indicative of market activity.
---------------------------------------------------------------------------

Example A

    On January 1, 2008, a registrant with a public float of $50 million
files a shelf registration statement on Form S-3 pursuant to proposed
General Instruction I.B.6. intending to register the registrant's offer
and sale of up to $20 million of debt and equity securities over the
next three years from time to time as market opportunities arise.\43\
The registration statement is subsequently declared effective. In March
2008, 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 proposed General Instruction
I.B.6. Calculating that its public float is now $55 million, the
registrant determines that the total market value of all sales effected
pursuant to Instruction I.B.6. over the past year, including the
intended sale, may not exceed $11 million, or 20% of the registrant's
float. Since the registrant has not previously filed on Form S-3 and
has made no prior sales off the subject Form S-3, it is able to sell
the entire $11 million off the subject Form S-3.
---------------------------------------------------------------------------

    \43\ Although only 20% of the public float may be sold in any
year, a company may register a larger amount.
---------------------------------------------------------------------------

    Assuming that it sold the entire $11 million of securities in March
2008, the registrant in September 2008 once again contemplates a
takedown off the shelf. It determines that its public float (as
calculated pursuant to Instruction 1 to proposed General Instruction
I.B.6.) has risen to $60 million. Because 20% of $60 million is $12
million, the registrant is now able to sell additional securities in
accordance with proposed General Instruction I.B.6(a), even though in
March 2008 it took down the equivalent of what was then the entire 20%
of its float. However, because the registrant has already sold $11
million worth of its securities within the 12 calendar months prior to
the contemplated sale, the registrant may sell no more than $1 million
of additional securities at this time.
    In December 2008, the registrant determines that its public float
has risen to $85 million. To this point, assuming it has only sold an
aggregate of $12 million of its securities pursuant to the subject Form
S-3 as described above, it has $8 million of securities remaining

on the registration statement and potentially available for takedown
(the total amount registered of $20 million, less the $12 million
previously sold). Because 20% of $85 million is $17 million, and the
registrant has already sold $12 million within the previous year,
Instruction I.B.6.(a) would, in most circumstances, prohibit the
registrant from selling more than an additional $5 million of
securities in the latest offering. However, under Instruction 3 to
proposed General Instruction I.B.6., the registrant is no longer
subject to the 20% limitation on annual sales because its float has
exceeded $75 million. If it chooses, the registrant may sell the entire
remaining $8 million of securities all at once or in separate tranches
at any time until the company updates the registration statement
pursuant to Section 10(a)(3) by filing a Form 10-K. This will be the
case even if the registrant's float subsequently falls below $75
million until it files that Form 10-K.

Example B

    A registrant has 12 million shares of voting common equity
outstanding held by nonaffiliates. The market price of this stock is
$5, 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 proposed 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 proposed 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
at $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, the value of the securities being offered for
purposes of General Instruction I.B.6. is $11,111,110 (2,222,222 shares
at $5 per share), which is less than the $12 million allowed by the 20%
cap (20% 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 proposed 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 \44\ prior to the
anticipated sale by the per share market price of the registrant's
equity used for purposes of determining its current float.
---------------------------------------------------------------------------

    \44\ Note that 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 proposed General Instruction I.B.6. See
Instruction 5 to proposed 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 proposed 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 is then
multiplied by the current market value of $5.55. Thus, for purposes of
Instruction 2 to proposed 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
would 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 year. If this amount is less than 20% of
the registrant's current public float, it may sell additional
securities with a value up to, but not greater than, the difference
between 20% of its current public float and the value of all securities
sold by it pursuant to Instruction I.B.6. during the preceding year.

Example C

    A registrant has an effective registration statement on Form S-3
through which it intends to conduct shelf offerings of its securities.
The Form S-3 was filed pursuant to proposed General Instruction I.B.6.
At the time of its first shelf takedown, the registrant's public float
is equal to $20 million (which means that the maximum amount available
to be sold under the 20% cap would be $4 million). Based on proposed
General Instruction I.B.6(a), the registrant sells $3 million available
of its debt securities. Six months later, the registrant's public float
has decreased to $10 million. The registrant wishes to conduct an
additional takedown 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 $10 million, General Instruction I.B.6(a) would only allow the
registrant to sell a maximum of $2 million worth of securities (20% of
$10 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 proposed General Instruction I.B.6.) at $3 million in the 6
months prior to the contemplated sale and so must wait until at least a
full year has passed since the $3 million sale of debt securities to
undertake another offering off the Form S-3 unless its float increases.
Note that, although the registrant's float would not allow additional
sales, the $3 million takedown of securities 6 months prior does not
violate the 20% restriction because, at the time of that prior sale,
the registrant's float was $20 million.
    Because allowing smaller public companies to take advantage of
shelf primary offerings on Form S-3 would permit such companies to
avail themselves of periodic takedowns

without further Commission action or prior staff review, some concerns
have been raised.\45\ Although the Commission staff may review
registration statements before they are declared effective, individual
takedowns are not subject to prior selective staff review. Under the
current rules, if these issuers were instead using Form S-1 or Form SB-
2, they would be required to file separate registration statements for
each new offering, which would be subject to pre-offering selective
staff review before going effective.
---------------------------------------------------------------------------

    \45\ For example, see Report of the Task Force on Disclosure
Simplification (Mar. 5, 1996) (the ``Task Force''), available at
http://www.sec.gov/news/studies/smpl.htm. Among other things, the

Task Force 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.
    See also, Delayed Pricing for Certain Registrants, Release No.
33-7393 (Feb. 20, 1997) [62 FR 9276]. Following on the Task Force's
recommendations, the Commission proposed to permit certain smaller
companies to price registered securities offerings on a delayed
basis for up to one year after effectiveness. The Commission noted,
however:
    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.
---------------------------------------------------------------------------

    While we recognize that extending the benefits of shelf
registration to an expanded group of companies will, by necessity,
limit the staff's direct prior involvement in takedowns of securities
off the shelf, we believe that the risks will be justified by the
benefits that will accrue by facilitating the capital formation efforts
of smaller public companies. As we have discussed elsewhere in this
release, the risks to investor protection by expanding the base of
companies eligible for primary offerings on Form S-3 have been
significantly mitigated by technological advances affecting the manner
in which companies communicate with investors, allowing widespread,
direct, and contemporaneous accessibility to company disclosure at
little or no cost. Moreover, the scope of disclosure obligations and
liability of smaller public companies under the federal securities laws
are sufficiently comparable for these purposes to the largest reporting
companies such that the proposed expansion of Form S-3 primary offering
eligibility should not adversely impact investors.\46\
---------------------------------------------------------------------------

    \46\ We acknowledge that the companies implicated in this
rulemaking are not yet 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).+-
---------------------------------------------------------------------------

    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. Securities in thinly traded markets may be more vulnerable to
potential manipulative practices. In this regard, to ensure that shelf
eligibility is expanded with appropriate moderation and attention to
the continued protection of investors, we have proposed to exclude
shell companies from eligibility and to impose a 20% restriction on the
amount of securities that can be sold into the market on Form S-3 in
any period of 12 calendar months by issuers with a public float below
$75 million.\47\ By placing such restrictions on the expansion of Form
S-3 eligibility, we believe we are mitigating the potential for abuse
that could result as a function of the increase in the volume of
smaller public company securities sold in primary offerings on Form S-
3. At the same time, we believe that the 20% limit will be sufficient
to accommodate the capital raising needs of the large majority of
smaller public companies.\48\
---------------------------------------------------------------------------

    \47\ Under the proposal, offerings above the 20% limitation
would violate the form requirements, and may have implications under
Section 5.
    \48\ In connection with this rulemaking, the Division of
Corporation Finance undertook a review of shelf registration
takedowns in 2006 by companies with a public float of moderate size.
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 suggests that limiting smaller public companies to 20% of
their public float in any 12-month period strikes the appropriate
balance between the capital needs of these companies and investor
protection concerns.
---------------------------------------------------------------------------

    We note that the Advisory Committee, in its May 2006 Final Report
to the Commission, expressed support for a more expansive rule change,
with no suggestion of a limitation on Form S-3 eligibility other than
current required Exchange Act reporting and listed on a national
securities exchange or the Over-the-Counter Bulletin Board. However, we
are not at this time proposing such a less restrictive eligibility
requirement. We believe that by restricting the applicability of the
revised eligibility rule to companies that are not shell companies and
by imposing the 20% limitation on the amount of securities that smaller
public companies may sell pursuant to primary offerings on Form S-3, as
described, the proposal strikes the appropriate balance between helping
to facilitate capital formation through the securities markets and our
objective of investor protection. If the amendment is adopted as
proposed, this would not foreclose the possibility that we may revisit
the appropriateness of this 20% restriction at a later time. However,
we believe that limiting the expanded use of S-3 as proposed will allow
us to consider the impacts of the expansion in an environment where
there are limitations so that investor protection concerns are
addressed.

C. Proposed Revisions to Form F-3

    Form F-3, which was designed to parallel Form S-3,\49\ is the
equivalent short-form registration form available for use by ``foreign
private issuers'' \50\ 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.\51\ 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.\52\ 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.\53\
---------------------------------------------------------------------------

    \49\ See 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.
    \50\ 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.
    \51\ See General Instruction I. of Form F-3: ``Eligibility
Requirements for Use of Form F-3.''
    \52\ 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) 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), at 2 (explaining that the requirement
was adopted ``in order to ensure that information regarding the
issuer is available to the market'').
    \53\ See 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 digested and disseminated to the marketplace. When the
Commission adopted Form F-3 in 1982,\54\ 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.\55\ 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.'' \56\ In explaining its
rationale, the Commission stated:
---------------------------------------------------------------------------

    \54\ Adoption of Foreign Issuer Integrated Disclosure System,
Release No. 33-6437 (Nov. 19, 1982) [47 FR 54764].
    \55\ See Release No. 33-7029, at 2.
    \56\ 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.\57\
---------------------------------------------------------------------------

    \57\ 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 without compromising investor protection.\58\
---------------------------------------------------------------------------

    \58\ In the release adopting this change to the Form F-3
eligibility requirements, 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,\59\ we are proposing amendments to
Form F-3 that are comparable to our proposed changes to Form S-3.
Specifically, proposed General Instruction I.B.5. to Form F-3 would
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:
---------------------------------------------------------------------------

    \59\ 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;
     They are not shell companies and have not been shell
companies for at least 12 calendar months before filing the
registration statement; and
     They do not sell more than the equivalent of 20% of their
public float in primary offerings under General Instruction I.B.5. on
Form F-3 over any period of 12 calendar months.

D. Request for Comment

    We request and encourage any interested person to submit comments
on the proposal and any other matters that might have an impact on the
proposal. With respect to any comments, we note that such comments are
of greatest assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments.
In addition to general comment, we encourage commenters to address the
following specific questions:
     Is the proposed change in the public float eligibility
criteria for Forms S-3 and F-3 appropriate? Is our assumption correct
that it is appropriate to lift the public float restrictions in a
limited manner given advances in the electronic dissemination and
accessibility of company disclosure transmitted over the Internet?
     In this regard, in what way is market following an
important criteria in light of these technological changes? \60\
---------------------------------------------------------------------------

    \60\ See Release No. 33-6383, at 8 (discussing the objective of
relating short-form registration to the existence of widespread
following in the marketplace).
---------------------------------------------------------------------------

     The Form S-3 eligibility requirement for primary offerings
which requires minimum public float was last set in 1992 at $75
million. Based on the Personal Consumption Expenditures Price Index
(PCEPI) and the Consumer Price Index (CPI), if this threshold were
adjusted for inflation, it would equal between $100-110 million,
respectively, in today's dollars. Does this suggest that we should not
adopt this proposal and leave the form eligibility requirements
unchanged, since by retaining $75 million as the minimum and not
raising it to at least $100 million to account for inflation, we are in
effect allowing a lower threshold than was established in 1992?
     Should the Commission retain the float test in all cases
for primary offerings, but set it below $75 million? Should the float
test be higher than $75 million?
     Should we make parallel changes to Forms S-3 and F-3, as
proposed? If not, in what way should they be different? For example,
are there special conditions relating to foreign issuers that would
make any of the proposed amendments not appropriate or should they be
tailored in any way?
     Is there a more appropriate criteria to determine
eligibility for primary offerings on Forms S-3 and F-3 than public
float? Given the more limited liquidity of companies with a public
float less than $75 million, would a more appropriate criteria for
eligibility relate to Average Daily Trading Volume for the prior year?
If so, is 25% of Average Daily Traded Volume an appropriate cap (for
ADTV) per year? Should the cap be based on dollar volume traded per
day? If not, how would the criteria be evaluated for purposes of
determining issuances other than common stock? If Average Daily Trading
Volume is used as the criteria instead of public float, over what
period should the average be calculated?
     Is the proposed 20% limitation on the amount of securities
that can be sold

over any period of 12 calendar months appropriate? Should this
restriction be broader or more narrow? For example should 20% be higher
or lower or should the one-year period be longer or shorter? Is this
the right amount to provide smaller public companies with a realistic
financing alternative? If the restriction is not appropriate as
proposed, what alternatives are preferable and why?
     Proposed General Instruction I.B.6. of Form S-3 would
restrict the amount of securities that can be sold by a registrant over
a period of ``12 calendar months.'' This parallels the way in which the
phrase ``12 calendar months'' is used for purposes of the registrant
eligibility requirements in Form S-3. Therefore, if a registrant relies
on General Instruction I.B.6. to conduct a shelf takedown equivalent to
20% 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. Instead of ``12 calendar months,'' would it be preferable if the
relevant measurement period was ``one year,'' so that a registrant who
conducted a shelf takedown equal to 20% of its float on September 15,
2007 would next be eligible to do another takedown (assuming no change
in its float ) under General Instruction I.B.6. on September 15, 2008?
     Should we allow non-investment grade debt to be offered
under this provision? Should we have a cap for the amount of non-
investment grade debt that may be sold? If so, is it appropriate to tie
the cap to public float? If not, what would be a more appropriate
criteria?
     In the case of securities that are convertible into or
exercisable for equity shares, such as convertible debt securities, we
are proposing that the registrant calculate the amount sold by
reference to the aggregate market value of the underlying equity shares
in lieu of the market value of the convertible securities. Should we
also include in the amount the value of the overlying securities?
Should derivative securities be calculated in a different manner?
     Under Rule 430B, except for an effective date resulting
from the filing of a form of prospectus for purposes of updating the
registration statement pursuant to Section 10(a)(3) or reflecting
fundamental changes in the information in the registration statement
pursuant to the issuer's undertakings, the prospectus filing will not
create a new effective date for directors or signing officers of the
issuer, whereas the filing of a registration statement on Form S-1,
which issuers with a market capitalization of less than $75 million
would otherwise need to use for these offerings, would. Likewise, the
filing of the prospectus will not be a new effective date for auditors
who provided consent in an existing registration statement for their
report on previously issued financial statements as the filing of a new
Form S-1 would. Is this potential ``gap'' in liability appropriate in
the situations allowed under the proposed revisions?
     Should the 20% limitation be calculated only with respect
to securities sold pursuant to the proposed amendment or should it
include all securities sold pursuant to registered public offerings on
Form S-3, S-1, SB-2, etc.? Should the 20% also include securities sold
pursuant to private offerings? Should it include securities sold
pursuant to registered public offerings on any form by selling
shareholders?
     Should the calculation of 20% of the registrant's public
float reflect increases and decreases in the registrant's public float
during the period that its shelf registration statement is effective,
as is currently proposed? Do concerns relating to investor protection
and potential market manipulation weigh in favor of a different method
of calculating the 20% limitation, such as determining the 20% limit at
the time the registration statement is filed rather than at the time of
each sale under the registration statement? Would an annual limitation
on the number of offerings on Forms S-3 and F-3 that a registrant may
conduct under proposed General Instruction I.B.6. strike the
appropriate balance between investor protection and capital formation
facilitation?
     Should the calculation of a registrant's public float for
purposes of the amendment be based on an average, such as the average
weekly float during the four calendar weeks preceding the sale in
question?
     As proposed, General Instruction I.B.6. of Form S-3 and
General Instruction I.B.5. of Form F-3 provide that the 20% restriction
on sales will be lifted in the event that the registrant's public float
equals or exceeds $75 million subsequent to the effective date.
However, registrants would be required to recompute their public float
each time they filed an amendment to update the registration statement
pursuant to Rule 401 and, if the float measured less than $75 million,
the 20% restriction on sales could be reimposed until the float equaled
or exceeded $75 million. If the 20% restriction is lifted because the
registrant's public float surpasses $75 million, but is subsequently
reimposed because the float falls below $75 million, should the
calculation of 20% take into consideration the value of all securities
sold pursuant to Form S-3 (or Form F-3, as applicable) in primary
offerings in the preceding year; only securities sold pursuant to
General Instruction I.B.6. of Form S-3 (or General Instruction I.B.5.
of Form F-3, as applicable), in the preceding year; or, should the
calculation ignore the value of securities sold prior to the date of
the update when the float was last measured?
     In the event that a registrant's public float equals or
exceeds $75 million, is it appropriate for the transformation of the
filing from a primary shelf filing under General Instruction I.B.6. of
Form S-3 (or General Instruction I.B.5. of Form F-3, as applicable) to
a primary shelf filing under General Instruction I.B.1. of Form S-3 (or
General Instruction I.B.1. of Form F-3, as applicable) to be made
without there being a new effective date for the registration
statement? If we should have a new effective date for the registration
statement, how would that date be set and should there be any filing
made with the Commission?
     Should the calculation of a registrant's public float for
purposes of the amendments be made by reference to the price of the
registrant's common equity within 60 days prior to the date of sale, or
should the reference period for the price of the registrant's common
equity be as of a date closer to the date of sale?
     What should be the consequence of an issuer exceeding the
20% restriction on sales? If the consequences of violating the 20% are
significant, would the risks of doing so adversely affect the
willingness of issuers to use the proposal? If so, what, if anything,
should be done to ameliorate those risks?
     Should the issuer's intent be a factor in determining the
consequences of a violation of the 20% restriction?
     Should we amend Rule 401(g) \61\ of the Securities Act to
provide that violations of the 20% restriction would also violate the
requirements as to proper form under Rule 401 even though the
registration statement has been declared effective previously?
---------------------------------------------------------------------------

    \61\ 17 CFR 230.401(g).
---------------------------------------------------------------------------

     The proposal does not exclude any type of offerings, such
as at-the-market offerings. Should we impose restrictions on the manner
of sale under proposed General Instruction I.B.6. to Form S-3 (and, on
Form F-3, proposed General Instruction I.B.5.), so that only certain
kinds of distributions, such as firm

commitment underwritten offerings, are permitted?
     We recently eliminated restrictions on primary ``at-the-
market'' offerings of equity securities for primary shelf eligible
issuers because we felt they were not necessary to provide protection
to markets or investors for seasoned issuers.\62\ Given that the
proposal allows smaller companies to do primary offerings, should
registrants utilizing proposed General Instruction I.B.6. to Form S-3
(and, on Form F-3, proposed General Instruction I.B.5.) be prohibited
from conducting at-the-market offerings under Rule 415(a)(4)? \63\ If
at-the-market offerings are allowed, should we nevertheless require
that such offers and sales be made only through registered broker-
dealers and require such broker-dealers to be named as underwriters in
the prospectus?
---------------------------------------------------------------------------

    \62\ See Release No. 33-8591.
    \63\ Prior to the adoption of Securities Offering Reform in July
2005, Rule 415 prohibited registrants from making at-the-market
offerings on Form S-3 or Form F-3 unless certain conditions were
met. The conditions were that: The amount of securities could not
exceed ten percent of the registrant's public float; the securities
had to be sold through an underwriter or underwriters acting as
principal(s) or agent(s) for the registrant; and the underwriter(s)
must be named in the prospectus. Among other things, the 2005
amendments eliminated these restrictions for primary shelf eligible
issuers. In the Securities Offering Reform adopting release, the
Commission stated:
    The restrictions on primary ``at-the-market'' offerings of
equity securities currently set forth in Rule 415(a)(4) were adopted
initially to address concerns about the integrity of trading
markets. As discussed in the Proposing Release, we are eliminating
these restrictions for primary shelf eligible issuers because they
are not necessary to provide protection to markets or investors. The
market today has greater information about seasoned issuers than it
did at the adoption of the ``at-the-market'' limitations, due to
enhanced Exchange Act reporting. Further, trading markets for these
issuers' securities have grown significantly since that time.
Requiring the involvement of underwriters and limiting the amount of
securities that can be sold imposes artificial limitations on this
avenue for these issuers to access capital.
    Release No. 33-8591, at 213-214.
---------------------------------------------------------------------------

     Should all companies with a public trading market,
including companies traded on the Pink Sheets, be allowed to use the
amended form as proposed or should we limit it to just interdealer
quotations systems with some level of oversight and operated by a self-
regulatory organization?
     Is the proposal not to extend expanded Form S-3 and F-3
eligibility to shell companies appropriate? If not, why?
     Are there other restraints on the proposed expansion of
Form S-3 and F-3 eligibility that should be considered, such as
restricting the classes of issuers that may utilize this expansion or
the types and amounts of securities that may be registered on Forms S-3
and F-3 pursuant to this expansion?
     If the eligibility standards for Form S-3 and Form F-3 are
expanded as proposed, will allowing this larger class of companies to
conduct limited primary offerings of their securities on these forms
provide them with a meaningful source of financing? How might this
proposal impact the private markets for these companies' securities?
     If the proposal is adopted, what types of financings are
issuers likely to make on the expanded eligibility on Form S-3 and F-3?
     If the proposal is adopted, it is foreseeable that some
companies with a public trading market but with securities not listed
or authorized for listing on a national securities exchange may be
eligible to offer such securities in primary offerings on Form S-3 or
Form F-3. Since the proposal is not intended to alter the exemption
from state regulation of securities offerings under Section 18 of the
Securities Act, will the effect of state blue sky law make it
prohibitively difficult for companies without ``covered'' securities
(as defined by Section 18(b)) to register such securities in primary
offerings on Form S-3 and F-3 pursuant to the proposal? If the answer
is yes, what steps can we take to make the amendments more useful to
companies?
     Are there any market practices that may arise as a result
of this proposal that we should be concerned about?
     Is there any investor protection loss the proposal does
not address? If so, how can we address it? Are there any additional
disclosures that are appropriate? For instance, are there any
disclosures required in Forms S-1 or F-1 that should be included in
Forms S-3 or F-3 filed under General Instruction I.B.6. of Form S-3 or
General Instruction I.B.5. of Form F-3, respectively? Should issuers
have to disclose in the prospectus their calculation of the amount of
securities being offered, the amount offered pursuant to these
Instructions for the last 12 calendar months and of the amount of
securities that may be offered under the filing during the year?

II. Paperwork Reduction Act

A. Background

    The proposed amendments to Forms S-3 and F-3 contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\64\ We are submitting these to the Office of
Management and Budget for review and approval in accordance with the
Paperwork Reduction Act.\65\ The titles for this information are:

    \64\ 44 U.S.C. 3501 et seq.
    \65\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.

``Form S-3'' (OMB Control No. 3235-0073);
``Form S-1'' \66\ (OMB Control No. 3235-0065);
---------------------------------------------------------------------------

    \66\ Because our amendments to Form S-3 and Form F-3 are
anticipated to affect the annual number of Forms S-1, Forms SB-2 and
Forms F-1 filed, we are required to include them in the titles of
information collections even though we are not proposing to amend
them in this release.
---------------------------------------------------------------------------

``Form SB-2'' \67\ (OMB Control No. 3235-0418);
---------------------------------------------------------------------------

    \67\ See n. 66 above.
---------------------------------------------------------------------------

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

``Form F-1'' \68\ (OMB Control No. 3235-0258)

    \68\ Id.
---------------------------------------------------------------------------

    We adopted existing Forms S-3, S-1, SB-2, 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 proposed amendments to Forms S-3 and F-3 are intended to allow
issuers that are currently 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 and meet the other eligibility
requirements of the forms.
    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, SB-2, 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 proposing in this release
pertain only to Forms S-3 and F-3 eligibility and not to the disclosure
required by these forms, we do not believe that the amendments will
impose any new

recordkeeping or information collection requirements. On a per-response
basis, this proposal would 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, SB-2 or F-1,
as applicable, we believe there will be an aggregate decrease in the
disclosure burdens associated with Forms S-1, SB-2 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, SB-2 and F-1. 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, SB-2 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 Form S-
3. We also anticipate that many companies will choose to offer their
securities directly to the public through registration on Forms S-3 and
F-3 instead of through private placements and therefore, if the
proposal is adopted, we expect comparatively more Form 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
proposed amendments to Forms S-3 and F-3 will result in an overall
increase in the number of such forms filed annually and an overall
decrease in the number of Forms S-1, Forms SB-2 and Forms F-1 filed
annually. 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, Forms SB-
2 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
proposal would result in a net increase in the annual aggregate number
of filings on all Forms S-3, S-1, SB-2, 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, SB-2 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, SB-2 or F-1.
However, this offset could be lessened in part by the proposed 20%
limitation on the amount of securities that companies may sell on Form
S-3 and Form F-3 in any period of 12 calendar months. Companies that
require more capital but are prohibited by this 20% restriction 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, SB-2 or F-1 or through
the private markets even though Form S-3 and F-3 are preferable.

C. Paperwork Reduction Act Burden Estimates

    For purposes of the Paperwork Reduction Act, we estimate the annual
decrease in the paperwork burden for companies to comply with our
proposed collection of information requirements to be approximately
39,952 hours of in-house company personnel time and to be approximately
$47,942,000 for the services of outside professionals.\69\ 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.
---------------------------------------------------------------------------

    \69\ For administrative convenience, the presentation of 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.
---------------------------------------------------------------------------

    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 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 \70\ or Form F-3,\71\ as
applicable, but had a public float of less than $75 million at the end
of their last fiscal year. In all, we estimate that there were 4,901
such companies at the end of calendar year 2006 and that they filed a
total of 815 registration statements on Forms S-1, SB-2 and F-1 during
the twelve months ending December 31, 2006.\72\ To determine the effect
of our proposal on the overall paperwork burden, we have assumed that
these filings on Forms S-1, SB-2 and F-1 would have been made instead
on Form S-3 or Form F-3, as applicable, to the extent that the issuers
would not be limited by the proposed 20% restriction on the amount of
securities they may offer in any period of 12 calendar months.
Therefore, we assume that the Forms S-1, SB-2 and F-1 filed by the
subject companies will decrease from the number filed in 2006, but
because of the proposed 20% restriction on sales, will not decrease to
0. Instead, we believe that some Forms S-1, SB-2 and F- will continue
to filed annually by these companies. To reflect this, we have taken
the number of Forms S-1, SB-2 and F-1 that were filed by these
companies in calendar year 2006 and decreased this number by 85% for
each form, for a total decrease of 694 filings.\73\ Therefore, we
assume that approximately 694 fewer Forms S-1, SB-2 and F-1 will be
filed by all issuers in calendar year 2006. The actual number could be
more or less depending on various factors, including future market
conditions.
---------------------------------------------------------------------------

    \70\ See n. 29 above.
    \71\ See n. 51 above.
    \72\ The total of 815 filings is comprised of 138 Forms S-1; 674
Forms SB-2; and 3 Forms F-1.
    \73\ This number deducts 85% from the totals for each of the
three registration forms, as follows: Form S-1 (85% of 138, rounded
up, equals 118); Form SB-2 (85% of 674, rounded up, equals 573); and
Form F-1 (85% of 3, rounded up, equals 3). Adding these together,
the combined reduction totals 694 filings.
---------------------------------------------------------------------------

    Furthermore, we believe that the 4,901 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, 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 694 fewer
registration statements on Forms S-1, SB-2 and F-1 that we estimate
will be filed going forward by the 4,901 companies who would qualify
for primary offerings on Forms S-3 and F-3 as a result of our proposal.
We further assume that this increase in Forms S-3 and F-3 will be
mitigated to some degree by the proposed 20% restriction on securities
sold in any period of 12 calendar months, 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 694 Forms S-1, SB-2 and F-1 that
were filed by these companies in calendar year 2006 and increased this
number by 10% for each form, for a total increase of 765 filings.\74\
Therefore, we assume that approximately 765 additional Forms S-3 and F-
3 will be filed over and above the number of total Forms S-3 and F-3
filed by all issuers, large and small, in calendar year 2006. The
actual number could be more or less depending on various factors,
including future market conditions.
---------------------------------------------------------------------------

    \74\ This number adds a 10% premium to the individual totals for
each of the three registration forms, as follows: Form S-1 (10% of
118, rounded up, equals 12); Form SB-2 (10% of 573, rounded up,
equals 58); and Form F-1 (10% of 3, rounded up, equals 1). The sum
of these increases, which is equal to 71, is then added to the total
of 694 Forms S-1, SB-2 and F-1 filed by the subject companies in
2006.
---------------------------------------------------------------------------

    To calculate the total effect of the proposed amendments on the
overall compliance burden for all issuers, large and small, we
subtracted the burden associated with the 694 fewer Forms S-1, SB-2 and
F-1 registration statements that we expect will be filed annually in
the future and added the burden associated with our estimate of 765
additional Forms S-3 and F-3 filed annually as a result of the
proposal. 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,\75\ we estimate that 25% of the
burden of preparation of Forms S-3, S-1, SB-2, 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.\76\ 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.
---------------------------------------------------------------------------

    \75\ 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.
    \76\ 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, SB-2, F-3 and F-1 as a result of
this proposal.
---------------------------------------------------------------------------

    \77\ This reflects current Office of Management and Budget
estimates.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Estimated change
                 Form                       in  annual       Hours/form\77\      Incremental         25% Issuer      75% Professional       $400/hr
                                            responses                               burden                                             Professional cost
                                                      (A)                (B)                (C)=(A)*(B)        (D)=(C)*0.25       (E)=(C)*0.75       (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
S-3...................................               761                459            349,299          87,324.75         261,974.25       $104,789,000
S-1...................................              (118)             1,176           (138,768)           (34,692)          (104,076)       (41,630,400)
SB-2..................................              (573)               638           (365,574)         (91,393.5)        (274,180.5)      (109,672,200)
F-3...................................                 4                166                664                166                498            199,200
F-1...................................                (3)             1,809             (5,427)         (1,356.75)         (4,070.25)        (1,628,100)
                                       -----------------------------------------------------------------------------------------------------------------
    Total.............................  .................  .................          (159,806)         (39,951.5)        (119,854.5)       (47,941,800)
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Request for Comment

    We request comment in order to evaluate the accuracy of our
estimate of the burden of the collections of information.\78\ Any
member of the public may direct to us any comments concerning the
accuracy of these burden estimates. Persons who desire to submit
comments on the collection of information requirements should direct
their comments to the OMB, Attention: Desk Officer for the Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should send a copy of the comments to Nancy
M. Morris, Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-1090, with reference to File No. S7-10-07.
Requests for materials submitted to the OMB by us with regard to this
collection of information should be in writing, refer to File No. S7-
10-07, and be submitted to the Securities and Exchange Commission,
Office of Filings and Information Services, Branch of Records
Management, 6432 General Green Way, Alexandria, VA 22312. Because the
OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication, your comments are
best assured of having their full effect if the OMB receives them
within 30 days of publication.

 III. Cost-Benefit Analysis

A. Summary of Proposals

    We are proposing revisions to the transaction eligibility
requirements of Forms S-3 and F-3 that would allow companies to take
advantage of these forms for primary offerings regardless of the size
of their public float. Whereas secondary offerings may be registered on
Forms S-3 and F-3 irrespective of float, the current instructions to
Forms S-3 and F-3 restrict the use of these forms for primary
securities offerings to companies that have a minimum of $75 million in
public float calculated within 60 days prior to the date the
registration statement is filed. To expand the availability of Forms S-
3 and F-3 for primary offerings to more companies, we propose to allow
companies with

less than $75 million in public float to register primary offerings of
their securities on Forms S-3 and F-3, provided:
     They meet the other registrant eligibility conditions for
the use of Form S-3 or Form F-3, as applicable;
     They are not shell companies and have not been shell
companies for at least 12 calendar months before filing the
registration statement; and
     They do not sell more than the equivalent of 20% of their
public float in primary offerings under General Instruction I.B.6. of
Form S-3 or under General Instruction I.B.5. of Form F-3 over any
period of 12 calendar months.

B. Benefits

    The ability to conduct primary offerings on Forms S-3 and F-3
confers significant advantages on eligible companies in terms of cost
savings and capital formation. The time required to prepare Form S-3 or
Form F-3 is significantly lower than that required for Forms S-1, F-1
and SB-2.\79\ This difference is magnified by the fact that Form S-3
and Form F-3, unlike Forms S-1, SB-2 and F-1, permit registrants to
forward incorporate required information by reference to disclosure in
their Exchange Act filings. Therefore, Form S-3 and Form F-3
registration statements can be automatically updated. This allows such
companies to avoid additional delays and interruptions in the offering
process and can reduce the costs associated with preparing and filing
post-effective amendments to the registration statement.
    Overall, we anticipate that the proposed expansion of Form S-3 and
Form F-3 eligibility will decrease the aggregate costs of complying
with the Commission's rules by allowing companies previously eligible
to use only Form S-1, Form SB-2 or Form F-1 the use of short-form
registration on Form S-3 or Form F-3, as applicable. Using our
estimates prepared for purposes of the Paperwork Reduction Act, we
estimate that under the proposal the annual decrease in the compliance
burden for companies to comply with our proposed collection of
information requirements to be approximately 39,952 hours of in-house
company personnel time (valued at $6,992,000\80\) and to be
approximately $47,942,000 for the services of outside professionals. If
our assumptions regarding these costs and current practices are not
correct or complete, then the decreased costs we anticipate may prove
to be either higher or lower than our current estimate.
    In addition to the benefits associated with the estimated reduction
in the time required to prepare Forms S-3 and F-3 in lieu of Forms S-1,
SB-2 and F-1, and a company's ability to forward incorporate prospectus
disclosure by reference, Forms S-3 and F-3 provide substantial
flexibility to companies raising money in the capital markets, which
ultimately may reduce the cost of capital for such companies and
facilitate their access to additional sources of investment. Companies
that are eligible to use Form S-3 or Form F-3 for primary offerings are
able to conduct delayed and continuous registered offerings under Rule
415 of the Securities Act, which provides considerable flexibility in
accessing the public securities markets from time to time in response
to changes in the market and other factors. Eligible companies are
permitted to register securities prior to planning any offering and,
once the registration statement is effective, offer these securities in
one or more tranches without waiting for further Commission action. By
having more control over the timing of their offerings, these companies
can take advantage of desired market conditions, thus allowing them to
raise capital on more favorable terms (such as pricing) or to obtain
lower interest rates on debt. In addition, they can vary certain terms
of the securities being offered upon short notice, enabling them to
more efficiently meet the competitive requirements of the public
securities markets. We believe that extending shelf registration
benefits to more companies, as we have proposed, will facilitate the
capital-raising efforts of smaller public companies who currently have
fewer financing options than their larger counterparts.\81\
Consequently, we anticipate that the proposal, if adopted, would result
in smaller issuers raising more capital through the public markets
rather than through exempt offerings conducted in the domestic and
offshore markets. Investors in these companies will benefit by such
companies' improved access to capital on more favorable terms. In
particular, investors in smaller public companies may be less subject
to the risk of dilution in the value of their shares if the companies
in which they invest are able to meet more of their capital needs in
the public markets. By selling into the public markets, these companies
may be able to avoid the substantial pricing discounts that private
investors often demand to compensate them for the relative illiquidity
of the restricted shares they are purchasing.\82\
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    \78\ Comments are requested pursuant to 44 U.S.C. 3506(c)(2)(B).
    \79\ The Office of Management and Budget currently estimates the
time required to prepare Form S-3 and Form F-3 as 459 hours and 166
hours, respectively. This is contrasted with current estimates for
Form S-1, F-1 and SB-2 as 1,176 hours, 1,809 hours and 638 hours,
respectively.
    \80\ Consistent with recent rulemaking releases, we estimate the
value of work performed by the company internally at a cost of $175
per hour.
    \81\ See generally, Chaplinsky and Haushalter, Financing Under
Extreme Uncertainty: Contract Terms and Returns to Private
Investments in Public Equity.
    \82\ Id.
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    The public registration of securities also provides additional
benefits to investors over alternative forms of capital raising. To the
extent that the amendments, if adopted, lead to an increase in the use
of Form S-3 and Form F-3 as a source of financing and a decrease in
private market alternatives, investors in those offerings will benefit
from the additional investor protections associated with public
registration.
    Notwithstanding our belief regarding the beneficial effects of the
proposed amendments, however, any resulting benefits that accrue to
companies and their investors as a result of these amendments will
depend on future market conditions and circumstances unique to each
company.

C. Costs

    As discussed in Section B. above, we do not expect that the
proposed amendments to Forms S-3 and F-3 will materially increase
companies' overall compliance costs associated with preparing,
reviewing and filing these registration statements, although there may
be some additional costs incurred by companies to monitor their ongoing
compliance with the 20% sales restriction imposed by the amendments. At
the same time, the amendments could result in certain additional market
costs that are difficult to quantify. For example, it has been
suggested that there are risks inherent in allowing smaller public
companies to take advantage of shelf primary offerings on Forms S-3 and
F-3: because this would permit such companies to avail themselves of
periodic takedowns without further Commission action or prior staff
review, concerns have been raised about the increased potential for
fraud and market manipulation.\83\ Although the Commission would retain
the authority to review registration statements before declaring them
effective, individual takedowns are not subject to prior staff review.
Under the current rules, if issuers are instead using Forms S-1, SB-2
or F-1, they would be required to file separate registration statements
for each new offering, which

would be subject to selective staff review before going effective. If
these issuers can instead conduct shelf offerings on Form S-3 and Form
F-3, there may be some loss of the deterrent effect on the companies'
disclosures in connection with each takedown off the shelf because of
the lack of prior staff review. 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. We have also considered the effect
the amendments may have on market demand in the securities of smaller
public companies offered on Form S-3 and Form F-3. If there is a
perception that smaller public company securities offered through shelf
registration statements are more prone to abuse because of the lack of
involvement by the Commission staff, this may erode investor confidence
in these offerings generally. This could, in turn, make it more
difficult for these companies to raise capital and significantly negate
the benefits of the rule.
    While we recognize that extending the benefits of shelf
registration to an expanded group of companies will, by necessity,
limit the staff's direct involvement in takedowns of securities off the
shelf and could therefore pose some risk to investors, we believe that
the costs will be justified by the benefits that will accrue by
facilitating the capital formation efforts of smaller public companies.
As we have discussed elsewhere in this release, the risks to investor
protection by expanding the base of companies eligible for primary
offerings on Forms S-3 and F-3 have been significantly mitigated by
technological advances affecting the manner in which companies
communicate with investors, allowing widespread, direct, and
contemporaneous accessibility of company disclosure at little or no
cost. Moreover, the scope of heightened disclosure obligations and
liability of smaller public companies under the Federal securities laws
are sufficiently comparable for these purposes to the largest reporting
companies such that the proposed expansion of Form S-3 and Form F-3
primary offering eligibility should not adversely impact investors. In
this regard, to ensure that the expansion of eligibility is carried out
with appropriate moderation and attention to the continued protection
of investors, we have proposed to exclude shell companies from
eligibility and to impose a 20% restriction on the amount of securities
that can be sold into the market in any period of 12 calendar months by
eligible issuers on Forms S-3 and F-3. We note, however, that
monitoring compliance with this 20% limitation may be more difficult
given the lack of prior staff review before a shelf offering.

D. Request for Comment

    We solicit comments, including quantitative data, to assist our
assessment of the costs and benefits of the proposal that we have
identified, or any other costs or benefits that we have not addressed
but ought to consider. Commenters are encouraged to address any
potentially material costs and benefits, whether direct or indirect.
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    \83\ See n. 45 above.
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IV. Consideration of Burden on Competition and Promotion of Efficiency,
Competition and Capital Formation

    Securities Act Section 2(b) \84\ requires us, when engaging in
rulemaking where we are required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

    We expect the proposed amendments, if adopted, to increase
efficiency and enhance capital formation, and thereby benefit
investors, by facilitating the ability of smaller public companies to
access the capital markets consistent with investor protection.
Currently, many companies are ineligible to use Forms S-3 and F-3 to
register primary offerings of their securities because the size of
their public float does not satisfy the $75 million threshold required
by these forms. Consequently, they are unable to take advantage of the
important benefits enjoyed by eligible companies, the most significant
of which is the ability to conduct primary offerings on a delayed and
continuous basis. The ability to register securities that may be taken
off the shelf as needed, without prior staff review, provides a
powerful tool for capital formation because it allows companies the
flexibility to take advantage of desired market conditions efficiently
and upon short notice. Companies may be able to raise capital more
cheaply, quickly, and on more favorable terms than would otherwise be
the case. We believe that investors in these companies will benefit by
such companies' improved access to capital on more favorable terms. In
particular, investors in smaller public companies may be less subject
to the risk of dilution in the value of their shares if the companies
in which they invest are able to meet more of their capital needs in
the public markets. By selling into the public markets, these companies
may be able to avoid the substantial pricing discounts that private
investors often demand to compensate them, in part, for the relative
illiquidity of the restricted shares they are purchasing.\85\
---------------------------------------------------------------------------

    \85\ See n. 82.
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    We therefore believe that extending shelf registration benefits to
more companies as we have proposed will facilitate the capital-raising
efforts of smaller public companies who currently have fewer financing
options than their larger counterparts.\86\ Consequently, we anticipate
that the proposal, if adopted, would lead to efficiencies in capital
formation, as smaller issuers would be able to raise more capital
through the public markets rather than through exempt offerings
conducted in the domestic and offshore markets.
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    \86\ See n. 81.
---------------------------------------------------------------------------

    At the same time, we have also considered the potential that the
amendments might result in certain additional market costs that could
limit any efficiencies realized. For example, it has been suggested
that extending the benefits of shelf registration to an expanded group
of companies will limit the staff's direct involvement in takedowns of
securities off the shelf and could therefore pose some risk to
investors. In addition, the short time horizon of shelf offerings also
may reduce the time that participating underwriters have to apply their
independent scrutiny and judgment to an issuer's prospectus disclosure.
By reducing this staff and underwriter oversight, there is a risk that
these securities offerings may be more vulnerable to abuses. Moreover,
because 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, smaller companies'
securities may be more vulnerable to potential manipulative practices.
We also have considered the effect the amendments may have on market
demand in the securities of smaller public companies offered on Form S-
3 and Form F-3. If there is a perception that smaller public company
securities offered through shelf registration statements are more prone
to abuse because of the lack of prior involvement by the Commission
staff, this may erode investor confidence in these offerings generally.
This could, in turn, make it more difficult for these companies to
raise capital and

significantly negate the benefits of the rule.
    We do not believe that the potential efficiencies and benefits to
capital formation resulting from the amendments will be substantially
lessened by these potential costs. We believe that the risks to
investor protection by expanding the base of companies eligible for
primary offerings on Forms S-3 and F-3 have been significantly
mitigated by technological advances affecting the manner by which
companies communicate with investors, allowing widespread, direct, and
contemporaneous accessibility of company disclosure at little or no
cost. Moreover, the scope of heightened disclosure obligations and the
liability of smaller public companies under the federal securities laws
are sufficiently comparable for these purposes to the largest reporting
companies, such that the proposed expansion of Form S-3 and Form F-3
primary offering eligibility should not adversely impact investors. In
this regard, to provide that the expansion of eligibility is carried
out with appropriate moderation and attention to the continued
protection of investors, we have proposed to exclude shell companies
from eligibility and to impose a 20% restriction on the amount of
securities that can be sold into the market in any period of 12
calendar months by eligible issuers on Forms S-3 and F-3.
    In addition to the salutary effects that we anticipate with respect
to capital formation, companies may also realize cost efficiencies
stemming from the enhanced ability to incorporate by reference
disclosure information from their Exchange Act filings. Because Forms
S-3 and F-3 allow a company maximum reliance on its Exchange Act
filings to satisfy required prospectus disclosure, these registration
statements can be more abbreviated than alternative registration forms
and are updated automatically by the company's future Exchange Act
filings. This translates into a reduction in the time and the cost of
preparing and reviewing disclosure, filing documents, and retaining
records. We estimate that under the proposal the annual decrease in the
compliance burden for companies who previously were ineligible to use
Forms S-3 and F-3 for primary offerings to be approximately 39,952
hours of in-house company personnel time (valued at $6,992,000 \87\)
and to be approximately $47,942,000 for the services of outside
professionals.
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    \87\ See n. 80 above.
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    The effects of the proposed amendments on competition are difficult
to predict, but it is possible that making it easier for smaller public
issuers to access the domestic public securities markets will lead to a
reallocation of capital, as companies that previously had little choice
but to offer their securities in private offerings or in offshore
markets because of their S-3 and F-3 ineligibility will now find it
cost-effective to offer their securities domestically in primary
offerings on Form S-3 and Form F-3. If such a reallocation occurs, it
may also impact securities market professionals, such as finders,
brokers and agents, who specialize in facilitating private securities
offerings. The demand for these services may shift to the public
markets, where other professionals, such as investment banks that
underwrite public offerings, have a comparative advantage.
    We request comment on whether the proposals, if adopted, would
promote efficiency, competition, and capital formation or have an
impact or burden on competition. Commenters are requested to provide
empirical data and other factual support for their views, if possible.

V. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Act Analysis has been prepared
in accordance with 5 U.S.C. 603. It relates to proposed revisions to
the eligibility requirements for the use of registration statements on
Forms S-3 and F-3 to register primary offerings of securities.

A. Reasons for the Proposed Action

    Currently, many smaller public companies are ineligible to use
Forms S-3 and F-3 to register primary offerings of their securities
because the size of their public float does not satisfy the $75 million
threshold required by these forms. Consequently, they are unable to
take advantage of the important benefits enjoyed by eligible companies,
the most significant of which is the ability to conduct primary
offerings on a delayed and continuous basis. The ability to register
securities that may be taken off the shelf as needed, without prior
staff review, provides a powerful tool for capital formation because it
allows companies the flexibility to take advantage of desired market
conditions efficiently and on short notice. As such, eligible companies
may be able to raise capital more cheaply, quickly, and on more
favorable terms than would otherwise be the case. Without this source
of financing, smaller public companies that are not eligible to
register primary offerings on Form S-3 or From F-3 currently have
fewer, and less favorable, financing options than their larger Form S-3
and F-3-eligible counterparts.

B. Objectives

    The proposed amendments aim to amend Forms S-3 and F-3 to extend
the benefits of incorporation by reference and shelf registration to
more companies, which in turn will facilitate the ability of smaller
public companies to access the capital markets.

C. Legal Basis

    We are proposing these amendments pursuant to Sections 6, 7, 8, 10
and 19(a) of the Securities Act, as amended.

D. Small Entities Subject to the Proposed Amendments

    The Regulatory Flexibility Act defines ``small entity'' to mean
``small business,'' ``small organization,'' or ``small governmental
jurisdiction.'' \88\ The Commission's rules define ``small business''
and ``small organization'' for purposes of the Regulatory Flexibility
Act for each of the types of entities regulated by the Commission.\89\
Roughly speaking, a ``small business'' and ``small organization,'' when
used with reference to an issuer other than an investment company,
means an issuer with total assets of $5 million or less on the last day
of its most recent fiscal year. We estimate that there are
approximately 1,100 issuers, other than investment companies, that may
be considered reporting small entities.\90\
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    \88\ 5 U.S.C. Sec.  601(6).