Release No. 33-8501

Release No. 34-50624

Release No. IC-26649

International Series Rel. No. 1282

69 Fed. Reg. 67391 - Nov. 17, 2004

Securities Offering Reform

ACTION: Proposed rule.

Table of Contents

II. Well-Known Seasoned Issuers; Other Categories of Issuers

A. Well-Known Seasoned Issuers

Our proposals today modify the framework for communications in connection with public offerings for all issuers and the framework of the registration process for most issuers that report under the Exchange Act. However, we believe that the most far-reaching revisions of our communications rules and registration processes should be considered for issuers that have a reporting history under the Exchange Act and are presumptively the most widely followed in the marketplace.³⁵ We believe that these issuers have an Exchange Act record, a broad following of their Exchange Act filings, and the contemplated attention directed to their Exchange Act reports by the staff of the Division of Corporation Finance that will produce the greatest likelihood of Exchange Act reports that not only are reliable but also are broadly scrutinized by investors and the markets.

Today, the largest issuers are followed by sophisticated institutional and retail investors, members of the financial press, and numerous sell-side and buy-side analysts that actively seek new information on a continual basis. Unlike smaller or less mature issuers, large, seasoned public issuers tend to have a more regular dialogue with investors and market participants through the press and other media. The communications of these well-known seasoned issuers are subject to scrutiny by investors, the financial press, analysts, and others who evaluate disclosure when it is made.

We therefore propose to add a new category of issuer '' a ''well- known seasoned issuer'' '' that has these characteristics and would be permitted to benefit to the greatest degree from proposed modifications to our rules regarding communications and the registration processes.³⁶ We are proposing to define a well-known seasoned issuer as an issuer that is required to file reports pursuant to Section 13(a) or Section 15(d) the Exchange Act and satisfies the following requirements: ³⁷

• the issuer must be current in its reporting obligations under the Exchange Act and timely in satisfying those obligations for the preceding 12 calendar months;

• the issuer must be eligible to register a primary offering of its securities on Form S-3 or Form F-3;

• the issuer either:

• Must have outstanding a minimum $700 million of common equity market capitalization held by non-affiliates; or

• Must have issued $1 billion aggregate amount of debt securities in registered offerings during the past three years and register only debt securities; and

• neither the offering nor the issuer may be of a type that falls within the category of ineligible issuers or offerings.³⁸

A majority-owned subsidiary of a well-known seasoned issuer also may be considered a well-known seasoned issuer in connection with the offer and sale of its own securities if:

• the majority-owned subsidiary itself meets the conditions for eligibility;

• a parent of the majority-owned subsidiary is a well-known seasoned issuer and fully and unconditionally guarantees the subsidiary's non-convertible obligations; ³⁹

• the majority-owned subsidiary guarantees the obligations of (1) its parent or (2) another majority-owned subsidiary where there is also a full and unconditional guarantee of the same obligation by a parent that is a well-known seasoned issuer and the obligations are non-convertible; or

• the majority-owned subsidiary's non-convertible obligations are fully and unconditionally guaranteed by another majority-owned subsidiary that itself is a well-known seasoned issuer.⁴⁰

Whether an issuer satisfies the requirements for current and timely filing of Exchange Act reports and the general eligibility requirements of Form S-3 or F-3 would be determined at the time of filing of its registration statement and, thereafter, at the time of the update of that registration statement required by Securities Act Section 10(a)(3).⁴¹ For purposes of determining their status as well-known seasoned issuers, issuers would measure their non-affiliate equity market capitalization, or ''public float'', and the aggregate amount of their debt issuances as of the last business day of their most recently completed second fiscal quarter prior to the date of filing the Form 10-K or Form 20-F.⁴²

We believe that the public float of a reporting issuer can be used as a proxy for whether the issuer has a demonstrated market following.⁴³ The threshold we propose is that an issuer have a public float of $700 million or

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more. We have used market capitalization as a proxy for public float in evaluating this threshold and its implications.

To evaluate the implications of a $700 million public float threshold, staff in our Office of Economic Analysis (''OEA'') obtained data on the 9690 registered offerings that were conducted during 1997- 2003 by 2784 issuers that had public equity outstanding and were listed on a major exchange or equity market.⁴⁴ Of these offerings, 6998 were debt offerings that raised proceeds of $1272 billion, and 2692 were equity offerings that raised proceeds of $477 billion. The average issuer conducted 3.8 debt offerings and 1.1 equity offerings per calendar year, although as many as 157 debt offerings have been conducted by a single issuer within a calendar year.

OEA also analyzed data on the financial market conditions under which these offerings were made. High levels of analyst coverage, institutional ownership, and trading volume are useful indicators of the scrutiny that an issuer receives from the market, although no one statistic can fully capture the extent to which an issuer is well- followed by the market.⁴⁵ Issuers with market capitalization in excess of $700 million that conducted offerings in 1997-2003 typically have had an average of 10 analysts following them prior to the offering.⁴⁶ This includes only sell-side analysts and is, we believe, a conservative indicator of analyst scrutiny. Institutional investors accounted for an average of 56% of equity ownership prior to offerings by issuers with market capitalization above $700 million. Those issuers had an average daily trading volume of nearly $25 million prior to offerings in this period and accounted for the following percentages of capital raised:

[Table omitted - see Federal Register PDF for text of table ]

Issuers that do not meet the public equity float test would be considered well-known seasoned issuers solely for purposes of debt offerings if they have sold more than an aggregate of $1 billion in debt through registered offerings over the prior three years. These issuers also would have to satisfy the other conditions of the well- known seasoned issuer definition, such as the reporting history requirement.⁴⁷

We have chosen the $1 billion threshold for issuers of public debt based on an evaluation of statistics on issuers that do not have public equity outstanding. The relevant statistics for these issuers are different from those for issuers that have securities traded on major equity markets.

The issuers of debt that meet the $1 billion threshold account for 23% of the issuers that issued public debt during the period 1997-2003. These issuers account for 72% of debt issued during the same period. None of these issuers' debt offerings were rated below investment grade, and 84% of their debt offerings were rated A or higher by a nationally recognized security rating organization, an NRSRO. This group of issuers also on average had 44 basis points lower yield spread for their issues relative to issuers that had not issued any debt in the past three years. We believe that this lower yield spread reflects lower default risk (higher ratings) and higher liquidity and transparency of the issuers.⁴⁸

Overall, the issuers that would meet our proposed thresholds for well-known seasoned issuers are thus the most active issuers in the U.S. public capital markets. In 2003, those issuers, which represented approximately 30% of listed issuers, accounted for about 95% of U.S. equity market capitalization. They have accounted for 87% of the total debt raised in registered offerings over the past seven years. These issuers accordingly represent the most significant amount of capital raised and traded in the U.S. As a result of the active participation of these issuers in the markets and, among other things, the wide following of these issuers by market participants, the media, and institutional investors, we believe that it is appropriate to provide greater communications and registration flexibilities to these well- known seasoned issuers beyond that provided to other issuers, including other seasoned issuers.

B. Other Categories of Issuers

We also would use existing categories of issuers, including seasoned issuers, unseasoned Exchange Act reporting issuers, and non- reporting issuers, in our proposals, discussed below, regarding communications and the registration process. A seasoned issuer would be an issuer that is eligible to use Form S-3 or Form F-3 to register primary offerings of securities--securities to be sold by or on its behalf, on behalf of its subsidiary, or on behalf of a person of which it is the subsidiary.⁴⁹ Majority-owned subsidiaries eligible to use Form S-3 or Form F-3 for offerings of their securities

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also would be considered seasoned issuers.⁵⁰

An unseasoned issuer would be an issuer that is required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, but does not satisfy the requirements of Form S-3 or Form F-3 for a primary offering of its securities. Under the proposal, an issuer that is filing Exchange Act reports voluntarily would be treated as a reporting unseasoned issuer. A non-reporting issuer would be an issuer that is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act and is not filing such reports voluntarily.

Request for Comment

• Should we raise the proposed public float test of $700 million (e.g., to $800 million)? If so, why?

• Alternatively, should we lower the public float test (e.g., to $500 million, $400 million, or $300 million)? If so, why? If we were to lower the threshold, how can we ensure that the issuers meeting that threshold would be sufficiently well followed? If we were to lower the threshold, what other characteristics not present in issuers with a lower public float would need to be present to ensure that an issuer would be well followed?

• Is a public float threshold the proper standard, or should we use another standard, such as percentage of institutional ownership, average daily trading volume, asset size, or any combination of these? If so, how would the standard compare to the public float threshold and how could it be readily determined and verified?

• Should we use the same public float calculation as we use for purposes of the cover page of the Form 10-K and Form 20-F? Would another calculation date for the public float be more appropriate? Is there another readily available information source for public floats of issuers that provides the information other than annually?

• Should we have a requirement for the staff to evaluate the eligibility thresholds for well-known seasoned issuers on a periodic basis? If so, how often should we evaluate the thresholds and what factors should we consider? Alternatively, should the definition provide for automatic adjustments in the public float and aggregate debt requirement based on factors such as, for example, analyst coverage, institutional ownership, or average daily trading volume for equity, or changes in debt rating for debt issuers? If yes, how often should adjustments occur, what factors should trigger an adjustment, and why?

• Should eligibility to use the proposals available to well- known seasoned issuers be calculated on the basis of trading conducted on any national securities exchange, any particular national securities exchange, the Nasdaq Stock Market, or any particular portion of the Nasdaq Stock Market (e.g., the National Market System or the SmallCap Market)? If yes, should there be any limitation on the trading location or platform?

• Besides the amount of registered debt sold by the issuer over a three-year period, are there any other bases upon which to determine that issuers eligible based on debt issuances are well-known seasoned issuers? Should investment grade debt ratings be part of the basis for eligibility?

• Is the eligibility threshold of $1 billion of registered debt over the prior three years the appropriate threshold? If not, should the threshold be higher? Should it be lower?

• Should an issuer be eligible to be a well-known seasoned issuer based on debt issuances if it has both publicly held debt and equity securities?

• Should offering participants be required to recalculate an issuer's eligibility at the time of use of a free writing prospectus or should the eligibility determination be done once a year for all purposes?

• Should we permit majority-owned subsidiaries to be considered well-known seasoned issuers under the proposed tests? Should we limit the definition only to wholly-owned subsidiaries? We are proposing conforming changes to Forms S-3 and F-3. Is this appropriate or necessary?

• Our proposed $700 million public float requirement is higher than the current $75 million public float level generally required for short-form and delayed shelf registration. The public float threshold for short-form and delayed shelf registration has not been revised since 1992.⁵¹ While our proposals do not alter that public float threshold for short-form registration, should that threshold be revised upward in light of the length of time since it was last revised, the changes that have occurred in the markets since then, and the underlying rationale that the firms eligible to use short form registration should be sufficiently well-followed? If so, what threshold would be appropriate? Provide empirical data supporting any proposed threshold.

• One disqualification from an issuer being considered a well-known seasoned issuers is that it is an ''ineligible issuer'', as we propose to define that term. Should well-known seasoned issuers, who otherwise satisfy the eligibility conditions, be disqualified from being a well-known seasoned issuer for all purposes of our proposals if it is an ineligible issuer under the definition? If not, why not?

• Do the categories of seasoned, unseasoned, and non- reporting issuers appropriately describe the issuers that fall into these categories? If not, why not and what would be a more appropriate categorization?

³⁵ Our proposals would provide a class of well-known seasoned issuers greater flexibility in registering their securities offerings under a more streamlined registration process known as automatic shelf registration. Under the automatic shelf registration process, eligible well-known seasoned issuers could register, on a more flexible basis than is currently the case, offerings of different types of securities using Form S-3 or Form F-3 registration statements that are effective upon filing. See discussion in Section V.B.2. below under ''Automatic Shelf Registration for Well-Known Seasoned Issuers.''

³⁶ Our proposals would not change the existing eligibility standards for the use of Form S-3 and Form F-3.

³⁷ See proposed amendments to Securities Act Rule 405. As later discussed, an issuer that files Exchange Act reports voluntarily would not be a well-known seasoned issuer or a seasoned issuer. Rather, those voluntary filers would be considered unseasoned issuers for purposes of our proposals. In addition, asset-backed issuers would not be well-known seasoned issuers.

³⁸ See proposed definition of ''ineligible issuers'' in Securities Act Rule 405 as discussed in Section III.D.3 below under ''Ineligible Issuers.''

³⁹ Whether a guarantee is full and unconditional would be analyzed under the same principles as those used under Rule 3-10 of Regulation S-X [17 CFR 210.3-10] and Exchange Act Rule 12h-5 [17 CFR 240.12h-5]. In addition, the guarantee may only be of an obligation that has a limited duration and is not perpetual. This analysis is not different from the current analysis under Form S-3 or Form F-3.

⁴⁰ See proposed amendment to Securities Act Rule 405.

⁴¹ The Section 10(a)(3) update generally occurs when the issuer files its Form 10-K containing the issuer's audited financial statements for its most recently completed fiscal year. See 15 U.S.C. 77j(a)(3).

⁴² Form 10-K and Form 20-F currently require that the aggregate market value of the voting and non-voting common equity held by non-affiliates be computed as of the last business day of the registrant's most recently completed second fiscal quarter. This is the same date as when issuers would determine their non-affiliate equity market capitalization for assessing their status as ''accelerated filers'' under Rule 12b-2 [17 CFR 240.12b-2]. This is different than the non-affiliate equity market capitalization used in determining eligibility to use Form S-3 and Form F-3 for primary offerings in reliance on General Instruction I.B.1 of Form S-3 or Form F-3 that is computed as of a day within 60 days of the date of filing (or the date of the Section 10(a)(3) update to the registration statement). We believe it is appropriate to use the same computation for purposes of eligibility as a well-known seasoned issuer.

⁴³ Public float is also one of the key determinants for eligibility for current short-form registration on Forms S-3 and F- 3.

⁴⁴ OEA compiled and analyzed the supporting data for the public float (using market capitalization) and outstanding debt thresholds.

⁴⁵ See e.g., Harrison Hong, Terrence Lim and Jeremy C. Stein, Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies, 55 Journal of Finance 265 (2000); Robert C. Merton, A Simple Model of Capital Market Equilibrium with Incomplete Information, 42 Journal of Finance 483 (1987).

⁴⁶ Issuers with a market capitalization of between $75 million and $200 million, in most cases, have between zero to four analysts following them with approximately 50% having zero to one analysts following them. These issuers, therefore, have significantly less analyst coverage than well-known seasoned issuers.

⁴⁷ These issuers would only be eligible to register non- convertible obligations on an automatic shelf registration statement. See discussion in Section V.B.2 below under ''Automatic Shelf Registration for Well-Known Seasoned Issuers.''

⁴⁸ See Gordon J. Alexander, William F. Sharpe, and Jeffrey V. Bailey, Fundamentals of Investments (2001 ed.) at 530.

⁴⁹ Eligibility to register primary offerings of securities on Form S-3 or Form F-3 is based on public float or issuance of investment grade securities. See General Instruction I.B.1 and I.B.2 to Form S-3 and Form F-3.

⁵⁰ We propose to expand the majority-owned subsidiary eligibility in Form S-3 and Form F-3 to allow majority-owned subsidiaries to use the forms under the same circumstances in which majority-owned subsidiaries would be well-known seasoned issuers. For example, see General Instruction I.C. to Form S-3.

⁵¹ See Simplification of Registration Procedures for Primary Securities Offerings, Release No. 33-6943 (July 16, 1992) [57 FR 32461].