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PROPOSED CHANGES TO SHORT-FORM REGISTRATION ELIGIBILITY

02.21.11

The SEC recently (Feb. 9, 2011) proposed rule amendments (PDF) that would eliminate the requirement of credit ratings in determining the eligibility of an issuer to use a short-form registration statement or the expedited shelf registration process.  The SEC announced the rule amendments as the first in a series of proposed rulemaking to remove references to credit ratings as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Issuers that are eligible for short-form registration have more limited disclosure requirements and are also able to register securities “on the shelf.”  Currently, one of the ways to satisfy the transaction requirements for eligibility is to have registered nonconvertible securities that have been rated investment grade by at least one nationally recognized statistical rating organization.

Under the proposed rule changes, the credit rating requirement would be replaced by a test tied to the amount of non-convertible debt and other securities the issuer has sold in the previous three years.  The test would be met if the issuer has issued over $1 billion of non-convertible securities, other than common equity, in the last three years.  The test is modeled after the standard used to determine if an issuer is a WKSI, or well-known seasoned issuer.  The proposed amendments would result in changes to both Form S-3 and Form F-3, as well as other registration statements that refer to Form S-3/F-3 eligibility, such as Form S-4.

Comments to the proposed amendments must be submitted by Mar. 28, 2011.  The SEC is seeking comments that provide alternative approaches to the proposed $1 billion test.

OUR TAKE:  Driven by the Dodd-Frank Act, this is the SEC’s first step to eliminate reliance in its rules on credit ratings.  Substantially similar rules were proposed in 2008, but were met with strong objections.  The Dodd-Frank Act requirements reflect the negative view of credit rating organizations as a contributing factor in the U.S. economic downturn and direct the SEC to substitute creditworthiness standards that the SEC determines are appropriate.

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