Magazine article Strategic Finance

SEC Final Rule on Use of S-3

Magazine article Strategic Finance

SEC Final Rule on Use of S-3

Article excerpt

Here is a final rule connected to the Dodd-Frank Act (DFA) that affects the ability of corporations to issue debt securities. The rule comes out of Section 939A of the Act, which requires the U.S. Securities & Exchange Commission (SEC) to remove any reference to credit rating agencies from its rules. The SEC has a number of separate regulatory proceedings under way stemming from that requirement. The one we are concerned with here makes some changes for companies who offer non-convertible securities, other than common equity, and want to register that offering on Form S-3.

Many large SEC-reporting subsidiaries of well-known seasoned issuers (WKSIs) currently rely on the investment grade eligibility criteria in Form S-3. The key requirement in the SEC proposed rule was that to use Form S-3, a company must have issued at least $1 billion in nonconvertible securities, other than common equity, in primary offerings for cash over the prior three years (as of a date within 60 days prior to the filing of the registration statement). The SEC proposed that standard as a way of assuring investors that the company issuing the bond is "widely followed" in the investment community. But that test perturbed many companies. Michael J. Cave, president of Boeing Capital Corporation, told the SEC, "That test would impede the cost-efficient and flexible access to capital currently enjoyed by many widely followed issuers of public debt. Many such companies do not publicly issue $1 billion in debt securities every three years. …

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