Shelf Registration as a Post-IPO Financing Option for Companies
Companies that have already gone public may want to preserve the option to offer additional shares on the market at a later date. This may correspond with a new product launch, a future acquisition, or other major corporate event involving a need for additional financing. The shelf offering process allows a public company to file a shelf registration statement with the Securities and Exchange Commission (SEC) that will enable the company to sell the registered securities, or take them “off the shelf”, at a later time relatively quickly. Companies commonly use shelf registrations when they wish to sell securities at a future date without much lag time.
Advantages of Shelf Offerings
There are a number of benefits of shelf offerings for public companies. The most notable benefits are timing and certainty. Shelf offerings give companies fast market access when market conditions become optimal for them in the future. For example, if an issuer is a real estate development company and the housing market is heading toward a decline, it may not be ideal timing to offer additional securities to the market. Once real estate conditions improve, however, the company can use the shelf registration statement it filed earlier to quickly offer the previously registered securities to the market for sale.
The later sale, or “takedown off the shelf”, of these securities does not require another round of SEC review. This streamlines the process so that the securities previously registered on the shelf registration statement filed with the SEC can be released to the market soon after the company declares its intent to “takedown off the shelf”. This process requires little administrative paperwork since company made most of the necessary disclosures in the initial registration statement. This greatly reduces processing time.
Shelf offerings provide issuing companies the ability to exert greater control over managing the supply of their securities on the market. It also provides cost-savings for companies by not requiring them to re-register with the SEC each time they want to offer new shares. After the shelf registration statement’s effective date, the periodic quarterly and annual reports that the company is required to file with the SEC are automatically incorporated by reference. Incorporation by reference occurs when one filed document recites that it includes another filed document. Thus, the company must complete little administrative maintenance once it has a shelf registration on file with the SEC.
How the Shelf Registration Process Works
The shelf registration discloses the classes of registered securities for a potential future offering, such as common shares, preferred shares, debt securities, and warrants. It involves a base prospectus and a prospectus supplement.
The company uses a base prospectus for the initial shelf registration for the new issuances of securities. The offering must take place within a three-year time window. The base prospectus normally requires filing of a Form S-3 with the SEC. Foreign issuers may also file for shelf offerings using Form F-3, which is analogous to Form S-3 for U.S. companies. The SEC typically takes a few weeks to review and declare the shelf registration effective. The base prospectus contains information such as the type of securities being offered to the market, a summary of the company’s business operations, and a description of how the company intends to use the proceeds.
When the company later decides to sell the offering, it files a prospectus supplement with the SEC. The prospectus supplement discloses the specific offering terms and other SEC requirements to take the offering “off the shelf”. Rule 424 of the Securities Act of 1933 governs the prospectus supplement. The prospectus supplement together with the earlier filed base prospectus makes a complete prospectus for an offering of the specified securities.
An issuer can use a shelf registration to sell new securities, or in other words, a primary offering. It can also use a shelf registration to resell outstanding securities. This process constitutes a secondary offering. Once the shelf registration statement goes into effect, it will last for three years until it expires or the company renews it. Rule 415 of the Securities Act of 1933 governs the shelf offering process.
Limitations on Use of Shelf Registration
Shelf offerings are only available to certain qualifying issuers. In order to qualify, a company must have been a public company for at least 12 months. It also cannot have defaulted on loans or failed to pay dividends since the end of the previous year.
If a company is a well-known seasoned issuer (WSKI), the shelf offering automatically becomes effective upon filing. In order to be classified as a WSKI, a company must have a market capitalization exceeding $700 million for an equity shelf, or the company must have issued at least $1 billion in debt in the previous three years for a debt shelf.
A company may register a shelf offering on a continuous or a delayed basis. In a continuous offering, companies must offer the securities within two days after the registration statement is effective. In contrast, in a delayed offering, the company do not offer securities for prompt sale after effectiveness of the registration statement. Delayed offerings are generally only available to more seasoned issuers, or companies with a strong and sustained track record.