What is a Shelf Registration?

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Shelf registration enables the issuing company to raise capital immediately when market conditions are ideal with minimal bureaucratic paperwork. It permits the company to sell new securities (in the primary marketPrimary MarketThe primary market is where debt-based, equity-based or any other asset-based securities are created, underwritten and sold off to investors. It is a part of the capital market where new securities are created and directly purchased by the issuer.read more) or resell outstanding securities (in the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more). Once the registration is complete, it stands valid for three years. During this period, the issuer may offer to sell securities to the public any number of times on a continuous or delayed basis.

Key Takeaways

  • Shelf registration allows a security issuing company to make multiple public offerings in the future by registering with the SEC once. However, the offerings must be made within three years.It qualifies the issuer to raise the required capital with minimal formalities when favorable market conditions exist.Companies aspiring for shelf registration generally have to file Forms S-3 or F-3 with the SEC, along with a base prospectus.Shelf offering may be continuous or delayed. In the former, securities are issued immediately after registration, while in the latter, they are deferred.

Shelf Registration Explained

Shelf registration, also called shelf offering, allows a company to issue multiple securities over a period of three years on filing a one-time registration document with the SEC. Companies usually resort to shelf offering when they don’t want to sell the securities immediately but like to keep the window of opportunity open.

The shelf offering process starts with filling in S-3 or F-3 forms with the base prospectus. Mostly, issuers use S3 forms (a registration statement that comes under the Securities Act of 1933) when filing for shelf registrations. On the other hand, F-3 forms come in handy for foreign companies.

The prospectus usually contains general information such as the kind of securities being registered, investment objectives, distribution plans, the company’s performance, and all the risks involved in the offering. It ensure that all crucial facts about the company are disclosed at the time of registration.

The registration statement goes to SEC for a final review. It takes a few weeks for approval. Once the SEC gives its nod, the company becomes eligible to take its securities “off the shelf” at a favorable market timeMarket TimeMarket timing is the plan of buying and selling the securities on the basis of decisions made by financial investors. They do security analysis to earn a profit on selling and it is the action plan to cope up with the fluctuations in the market prices.read more. Technically, this process is called takedown. Once the securities are taken off the shelf, they are released to the public.

The company discloses the specifics related to the offering in the prospectus supplement at the time of sale. However, it can issue securities immediately after the shelf registration comes into effect without waiting for the SEC to review the supplementary prospectus.

Shelf Registration – Eligibility Requirements

#1 – Registrant Eligibility

To be eligible for filing the Form S-3 or F-3, an issuer must:

  • Have its securities registered under the Security Exchange Act of 1934 or file reports under Section 15 (d) of the Exchange Act.Have filed and updated all its financial statements for the last twelve months before registration.Have paid its financial dividends Dividends Dividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read moreand have not defaulted on its installments on borrowed funds in the last 12 months before registration.

#2 – Primary Offering Eligibility

For primary offerings, the issuer may use Form S-3 if it has a public float of $75 million or more. However, an issuer may file Form S-3 without meeting the $75 million public float requirement if it is issuing non-convertible securities or is a baby shelf issuer.

Non-convertible securities, unlike convertible securities, do not provide the option of converting securities into shares or equitiesEquitiesEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company’s balance sheet.read more. To be eligible for offering non-convertible securities, an issuer must:

  • Have invested at least $1 billion in non-convertible securities 60 days before filling the shelf registration form.Stand at a valuation of at least $750 million non-convertible sources (other than common equity) 60 days before filing the shelf registration form.Be associated with a well-known seasoned issuer.

Many small issuers do not have the luxury of such a huge market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more. Baby shelf issuers are small entities whose market value stands less than the standard $75 million. They need to fulfill certain requirements to take advantage of shelf offerings.

  • The issuers should not be on the list of shell companies before a year of filing the registration forms.They should have a class of common stocks enlisted on the country’s national stock exchange.They should not sell securities worth more than one-third of its public float for a year after its registration.

Types of Shelf Offering

  • Continuous Offering – Through the continuous offering, issuers can offer their stocks immediately after the registration is complete. The offering continues to remain in effect throughout the registration period of three years. During this period, the issuer can sell the securities intermittently. However, note that continuity is restricted only to the offer of securities and not to their sale.Delayed Offering – In a delayed offering, the issuing company holds onto its securities instead of offering them immediately after registration. The company can choose to issue its shares in the market anytime within the duration of three years. However, more paperwork is generally required in the delayed offering than continuous offering.

Examples

Example #1

For example, ABC, a registered company, wants to raise $1,000,000 for funding its new project. It plans to raise capital through the issue of the following securities:

  • 5,000 shares2,500 bonds2,500 warrants

Later, it realizes the money obtained by selling these securities would be far more than it requires and plans to sell only 3,000 shares and 2,500 bonds Bonds Bonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read morefor the time being.

However, ABC senses that it can use the remaining securities in the near future to garner more money. Realizing this, the company files for shelf registration with the SEC under Rule 415, which allows it to sell multiple securities at different points of time.

ABC files a shelf registration statement (Form S-3) with a base prospectus for 3,000 shares and 2,500 bonds. This allows ABC to sell 3,000 shares and 2,500 bonds now and the remaining 4,500 securities whenever it wants to within a time frame of up to three years.

Example #2

Advantages

  • Shelf registration allows its users an opportunity to gain access to capital marketsCapital MarketsA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more instantly when the market conditions are in their favor.It permits the entitled companies to manage their capital efficiently. For example, a shelf registered company with $10,000 shares can choose to sell $4,000 shares now and the other $6,000 two years later if it does not want all the money at once.It is a one-step registration process free from multi-layered hassles of documentation, paperwork, and technical legalities.It provides control of the supply of shares to the issuing company. This gives the company the power to manipulate its share prices.Investors usually trust companiesTrust CompaniesA trust company is a legal arrangement set up or chosen by the grantor (an individual or entity) to manage assets and wealth for a certain period. Based on the purpose of handling and distributing assets and estates to the beneficiaries, it can work in the capacity of a trustee, fiduciary, custodian, or agent.read more going for shelf offering because all their financial details are open to the public for analysis and interpretation.

This has been a Guide to Shelf Registration & its Definition. Check out the requirements for a company filing shelf registration statement (S-3) with SEC. You may also have a look at the following articles to learn more –

Shelf registration is a facility provided by the Security Exchange Commission (SEC) that allows issuers to register for securities they are planning to offer in the future. It permits them to access the capital markets when the conditions are in their favor.

Normally, a shelf registration statement becomes ineffective after a period of three years. However, issuers who fail to sell their securities within the stipulated time can file for an extension.

· Permits issuers to time the market, which means selling securities when market conditions are ideal· Allows a company to manage its funds effectively· Helps in minimizing lengthy paperwork and documentation· Allows the issuing company control over the supply of their shares· Builds confidence among investors because of the openness of the entire process

Rule 415 under the Securities Act of 1933 allows its users to make multiple offerings by filing only one registration document with the SEC.

  • SEC FilingsElectronic FilingFollow on Public Offering