Shelf registration is a procedure under United States securities law that allows an issuer to register an offering of securities in advance and then sell them, in one or more instalments, when it chooses. The registered securities are said to sit "on the shelf" until the issuer takes some or all of them down for sale. Companies use it so that they can raise money quickly when market conditions are favourable, without preparing and clearing a new registration statement for each offering.
The procedure is set out in Rule 415 under the Securities Act of 1933 and is administered by the Securities and Exchange Commission. It is one form of securities registration, and it applies to follow-on sales by companies that already report publicly, not usually to an initial public offering.
Background
Under the 1933 Act, securities may not be offered to the public unless a registration statement is in effect. Originally each offering needed its own filing and review, which could take weeks and exposed issuers to the risk that markets would move before they could sell. The SEC adopted Rule 415 on a trial basis in 1982 and made it permanent in 1983. Reforms to offering rules in 2005 went further by creating a class of large issuers whose shelf filings become effective automatically, and by relaxing limits on communications around offerings.
How it works
The process has two stages:
- The base filing. The issuer files a registration statement, typically on Form S-3, or Form F-3 for foreign companies. It contains a base prospectus describing in general terms the types of securities that may be offered, such as ordinary shares, preferred shares, debt securities and warrants. Detailed information about the company is incorporated by reference from its periodic reports, such as the annual Form 10-K, including reports filed later.
- The takedown. When the issuer decides to sell, it files a prospectus supplement giving the specific terms: the security, amount, price, underwriters and use of proceeds. No further SEC review is needed, so an offering can be launched and priced within hours.
A shelf registration statement can generally be used for three years, after which a new one must be filed. A universal shelf covers several classes of security in a single filing.
Who can use it
Eligibility for Form S-3 depends on the issuer's reporting history and size. In broad terms, the company must have filed its periodic reports on time for at least twelve months, and to make unrestricted primary offerings it must have a public float of at least 75 million US dollars. Smaller listed companies may still use the form but are limited in any twelve-month period to selling securities worth no more than one-third of their public float, a restriction often called the baby shelf rule.
The largest issuers qualify as well-known seasoned issuers, broadly those with a public float of at least 700 million US dollars or with substantial recent issuance of registered debt. Their shelf registration statements take effect on filing, they need not state an amount of securities in advance, and they can add new classes of security later.
Uses
Shelf registration underlies much of the US market for follow-on capital raising. Investment-grade companies issue corporate bonds off the shelf, often with only a day's preparation, and bond issuance programmes such as medium-term notes rely on it. In equities, it supports overnight or accelerated offerings, in which banks run a rapid book building after the market closes, and at-the-market programmes, in which shares are sold gradually into ordinary trading through a broker. Issuers of an asset-backed security have their own shelf form with additional conditions. Shelves are also used to register resales of shares by existing holders, for example after a private placement.
Advantages and risks
The main benefits are speed, lower cost per offering and the ability to time the market. Having a shelf in place also strengthens an issuer's position when negotiating with an underwriting syndicate, since competing banks can bid for a deal at short notice.
There are drawbacks. The existence of a large equity shelf can weigh on the share price, because investors anticipate dilution; this is known as overhang. The compressed timetable leaves underwriters little time for due diligence, although they remain liable for misstatements, so banks keep up continuous review of frequent issuers. The issuer and its directors are liable for the accuracy of the registration statement, including the documents incorporated by reference, as of each takedown.
Comparable arrangements elsewhere
Other jurisdictions offer similar flexibility in different forms. Under the European Union's Prospectus Regulation, an issuer of debt securities can publish a base prospectus valid for twelve months and issue under it by filing final terms for each tranche, and frequent issuers can file a universal registration document that shortens later approvals. Canada operates a shelf prospectus system closely modelled on the US one. These are all forms of streamlined primary market issuance for established issuers.