Revised Statement on Well-Known Seasoned Issuer Waivers
April 24, 2014
In 2005’s Securities Offering Reform release,1 the Commission adopted various modifications to the registration, communications and offering processes under the Securities Act, including creating a new category of issuer — the “well-known seasoned issuer” (“WKSI”)2 — for the most widely followed issuers representing the most significant amount of capital raised and traded in the United States. WKSIs benefit to the greatest degree from the communications and registration flexibilities provided in Securities Offering Reform. Most notably, WKSIs can register their securities offerings on shelf registration statements that become effective automatically upon filing. As a result, a WKSI is not required to wait until the Division of Corporation Finance reviews and declares its registration statement effective before it is permitted to make sales.3
In order to qualify as a WKSI, an issuer may not be an “ineligible issuer.” Rule 405 of the Securities Act defines an “ineligible issuer” to be, among other things,4 an issuer that has (or whose subsidiary has) been convicted of a felony or misdemeanor specified in four enumerated provisions under Section 15 of the Exchange Act5 or an issuer that has violated (or whose subsidiary has violated) the anti-fraud provisions of the federal securities laws (or that are the subject of a judicial or administrative decree or order prohibiting certain conduct or activities involving the anti-fraud provisions of the federal securities laws).6 In determining to exclude certain categories of issuers from WKSI status, the Commission noted that certain issuers have been viewed historically as ineligible for disclosure-related relief.7
Under Securities Act Rule 405, the Commission may grant waivers of ineligible issuer status “upon a showing of good cause, that it is not necessary under the circumstances that the issuer be considered an ineligible issuer.” Authority to act on applications for waivers from ineligible issuer status has been delegated by the Commission to the Director of the Division of Corporation Finance.8
On July 8, 2011, the Division issued a statement on WKSI waivers to provide guidance on what constitutes “a showing of good cause” for purposes of an ineligible issuer waiver request.9 The purpose of that guidance was to provide transparency into the framework that the Division follows in considering an application for a waiver of ineligible issuer status. Based on our experience with WKSI waivers to date, including the 18 months since the issuance of the original policy, the Division has decided to update and refine its policy. This statement outlines the framework the Division generally will follow in considering whether to grant a waiver of ineligible issuer status.
Framework for Determining Waivers
The Division’s assessment in determining whether an issuer has shown good cause that ineligible issuer status is not necessary for the public interest or the protection of investors focuses on how the conduct that gave rise to the ineligibility relates to the reliability of the issuer’s current and future disclosure and, if it does, what steps the issuer has taken to remediate any deficiencies.
A waiver, which could include conditions or undertakings, may be granted if a review of all of the facts and circumstances leads the Division to conclude that granting the waiver would be consistent with the public interest and the protection of investors. In making this determination, the Division will consider the nature of the violation or conviction and whether it involved disclosure for which the issuer or any of its subsidiaries was responsible or calls into question the ability of the issuer to produce reliable disclosure currently and in the future. In addition, the Division will review whether the conduct involved a criminal conviction or scienter based violation, as opposed to a civil or administrative non-scienter based violation.10 Where there is a criminal conviction or a scienter based violation involving disclosure for which the issuer or any of its subsidiaries was responsible, the issuer's burden to show good cause that a waiver is justified would be significantly greater.
The Division will also consider the factors below when it evaluates the appropriateness of granting a waiver from ineligible issuer status. No single factor is dispositive, and the burden will be on the issuer to demonstrate that the conduct that gave rise to the violation, and the facts and circumstances as they currently exist, do not affect its ability to produce reliable disclosure and that it is not necessary under the circumstances that the issuer be considered an ineligible issuer.
- Who Was Responsible for and What Was the Duration of the Misconduct? Specifically, the Division would consider who was responsible for the misconduct and whether it was known by the WKSI parent or whether personnel at the WKSI parent ignored warning signs regarding the misconduct. The concern would be the potential impact of such actor(s) and circumstances upon the issuer’s ability to file reliable reports with the Commission. In this regard, the Division would consider whether the individuals responsible for or involved in the misconduct were officers or directors of the WKSI parent, or were lower level employees in the operation of a subsidiary. The Division would also consider whether there were red flags about the conduct and whether more senior officers of the WKSI parent disregarded these warning signs. The Division would also look at the duration of the violative conduct. Did the conduct last over a period of years or was it an isolated instance? If the conduct was an isolated instance conducted at the subsidiary level and not known or disregarded by the WKSI parent, then it would be more likely that this factor would weigh in favor of granting a waiver. However, if the conduct was known or warning signs were disregarded by the WKSI parent, or the conduct lasted over several years, or it reflected a tone at the top that condoned or chose to ignore the conduct, then this factor would weigh against granting a waiver. Greater emphasis will be placed on this factor if individuals involved with, or with influence over, the issuer’s disclosure were participants in or knew or should have known about the misconduct resulting in ineligibility, as this may call into question the reliability of the issuer’s current and future disclosure.
- What Remedial Steps Did the Issuer Take? The Division will consider what remedial measures the issuer has taken to address the violative conduct and whether those actions would likely prevent a recurrence of the misconduct and mitigate the possibility of future unreliable disclosure. The Division will look at whether there were key changes in the personnel involved in the violative or criminal conduct. The Division will also look at whether the issuer has taken steps to improve training or made improvements to internal controls and disclosure controls and procedures. The Division’s analysis of the importance of these remedial steps will focus on how they relate to the issuer’s ability to produce reliable disclosure. The effectiveness of these actions would help support a conclusion that, despite past violations, the issuer’s disclosure to the markets would be more likely to be reliable in the future. On the other hand, if the conduct in question or similar conduct has happened on prior occasions, it may raise questions about the efficacy of the remediation and the adequacy of an issuer’s internal controls, which could bear on the issuer’s ability to produce reliable disclosure.
- Impact If the Waiver Request Is Denied. We will weigh the severity of the impact on the issuer if the waiver request is denied and weigh any such impact against the facts and circumstances relating to the violative or criminal conduct to assess whether the loss of WKSI status would be a disproportionate hardship in light of the nature of the issuer’s misconduct. We will also look at any effects that the issuer’s loss of WKSI status could have for the markets as a whole and the investing public in considering whether a waiver would be consistent with the public interest and the protection of investors.
Issuers seeking a waiver must submit a request letter that includes appropriate justification, based on the framework outlined above, for why a waiver should be granted and will bear the burden of establishing such justification. Inquiries about WKSI Waivers should be directed to the Division’s Office of Enforcement Liaison at 202-551-3420.
See Securities Offering Reform, Securities Act Release No. 8591 (August 3, 2005)[70 FR 44721] (“Securities Offering Reform Adopting Release”).
Under Securities Act Rule 405, a WKSI is an issuer that meets the registrant requirements of Form S-3 or Form F-3 and either: (1) “as of a date within 60 days of determination date, has a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700 million or more”; or (2) “as of a date within 60 days of the determination date, has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the [Securities] Act.” In addition, as discussed below, the issuer may not be an ineligible issuer.
Issuers who are not WKSIs and who are otherwise eligible to register offerings on Form S-3 or Form F-3 can still conduct delayed offerings using shelf registration statements, but do not enjoy such privileges as automatic effectiveness of such registration statements.
Generally, an ineligible issuer also would include any issuer that failed to file all reports and materials required to be filed under Exchange Act Section 13(a) or 15(d) during the preceding 12 months; an issuer that is, or within the past three years the issuer or any of its predecessors was, a blank check company, a shell company, or an issuer in a penny stock offering; an issuer that is a limited partnership engaged in an offering other than through a firm commitment underwriting; an issuer that, within the past three years, filed or had filed against it a petition under federal bankruptcy laws or any state insolvency law; an issuer that has filed a registration statement that is subject to a pending proceeding under Section 8 of the Securities Act or has been the subject of any refusal order or stop order under Section 8 within the prior three years; or an issuer subject to a pending proceeding under Section 8A of the Securities Act in connection with the offering.
Clause (1)(v) of the definition of ineligible issuer states, “(v) Within the past three years, the issuer or any entity that at the time was a subsidiary of the issuer was convicted of any felony or misdemeanor described in paragraphs (i) through (iv) of section 15(b)(4)(B) of the Securities Exchange Act of 1934.” Paragraphs (i) through (iv) of Section 15(b)(4)(B) of the Exchange Act include a felony or misdemeanor that:
- involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, any substantially equivalent activity however denominated by the laws of the relevant foreign government or conspiracy to commit any such offense;
- arises out of the conduct of the business of a broker, dealer, municipal securities dealer, municipal advisor, government securities broker, government securities dealer, investment adviser, bank, insurance company, fiduciary, transfer agent, nationally recognized statistical rating organization, foreign person performing a function substantially equivalent to any of the above or entity or person required to be registered under the Commodity Exchange Act (7 U.S.C. 1 et seq.) or any substantially equivalent foreign statute or regulation;
- involves the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or substantially equivalent activity however denominated by the laws of the relevant foreign government, or
- involves the violation of section 152, 1341, 1342, or 1343 or chapter 25 or 47 of title 18, United States Code, or a violation of a substantially equivalent foreign statute.
Clause (1)(vi) of the definition of ineligible issuer states: (vi) Within the past three years (but in the case of a decree or order agreed to in a settlement, not before December 1, 2005), the issuer or any entity that at the time was a subsidiary of the issuer was made the subject of any judicial or administrative decree or order arising out of a governmental action that:
- Prohibits certain conduct or activities regarding, including future violations of, the anti-fraud provisions of the federal securities laws;
- Requires that the person cease and desist from violating the anti-fraud provisions of the federal securities laws; or
- Determines that the person violated the anti-fraud provisions of the federal securities laws.
See Securities Offering Reform Adopting Release, 70 FR at 44746.
See Rule 30-1(a)(10) of the Rules of Organization and Program Management Governing Delegations of Authority to the Director of the Division of Corporation Finance [17 CFR 200.30-1].
Division of Corporation Finance Statement on Well-known Seasoned Issuer Waivers, July 8, 2011, available at: http://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp.htm
The Supreme Court has defined “scienter” as “a mental state embracing intent to deceive, manipulate, or defraud.” See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 2 (1976). In addition, “Every Court of Appeals that has considered the issue has held that a plaintiff may meet the scienter requirement by showing that the defendant acted intentionally or recklessly, though the Circuits differ on the degree of recklessness required.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 n.3 (2007) (citing Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338, 343 (4th Cir. 2003) (collecting cases)).