Rule 12h-3; reporting SEC 15(d) Exchange Act

[Sapphire Capital]

Division of Corporation Finance
Securities and Exchange Commission
Exchange Act Rule 12h-3
Staff Legal Bulletin No. 18 (CF)

Action: Publication of CF Staff Legal Bulletin

Date: March 15, 2010

Summary: This staff legal bulletin provides the Division of Corporation Finance's views regarding certain situations in which issuers may utilize Rule 12h-3 under the Securities Exchange Act of 1934 to suspend their reporting obligations under Section 15(d) of the Exchange Act.

Supplementary Information: The statements in this legal bulletin represent the views of the Division of Corporation Finance. This bulletin is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.

Contacts: For further information, please contact the Office of Chief Counsel in the Division of Corporation Finance at [phone].
I. Introduction

Over the past several years, the staff of the Division of Corporation Finance has responded to an increasing number of routine no-action requests from issuers seeking to suspend their reporting obligations under Section 15(d) of the Exchange Act by relying on Rule 12h-3 under the Exchange Act.1 The purpose of this legal bulletin is to:

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explain the operation of Section 15(d) and Rule 12h-3;
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identify two common situations that give rise to favorable no-action responses under Rule 12h-3;
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set forth the conditions that must be satisfied in these situations in order for an issuer to avail itself of the reporting suspension provided by Rule 12h-3; and
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discuss the Division's approach to processing Rule 12h-3 no-action requests on a going-forward basis.

II. The Operation of Section 15(d) and Rule 12h-3

When an issuer's registration statement under the Securities Act of 1933 becomes effective, Section 15(d) requires the issuer to file the reports required by Section 13(a) of the Exchange Act with respect to each class of securities covered by the registration statement. As the Commission has explained, the purpose of periodic reporting under Section 15(d) is "to assure a stream of current information about an issuer for the benefit of purchasers in the registered offering, and for the public, in situations where Section 13 of the Exchange Act would not otherwise apply."2 The issuer must continue to file these reports until the Section 15(d) reporting obligation for each class of securities is suspended.

The Section 15(d) reporting obligation is suspended while a class of securities is registered under Section 12 of the Exchange Act. In addition, there are two other ways in which a Section 15(d) reporting obligation may be suspended. First, Section 15(d) provides for an automatic statutory suspension of this reporting obligation if, on the first day of any fiscal year other than the fiscal year in which a Securities Act registration statement became effective, there are fewer than 300 record holders of the class of securities offered under the Securities Act registration statement. Second, an issuer may seek to avail itself of the suspension provided by Rule 12h-3 at any time during the issuer's fiscal year if it meets the conditions of the rule.

In order to rely on Rule 12h-3, the issuer:

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must be current in its Exchange Act reporting obligations;3
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must have (1) fewer than 300 record holders of the class of securities offered under the Securities Act registration statement; or (2) fewer than 500 record holders and its assets must not have exceeded $10 million on the last day of each of the issuer's three most recent fiscal years;4 and
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must not have had a Securities Act registration statement relating to that class of securities become effective in the fiscal year for which the issuer seeks to suspend reporting, or have had a registration statement that was required to be updated by Section 10(a)(3) of the Securities Act during the fiscal year for which the issuer seeks to suspend reporting, and, if the issuer is relying on the fewer than 500 record holder and $10 million in assets threshold noted above, during the two preceding fiscal years.

It is this last requirement, contained in Rule 12h-3(c), that has prompted issuers to seek no-action relief from the staff.5

In order to avail itself of the suspension provided by Rule 12h-3, the issuer must also file a certification of termination on Form 15. If the certification of termination on Form 15 is subsequently withdrawn or denied, the company must file all reports that would have been required if the Form 15 had not been filed.6 Similarly, if in the future the issuer no longer satisfies the requirements under which it was able to cease reporting under Section 15(d), the suspension ends and the reporting obligation returns without any action by the issuer.7
III. Two Common Situations That Give Rise to Favorable No-Action Responses Under Rule 12h-3

In the following two situations, the Division has repeatedly expressed the view that Rule 12h-3(c) does not preclude an issuer from filing a Form 15 to suspend its Section 15(d) reporting obligation with respect to a class of securities, even though a Securities Act registration statement relating to that class became effective or was required to be updated by Section 10(a)(3) during the time period specified in Rule 12h-3(c).

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Abandoned Initial Public Offering: An issuer with no Exchange Act reporting obligations has a Securities Act registration statement become effective, but does not sell any securities pursuant to the registration statement. The issuer files an application to withdraw the registration statement pursuant to Securities Act Rule 477, and the staff consents to the withdrawal.8
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Acquired Issuer: An issuer has been acquired by another entity, resulting in the class or classes of securities for which the issuer has a Section 15(d) reporting obligation being either: (1) extinguished; or (2) held or assumed by only one recordholder, the acquiring entity.9

In these two situations, subject to the conditions noted below, the Division has repeatedly expressed the view that continued Exchange Act reporting no longer serves the purposes underlying Section 15(d) and Rule 12h-3 because there are either no public shareholders or no longer any public shareholders of the class of securities for which there is a Section 15(d) reporting obligation, thereby making the benefits of periodic reporting not commensurate with the burdens imposed.10 Consequently, the Division has agreed with issuers that Rule 12h-3(c) would not preclude them from filing Forms 15 to suspend their reporting obligations under Section 15(d) in these two situations.
IV. Conditions That Must Be Satisfied in These Two Situations in Order for an Issuer to Avail Itself of the Reporting Suspension Provided by Rule 12h-3

When an issuer fits within either situation described in Part III above, and satisfies the conditions discussed below, the Division has repeatedly expressed the view that the application of Rule 12h-3(c) would not preclude the issuer from filing a Form 15 to suspend its reporting obligation for a class of securities under Section 15(d), even though a Securities Act registration statement relating to that class became effective or was required to be updated by Section 10(a)(3) during the time period specified in Rule 12h-3(c).
1. The issuer must not have a class of securities registered under Section 12 of the Exchange Act

An issuer may not rely on Rule 12h-3 to suspend its Section 15(d) reporting obligation if it has a class of securities registered, or required to be registered, under Section 12 of the Exchange Act. Section 15(d) provides that the obligation to file reports under Section 15(d) is automatically suspended if and so long as any class of securities of an issuer is registered pursuant to Section 12. Accordingly, any Forms 25 and 15 to terminate Section 12 registration for any class of securities registered under Section 12 must be properly filed before suspension of a Section 15(d) reporting obligation may be effected pursuant to Rule 12h-3.11
2. The issuer must comply with the other requirements of Rule 12h-3

The issuer may not exceed the recordholder and asset thresholds in Rule 12h-3(b)(1). The issuer must file a Form 15 and be current in its Exchange Act reporting obligations as of the date of filing the Form 15.
3. The issuer must deregister any unsold securities from Securities Act registration statements and withdraw any registration statements if there were no sales

The issuer must have terminated all registered securities offerings and cannot have any unsold securities remaining on any Securities Act registration statement. In this regard, the issuer must have filed post-effective amendments to deregister all unsold securities under Securities Act registration statements or, if there were no sales made pursuant to a registration statement, an application to withdraw the registration statement. These post-effective amendments or applications to withdraw must be effective or consented to before filing the Form 15.12 Also, the issuer may not have any pre-effective Securities Act registration statements on file with the Commission that have not been withdrawn.
4. The issuer must not otherwise file Exchange Act reports during the time period in which it seeks to avail itself of the suspension provided by Rule 12h-3

If the issuer will continue to have any outstanding debt, neither the indenture nor any documents related thereto may require the issuer to submit, provide, furnish or file reports under the Exchange Act with the Commission or the indenture trustee during the time period in which the issuer seeks to avail itself of the suspension provided by Rule 12h-3. Otherwise, suspending the issuer's obligation to file reports under Section 15(d) would have no practical effect on the issuer's preparation of Exchange Act reports.
V. The Division's Approach to Processing Rule 12h-3 No-Action Requests on a Going-Forward Basis

The Division has issued an extensive number of no-action responses regarding the ability of an issuer to rely on Rule 12h-3 for a class of securities, notwithstanding the fact that a Securities Act registration statement relating to that class became effective or was required to be updated by Section 10(a)(3) during the time period specified in Rule 12h-3(c). Because of the routine nature of these requests, the large body of no-action precedent and the guidance in this legal bulletin, the Division is of the view that, on a going-forward basis, an issuer that fits within either of the two situations identified above and satisfies the conditions set forth in this legal bulletin does not need a no-action response from the Division before filing a Form 15 to suspend its Section 15(d) reporting obligation in reliance on Rule 12h-3. In order to cease reporting, an issuer must file a Form 15 for each class of securities for which there is a Section 15(d) reporting obligation.

The Division will continue to entertain questions regarding the availability of Rule 12h-3 for situations that fall outside the facts and conditions discussed in this legal bulletin.13

1 Excluding requests for no-action letters under Exchange Act Rule 14a-8, the shareholder proposal rule, approximately one-third of all interpretive, no-action and exemptive requests acted on by the Office of Chief Counsel during fiscal year 2009 involved the application of Rule 12h-3. In fiscal year 2010 to date, approximately 60% of such requests acted on by the Office have involved Rule 12h-3.

2 See Exchange Act Release No. 20263 (Oct. 5, 1983).

3 More specifically, the issuer must have filed all reports required by Section 13(a) for the shorter of its most recent three fiscal years and the portion of its current year, or the period since it became subject to a Section 15(d) reporting obligation. See Rule 12h-3(a). In addition, if the issuer obtained an extension of time under Rule 12b-25 under the Exchange Act to file a required periodic report, it still would have to file the periodic report in question before availing itself of the suspension provided by Rule 12h-3. See Exchange Act Release No. 20263 at II.2.

4 See paragraphs (b)(1)(i) and (ii) of Rule 12h-3. In addition, paragraph (b)(2) of Rule 12h-3 requires that the class of securities not be registered under Section 12.

5 For example, an issuer may have an effective Form S-3 or Form S-8. The automatic incorporation by reference of its annual report on Form 10-K into the Form S-3 or Form S-8 serves as the Section 10(a)(3) update for those registration statements, thus calling into question the availability of Rule 12h-3 to suspend reporting.

6 See Rule 12h-3(a).

7 If on the first day of any subsequent fiscal year the thresholds in Rule 12h-3(b)(1) are exceeded, the suspension of reporting obligations under Section 15(d) will lapse, and the issuer would be required to resume periodic and current reporting under Section 15(d) in the manner specified in Rule 12h-3(e).

8 See, e.g., Liberty Lane Acquisition Corp. (July 28, 2008).

9 See, e.g., Wyeth (Nov. 4, 2009). In proposing to adopt former Rule 12h-4 under the Exchange Act, the predecessor to Rule 12h-3, the Commission noted that: "Recent acquisition activity has given rise to many . . . applications [for reporting relief] in situations where a corporation is the sole holder of a class of an acquired company's securities subject to a section 15(d) duty to file reports [and that] any benefit of requiring corporations to either file reports . . . or to apply for exemption . . . is generally outweighed both by the burden of compliance imposed upon such corporations and by the burden placed upon the staff in processing routine . . . applications." See Exchange Act Release No. 15757 (Apr. 23, 1979). Similarly, less than one year after the Commission adopted paragraph (c) of Rule 12h-3 in 1984, the Division indicated that Rule 12h-3(c) was not intended to require a company that was acquired in a merger to remain subject to the reporting requirements of Section 15(d) solely because the company had a Form S-8 that was updated pursuant to Section 10(a)(3) during the fiscal year in which the merger was consummated. See C. Michael Harrington (Jan. 4, 1985).

10 As the Commission has observed, Congress allowed the Section 15(d) reporting obligation to be suspended out of the recognition that "with respect to Section 15(d) . . . the benefits of periodic reporting by an issuer might not always be commensurate with the burdens imposed." See Exchange Act Release No. 20263.

11 See Exchange Act Rules Compliance and Disclosure Interpretations 144.01 and 144.02 regarding the timing for filing forms when a Section 12 registration is being terminated.

12 See Item 512(a)(3) of Regulation S-K. Post-effective amendments to Forms S-8 filed for the purpose of removing unsold securities from registration are effective upon filing, while post-effective amendments to most other registration statements for such purpose must be declared effective by the Division. See Securities Act Rule 464. Similarly, the staff must consent to applications to withdraw registration statements. See Securities Act Rule 477. Note that the requirement to file a post-effective amendment to deregister unsold securities does not apply to registration statements that have expired under Securities Act Rule 415(a)(5). Under Rule 415(a)(5), if three years have elapsed since the initial effective date of the registration statement under which they were being offered and sold, and a new registration statement has not been filed under Rule 415(a)(6), the offering of securities on the registration statement has expired. The registration statement will not be required to be updated under Item 512(a)(3) of Regulation S-K and will not need to be post-effectively amended to deregister unsold securities.

13 For example, an issuer with a "going dark" fact pattern — in which the number of record holders of the class of securities subject to the Section 15(d) reporting obligation has fallen below the thresholds in Rule 12h-3(b)(1), and there have been no sales pursuant to Securities Act registration statements during the fiscal year with respect to which the issuer seeks to suspend reporting — must continue to seek no-action relief to suspend its Section 15(d) reporting obligation if it does not meet the requirements of Rule 12h-3. See, e.g., International Wire Group, Inc. (Nov. 6, 2009).