By David M. Eaton
Section 15(d) of the Securities Exchange Act of 1934 requires an issuer who files a registration statement under the Securities Act of 1933 to file Exchange Act reports with the SEC for at least the year in which the registration statement goes effective. This duty to file under § 15(d) is automatically suspended while an issuer is reporting pursuant to Exchange Act § 12—for instance, because the securities are listed on a stock market. The duty to file is also automatically suspended as to any fiscal year, other than the fiscal year during which the registration statement went effective
, if at the beginning of the year the securities covered by the registration statement are held of record by less than 300 persons in the case of nonbanks, or 1,200 in the case of banks, savings and loans and bank holding companies. The Ostensible Problem
When securities lawyers refer to the “Hotel California” problem in § 15(d), they are usually referring to the fact that domestic issuers can never really terminate
a § 15(d) filing obligation—they can only suspend
If the filing obligation is suspended by virtue of a superseding § 12 filing obligation, the § 15(d) obligation returns when the § 12 filing obligation falls away. In addition, if a § 15(d) reporting duty is suspended due to the number of record holders falling below the requisite threshold, the duty resumes if the number eventually climbs back to the threshold or above. Hence, in the words of the Eagles’ 1977 classic, “[y]ou can check out any time you like, but you can never leave!” A Bigger Problem
However, this potential “gotcha” in the securities laws is probably outweighed in significance by a different problem—namely, that you really can’t
check out any time you like. The prohibition against reporting suspension during the fiscal year when the offering registration statement went effective, while seemingly straightforward on its face, has historically been interpreted in a manner which often frustrates issuers’ ability to suspend § 15(d) reporting in cases where the record holders are actually below 300. The problem, in short, is ‘evergreen’ Securities Act registration statements, like Forms S-3 and S-8. These types of registration statements allow securities to be offered from time to time over a period of potentially years—these are sometimes called “shelf” registrations, since securities can be “taken down off the shelf” and sold as needed from time to time. They are generally kept up to date through a company’s routine filing of SEC reports, which are deemed to be incorporated into the previously filed registration statements. The annual filing of a company’s Annual Report on Form 10-K is considered a more major update to these types of registration statements. The SEC views the Form 10-K as a “post-effective amendment” to a shelf registration statement—in other words, the registration statement is deemed to have gone “effective” again
upon the filing of the Form 10-K. This results in the automatic reporting suspension in § 15(d) being unavailable for any year in which a shelf registration statement (covering outstanding securities with a § 15(d) obligation) is automatically updated by the filing of a Form 10-K.
The same result can occur under Exchange Act Rule 12h-3, which under certain conditions permits suspension of reporting duties under § 15(d) when record holders decline below the threshold during the year, but were at or above it at the first of a year (which is a prerequisite for suspension under the actual statute
, vs. Rule 12h-3). Reporting suspension under Rule 12h-3 is “unavailable for any class of securities for a fiscal year in which a registration statement relating to that class becomes effective under the Securities Act of 1933, or is required to be updated pursuant to section 10(a)(3) of the Act.” The reference to Securities Act § 10(a)(3) refers to, among other things, the update to certain shelf registrations effected by the filing of an Annual Report on Form 10-K. To summarize, the passive updating via a Form 10-K of a shelf registration statement filed years ago can frustrate plans to suspend reporting under § 15(d), even if that registration statement has not been used to issue securities in a while. “Express Checkouts”
There are a couple of “express checkouts” available. In Staff Legal Bulletin 18, the SEC provided interpretative relief in two common situations: (1) the closing of an acquisition of a public company and (2) abandoned IPOs. When a public company is acquired, the number of holders of its common stock typically goes to one (i.e., the acquiring parent company, in the case of the popular reverse triangular merger structure) or zero. However, if the target had an outstanding shelf registration under which common stock could be issued (like a Form S-8 covering an employee stock incentive plan), and the acquisition closes after the target has filed its Form 10-K with respect the preceding completed fiscal year, suspension of the § 15(d) reporting obligation attached to the common stock would technically be unavailable under § 15(d) and Rule 12h-3. The abandoned IPO situation involves an issuer, with no existing Exchange Act reporting obligation, filing a Securities Act registration statement which goes effective, but which is withdrawn prior to any securities being sold under it. Since the § 15(d) reporting obligation is triggered merely off of the registration statement going effective, and not the actual completion of the securities offering, issuers technically incur a § 15(d) reporting duty even if they never issue one share. SLB 18 grants relief from reporting in both of these situations (subject to conditions set forth in the bulletin). The guidance makes good sense. In both the acquired public company and abandoned IPO scenarios, there are no public holders of the company’s common stock that would receive any benefit from SEC reporting. Problem Areas
There are, however, a surprising number of situations that SLB 18 doesn’t cover, which may result in a company theoretically retaining a reporting obligation in situations where it may make no sense for it to do so. Among them:
Relying on No-Action Letters for Solutions—Good News—and a Couple Caveats
- A security (typically a corporate debt security—i.e., a bond) is redeemed, repaid at maturity, defeased, or repurchased during a year in which a registration statement covering the security goes effective or is updated by a Form 10-K filing. The § 15(d) reporting obligation can continue through that year even though there are no securities left outstanding, and thus no holders.
- A related problem is when a subsidiary guarantor of a parent company’s corporate bond is released from its guarantee—if a registration statement covering the guarantee goes effective or is updated during the year of guarantee release, the subsidiary guarantor may not be able to suspend reporting.
- An acquired company has its own outstanding debt securities upon closing of the acquisition—typically, no series of bonds would be held of record by 300 or more holders, but, if the target had a registration statement covering the securities that went effective or was updated by a Form 10-K filing during the year the acquisition closes, the § 15(d) reporting suspension is not technically available with respect to that year.
- Problems can even arise in the benefit plan context. Consider a 401(k) plan that decides to eliminate its issuer common stock investment alternative. Can the plan stop filing its Form 11-K annual report—and assuming it can stop, when?
The good news is that there are a lot of favorable SEC staff “no-action” letters published in this area—many of them cast as interpretative relief under Rule 12h-3.
In some situations, there are sufficient numbers of letters such that counsel may feel comfortable relying on them rather than seeking individual no-action relief. Nevertheless, it is important to analyze a particular situation to make sure it squares with the available letters. If a situation is not on all fours with a line of precedents, counsel may choose to consult with the SEC’s Office of Chief Counsel. A couple caveats—first, no-action relief is generally denied if the security covered by the registration statement was actually offered and sold pursuant to that registration statement in the year in which reporting relief is sought. The typical situation for no-action relief therefore involves a shelf registration being passively updated by a Form 10-K filing in a year during which no actual offering under the registration statement is made. Second, whether a company can suspend a § 15(d) reporting obligation (usually accomplished through filing a Form 15) is a different question from whether a reporting company can discontinue including a Regulation S-X Rule 3-10 condensed consolidating note that has previously appeared in the company’s financial statements. To briefly explain this issue: subsidiary guarantors of the debt securities of a reporting parent commonly do not file their own Exchange Act reports separately from their parent, even though guarantees of debt securities are themselves considered securities that can trigger a reporting obligation if offered pursuant to a registration statement. Instead, the reporting parent will typically include financial information about the subsidiary guarantors in a special footnote in the parent’s financial statements prescribed by Rule 3-10 of Regulation S-X. If a subsidiary guarantor can omit filing its own financial statements because its parent includes the requisite footnote, then Exchange Act Rule 12h-5 exempts that subsidiary guarantor from Exchange Act reporting. The hitch is that the SEC staff requires, as a condition to the use of the Rule 12h-5 reporting exemption for subsidiary guarantors, that the special Rule 3-10 footnote be included in the parent’s financial statements for as long as the security is outstanding. So, even if the number of guarantee holders falls below 300, and the subsidiary guarantor is consequently able to file a Form 15 to suspend its reporting obligation, the parent’s reports must continue to feature the special footnote (which can be difficult to prepare, depending on the guarantee structure) for so long as the guarantee is held by any
holders. If the subsidiary reported separately from the parent in this situation rather than rely on the Rule 12h-5 exemption, it could suspend reporting and the parent would have no special financial statement footnote requirement.
In other words--imagine if you did
check out of the hotel, but had to continue paying the bill into perpetuity! Conclusion
The message here is not that § 15(d) can create insurmountable problems when an issuer seeks to cease reporting with respect to a particular security that is held by somewhere between zero and 299 holders; the real takeaway is that you need to engage in one of the oldest of lawyerly skills—issue-spotting—when considering Exchange Act § 15(d) reporting suspension. Many of the problems you may identify can be addressed through reliance on existing SEC staff guidance (whether the SLB or published no-action letters), but given the wide variety of facts that may pertain, you can encounter situations that don’t square with the guidance. Better to get a handle on any § 15(d) issues early in your process and get comfortable with your solutions, rather than run up against an Exchange Act reporting deadline unsure of whether you can skip the report. 
This means you still have to file a Form 10-K with respect to the year of effectiveness, even if the report is actually filed in the subsequent year after the duty to file under § 15(d) is suspended. 
Pursuant to Exchange Act Rule 12h-6, adopted in 2007, a foreign private issuer actually can
terminate, and not just suspend, its duty under § 15(d) to file SEC reports. The previous inability of foreign private issuers to permanently exit SEC reporting was thought to be a disincentive for foreign companies to access the U.S. capital markets. Rel. No. 34-55540 (June 4, 2007). 
SEC Exchange Act Sections Compliance and Disclosure Interpretations Question 153.01. 
“No-action” letters are a traditional form of written administrative guidance companies and their lawyers can sometimes obtain from the SEC staff—so named because a favorable response from the staff will conclude with a sentence to the effect that the staff will not recommend to the actual commissioners that any enforcement action be taken against the company requesting relief if it proceeds as outlined in its no-action request. 
See, e.g., § 2540.2 of the SEC’s Division of Corporation Finance Financial Reporting Manual.