UVA-F-1701

Rev. Nov. 19, 2015

The Shelf Registration Process

Over the past several decades, most financial regulatory bodies have recognized that investors differ in
their need for financial information and their abilities to acquire and process it. Regulators should ideally
focus their attention on issuers (and their respective security offerings) that investors know little about and
limit their scrutiny of issuers that already provide extensive disclosure and are well known to investors.
Accordingly, in the United States and other developed countries, initial public offerings receive the greatest
scrutiny and require the most complete disclosure of information. But as firms grow larger and become more
frequent issuers in the capital markets, the regulatory requirements and oversight are typically reduced. The
easing of restrictions on larger and better known issuers is commonplace across many countries but all these
regulations have their origins in Securities and Exchange Commission (SEC) Rule 415. This note provides a
brief historical review the origins of Rule 415, or as it is more widely known as shelf registration, and some of
the important revisions to it that have increased its use over time. The more frequent use of shelf registration
has led to the development of alternative methods of selling seasoned or follow-on equity offers, such as fully
marketed offers, accelerated book building offers, and overnight offers.

Rule 415

Rule 415, instituted in March 1982, allowed an issuer to immediately sale a block of securities within a
two-year period after the filing of a registration statement. The rule allowed firms to register a single type of
security (debt or equity) in an amount that could “reasonably be expected to be offered and sold within two
years of the effective date of the registration statement.” The Securities Act of 1933 states that a “registration
statement shall be deemed effective only as to the securities specified therein as proposed to be offered.”
Historically, this statement prevented the registration of securities without a firm sale date in the near future.
Essentially under shelf registration, a firm receives preclearance from the SEC to issue at a later date by
undergoing the review process in advance. Once the shelf registration is declared effective, the firm can sell
securities without further regulatory delay within this two-year window. There is no requirement that firms
raise the amount of capital specified on their shelf registration. While shelf registrants publicly declare their
intent to raise capital, they need not specify the actual amounts, the timing of offers, or the expected use of
proceeds. Because the shelf filing does not require firms to specify the underwriters in the offer until the
securities are sold (pulled off the shelf), the competition among underwriters is purposefully intensified
through this process. Savvy issuers have used the shelf registration process to create auctions among
underwriters to reduce their costs and fees. Many observers point to this auction process as one of the
reasons for the sharp decline in the gross spreads on debt offers over time.

After 1982, debt issuers were quick to adopt shelf registration while equity issuers made little use of the
method. Exhibit 1 shows the trends in the percentage of shelf and nonshelf equity offers from 1990 to 2012.
In 1990, eight years after the law was enacted, less than 1% of equity was issued using shelf registration. Two

This technical note was prepared by Susan Chaplinsky, Tipton R. Snavely Professor of Business Administration, University of Virginia. Copyright ©
2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
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Any unauthorized use or reproduction of this document is strictly prohibited*.
Page 2 UVA-F-1701

concerns were initially raised about shelf registration. First, given the increased speed of issuance, investors
were concerned there would be inadequate time for due diligence about the offer. Second, issuers were
perceived to avoid shelf-registered equity because of a perceived “equity overhang.” Since equity issues were
typically associated with a 2% to 4% decrease in the issuer’s stock price at announcement of the offer, these
concerns conceivably might lead to larger price declines.

Revisions in Rule 415 attempted to remove some of the stumbling blocks thought to inhibit its use for
equity offers. In 1992, the SEC permitted firms to register several types of securities (as opposed to a single
type of security) on a universal registration statement. A universal registration statement allowed for registration of
multiple securities (e.g., debt, preferred stock, common stock) on one form. Under the revised rules, firms
still publicly declared their intent to raise capital and the overall amount of capital they might raise, but they
did not have to specify which security would be used for an offer until the point of sale. An example of a
filing using a universal registration statement is shown below:

Digimarc Corporation (NASDAQ: DMRC) announced today that it has filed a shelf registration
statement on Form S-3 with the Securities and Exchange Commission. When declared effective by
the SEC, the registration statement will allow Digimarc to issue various types of securities, including
common stock, preferred stock, debt securities, and/or warrants, from time to time up to an
aggregate amount of $100 million. After the shelf registration statement becomes effective, Digimarc
may offer and sell securities covered by the registration statement through one or more methods of
distribution, subject to market conditions and Digimarc’s capital needs. The terms of any offering
under the shelf registration statement will be established at the time of such offering and will be
described in a prospectus supplement filed with the SEC prior to completion of the offering.1

An important advantage of shelf registration is greater speed to market compared to a traditional firm
commitment offering. Table 1 compares some of the characteristics of common stock sold via shelf
registration and the traditional firm commitment process (nonshelf registration). Note that the speed with
which the offer can be conducted for shelf registered offers is reduced to a median three days compared to a
median 29 days for nonshelf offers. In addition, shelf registered equity offers have a lower average gross
spread and offer discount compared to the nonshelf registered equity offers.2

Table 1. Comparison of Shelf and Nonshelf Follow-on Equity Offers.

Shelf Registered Offers Nonshelf Registered Offers
Mean Median Mean Median
Gross spread 3.77% 3.89% 4.93% 5.00%
Offer discount* 2.10% 1.06% 2.61% 1.69%
Days in registration 9.0 3.0 44.8 29.0
* Offer discount is the discount from the closing price the day before the offering to the follow-on offer price.

1 http://finance.yahoo.com/news/digimarc-files-form-3-shelf-

200000850.html;_ylt=AwrBT82kEDVWZ_UA1pxXNyoA;_ylu=X3oDMTBzdWd2cWI5BGNvbG8DYmYxBHBvcwMxMAR2dGlkAwRzZWMDc3
I-.
2 Table 1 is based on 2,847 equity takedowns from shelf registrations and 2,608 nonshelf follow-on equity offers made during 1993–2003. The

differences in the gross spread and offer discount remain significant after controlling for potential differences in the quality of shelf and nonshelf
registered issuers. The results in Table 1 are reported in Jennifer Bethel and Laurie Krigman, “Unallocated Shelf Registration: Why Doesn’t Everybody
Use It?,” Babson College, working paper, February 2005.

This document is authorized for use by Darden Students, from 12/14/2021 to 6/15/2022, in the course:
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Any unauthorized use or reproduction of this document is strictly prohibited*.
Page 3 UVA-F-1701

Despite the documented advantages of lower costs and less delay in registration, the authors report that
as recently as 2003, a sizeable fraction of companies eligible to issue equity under a shelf registration still
chose not to do so.

As one might imagine, not all firms are eligible to use shelf registration. When first enacted in 1982, to
qualify for shelf registration, issuers had to (1) have a public float in excess of $150 million, (2) not have
defaulted on any outstanding claim in the previous three years, (3) have met all disclosure requirements of the
SEC in the previous three years, and (4) have investment-grade debt. These qualifications were designed to
restrict eligible issuers to companies that already had a history of public filings and were known to the
investor community. In 1992, the public float requirement was dropped to $75 million, and the time of SEC
disclosure compliance was reduced to one year.

Well Known Seasoned Issuers

Exhibit 1 reveals that it took until 2003 before the majority of equity issues used shelf registration, and
since then its use has risen sharply.3 Many market observers attribute its increased use to rules approved by
the SEC in June 2005 (effective December 2005) that further streamlined the shelf registration process.
Under the revised rules, the period in which a firm is permitted to issue securities under an existing shelf
registration was extended from two years to three years. The revised rules also permit immediate shelf
takedowns, whereas prior to that the informal requirement was that an offer could not occur sooner than 48
hours after the effective date.4

In addition, the reforms further liberalized the shelf eligibility requirements and created a new category of
firms called well known, seasoned issuers (WKSIs, pronounced “wicks sees”). WKSIs are large firms (with a
minimum of $700 million in global market value) that are frequent issuers in the capital markets (issuing at
least $1 billion in primary offerings of nonconvertible securities, other than common equity, in the past three
years). The new rules no longer require issuers to have investment grade debt, and encourage WKSIs to issue
noninvestment grade debt, previously issued privately under Rule 144A, on a shelf registration. The revised
rules allow expanded use of prospectus supplements (incorporation by reference to other audited financials)
and established a flexible automatic shelf registration process. The advantage of this for WKSIs is that all shelf
registrations become effective automatically upon filing of a registration statement without any SEC staff
review.5 None of the liberalizations of shelf, however, apply to initial public offerings—they remain
prohibited from using shelf registration.

The revised rules have spawned several variations in the methods that firms can use to make follow-on
equity issues. Companies can choose to utilize a fully marketed offer, an accelerated book building offer, or an overnight
offer (also known as a block offer or bought deal). All these methods are firm commitment offerings (i.e., the
underwriter provides a guarantee of proceeds) but differ in the length and extent of the roadshow and
marketing efforts for the offer. For a fully marketed offer, the roadshow and book building may last for up to

3 D. M. Atore, R Kumar, and D. K. Shome, “The Revival of Shelf Registered Corporate Equity Offerings,” Journal of Corporate Finance 14, 2008, 32–

50 report similar findings and discuss some the reasons for the increased use of shelf registration for equity issues.
4 The revised rules also streamlined the procedures for handling an At the Market (ATM) offering. Under an ATM offering program (also known as

an equity dribble out program), an exchange listed company sells newly issued shares through a designated broker-dealer at prevailing market prices
rather than through a traditional underwriting offering with a fixed number of shares at a fixed offer price. These programs require the use of a shelf
registration, and, although versions of these programs have existed for many years, their use and attractiveness increased significantly after 2005.
5 Effective January 28, 2008, the SEC further expanded shelf registration to small issuers with less than $75 million in public float provided they met

certain criteria, https://www.lowenstein.com/files/Publication/077332f5-f906-40f5-a9be-

693f1fe21907/Presentation/PublicationAttachment/1fc5458d-493e-4ca6-b309-
6ad11d292f82/SEC%20Expands%20Eligibility%20Requirements%20KD.%2001.08%20Derivatives.pdf|.

This document is authorized for use by Darden Students, from 12/14/2021 to 6/15/2022, in the course:
SY Q3 8470 A Corporate Financing, University of Virginia.
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Page 4 UVA-F-1701

a week compared to accelerated book builds in which the book building occurs in a one- or two-day period.
Overnight offers, as the name suggests, involve no roadshow and rely on the investment bank that has
“bought the deal” to place the shares quickly with its network of institutional investors. Both accelerated
book builds and bought offers are conducted using shelf registration. These alternatives essentially allow
companies to choose an appropriate level of marketing effort for their offer.

Exhibit 2 shows the trends in the use of alternative selling methods from 2000 to 2011 and some of the
characteristics of the respective types of offers for all follow-on equity offers made in 2011. Before 2000, fully
marketed offers served as the method of issue for virtually all follow-on equity offers, but since 2005 and the
revised rules, there has been a marked increase in the use of accelerated book builds. As might be expected,
“you get what you pay for,” and bought deals are executed at the lowest gross spread, and the costs of
issuance increase with the marketing effort involved with the offer.

Conclusions

As markets have grown and the volume of issuance has increased, regulators and issuers have sought
ways to reduce the regulatory costs for firms that already provide extensive disclosure and are well known in
the marketplace. This trend began with the enactment of SEC Rule 415 (shelf registration) in the United
States in 1982. The United Kingdom, Canada, the European Union, and other countries have followed suit
and enacted similar regulations to ease the oversight of more established and well known issuers. From the
beginning, debt issuers were quick to embrace the new rules such that the vast majority of debt in the United
States has been issued under shelf registration since the mid-1980s. As speed to market would seem to be an
important advantage for equity issue, for many years it was puzzling as to why eligible firms seemed reluctant
to issue shelf registered equity. In light of this, the rules were revised in 1992 to allow for filing of a universal
registration statement, and more recently in 2005, to provide for automatic registration of well known
seasoned issuers. Further attempts to reduce costs have produced alternative selling methods for issuing
follow-on equity: fully marketed offers, accelerated book builds, overnight deals, and At-The-Money
offerings. As a result, managers must exercise more judgment today in selecting the capital raising method
that best matches their firm’s needs.

This document is authorized for use by Darden Students, from 12/14/2021 to 6/15/2022, in the course:
SY Q3 8470 A Corporate Financing, University of Virginia.
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Page 5 UVA-F-1701

Exhibit 1
The Shelf Registration Process
Trends in the Use of Shelf Registration for Follow-On Equity Offerings

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1996
1990
1991
1992
1993
1994
1995

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
%Shelf %Non Shelf

Data source: Thomson Reuters Security Data Corporation New Issues Database. The sample is restricted to offerings of common stock by
firms listed on major U.S. exchanges. It excludes issues by utilities, closed-end funds, and real estate investment trusts.

This document is authorized for use by Darden Students, from 12/14/2021 to 6/15/2022, in the course:
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Page 6 UVA-F-1701

Exhibit 2
The Shelf Registration Process
Trends in the Use of Alternative Selling Methods for Follow-On Equity Issues

100%
13% 17% 12% 14% 16% 12% 13% 13%
90% 20% 21% 23% 20%
4%
80% 8% 19%
20%
17% 12% 12% 18%
70%
60% 51% 57% 57%
63%
50%
40% 84%
74% 70% 66% 63% 67% 65% 62%
30%
20%
33% 30% 30%
10% 25%

0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Fully Mkt Acc Bookbuild Bought Deal

Note: Fully Mkt = fully marketed offer, Acc Bookbuild = accelerated build offer, Bought Deal = bought or overnight deal.

Follow-on Equity Offers Issued Using Fully Marketed Offers, Accelerated Book Builds, and Bought Deals

Data source: Follow-on equity offer made in 2011 as reported by Dealogic.

This document is authorized for use by Darden Students, from 12/14/2021 to 6/15/2022, in the course:
SY Q3 8470 A Corporate Financing, University of Virginia.
Any unauthorized use or reproduction of this document is strictly prohibited*.