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Shelf registration is a process which makes it easier for United States-based companies to quickly issue and sell new stock. The system involves filing a single document which then allows stock to be issued at any time in the next two years. There are strict rules which a company must meet to qualify for the system. The system can't be used by companies which haven't yet issued stock or other securities.
A company would most commonly use shelf registration in situations when it expects to issue stock on multiple occasions. Normally, each issue would need to go through a full and lengthy legal process. This can be a particular burden if a company needs to raise money by issuing new stock as it would normally face delays before it was allowed to do so. With a shelf registration, the legal process is completed in advance and the same filing document can be reused whenever needed during the two-year period.
Another advantage of a shelf registration is that it allows the company more flexibility about the timing of a stock issue. This could allow it to take advantage of changes in attitudes among potential investors. For example, medical company stocks may find few buyers in the wake of a widespread scandal over medicine. That could change at a later date if researchers make a breakthrough in treating a major disease. Being able to issue stock without delay could capitalize on this change in the industry which may well make investors temporarily more interested in buying medical stocks.
The Securities and Exchange Commission (SEC) introduced shelf registration in 2005. The name is based on the idea that the filing documents wait "on the shelf" until the company decides to issue the stock. This shouldn't be confused with an "off the shelf" company, which is created and put through the legal registration process but doesn't have any real-world activity. Instead this type of company is later sold to people who want a hassle-free way of turning their existing business into a company.
Companies wanting to use shelf registration must be classed as a "well-known seasoned investor". To earn this classification, a firm must either have a $700 million US Dollar (USD) or greater market capitalization, which is the number of shares in the company multiplied by the current stock price, or it must have issued a total of $1 billion USD of certain types of securities in the past three years. The firm must also have met all requirements for SEC filings over the previous year.
A shelf registration is most commonly associated with issues of common stock. It can also be used for preferred stock, which usually offers priority treatment in receiving dividends and has more guarantee of getting some money back if the company is liquidated. The registration can also cover debt securities such as bonds.
There are pros and cons to investing in a company with enough market activity to qualify for shelf offerings.
If a company qualifies for shelf registration, it will be experienced with stock and bond offerings and likely has plans for future growth.
However, some investors may be wary of jumping on board unless the intended projects to be financed through the offering are extremely well defined and have an excellent chance of success.
Since markets are extremely sensitive and fickle, it is difficult to predict what yet unknown factors could potentially spell trouble.
Despite the potential risk, a company electing to make a shelf registration is probably a good bet for investment because it must qualify to make these offerings and most likely has had previous success with new projects.
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