Baby shelf rule
Also called: baby shelf, I.B.6, baby shelf limit, one-third rule
The Form S-3 limit (General Instruction I.B.6) that caps companies with under $75 million of public float at selling one-third of that float in primary offerings in any 12 months.
Last verified
What it is
A shelf registration on Form S-3 lets a company register securities once and sell them later. Larger companies can use a shelf without a size limit on primary sales. Smaller ones can still use Form S-3 under General Instruction I.B.6, but with a cap: the total sold off the shelf in primary offerings over any 12-month period cannot exceed one-third of the company's public float.
The rule applies when public float (the market value of common equity held by non-affiliates) is below $75 million. The company also needs a class of common equity listed on a national securities exchange, must not be a shell company (or have been one in the past 12 months), and must disclose its calculation in the prospectus.
Worked example
Hypothetical: Company X has 30,000,000 shares held by non-affiliates and a recent price of $1.50, so its public float is $45,000,000. One-third of that is $15,000,000. If it sold $9,000,000 through an ATM program in the past 12 months, it can sell only about $6,000,000 more off the shelf until older sales roll out of the window or the float rises.
Why it matters
The cap explains a lot of small-cap behavior. A company that is near its limit may turn to deals the cap does not cover, such as private placements, equity lines registered on Form S-1, or registered direct offerings sized to the remaining room. A rising share price lifts the cap, because the float is recalculated using a recent price (within 60 days before the sale).
How to spot it
Prospectus supplements filed under the shelf (often a 424B5) usually state the public float calculation and the amount sold under I.B.6 in the prior 12 months. See S-1 vs S-3 and the baby shelf.
Related terms
Guides that use this term
Dilution 101 · 6 min read
S-1 vs S-3 vs the Baby Shelf Rule, With the One-Third Math Worked Out
How Form S-1 and Form S-3 differ, who can use a shelf, and how the baby shelf rule caps small companies at one-third of public float per year.
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