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Which issuers are subject to the “baby shelf” requirements?
Instruction I.B.1 of Form S-3 permits an issuer with $75 million or more in aggregate market value of its voting and nonvoting common equity held by non-affiliates, which we refer to in this guide as the issuer’s “public float,” to use a Form S-3 registration statement to conduct a primary offering of securities for cash. This includes using Form S-3 to put up a shelf registration statement so an issuer may issue securities at a later date, which permits an issuer to quickly raise capital when desired.
An issuer with less than $75 million in public float may only utilize Form S-3 for a primary offering if the issuer: (a) is not a shell company and has not been a shell company for at least the 12 previous calendar months (and if it was a shell company at any time, it must have filed its current Form 10 information at least 12 calendar months previously, reflecting it is not a shell company), (b) has at least one class of common equity securities listed on a national securities exchange, and (c) must comply with the baby shelf requirements to sell securities using a Form S-3 registration statement.
That definition of public float has a lot of heavy lifting to do in this analysis, so we’ll use the fictional issuer “XYZ Corp.” to illustrate the relevant calculations.
Calculating Public Float
Most issuers are comfortable calculating their market capitalizations, and fortunately, public float is just a variation of this familiar formula. An issuer must start by identifying the total number of shares of “voting and non-voting common equity” outstanding, which generally covers any class of common stock. This outstanding share count may be measured as of any date within the 60 days prior to the applicable measurement date. Please see the “measurement date” section below for additional information about when public float should be measured.
Next, the issuer must identify (and subtract) the number of outstanding shares that are held by “affiliates.” An affiliate is a person or entity “that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person [or entity] specified.” Evaluating whether or not a person or entity is an affiliate is a facts-and-circumstances determination, but directors and officers are always considered affiliates. Most often, but not always, an entity controlled by an officer or director will also be considered an affiliate. Generally, there is a presumption that a shareholder without any special controlling rights who holds less than 10% of a class of voting securities of an issuer will be a non-affiliate, but the facts and circumstances should be analyzed to review for any additional “control” rights that such shareholder has, including looking at factors such as: (a) can the shareholder appoint a director of the issuer (even if the right is not exercised)?; (b) has the shareholder filed a Schedule 13D to disclose its ownership in the issuer versus filing a Schedule 13G?; (c) are there significant commercial relationships between the issuer and the shareholder?; and (d) does the shareholder have any protective voting provisions or other control-type rights? If a shareholder holds greater than 10% of a class of voting securities, then there is a presumption that such shareholder will be deemed an affiliate; however, this presumption is rebuttable, especially if the shareholder does not have any additional “control” rights beyond the ability to vote its shares. That being said, when making affiliate determinations, please keep in mind that being too aggressive in your affiliate determinations could have negative consequences for both the underwriters and issuer’s counsel. Underwriters don’t want their deal to bust down the road because someone was too aggressive in determining affiliate status; and it is typical for issuer’s counsel to provide a “no violations” opinion, which requires the issuer to have sufficient baby shelf capacity to issue the shares sold in the offering.
Once shares owned by affiliates are subtracted from the total number of shares outstanding, that share count must be multiplied by the applicable share price to arrive at the public float. This share price must also be as of a date within the 60 days prior to the applicable measurement date; but fortunately, this date doesn’t have to be the same date that was used for the outstanding share count measurement. In other words, the outstanding share count could be measured on the 30th day prior to the applicable measurement date, while the share price could be measured on the 15th day prior to the applicable measurement date. The share price to be utilized is the highest of (a) the closing price or (b) the average of the bid and ask prices on the applicable date.
Determining Measurement Dates
Complying with the baby shelf requirements involves measuring an issuer’s public float as of a number of different measurement dates. The first relevant measurement date is the date the Form S-3 is filed; and if an issuer’s public float is below $75 million as calculated as of that measurement day, the baby shelf requirements apply. Once the Form S-3 has been filed, each subsequent Form 10-K filing date also is a measurement date because the Form 10-K filing is deemed an amendment to the Form S-3 under Section 10(a)(3) of the Securities Act.
For example, let us assume XYZ Corp. filed a Form S-3 registration statement on December 31, 2024. To determine if the baby shelf requirements apply to XYZ Corp., it must calculate its public float using an outstanding share count and a share price from dates no earlier than November 1, 2024. In this case, XYZ Corp. selected December 2, 2024, for determining its outstanding share count, when it had 5,000,000 shares of common stock outstanding, 1,000,000 of which were held by affiliates. As a result, XYZ Corp.’s outstanding non-affiliate share count was 4,000,000. In addition, XYZ Corp. had its highest closing share price of $15.00 on December 13, 2025. By multiplying 4,000,000 by $15.00, XYZ Corp. determined its public float was $60 million, so XYZ Corp. was subject to the baby shelf requirements.
There is a nice benefit in the baby shelf rules for issuers that increase their public float. If at any time between these measurement dates an issuer’s public float equals or exceeds $75 million, then the baby shelf requirements no longer apply until the next measurement date. Even just a day of meeting the $75 million threshold is sufficient for this purpose.
In our example, there is good news for XYZ Corp. On January 6, 2025, its share price closed at $18.00 after disclosure of a significant new customer. On January 15, 2025, XYZ Corp.’s affiliates sold 500,000 shares in the open market to take advantage of the increased stock price, raising XYZ Corp.’s total outstanding non-affiliate share count to 4,500,000. Because those dates are within 60 days of each other, XYZ Corp. used both numbers to calculate a new public float of $81 million — so it was no longer subject to the baby shelf requirements beginning on January 16, 2025, until its next measurement date.
Unfortunately, after XYZ Corp. filed a Form 8-K on January 21, 2025, disclosing a devastating fire at its only production facility over the holiday weekend, its closing stock price plummeted to $5.00 per share. When XYZ Corp. filed its Form 10-K on March 31, 2025, its outstanding share count was unchanged and the highest closing share price within the preceding 60 days was only $5.50 on February 5, 2025. As a result, XYZ Corp.’s public float as of the Form 10-K measurement date was just under $24.8 million, resulting in the issuer again being subject to the baby shelf requirements.
How much can an issuer sell under the baby shelf requirements?
If an issuer is subject to the baby shelf requirements, it can only sell one-third of its public float during the 12 calendar months immediately prior to the sale using Form S-3, excluding any sales prior to the issuer becoming subject to the baby shelf requirements.
We’ve already discussed the measurement dates for determining if the baby shelf requirements apply, but an issuer must use a different measurement date to determine how much it can sell in any offering. That measurement date is the date of sale, which is typically the date of filing the preliminary prospectus supplement for an offering. The same measurement rules and 60-day period apply to this measurement date as to the others discussed above.
Let us return to XYZ Corp., which has decided to raise capital with an at-the-market offering (ATM) and filed a prospectus supplement on April 30, 2025, when its outstanding share count was unchanged and the highest closing share price within the preceding 60 days was $5.75 on April 7, 2025. As a result, XYZ Corp.’s public float as of the date it filed its ATM prospectus supplement was just under $25.9 million, and XYZ Corp. will be permitted to sell up to one-third of this public float (just over $8.6 million) through the ATM until the registration statement expires or XYZ Corp. files a new prospectus supplement for the ATM.
XYZ Corp. next decided to conduct a confidentially marketed public offering (CMPO) to raise additional cash to help fund the rebuilding of its production facility. XYZ Corp. filed its preliminary prospectus supplement on May 20, 2025, and concurrently terminated its ATM, under which it had sold $4 million of securities, to free up capacity on its shelf registration statement. Fortunately, on May 15, 2025, affiliates sold an additional 500,000 shares, increasing XYZ Corp.’s total outstanding non-affiliate share count to 5,000,000. In addition, after a well-known finance influencer posted “XYZ 🚀 🌕” on her X account, XYZ Corp.’s common stock rallied to close at $6.00 per share on May 1, 2025, before tumbling again the following day. By multiplying 5,000,000 shares by $6.00, XYZ Corp. calculated a public float of $30 million as of its May 20, 2025, measurement date. As a result, it was permitted to sell one-third of this amount, or $10 million. Please keep in mind that this is the total value of securities XYZ Corp. call sell during the 12 months preceding the measurement date, so because XYZ Corp. sold $4 million through its ATM in April and May of 2025, it would only be able to sell an additional $6 million of securities in May 2025. When measuring the amount of baby shelf capacity available for a later noncontinuous takedown offering (like a CMPO), only those securities actually sold are counted against the one-third limit; however, in the event of multiple, concurrent continuous offerings, any securities that continue to be offered in other continuous offerings under Form S-3 would also count against the one-third limit. As a result, if XYZ Corp. had wanted to put up an equity line of credit (ELOC) instead of doing a CMPO and didn’t terminate its ATM prior to the ELOC, XYZ Corp. would only have been able to sell just under $1.4 million of securities in the ELOC.
Finally, on December 31, 2025, XYZ Corp. disclosed that Big Software had agreed to use XYZ Corp.’s latest product line in all of its planned data centers, leading the stock to skyrocket to $20.00 per share, or a $120 million public float. As a result of no longer being subject to baby shelf restrictions, on January 2, 2026, XYZ Corp. filed a prospectus supplement for a $100 million ATM offering. However, when XYZ Corp.’s CEO was spotted cozying up to the company’s new vice president of special projects on the jumbotron at a Nickelback concert on January 21, 2026, the ensuing press coverage and online ridicule drove XYZ Corp.’s stock price all the way down to $3 per share.
Unfortunately, when XYZ Corp. filed its Annual Report on Form 10-K on March 23, 2026, its stock price still hadn’t recovered, and thus its public float was only $15 million, thereby subjecting XYZ Corp. to the baby shelf requirements once again. However, based on March 19, 2026, SEC guidance in CFI 116.26, XYZ Corp.’s available ATM capacity will not be impacted by the Form 10-K filing; and XYZ Corp. will still be able to utilize the full $100 million included in its ATM prospectus supplement. Note that under CFI 116.26, this special treatment only explicitly applies to ATM offerings and would not necessarily apply to an ELOC or other continuous offering. That being said, we believe that the underlying principle for the CFI is that the measurement date for a specific offering is the filing date for the preliminary prospectus supplement (or the final prospectus supplement if there is no preliminary), and the measurement date does not change when there is a Section 10(a)(3) update to the registration statement. Therefore, it would be reasonable for the SEC to apply the same logic to ELOCs and other continuous offerings by allowing them to remain open with their initially filed availability.
What about derivative securities?
An unfortunate reality is that many public companies with lower market capitalizations may need to issue derivative securities — such as convertible preferred stock, convertible notes, or warrants — to close a necessary financing. Calculating the amount of common stock XYZ Corp. can sell is simple, as one just divides the total dollar value of securities it can sell under the baby shelf requirements by the proposed per share sale price in the offering to determine the number of shares it can sell. However, the issuance of derivative securities makes this math significantly more complex.
To value derivative securities, the issuer must first determine the maximum number of shares of common equity issuable pursuant to the derivative securities, then multiply that number by the share price used to calculate the value of securities the issuer could sell as of the applicable measurement date.
We can apply this idea to our example. Let us assume XYZ Corp. was unable to close a common stock offering in May 2025 and needed to add warrants to sweeten the deal. As discussed above, XYZ Corp. determined it could sell $10 million of securities, and it used $6.00 per share to measure its public float as of May 20, 2025. The underwriters in the transaction determined that they could sell one share of XYZ Corp. common stock plus one warrant to purchase a share of XYZ Corp. common stock for a total price of $4.00. At that price, and after deducting the $4 million of shares sold through the terminated ATM, XYZ Corp. could sell up to 600,000 shares and the same number of warrants:
($4.00 per share × 600,000 shares) + ($6.00 per share × 600,000 shares underlying warrants) = $6,000,000 of securities
After this offering, XYZ Corp. decided to do a second offering and filed its preliminary prospectus supplement on July 20, 2025. Using that measurement date, XYZ Corp. determined its public float had increased to $60 million because its stock price closed at $12.00 per share on June 30, 2025. Therefore, XYZ Corp. could sell up to $20 million of securities in the preceding 12 months. Unfortunately for XYZ Corp., the outstanding warrants now must be revalued using the price of $12.00 per share, so for purposes of the July 2025 offering, XYZ Corp. has already issued $13.6 million of securities using Form S-3:
($4.00 per share × 600,000 shares) + ($12.00 per share × 600,000 shares underlying warrants) + $4,000,000 of securities sold in the ATM = $13,600,000 of securities
That leaves $6.4 million of remaining availability. This time around, the underwriters are proposing to sell common stock at $10.00 per share with no warrants. However, because XYZ Corp. can only sell an additional $6.4 million of securities, it is limited to an offering of 640,000 shares of common stock, even though it would like to capitalize on its elevated stock price by selling more shares.
As you can see, derivative securities can significantly limit an issuer’s ability to do multiple offerings in a 12-month period using Form S-3, as the derivative securities will be valued higher when the price of the issuer’s common stock rises. The only exception is if the derivative securities have been exercised or converted, in which case the actual number of shares issued and the actual market price of the shares on the date of conversion or exercise will be used.
What if an issuer needs to raise more capital than permitted by the baby shelf requirements?
Many issuers — especially pre-revenue companies — may need to access the capital markets on a regular basis in order to continue their operations. The good news is that Form S-3 is not the exclusive way for issuers to raise capital in the public markets. An issuer can always file a Form S-1 and raise capital without being restricted by the baby shelf requirements, but a Form S-1 registration statement is usually specific to a single offering and must be filed publicly and declared effective by the SEC prior to any sales. This makes it significantly less beneficial to companies looking to take advantage of short trading windows and may trigger sales by existing investors (and a stock price slump) by alerting existing investors wary of possible dilution from future potential securities sales.
