On December 4, 2015, President Barack Obama signed into law a highway funding bill, known as the Fixing America’s Surface Transportation (FAST) Act, which included provisions designed to help facilitate capital raising transactions for public companies and secondary trading for private companies and modernize certain public company disclosure requirements. These provisions are a follow-on to the Jumpstart Our Business Startups (JOBS) Act of 2012, which made significant changes to the US capital formation process, and are summarized below.
Title LXXI—Improving Access to Capital for Emerging Growth Companies
Title LXXI provides additional flexibility to emerging growth companies (EGCs), a category of issuer created under the JOBS Act that is generally defined as an issuer with annual gross revenues of less than $1 billion during its most recent fiscal year, by:
- Reducing from 21 to 15 the number of days prior to the launch of a road show by which an EGC must publicly file confidential submissions of its registration statement that it has previously made with the SEC;
- Establishing a grace period for an issuer that loses EGC status after confidentially submitting or publicly filing a registration statement so that the issuer will continue to be treated as an EGC until the earlier of the completion of its IPO pursuant to such registration statement or the end of one year following the date on which the issuer has lost EGC status; and
- Permitting EGCs to file registration statements that omit financial information that would otherwise be required pursuant to Regulation S-X, as long as (1) the omitted financial information relates to a historical period that the issuer reasonably believes will not be required in its registration statement at the time of its contemplated offering and (2) prior to the distribution of a preliminary prospectus to investors, the issuer’s registration statement is amended to include all financial information required by Regulation S-X at the date of such amendment. The SEC is required to revise the relevant instructions to Forms S-1 and F-1 within 30 days of enactment of this new legislation to reflect this change.
Title LXXII—Disclosure Modernization and Simplification
Title LXXII aims to modernize and simplify certain disclosure requirements under the SEC disclosure rules and forms by:
- Requiring the SEC to issue regulations within 180 days of enactment of this new legislation to permit issuers to submit a “summary page” on Form 10-K which cross-references (by electronic link or otherwise) the related disclosure included in the Form 10-K;
- Requiring the SEC to revise Regulation S-K within 180 days of enactment of this new legislation to further scale or eliminate requirements of Regulation S-K in order to ease the burden on EGCs, accelerated filers, smaller reporting companies and other smaller issuers, while still providing all material information to investors and (2) to eliminate provisions of Regulation S-K, required for all issuers, that are duplicative, overlapping, outdated or unnecessary, and for which the SEC determines no further study (as described below) is necessary to determine the efficacy of such revisions to Regulation S-K; and
- Requiring the SEC to conduct a study to determine how to best modernize and simplify Regulation S-K in a manner that reduces the costs and burdens to issuers while still providing all material information. The SEC must provide a report on this study to Congress within 360 days of enactment of the new legislation. The report is required to include recommendations on how to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information. The SEC is also required to propose rules to implement the recommendations of its study within 360 days of the date its report is provided to Congress.
Title LXXVI—Reforming Access for Investments in Startup Enterprises
Title LXXVI amends the Securities Act of 1933 by codifying “Section 4(1½),” a resale exemption developed over time by securities professionals in connection with private resales of restricted securities. This codified exemption, a new Section 4(a)(7), exempts from registration a resale transaction so long as, among other things:
- Each purchaser is an “accredited investor”;
- The seller does not engage in any form of general solicitation or general advertising;
- With respect to sales involving securities of a non-reporting issuer, the issuer (upon request of the seller) provides the seller and the prospective buyer of the securities with certain additional information, including, among other things: the issuer’s name; its address; the nature of its business; the names of its officers and directors; the title, class and outstanding amount of the securities being sold; and certain financial information;
- The transaction is not conducted by the issuer or a subsidiary of the issuer;
- Neither the seller nor any person receiving a commission in connection with the transaction would be disqualified as a bad actor under Regulation D;
- The issuer is engaged in business and is not in the organizational stage or in bankruptcy, or a blank check, blind pool or shell company with no specific business plan or purpose;
- The transaction does not involve securities that are a part of an unsold allotment to an underwriter of the securities; and
- The transaction involves securities of a class that has been authorized and outstanding for at least 90 days prior to the date of the transaction.
Notably, Section 4(a)(7) preempts state “blue sky” registration requirements. Adoption of Section 4(a)(7) is considered an important development in helping to facilitate trading activity in the secondary market for securities of private companies.
Title LXXXIV—Small Company Simple Registration – Forward Incorporation by Reference
Title LXXXIV permits smaller reporting companies (generally defined as issuers with a public float of less than $75 million as of the last business day of their second fiscal quarter) to incorporate by reference in a registration statement filed on Form S-1 any documents the issuer files with the SEC after the effective date of such registration statement. The SEC is required to revise Form S-1 no later than 45 days after enactment of this new legislation to reflect this change.