On December 4, 2015, the Fixing America’s Surface Transportation Act (“FAST Act”) was enacted. Although the FAST Act is aimed principally at facilitating highway and transit projects, it includes several U.S. securities law-related provisions, primarily amendments to the Jumpstart Our Business Startups Act (“JOBS Act”). A summary of the FAST Act’s key U.S. securities law-related changes relevant to foreign private issuers is set forth below. Some provisions take effect immediately or in the near future, while others require SEC rulemaking and, in the case of Regulation S-K, a long-term project commitment by the SEC stretching over the next two years.
New Private Resale Exemption – Section 4(a)(7)
Effective immediately upon enactment, the FAST Act adds new Section 4(a)(7) to the U.S. Securities Act of 1933 (the “Securities Act”). This new section exempts from registration certain resales of restricted securities to accredited investors (as defined under Rule 501(a) of Regulation D under the Securities Act) for public and private issuers, where:
- the seller is neither the issuer nor a direct or indirect subsidiary of the issuer;
- neither the seller nor any person acting on the seller’s behalf engages in any form of general solicitation or general advertising;
- neither the seller nor any person acting on the seller’s behalf that has been or will be paid (directly or indirectly) for their participation in the offer or sale is subject to the bad actor disqualification under Rule 506(d)(1) of Regulation D or the statutory disqualification under section 3(a)(39) of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”);
- the issuer is engaged in business, is not in bankruptcy or receivership and is not a blank check, blind pool, or shell company that has no specific business plan or that has as its primary business plan the intention to be an acquisition company;
- the securities are not part of a broker-dealer’s unsold allotment or subscription or participation as an underwriter of the securities;
- the securities are of a class that have been authorized and outstanding for at least 90 days prior to the transaction;
- in the case of an issuer that is not a reporting company under the Exchange Act, is not exempt from reporting under Rule 12g3-2(b) or is not a foreign government eligible to register securities under Schedule B, the issuer provides the following information to purchasers, which must be reasonably current:
- certain information about the issuer, including its exact name and address of its principal executive offices;
- the names of its officer and directors;
- the name and address of the transfer agent, corporate secretary, or other person responsible for share transfers;
- a statement of the nature of the issuer’s business (presumed to be reasonably current if it is as of 12 months prior to the transaction date);
- the names of any brokers, dealers or agents to be paid a commission in connection with the transaction;
- the title and class of the securities, their par or stated value, and the number or amount outstanding as of the issuer’s most recent fiscal year;
- the issuer’s most recent balance sheet and profit and loss statement and similar financial statements for the two preceding fiscal years in accordance with IFRS (for foreign private issuers); and
- if the seller is a control person of the issuer, a brief statement regarding the nature of affiliation and a certification that the seller has no reasonable grounds to believe the issuer is in violation of securities laws or regulations.
The securities sold in compliance with Section 4(a)(7) will be deemed to be “restricted securities” within the meaning of Rule 144 and “covered securities” for state “blue sky” regulation purposes. Furthermore, a transaction meeting the Section 4(a)(7) requirements is deemed not to be a distribution for purposes of determining whether the seller is an underwriter under Section 2(a)(11).
Changes Affecting Emerging Growth Companies
The JOBS Act defines an Emerging Growth Company (“EGC”) as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year as presented on the income statement under International Financial Reporting Standards (“IFRS”) (for foreign private issuers).
- Time Period Prior to Road Show: Under the JOBS Act, an EGC was required to publicly file its registration statement on Form S-1 (for domestic U.S. issuers) or Form F-1 (for foreign private issuers) no later than 21 days prior to commencing the road show. Effective upon enactment on December 4, 2015, the FAST Act reduces this time period from 21 days to 15 days.
- Grace Period for EGCs: Effective upon enactment on December 4, 2015, the FAST Act provides a grace period for an issuer that is an EGC at the time it confidentially submits or publicly files a registration statement on Form S-1 or Form F-1, but ceases to be an EGC prior to completion of its IPO.
- Omission of Certain Financial Statements: On January 13, the SEC announced that it adopted interim final rules to revise Form S-1 and Form F-1 to permit EGCs to accommodate the below. Effective January 3, 2016 (i.e., 30 days after enactment), the FAST Act amends the JOBS Act to permit an EGC that files or submits for confidential review a registration statement on Form S-1 or Form F-1 to omit financial information for historical periods otherwise required by Regulation S-X as of the time of the filing, provided that:
- the omitted financial information relates to a period the EGC reasonably believes will not be required in the filing at the time of the contemplated offering; and
- the issuer amends the registration statement prior to distributing a preliminary prospectus to investors to include all financial information required by Regulation SX as the date of such amendment.
The FAST Act requires the SEC to revise Regulation S-K within 180 days after the enactment of the FAST Act (i.e., by June 1, 2016), to:
- “further scale or eliminate requirements of Regulation S-K, in order to reduce the burden on EGCs, accelerated filers, smaller reporting companies, and other smaller issuers, while still providing material information to investors”; and
- “eliminate provisions of Regulation S-K, required for all issuers, that are duplicative, overlapping, outdated or unnecessary.”
The SEC must also carry out a study on modernization and simplification of Regulation S-K in consultation with the Investor Advisory Committee and the Advisory Committee on Small and Emerging Companies), to, among other things:
- modernize and simplify the regulation in a manner that reduces costs and burdens on issuers, while still providing all material information to investors; and
- emphasize a company-by-company disclosure approach and discourage repetition and immaterial information disclosure.
The SEC must issue a report on its Regulation S-K findings 360 days after enactment of the FAST Act (i.e., November 28, 2016). The SEC must also issue rules to implement the recommendation of the report within 360 days after the delivery of the report. The SEC delivered a similar report on Regulation S-K in December 2013 as required under the JOBS Act and is already considering reforms under its Disclosure Effectiveness Initiative.
Foreign private issuers should closely monitor developments in this area as they may be able to take advantage of the significant changes adopted by the SEC.
For the Fast Act, please click here. [https://www.govtrack.us/congress/bills/114/hr22/text.]
For the SEC’s Interim Final Rules (January 13, 2016), please click here. [http://www.sec.gov/rules/interim/2016/33-10003.pdf]
For the SEC’s Compliance and Disclosure Interpretations regarding the FAST Act (updated December 21, 2015), please click here. [http://www.sec.gov/divisions/corpfin/guidance/fast-actinterps.htm]
For the SEC Announcement entitled “Recently Enacted Transportation Law Includes a Number of Changes to the Federal Securities Laws” (December 10, 2015), please click here. [http://www.sec.gov/corpfin/announcement/cf-announcement---fast-act.html]