On December 4, 2015, the Fixing America’s Surface Transportation Act (“FAST Act”) was signed into law by President Obama. The FAST Act includes a number of provisions that are intended to facilitate the resale of securities, enhance certain aspects of the Jumpstart our Business Startups Act (“JOBS Act”) and modernize disclosure requirements for documents filed with the Securities and Exchange Commission (“SEC”).
Section 4(a)(7) Resale Exemption
The FAST Act amends the Securities Act of 1933, as amended (the “Securities Act”), by adding a new Section 4(a)(7), which is an exemption from the registration requirements of the Securities Act for certain resales of securities.
Section 4(a)(7) exempts a resale of securities from registration if, among other things:
- each purchaser of the securities is an “accredited investor;”
- the seller does not engage in general solicitation or advertising related to the sale of the securities;
- in the event that the securities were issued by a non-reporting issuer, the seller makes available to the purchaser certain information concerning the issuer and the securities, including the issuer’s name and address; the nature of its business; the names of its officers and directors; its most recent balance sheet and income statements for the two preceding fiscal years and other financial information; the title, class and outstanding amount of the security to be sold; and, if the seller is a control person of the issuer, a statement describing the seller’s affiliation and that the seller has no reasonable grounds to believe that the issuer is in violation of the securities laws;
- the seller is not the issuer of the security or one of the issuer’s subsidiaries;
- neither the seller nor any person receiving a commission in the transaction is subject to a “bad actor” disqualification under Regulation D promulgated under the Securities Act; and
- the issuer is not a blank check or a shell company with no specific business plan or purpose.
Securities sold in a transaction exempt under Section 4(a)(7) will be deemed “restricted securities,” will not be deemed to be a “distribution” under the Securities Act and will be treated as “covered securities” that are exempt from the registration requirements of state “Blue Sky” securities laws.
The Section 4(a)(7) exemption is considered a codification of the “Section 4(a)(1½) exemption” that has developed over time through SEC no-action letters. However, there are minor differences between the exemptions, with the principal difference being the information reporting requirements for the resale of securities issued by a non-reporting company.
As discussed above, Section 4(a)(7) requires the seller to provide the purchaser with a litany of information concerning a non-reporting issuer and the security to be sold. On the other hand, Section 4(a)(1½) does not require specific information concerning non-reporting issuers to be provided to a purchaser, although the SEC has considered access to information concerning the issuer to be a relevant factor in assessing whether the exemption has been met. Accordingly, we believe that the requirements of the Section 4(a)(7) exemption may prove to be more onerous than the Section 4(a)(1½) exemption for resales of securities issued by non-reporting companies. In addition, the Section 4(a)(7) exemption is not available for sales by “bad actors” or where a person receiving a commission is a “bad actor,” but the Section 4(a)(1½) exemption does not contain a similar restriction.
Although we believe that the new Section 4(a)(7) exemption will be a key tool in facilitating third-party resales of securities, we anticipate that because securities sold under the Section 4(a)(7) exemption will be treated as “restricted securities,” the majority of third-party resales will continue to be made under the safe harbor provided by Rule 144 promulgated under the Securities Act, which provides that resold securities are no longer deemed “restricted securities” once held by the purchaser. However, where a resale would not qualify under Rule 144, such as where an affiliate of the issuer intends to sell an amount of securities exceeding Rule 144’s volume limitations, the Section 4(a)(7) exemption may be a preferred alternative to registering the resale. Moreover, Section 4(a)(7) does not require a holding period before securities can be resold, whereas Rule 144 generally requires securities to be held for a period of between six months to a year before they can be resold. Accordingly, Section 4(a)(7) may provide a significant source of liquidity for individuals looking to resell securities that they have not held for a significant period of time.
JOBS Act Enhancements
The JOBS Act was enacted on April 5, 2012, and, among other things, established a new category of issuer under the Securities Act and the Securities Exchange Act of 1934 called an “emerging growth company.” Under the JOBS Act, emerging growth companies are granted certain benefits, such as the ability to confidentially submit a registration statement to the SEC and the ability to include only two years of audited financial statements in their initial registration statement.
The FAST Act further enhances the advantages granted to emerging growth companies by:
- providing that an emerging growth company that has confidentially submitted a registration statement to the SEC does not have to publicly file the registration statement until 15 days before its road show, as opposed to the 21 days originally required under the JOBS Act;
- establishing a grace period for an issuer that loses its status as an emerging growth company after confidentially submitting or publicly filing a registration statement, such that the issuer will continue to be treated as an emerging growth company until the earlier of (i) the completion of the issuer’s initial public offering pursuant to the registration statement and (ii) the first anniversary of the date that the issuer lost its emerging growth company status; and
- allowing an emerging growth company to omit historical financial information that would ordinarily be required in a registration statement, so long as (i) the financial information relates to a historical period that the emerging growth company believes will not be required to be included in the registration statement at the time that the offering is contemplated to be launched and (ii) prior to the time a preliminary prospectus is delivered to investors, the registration statement is amended to include all financial information required by SEC rules.
We anticipate that these amendments will prove to be very popular among emerging growth companies looking to complete an initial public offering. Allowing emerging growth companies a greater amount of time to keep a registration statement confidential before commencing a road show should provide emerging growth companies with greater flexibility in assessing market windows for launching an initial public offering. In addition, we believe that the ability to omit certain historical financial statements will help reduce offering costs incurred by emerging growth companies by eliminating unnecessary disclosures and focusing SEC review on financial statements that will be included in the prospectus delivered to investors.
The amendments discussed in the first two bullet points above are effective immediately. The amendment allowing an emerging growth company to omit certain historical financial information in a registration statement becomes effective January 3, 2016.
Disclosure Requirements Modernization
The FAST Act also directs the SEC to modernize and simplify the disclosure requirements called for by certain SEC rules and forms by:
- allowing public companies to include a summary page in their Annual Reports on Form 10-K that includes cross-references to the related disclosure in the report;
- revising Regulation S-K to (i) further scale or eliminate disclosure requirements for emerging growth companies, accelerated filers, smaller reporting companies and other smaller issuers and (ii) eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated or unnecessary; and
- carrying out a study to determine the best approach to modernize and simplify the disclosure requirements of Regulation S-K and issuing a report to Congress concerning the results of such study, as well as issuing a proposed rule to implement the recommendations of the report.
The FAST Act provides the SEC with 180 days to issue regulations effecting the amendments discussed in the first two bullet points above. The SEC’s report on the modernization and simplification of Regulation S-K discussed in the third bullet point above is due to Congress within 360 days from December 4, 2015, and the SEC’s proposed rulemaking to implement the recommendations of such report is due within 360 days following the issuance of the SEC’s report to Congress.
Form S-1 Amendment
The FAST Act also directs the SEC to allow smaller reporting companies to incorporate by reference in a registration statement on Form S-1 any future filings made by the smaller reporting company. The FAST Act provides the SEC with 45 days to amend Form S-1 to effect this revision.
We expect that this amendment will benefit smaller reporting companies that use Form S-1 for resale shelf and primary mini-shelf offerings by eliminating the need for such companies to prepare post-effective amendments and prospectus supplements to keep their shelf registration statements current.
The complete text of the FAST Act is available here.