In December 2015, President Barack Obama signed into law an omnibus highway bill called “Fixing America’s Surface Transportation Act” or the “FAST Act.” This new law (i) amends certain sections of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), (ii) requires changes to Securities and Exchange Commission (SEC) Form 10-K and Regulation S-K, (iii) requires changes to permit so-called “forward incorporation by reference” in a Form S-1 registration statement; and (iv) creates a new safe harbor for the private resale of securities.
JOBS Act Changes
In 2012, Congress passed the JOBS Act to make it easier and less burdensome for companies to raise capital through securities offerings, including initial public offerings (“IPOs”). Among other things, the JOBS Act created a new category of companies—“emerging growth companies”—and allowed them to take advantage of relaxed and less burdensome SEC rules in connection with their IPOs and subsequent SEC disclosure obligations for a period of up to five years after their IPOs.
The FAST Act further refines certain JOBS Act rules applicable to emerging growth companies. First, the new law reduces the number of days before an IPO road show that an emerging growth company must publicly file its IPO registration statement with the SEC. Under the JOBS Act, an emerging growth company can submit a draft IPO registration statement to the SEC for confidential review. These confidential submissions are exempt from the Freedom of Information Act, but previously needed to be publicly filed with the SEC at least 21 days before the road show for an IPO. As a result of the FAST Act, emerging growth companies now only need to publicly file their IPO registration statements with the SEC 15 days before the road show for an IPO.
Second, the FAST Act creates a grace period for an issuer with emerging growth company status at the time it submitted a confidential filing of its IPO registration statement, but later loses such status. The grace period allows the issuer to retain its emerging growth company status until the earlier of the date when the issuer begins its IPO or the end of one year from the date the issuer lost its status as an emerging growth company.
Third, the FAST Act provides additional flexibility on how an emerging growth company submits audited financial statements on registration statements filed on Forms S-1 or F-1. Under the JOBS Act, emerging growth companies were required to only include two years of audited financial statements in their IPO registration statements instead of the three years required for other issuers. The new law amends this standard so that an emerging growth company can submit less than two years of audited financial statements when it submits or files its IPO registration statement so long as it submits two complete years of audited financial statements by the time it files its preliminary prospectus. This change is the most relevant if an issuer expects to become effective in the earlier part of a year. For example, an issuer that expects its IPO registration statement to become effective in early 2016 could exclude audited financial statements for 2013 from its IPO registration statement filings made in 2015 or early 2016, so long as by the time the preliminary prospectus is filed, two full years of audited financial statements (in this case, 2014 and 2015) are provided therein.
Form 10-K and Regulation S-K
The FAST Act directs the SEC to simplify and modernize aspects of its disclosure regime on Form 10-K and in accordance with Regulation S-K. The FAST Act requires the SEC, within 180 days of the act’s enactment, to issue regulations permitting a summary page in a company’s Annual Report on Form 10-K as long as each item in the summary includes a cross-reference to the content in the Form 10-K.
The FAST Act further directs the SEC, within 180 days of the act’s enactment, to revise Regulation S-K to scale back or eliminate disclosure requirements for emerging growth companies, accelerated filers and smaller reporting companies. Additionally, the SEC must revise Regulation S-K to eliminate duplicative, overlapping, outdated or unnecessary disclosure requirements for all companies.
The FAST Act also directs the SEC, in consultation with the SEC’s Investor Advisory Committee and the Advisory Committee on Small Emerging Companies, to conduct a study and issue a report on how to best simplify and modernize Regulation S-K disclosures within 360 days of the act’s enactment. The SEC is also directed to issue proposed rules to implement the report’s recommendations within 360 days of the report’s issuance.
Forward Incorporation by Reference for Form S-1 Registration Statements
The FAST Act requires the SEC, within 45 days of the act’s enactment, to amend registration statement Form S-1 to permit forward incorporation by reference to reports and documents (e.g., Form 10-Ks, Form 10-Qs and proxy statements) filed by the company after the effective date of its Form S-1 registration statement. Currently, Form S-1 only permits a registrant to incorporate by reference previously filed reports. The amendment to Form S-1 will allow smaller reporting companies to benefit from forward incorporation by reference and will permit these companies to update their Form S-1 registration statements without having to file post-effective amendments (which are subject to the SEC review and comment process).
New Private Resale Safe Harbor
Additionally, the FAST Act establishes a legal framework for the private resale of restricted securities. The new Section 4(a)(7) of the Securities Act of 1933 (the “Securities Act”) establishes a safe harbor to permit private resales of securities by non-issuers, which were acquired in a private placement, so long as certain conditions are met.
Section 4(a)(7) permits such private resales when: (1) each purchaser is an accredited investor; (2) neither the seller, nor any person acting on the seller’s behalf, offers or sells the securities by any form of general solicitation; (3) the seller and prospective purchaser obtain reasonably current information prescribed in Section 4(a)(7) if the issuer is not subject to the reporting requirements of the Securities Exchange Act of 1934; (4) the transaction is not a sale of a security by the issuer or a subsidiary of the issuer; (5) neither the seller nor any person that has been or will be paid for their participation in the offer or sale is a “bad actor” (as defined in Regulation D under the Securities Act); (6) the issuer is not in the organizational stage or in bankruptcy or receivership, and is not a blank check, blind pool or shell company that has no specific business plan or purpose; (7) the securities must not be part of an unsold allotment to, or a subscription or participation by, an underwriter; and (8) the class of securities must have been authorized and outstanding for at least 90 days before the transaction.
Prior to the adoption of Section 4(a)(7), practitioners relied on the informal “Section 4(a)(1-1/2) exemption” from the registration requirements of the Securities Act for such resales. Securities acquired pursuant to the new Section 4(a)(7) exemption will be deemed to have been acquired in a transaction not involving a public offering and, as a result, these securities will be considered “restricted securities” under Rule 144 of the Securities Act. As a result, subsequent resales will still need to comply with the registration requirements of the Securities Act, or the seller will need to find an available exemption. In addition, securities sold pursuant to the Section 4(a)(7) exemption will be deemed to be “covered securities” for purposes of Section 18 of the Securities Act and, as a result, such sales will be preempted from regulation by any state. Thus, unlike the existing Section 4(a)(1-1/2) exemption, the Section 4(a)(7) exemption provides certainty to sellers and other transaction participants on the exempt status of the transaction under the Securities Act as well as preempts these transactions from state “blue sky” laws.