On Dec. 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (the “FAST Act”).1 As the name implies, the FAST Act is primarily concerned with transportation and infrastructure spending, but it also includes a number of provisions related to securities laws and capital-raising measures involving changes to the Jumpstart Our Business Startups Act (the “JOBS Act”). Summarized below are the key securities law developments contained in the FAST Act.
Easing Private Resales – New Section 4(a)(7) Transactional Exemption:
Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), requires all offers and sales of securities to be registered with the Securities and Exchange Commission (“SEC”) unless an exemption from registration is available. One common approach with respect to resales is to use an unofficial exemption developed over time by securities law professionals and informally recognized by the SEC known as the “4(1½) exemption”. The FAST Act amended the Securities Act to provide a statutory exemption for certain resales of securities in a manner similar to the 4(1½) exemption. The new exemption, codified as Section 4(a)(7) of the Securities Act, will permit resale transactions to accredited investors if certain conditions are met, including:
- The seller cannot be the issuer or a subsidiary of the issuer.
- The seller and anyone paid for their participation in the sale cannot be a "bad actor".2
- The issuer must be engaged in business, cannot be in the organizational stage, bankruptcy or receivership, and cannot be a blank check, blind pool, or shell company that has no specific business plan or purpose.
- Each purchaser must be an “accredited investor.”3
- The securities must be part of a class that been authorized and outstanding for at least 90 days.
- The securities must not be part of an unsold allotment to, or a subscription or participation by, a broker or dealer as an underwriter of the security or a redistribution.
- Neither the seller nor any person acting on behalf of the seller may engage in any form of general solicitation or advertising to offer and sell the securities.
- The seller must make certain information about the issuer available to the purchasers, including a statement of the nature of the issuer’s business; the issuer’s recent balance sheet and profit and loss statement and similar financial statements; the total number of the issuer’s shares outstanding as of the end of the most recent fiscal year; and the names of the issuer’s officers and directors. Note that this is a significant difference to the 4(1½) exemption, which is generally considered to require the seller to provide information it has with respect to the issuer but otherwise does not have any specific informational requirements.
Section 4(a)(7) may provide comfort to sellers as to the availability of the exemption compared to having to rely on the informal (and uncertain) 4(1½) exemption. However, the FAST Act specifies that Section 4(a)(7) is non-exclusive, meaning sellers may continue to rely on other exemptions from the registration requirements of the Securities Act, including the 4(1½) exemption (for example, in situations where the seller is not able to comply with the issuer information requirement). We also expect Section 4(a)(7) to be used by “affiliates” or “control persons” desiring to resell securities without the volume restrictions applicable to resales by “affiliates” under Rule 144 promulgated under the Securities Act.
Securities acquired pursuant to Section 4(a)(7) are “restricted securities”,4 meaning any subsequent resales will need to comply with the registration requirements of the Securities Act, and are “covered securities” under the Securities Act for purposes of preemption from state “blue sky” regulations.
Additional Key Provisions of the FAST Act
In addition to the new 4(a)(7) transactional exemption, the FAST Act also includes the following key provisions.
Changes Applicable to Emerging Growth Companies (“EGC”)
- The FAST Act reduced the waiting period during which an EGC must publicly file its registration statement with the SEC before commencing its road show from 21 to 15 days.
- The FAST Act also implemented a grace period for companies that satisfied the EGC requirements at the time of the initial filing or submission of their registration statement with the SEC, but later fail to maintain their EGC status. Such companies shall continue to be treated as EGCs until the earlier of the date the company completes its IPO pursuant to its registration statement or 1 year after the company ceases to be an EGC.
- Following revisions to Form S-1 and Form F-1, which are to be completed by the SEC no later than Jan. 3, 2016, EGCs will be permitted to omit certain financial statements from these registration statements in specific circumstances. In addition, on Dec. 10, 2015, the SEC released two new CD&Is5 providing additional guidance on which types of financial statements an EGC may omit from their registration statement under the new rules.5 Specifically, an EGC may omit certain financial statements of other entities and may not omit certain interim financial statements.
Revisions to Form 10-K and Regulation S-K
- No later than June 1, 2016, the SEC is required to issue regulations that allow reporting companies to include a summary page in their Annual Report on Form 10-K, provided that the summary page includes a cross-reference to the relevant material located elsewhere in their 10-K.
- The FAST Act also requires the SEC to review Regulation S-K to remove or streamline duplicative, outdated, overlapping or unnecessary provisions of Regulation S-K with a goal of reducing the reporting burden on EGCs, smaller reporting companies, and accelerated filers.
Forward Incorporation for Smaller Reporting Company Registration Statements
- The SEC will also be required to revise Form S-1 to allow forward incorporation by reference of documents filed with the SEC by smaller reporting companies after the effective date of the Form S-1.