On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, known as the “FAST Act.” The FAST Act’s principal purpose is to authorize spending on new highway and transit projects, but the law also includes provisions that (a) modify the JOBS Act provisions relating to capital raising by emerging growth companies, (b) simplify disclosure requirements for smaller issuers, and (c) codify and clarify a securities registration exemption for the resale of privately issued securities.
Provisions Affecting Emerging Growth Companies
- The FAST Act requires the SEC, within 30 days of enactment, to amend Forms S-1 and F-1 to provide that an emerging growth company (“EGC”), as defined in Section 2(a)(19) of the Securities Act of 1933, as amended (the “Securities Act”), may omit from its registration statement financial information for historical periods that the issuer reasonably believes will not be required to be included in Form S-1 or Form F-1 at the time of the offering. Thus, an EGC will not be required to audit a fiscal year that would otherwise have been required when it submitted its confidential filing if (a) the issuer reasonably believes that those financial statements will not be required to be included in its registration statement at the time of the offering; and (b) before the issuer distributes a preliminary prospectus to investors, the issuer amends the registration statement to include all financial information required by Regulation S-X at the date of that amendment.
- The JOBS Act created a mechanism for EGCs to submit a draft registration statement to the SEC for review on a confidential basis before a public filing, provided that the confidential submission and all amendments to it are publicly filed with the SEC no later than 21 days before the commencement of the issuer’s road show. The FAST Act shortens this 21-day time period to 15 days, effective immediately.
- The SEC previously issued guidance that if an issuer is an EGC when it files its IPO registration statement but ceases to be an EGC during the SEC review process, the issuer may continue to rely on the EGC rules through the effective date of the registration statement. The FAST Act creates a grace period for change of emerging growth company status by permitting an issuer that was an EGC when it submitted or filed its registration statement for review to continue to be treated as an EGC until the earlier of the date on which it completes its IPO or one year after it ceased to be an EGC.
Amendments to Form 10-K and Regulation S-K
The FAST Act includes a number of measures designed to streamline the disclosure requirements of Regulation S-K and Form 10-K. In particular:
- The FAST Act requires the SEC, within 180 days after enactment, to issue regulations permitting issuers to include a summary page in their Annual Report on Form 10-K. The summary page must include a cross-reference (by electronic link or otherwise) to the related materials in the Form 10-K.
- The FAST Act requires the SEC, within 180 days after enactment, to revise Regulation S-K (i) to further scale or eliminate requirements to reduce the burden on EGCs, accelerated filers, smaller reporting companies, and other small issuers, while still providing all material information to investors, and (ii) to eliminate provisions of Regulation S-K for all issuers that are duplicative, overlapping, outdated or unnecessary.
The FAST Act also requires the SEC to conduct a study of Regulation S-K:
- to determine how best to modernize and simplify Regulation S-K to reduce its costs and burdens while still providing all material information;
- to emphasize a company by company approach that avoids boilerplate or static requirements while preserving completeness and comparability of information across registrants; and
- to evaluate methods of information delivery and presentation and explore methods of discouraging repetition and disclosure of immaterial information.
The FAST Act also requires the SEC:
- to submit a report to Congress on the findings of the Regulation S-K study, its recommendations on modernizing and simplifying Regulation S-K and improving the readability and navigation of disclosure documents; and
- to issue proposed rules to implement the recommendations contained in the report.
New Section 4(a)(7) Exemption
The FAST Act adds new Section 4(a)(7) to the Securities Act, which codifies the so-called “Section 4(1½) exemption” that securities lawyers have long relied on to exempt from registration private resales of securities initially sold in private placements. The new statutory exemption officially sanctions the previously informal exemption and also clarifies it.
For a transaction to comply with Section 4(a)(7):
- each purchaser of the securities must be an accredited investor;
- neither the seller nor any person acting on the seller’s behalf can offer or sell the securities by general solicitation or advertising;
- if the securities are of an issuer that is neither (a) subject to the SEC reporting obligations imposed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor (b) a private foreign issuer exempt from registering a class of equity securities under the Exchange Act, nor (c) a foreign government eligible to register securities under Schedule B, the seller and the prospective purchaser must obtain from the issuer, and the seller must make available to the prospective purchaser, certain reasonably current information about the issuer, including recent financial statements prepared in accordance with GAAP (or IFRS for foreign private issuers);
- neither the seller nor any person receiving remuneration for participating in the offer or sale of such security can be subject to legal disqualification (e.g., a bad actor);
- the issuer must be engaged in a business, must not be in an organizational stage or in bankruptcy or receivership, and must not be a blank check, blind pool or shell company with no specific business plan or purpose;
- the transaction cannot involve a security that constitutes the whole or 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; and
- the transaction must involve a security of a class authorized and outstanding for at least 90 days before the transaction.
Securities sold under Section 4(a)(7) will be “restricted securities” within the meaning of Rule 144 and “covered securities” that are exempt from certain aspects of “blue sky” regulation.