United States: FAST Act Includes Enhancements To Capital Raising And Securities Laws

On December 4, 2015, President Obama signed the Fixing America's Surface Transportation Act (the "FAST Act") which included a host of provisions related to capital raising and securities law matters. Provisions of particular interest to private companies include:

Clear federal exemption (and "blue sky" preemption) for secondary resales by stockholders

In the past, stockholders of private companies who wanted to resell their holdings (especially those who were considered affiliates of the issuer) had to undertake a complicated analysis under the so-called "Section 4(a)(1½) exemption" to determine if an exemption from the registration requirements of the federal securities laws was available. This exemption was sometimes difficult to apply to given facts and often left some risk and uncertainty to the selling stockholder, the issuer and the buyer regarding the securities law exemption. The new provision set forth in the FAST Act will provide a clear path when parties want to engage in secondary transfers of shares.

The FAST Act adds a new Section 4(a)(7) to the Securities Act of 1933, which is effective now and which provides an exemption from federal registration requirements (and from state "blue sky" regulation because they are deemed "covered securities") for the resale of securities so long as the transfer transaction meets certain requirements, including:

  • no general solicitation;
  • all purchasers are accredited investors;
  • the class of securities has been outstanding for longer than 90 days;
  • the selling stockholder is not a "bad actor;"
  • the issuer is not a blank check, blind pool or shell company; andhe issuer is not a blank check, blind pool or shell company; and
  • certain "reasonably current" information is available about non-reporting issuers, including:
    • general information about the issuer, the security and any registered broker dealers or others involved that are being paid commissions in the offer or sale of the securities; and
    • the most recent balance sheet and profit and loss statement ("P&L") and similar financial statements:
      • covering most recent 2 fiscal years;
      • must comply with GAAP (or if foreign private issuer IFRS or GAAP);
      • balance sheet must be as of date not less than 16 months before transaction;
      • P&L for the 12 months preceding the date of balance sheet; and
      • if balance sheet is not less than 6 months before the transaction date, must be accompanied by additional P&L for the period from the date of the balance sheet to a date that is not less than 6 months before the transaction date.

The securities purchased in a Section 4(a)(7) transaction will be "restricted securities" and therefore, in the hands of the new holder subject to finding an exemption for a further transfer.

The new Section 4(a)(7) exemption is non-exclusive, meaning that stockholders can continue to use the principles of the Section 4(a)(1½) exemption for their transactions if they are unable to meet the conditions of Section 4(a)(7). In addition Rule 144 is available. Rule 144 allows resales of securities that have been held for longer than one-year by most stockholders that are not affiliates of the issuer without further restrictions; resales by affiliates of non-reporting issuers under Rule 144 are subject to public information requirements that are more extensive than those set forth under Section 4(a)(7).

IPO process enhancements for Emerging Growth Companies

The 2012 Jumpstart Our Business Startups Act (the "JOBS Act") scaled back a number of provisions of the Sarbanes-Oxley Act, the Dodd-Frank Act and other federal securities laws and regulations as they applied to "emerging growth companies," or EGCs, which includes most companies conducting an IPO other than those with $1 billion or more in revenues in their most recently completed fiscal year. Congress intended the JOBS Act to provide a so-called "on-ramp" for IPO issuers in order to make the IPO process less burdensome, ease their transition to public ownership and improve their access to capital.

The FAST Act provides three further enhancements to the IPO process for EGCs (the first two bullets are effective now, the third is to become effective no later than January 2, 2016):

  • The waiting period between when an EGC must publicly file a registration statement with the SEC and when it can start its "roadshow" is reduced from 21 calendar days to 15 calendar days;
  • A company that qualified as an EGC when it confidentially submitted a draft registration statement to the SEC or publicly filed for its IPO, but later loses EGC status, will continue to be treated as an EGC until the earlier of the consummation of its IPO or one year after it loses EGC status; and
  • Companies may omit in S-1 and F-1 filings and confidential submissions financial information for historical periods that are required by the rules if they reasonably believe that such omitted historical information will not be required at the time of the offering and if all required information is provided to investors at the time a preliminary prospectus is distributed.

This third bullet is potentially significant in that it should streamline the IPO process as companies will not have to dedicate resources to presenting financial information in early filings that would have ended up being dropped in later filings due to the passage of time.

Smaller reporting company forward incorporation

No later than January 17, 2016, the SEC is to make changes to the instructions to Form S-1 to allow smaller reporting companies (those with a public float of less than $75 million) to incorporate by reference future SEC filings into the S-1 Registration Statements. This will allow these smaller reporting companies to use the Form S-1 as a type of "shelf registration" for the registration of secondary resales by its stockholders. These changes should lead to significant savings of time and effort for smaller reporting companies who are not eligible to use Form S-3 for a particular offering.

FAST Act requires the SEC to take certain actions and study others

In addition to the significant matters discussed above, the FAST Act requires the SEC to issue new regulations, by May 31, 2016 to:

  • allow SEC reporting issuers the option to present a summary page in their Annual Reports on Form 10– K so long as the summary includes a cross-reference to the complete disclosure in the body of the Form 10-K itself; and
  • "further scale or eliminate requirements of Regulation S-K" to reduce the burden on EGCs, accelerated filers, smaller reporting companies and other smaller issuers, and eliminate "duplicative, overlapping, outdated, or unnecessary" requirements for all issuers.

Finally, the FAST Act requires the SEC to undertake a detailed study on Regulation S-K, and to adopt related rules, to "(1) determine how best to modernize and simplify such requirements in a manner that reduces the costs and burdens on issuers while still providing all material information; (2) emphasize a company-by-company approach that allows relevant and material information to be disseminated to investors without boilerplate language or static requirements...; [and] (3) evaluate methods of information delivery and presentation and explore methods for discouraging repetition and the disclosure of immaterial information".

The SEC is to report on this study to Congress by November 27, 2016, and propose rules related to the study within 360 days after issuing the report.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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