United States: The "FAST" Act And Its Implications On Securities Laws

On December 4, 2015, President Obama signed into law The Fixing America's Surface Transportation Act (the "FAST Act"). The new law includes several amendments to the federal securities laws that are provided to help further facilitate capital-raising and resale efforts by private and public companies and to streamline and modernize certain securities laws. Certain of these provisions are effective immediately while others are subject to Securities and Exchange Commission (the "SEC") rulemaking or study prior to being implemented.

New Private Resale Exemption Under the Securities Laws

Section 76001 of the FAST Act establishes a new statutory exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), for private resales to accredited investors. New Section 4(a)(7) of the Securities Act exemption essentially codifies a private resale exemption under the Securities Act that is similar to the "Section 4(a)(11/2)" private resale exemption that had been developed over time by securities practitioners and was generally accepted by the SEC. The new Section 4(a)(7) provides an exemption from registration for certain private resale transactions meeting the following requirements:

  • Each purchaser is an "accredited investor";
  • Neither the seller, nor any person acting on the seller's behalf, offers or sells the securities by any form of "general solicitation" or "general advertising";
  • The seller is not the issuer or a subsidiary of the issuer (i.e. the exemption cannot be used for primary offerings of securities by issuers);
  • The securities are not part of an unsold allotment to, or a subscription or participation by, an underwriter of the security or a redistribution;
  • The securities are of a class that has been authorized and outstanding for at least 90 days prior to the date of the transaction; and

In the case of a transaction involving (a) the securities of a non-reporting issuer, (b) an issuer exempt from reporting pursuant to Rule 12g3-2(b) (which would capture many foreign issuers, in particular those issuers listed on the OTCQX International) or (c) a foreign government eligible to register securities under Schedule B, the seller and the prospective purchaser are entitled to receive from the issuer, at the request of the seller, current information about the issuer, including, but not limited to:

  • the issuer's name;
  • the issuer's address;
  • the title and class of the security to be sold;
  • the par value of the security;
  • the total number of shares outstanding as of the end of the issuer's most recent fiscal year;
  • the name and address of the transfer agent or other person responsible for the transfer of such security;
  • the nature of the issuer's business;
  • the names of the issuer's officers and directors;
  • the names of any person that will receive commission or other remuneration in connection with the sale;
  • the issuer's most recent balance sheet and profit and loss statement and similar financial statement for the two preceding fiscal years during which the issuer has been in business, prepared in accordance with GAAP or, in the case of a foreign issuer, IFRS; and
  • if the seller is an affiliate, a statement regarding the nature of the affiliation accompanied by a certification from the seller that it has no reasonable grounds to believe that the issuer is in violation of the securities laws or regulations.

The new Section 4(a)(7) exemption, however, is not available if the seller, or any person who will receive a commission or other remuneration in connection with offering or selling the securities, is subject to an event that triggers the "bad actor" disqualification rules under Rule 506(d) of Regulation D under the Securities Act. In addition, the new exemption is available only for securities of an issuer "engaged in business" and not in an organizational stage or in bankruptcy or receivership, and not a "blank check", "blind pool" or "shell company" or special purpose acquisition company.

Any securities acquired in accordance with the Section 4(a)(7) exemption will be deemed to have been acquired in a transaction not involving a public offering and will be deemed to be "restricted securities" within the meaning of Rule 144 under the Securities Act and "covered securities" for Blue Sky purposes. Further, the transaction will not be deemed to be a "distribution" for purposes of Section 2(a)(11) of the Securities Act.

The FAST Act also confirms that the new Section 4(a)(7) exemption is not exclusive of other available exemptions (i.e. resales pursuant to Rule 144).

Amendments regarding Emerging Growth Companies

The following amendments provide further clarification and enhancements for emerging growth companies ("EGCs"):

  • Section 71001 of the FAST Act reduces the period of time during which an EGC must have publicly filed its IPO registration statement prior to commencing a road show from 21-days down to 15-days. This provision became effective upon enactment.
  • Section 71002 of the FAST Act established a grace period for an issuer who was an EGC at the time itfiled a registration statement with the SEC for review but who has lost its EGC status prior to its initial public offering. Pursuant to such grace period, the issuer will continue to be treated as an EGC until the earlier of (i) the date on which the issuer consummates its initial public offering pursuant to such filed registration statement or (ii) the end of the one-year period beginning on the date the issuer ceases to be an EGC. This provision became effective upon enactment.
  • Section 71003 of the FAST Act establishes simplified financial disclosure requirement for EGCs and requires that the SEC, within 30 days of enactment of the FAST Act, revise Forms S-1/F-1 to indicate that a registration statement filed by an issuer prior to its initial public offering may omit financial information for historical periods otherwise required by Regulation S-X as of the time of filing provided that (i) the omitted financial information relates to a historical period that the issuer reasonably believes will not be required to be included in the Form S-1/F-1 at the time of the contemplated offering and (ii) prior to the issuer distributing a preliminary prospectus to investors, such registration statement is amended to include all financial information required by Regulation S-X as of the date of such amendment. The SEC will not object if an issuer applies this provision immediately.

    On December 10, 2015, the SEC provided interpretive guidance confirming that than an EGC may not omit financial statements for an interim period that will be included within required financial statements for a longer interim or annual period at the time of the offering, even though the shorter period will not be presented separately at that time. For example, if a calendar year-end EGC submits or files a registration statement in December 2015 and reasonably expects to commence its offering in April 2016 when annual financial statements for 2015 and 2014 will be required, such issuer may omit its 2013 annual financial statements from the December filing. The issuer, however, may not omit its nine-month 2014 and 2015 interim financial statements because those statements include financial information that relates to annual financial statements that will be required at the time of the offering in April 2016.

    The SEC also confirmed that an EGC may omit financial statements of other entities if it reasonably believes that those financial statements will not be required at the time of the offering. Thus, an issuer could omit financial statements of an acquired business that would be required by Rule 3-­05 of Regulation S­-X if the issuer reasonably believes that those financial statements will not be required at the time of the offering.

Modernization and Simplification of Disclosure Requirements

The FAST Act requires various steps to be taken by the SEC to modernize and simplify certain disclosure requirements, including:

  • Within 180 days of the enactment of the FAST Act, the SEC must issue regulations to permit issuers to submit a summary page on Form 10-K, provided that each item on the new summary page includes a cross-reference to the related material contained in the Form 10-K.
  • Within 180 days of the enactment of the FAST Act, the SEC must take action to revise Regulation S-K to (i) further scale or eliminate certain requirements in order to reduce the burden on EGCs, accelerated filers, smaller reporting companies and other smaller issuers, while still providing all material information to investors and (ii) eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated or unnecessary, and for which the SEC determines no further study (as further described below) is necessary to determine the efficacy of such revisions to Regulation S-K.
  • The SEC must carry out a study of the requirements contained in Regulation S-K to determine how best to modernize and simplify such requirements, emphasizing a company by company approach without boilerplate or static requirements, and evaluate methods of information delivery and presentation that discourage repetition and disclosure of immaterial information. Within 360 days of the enactment of the FAST Act, the SEC must issue a report to Congress with its findings, determinations and detailed recommendations on modernizing and simplifying the requirements in Regulation S-K, and within 360 days from the date such report is issued, the SEC must propose rules to implement the recommendations of its study.

Simplification of Small Company Registration

Section 77001 of the FAST Act requires the SEC to revise Form S-1, within 45 days of the enactment of the FAST Act, to permit smaller reporting companies to incorporate by reference into a registration statement on Form S-1 any documents that such company files with the SEC after the effective date of such registration statement on Form S-1. Before the FAST Act, Form S-­1 only permitted an issuer to incorporate by reference only periodic reports filed prior to effectiveness and only a short­form registration statement on Form S-­3/F-3 could be utilized by an issuer to incorporate its periodic reports filed after the effective date of the registration statement by reference. Consequently, an issuer could only update the Form S-­1 registration statements by filing a post­effective amendment that would be potentially subject to SEC review. The FAST Act, however, does not alter the current requirement that issuers must conduct delayed offerings under Securities Act Rule 415(a)(1)(x) using Form S-­3/F-3.

We believe that once the SEC adopts rules implementing Section 77001, this will be a significant improvement for smaller reporting companies that are required to use Form S-1 for a resale registration statement. Under the new rules, such issuers should be able to avoid having to file post-effective amendments for the purpose of keeping the resale registration statement on Form S-1 current.

Holding Company Registration Threshold Equalization

Section 85001 of the FAST Act amends Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), so that savings and loan holding companies are treated in a similar manner to banks and bank holding companies for the purposes of registration, termination of registration or suspension of their Exchange Act reporting obligations. Thus, Section 85001 provides that banks, bank holding companies and savings and loan holding companies will all be treated the same under the Exchange Act, and will not be required to register under the Exchange Act unless they have total assets in excess of $10,000,000 and a class of equity securities held of record by at least 2,000 persons at the end of the fiscal year. This provision became effective upon enactment.

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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