United States: Federal Securities Law Implications Of The FAST Act

Last Updated: January 5 2016
Article by Albert Lung, Amy I. Pandit and Joanne R. Soslow

New rules enhance IPO accommodations under the JOBS Act and provide private resale exemption.

On December 4, US President Barack Obama signed the Fixing America's Surface Transportation Act (the FAST Act or the Act, H.R. 22) into law. Although the Act primarily is designed to provide long-term funding certainty for surface transportation, Division G (Financial Services) of the Act contains several provisions that implicate the federal securities laws. These provisions include amendments to the Jumpstart Our Business Startups Act (JOBS Act), a new statutory exemption for private resale of securities, and provisions that relate to the recent pronouncements by the Securities and Exchange Commission (SEC) regarding modernization and simplification of public disclosures.

Improving Initial Public Offering On-Ramp for Emerging Growth Companies

Title LXXI of the Act contains certain provisions applicable to initial public offerings (IPO) by emerging growth companies (EGC) under the JOBS Act.

Simplified Financial Statement Disclosure

Section 71003 of the Act permits EGCs to omit financial statements in registration statements for historical periods as required by Regulation S-X in an IPO if (i) the EGC reasonably believes that such financial statements will not be required to be included in the registration statement at the time of the offering and (ii) the EGC amends the registration statement to include all then-required financial statements before distributing a preliminary prospectus. This provision potentially can reduce significantly the cost associated with financial audit and accelerate the timeframe for completing the initial registration statement in an IPO.

For example, if a calendar-year company plans to file or submit its first registration statement during the third quarter of 2015, the current SEC rules require the company to provide audited financial statements for 2013 and 2014 in the initial filing. Under this new provision, the company may omit the 2013 financial statements in the first filing if it plans to price the IPO in April 2016 and amend the registration statement to include audited financial statements for 2014 and 2015 before pricing.

In addition, SEC guidance indicates that the EGC is not permitted to omit interim financial statements for a period that will be included within the required financial statements that cover a longer interim or annual period at the time of the offering, where the shorter period will not be presented separately at that time. For instance, in the above example, the company will not be permitted to omit interim financial statements for the nine-month period in 2015 in the initial filing, even though such interim financial statements may be replaced by the annual audited financial statements for 2015 at the time of pricing. Furthermore, SEC guidance provides that EGC may omit financial statements of other entities from its filing or submission, provided that it reasonably believes that such financial statements will not be required at the time of the offering.

This provision becomes effective on January 3, 2016; however, the SEC has indicated that it will not object if companies avail themselves of this provision prior to that date.

Reduced Time Period for Public Filing Prior to IPO Roadshow

Previously, an EGC was required to publicly file its registration statement, including all previously submitted confidential drafts, within 21 days of the commencement of roadshow in an IPO. Section 71001 of the Act shortens this time period to 15 days, which should provide EGCs with more flexibility to coordinate and strategize their marketing efforts with the public filing of the IPO. This provision became effective on December 4 and is applicable to EGCs with pending IPOs prior to the effective date.

Grace Period for Change in EGC Status

Section 71002 of the Act amends section 6(e) of the Securities Act of 1933, as amended (Securities Act) to provide that, if a company subsequently ceases to be an EGC after the time that it submits or files a registration statement, it will continue to be treated as an EGC until the earlier of (i) the date on which the EGC completes its IPO or (ii) the end of the one-year period beginning on the date that the company ceased to have EGC status. This provision also became effective on December 4. The amendment provides certainty that companies can rely on all of the EGC accommodations under the JOBS Act throughout the entire IPO process, even if it exceeds the EGC threshold prior to pricing the IPO.

New Private Resale Exemption

Although the statutory exemption under section 4(a)(2) of the Securities Act is well-established for private placement of securities by issuers, no comparable statutory provision exists for private resales of securities by security holders. Rule 144 and Rule 144(A) provide two resale exemptions under section 4(a)(1) of the Securities Act, but they impose additional limitations and obligations that may render them unavailable. For example, Rule 144 requires a certain holding period by the seller and current public information about the issuer before the resale and imposes additional restrictions on affiliates of issuers, such as volume limitation, manner of sales, and filing of Form 144 with the SEC. Rule 144A is only applicable to offers to "qualified institutional buyers" (QIBs) of securities not of the same class as securities listed on a US national securities exchange or quoted on an over-the-counter market. Instead, selling stockholders generally rely on what is known as the "4(a)(1˝)" exemption for unlimited private resales to purchasers that are not QIBs. The 4(a)(1˝) exemption is based on a mosaic of SEC guidance, case laws, and general practices that have developed over time. As a result, these private resales carry inherent uncertainty and often involve higher costs associated with the requirement for obtaining a legal opinion. Section 76001 of the Act removes this uncertainty by creating a nonexclusive safe harbor in a new section 4(a)(7) of the Securities Act, which codifies the main elements of the 4(a)(1˝) exemption.

A selling stockholder may rely on the new exemption under section 4(a)(7) if the following conditions are met:

  • Each purchaser is an accredited investor, as defined under Regulation D
  • Neither the seller, nor any person acting on the seller's behalf, uses any form of general solicitation or advertising
  • The seller is neither the issuer nor a subsidiary of the issuer
  • Neither the seller nor any person who has been or will be paid for their participation in the transaction would be qualified as a "bad actor" under Regulation D
  • The issuer is engaged in business, 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, or the issuer has indicated that its primary business plan is to engage in a merger with an unidentified person
  • The transaction does not relate to an unsold allotment to, or a subscription or participation by, a broker or dealer as an underwriter of the securities
  • The securities have been authorized and outstanding for at least 90 days

Additionally, for the resale of securities of issuers not subject to SEC reporting requirements, certain information must be delivered to prospective purchasers, including the following:

  • The name of the issuer (and any predecessor)
  • The address of the issuer's principal executive offices
  • The exact title and class of the security, its par or stated value, and the number of shares or total amount of the securities outstanding as of the end of the issuer's most recent fiscal year
  • The name and address of the transfer agent, corporate secretary, or other person responsible for stock transfers
  • A statement of the nature of the issuer's business and the products and services it offers as of 12 months before the transaction date
  • The names of the officers and directors of the issuer
  • The names of the broker, dealer, or agent to be paid any commission or compensation in connection with the transaction
  • The issuer's most recent balance sheet and statement of profit and loss, and similar financial statements for the two preceding fiscal years during which the issuer has been in operation, prepared in accordance with generally accepted accounting principles or International Financial Reporting Standards (in the case of a foreign private issuer)
  • If the seller is a control person of the issuer, a brief statement regarding the nature of the affiliation and a certification that the seller has no reasonable grounds to believe that the issuer is in violation of the securities laws or regulations

Securities acquired under section 4(a)(7) are considered "restricted securities" and cannot be transferred in the absence of another exemption under the Securities Act. In addition, securities sold under the exemption are "covered securities" within section 18 of the Securities Act, therefore federal preemption applies and no "blue sky" qualifications will be required under state securities laws.

Although section 4(a)(7) provides a clear exemption for private resales that will certainly be welcomed, it remains unclear as to whether it will be widely adopted. In particular, the section 4(a)(7) information requirements appear to be more extensive and stringent than those required under Rule 144A and Regulation D, therefore some market participants may continue to rely on other exemptions, such as Rule 144, Rule 144A, or even the "section 4(a)(1˝) exemption" in certain circumstances, given that section 4(a)(7) is a nonexclusive safe harbor. On the other hand, section 4(a)(7) may be useful for secondary sales of private company securities to natural persons who are accredited investors, because it provides certainty in the exemption and preemption of state blue sky laws. This is particularly useful to affiliates of issuers that may be subject to more stringent resale restrictions under Rule 144.

Disclosure Modernization and Simplification

Title LXXII of the Act includes the following provisions, applicable to all reporting issuers.

Summary Page for Form 10-K

Section 72001 of the Act requires the SEC to issue rules that allow issuers to include a summary page in their annual reports on Form 10-K, provided that each item in the summary contains a cross-reference to material elsewhere in Form 10-K.

Improvement of Regulation S-K

Section 72002 of the Act requires the SEC to revise Regulation S-K to (i) further scale or eliminate requirements relating to EGCs, accelerated filers, smaller reporting companies, and other smaller issuers and (ii) eliminate duplicative, overlapping, outdated, or unnecessary provisions.

Study on Modernization and Simplification of Regulation S-K

Section 72003 of the Act requires the SEC to conduct a study of Regulation S-K requirements for the purposes of modernizing and simplifying disclosure requirements, emphasizing a facts-and-circumstances approach (i.e., no boilerplate or static disclosure requirements), and determining how best to deliver and present information while discouraging repetitious information and disclosure of immaterial information. A report on this study, in coordination with the Investor Advisory Committee and the Advisory Committee on Small and Emerging Companies, is due to Congress by December 4, 2016, with rules to follow 360 days from the date of the report to the Congress.

Small Company Simple Registration

Section 84001 of the Act requires the SEC to amend Form S-1 to allow smaller reporting companies to incorporate by reference any documents that it subsequently files with the SEC after the effective date of Form S-1. Currently, incorporation by reference in Form S-1 is only permitted for information filed prior to the filing of Form S-1. The new rule is particularly useful for smaller reporting companies that are not eligible to file shelf registration statements on Form S-3, because it enables them to keep a resale registration statement on Form S-1 current by satisfying its ongoing SEC reporting obligations without having to file any posteffective amendment to Form S-1. This provision requires SEC rulemaking by January 18, 2016.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.