On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, or FAST Act. Although primarily a transportation bill, the FAST Act also made changes to the federal securities laws as described below. Overall, the FAST Act’s changes to the securities laws will help facilitate raising capital.
Shorter Waiting Period for EGCs
The FAST Act reduces the period that an emerging growth company[i] (“EGC”) must wait before commencing its road show from 21 days to 15 days after publicly filing its initial public offering, or IPO, registration statement.[ii] This change enables issuers to begin their IPO road shows about a week earlier than before.
EGC Status Grace Period
The FAST Act introduces a grace period for an issuer that began the IPO process as an EGC but loses EGC status before completion of the offering. Now, an issuer that confidentially or publicly files its IPO registration statement for review as an EGC will maintain its status as an EGC until the earlier of (i) the end of the one-year period beginning on the date the issuer ceases to be an EGC, and (ii) the date on which the issuer completes the IPO pursuant to such registration statement.[iii]
Elimination of Certain Financial Statements
The FAST Act allows an EGC to omit certain financial information in a Form S-1 registration statement.[iv] Under the FAST Act, the issuer can omit historical financials if:
- 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 registration statement at the time the contemplated offering commences; and
- 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.
For example, a calendar year-end EGC confidentially files in December 2015, but reasonably expects to commence the offering in June 2016. Prior to the FAST Act, the issuer’s confidentially submitted registration statement would be required to include audited financials for 2013, even though the registration statement at the time the offering commences in June 2016 will only be required to contain audited financials for 2014 and 2015 and unaudited financial statements for the interim periods ended March 31, 2015 and 2016.
This change is a welcome development and will save issuers the time, distraction and expense of preparing (and having audited and/or reviewed by independent auditors) financial statements that will not be included in the registration statement at the time of effectiveness.
Forward Incorporation by Reference in Form S-1 for Smaller Reporting Companies
The FAST Act allows Form S-1 registration statements filed by smaller reporting companies (“SRCs”) to forward incorporate by reference information contained in subsequent Exchange Act reports.[v] This means that a Form S-1 shelf registration statement filed by an SRC will no longer need to be continuously amended and/or supplemented to incorporate new material information that is already contained in the issuer’s reports and available to investors. This will significantly reduce transaction costs for SRCs, particularly in the context of keeping resale registration statements current in respect of securities issued to investors in private placements.
New Private Resale Exemption
The FAST Act provides a safe-harbor for a private resale exemption from registration under the Securities Act that is similar to the exemption known as the “Section 4(a)(1-1/2)” exemption.[vi] Section 4(a)(1-1/2) is not actually codified in the Securities Act; rather, the exemption is so named because it logically fits between the Section 4(a)(1) exemption, which provides an exemption from registration for transactions by any person who is not an issuer, underwriter or dealer, and Section 4(a)(2), which allows issuers to offer and sell securities in transactions not involving a public offering. The Section 4(a)(1-1/2) exemption, while never officially blessed by the SEC until now, was developed by legal practitioners as a logical extension of these two sections to permit resales by non-issuers in a transaction not involving a public offering.
The new exemption, the Section 4(a)(7) exemption, allows resale of securities without registration under the Securities Act if the following requirements are met:
- Each purchaser is an accredited investor
- There is no general solicitation
- If the issuer is not a reporting company, the seller and purchaser obtain the following reasonably current information:
- Issuer’s exact name
- Address of issuer’s principal executive office
- Title and class of securities, par value, and current capitalization of the issuer
- Details for the transfer agent (or other person responsible for transfer)
- A statement of the nature of the issuer’s business
- The issuer’s officers and directors
- Information about any broker, dealer or agent that will receive remuneration in connection with the sale
- Issuer’s two most recent balance sheets and profit and loss statements, prepared in accordance with GAAP
- If the seller is a control person, a brief statement on the relationship and a certification that the seller has no reasonable grounds to believe the issuer is in violation of the securities laws or regulations
- The issuer is engaged in business, is 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 has indicated that the issuer’s primary business plan is to engage in a merger or combination of the business with, or an acquisition of, an unidentified person
- The transaction is not with respect to a security that constitutes the whole or part of an unsold distribution
- The class of security has been authorized and outstanding for at least 90 days prior to the transaction
This new resale exemption cannot be used by the issuer or a subsidiary of an issuer, and neither the seller nor any person being paid in connection with the sale can be a “bad actor”.[vii] This is a welcome codification of a practice long accepted in the securities industry.
More Changes to Come
In addition to the foregoing changes, the FAST Act requires the SEC to scale or eliminate regulatory requirements to reduce the burden on certain types of filers, including EGCs, and to eliminate regulations that are duplicative, overlapping, outdated or unnecessary.[viii] The SEC has 180 days from the enactment of the FAST Act to do so, so issuers have to wait and see what further changes are in store. The FAST Act also requires the SEC to carry out a study in preparation of the foregoing changes, so interested parties can send comments to the SEC.
The information provided by this client memorandum is intended to give a general understanding of the changes to the federal securities laws contained in the FAST Act, and should not be relied upon to comply with the law and regulations. Please contact the authors if you seek further clarification or advice.
[i] As defined under the Securities Act of 1933.
[ii] See FAST Act Section 71001, which amends Section 6(e)(1) of the Securities Act of 1933.
[iii] See FAST Act Section 71002, which amends Section 6(e)(1) of the Securities Act of 1933.
[iv] Or Form F-1 registration statement for foreign issuers. See FAST Act Section 71003.
[v] See FAST Act Section 84001.
[vi] See FAST Act Section 76001, which adds a section (7) on the end of Section 4(a) of the Securities Act of 1933.
[vii] For more information on what is a “bad actor,” see persons that are disqualified under Rule 506(d)(1) of Regulation D and Section 3(a)(39) of the Securities Exchange Act of 1934.
[viii] See FAST Act Section 72002.