Tucked into the 490 pages of the Highway Transportation Bill that President Obama signed into law in December 2015, known as the Fixing America’s Surface Transportation Act (FAST Act) and which largely deals with transportation and infrastructure funding, are several securities law-related provisions that, among other things:
- provide additional relief for emerging growth company IPOs;
- modernize some disclosure requirements for public companies;
- facilitate shareholder liquidity by codifying the Section 4(a)(1 1/2) exemption for private resales of securities; and
- simplify the SEC registration process for smaller reporting company IPOs.
This update summarizes the securities law-related provisions of the FAST Act, highlights key issues and interpretations and offers practical advice for companies.
FAST Act Enhances JOBS Act Relief for Emerging Growth Company IPOs
The JOBS Act changed a number of laws and regulations to make it easier for emerging growth companies to go public. The FAST Act enhances the JOBS Act in several ways:
Extends Confidentiality for IPO Filing Until 15 Days Before Roadshow. Reduces from 21 to 15 the number of days before the roadshow that an emerging growth company must publicly file its previously confidential IPO registration statement.
Creates “Grace Period” for IPO Companies Losing Emerging Growth Company Status. Establishes a grace period for a company that was an emerging growth company at the time it submitted its confidential IPO registration statement to the SEC, but ceases to be an emerging growth company prior to the completion of the offering, so that the company can to continue to be treated as an emerging growth company through the earlier to occur of the following dates:
- The date on which the company consummates its IPO.
- The expiration of a one-year period beginning on the date that the company ceased to qualify as an emerging growth company.
Provides Financial Statement Relief for Emerging Growth Company’s Initial IPO Filing. Permits emerging growth companies that file a Form S-1 (or Form F‑1 for foreign private issuers) registration statement—or submit the registration statement for confidential review—to omit from the registration statement financial information for historical periods otherwise required by Regulation S-X as of the time of SEC filing (or confidential submission) provided that the company complies with both of the following:
- The omitted financial information must relate to a historical period the emerging growth company reasonably believes will not be required in the Form S-1 or Form F-1 at the time of the contemplated offering.
- Prior to the distribution of a preliminary prospectus to investors, the emerging growth company must amend the registration statement to include all financial information required by Regulation S-X as of the date of such amendment.
SEC Guidance on Financial Statement Relief for Emerging Growth Company’s Initial IPO Filing
In December 2015, the SEC issued guidance on the FAST Act’s provisions that allow certain financial statements to be omitted from a registration statement submission or filing.
Companies May Not Omit Interim Financial Information. The SEC clarified that an emerging growth company may not omit interim financial statements from its filing or confidential submissions relating to a period that will be included within required financial statements covering a longer interim or annual period at the time of the offering, even though such interim financial information will reasonably be expected to be superseded by annual or interim financial information that will be included in the registration statement at the time of the offering.
- Example. A calendar year-end emerging growth company that submits or files a registration statement in December 2015, expecting to launch its IPO in April 2016, could not exclude its nine-month 2015 and 2014 interim financial statements because in the SEC’s view, the 2015 and 2014 nine-month interim financial information “relates to” the annual financial information for 2015 and 2014 that will be included in the registration statement at the time of the launch of the IPO.
Companies May Omit Acquired Business Financial Statements. The SEC also clarified that an emerging growth company may omit the financial statements of an acquired business otherwise required by Rule 3-05 of Regulation S-X if the company reasonably believes that those financial statements will not be required at the time of the offering.
SEC Also Adopts Interim Final Rules Implementing Financial Statement Relief for Emerging Growth Company’s Initial IPO Filing. In January 2016, the SEC also adopted interim final rules required under the FAST Act that revise the text of Form S-1 (and Form F-1 for foreign private issuers) to permit emerging growth companies to omit financial information for certain historical periods as described above. The interim final rules became effective in January 2016 but included a request for comment on whether the rules should be expanded to include other registrants or forms.
FAST Act Modernizes Form 10-K and Regulation S-K Disclosure Requirements
Creates New Summary Page for Form 10-K. The FAST Act requires the SEC to adopt final rules by June 1, 2016 to permit companies to include a “summary page” within their annual report on Form 10-K that includes a cross-reference (by electronic link or otherwise) for each item on the summary page to the related material in Form 10-K.
Requires SEC to Improve Regulation S-K. The FAST Act requires the SEC to amend Regulation S-K by June 1, 2016 to eliminate duplicative, outdated or otherwise unnecessary requirements. The SEC must also carry out a study of the requirements of Regulation S-K to determine how best to modernize and simplify disclosure requirements and reduce the costs and burdens to reporting companies, while continuing to provide material information to investors. The SEC must submit the study’s findings to Congress by November 28, 2016.
FAST Act Codifies Private Offering Exemption for Resales of Securities
The FAST Act created a new, non-exclusive statutory exemption from the registration requirement under the Securities Act of 1933 for private offerings of securities by the existing holders that essentially codifies the reasoned Section 4(a)(1 1/2) exemption position that holders of securities have long relied on for private resale transactions.
Requirements for Private Resale Exemption. New Section 4(a)(7) of the Securities Act exempts from registration any resale transaction involving the securities of any company (public or private, regardless of size), that satisfies all of the following conditions:
- Purchaser Is Accredited Investor. Each purchaser is an “accredited investor” as defined in Rule 501 of Regulation D under the Securities Act of 1933.
- No General Solicitation. The seller and any person acting on its behalf do not engage in a general solicitation to offer or sell the securities.
- For Private Company, Certain Information Must Be Available. In the case of transactions involving securities of a private (non-reporting) company, such company (upon request of the seller) makes available to both the seller and the prospective purchaser certain reasonably current information, including all of the following:
- Company Information. Specific information about the company, such as name; address; nature of the company’s business, products or services officers and directors; corporate secretary and transfer agent.
- Information About the Securities. Specific information about the securities, such as title; class; par value and amount outstanding.
- Company Financial Information. Certain financial information about the company, including its balance sheet and profit and loss statement for the most recent period and for the two preceding fiscal years.
- Information About Any Seller Affiliation. To the extent the seller is an affiliate of the company, a brief statement regarding the nature of the affiliation, accompanied by a certification by such seller that it has no reasonable grounds to believe that the company is in violation of securities laws or regulations.
- Not Available for Subsidiaries. The securities may not be offered by the company or a direct or indirect subsidiary of the company that issued the securities.
- Not Available for Unsold Portion of Underwriter’s Allotment. The offering does not involve securities that are part of an unsold allotment to an underwriter of the securities.
- Class of Securities Outstanding at Least 90 Days. The securities are of a class that has been outstanding for at least 90 days prior to the date of the transaction.
- Not Available for Certain Companies. The company that issued the securities is engaged in business and is not in the organizational state or in bankruptcy or receivership, and is not a blank check, blind pool or shell company with no specific business plan or purpose.
No Minimum Holding Period Required. Unlike the Rule 144 exemption for resales of securities under Section 4(a)(1) of the Securities Act of 1933, new Section 4(a)(7) does not impose any holding period requirement on the seller before the securities may be sold in reliance on the exemption.
Restricted Securities Under Rule 144. Securities sold pursuant to the new Section 4(a)(7) exemption will be “restricted” securities in the hands of the purchasers for purposes of Rule 144, which means that any subsequent resales by the purchasers in reliance on Rule 144 would be subject to the Rule 144 holding period requirements and other restrictions.
Covered Securities—No State Blue Sky Requirements. Securities sold in reliance on the Section 4(a)(7) exemption will also be “covered securities” under Section 18(b)(4) of the Securities Act of 1933 (similar to securities sold in reliance on the Rule 506 exemption for private sales of securities under Section 4(a)(2) of the Securities Act of 1933). This means that state securities requirements, commonly referred to as blue sky laws and regulations, generally do not apply to the transaction under which the securities are sold because state law has been preempted by federal law for the purposes of the exempted transaction. As a practical matter, this means that holders selling securities in reliance on Section 4(a)(7) will not have to comply with any state securities requirements with respect to the transactions pursuant to which they sell the securities. This would significantly reduce the time and expense associated with completing resale transactions with respect to securities that would otherwise not qualify as “covered securities.”
No “Bad Actors.” Certain “bad actor” disqualification provisions, similar to those that apply to Rule 506 offerings, would apply to sellers relying on the Section 4(a)(7) exemption, as well as to anyone receiving remuneration or a commission with respect to their participation in the offer or sale of the securities in reliance on the Section 4(a)(7) exemption, including with respect to soliciting purchasers for the seller.
FAST Act Provides Additional Relief by Allowing Smaller Reporting Companies to Update Registration Statements Using Forward Incorporation by Reference
The interim final rules that the SEC issued in January 2016 also implement the provisions mandated by the FAST Act requiring amendments to Form S-1 to smaller reporting companies (entities that, as of the last business day of their second fiscal quarter, have a public float of less than $75 million) to be able to automatically update information in a Form S-1 registration statement prospectus using forward incorporation by reference.
This forward incorporation by reference allows a smaller reporting company to update the disclosure in its registration statement filed on Form S-1 by incorporating by reference into the Form S-1 disclosure included in any additional filings that the smaller reporting company makes under the Securities Exchange Act of 1934 after the effective date of the Form S-1. This streamlined method of updating a registration statement—which was previously only generally available to established public companies with a large enough public float to be eligible to use Form S-3—eliminates the need for a smaller reporting company to expend additional time and resources to update its Form S-1 registration statement by filing post-effective amendments.
You can access the full text of the FAST Act and the SEC rules, announcement and interpretations discussed in this update as follows:
- Full text of the FAST Act
- Full text of the SEC’s interim final rules required under the FAST Act
- SEC’s announcement regarding the FAST Act
- SEC's Compliance and Disclosure Interpretations related to the recent changes to the JOBS Act in the FAST Act
Additional information on securities laws and regulations and discussions of recent speeches, cases, laws, regulations and rule proposals of interest to companies are available at Perkins Coie’s website.
© 2016 Perkins Coie LLP