FAST Act Includes Changes to Securities Laws

By Avital Perlman

President Obama signed the Fixing America’s Surface Transportation Act, or FAST Act, into law on December 4, 2015.  The FAST Act, which is aimed at improving the country’s surface transportation infrastructure, also contains several sections that amend securities laws to ease regulatory burdens for smaller companies.

Improving Access to Capital for Emerging Growth Companies, or EGCs

The FAST Act amends Section 6(e)(1) of the Securities Act of 1933 (the
“Securities Act”) to provide additional accommodations for EGCs.  EGCs that take advantage of the confidential submission process for registration statements must first publicly file their registration statement at least 15 days (rather than 21 days) before any road show.  The amended section also provides that a company that is an EGC at the time it confidentially submits or publicly files a registration statement but later no longer meets the definition of EGC maintains EGC status until the earlier of the day its IPO is consummated or the end of the one-year period beginning on the date it no longer meets the definition of EGC.  These changes are effective immediately.

Smaller Reporting Company Forward Incorporation by Reference

The FAST Act requires that the SEC revise Form S-1 to permit a smaller reporting company to incorporate by reference in a registration statement on Form S-1 any documents filed with the SEC after the effective date of the registration statement.  The SEC is required to revise Form S-1 by January 18, 2016.

Disclosure Modification and Simplification

Regulation S-X Financial Disclosures for EGCs

The FAST Act directs the SEC to revise Form S-1 and Form F-1 to permit EGCs to omit Regulation S-X financial information for historical periods otherwise required at the time of filing (or confidential submission), provided that the issuer reasonably believes the omitted financial information will not be required in the registration statement at the time of the contemplated offering and that, prior to the issuer distributing a preliminary prospectus, such registration statement is amended to include all required Regulation S-X financial information at the date of such amendment. On December 11, the SEC issued two new Compliance and Disclosure Interpretations, or C&DIs, to provide further guidance as to how to apply this provision.

The first C&DI clarifies that an EGC may not omit interim financial statements from its filing or submission for a period that has financial information that will be included within required financial statements covering 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. By way of example, the SEC noted that a calendar year-end EGC that submits or files a registration statement in December 2015, and reasonably expects to commence its offering in April 2016, may omit its 2013 annual financial statements from the December filing but 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 ultimately be required at the time of the offering in April 2016.

The second C&DI provides that, in addition to omitting its own financial information for historical periods, an EGC may omit financial statements of other entities from its filing or confidential submission if it reasonably believes that those financial statements will not be required at the time of the offering. This would include, for example, an acquired business whose financial statements would otherwise be required by Rule 3-05 of Regulation S-X if the issuer reasonably believes that the financial statements will not be required at the time of the offering because the acquired business has been part of the issuer’s financial statements for an amount of time to obviate the need for separate financial statements.

Summary Page for Form 10-K

The FAST Act requires the SEC to issue regulations by June 1, 2016 to permit issuers to include a summary page in annual reports on Form 10-K, but only if each item on the summary page provides a cross-reference to the applicable material in the Form 10- K.

Improvement of Regulation S-K

The FAST Act requires the SEC to issue regulations by June 1, 2016 to further scale or eliminate certain requirements for smaller reporting companies, EGCs, accelerated filers and other smaller investors, while still providing all material information to investors, and to revise Regulation S-K to eliminate for all issuers provisions that are duplicative, overlapping, outdated or unnecessary

The SEC is required to, in consultation with the Investor Advisory Committee and the Advisory Committee on Small and Emerging Companies, carry out a study and issue a report to Congress on Regulation S-K by November 28, 2016 to:

  • determine how best to modernize and simplify Regulation S-K in a manner that reduces the costs and burdens on issuers while still providing all material information;
  • emphasize a company-by-company approach that allows relevant and material information to be disseminated to investors without boilerplate language or static requirements, while preserving the completeness and comparability of information across registrants; and
  • evaluate methods of information delivery and presentation, and explore methods to discourage repetition and the disclosure of immaterial information.

By November 28, 2016 the SEC is also required to issue a proposed rule to implement the recommendations set forth in its report to Congress.

New Private Resale Exemption   

Section 4(a)(7) was added to the Securities Act, which, effective immediately, provides an exemption for unregistered resales of securities meeting certain conditions, including, among other things, that each purchaser is an accredited investor and that certain information requirements are met.  The new Section 4(a)(7) exemption is similar in certain respects to the to the current “Section 4(a)(1-1/2)” exemption for private resales of restricted securities.

Section 4(a)(7) exempts transactions in which:

  • Each purchaser is an accredited investor.
  • Neither the seller nor any person acting on the seller’s behalf uses general solicitation or general advertising.
  • If the issuer is a non-reporting issuer, not exempt from reporting pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) or not a foreign government eligible to register securities on Schedule B , at the request of the seller, the seller and a prospective purchaser designated by the seller are able to obtain from the issuer the following information (which must be reasonably current):
    • the exact name of the issuer and any predecessor;
    • the address of the issuer’s principal executive offices;
    • the exact title and class of the security;
    • the par or stated value of the security;
    • 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 transferring shares and stock certificates;
    • a statement of the nature of the business of the issuer and the products and services it offers, which will be presumed reasonably current if the statement is as of 12 months before the transaction date;
    • the names of the officers and directors of the issuer;
    • the names of any persons registered as a broker, dealer or agent that will receive, directly or indirectly, any commission;
    • the issuer’s most recent balance sheet (which must be as of a date within 16 months of the transaction date);
    • the issuer’s profit and loss statements for the two preceding fiscal years, with the most recent profit and loss statement covering the 12 months preceding the date of the issuer’s balance sheet;
    • if the issuer’s balance sheet is not as of a date less than six months before the transaction date, an interim profit and loss statement covering the period between the date of the balance sheet to a date less than six months before the transaction date; and
    • if the seller is a control person the issuer, a statement regarding the nature of the affiliation and a certification by the seller that it has no reasonable grounds to believe that the issuer is in violation of the securities laws.

Any financial statements required to be delivered in a transaction relying on Section 4(a)(7) must be prepared in accordance with US generally accepted accounting principles (“GAAP”). However, if the issuer is a foreign private issuer, these financial statements may be prepared in accordance with GAAP or International Financial Reporting Standards  issued by the International Accounting Standards Board.

Section 4(a)(7) is not available if:

  • The seller is a direct or indirect subsidiary of the issuer.
  • The seller or any person that will directly or indirectly receive compensation or a commission for their participation in the offering is subject to:
    • an event that would disqualify an issuer or other covered person under Rule 506(d)(1) under Regulation D; or
    • a statutory disqualification under Section 3(a)(39) of the Exchange Act.
  • The issuer is a blank check, blind pool, shell company, special purpose acquisition company, or in bankruptcy or receivership
  • The transaction relates to a broker-dealer’s or underwriter’s unsold allotment; or
  • The security to be sold is part of a class of securities that has not been authorized and outstanding for at least 90 days prior to the transaction.

The securities sold in a Section 4(a)(7) resale transaction will be considered “restricted securities” and “covered securities” for blue sky purposes. A transaction effected pursuant to this exemption will not be deemed to be a “distribution” under the Securities Act.

The information in this article is for general, educational purposes only and should not be taken as specific legal advice.

About the author

Avital Perlman

Avital Perlman

Avital Perlman concentrates her practice on securities law compliance, mergers and acquisitions and corporate governance. She represents public and private clients in a variety of corporate and securities matters.
Avital Perlman

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