Need for Speed: FAST Act Impacts Securities Laws
On December 4, 2015, President Obama signed a five-year transportation bill, the Fixing America’s Surface Transportation, or FAST Act. While the 490-page act, which received broad bi-partisan support, is designed to free up highway bottlenecks, increase the number of buses and ferries and enhance high-tech information sharing to reduce congestion, it also contains several capital markets and public company reporting provisions.
Many of the securities law provisions are expected to aid capital raising. Some of these provisions are self-executing, while others require rulemaking by the SEC (within specified and tight timeframes) and demonstrate Congress’ increasing willingness to legislate securities matters and impose its views on the SEC’s agenda. In connection with the adoption of the FAST Act, the SEC’s Division of Corporation Finance issued an announcement highlighting the Act’s securities law provisions as well as two related Compliance and Disclosure Interpretations, or CDIs.
The FAST Act securities law provisions include:
IPOs – Improving Access to Capital for Emerging Growth Companies
Title LXXI of the FAST Act changes the treatment of Emerging Growth Companies, or EGCs, including those with pending registration statements, by:
Reducing from 21 to 15 the number of days in advance of a roadshow that an EGC must make its confidential submission of an IPO registration statement public. If an EGC does not conduct a roadshow, it must publicly disseminate the confidential submissions at least 15 days before effectiveness of the registration statement.
Permitting an EGC that met the conditions for EGC status when it initially filed for its IPO (or confidentially submitted its draft registration statement) - but subsequently lost that status before completion to continue to be treated as an EGC for up to one year or the earlier completion of its IPO.
Permitting an EGC that files (or submits for confidential review) a registration statement on Form S-1 or F-1 (for foreign private issuers) to omit financial information for historical periods that would otherwise be required at that time, under certain conditions: that the omitted financial information relates to a historical period the issuer reasonably believes will not be required in the registration statement at the time of the offering and, before the issuer distributes a preliminary prospectus to investors, the registration statement is amended to include all financial statements required at the time of the amendment.
TIMING: The first two items above became effective upon enactment of the FAST Act, and the third will become effective on January 3, 2016, 30 days after enactment.
COMMENTARY: The ability to omit historical financial information that would not ultimately be required in the filed preliminary IPO prospectus could ease the burden on some issuers during the review stage. For example, an EGC expecting to price its IPO in the summer of 2016 with audited 2014 and 2015 financial statements would be permitted to exclude from its initial filings (or confidential submissions) audited 2013 financial statements that might otherwise be required because they would no longer be required in the prospectus by the time the company had made its way through the SEC review process and commenced the IPO.
The FAST Act CDIs, however, clarify that an issuer may not omit interim period information for a shorter period if that period will be incorporated into financial statements covering a longer period at the time of the offering. For example, an issuer could not omit first quarter 2016 financial information from its initial filings (or confidential submissions) where the prospectus at the time of the offering must include 2016 financial information, such as unaudited second quarter and six months information or full-year audited financial statements. The CDIs also clarify that omitting separate acquired business financial statements in the initial filings is permitted if they would not be required at the time of the offering.
Public Company Reporting – Disclosure Modification and Simplification
Title LXXII includes several measures requiring the SEC to issue regulations designed to simplify reporting requirements and to conduct a study and issue a report about the modernization of Regulation S-K.
Specifically, the SEC is required to:
Issue regulations permitting issuers to submit a summary page on Form 10-K with cross-references (by electronic link or otherwise) to its fuller, required disclosure.
Amend Regulation S-K to ease the burden on emerging growth companies, accelerated filers, smaller reporting companies and other smaller issuers and, for all issuers, to eliminate duplicative, overlapping, outdated or unnecessary disclosure requirements.
Additionally, the SEC is required to conduct a study to determine how best to modernize and simplify the Regulation S-K disclosure requirements in a manner that emphasizes a company-by-company approach while preserving completeness and comparability of information across companies. The SEC is required to disseminate a report containing the findings of its study as well as specific and detailed recommendations for changing Regulation S-K.
TIMING: SEC rulemaking is required to implement the revisions to Form 10-K and Regulation S-K. The FAST Act requires the new rules to be in effect within 180 days of enactment. The SEC has 360 days following enactment to issue its reports on Regulation S-K modernization and simplification.
COMMENTARY: The Division of Corporation Finance is already engaged in a Disclosure Effectiveness project. In connection with these disclosure review measures, the staff has encouraged issuers to review their own disclosure and seek ways to simplify it. It is unclear if the FAST Act would change the staff’s ongoing Disclosure Effectiveness work. For example, while the FAST Act may envision regulations that permit or encourage broader use of 10-K cross-references, including to disclosure not included in the four corners of the 10-K itself, there is currently no prohibition against a 10-K summary page with links to other portions of the 10-K, so the statute itself does not necessarily implement actual change.
Private Offerings and Accredited Investors – Reforming Access for Investments in Startup Enterprises
Title LXXVI amends Section 4 of the Securities Act to add a new Section 4(a)(7) that would exempt from registration private resales of restricted securities conducted in accordance with specified conditions. These amendments would essentially codify the informal “4(1-1/2)” resale exemption that has developed in practice as a legal construct based on case law. They exempt from registration (including state “blue sky” registration) resales transacted subject to certain conditions, including:
Each purchaser in the resale is an accredited investor;
General solicitation is not used;
For transactions involving the securities of a non-reporting issuer, upon request of the seller, the issuer makes available to the seller and the prospective purchaser certain general information about the issuer and the securities as well as certain financial information about the issuer;
The securities are not offered for sale by the issuer or a direct or indirect subsidiary of the issuer;
Neither the issuer nor any intermediary is subject to certain “bad actor” disqualifications;
The issuer of the securities is “engaged in a business” and is not in the organizational or bankruptcy stage or a blank check or shell company;
The securities being sold are not part of an unsold allotment to, or a subscription or a participation by, an underwriter of the securities; and
The securities are part of a class that has been authorized and outstanding for at least 90 days before the date of the transaction.
Rule 4(a)(7) transactions are private placements and will not be deemed “distributions” under Section 2(a)(11) of the Securities Act, and the securities acquired in these transactions will be “restricted securities” within the meaning of Rule 144 under the Securities Act.
TIMING: The 4(a)(7) exemption became effective immediately and does not require SEC rulemaking.
COMMENTARY: Though the title of this provision references startup companies, it actually creates a non-exclusive exemption that is applicable for all companies, assuming fulfillment of the required transaction conditions. While it remains to be seen when market participants will manage to transition from referring to the exemption as the “4(1-1/2) exemption” to the “4(a)(7) exemption,” this codification of current practice should help further facilitate secondary sales transactions in the securities of private companies by contributing added certainty to the legal treatment.
Registration – Small Company Simple Registration
Title LXXXIV requires the SEC to revise Form S-1 to allow smaller reporting companies to automatically update information in a Form S-1 prospectus by forward-incorporating by reference reports they file with the SEC after the effective date of the S-1 registration statement.
TIMING: The SEC is required to implement these changes within 45 days of the enactment of the FAST Act.
COMMENTARY: Currently, only issuers using Form S-3 shelf registration statements can use forward incorporation by reference to supplement and update their securities offering documents during the pendency of an offering. Smaller reporting companies not eligible to use Form S-3 must use Form S-1 to register securities offerings, and currently can only update them by filing supplements or post-effective amendments. This change should permit smaller reporting companies that are not S-3 eligible to more easily use Form S-1 for resale shelf registration statements. The FAST Act will not, however, allow larger companies to forward incorporate by reference into an S-1 registration statement.