On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (the FAST Act). While the FAST Act is primarily a transportation bill, the Act includes several reforms designed to simplify disclosure requirements and facilitate access to the capital markets by, among other things:
- Permitting an emerging growth company (EGC) to omit certain financial statements from its registration statement, initiate the road show for its initial public offering (IPO) as little as 15 days after publicly filing its registration statement and enjoy a grace period following loss of EGC status;
- Permitting a smaller reporting company to forward incorporate by reference in Form S-1;
- Permitting companies to include a summary page in Form 10-K;
- Simplifying the disclosure requirements of Regulation S-K; and
- Providing a new registration exemption for resales to accredited investors.
Reforms and Provisions Effective Immediately
Shortened Waiting Period for EGC IPO Registration Statements
Previously, the existing law allowed any EGC, prior to its IPO date, to confidentially submit a draft registration statement to the Securities and Exchange Commission (SEC) for confidential nonpublic review by the SEC, as long as the initial confidential submission and all related amendments were publicly filed with the SEC no later than 21 days before the EGC conducted a road show. The FAST ACT reduces the 21-day requirement to 15 days.
Grace Period for Change of Status of EGCs
The FAST Act introduces a statutory grace period for a change of EGC status. Under the FAST Act, if an issuer was an EGC at the time it submitted its confidential registration statement or publicly filed a registration statement for review, but ceased to be an EGC thereafter, the issuer will continue to be treated as an EGC until the earlier of: (i) the date on which the issuer consummates its IPO; or (ii) the end of the one-year period beginning on the date the company ceases to be an EGC.
New Exemption for Non-Issuer Resales to Accredited Investors
The FAST Act codifies aspects of the so-called Section 4(a)(1½) resale exemption by adding Section 4(a)(7) to the Securities Act of 1933 (Securities Act). Section 4(a)(7) provides a statutory exemption and preempts state registration requirements for private resales of securities to accredited investors, subject to the following requirements:
- The seller is not, directly or indirectly, an issuer or a subsidiary of the issuer.
- Each purchaser is an accredited investor.
- No offers of sales using general solicitation or general advertising.
- If the issuer is not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act), is not a foreign private issuer exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act and is not a foreign government eligible to register securities under Schedule B, then specified, reasonably current information about the issuer and the securities must be made available to the purchaser, including:
- Identity of the issuer, its transfer agent and its officers and directors;
- Description of the issuer’s business;
- Description of the securities including amounts outstanding;
- The names of any persons registered as a broker, dealer, or agent that will be paid or given, directly or indirectly, any commission or remuneration in connection with that persons participation in the offer or sale of the securities;
- If the seller is a control person of the issuer, a brief statement regarding the nature of the affiliation, and a statement certified by the seller that they have no reasonable grounds to believe that the issuer is in violation of the securities laws or regulations; and
- Specified financial information of the issuer, which must be prepared in accordance with U.S. generally accepted accounting principles, or in the case of a foreign private issuer, International Financial Reporting Standards issued by the International Accounting Standards Board.
- Neither the seller, nor any person that has been or will be paid (directly or indirectly) remuneration or a commission for their participation in the offer or sale of the securities, is subject to an event that would disqualify an issuer or other covered person under Rule 506(d)(1) of Regulation D under the Securities Act, or is subject to a statutory disqualification described under Section 3(a)(39) of the Exchange Act.
- The issuer is:
- engaged in business;
- not in the organizational stage or in bankruptcy or receivership; and
- 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 securities do not constitute the whole or part of an unsold allotment to a broker or dealer as an underwriter of the securities or a redistribution.
- The class of securities has been authorized and outstanding for at least 90 days.
Securities resold under Section 4(a)(7) will be restricted securities subject to transfer restrictions within the meaning of Rule 144 under the Securities Act, but will be exempt from registration requirements under state securities or “blue sky” laws.
The FAST Act Also Makes the Following Reforms, the Effects of which are not Immediate:
Simplified Financial Disclosures for EGCs (Effective Date: 30 days after the date of enactment)
Effective 30 days after enactment of the FAST Act, an EGC that is filing a registration statement with the SEC (or submitting a statement for confidential review) may omit financial information for historical periods otherwise required by Regulation S–X as of the time of filing (or confidential submission) of such registration statement, as long as the following requirements are satisfied:
- 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 or F–1 at the time of the contemplated offering; and
- Prior to the issuer distributing a preliminary prospectus to investors, the registration statement is amended to include all financial information required by Regulation S–X at the date of that amendment.
This change to Forms S-1 and F-1 allows EGCs to exclude historical financial statements that will eventually be superseded by more recent financial statements during the SEC review process.
Forward Incorporation by Reference for Form S-1 Filed by Smaller Reporting Companies (Subject to SEC Rulemaking)
The FAST Act requires the SEC to, within 45 days of enactment of the Act, revise Form S–1 to permit a smaller reporting companies to incorporate by reference any documents that such companies file with the SEC after the effective date of such registration statement.
Disclosure Modernization and Simplification (Subject to SEC Rulemaking)
The FAST Act requires the SEC:
- Within 180 days of the enactment of the Act, to:
- Issue regulations that permit issuers to submit a summary page on Form 10-K, as long as each item on the summary page includes a cross-reference (by electronic link or otherwise) to the material in the Form 10-K to which the item relates;
- Revise Regulation S-K (through elimination of requirements or otherwise) in order to reduce the burden on emerging growth companies, accelerated filers, smaller reporting companies, and other smaller issuers, while still providing all material information to investors; and
- Eliminate required provisions of Regulation S–K that are duplicative, overlapping, outdated, or unnecessary.
- To conduct a study of Regulation S-K and within 360 after enactment of the FAST Act, issue a report to Congress containing the following:
- All findings and determinations from the Regulation S-K study which must:
- Determine how best to modernize and simplify the requirements 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 completeness and comparability of information across registrants; and
- Evaluate methods of information delivery and presentation and explore methods for discouraging repetition and the disclosure of immaterial information.
- Specific and detailed recommendations on modernizing and simplifying the requirements in Regulation S–K in a manner that reduces the costs and burdens on companies while still providing all material information; and
- Specific and detailed recommendations on ways to improve the readability and navigability of disclosure documents and to discourage repetition and the disclosure of immaterial information; and
- Within 360 days after the above report is submitted to Congress, to issue a proposed rule to implement the recommendations of the report.