On December 4, 2015, President Obama signed the Fixing America’s Surface Transportation Act (the “FAST Act”) which included a host of provisions related to capital raising and securities law matters. Provisions of particular interest to private companies include:
Clear federal exemption (and “blue sky” preemption) for secondary resales by stockholders
In the past, stockholders of private companies who wanted to resell their holdings (especially those who were considered affiliates of the issuer) had to undertake a complicated analysis under the so-called “Section 4(a)(1½) exemption” to determine if an exemption from the registration requirements of the federal securities laws was available. This exemption was sometimes difficult to apply to given facts and often left some risk and uncertainty to the selling stockholder, the issuer and the buyer regarding the securities law exemption. The new provision set forth in the FAST Act will provide a clear path when parties want to engage in secondary transfers of shares.
The FAST Act adds a new Section 4(a)(7) to the Securities Act of 1933, >which is effective now and which provides an exemption from federal registration requirements (and from state “blue sky” regulation because they are deemed “covered securities”) for the resale of securities so long as the transfer transaction meets certain requirements, including:
The securities purchased in a Section 4(a)(7) transaction will be “restricted securities” and therefore, in the hands of the new holder subject to finding an exemption for a further transfer.
The new Section 4(a)(7) exemption is non-exclusive, meaning that stockholders can continue to use the principles of the Section 4(a)(1½) exemption for their transactions if they are unable to meet the conditions of Section 4(a)(7). In addition Rule 144 is available. Rule 144 allows resales of securities that have been held for longer than one-year by most stockholders that are not affiliates of the issuer without further restrictions; resales by affiliates of non-reporting issuers under Rule 144 are subject to public information requirements that are more extensive than those set forth under Section 4(a)(7).
IPO process enhancements for Emerging Growth Companies
The 2012 Jumpstart Our Business Startups Act (the “JOBS Act”) scaled back a number of provisions of the Sarbanes-Oxley Act, the Dodd-Frank Act and other federal securities laws and regulations as they applied to “emerging growth companies,” or EGCs, which includes most companies conducting an IPO other than those with $1 billion or more in revenues in their most recently completed fiscal year. Congress intended the JOBS Act to provide a so-called “on-ramp” for IPO issuers in order to make the IPO process less burdensome, ease their transition to public ownership and improve their access to capital.
The FAST Act provides three further enhancements to the IPO process for EGCs (the first two bullets are effective now, the third is to become effective no later than January 2, 2016):
This third bullet is potentially significant in that it should streamline the IPO process as companies will not have to dedicate resources to presenting financial information in early filings that would have ended up being dropped in later filings due to the passage of time.
Smaller reporting company forward incorporation
No later than January 17, 2016, the SEC is to make changes to the instructions to Form S-1 to allow smaller reporting companies (those with a public float of less than $75 million) to incorporate by reference future SEC filings into the S-1 Registration Statements. This will allow these smaller reporting companies to use the Form S-1 as a type of “shelf registration” for the registration of secondary resales by its stockholders. These changes should lead to significant savings of time and effort for smaller reporting companies who are not eligible to use Form S-3 for a particular offering.
FAST Act requires the SEC to take certain actions and study others
In addition to the significant matters discussed above, the FAST Act requires the SEC to issue new regulations, by May 31, 2016 to:
Finally, the FAST Act requires the SEC to undertake a detailed study on Regulation S-K, and to adopt related rules, to “(1) determine how best to modernize and simplify such requirements in a manner that reduces the costs and burdens on issuers while still providing all material information; (2) emphasize a company-by-company approach that allows relevant and material information to be disseminated to investors without boilerplate language or static requirements…; [and] (3) evaluate methods of information delivery and presentation and explore methods for discouraging repetition and the disclosure of immaterial information”.
The SEC is to report on this study to Congress by November 27, 2016, and propose rules related to the study within 360 days after issuing the report.