How the FAST Act Helps EntrepreneursBusiness Formation, Securities Attorneys (Exchange Act)
How the FAST Act Helps Entrepreneurs
On December 4, 2015 the FAST Act (Fixing America’s Surface Transportation Act) was signed into law. It’s important to know how the FAST Act helps entrepreneurs. Although the name of the Act doesn’t seem to have anything to do with securities law or entrepreneurs, hidden within the several hundred pages of the FAST Act are many provisions that modify the Jumpstart Our Business Startups Act (JOBS Act) to make it even better than it was before for entrepreneurs. The FAST Act facilitates capital raising for EGCs (Emerging Growth Companies), which is good for entrepreneurs. It also seeks to simplify disclosure requirements for reporting companies, codifies a previously informal exemption from registration for re-sales of securities and streamlines the registration process for smaller reporting companies. This article summarizes the important provisions of the FAST Act and explains how the FAST Act helps entrepreneurs.
The SEC has put out a summary of the FAST Act and has adopted Compliance and Disclosure Interpretations (CDIs). Both are very useful in gaining a full understanding of the FAST Act and how the SEC interprets it. Some of the provisions of the FAST Act must be implemented through SEC rule making or study while others became effective immediately upon adoption. We have noted below whether a particular provision of the FAST Act is effective or not.
Changes to the Offering Process
Change to Public Filing Requirement for IPOs
The JOBS Act permits EGCs to submit for confidential, non-public staff review a draft registration statement relating to an IPO. Under the JOBS Act an issuer was required to publicly file the registration statement and all previously submitted drafts no later than 21 days before the date on which the issuer begins its road show. The FAST Act reduces the 21 day period to 15 days. If an EGC does not conduct a road show, then the non-public drafts must be filed at least 15 days before the registration statement is declared effective. This provision of the FAST Act is immediately effective. This change should give EGCs more flexibility when they are determining when to launch their roadshow.
New Grace Period for Companies that Change EGC Status after Filing
If an issuer is an EGC at the time that it files its registration statement, but then sometime after filing, but before effectiveness, loses its EGC status, the FAST Act provides that the issuer will continue to be treated as an EGC until the earlier of the date on which the issuer consummates its public offering or the end of the 1-year period starting from the date that the issuer ceased to be an EGC. This provision of the FAST Act is immediately effective. This provision overturns prior SEC guidance and allows transitioning EGCs to continue to benefit from EGC status until their public offering is complete.
No Audit Required For Financial Statements that Will go Stale Anyway
The FAST Act allows an EGC to omit from its IPO registration statement any financial statements otherwise required if the EGC reasonably believes that the omitted financial statements will not be required to be included in the registration statement at the time of the contemplated offering. In other words, an issuer does not have to waste a lot of time and money to do an audit for a particular fiscal year if that issuer reasonably believes that at the time it starts selling securities, that year’s audit will not need to be included in the registration statement. For example, if an EGC makes its submission today, January 12, 2016, it would have been required to include audited financial statements for 2013 and 2014 and interim financial statements for the nine month period ended September 30, 2015. However, thanks to the FAST Act, if the EGC reasonably believes that it will not conduct its road show until after February 16, 2016, it may now exclude audited 2013 financial statements as long as it includes audited 2014 and 2015 financial statements in its red herring prospectus and in the registration statement at the time of effectiveness. Interim financial statements for the nine months ended September 30, 2015 and 2014 would also be required.
This provision of the FAST Act can be relied upon from and after January 3, 2016 and will prove very helpful to issuers who can now eliminate older periods that are not material to an understanding of their business. Historically, issuers would attempt to obtain waivers from the SEC permitting them to omit these older financial statements. The FAST Act has eliminated the need to obtain these waivers.
Making Disclosure More Simple
Summary Page for Form 10-K
Although issuers are not currently prohibited from including a summary box in their 10-Ks, the FAST Act requires the SEC, by June 1, 2016, to issue rules that permit issuers to include a summary page in their annual reports on Form 10-K. Each item in the summary must be cross-referenced to the more fulsome disclosure elsewhere in the report. We believe that legislators included this provision in the FAST Act to encourage issuers to include summary boxes in their 10-Ks. We believe that a practice may develop where annual reports on Form 10-K will begin to contain summary boxes similar to prospectuses. This practice will be good for investors who can more quickly get an overview of the annual report and then drill down on those provisions that require more study.
Overhaul of Regulation S-K
The FAST Act requires the SEC, by June 1, 2016, to revise Regulation S-K to further scale down or eliminate requirements relating to EGCs, accelerated filers, smaller reporting companies and other smaller issues, and eliminate duplicative, overlapping, outdated or unnecessary provisions of Regulation S-K. This requirement of the FAST Act is good for issuers and investors. More streamlined regulations that focus on what is important will facilitate business and investment.
The FAST Act also requires the SEC to carry out a study of the requirements of Regulation S-K to determine how best to modernize and simplify disclosure requirements, emphasizing a company by company approach without boilerplate or static requirements, and evaluate methods of information delivery and presentation that discourage repetition and disclosure of immaterial information.
New Resale Exemption
The FAST Act implements new Section 4(a)(7) of the Securities Act of 1933. The exemption applies to secondary sales of securities that are purchased by accredited investors. Before the FAST Act was enacted, a typical seller of restricted securities that could not rely on the safe harbor provided by Rule 144 because the holding period requirement was not met or for other reasons would rely on Section 4(1 1/2), which is not a section of the Securities Act at all. Instead, 4(1 1/2) is the shorthand for the reliance by a seller on two different sections of the Securities Act, i.e., Section 4(a)(1) and Section 4(a)(2). Neither of those sections apply specifically to the seller’s situation, but case law and practice permit the exemption where the purchaser is sophisticated and has access to relevant material information about the issuer. The FAST Act codifies Section 4(1 1/2) without eliminating it.
Under Section 4(a)(7) a resale is exempt from registration so long as:
- the purchaser is an accredited investor, as defined in Rule 501 of Regulation D;
- the seller (or any person acting on behalf of the seller) does not use general solicitation to offer or sell the securities; and
- if the securities are those of an issuer that is not subject to the reporting requirements of the Securities Exchange Act of 1934, then the seller and the prospective purchaser must obtain specified information from the issuer, including
— the company’s name and the name of any predecessor company,
— principal place of business,
— title and class of the security being offered and the current capitalization of the company,
— transfer agent details or details of any other person responsible for stock transfers,
— a statement of the company’s current business and products, which will be presumed current if it is as of a date that is no more than 12 months before the date of sale,
— the company’s directors and officers,
— information regarding brokers and dealers,
— the company’s most recent balance sheet and profit and loss statement and similar financial statements (not required to be audited) for the two prior fiscal years prepared in accordance with GAAP or IFRS if the company is a foreign issuer, and
— if the seller is an affiliate of the company, a statement regarding the nature of the affiliation accompanied by a certification from the seller that it has no reasonable grounds to believe that the company is in violation of the securities law.
Section 4(a)(7) will not be available, however, if:
- the seller is a direct or indirect subsidiary of the issuer,
- the company or anyone paid a commission for facilitating the sale is subject to the “bad actor” provisions of Rule 506(d) of the Securities Act of 1933;
- the company is in bankruptcy or receivership, a blank check, blind pool or shell company;
- the securities are part of an unsold allotment to an underwriter; or
- the class of securities has not been authorized or outstanding for at least 90 days.
Securities sold under the new 4(a)(7) exemption are “restricted securities” under Rule 144.
Finally, the FAST Act amends Securities Act Section 18 to preempt state blue sky requirements for re-sales conducted under the new exemption. Preemption means that Section 4(a)(7) securities are “covered” securities for blue sky purposes.
Letting Issuers Incorporate Future Information into S-1s by Reference
The FAST Act requires the SEC to amend Form S-1 by January 18, 2016 to allow smaller reporting companies to incorporate by reference in a registration statement on that form any documents that the company files after the effective date of the registration statement. This provision will save money for issuers because they will no longer have to file post-effective amendments each year to update their financial statements and disclosure. Unfortunately, issuer’s that want to conduct delayed shelf offerings must still be S-3 or F-3 eligible. But, after this provision of the FAST Act is implemented by the SEC, EGCs will be able to undertake other offerings under Rule 415 such as continuous offerings that are ongoing for a period of time after effectiveness and resale offerings.
Fixes Registration Threshold for Savings and Loan Holding Companies
The FAST Act corrects an error that was made in the JOBS Act. It amends Section 12(g) so that savings and loan holding companies are treated in the same way as banks and bank holding companies for the purposes of registration, termination of registration or suspension of their Exchange Act reporting obligations. This provision became effective upon enactment of the FAST Act.
Please contact us at firstname.lastname@example.org to learn more about the FAST Act and how it will affect your company