FAST Act Amendments to Securities Laws Improve Access to Capital Markets
The new Fixing America’s Surface Transportation Act (FAST Act) builds upon several securities laws contained in the Jumpstart Our Business Startups Act (JOBS Act), the 2012 law that sought to expand and ease capital raising by smaller companies by relaxing the applicable regulatory and reporting obligations. While much of the lengthy statute deals with improving America’s transportation infrastructure, the FAST Act also amends several federal securities laws to ease capital raising by Emerging Growth Companies (EGCs), which are companies with annual gross revenues of less than $1 billion, and by smaller reporting companies, which are SEC reporting companies that have a common equity public float of less than $75 million or have annual revenue of $50 million or less.
The changes to the federal securities laws included in the FAST Act address three primary subjects: (1) improving EGCs’ access to capital markets by further streamlining the IPO process, (2) allowing smaller reporting companies to “forward incorporate” subsequent securities filings in their Form S-1 registration statements, and (3) codifying the unwritten “Section 4(a)(1½)” exemption for certain unregistered resales of securities by sophisticated investors. The securities law provisions in the FAST Act seek to address the challenges faced by EGCs and smaller reporting companies seeking to raise capital through the public markets, a traditionally expensive and time consuming process fraught with extensive regulatory oversight by the SEC.
Streamlining the IPO Process for EGCs
When the JOBS Act was passed, it sought to spur business growth by allowing smaller companies to more easily access the capital markets by simplifying the IPO process and making public reporting obligations more manageable. The FAST Act amends certain JOBS Act provisions to further simplify the IPO process for EGCs, including by:
- Reducing the 21-day period during which an EGC must have publicly filed its confidential registration statement with the SEC prior to commencing its road show to a 15-day period;
- Providing a grace period allowing an issuer that was EGC when it submitted its confidential registration statement to the SEC but no longer meets the definition of an EGC prior to the completion of its offering to continue to be treated as an EGC through the earlier of (i) the date on which the issuer consummates its IPO or (ii) the expiration of a one-year period beginning when the issuer ceased to qualify as an EGC; and
- Allowing EGCs to file registration statements (or submit them for confidential SEC review) to leave out financial information for historical periods otherwise required by Regulation S-X, provided that (i) the omitted financial information relates to a historical period the EGC reasonably believes will not be required in the registration statement at the time of the contemplated offering and (ii) prior to the distribution of a preliminary prospectus to investors, the registration statement is amended to include all financial information required by Regulation S-X at the date of such amendment.
The changes in the first two bullets became effective upon enactment of the FAST Act, while the third becomes effective on January 3, 2016. These changes are intended to further simplify the IPO process for EGCs by giving them more time to test the waters of an IPO before fully (and publicly) committing to the offering. The grace period described in the second bullet allows EGCs to file a confidential registration statement for SEC review before publicly committing to an IPO without fear that they may no longer avail themselves of this confidential process by virtue of exceeding the $1 billion annual gross revenue threshold. This grace period will give management and in house lawyers more confidence that they can start down the IPO road and pull back without risking investor backlash from a perceived “failed” offering that becomes public. Allowing EGCs to omit historical financial information from their initial registration statement filings will also save EGCs considering an IPO significant time and expense since those EGCs will not have to present financial information in their initial filings that would not be required in later filings due to the passage of time.
Simplifying Form S-1 for Smaller Reporting Companies
Within 45 days of the enactment of the FAST Act, the SEC is also required to revise Form S-1, the long-form registration statement form, to permit smaller reporting companies to incorporate by reference in a Form S-1 registration statement any documents that such company files with the SEC after the effective date thereof.
This change will make using Form S-1 registration statements far less time-intensive and costly for smaller reporting companies to use because such registration statements will automatically update for events occurring after the effective date thereof without the smaller reporting company needing to file amendments with the SEC. This change will be especially meaningful for smaller reporting companies that are not eligible to use the less-detailed Form S-3 registration statement. Because a smaller reporting company that has sold securities valued at more than one-third of its public float in certain primary offerings over the previous year is not eligible to use Form S-3, reducing the time and expense associated with using Form S-1 registration statements should improve smaller reporting companies’ ability to sell equity in the public markets.
New Section 4(a)(7) of the Securities Act – Formalizing the “Section 4(a)(1½)” Exemption
The FAST Act’s codification of new Section 4(a)(7) to the Securities Act of 1933 formalizes the long-standing but unwritten exemption from registration of non-public resales of restricted securities on the same basis as an initial private placement sale by an issuer where the seller provides “reasonably current” information about the issuer (if not an SEC reporting company) to the purchasers. New Section 4(a)(7) does not require any SEC rulemaking and became effective upon the enactment of the Act. Securities lawyers have been relying on this exemption, long known as the “Section 4(a)(1½)” exemption because of its combination of components of both Sections 4(a)(1) and 4(a)(2) of the Securities Act, for decades, but neither the SEC nor Congress has formally passed judgment on its use until now.
The Section 4(a)(1½) exemption has been important for providing liquidity to holders of restricted securities by exempting from registration resales of such securities by persons (other than the issuer or its subsidiaries) to accredited investors so long as no general solicitation or general advertising is used in connection with the resales and where the issuer is “engaged in a business” and is not in the organizational or bankruptcy stage or a blank check or shell company. This exemption has benefited both issuers and investors by making it easier for investors to resell their shares, thus making investments in private companies less restrictive for holders. New Section 4(a)(7) of the Securities Act should help private companies by making their securities more transferrable and giving investors more confidence that they will be able to resell such securities to other sophisticated investors. Both investors and issuers will benefit from having clear “rules of the road” governing the resale of restricted securities. While formalizing this exemption may have removed some of the flexibility that accompanied the unwritten “Section 4(a)(1½)” exemption, holders and issuers seeking comfort that resale transactions will not trigger SEC scrutiny can now look to new Section 4(a)(7) of the Securities Act.