FAST Act’s Hidden Securities Law Benefits

The FAST Act is a major piece of legislation with the principal aim of providing long-term funding for surface transportation. However, among the dozens of unrelated provisions, the FAST Act slips several important changes to the Jumpstart Our Business Startups Act (the JOBS Act) and the Securities Act of 1933 (the Securities Act) affecting emerging growth companies (EGCs), smaller reporting companies and other issuers. Most notably, the FAST Act establishes a new exemption under Section 4(a)(7) of the Securities Act for private resales of securities intended to facilitate the development of secondary markets in private securities.

Summary

• Statutory Exemption for Resales of Restricted and Control Securities.

  Title LXXVI of the FAST Act—Reforming Access for Investments in Startup Enterprises—adds Section 4(a)(7) to the Securities Act as a new exemption from registration to facilitate the private resale of securities, which codifies the so-called “Section 4(a)(1½)” exemption but in a more limited scope. This exemption is effective immediately. See below for a more detailed description of this aspect of the FAST Act.
• Requirements for EGCs under the JOBS Act. Title LXXI of the FAST Act—Improving Access to Capital for Emerging Growth Companies—amends Section 6(e)(1) of the Securities Act to shorten the waiting period, from 21 days to 15 days, during which an EGC must have its registration statement on public file with the Securities and Exchange Commission (the SEC) before it may commence its “road show.” In addition, EGCs that have submitted a registration statement and thereafter lose their EGC status will have a one-year grace period from the date they lose their EGC status during which they will continue to be treated as an EGC—until the end of the one-year grace period or, if earlier, the date on which the EGC completes its IPO. Previously, if a company lost its EGC status during the confidential review process, it would be required to publicly file its registration statement pursuant to SEC rules applicable to non-EGCs. These changes are effective immediately.

  Title LXXI of the FAST Act also amends Section 102 of the JOBS Act to allow EGCs to submit a registration statement to the SEC that omits financial information for historical periods required by Regulation S-X as of the time a registration statement is filed or confidentially submitted if (i) the issuer reasonably believes the information relates to a historical period that will not be required to be included at the time of the contemplated offering and (ii) prior to the distribution of the 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 SEC has until January 3, 2016 to effect these changes to the JOBS Act; however, issuers may omit this financial information commencing on January 3, 2016. This provision will likely result in significant cost-savings for companies engaged in an IPO, where the preparation of financial statements is a costly and lengthy affair. Moreover, issuers often struggle to prepare financial statements and related disclosures for periods required solely to comply with Regulation S-X requirements that are subsequently updated by more current information required to be included in the final offering document. As an example, currently, if a calendar year EGC files its IPO registration statement in January 2016, it would be required to include audited financial statements for 2013 and 2014, as well as interim financial statements for the nine-month period ended September 30, 2015, even if the company then completes its IPO later in 2016, at which point only audited financial statements for 2014 and 2015 would be required. Under the new rules, this EGC would be able to omit the financial statements for 2013 on its initial filing if it includes the audited financial statements for 2015 before the preliminary IPO prospectus is distributed to investors. The SEC issued Compliance and Disclosure Interpretations on December 10, 2015 to clarify that an issuer nonetheless must include interim unaudited financial statements in its initial filing if annual financial statements covering such interim periods would ultimately be required at the time of the offering, even if the shorter interim periods would not be presented at that time. The SEC also stated in those interpretations that an EGC may omit financial statements of other entities if the issuer reasonably believes that those financial statements will not be required at the time of the offering.

• Disclosure Simplification. Title LXXII of the FAST Act—Disclosure Modernization and Simplification—directs the SEC to issue by June 1, 2016 new regulations allowing issuers to submit a summary page on Annual Reports on Form 10-K as long as the summary cross-references the material in the Form 10-K. The cross-reference may be by electronic hyperlink or otherwise. Title LXXII of the FAST Act also directs the SEC by June 1, 2016 to scale back or eliminate requirements of Regulation S-K in order to reduce the burden on EGCs, accelerated filers, smaller reporting companies and other smaller issuers and to eliminate duplicative, overlapping, outdated or unnecessary Regulation S-K requirements for all issuers. Finally, Title LXXII of the FAST Act directs the SEC to further study Regulation S-K disclosure and issue a report and proposed rules by November 28, 2016.
• Small Company Simple Registration. Title LXXXIV of the FAST Act—Small Company Simple Registration—directs the SEC to revise Form S-1 by January 18, 2016 so as to allow smaller reporting companies to incorporate by reference in a registration statement any documents they have filed with the SEC after the effective date of the registration statement. This new provision will eliminate the need for smaller reporting companies to file post-effective amendments and supplements. Additionally, it may allow smaller companies to use Form S-1, in effect, as a shelf registration statement.
• Exchange Act Registration for Savings and Loan Holding Companies. Title LXXXV of the FAST Act—Holding Company Registration Threshold Equalization—amends Section 12(g)(1)(B) of the Securities Exchange Act of 1934 (the Exchange Act), effective immediately, to include “savings and loan holding companies (as defined in section 10 of the Home Owners’ Loan Act). Section 12(g)(1)(B) requires banks and bank holding companies with total assets exceeding $10 million and a class of equity securities (other than an exempted security) held of record by at least 2,000 persons to register that class of securities under the Exchange Act. Prior to the amendment, savings and loan holding companies were subject to Section 12(g)(1)(A), which provides that an issuer will become subject to Exchange Act registration requirements within 120 days after the last day of its first fiscal year ended on which the issuer has total assets in excess of $10 million and a class of equity securities (other than exempted securities) held of record by either (i) 2,000 persons or (ii) 500 persons who are not accredited investors.

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*We would like to thank Senior Law Clerk Andrés Berry for his contribution to this alert.