On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, or the “FAST Act.” Although most of its 1,300 plus pages address matters relating to transportation and infrastructure, the FAST Act provides important changes to rules governing access to the capital markets and reporting under SEC regulations. The full text of the legislation can be found here.
The changes that we find most interesting include the following:
Improving the IPO Process for Emerging Growth Companies
1. Initial Filing of IPO Registration Statement May Omit Financial Statements That Will Not Be Included In the Final Prospectus. Before the FAST Act, an Emerging Growth Company, or EGC, was required to include at least two years of audited financial statements in its IPO registration statement, even if the financial statements for the earlier of the two years would not ultimately be required to be included in the prospectus used in the IPO. Under Section 71003 of the FAST Act, an EGC may omit historical financial information otherwise required to be included in an IPO registration statement by Regulation S-X if the EGC “reasonably believes” that financial information for a given historical period will not be required to be included in the registration statement at the time of the “contemplated offering.” Prior to the launch of the IPO, the EGC must amend its registration statement to include all historical financial information required at the time of such amendment. The change is effective 30 days after enactment of the law (January 3, 2016), and the SEC is charged with amending the instructions to Form S-1 and Form F-1 by such date to reflect this change.
What does this mean for our clients? This new law could save significant time and expense by avoiding preparation and inclusion of financial statements for historical periods that will not ultimately be required to be included in the prospectus used in the IPO. For example, there might be an EGC that decides to make its first filing of its IPO registration statement in the third quarter of 2015. Currently, this EGC would be required to include 2013 and 2014 financial statements. Under the FAST Act, if this EGC reasonably believes that its IPO will launch after the date on which 2013 audited financials are no longer required to be included in the registration statement (i.e., after February 16, 2016), then the EGC could omit 2013 financial statements from the registration statement all together (i.e., the first few filings of the registration statement would only include 2014 financial statements). This EGC would amend the registration statement to include 2015 financial statements when they became available in the first quarter of 2016 and with sufficient time for the Staff of the SEC to review the new financial statements in advance of the launch of the IPO. In the meantime, this EGC would have advanced the SEC review process and avoided spending time and money on an audit of the 2013 financial statements. When the SEC amends Forms S-1 and F-1, it may impose additional requirements on this process.
2. EGCs Can Keep The S-1 Confidential Longer. Currently, an EGC that has submitted its IPO registration statement confidentially must file that registration statement publicly at least 21 days before commencing the IPO roadshow. Section 71001 of the FAST Act shortens this time period to 15 days. This change is effective upon enactment of the law.
What does this mean for our clients? The public filing of an IPO registration statement by an EGC is often viewed as a clear signal of the timing of the IPO. The shorter time period during which the registration statement is required to be public may limit the time during which the market will speculate before the launch of the roadshow. It may also provide the issuer with a greater ability to access available market “windows,” as it is not uncommon for the 21-day public filing requirement to be the gating item for launching an offering that has otherwise substantially completed the SEC review process.
3. An EGC Has a Grace Period If It Loses EGC Status During the IPO Process. Currently, if the IPO registration process for an issuer who qualifies as an EGC at the time it first filed or confidentially submitted its IPO registration statement crosses a fiscal year end and the issuer had $1 billion of revenue in the recently completed fiscal year, then the issuer will no longer be considered an EGC and will be unable to take advantage of the related benefits of an EGC during the rest of the IPO registration process. Section 71002 of the FAST Act provides that an issuer that was an EGC at the time it first filed or confidentially submitted its IPO registration statement, but subsequently lost its EGC status will, during a grace period, still be treated as an EGC. The grace period ends on the earlier of (i) the consummation of the issuer’s IPO under the relevant registration statement or (ii) one year after the issuer ceased to be an EGC. This change is effective upon enactment of the law.
What does this mean for our clients? This amendment will only impact the subset of IPO issuers that is close to the line in terms of qualifying as an EGC or experience a significant increase in revenues during the registration process. In these cases, this amendment will provide EGCs with a greater degree of certainty while working through the IPO registration process with the SEC. We note, however, that the FAST Act specifically amends Section 6(e)(1) of the Securities Act, which deals with confidential submissions by EGCs. It is not yet clear whether its application will ultimately be limited to an EGC’s ability to make confidential submissions or will be applied more broadly to other advantages given to EGCs in the IPO registration process.
New Resale Exemption
4. New Exemption for Private Resale of Restricted Securities. Currently, Section 4(a)(2) of the Securities Act provides a statutory exemption for private sales of securities by the issuer if certain conditions are met. Although practice and legal doctrine has developed that provides comfort around certain private resales of securities by persons other than the issuer (i.e., the “4(a)(1 1/2) exemption”), no express statutory exemption existed. The FAST Act establishes a new statutory exemption from registration for private resales of control and restricted securities under Section 4(a)(7) of the Securities Act. To qualify for the exemption, the transaction must satisfy certain conditions, including participation only by accredited investors, no general solicitation, provision of certain financial and other information, no offering by the issuer and no “bad actor” involvement. The issuer must be “engaged in business” and not in the organizational stage or in bankruptcy, and the securities sold must be of a class of securities that have been outstanding for more than 90 days. Securities sold under Section 4(a)(7) will be “restricted securities” for purposes of Rule 144 and “covered securities” under the Securities Act that are exempt from certain aspects of state “blue sky” regulation. This amendment is effective upon enactment of the law.
What does this mean for our clients? The new statutory exemption should make transfers of unregistered securities easier to accomplish. This should help facilitate the market for the securities of private companies by providing an additional method for resales of restricted securities, and may also increase the potential investor base for public companies seeking to use privately placed securities for capital raising activities in lieu of accessing the public markets.
Simplifying the Process for Smaller Reporting Companies Using Form S-1
5. Smaller Reporting Companies May Forward Incorporate by Reference in Form S-1. Currently, a shelf registration statement on Form S-1 does not automatically incorporate Exchange Act filings made by the issuer after the effective date of the shelf registration statement. In other words, Form S-1, unlike Form S-3, does not permit “forward incorporation by reference.” In order to keep a shelf registration statement on Form S-1 current and incorporate subsequent Exchange Act filings, an issuer must frequently file prospectus supplements or amendments to the Form S-1 (some of which have to be declared effective by the SEC). This is a burdensome process, particularly for those smaller issuers who do not qualify to use Form S-3. Under Section 84001 of the FAST Act, the SEC must revise Form S-1 to permit a “smaller reporting company” (generally defined as an issuer with a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter) to automatically incorporate by reference Exchange Act filings made by the issuer after the effective date of the registration statement. The SEC is charged with revising Form S-1 to reflect this change within 45 days after enactment of the law.
What does this mean for our clients? Adding the feature of forward incorporation by reference to Form S-1 registration statements provides one of the key benefits of Form S-3 to a group of issuers that are not large enough to qualify to use Form S-3. This will result in significant time and cost savings for smaller reporting companies that seek to maintain a shelf registration statement in order to access the capital markets. It may also make PIPEs and other private placements more accessible to smaller reporting companies as they can more easily provide investors with a resale registration statement following the private placement.
Simplifying Disclosure Requirements and Revisiting Regulation S-K
6. Issuers May Submit Summary Pages with Form 10-K. Section 72001 of the FAST Act requires the SEC to issue regulations within 180 days after enactment permitting all registrants to submit a summary page with their Annual Report on Form 10-K that provides cross-references to the more detailed discussion in the body of the Form 10-K. The cross-reference may include a hyperlink to the applicable section of the Form 10-K.
What does this mean for our clients? This change will impact all reporting companies, whether large or small. Until the SEC regulations are published, it is hard to predict exactly how brief the summary will be and whether registrants will take advantage of the option to include the summary pages with their Form 10-K. If registrants adopt the practice, it would not be surprising for the summary to become, to some extent, a marketing or investor relations tool (similar to the summary sections of CD&A a few years ago).
7. SEC is Charged with Simplifying Regulation S-K. The FAST Act requires the SEC to simplify Regulation S-K and eliminate duplicative or unnecessary requirements. The FAST Act also requires the SEC to conduct a study of ways for issuers to provide material information to investors at reduced costs. The SEC is charged with issuing the regulations within 180 days after enactment of the law and submitting the results of its study to Congress within 360 days after enactment of the law.
What does this mean for our clients? There is clearly a focus on both simplifying disclosure so that it will be more easily understood by investors and reducing the burdens on smaller issuers such as EGCs and smaller reporting companies. It remains to be seen what changes will result from these “simplification” requirements, how quickly those changes will be implemented by the SEC and whether they will have a meaningful impact on the compliance costs of issuers.