December 2015
Practice Group(s):
Capital Markets
FAST Act Continues Capital Formation Initiatives of
the JOBS Act
By David C. Lee
Corporate/M&A
Em erging Grow th and
Venture Capital
Global Governm ent
Solutions
Overview
On December 4, 2015, the Fixing America’s Surface Transportation Act (the “FAST Act”)
was signed into law by President Obama. While not apparent from its name, the FAST Act
contains provisions that amend or supplement the Jumpstart Our Business Startups Act of
2012 (the “JOBS Act”), permits forward incorporation by reference in Form S-1 and also
implements a statutory private resale exemption. In general, these provisions further ease
certain statutory and regulatory burdens on specified categories of issuers, including
emerging growth companies (“EGCs”), in connection with capital formation.
Emerging Growth Companies
Public Filing of Draft Registration Statements. Prior to the FAST Act, Section 6(e)(1) of the
Securities Act of 1933 (the “Securities Act”) required EGCs to publicly file draft registration
statements submitted for confidential nonpublic review by the U.S. Securities and Exchange
Commission (“SEC”) staff no later than 21 days prior to the date on which the EGC
conducted its road show. Section 71001 of the FAST Act amends Section 6(e)(1) of the
Securities Act to reduce the 21-day period to 15 days prior to the date on which the EGC
conducts its road show. The SEC staff has indicated that consistent with its JOBS Act
interpretations relating to Section 6(e), if an EGC does not conduct a road show, then the
draft registration statements must be filed at least 15 days prior to the effectiveness of the
registration statement. This provision was effective immediately upon the enactment of the
FAST Act, and the SEC staff has indicated that EGCs with initial public offerings pending
prior to the enactment of the FAST Act are permitted to rely on this provision.
Grace Period for Change of EGC Status. Section 71002 of the FAST Act provides that an
issuer that qualified as an EGC at the time it submitted a confidential registration statement
or filed a registration statement publicly but which ceases to be eligible as an EGC thereafter
shall continue to be treated as an EGC through the earlier of the date on which the issuer
completes its initial public offering pursuant to such registration statement or the end of the
one-year period beginning on the date that the issuer ceases to be an EGC. This provision
provides issuers with more certainty as to EGC status, particularly in situations where an
issuer is close to the EGC $1 billion threshold or is close to one of the triggers causing
disqualification of EGC status. 1 EGCs that are at risk of losing EGC status thus have more
1
Section 2(a)(19) of the Securities Act defines an EGC as “an issuer that had total annual gross revenues of less than
$1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the
Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the
FAST Act Continues Capital Formation Initiatives of the JOBS Act
flexibility in the event that they lose EGC status in that they can either complete their initial
public offering or have a one-year period from the time that they lose EGC status, whichever
comes first. This provision was effective immediately upon the enactment of the FAST Act,
and the SEC staff has indicated that EGCs with registration statements pending at the time
of the enactment of the FAST Act are permitted to rely on this provision.
Financial Statements. Section 102 of the JOBS Act reduced certain required disclosures for
issuers that qualified as EGCs, such as reducing financial statement requirements to two
years of audited financial statements. Section 71003 amends Section 102 of the JOBS Act
to further reduce the burdens of financial statements by providing that a registration
statement on Form S-1 or Form F-1 filed by an issuer prior to its initial public offering is
permitted to omit financial information for historical periods otherwise required by Regulation
S-X when it files its registration statement (or submits its confidential submission), provided
that (1) the omitted financial information relates to a historical period that the issuer
reasonably believes will not be required to be included in the Form S-1 or Form F-1 at the
time of the contemplated offering, and (2) prior to the distribution of the preliminary
prospectus to investors, such registration statement is amended to include all financial
information required by Regulation S-X at the date of such amendment. This provision
provides issuers with significant benefits in avoiding unnecessary cost and burden in
preparing and producing financial statements when such financial statements would not be
required to be included in the registration statement at the time of the contemplated offering.
The language of Section 71003 is not entirely clear as to whether acquisition financial
statements required by Rule 3-05 of Regulation S-X are covered by its terms. The SEC staff
issued Compliance and Disclosure Interpretations on December 10, 2015, clarifying that
Section 71003 is not limited to issuer financial statements and that issuers can therefore omit
financial statements of third parties under this provision of the FAST Act. 2 The SEC staff has
also indicated that it would not object if EGCs apply this provision immediately.
Another ambiguity in the language contained in Section 71003 relates to what point in time is
meant by the phrase “at the time of the contemplated offering.” Is it the time that marketing
of the offering commences, e.g., the distribution of the preliminary prospectus or the
commencement of the roadshow? Or is it the time of effectiveness of the registration
statement relating to the offering? One view is that “at the time of the contemplated offering”
refers to the time that the preliminary prospectus is distributed, which would be consistent
with the statutory language requiring that prior to the distribution of the preliminary
prospectus, the registration statement must be amended to include all required financial
nearest 1,000,000) during its most recently completed fiscal year.” An issuer that qualifies as an EGC continues its status
as an EGC until the earliest of (1) the last day of the fiscal year of the issuer during which it had total annual gross
revenues of $1 billion or more; (2) the last day of the fiscal year of the issuer following the fifth anniversary of the date of
the first sale of common equity securities of the issuer pursuant to an effective registration statement; (3) the date on
which the issuer has, during the previous three-year period, issued more than $1 billion in nonconvertible debt; or (4) the
date on which the issuer is deemed to be a large accelerated filer.
2
See Fixing America’s Surface Transportation (FAST) Act Compliance and Disclosure Interpretations (December 10,
2015), available at http://www.sec.gov/divisions/corpfin/guidance/fast-act-interps.htm.
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FAST Act Continues Capital Formation Initiatives of the JOBS Act
information. However, the language is not clear, and the SEC staff has not as of yet issued
any clarifying written guidance.
Section 71003 directs the SEC to adopt amendments to Forms S-1 and F-1; however, it
appears that Section 71003 also provides that this provision is effective 30 days after the
enactment of the FAST Act, which may be intended to provide issuers with relief in the event
that the SEC has not completed the amendments to Form S-1 and Form F-1 by that time.
Forward Incorporation in Form S-1
Section 84001 requires the SEC to, no later than 45 days after the enactment of the FAST
Act, revise Form S-1 to permit smaller reporting companies to incorporate by reference
filings made with the SEC after the effectiveness of the registration statement, i.e., forward
incorporation by reference. This revision will provide smaller reporting companies with the
welcome ability to avoid the necessity to file either prospectus supplements or post-effective
amendments, as necessary, to outstanding Forms S-1 when such issuers file Forms 10-K,
10-Q, and 8-K. This comes up often in instances where an issuer has filed resale
registration statements that are required to be outstanding due to registration rights
covenants that require such issuer to maintain effective registration statements for a
specified period of time.
Disclosure Effectiveness
Form 10-K. Section 72001 of the FAST Act requires the SEC to issue rules permitting
issuers to submit a summary page on Form 10-K, provided that each item on such a
summary page includes a cross-reference, by electronic link or otherwise, to the disclosure
in the Form 10-K to which such item relates. This rulemaking is required within 180 days
following the enactment of the FAST Act. Issuers are currently permitted to provide a
summary page in their Form 10-K filings so long as they fairly present the material
information in the Form 10-K.
Regulation S-K. Section 72002 of the FAST Act requires the SEC to (1) revise Regulation SK to further scale or eliminate Regulation S-K requirements to reduce burdens on EGCs,
accelerated filers, smaller reporting companies, and other smaller issuers, while continuing
to provide all material information to investors, and (2) eliminate duplicative, overlapping,
outdated, or unnecessary provisions of Regulation S-K. Section 72003 of the FAST Act
requires yet another study on Regulation S-K 3, which should (1) determine how best to
modernize and simplify Regulation S-K requirements in a way that reduces the costs and
burdens on issuers, yet still provides all material information; (2) emphasize a company-bycompany approach that allows relevant and material information to be disseminated to
investors without boilerplate language or static language, while preserving completeness and
3
Section 108(a) of the JOBS Act required the SEC to review Regulation S-K for purposes of determining how its
requirements could be updated to modernize and simplify the registration process and reduce costs and burdens
associated with the requirements of Regulation S-K for EGCs. Section 108(b) of the JOBS Act required a report of such
review.
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FAST Act Continues Capital Formation Initiatives of the JOBS Act
comparability of information across issuers; and (3) evaluate methods of information delivery
and presentation and explore methods for discouraging repetition and the disclosure of
immaterial information. The SEC is required to consult with the Investor Advisory Committee
and the Advisory Committee on Small and Emerging Companies with respect to the above
study and to submit a report to Congress no later than 360 days from the enactment of the
FAST Act.
Statutory Private Resale Exemption
In addition to the capital formation-related provisions discussed above, Section 76001 of the
FAST Act adds Section 4(a)(7) to the Securities Act, which provides an exemption for private
resale transactions. Specifically, new Section 4(a)(7) provides an exemption from the
registration requirements of Section 5 of the Securities Act for resale transactions satisfying
the following requirements: (1) each purchaser is an accredited investor as defined in
Securities Act Rule 501(a) of Regulation D; (2) neither the seller nor any person acting on
behalf of the seller offers or sells the securities by any form of general solicitation or general
advertising; (3) where the securities are of an issuer that is not subject to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (the “Exchange Act”) nor exempt under Exchange
Act Rule 12g3-2(b) nor a foreign government eligible to register securities under Schedule B,
the seller and the prospective purchaser obtain from the issuer, upon request of the seller,
and the seller in all cases makes available to the prospective purchaser, specified
information regarding the issuer; (4) the issuer or any of its subsidiaries is not the seller of
the securities in question; (5) neither the seller nor any person that has been or will be paid,
directly or indirectly, remuneration or a commission for their participation in the offer or sale
of the securities, including solicitation of purchasers for the seller, is subject to an event that
would disqualify an issuer or other covered person under Securities Act Rule 506(d)(1) of
Regulation D or is subject to a statutory disqualification under Section 3(a)(39) of the
Exchange Act; (6) the issuer is engaged in business, is not in the organizational stage or in
bankruptcy or receivership, and is not a blank check, blind pool, or shell company that has
no specific business plan or purpose or has indicated that the issuer’s primary business plan
is to engage in a merger or combination of the business with, or an acquisition of, an
unidentified person; and (7) the transaction is with respect to a security of a class that has
been authorized and outstanding for at least 90 days prior to the date of the transaction.
Securities that are acquired in a Section 4(a)(7) exempt transaction are deemed to have
been acquired in a transaction not involving any public offering and are thus deemed
restricted. In addition, transactions under Section 4(a)(7) are not deemed to be a distribution
for purposes of Section 2(a)(11) of the Securities Act, and securities sold in Section 4(a)(7)
transactions are covered securities for purposes of Section 18(b)(4) of the Securities Act and
thus have the benefit of federal preemption. Section 4(a)(7) was effective immediately upon
the enactment of the FAST Act.
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FAST Act Continues Capital Formation Initiatives of the JOBS Act
Author:
Dav id C. Lee
dav id.lee@klgates.com
+1.949.623.3596
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FAST Act Continues Capital Formation Initiatives of the JOBS Act
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