New legislation, the “FAST Act”1, signed into law by President Obama on December 4, 2015 takes several steps in the right direction toward simplifying capital raising by small companies, easing the transfer of restricted securities among investors and increasing the liquidity of private companies’ securities.
The SEC adopted rules implementing FAST Act Provisions on January 13, 20162.
Emerging Growth Companies
“Emerging growth companies”3 (EGCs) may start their IPO road shows 15 days after filing their registration statement (prospectus, plus), instead of the previously required 21 day waiting period.
Companies which lose their EGC status after they file their IPO with the SEC will be able to maintain their EGC status – and take advantage of less burdensome EGC disclosure requirements – under a grace period defined as the earlier of 1 year from the filing date or completion of their IPO.
EGCs can now omit audited financial statements for certain periods from SEC Form S-1 registration disclosures if those statements cover periods which would not be required to be included at the time the IPO begins, as may occur when there is a several month gap between the registration statement filing date and the effective date.
Smaller Reporting Companies
Smaller reporting companies (SRCs)4, can forward incorporate by reference into their S-1 Registration Statements, the information contained in their subsequent periodic 1934 Exchange Act filings. As a result, SRC shelf registration statements will not have to be continuously amended with information that has been previously filed with the SEC and which is publicly available via Exchange Act reports.
Resales of Restricted Securities
The FAST Act provides a new exemption, Section 4(a)(7), from registration under the Securities Act of 1933 for private resales by non-issuers of “restricted securities” (securities acquired in a private offering, as contrasted with free-trading securities purchased or acquired in a public offering or on a public trading market).
Section 4(a)(7) codifies or formalizes the informal “Section 4(a)(1 1/2)” exemption (developed by practitioners and tacitly accepted by the SEC) that bridges the Section 4(a)(1) exemption for transactions by a person who is not an issuer, underwriter, or dealer, and Section 4(a)(2) which permits issuers to sell securities in private transactions.
Under Section 4(a)(7), restricted securities may be resold without public registration provided:
- The purchaser is an accredited investor
- There is no general solicitation
- If the issuer is not a reporting company, the seller and purchaser must have the following reasonably current information about the issuer:
- Name, address
- Securities’ Title, class, par value
- Transfer agent
- Business description, and identification of officers, directors
- Information about any party being compensated in connection with the sale
- Two most recent balance sheets and profit and loss statements, prepared in accordance with GAAP
- If the seller is a control person, a brief statement on the relationship and a certification that the seller has no reasonable grounds to believe the issuer is in violation of the securities laws or regulations
- The issuer must be 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
- The transaction is not with respect to a security that constitutes the whole or part of an unsold distribution
- The class of security has been authorized and outstanding for at least 90 days prior to the transaction.
The new Section 4(a)(7) resale exemption cannot be used by the issuer or a subsidiary of an issuer.
- Fixing America’s Surface Transportation Act, Pub. L. No. 114-94 (Dec. 4, 2015)
- SEC Release 2016-6; sec.gov/news/pressrelease/2016-6.html
- An EGC is an issuer that had total annual gross revenues of less than $1 billion during its most recently completed fiscal year. An issuer that is an EGC would continue to be considered an EGC until the earliest of:
- the last day of the fiscal year during which it had total annual gross revenues of at least $1 billion;
- the last day of the fiscal year following the fifth anniversary of the IPO of its equity;
- the date on which it has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or the date on which it is considered to be a “large accelerated filer” under the Exchange Act.
- A “smaller reporting company,” as defined by Securities Act Rule 405 and Exchange Act Rule 12b-2, is an issuer that:
- had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter;
- in the case of an initial registration statement under the Securities Act or Exchange Act for shares of its common equity, had a public float of less than $75 million as of a date within 30 days of the date of the filing of the registration statement; or
- in the case of an issuer whose public float was zero, had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available.
The issuer must not be an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company.