The recently-enacted highway bill, also known as the Fixing America’s Surface Transportation Act (or the “FAST Act”), contains a number of provisions relevant to start-up companies and those companies seeking to pursue the IPO path. The full text of the FAST Act can be found at the following link: https://www.gpo.gov/fdsys/pkg/BILLS-114hr22enr/pdf/BILLS-114hr22enr.pdf
Below are what we regard as the key elements of this legislation for pre-IPO technology and life science companies.
Secondary Trading of private company shares
Secondary trading in the shares of a few “large cap” and mature private company securities has been taking place over the past several years under a combination of SEC rules and well recognized informal exemptions. Section 76001 of the FAST Act has created a new exemption under Section 4(a)(7) of the U.S. Securities Act that formalizes existing practice. These transactions, however, were potentially subject to state regulation depending on the location of the parties. As a result, so long as the requirements of the exemption are met, it is now clear that trading of private company shares is exempt from both U.S. Federal and state registration requirements.
Key requirements of this new exemption include:
In addition to these key requirements, other requirements include that the class of securities being sold must have been outstanding for at least 90 days, the selling stockholder must not be a “bad actor” under applicable SEC rules, and the issuer must not be a blank check, blind pool or shell company.
Shares purchased in a transaction relying on this exemption would be deemed to be “restricted securities” and therefore subject to the holding period requirements of Rule 144 before the securities may be resold, one year for privately held companies. However, a purchaser in such a transaction would be allowed to tack the holding period of a seller that is not an affiliate of the company.
Further Streamlining of the IPO process for Emerging Growth Companies
Sections 71001-71003 of the FAST Act will help to further streamline the IPO process for Emerging Growth Companies.
Under the JOBS Act, companies that met the definition of an “Emerging Growth Company” (generally, a company with less than $1 billion in revenues in its most recent fiscal year), would need to publicly file a registration statement for its IPO not fewer than 21 days prior to the start of its roadshow. Under the FAST Act, this time period has been reduced to 15 calendar days.
In some cases, companies that have started the IPO process as Emerging Growth companies have lost that status if, for example, the SEC review process continued past the end of a fiscal year where the issuer crossed over the $1 billion revenue threshold. Under the FAST Act, such a company would remain an Emerging Growth Company through the earlier to occur of the IPO date or the 1-year anniversary of otherwise losing Emerging Growth Company status. While this situation is rare, companies that would otherwise lose their status as an Emerging Growth Company during the SEC review process will be able to continue with the confidential review process and avoid including the additional historical financial information and detailed executive compensation disclosures required of larger, more mature public companies.
Lastly, the FAST Act permits companies to omit historical financial information from initial confidential submissions or public filings of the registration statement for the IPO if those historical financial statements would not be required in a registration statement at the time of the roadshow. For example, Emerging Growth Companies are currently required to include 2 years of audited financial statements. For some issuers, the timing of the IPO process may be such that it would complete a fiscal year during the review process, and therefore need to add audited financial statements for that most recent year and the second prior year of historical financial statements would not be required in the registration statement. Instead of going through the expense and effort to audit and include financial statements from that second prior year, the issuer could omit that initial year of audited financial statements in the initial and subsequent filings.
Other Noteworthy Provisions
The FAST Act requires that the SEC issue new regulations within 180 days to scale the provisions of the SEC’s disclosure regulation, Regulation S-K, for emerging growth companies and other issuers with a public float of less than $700 million and also to amend the regulation to avoid provisions that are “duplicative, overlapping, outdated or unnecessary.” Additionally, the SEC is also required to conduct a study and issue a report on how to modernize and simplify the disclosure requirements, including reducing the use of “boilerplate,” repetitive and immaterial disclosures, of Regulation S-K, and issue proposed rules to do so at the end of the process.
For smaller reporting companies (companies with a public float of less than $75 million), the FAST Act provides an ability to incorporate by reference future SEC filings into a registration statement on Form S-1. This will allow companies that are not otherwise eligible to use the short form S-3 registration statement to now avoid the requirement to update a registration statement through filing post-effective amendments or supplements, which can be costly or potentially be subject to SEC review.