FAST Reduces Form S-1 Rules & Creates the Section 4(a)(7) Resale Resale Exemption

FAST Act Section 4(a)(7)

Last month, the Fixing America’s Surface Transportation Act, or FAST Act became law. The FAST Act is primarily a transportation bill but there are changes to the federal securities laws which should assist in the capital raising process particularly for Emerging Growth Companies.  The JOBS Act defines an Emerging Growth Company as an issuer with annual gross revenues of less than $1 billion during its most recent fiscal year.  The FAST Act impacts the securities registration process and the use of Form S-1 registration statements in an issuer’s initial public offering (“IPO”). The new rule should ease some of the burdens for small companies during the going public process.

The FAST Act requires the SEC to scale or eliminate regulatory requirements to reduce regulatory burdens on certain types of filers, including Emerging Growth Companies, and to eliminate regulations that are duplicative, overlapping, outdated or unnecessary. The SEC has 180 days from the enactment of the FAST Act to complete this task.

Road Show Waiting Periods

The FAST Act reduces the waiting period for road shows by Emerging Growth Companies. Under the FAST Act, an Emerging Growth Company cannot commence its road show 15 days after publicly filing its initial public offering (“IPO”) registration statement. The former rule required the issuer wait 21 days before conducting its road show.

Emerging Growth Company Grace Period

The FAST Act created a new grace period for an issuer that began the IPO process as an Emerging Growth Company and which loses its status before completion of the offering. Under FAST, a company that files its IPO registration statement as an Emerging Growth Company maintain its status as such until the earlier of (i) the end of the one-year period beginning on the date the company ceases to be an Emerging Growth Company, and (ii) the date on which the issuer completes the IPO pursuant to such registration statement.

Elimination of Certain Financial Statements

The FAST Act permits an Emerging Growth Company to omit certain financial information in a Form S-1 registration statement if:

  • the omitted financial information relates to a historical period that the company reasonably believes will not be required to be included in its Form S–1 registration statement at the time its planned IPO begins; and
  • prior to the company providing its preliminary prospectus to investors, its Form S-1 registration statement is amended to include all financial information required by Regulation S-X.

This change provides a significant benefit for issuers by saving them the expense and time of preparing financial statements that become stale in the period between the initial Form S-1 filing and effectiveness.

The Section 4(a)(7)  Resale Exemption

The FAST Act creates a private resale exemption from registration under the Securities Act. The FAST exemption is similar to the Section 4(a)(1-1/2) exemption.  The exemption cannot be used by the issuer or a subsidiary of an issuer, and neither the seller nor any person being paid in connection with the sale can be a “bad actor” as defined by Rule 506(d)(1) of Regulation D and Section 3(a)(39) of the 1934 Act.

Section 4(a)(7) exemption, allows resale of securities without registration under the Securities Act if each purchaser is an accredited investor and the offer and sale are made without general solicitation. Further, if the issuer is not a reporting company, the seller must provide purchaser with the following information:

  • Issuer’s exact name and address of issuer’s principal executive office
  • Title and class of securities, par value, and current capitalization of the issuer
  • Transfer agent contact information
  • A statement of the nature of the issuer’s business
  • The issuer’s officers and directors
  • Information about any broker, dealer or agent that will receive remuneration in connection with the sale
  • Issuer’s two most recent balance sheets and profit and loss statements, prepared in accordance with GAAP

Other requirements of the new Section 4(a)(7) exemption include:

  • 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 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
  • 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

Incorporation by Reference in Form S-1 for Smaller Reporting Companies

The FAST Act allows Form S-1 registration statements filed by smaller reporting companies to incorporate information in subsequent reports filed under the Securities Exchange Act of 1934 (“1934 Act”) by reference. This will reduce offering costs by allowing issuers to avoid post effective amendments and/or supplements to their Form S-1 when the required information has been included in their 34 Act reports.

The FAST Act should reduce offering costs and eliminate unnecessary time spent during the offering process under current rules.

This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected]. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855