SEC Adopts Interim Final Rules to Implement FAST Act

By Avital Perlman

On January 13, 2016 the SEC approved interim final rules implementing two provisions of the Fixing America’s Surface Transportation (FAST) Act, adopted by Congress in December, that revise financial reporting forms for emerging growth companies* and smaller reporting companies.** The FAST Act is described in more detail here. The new rules ease the financial statement disclosure requirements for IPO registration statements of emerging growth companies and permit forward incorporation by reference by smaller reporting companies in certain Form S-1 registration statements. The interim final rules became effective when published in the Federal Register on January 19, 2016. Because the rules were adopted as interim final rules, the SEC is soliciting public comments, including with respect to whether the amendments should be extended to other registrants or forms. The deadline for public comments is February 18, 2016.

Financial Disclosure for Emerging Growth Companies

The new rules revise Forms S-1 and F-1 to provide that as long as emerging growth companies’ registration statements include all required financial information at the time the offering is conducted, they will be allowed to omit certain historical period financial information in filings made prior to the offering. Section 71003 of the FAST Act amends Section 102 of the Jumpstart Our Business Startups (JOBS) Act to allow an emerging growth company that is filing a registration statement (or submitting a draft registration statement for confidential review) on Form S-1 or Form F-1 to omit financial information for historical periods otherwise required by Regulation S-X if it reasonably believes the omitted information will not be required to be included in the filing at the time of the contemplated offering. Prior to distributing a preliminary prospectus to investors, the issuer must amend the registration statement to include all financial information required by Regulation S-X at the time of the amendment.

In its analysis provided with the rules, the SEC noted that these provisions are intended to allow emerging growth companies to reduce the costs incurred in public offerings by permitting the exclusion of historical financial statements that will eventually be superseded by more recent financial statements by the time the marketing of the offering commences through the distribution of a preliminary prospectus.  As the SEC will not be required to review certain financial statements, the amendment may also shorten the time necessary to complete the initial registration statement of an IPO, which could improve an issuer’s ability to raise capital in a timely manner. Further, to the extent issuers have sensitive material in their historical financial information, the amendments may also enable emerging growth companies to protect their competitive position by not publicly disseminating information beyond what is required when the securities offering is conducted.

Smaller Reporting Company Forward Incorporation by Reference

The rules revise Form S-1 to allow a smaller reporting company to incorporate by reference in a registration statement on Form S-1 any documents filed with the SEC after the effective date of the registration statement.  A smaller reporting company making this election must state in the prospectus contained in the registration statement that all documents subsequently filed by the registrant pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), prior to the termination of the offering, shall be deemed to be incorporated by reference into the prospectus. The SEC also revised Item 512(a) of Regulation S-K to conform to the new rules. The undertakings in Item 512(b) of Regulation S-K will also be required in Form S-1 registration statements filed by smaller reporting companies that use forward incorporation by reference.

To qualify for forward incorporation by reference, a smaller reporting company must meet each of the existing eligibility requirements for historical incorporation by reference, including filing an annual report for its most recently completed fiscal year and filing all required Exchange Act reports during the 12 months preceding the filing date of the S-1 (or such shorter period as the smaller reporting company was required to file such reports). Smaller reporting companies that are blank check companies, shell companies (other than business combination related shell companies) or issuers for offerings of penny stocks will not be permitted to forward incorporate by reference into a Form S-1. In addition, the ability to forward incorporate by reference will be conditioned on the smaller reporting company making its incorporated Exchange Act reports and other materials readily available and accessible on a web site maintained by or for the issuer and disclosing in the prospectus that such materials will be provided upon request.

Forward incorporation by reference will eliminate the need to update information in a filing that has become stale or is incomplete. The SEC commented in its analysis that the intent of these amendments is to decrease the existing filing burdens by reducing multiple disclosure filings, thereby allowing smaller reporting companies to satisfy Form S-1 disclosure requirements and access capital markets at a lower cost. The revision to Form S-1 will make its requirements more consistent with those of Form S-3, which will particularly benefit companies that cannot use Form S-3 and have to rely on the longer Form S-1 to register their securities offering. The amendment will be most effective for continuous offerings, and those involving resales of securities, that often require repeated informational updates.

*Section 2(a)(19) of the Securities Act of 1933, as amended (the “Securities Act”) defines an “emerging growth company” as an issuer that had total annual gross revenues of less than $1,000,000,000 (as adjusted for inflation every five years) during its most recently completed fiscal year. An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year during which it had total annual gross revenues of $1,000,000,000, (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement, (iii) the date on which such issuer has, during the previous three year period, issued more than $1,000,000,000 in non-convertible debt, or (iv) the date on which such issuer is deemed to be a “large accelerated filer”, as defined in Rule 12b-2 of the Exchange Act. Section 71002 of the FAST Act, which was effective December 4, 2015, provides that a company that qualified as an emerging growth company at the time it filed a registration statement but later no longer meets the definition maintains its status until the earlier of the day its IPO is consummated or the end of the one-year period beginning on the date it no longer meets the definition. 

**Rule 405 of the Securities Act defines a “smaller reporting company” as an issuer that is not an investment company, asset-backed issuer or majority owned subsidiary that is not a smaller reporting company. If it is a reporting company, an issuer must have a public float of less than $75,000,000. In the case of an initial registration statement, an issuer must have a public float of less than $75,000,000 as of a date within 30 days of the date of the registration statement filing date. An issuer with no public float qualifies as a smaller reporting company if it had less than $50,000,000 during its last fiscal year.

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Avital Even-Shoshan Perlman
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