The Fixing America’s Surface Transportation Act (FAST Act) was signed into law on December 4, 2015 by President Barrack Obama. The FAST Act contains many securities related bills which required SEC guidance following the implementation of these new rules. The SEC released interim rules regarding two provisions of the FAST Act that will be effective on January 19, 2016. The SEC implemented section 71003 and 84001 of the FAST Act, which required the revision of Form S-1 and Form F-1. The revision of these two forms allows emerging growth companies to omit certain financial information. The amendments have a large effect on the existing collection of information requirements, mandated within the Paperwork Act of 1995, and the SEC estimates that it will decrease the time spent on paperwork by company personnel by approximately 70,214 hours.
Form S-1 is the form filed by domestic issuers for the sale and offering of securities, as outlined in the Securities Act of 1933. Form F-1 is the corresponding form used by foreign private issuers, which are any foreign issuers not including a foreign government.
Registration Statements for Emerging Growth Companies (Section 71003)
Section 71003 of the FAST Act amends Section 102 of the JOBS Act, to now allow emerging growth companies (EGCs) filing a registration statement to be able to omit financial information for certain historical periods not used in the offering. This is allowed if they have reason to believe that this information will not be included in the final registration statement used in the offering. The final registration statement must include all current financial information regarding the offering. This is permitted when EGCs are filing statements under Section 6 of the Securities Act on either Form S-1 or F-1. Section 6 requires that any security registered with the Commission require a registration statement. This provision was automatically put into effect 30 days after the FAST Act was enacted.
Section 71003 allows EGCs to only provide information that they expect will be required at the time they attempt to make their initial public offerings. This lowers the regulatory burden and reduces registration costs for EGCs. This also protects an EGCs competitive position by not requiring them to publicly release any sensitive information beyond what is initially required when offering securities. This is effective because it shortens the time needed for paperwork, allowing issuers to raise capital in a more timely manner.
An EGC is defined as any issuer with less than $1 billion in annual gross revenue during the most recent fiscal year. If a company qualifies as an EGC, it retains that status until the last day of the fiscal year when the company has a gross revenue of over $1 billion.
This amendment primarily impacts Form S-1 and F-1 filings, as well as draft registration statements by both domestic and foreign EGCs who conduct initial public offerings.
Financial Statement Inclusion in Registration Statements (Section 81003)
Section 84001 requires the revision of Form S-1 by the SEC, to permit smaller companies to incorporate by reference into the registration statement any documents filed following the effective date of the registration statement. This essentially allows advanced incorporation of documents for reference. Currently smaller reporting companies are prohibited from incorporating by reference, and must instead file post-effective amendments even to outdated filings, which is very costly and burdensome on time. The SEC also released eligibility requirements, which prohibit certain companies from using this requirement. This limits the use of this provision by companies not fitting the definition of a smaller reporting company. A new paragraph will be added to Item 12 of Form S-1 to put this provision into effect.
In order to be eligible to use forward incorporation by reference, smaller reporting companies must:
Have filed an annual report for their most recently completed fiscal year,
Have filed all Exchange Act reports and materials during the past 12 months prior to filing Form S-1., and
Make its incorporated Exchange Act reports easily accessible online, disclosed in the initial offering amount, or be available upon request.
Bank check companies, shell companies, or issuers offering penny stocks will not be permitted to utilize forward incorporation by reference.
A smaller reporting company is defined as any issuer that had public investors that own shares worth less than $75 million as of the end of the second quarter in the most recently completed fiscal year, or if they have an annual revenue of $50 million or less.
This amendment helps simplify regulations set forth by the SEC. Forward incorporation by reference will help eliminate the need to update the information in filings that are no longer relevant. This also reduces the amount of multiple disclosure filings, which is cost and time effective, as well as reducing audit and legal costs. This is also most effective for issuers making continuous offerings that require repeated information updates.
Item 512(a) of Regulation S-K
There is also a similar change being made to Item 512(a) of Regulation S-K, which also allows forward incorporation by reference to Exchange Act reports. These are filed after the effective date of any registration statements on Form S-1. Section 512 of the Exchange Act reports previously required post-effective amendments to the registration statements. This will also have a tremendous effect on the amount of paperwork required by issuers.
The SEC adopted final amendments to adopt sections 71003 and 84001, as well as an amendment to Item 512(a) of Regulation S-K, of the FAST Act, requiring the revision of Form S-1 and F-1. These amendments will reduce the cost and time required for filing and will be very beneficial for issuers.