Recently Enacted Transportation Act Affects Securities LawsJanuary 2016
On December 4, 2015, President Obama signed into law the Fixing America's Surface Transportation Act (FAST Act), which, despite its broader focus on transportation issues, also included several important changes to federal securities laws. Among them is the introduction of a new resale exemption under Section 4(a)(7) of the Securities Act (the 4(a)(7) Exemption), which was effective upon signing.
Generally, each purchase or sale of securities must be registered under the Securities Act or qualify for an exemption, even for securities acquired in a public offering or private placement. The 4(a)(7) Exemption is essentially the codification of a long-standing informal exemption from registration, commonly referred to as the "4(a)(1 ½)" exemption, that arises from Securities and Exchange Commission (SEC) guidance, case law, and general practices relating to resales by security holders under Section 4(a)(1) of the Securities Act and by issuers for private offerings under Section 4(a)(2) of the Securities Act. The 4(a)(7) Exemption creates a non-exclusive safe harbor that may be used if the following conditions are met:
- Each purchaser must be an accredited investor as defined in Rule 501 of Regulation D
- Neither the seller nor any person acting on behalf of the seller offers or sells the securities by any form of general solicitation or advertising
- For issuers that are non-reporting companies, the seller and prospective purchaser obtain from the issuer, upon request of the seller, and the seller in all cases makes available to the prospective purchaser, specified information regarding the issuer, including certain financial information such as the issuer's most recent balance sheet and profit-and-loss statements for the two preceding fiscal years prepared in accordance with generally accepted accounting principles
- Neither the seller nor any agent receiving compensation is a "bad actor" subject to disqualification under Rule 506(d)(1) of Regulation D or Section 3(a)(39) of the Exchange Act
- 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 with respect to a security of a class that has been authorized and outstanding for at least 90 days prior to the date of the transaction
Securities acquired in reliance on the 4(a)(7) Exemption will be "restricted securities," meaning that the securities cannot be transferred by the buyer unless they are part of a registered offering or subject to an exemption (which could include the 4(a)(7) Exemption). Shares transferred under the 4(a)(7) Exemption are "covered securities" and, therefore, the purchase and sale are exempt from registration requirements under state securities laws, although notice filings and fees may still be required at the state level.
In addition to the 4(a)(7) Exemption, the FAST Act introduced additional accommodations for emerging growth companies and directed the SEC to simplify disclosure requirements for Exchange Act reporting and securities offerings.