On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, or FAST Act. Though it is aimed at improving the nation’s transportation infrastructure, the FAST Act also includes a number of provisions that impact federal securities laws. Under Section 5 of the Securities Act of 1933, all offers and sales of securities must be registered with the SEC unless they qualify for some exemption. The FAST Act, among other things, created a new statutory exemption for private resales of securities, provided the transaction meets certain requirements.
The new provision, Section 4(a)(7), is considered to be a codification of the so-called Section 4(a)(1½) exemption, which has been developed over time by securities lawyers and is recognized by the SEC. There are some minor differences, but the FAST Act makes clear this new amendment is non-exclusive.
In order to benefit from the Section 4(a)(7) exemption, which is effective immediately, a resale transaction must meet the following criteria:
- each purchaser is an accredited investor;
- the seller does not use a form of general solicitation or advertisement;
- the seller is not the issuer or a subsidiary of the issuer;
- neither the seller, nor any person that receives a commission for participation in the sale, is subject to a “bad actor” disqualification pursuant to Rule 506(d)(1) under the Securities Act;
- the issuer is engaged in business and is not a blank-check or shell company that has no specific business plan or purpose;
- the securities have been authorized and outstanding for at least 90 days before the resale;
- the transaction does not relate to a security that is part of an underwriter’s unsold allotment; and
- if the issuer of the securities being resold were issued by a non-reporting issuer, the issuer must make available certain information to the seller and a prospective purchaser.
This information includes, among other things, the nature of the issuer’s business, a list of its officers and directors and the most recent balance sheet and profit and loss statements for such part of the two preceding fiscal years as the issuer has been in operation.
Securities acquired in transactions under Section 4(a)(7) will be deemed to be “restricted securities” within the meaning of Rule 144 under the Securities Act. The securities will also be “covered securities” within the meaning of Rule 144, and therefore exempt from certain aspects of state securities laws, which are often referred to as “Blue Sky Laws.”
Generally speaking, Section 4(a)(7) should make it easier for investors to resell securities acquired in unregistered offerings. This could help facilitate the market for the securities of private companies and provide for more certainty in the process.
However, in my opinion, this exemption is not helpful, as meeting the requirements of Section 4(a)(1½), the existing exemption, is much easier. Section 4(a)(7) adds the following requirements, which aren't necessary to meet the Section 4(a)(1½) exemption and won't always be workable: (i) the securities have to be outstanding at least 90 days prior to resale; (ii) certain information, which normally wouldn't be prepared, must be provided; and (iii) the purchasers must be accredited. As a result, securities holders will likely continue to rely on Section 4(a)(1½) caselaw rather than the new exemption.