A few nuggets for smaller companies buried in the Drive Act

Print

by Cydney Posner

The House has passed a new transportation bill, HR 22, the “Drive Act” – not normally something to write about in the PubCo blog. (Originally, this bill appears to have been the “Hire More Heroes Act,” but was somehow transformed into the Drive Act – go figure.) However, Financial Services Committee Chairman Jeb Hensarling successfully attached to the bill an amendment (H. Amdt. 827)  comprising 15 other bills that had previously passed the House as stand-alone measures, some of which related to capital for emerging growth companies, disclosure modernization, the development of secondary markets and the registration process for smaller companies. The amendment passed on a voice vote. Below are short summaries of the some of the key relevant provisions of the amendment:

 IMPROVING ACCESS TO CAPITAL FOR EMERGING GROWTH COMPANIES

• Amend Section 6(e)(1) of the Securities Act to reduce from 21 to 15 the number of days prior to the roadshow that the confidential submission of an IPO registration statement for an EGC must be made public.
• Amend Section 6(e)(1) to allow an issuer that was an EGC at the time it submitted or filed its registration statement for review but ceased to be an EGC thereafter to continue to be treated as an EGC under that subsection until it either completes its IPO under that registration statement or one year after it ceased to be an EGC.
• Amends Section 102 of the JOBS Act to allow EGCs to omit from their pre-IPO registration statements financial information for historical periods otherwise required by Reg S-X so long as the omitted financial information relates to a historical period that the issuer reasonably believes will not be required to be included at the time of the contemplated offering and, prior to distribution of the prelim, the registration statement is amended to include all financial information required by Reg S-X at the date of the amendment. Issuers would be entitled to rely on the provision 30 days after enactment.

DISCLOSURE MODERNIZATION AND SIMPLIFICATION

• Requires the SEC to issue regs permitting issuers to submit a 10-K summary page, but only if each item on the summary page includes a cross-reference (by electronic link or otherwise) to the related material in the 10-K.
• Requires the SEC, within 180 days after enactment, to revise Reg S-K:
  • to further scale or eliminate requirements of Reg S-K to reduce the burden on EGCs, accelerated filers, smaller reporting companies and other smaller issuers, while still providing all material information to investors;
  • to eliminate provisions of Reg S-K, for all issuers, that are duplicative, overlapping, outdated or unnecessary and that the SEC determines no further study (below) to be necessary to determine their efficacy.
• Requires the SEC to conduct a study of Reg S-K, in consultation with the SEC’s Investor Advisory Committee and the Advisory Committee on Small and Emerging Companies, report to Congress on the study in 360 days and issue proposed rules in another 360 days:
  • to determine how best to modernize and simplify  REg S-K to reduce costs and burdens while still providing all material information;
  • to emphasize a company-by-company approach that avoids boilerplate or static requirements while preserving completeness and comparability of information across registrants; and
  • to evaluate methods of information delivery and presentation and explore methods for discouraging repetition and the disclosure of immaterial information.

REFORMING ACCESS FOR INVESTMENTS IN STARTUP ENTERPRISES

Amends Section 4 of the Securities Act to exempt from the registration requirements certain secondary (non-issuer) transactions with accredited investors that meet the following requirements:

• Each purchaser is an accredited investor;
• Neither the seller, nor any person acting on the seller’s behalf, offers or sells securities by a general solicitation;
• If the issuer is private, the seller and a prospective purchaser designated by the seller obtain from the issuer reasonably current information identifying the issuer and its business and products, the securities, the issuer’s officers and directors, the transfer agent, any paid broker or dealer, GAAP financial statements for the two prior fiscal years, and, if the seller is a control person, a brief statement regarding the nature of the affiliation, and a statement certified by the seller that it has no reasonable grounds to believe that the issuer is in violation of the securities laws;
• Neither the issuer nor anyone paid a commission for participation may be “bad actors”;
• The issuer is engaged in business, is not in the organizational stage or in bankruptcy, and is not a blank check, blind pool or shell company;
• The transaction does not involve an unsold allotment to, or a subscription or participation by an underwriter or a redistribution;
• The class of securities has been authorized and outstanding for at least 90 days.

The securities issued are deemed to be “restricted” securities under Rule 144 and “covered securities” for purposes of NSMIA (i.e., exempt from state blue sky laws).

SMALL COMPANY SIMPLE REGISTRATION

Requires the SEC to revise Form S-1 to permit a smaller reporting company to incorporate by reference in a Form S-1 any documents that the company files with the SEC after the effective date of the registration statement.

——–

Rep. Hensarling argued that his amendment should be included in the Drive Act because it combines 15 bills that were passed on a bipartisan basis, “almost all of them, unanimously by voice vote or near 400-plus votes…. They are modest bills, but they happen to be germane to this transportation bill because of the revenue stream, the funding source, the pay-for in the transportation bill. So because they have already been debated in committee, passed in the committee, debated in the House, passed in the House, we are simply packaging 15 of these bills together because there is an opportunity to have these become law and benefit the American people.”

Rep. Maxine Waters, who supported these bills in committee and on the Floor, opposed the amendment because, she said, she wanted the Senate to have the opportunity to  debate and amend these bills. She was also concerned about the impact of another amendment, one proposed by Rep. David Young (H. Amdt. 816), that would require each rulemaking under the highway bill to include a list of information upon which it is based, including data, scientific and economic studies, and cost-benefit analysis, and identify how the public can access such information online. In her view, that meant that the SEC, “in conducting its rulemaking under Chairman Hensarling’s amendment, would face this additional administrative hurdle, including the innocent-sounding cost-benefit analysis. However, cost-benefit analysis is a tool that has been used by the industry and the opposite side of the aisle both in agencies and in the courts and in Congress to delay, weaken, or kill necessary reforms. Such analysis encourages second-guessing, favors easily quantifiable costs over less tangible benefits, and is extremely resource intensive. That is why my Democratic colleagues and I have opposed its application to the SEC, an agency that already performs economic analysis for its rulemaking and has enough on its plate with its additional responsibility under the JOBS Act and the Dodd-Frank Act.”