As described in our client advisory, the recently enacted FAST Act required the SEC, within 45 days, to revise Form S-1 (and F-1) to permit any 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 its registration statement. The SEC today adopted “interim” rules to implement this FAST Act provision, as well as another provision permitting the omission by emerging growth companies of certain historical financial information in offering documents. The interim rules can be found here and also request public comments on whether they should be further expanded in coverage. 

Under current rules, for ongoing offerings or resale registrations, a company that is not eligible to use Form S-3 must continually amend or supplement its Form S-1 registration statement. The new interim rule gives smaller reporting companies the option of automatic updates through periodic reports filed by the company, thus eliminating the time and effort to prepare mostly duplicative separate filings that formerly were needed to update Form S-1. There are a few eligibility conditions, such as having filed an annual report for the most recently completed fiscal year and having filed all required periodic reports during the preceding 12 months. In addition, incorporated reports must also be included on the smaller reporting company’s website and be available upon request. 

In December 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (FAST Act). Buried in the hundreds of unrelated pages of the FAST Act are several provisions that modify the previously adopted Jumpstart Our Business Startups Act (JOBS Act). The FAST Act impacts capital raising for emerging growth companies (EGCs), seeks to simplify disclosure requirements for reporting companies, codifies a previously informal exemption from registration for resales of securities and streamlines the registration process for smaller reporting companies. The key securities provisions of the FAST Act are summarized below.

Click below to read the complete Client Advisory, co-authored by Sullivan attorneys Howard Berkenblit, Rob Condon, Jeff Morlend and Avi Rao.

The SEC has issued a staff report on the accredited investor definition. The Dodd-Frank Act directed the SEC to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted. Staff from the Divisions of Corporation Finance and Economic and Risk Analysis prepared the report in connection with the first review of the definition. The report examines the history of the accredited investor definition and considers comments on the definition received from a variety of sources. The report considers alternative approaches to defining "accredited investor," provides staff recommendations for potential updates and modifications to the existing definition and analyzes the impact potential approaches may have on the pool of accredited investors. The SEC is inviting members of the public to provide comments on the accredited investor definition, after which it is possible that changes could be more formally proposed.

Subject only to SEC approval, the Public Company Accounting Oversight Board adopted rules yesterday that will require the disclosure of the name of the engagement partner and other accounting firms participating in an audit. The new rules will require auditing firms to file a new "Form AP" beginning in early 2017. For additional information and links to the rules and new Form AP, click here.

The SEC recently issued under the JOBS Act the long-awaited crowdfunding rules, whereby small businesses may raise capital from a large number of investors, each of whom contributes a small amount of money, without going through the trouble of filing a registration statement with the SEC.  However, it is important to understand the limits and filing requirements imposed by the SEC before moving forward with a crowdfunding transaction.  

1. Limits.  As much as we’d each like to go collect $5 from every person we’ve ever met, the SEC has imposed several limits on crowdfunding in order to protect investors.  To qualify for the registration exemption, the aggregate amount of securities sold by a company to all investors in a crowdfunding transaction during a 12-month period cannot exceed $1 million.  In addition, the aggregate amount of securities sold by a company to any one investor in a crowdfunding transaction cannot exceed certain limits – if the investor’s annual income or net worth is less than $100,000, the limit is the greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth, and if both the investor’s annual income and net worth are equal to or more than $100,000, the limit is 10% of the lesser of the investor’s annual income or net worth.  Still with me?  The SEC has also limited the aggregate amount of securities sold to one investor through all crowdfunding transactions to a maximum of $100,000.   In addition to these limits, a crowdfunding transaction must be done using one – and only one – intermediary (i.e., broker or funding portal).  So if you were thinking about crowdfunding through your website or by using multiple funding portals, sorry to be the bearer of bad news. 

2. Issuer Requirements.  As mentioned above, the crowdfunding rules exempt a company from filing a registration statement with the SEC, but create a different obligation to file a new “Form C” with the SEC.  The Form C, despite not being as full-blown as a registration statement, still requires detailed disclosures.  As of the date of this post, the Form C was not available on the SEC’s website, but the crowdfunding rules tell us that it will require disclosures such as descriptions of the company, financial condition, intended use of proceeds, targeted amount of money to be raised and price per share.  Notably, a company will need to provide a complete set of financial statements that are, depending on the amount of securities offered and sold in a crowdfunding transaction during a 12-month period, accompanied by information from the company’s tax returns, reviewed by an independent public accountant or audited by an independent auditor.  A company that relies on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless its audited financial statements are available.  The Form C will also require disclosures about the company’s officers, directors and any beneficial owners of 20% or more.  Each required disclosure has a specific description as to what needs to be included in the Form C, so be sure to read each rule and each instruction to each rule once the Form C becomes available. 

3. Intermediary Requirements.  If you’re interested in crowdfunding from the perspective of the intermediary, this is where your ears perk up.  Any person acting as an intermediary in a crowdfunding transaction must register with the SEC as either a broker or funding portal.  These registration requirements are also very detailed and include registering with applicable self-regulatory organizations in addition to the SEC.  The crowdfunding rules also prohibit an intermediary’s directors, officers or partners from having any financial interest in any company using its services, so be careful to do your research before getting involved in a crowdfunding transaction. 

The crowdfunding rules are rather extensive and the above summary is intended only to give some quick answers to the questions we’ve received so far.  Remember that the crowdfunding rules, while making it easier for companies to raise capital, are designed with the intention of preventing fraud and protecting investors.  Stay tuned as these rules are put to the test. 

As mandated by the JOBS Act, the SEC today adopted rules that permit private companies to offer and sell securities through crowdfunding. The new rules (and additional proposed amendments to existing intrastate offering exemptions) are designed to assist smaller companies with capital formation and provide investors with additional protections. 

While the final rules have not yet been released, they will permit a company to raise up to $1 million through crowdfunding efforts in a 12-month period and permit individual investors over a 12-month period to invest in the aggregate across all crowdfunding offerings up to (a) if either their annual income or net worth is less than $100,000, the greater of $2,000 or 5% of the lesser of their annual income or net worth and (b) if both their annual income and net worth are equal to or more than $100,000, 10% of the lesser of their annual income or net worth. In addition, the rules will permit during the 12-month period, an aggregate amount of $100,000 of securities to be sold to an investor through all crowdfunding offerings. Securities purchased in a crowdfunding transaction generally will not be able to be resold for one year. Several disclosures regarding the use of crowdfunding will be required to be filed with the SEC by companies using crowdfunding efforts, including financial statements that must be audited or accompanied by tax returns if certain thresholds are exceeded, as well as annual reports.

Additional details regarding these rules are available here. The rules will be effective sometime next May (180 days after publication in the Federal Register, which should occur in the next week or two).

The rules also set forth requirements for crowdfunding portals. The forms enabling funding portals to register with the SEC will be effective January 29, 2016.

As of October 1^st, the SEC filing fee rate for Securities Act registration statements will decrease from $116.20 per million to $100.70 per million.

The SEC’s announcement of the change can be found here.

The SEC has adopted a final rule under the Dodd-Frank Act requiring that public companies present the ratio of their chief executive officer’s total annual compensation to their median worker’s compensation. This rule comes nearly two years after being proposed, in a divided vote on an issue that has also divided public opinion.

Click below to read the complete Client Advisory, co-authored by Sullivan attorneys Howard Berkenblit and Natalie Lederman.

The SEC has issued some new Compliance & Disclosure Interpretations regarding the staff’s view on general solicitation in a variety of contexts, including "demo days," websites and angel groups. While much of what’s in the new C&DIs has been previously stated by the staff, it is helpful to see it all in one place in writing.

As mandated by the Dodd-Frank Act, the SEC today adopted a rule that requires public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. The new rule will require disclosure of the pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure. Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after January 1, 2017. 

The SEC purports to address concerns about the costs of compliance by providing companies with flexibility in meeting the rule’s requirements. For example, a company will be permitted to select its methodology for identifying its median employee and that employee’s compensation, including through statistical sampling of its employee population or other reasonable methods. The rule also permits companies to make the median employee determination only once every three years and to choose a determination date within the last three months of a company’s fiscal year. In addition, the rule allows companies to exclude non-U.S. employees from countries in which data privacy laws or regulations make companies unable to comply with the rule and provides a de minimis exemption for non-U.S. employees. Companies would be required to briefly describe the methodology used to identify the median employee, and any material assumptions, adjustments (including cost-of-living adjustments), or estimates used to identify the median employee or to determine annual total compensation. If a company identifies a median employee based on a consistently applied compensation measure, it would be required to disclose the measure it used. Also, companies would be required to clearly identify any estimates used.

The rule does not apply to smaller reporting companies, emerging growth companies, foreign private issuers, MJDS filers, or registered investment companies. The rule does provide transition periods for new companies, companies engaging in business combinations or acquisitions, and companies that cease to be smaller reporting companies or emerging growth companies.

The adopting release for the rules appears here. The rules will be effective 60 days after publication in the Federal Register.