Highway Bill Includes Changes to Registration, Privacy and Other Securities Laws

On December 4, 2015, President Obama signed the Fixing America’s Surface Transportation Act, or FAST Act, into law.  While the statute’s primary impact is to authorize federal funds for highways and other transportation programs and infrastructure, it also amends various securities and financial services laws.  Notably, Title LXXVI of the FAST Act amends Section 4 of the Securities Act of 1933 (the 1933 Act) to permit non-issuers to resell privately offered securities so long as various requirements are met, and Title LXXV eliminates under certain circumstances the Gramm-Leach-Bliley Act (GLBA) requirement that financial institutions provide annual privacy notices.¹

The purpose of the amendments to Section 4 of the 1933 Act, as noted in the joint explanatory statement, is to facilitate the sale of company-issued securities by employees of private companies.  Currently, these employees may resell their privately issued securities in the public market following a holding period, but there is often no clear legal framework for the private resale of these securities.²  The Section 4 amendments explicitly exempt these private resales from the 1933 Act’s registration requirements, provided they meet the following conditions:

1. Each purchaser is an accredited investor
2. Neither the seller nor its agent uses general solicitation or advertising
3. The seller obtains from the issuer and makes available to the purchaser various information regarding the issuer and the securities offered, including the issuer’s financial statements (except where the issuer is a reporting company)
4. The seller is not an issuer or a subsidiary, either directly or indirectly, of the issuer
5. Neither the seller nor anyone else who will receive compensation as a result of the offer or sale of the securities is subject to a “bad actor” prohibition
6. The issuer is engaged in business and is not in the organizational stage, bankruptcy or receivership, and is not a blank check, blind pool or shell company that has no specific business purpose or whose sole business purpose is to enter into a merger, combination or acquisition with an unidentified person
7. The securities are not part of an unsold allotment to, or a subscription or participation by, a broker or dealer as an underwriter of the security or a redistribution
8. The class of securities has been authorized and outstanding for at least 90 days

The codification of this private resale provision should have potentially beneficial implications for most private companies, including that it generally enhances their liquidity, except where the conditions set out above cannot be satisfied for some reason.

The GLBA amendments provide that financial institutions are no longer required to provide annual privacy notices unless there has been a change in the institution’s privacy policies or the institution shares nonpublic personal information with outside parties for marketing purposes.  The impact of this change is likely to be widely felt, as the GLBA’s definition of “financial institutions” implicates a broad range of industry participants, including registered and unregistered investment and private fund advisers and broker dealers.

The FAST Act does not include specific effective dates for either the 1933 Act amendments or the GLBA amendments, so presumably both the registration exemption and the partial elimination of the annual privacy notice requirement became effective on December 4.

Other notable changes include a requirement under the Fast Act’s Title LXXII that the SEC modernize and simplify disclosure requirements under Reg. S-K and amendments to the Investment Advisers Act of 1940 pursuant to Title LXXIV that are designed to simplify registration and other requirements applicable to Small Business Investment Companies (SBICs).
 

₁  The final version of the FAST Act and joint explanatory statement are included in the conference report, H. R. Rep. No. 114-357 (2015), which is available at https://www.congress.gov/114/crpt/hrpt357/CRPT-114hrpt357.pdf.
₂  Current exemptions for resales of securities include Section 4(a)(1) of the 1933 Act, which permits sales of securities by persons who are not issuers, underwriters or dealers.  There is also, notably, the so-called “Section 4(a)(1½) exemption,” which is a reasoned set of procedures for resale transactions that makes use of a combination of Section 4(a)(1) and the exemption afforded by Section 4(a)(2) of the 1933 Act, which permits sales by issuers in transactions not involving a public offering.