January 19, 2016

SEC Adopts Rules Implementing Forward Incorporation in Form S-1 and Streamlined Financial Statement Requirements for Emerging Growth Companies

As required by the recently enacted FAST Act, the Securities and Exchange Commission has adopted rules that reduce financial statement disclosure requirements for pre-effective IPO registration statements filed by emerging growth companies (“EGCs”) and permit forward incorporation by reference by smaller reporting companies in Form S-1 registration statements.

As summarized in our recent client alert “FAST Act Brings Additional Benefits for Emerging Growth Companies and New Resale Exemption,” President Obama signed the Fixing America’s Surface Transportation Act  ("FAST Act"),on December 4, 2015. Among the changes resulting from the FAST Act were simplified financial statement disclosure requirements for initial public offering registration statements of EGCs and the introduction of forward incorporation by reference for Form S-1 registration statements filed by smaller reporting companies. On January 13, 2016, the SEC adopted interim final rules to implement these two changes, as required by the FAST Act. The amendments summarized below were effective upon publication in the Federal Register on January 19, 2016.

Simplified Financial Statement Disclosure Requirements for EGC IPOs

As required by Section 71003 of the FAST Act, the SEC has amended Form S-1 to add a new General Instruction II.C., which permits an EGC to omit certain historical financial information from pre-effective filings of an IPO registration statement filed or submitted for confidential review on Form S-1. The SEC rulemaking implements a similar change for EGCs that file an IPO registration statement on Form F-1. As amended, General Instruction II.C. to Form S-1 requires that:

  • the omitted financial information relates to a historical period that the company reasonably believes will not be required to be included in the registration statement at the time of the contemplated offering; and
  • prior to the company distributing a preliminary prospectus to investors, the company amends the registration statement to include all financial information required by Regulation S-X at the date of the amendment.

This change eliminates the time burdens, as well as the auditor and legal fees, associated with preparing and filing financial statements for periods that ultimately will not be required in the IPO prospectus. Section 71003 required the SEC to revise Form S-1 and Form F-1 to reflect these changes not later than January 3, 2016, but expressly provided that companies could rely on Section 71003 beginning on that date even if the SEC had not yet amended its Form S-1 and Form F-1 registration statement forms. The Division of Corporation Finance had previously stated that it would not object if EGCs applied this provision immediately. The effectiveness of these amendments to Form S-1 and Form F-1 on January 19, 2016 renders these transition provisions moot.

Companies should be aware of two Compliance and Disclosure Interpretations issued by the Division of Corporation Finance on December 10, 2015.  As described in our earlier alert, the first states that although Section 71003 permits a company to omit financial information that “relates to a historical period that the registrant reasonably believes will not be required to be included . . . at the time of the contemplated offering,” this does not permit a company to omit interim financial information that will be included within required financial statements covering a longer interim or annual period at the time of the offering, even though the shorter period will not be presented separately. For example, if a calendar year-end EGC submitted or filed a registration statement in December 2015 and reasonably expected to commence its offering in April 2016 when financial statements for 2014 and 2015 will be required, the company could omit its 2013 annual financial statements from the December filing. However, the company could not omit its nine-month 2014 and 2015 interim financial statements because those statements include financial information that relates to annual financial statements that will be required at the time of the offering in April 2016.

The second interpretation clarifies that an EGC may omit not only its own financial statements but also financial statements of other entities from its filing if it reasonably believes that those financial statements will not be required at the time of the offering. For example, an EGC could omit financial statements of an acquired business that would be required by Rule 3-05 of Regulation S-X if the EGC reasonably believes that those financial statements will not be required at the time of the offering.

Forward Incorporation Permitted in Form S-1 Registration Statements Filed by Smaller Reporting Companies

Form S-1 Amendment.  As required by Section 84001 of the FAST Act, the SEC has adopted an amendment to Form S-1 and conforming amendments to the undertakings in Item 512(a)(1)(iii)(B) of Regulation S-K to permit smaller reporting companies (generally, companies having a public float of less than $75 million) to incorporate by reference reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) after the effective date of a Form S-1 registration statement. Before the FAST Act, only short-form registration statements on Form S-3 and Form F-3 permitted companies to incorporate their Exchange Act reports filed after the effective date of the registration statement by reference. Form S-1 permitted companies to incorporate by reference only Exchange Act reports filed prior to effectiveness.  As a result, companies previously could only update Form S-1 registration statements by filing post-effective amendments that would be potentially subject to SEC review before becoming effective.

The amendment to Form S-1 requires smaller reporting companies that make this election to state in the prospectus contained in the registration statement that all documents subsequently filed by the smaller reporting company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act before the termination of the offering shall be deemed to be incorporated by reference into the prospectus.

This amendment will permit smaller reporting companies to eliminate the additional costs and delays of manual updates to "shelf" registration statements on Form S-1 for resale transactions and continuous offerings that commence promptly after effectiveness and continue for a period in excess of 30 days after effectiveness. This amendment does not change the current requirement that companies must conduct delayed offerings under Rule 415(a)(1)(x) under the Securities Act of 1933 using Form S-3 or Form F-3.

In addition, this amendment does not change the eligibility requirements for companies that wish to incorporate documents filed after the effective date of the registration statement under General Instruction VII to Form S-1. The principal eligibility requirements include the following: (1) the company is required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, (2) the company has filed all reports and other materials required by Sections 13(a), 14 or 15(d) of the Exchange Act during the preceding 12 months or such shorter period as the company was required to file such reports and materials, (3) the company has filed an annual report required under Section 13(a) or Section 15(d) of the Exchange Act for its most recently completed fiscal year, (4) the company is not a blank check company, a shell company or a registrant for a penny stock offering and (5) the company is not registering an offering that effectuates a business combination transaction).

Request for Comments on Other Forms and Filers. The amendment that permits forward incorporation by reference does not include other, similar registration statements, such as Form S-11 and Form F-1. In addition, the amendment limits forward incorporation by reference in Form S-1 to smaller reporting companies. The amendment permitting omission of certain financial information is limited to EGCs filing IPO registration statements on Form S-1 or Form F-1. The SEC has invited comment on whether either of these amendments should be extended to other classes of registrants or other forms under SEC rules. Comments should be received by the SEC on or before February 18, 2016.