The Securities and Exchange Commission (SEC) has adopted interim final rules permitting smaller reporting companies, generally companies with a public float of less than $75 million, to incorporate by reference on Form S-1 any documents filed after the effective of a registration statement. The interim final rules also revise Form S-1 to allow emerging growth companies (EGCs) to omit certain historical financial information otherwise required by Regulation S-X. The interim final rules became effective on January 19, 2016.
The period to comment on the new rules recently expired. A number of commentators suggested expanding the new rules to cover all issuers, instead of just smaller reporting companies and EGCs. The SEC noted in the adopting release that it would consider whether the changes in the interim final rules should be made available to a larger group of issuers. Any changes to expand the interim final rules would be subject to notice and public comment.
The revisions adopted in the interim final rules were mandated by the Fixing America's Surface Transportation Act (FAST Act), which was enacted on December 4, 2015. The FAST Act provided for additional changes to federal securities laws in order to facilitate smaller companies' ability to raise capital.
The interim final rules implement a significant change to Form S-1 by, for the first time, allowing smaller reporting companies to incorporate by reference documents filed after the effective date of a registration statement, commonly referred to as ''forward incorporation by reference.'' Under the revisions, a smaller reporting company must meet the existing eligibility requirements for ''backwards incorporation'' (i.e., incorporation of documents filed prior to the registration statement’s effective date) in order to be eligible to use forward incorporation by reference.
These eligibility requirements principally require that a smaller reporting company have filed an annual report for the most recently completed fiscal year and all reports required to be filed under the Securities Exchange Act of 1934, as amended (Exchange Act), during the 12 months immediately prior to filing of the Form S-1. To be eligible for forward incorporation by reference, smaller reporting companies must also make their Exchange Act reports readily available and accessible on a website maintained by the company and disclose in the prospectus that such materials will be provided upon request. In connection with the revisions providing for forward incorporation by reference in a Form S-1, the SEC also made a conforming change to a related undertaking in Item 512(a) of Regulation S-K.
In addition to permitting forward incorporation by reference, the interim final rules allow EGCs to omit from Form S-1 historical financial information that would otherwise be required, so long as the company reasonably believes the omitted information will not be required at the time of the offering. An EGC is generally an issuer with less than $1 billion in total annual gross revenues during its most recently completed fiscal year. An EGC may omit such historical financial information if the company amends its registration statement to include all financial information required under Regulation S-X prior to distributing a preliminary prospectus. The SEC previously published two Compliance and Disclosure Interpretations addressing the omission of such financial information in certain circumstances.
Both of the changes adopted in the interim final rules should make it easier for smaller companies to raise capital and access the public markets. The adoption of forward incorporation by reference in Form S-1 will allow smaller reporting companies, who may not be eligible to use Form S-3, to conduct continuous offerings without having to file post-effective amendments. This change will allow smaller reporting companies to more quickly raise capital by avoiding the delay of filing updates to an effective Form S-1 registration statement. In addition, the change to permit omission of certain historical financial information eases the filing requirements of EGCs by reducing auditor and legal costs and decreasing the time needed to complete a registration statement for an initial public offering.
