US President Barack Obama recently signed the FAST Act into law. Buried in a variety of provisions relating to surface transportation (the named purpose of the law) is a new registration exemption for private resales of securities, Section 4(a)(7) of the Securities Act. This provision is a nonexclusive safe harbor under “Section 4(a)(1½),” the colloquial name for the legal principles that govern exempt private resales. Although most private ABS offerings rely primarily on Rule 144A for their exemption from registration, Rule 144A purchasers must be qualified institutional buyers, or QIBs, so expanding the base of potential investors requires the use of a different exemption. Section 4(a)(1½) is commonly used as the registration exemption for tranches offered to institutional accredited investors.
As we discuss in today’s LawFlash, The FAST Act, New Section 4(a)(7), and Section 4(a)(1½), the parameters of Section 4(a)(1½) are complicated, fact intensive and unclear, so one might think that the use of a more certain safe harbor would be preferable. However, Section 4(a)(7) comes with a long list of requirements, including that the securities must have been outstanding for at least 90 days and that a variety of specified information (including a financial statement prepared in accordance with GAAP or IFRS) must be delivered. ABS will not, at the time of their initial offering, have been outstanding for a single day, much less 90, and ABS issuers virtually never prepare financial statements. For these reasons, we expect that institutional accredited investor tranches in private ABS offerings will continue to rely on Section 4(a)(1½) for their exemption from registration.