IPA Submits Comment in Response to the SEC’s Proposed Rule to Harmonize, Simplify and Improve the Exempt Offering Framework
The IPA yesterday submitted a comment letter in response to the SEC’s latest rule proposal regarding amendments to the exempt offering framework to promote capital formation and expand investment opportunities by improving access to private markets while preserving and enhancing investor protections.
We’d like to again thank Darryl Steinhause, Partner, DLA Piper and the entire SEC Concept Release Task Force for their critical input to this letter.
The IPA’s letter details the following suggestions regarding Integration, General Solicitation and Offering Communication, Regulation A, Rule 506(b), Rule 506(c), and Bad Actor Harmonization.
- The IPA supports the SEC’s proposal to create one broadly applicable rule to clarify the ability of issuers to engage in contemporaneous or close-in-time transactions under independent exemptions or pursuant to a registration statement. We request clarification to confirm the ability of an issuer to engage in concurrent and/or subsequent Rule 506(b) and Rule 506(c) offerings, addressing both integration and general solicitation concerns. We also suggest the use of an investor certification to confirm that the investor did not become aware of a potential Rule 506(b) offering through a prior general solicitation.
- The IPA agrees there should be a modification to Regulation S to modify the definition of “direct selling efforts” to allow issuers to make a concurrent Regulation S offering offshore and a Rule 506(c) offering in the U.S.
General Solicitation and Offering Communication
- The IPA believes that the provisions prohibiting general solicitation in an exempt offering are archaic and no longer serve their originally intended purpose given the significant changes since Regulation D was enacted. Investor protections can be built into securities offerings without over-regulating how investors become aware of specific offerings, and our letter outlines those suggestions.
- The IPA applauds the additional methods of communication included in the SEC proposal. As a result of the prohibition against general solicitation, however, we urge the SEC to include more clarity around “what” information issuers can disclose rather than “how” that information is disclosed.
- The IPA asks the SEC to clarify the application of the contemplation rule when general solicitation is used by a broker-dealer or a platform to obtain investors. As a result of the many methods of reaching potential investors today, there is uncertainty in the marketplace as to whether the rule still exists.
- The IPA supports the SEC’s proposal to increase the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million and to increase the maximum offering amount for secondary sales from $15 million to $22.5 million. We strongly encourage the SEC, however, to raise the offering limit under Tier 2 to $100 million, which provides greater economies of scale and encourages the use of Regulation A for industries like commercial real estate with significant upfront costs and capital expenditures. We also believe the Regulation A thresholds should be indexed to inflation to more accurately reflect the economics of the future.
- The IPA encourages the SEC to allow companies to continue to use the same advertising methods after qualification of a Regulation A offering – subject to a legend requirement – as they do prior to qualification. If the SEC does not relax the advertising restrictions with a legend requirement, then it should extend the tombstone exemption to Regulation A offerings.
- The IPA strongly encourages regulatory amendments to allow general solicitation given the significant advances in technology, consumers’ communication preferences through email, the Internet and social media, and firms’ modern-day business practices.
- We support the SEC’s proposed changes to the financial information that must be provided to non-accredited investors in Rule 506(b) to align with the financial information that issuers must provide to investors in a Regulation A offering. However, we suggest stronger ways to protect non-accredited investors, such as requiring a registered broker-dealer or investment adviser “purchaser representative” or certain investment limitations without a purchaser representative.
- The IPA discusses numerous factors that have led to the underuse of Rule 506(c) offerings. We then suggest the following clarifications and changes.
- Alternative and more flexible methods of verification that don’t raise privacy concerns, such as the SEC’s proposed additional verification method that would allow an issuer to establish that an investor who the issuer has previously verified to be accredited remains accredited, through a written representation and no known information to the contrary;
- New, additional verification methods, including an annual net worth certification process rather than the prior three-month period, and the use of self-certification;
- Include a reasonable belief standard consistent with 501(a);
- Reaffirm and provide clarity on prior guidance that the non-exclusive list is not prescriptive, and that a range of verification methods not enumerated may qualify as “reasonable”;
- Confirm the verification safe harbors are six “separate” verification methods, and that the SEC does not require a 2-part test for a broker-dealer or registered investment adviser.
Bad Actor Harmonization
- The IPA supports the SEC’s harmonization of bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding, and encourages the SEC to coordinate those changes with FINRA and state regulators.
- The IPA believes there should be one centralized database, through BrokerCheck or otherwise, where firms and the public can research and review all bad actor determinations.
The IPA commends the SEC on their continued work to harmonize and improve private securities offerings, and we look forward to proactively working with the SEC and other regulators to advance this critical advocacy initiative.
If you have any questions, please don’t hesitate to reach out to Tony or me.
SVP, Government Affairs and General Counsel
Institute for Portfolio Alternatives