New SEC Amendments are the Latest in Broader Effort to Harmonize, Simplify and Improve the Securities Exempt Offering Framework
Today, the SEC voted in favor of final rule amendments to harmonize, simplify, and improve the securities exempt offering framework. These latest rule amendments are part of the SEC’s broad effort to improve and modernize exempt offerings following their June 2019 concept release.
The IPA submitted a detailed comment letter to the SEC on June 25, 2020 in favor of the proposed amendments, and we are excited to see the SEC adopt many of our suggested changes, including those requesting wholesale changes as well as technical clarification of existing rules. The final rule becomes effective 60 days after publication in the Federal Register.
The SEC lays out in four broad principles its changes today:
- Establish more clearly, in one broadly applicable rule, the ability of issuers to move from one exemption to another;
- increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits;
- set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities; and
- harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions.
Specifically, the SEC adopts the following detailed amendments:
Integration – The SEC created new Rule 152 composed of a general principle of integration, and four safe harbors applicable to all securities offerings under the Securities Act, including registered and exempt offerings.
- The general principle looks to the particular facts and circumstances of two or more offerings, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering.
- The amendments provide the following 4 non-exclusive safe harbors from integration:
- any offering made more than 30 calendar days before the commencement of any other offering, or more than 30 calendar days after the termination or completion of any other offering, will not be integrated with such other offering(s); provided that:
- in the case where an exempt offering for which general solicitation is prohibited follows by 30 calendar days or more an offering that allows general solicitation, the issuer has a reasonable belief, based on the facts and circumstances, with respect to each purchaser in the exempt offering prohibiting general solicitation, that the issuer (or any person acting on the issuer’s behalf) either did not solicit such purchaser through the use of general solicitation or established a substantive relationship with such purchaser prior to the commencement of the exempt offering prohibiting general solicitation;
- offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S will not be integrated with other offerings;
- an offering for which a Securities Act registration statement has been filed will not be integrated if it is made:
- subsequent to a terminated or completed offering for which general solicitation is not permitted,
- a terminated or completed offering for which general solicitation is permitted that was made only to qualified institutional buyers and institutional accredited investors, or
- an offering for which general solicitation is permitted that terminated or was completed more than 30 calendar days prior to the commencement of the registered offering; and
- offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated if made subsequent to any terminated or completed offering.
Offering and Investment Limits – The SEC is amending the current offering and investment limits for certain exemptions.
For Regulation A, the amendments:
- raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
- raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.
For Regulation Crowdfunding, the amendments:
- raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
- amend the investment limits for investors in Regulation Crowdfunding offerings by:
- removing investment limits for accredited investors; and
- using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors; and
- extend for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period
For Rule 504 of Regulation D, the amendments:
- raise the maximum offering amount from $5 million to $10 million.
“Test-the-Waters” and “Demo Day” Communications – The SEC is amending offering communications rules, by:
- Through new Rule 241, permitting an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities;
- permitting Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the SEC in a manner similar to current Regulation A; and
- providing that certain “demo day” communications will not be deemed general solicitation or general advertising.
Regulation Crowdfunding and Regulation A Eligibility – The amendments establish rules that permit the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers. The amendments additionally impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations.
Other Improvements to Specific Exemptions
- change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings;
- add a new item to the non-exclusive list of verification methods in Rule 506(c);
- The SEC is permitting an issuer to establish that an investor that the issuer previously took reasonable steps to verify as an accredited investor in accordance with Rule 506(c)(2)(ii) remains an accredited investor as of the time of a subsequent sale if the investor provides a written representation that the investor continues to qualify as an accredited investor and the issuer is not aware of information to the contrary. The written representation will satisfy the issuer’s verification obligation for a period of five years.
- simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings; and
- harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding.