SEC Rule Amendments Aim to Improve Exempt Offering Framework
Recent Securities and Exchange Commission rule amendments for exempt offerings are intended to harmonize registration exemptions to eliminate complexity and facilitate access to capital and investment—while preserving or enhancing important investor protections, the SEC says.
- The recent amendments to rules promulgated under securities laws address inefficiencies in the current framework in a manner “that will facilitate capital formation for small and medium-size businesses and benefit investors for years to come,” SEC Chair Jay Clayton stated.
- The amendments “establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings” when analyzing whether the issuer can show that each offering either complies with the registration requirements under the Securities Act or qualifies for an exemption.
- The changes increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits.
The Bottom Line
The SEC said the amendments are the next step in the agency’s efforts to improve the exempt offering framework for the benefit of investors, emerging companies, and more seasoned issuers.
The Securities and Exchange Commission (SEC) voted earlier this month to amend the rules for exempt offerings under the Securities Act of 1933, as amended (the Securities Act). A recent SEC press release states that the amendments are intended to, among other things, serve the dual purpose of eliminating complexities that create unnecessary barriers to raising capital while simultaneously enhancing investor protections. Below is a summary of the key amendments, which will become effective 60 days after publication in the Federal Register. According to SEC Chair Jay Clayton, the amendments address inefficiencies in the current framework in a manner “that will facilitate capital formation for small and medium-sized businesses and benefit investors for years to come.”
Entrepreneurs and emerging growth businesses often use the exempt offering framework to raise capital. The exempt offering rules can generally be found in Regulation D and Regulation S under the Securities Act. Regulation D provides a non-exclusive safe harbor pursuant to which issuers may offer and sell unlimited amounts of securities, subject to certain exceptions, such as sales to accredited investors only. For offers and sales of securities that occur outside of the United States, Regulation S provides a safe harbor from Securities Act registration. Under Rule 502(a) of Regulation D, offers and sales made more than six months before the start of a Regulation D offering or more than six months after completion of a Regulation D offering will not be considered part of that Regulation D offering if, during the six months, there are no offers or sales of securities by or for the issuer that are of the same or a similar class as those offered or sold under Regulation D.
Amendments to Integration Framework
Companies engaging in consecutive multiple offerings must often determine whether the offerings constitute a single offering (i.e., whether the offerings should be integrated) for purposes of compliance with the exempt offering rules. The amendments “establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings” when analyzing whether the issuer can show that each offering either complies with the registration requirements under the Securities Act or qualifies for an exemption.
The amendments also provide the following four non-exclusive integration safe harbors:
- 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;
- an offering for which a Securities Act registration statement has been filed if it was made subsequent to a terminated or completed offering for which general solicitation is prohibited; an offering for which general solicitation is permitted but was made only to qualified institutional buyers and accredited investors; or an offering for which general solicitation is permitted that terminated or completed more than 30 calendar days prior to the registered offering; and
- offers and sales made in reliance on an exemption for which general solicitation is permitted if made subsequent to any terminated or completed offering.
Amendments to Offering and Investment Limits
The SEC has also amended the current offering and investment limits for certain exemptions under Regulation A, Regulation Crowdfunding, and Rule 504 of Regulation D. The amendments to Regulation A raise the maximum Tier 2 offering amount from $50 million to $75 million and the maximum offering amount for secondary Tier 2 sales from $15 million to $22.5 million. The Regulation Crowdfunding amendments raise the offering limit from $1.07 million to $5 million, amend the investment limits for investors in Regulation Crowdfunding offerings, and extend the temporary exemption permitted under Regulation Crowdfunding from certain financial statement review requirements for 18 months. The amendments under Rule 504 of Regulation D raise the maximum offering amount from $5 million to $10 million.
Amendments to ‘Test-the-Waters’ and ‘Demo Day’ Communications
The SEC’s amendments also change the offering communications rules by permitting an issuer to use a generic solicitation of interest materials to “test the waters” for an exempt securities offering prior to determining which exemption it will use for the securities sale, permitting Regulation Crowdfunding issuers to “test the waters,” and exempting certain “demo day” communications from being deemed general solicitation or general advertising.
Regulation Crowdfunding and Regulation A Eligibility
The amendments further establish rules that permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers and impose eligibility requirements on delinquent Exchange Act filers seeking exemption from registration under Regulation A.
Amendments to Specific Exemptions
Finally, the SEC’s amendments include other improvements to specific exemptions, such as changing the financial information required to be provided to non-accredited investors in Rule 506(b) private placements and simplifying Regulation A offering requirements, among other things.
Attorneys in Ballard Spahr’s Securities and Capital Markets Practice Group advise private and public companies through all stages of development and capital-raising activities, and help clients comply with public reporting, proxy, and disclosure obligations.
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