The SEC approved amendments to harmonize, simplify, and improve certain aspects of the exempt offering framework to promote capital formation. The amendments are intended to address gaps and complexities in the exempt offering framework that impede access to capital for issuers and access to investment opportunities for investors.
The amendments are provided for in Release No. 33-10884, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets. The amendments are effective March 15, 2021, except for the extension of the temporary Regulation Crowdfunding provisions, which is effective January 14, 2021.
Securities offerings are required to be registered with the SEC, unless an exemption from registration is available. The registration process is generally designed for larger companies with substantial resources, so many small and medium-sized businesses must rely on exemptions from registration in order to raise capital.
Among other items, the amendments:
- Establish, in one broadly applicable rule, an integration framework addressing the ability for issuers to move from one exemption to another
- Increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings
- Set clear and consistent rules governing certain offering communications between issuers and investors
- Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions
The integration framework consists of rules and guidance that seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that exemptions would apply to the multiple offerings that wouldn’t be available for the combined offering.
The new integration framework provides a general principle that looks to the particular facts and circumstances of each offering. Specifically, offerings won’t be integrated if 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 offering.
To simplify compliance, the amendments also provide the following four non-exclusive safe harbors from integration.
More than 30 Days from Other Offering
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, won’t be integrated with such other offering, provided that:
In the case where an exempt offering for which general solicitation is prohibited follows an offering that allows general solicitation by 30 days or more, 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 either did not solicit such purchaser through the use of general solicitation or established a substantive relationship with the purchaser prior to the commencement of the exempt offering prohibiting general solicitation.
Compliance with Rule 701
Offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S won’t be integrated with other offerings.
Registration Statement Filed
An offering for which a Securities Act registration statement has been filed won’t be integrated if it is made after:
- 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
- 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
General Solicitation Permitted
Offers and sales made in reliance on an exemption for which general solicitation is permitted won’t be integrated if made after any terminated or completed offering.
Offering and Investment Limits
Regulation A, Regulation Crowdfunding, and Rule 504 of Regulation D contain requirements and investor protections, including limits on the amount that may be offered and sold under the exemptions.
The amendments raise the Tier 2 offering limit from $50 million to $75 million to enhance the ability of Regulation A issuers that have exhausted existing offering limits to raise additional capital.
The maximum offering amount for secondary sales under Tier 2 of Regulation A is also increased from $15 million to $22.5 million.
Rule 504 of Regulation D
Rule 504 of Regulation D provides an exemption for eligible issuers from registration under the Securities Act for the offer and sale of up to $5 million of securities in a 12-month period.
The amendments raise the maximum offering amount from $5 million to $10 million to encourage more issuers to conduct regional multistate offerings.
Regulation Crowdfunding provides an exemption from registration for certain crowdfunding transactions.
To facilitate use of Regulation Crowdfunding for capital raising, the amendments:
- Raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million
- Remove investment limits for accredited investors
- Allow non-accredited investors to use the greater of their annual income or net worth when calculating the investment limits
- 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
The amendments provide that certain demo day communications won’t be deemed general solicitations or general advertising. An issuer won’t be deemed to have engaged in general solicitation if the communications are made in connection with a seminar or meeting sponsored by a college, university, or other institution of higher education, a state or local government or instrumentality of a state or local government, a nonprofit organization, or an angel investor group, incubator, or accelerator.
The amendments permit 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.
The final rule requires the generic testing-the-waters materials to provide specified disclosures notifying potential investors about the limitations of the generic solicitation. The issuer’s communications must state:
- The issuer is considering an offering of securities exempt from registration but hasn’t determined a specific exemption from registration
- No money or other consideration is being solicited
- No offer to buy the securities can be accepted and no part of the purchase price can be received until the issuer determines the exemption under which the offering is intended to be conducted
- A person’s indication of interest involves no obligation or commitment of any kind
The amendments also allow Regulation Crowdfunding issuers to test-the-waters orally or in writing prior to filing an offering document in a manner similar to current Regulation A.
The amendments align the disclosure requirements in Rule 502(b) of Regulation D with those in Regulation A.
The amendments harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding by adjusting the lookback requirements in Regulation A and Regulation Crowdfunding to include the time of sale in addition to the time of filing.
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For more information on how these changes may affect your business, contact your Moss Adams professional.