The Securities and Exchange Commission voted on Monday to amend its rules to facilitate capital raising for companies, while also preserving investor protections. These amendments would streamline, harmonize and increase offering limits under the SEC's existing regulatory framework to make it easier for companies to raise money — and more of it.
This SEC decision comes in response to over a year long process, starting with its June 2019 concept release, in seeking public engagement to find ways to address deficiencies in its existing exempt offering framework.
As Chairman Jay Clayton stated: "For many small and medium-sized business, our exempt offering framework is the only viable channel for raising capital. These businesses and their prospective investors must navigate a system of multiple exemptions and safe harbors, each with different requirements . . . The [SEC] staff has identified various costly and unnecessary frictions and uncertainties and crafted amendments that address those inefficiencies in the context of a more rational framework that will facilitate capital formation for small and medium-sized businesses and benefit investors for years to come.”
These amendments would undoubtedly change the fundraising landscape. Some key highlights include:
The amendments will improve the current integration framework, which integrates two or more securities offerings conducted in close time proximity with each other for purposes of analyzing compliance. Under the existing integration framework, a securities offering conducted within six (6) months before or after another securities offering will not be "integrated" with each other. However at the SEC points out, this approach can result in exempt offerings with otherwise different requirements and structure to be integrated together.
Instead, the SEC amendments establishes a new framework that looks to the particular facts and circumstances of two or more securities offering and focuses on whether the issuer can establish that each offering complies with its respective exemption or registration requirements.
Additionally, the amendments provide four non-exclusive safe harbors from integration:
- 30-Day Rule. Offerings made more than 30 calendar days before commencement of another offering, or more than 30 calendar days after termination or completion of another offering will not be integrated with each other. Note: In cases where an exempt offering prohibiting general solicitation follows by 30 calendar days or more an offering that permits general solicitation, the issuer must have a "reasonable belief" that the issuer (or anyone acting on its behalf) either did not solicit any purchaser through general solicitation or established a substantive relationship with such purchaser prior to commencing the exempt offering prohibiting general solicitation.
- Non-Integration of Rule 701 and Regulation S. Offerings under Rule 701 (employee benefit plans) or in compliance with Regulation S (raising capital outside of the US) will not be integrated with other offerings.
- Non-Integration of Exempt Offerings Permitting General Solicitation. Exempt offerings permitting general solicitation will not be integrated if conducted subsequent to any terminated or completed offering.
- Non-Integration of Securities Act Registration Offerings. Offerings made pursuant to a Securities Act registration statement will not be integrated if made subsequent to: (i) a terminated or completed offering permitting general solicitation; (ii) a terminated or completed offering prohibiting general solicitation in which was made only to "qualified institutional buyers" or "institutional accredited investors;" or (iii) an offering permitting general solicitation that was terminated or completed more than 30 calendar days prior to commencement of such registered offering.
For Regulation A, the amendments would:
- increase maximum offering amount under Tier 2 offerings from $50 million to $75 million; and
- increase maximum offering amount for secondary sales under Tier 2 offerings from $15 million to $22.5 million.
For Regulation Crowdfunding, the amendments would:
- increase offering limits from $1.07 million to $5 million;
- amend the investment limits for investors by: (i) removing investment limits altogether for accredited investors; and (ii) for non-accredited investors, using the greater of their annual income or net worth for calculating investment limits;
- extend for 18 months existing temporary relief exempting issuers offering $250,000 or less of securities from certain financial statement review requirements; and
- Permit the use of certain special purpose vehicles (SPVs) for investors to invest in Regulation Crowdfunding offerings
Rule 504 of Regulation D
For Rule 504 of Regulation D, the amendments would increase the maximum offering amount from $5 million to $10 million.
Changes in "Test-the-Waters" Communication Rules
The amendments would:
- permit issuers to use general solicitation of interest materials to "test-the-waters"to determine which offering exemptions to use
- permit Regulation Crowdfunding issuers to "test-the-waters" before filing in a manner similar to current Regulation A offerings
- provide that certain "demo day" communications will not be considered general solicitation or advertising
- Align financial information that must be provided to non-accredited investors in Rule 506(b) exempt offerings with those that issuers must provide to investors in Regulation A offerings;
- Harmonize bad actor disqualification provisions in Regulation A, Regulation D, and Regulation Crowdfunding.
The amendments will be effective 60 days after publication in the Federal Register. The extension of the temporary relief under the Regulation Crowdfunding provisions will be effective upon publication in the Federal Register.
DISCLAIMER: The subject matter discussed above is constantly evolving and may change on a frequent basis. The information contained in this post is for general education and informational purposes only. It should not be construed as legal advice or as creating an attorney-client relationship between the reader and TKN Law.