A fundamental part of the federal regulatory system is the mandate that all securities offerings be registered with the SEC or qualify for an exemption from registration. This can be an important step on the way to an initial public offering, and navigating that path requires maneuvering through the intricate exempt offering framework. The complexity of that framework reflects its progression over time through legislative changes and SEC rules that have resulted in varying conditions and requirements for exemption.

The recently approved modifications mark the beginning of the next phase in the SEC’s efforts to harmonize registration exemptions and preserve investor protections as they will:

• enhance the exempt offering framework to benefit investors, emerging companies, and expert issuers
• benefit from extensive public engagement and follow the SEC’s June 2019 concept release and March 2020 proposing release regarding the harmonization of offering exemptions
• focus on gaps and complications in the exempt offering framework that hinder access to capital for issuers and access to investment opportunities for investors
• harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions
• establish more clearly the ability of issuers to move from one exemption to another in one broadly applicable rule
• raise certain individual investment limits

Integrated Framework

Questions regarding the need to view the offerings as “integrated” for purposes of analyzing compliance may arise when issuers use various private offering exemptions at the same time or within a short time frame. This occurs because many exemptions have different limitations and conditions on their use, such as whether the general solicitation of investors is allowed. There is potential for the integrated offering to fail to meet all the applicable conditions and limitations if exempt offerings with differing requirements are structured separately but analyzed as one “integrated” offering.

The revisions establish a new incorporating framework that provides a general principle that 1) looks to the specific facts and circumstances of two or more offerings, and 2) focuses the analysis on whether the issuer can substantiate 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 also provide four non-exclusive safe harbors from integration providing that:

• 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
• any offering made more than 30 calendar days before the start 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. In such a case, 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
• 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 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
  • a terminated or completed offering for which general solicitation is not permitted
• 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 Crowdfunding, the amendments: 

• raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million
• 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
• amend the investment limits for investors in Regulation Crowdfunding offerings by:
  • removing investment limits for accredited investors
  • using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors

For Regulation A, the amendments:

• raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million
• increase the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million

For “Test-the-Waters” and “Demo Day” Communications, the SEC is amending offering communications rules by:

• allowing 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
• providing that certain “demo day” communications will not be deemed general solicitation or general advertising

For Rule 504 of Regulation D, the amendments raise the maximum offering amount from $5 million to $10 million.

For Regulation Crowdfunding and Regulation A Eligibility, the amendments will:

• 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
• impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations

For Improvements to Specific Exemptions, the amendments will:

• 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)
• simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings
• harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding

The following table provides an overview of the amendment capital-raising exemptions.

The amendments will go into effect 60 days following publication in the Federal Register, apart from the extension of the temporary Regulation Crowdfunding provisions, which will be effective once published in the Federal Register.

For further information, contact Anthony Barone or John Byrne, Special Counsel, Office of Small Business Policy, or Steven G. Hearne, Senior Special Counsel, Office of Rulemaking, at (202) 551-3460, Division of Corporation Finance; Jennifer Songer, Branch Chief, or Lawrence Pace, Senior Counsel, at (202) 551-6999, Investment Adviser Regulation Office, Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

Sources:

SEC Harmonizes and Improves “Patchwork” Exempt Offering Framework (sec.gov)

Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets (sec.gov)