United States: SEC Proposes To Modernize And Harmonize Exempt Offerings Rules

I. Overview

On March 4, 2020, the Securities and Exchange Commission (the "SEC") issued a release proposing amendments to the rules governing exempt offerings under the Securities Act of 1933, as amended (the "Securities Act").¹ The proposed amendments are intended to address, among other things, gaps and complexities in the current exempt offering framework. Specifically, the proposed amendments (1) discuss the ability of issuers to move from one exemption to another exemption or registered offering, (2) clarify and establish consistent rules applicable to offering communications, (3) address gaps and inconsistencies in the current rules relating to offering and investment limits, and (4) harmonize certain differences in the disclosure and bad actor disqualification provisions between exemptions.

II. Integration Framework

Current Rules: Determining whether a particular securities offering should be integrated with another requires a facts and circumstances analysis under Rule 502(a)'s five-factor test, which requires consideration of whether: (1) the sales are part of a single plan of financing, (2) the sales involve issuance of the same class of securities, (3) the sales have been made at or about the same time, (4) the same type of consideration is being received, and (5) the sales are made for the same general purpose.² Current rules generally provide safe harbor periods of six months for purposes of integration.

Proposal: Proposed Rule 152(a) would establish a general principle of integration, and proposed Rule 152(b) would set forth four new safe harbors from integration. References to proposed Rule 152 would replace the integration provisions of Regulation D, Regulation A, Regulation Crowdfunding, and Rules 147 and 147A.

Proposed Rule 152(a) would require an issuer to consider the facts and circumstances of an offering, including whether the issuer can establish that an offering complies with Securities Act registration requirements or that an exemption from registration is available. For an exempt offering that does not permit general solicitation, including an offering following either a registered offering or an offering permitting general solicitation, offers and sales would not be integrated if the issuer has a reasonable belief, based on the facts and circumstances, that in each exempt offering, the purchasers (1) were not solicited using general solicitation, or (2) established a substantive relationship with the issuer prior to the offering not permitting general solicitation (the "Integration Test").

• Rule 152(b)(1): An offering will not be integrated with another offering made more than 30 days before the commencement of such other offering or 30 days after the termination or completion of such other offering provided that, for an exempt offering that does not permit general solicitation, the Integration Test is satisfied.
• Rule 152(b)(2): Offers and sales made in compliance with Rule 701 or Regulation S would not be integrated with other offerings. Further, concurrent offshore offerings made in compliance with Regulation S would not be integrated with domestic offerings that are either registered or made pursuant to any available exemption, including Rule 506(c) offerings, so long as the issuer does not generally solicit for the purpose of conditioning the market in the United States.
• Rule 152(b)(3): An offering for which a registration statement has been filed under the Securities Act would not be integrated if it is conducted after: (1) a terminated or completed offering that does not permit general solicitation, (2) a terminated or completed offering that permits general solicitation and is made to qualified institutional buyers or institutional accredited investors, or (3) an offering that permits general solicitation which was terminated or completed more than 30 days before the commencement of such offering.
• Rule 152(b)(4): Offers and sales made in reliance on an exemption that permits general solicitation would not be integrated if made subsequent to an offering that has been terminated or completed.

III. General Solicitation and Offering Communications

1. Demo Day Communications

         Current Rule: The current Rule 506(c) exemption allows an issuer to solicit and generally advertise an offering if (1) the investors in the offering are all accredited investors, and (2) the issuer takes reasonable steps to verify that the investors are accredited.³ Regulation D does not define "general solicitation" or "general advertising," but does include illustrative examples.

         Proposal: Proposed Rule 148 would exclude certain "demo day" communications from being deemed general solicitation or general advertising, including communications "made in connection with a seminar or meeting by a college, university, or other institution of higher education, a local government, a nonprofit organization, or an angel investor group, incubator, or accelerator sponsoring the seminar or meeting."

2. Solicitation of Interest

         Current Rules: In a registered securities offering, issuers may gauge market interest prior to or following the registration statement filing by communicating with qualified institutional buyers and institutional accredited investors. Similarly, subject to certain conditions, Regulation A permits issuers to "test-the-waters" by soliciting interest from the general public, before or after the filing of the offering statement.

         Proposal: Proposed Rule 241 would permit an issuer to solicit interest in an exempt offering, orally or in writing, before deciding the specific exemption the issuer would rely upon, subject to (1) such issuer not identifying the specific exemption it may rely upon for a subsequent offer and sale, and (2) the materials used bearing a specified legend or disclaimer. An issuer that uses Rule 241 to solicit interest and then, within 30 days of the most recent generic solicitation materials or communication, (i) opts to rely on Regulation Crowdfunding for an offering, would be required to file such materials as an exhibit to the Form C, (ii) opts to rely on Rule 506(b) to sell securities to a purchaser that is not an accredited investor, would be required to provide such materials to such purchaser a reasonable time prior to sale, or (iii) opts to rely on Regulation A, would be required to file such materials as an exhibit to the Form 1-A.

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Footnotes

1. For full text of the Release, see Securities and Exchange Commission, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, SEC Release Nos. 33-10763; 34- 88321, available at https://www.sec.gov/rules/proposed/2020/33-10763.pdf (March 4, 2020) [hereinafter, the "Release"]. Unless otherwise specified, quoted statements in this memorandum are taken from the Release.

2. 17 CFR § 230.502(a).

3. 17 CFR § 230.506.