On March 4, 2020, the SEC proposed amendments to existing exemptions from the registration requirements under the Securities Act of 1933 to simplify, harmonize, and improve the existing regulatory framework and to promote capital formation while preserving or enhancing important investor protections. Promoting capital formation continues to be a primary object of the SEC, as evidenced by the previously proposed amendments to the "accredited investor" definition. (See our IPO, Then What? blog post here.)
Per the SEC, the proposed amendments would:
- "address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital;
- increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits based on the SEC's experience with the rules, marketplace practices, capital raising trends, and comments received;
- provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain 'demo day' activity without running afoul of the prohibition on general solicitation; and
- harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections."
The public comment period for the proposed rule amendments will remain open for 60 days following publication of the release in the Federal Register.
Summary of Proposed Amendments
Offering and Investment Limits. The SEC proposed revisions to the current offering and investment limits for certain exemptions.
For Regulation A:
- increase the Tier 2 maximum offering amount from $50 to $75 million; and
- raise the Tier 2 maximum offering amount for secondary sales from $15 to $22.5 million.
For Regulation Crowdfunding:
- raise the offering limit from $1.07 to $5 million;
- amend the investment limits for
- no longer apply any investment limits to accredited investors; and
- allow non-accredited investors to use the greater of their annual income or net worth as their investment limit.
For Rule 504 of Regulation D:
- raise the maximum offering amount from $5 to $10 million.
"Test-the-Waters" and "Demo Day" Communications. The SEC proposed several amendments relating to offering communications, including:
- permitting issuers to use generic solicitation of interest materials to "test-the-waters" for exempt securities offerings prior to determining the exemption used for the sale of the securities;
- permitting Regulation Crowdfunding issuers to "test-the-waters" prior to filing an offering document in a manner similar to current Regulation A; and
- providing that certain "demo day" communications would not be deemed general solicitation or general advertising.
Regulation A and Regulation Crowdfunding Eligibility. The SEC proposed amendments to the eligibility restrictions in Regulation Crowdfunding and Regulation A that would: (1) permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers, and (2) limit the types of securities that may be offered and sold in reliance on Regulation Crowdfunding.
Integration Framework. The SEC proposed amendments to the existing offering integration framework (which relies on both SEC guidance and rules) to provide a general principle of integration that looks to the particular facts and circumstances of the offering, and focuses the analysis on whether an issuer can establish that each offering either: (1) complies with the registration requirements of the Securities Act, or (2) that an exemption from registration is available for the particular offering.
The SEC proposed four non-exclusive safe harbors from integration:
|"Safe Harbor 1||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, would not be integrated with another offering; provided that, for an exempt offering for which general solicitation is not permitted, the purchasers either were not solicited through the use of general solicitation, or established a substantive relationship with the issuer prior to the commencement of the offering for which general solicitation is not permitted.|
|Safe Harbor 2||Offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S would not be integrated with other offerings.|
|Safe Harbor 3||An offering for which a Securities Act registration statement has been filed would not be integrated with another offering if made subsequent to: (i) a terminated or completed offering for which general solicitation is not permitted; (ii) a terminated or completed offering for which general solicitation is permitted and made only to qualified institutional buyers and institutional accredited investors; or (iii) an offering that terminated or completed more than 30 calendar days prior to the commencement of the registered offering.|
|Safe Harbor 4||Offers and sales made in reliance on an exemption for which general solicitation is permitted would not be integrated with another offering if made subsequent to any prior terminated or completed offering."|
Other Improvements to Specific Exemptions. The amendments also would:
- "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; and
- harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding."
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