On November 2, 2020, the U.S. Securities and Exchange Commission (SEC) voted to adopt amendments proposed in March 2020 that harmonize and modernize the exempt offering framework (referred to as the Amendments). As with several other recent votes to adopt rule proposals, the SEC Commissioners split their vote, with two Commissioners voting against the Amendments.
As we have noted in many prior client alerts, the amount of capital raised in exempt offerings in the United States vastly exceeds the amount raised in SEC-registered offerings. In its proposing release, the SEC noted that in 2019, registered offerings accounted for $1.2 trillion of new capital, compared to $2.7 trillion that was estimated to have been raised in exempt offerings. Given that the statistics collected and analyzed by the SEC's Division of Economic Risk and Analysis (DERA) rely on Form D filings, it is likely that the amounts attributable to exempt offerings are grossly understated for several reasons, including that many exempt offerings made to institutional accredited investors are made in reliance on the statutory private placement exemption in Section 4(a)(2) of the Securities Act of 1933, as amended (the Securities Act). Emerging companies continue to rely on successive rounds of private placements to fund their growth and continue to defer their initial public offerings or achieve other exit strategies for their investors. As a result, exempt offerings have become increasingly important to the capital markets. The framework relating to offering exemptions has come together over many years through the adoption of various safe harbors, including those under Regulation D of the Securities Act, and those that have developed following the enactment in 2012 of the Jumpstart Our Business Startups (JOBS) Act. In June 2019, the SEC issued its Concept Release on Harmonization of Securities offering Exemptions (Concept Release) in which it sought public comment on a wide range of matters relating to various securities exemptions, resale exemptions, and alternatives that might facilitate greater retail participation in the private markets. As noted earlier, in March 2020, before the pandemic took hold, as an initial response to the comments received in connection with the Concept Release, the SEC proposed various amendments to the exempt offering framework. The Amendmends are briefly summarized below.
Integration
For years, the securities law concept of "integration," or the notion that securities offerings occurring in close proximity to one another should be analyzed and assessed in order to determine whether the offerings were independent of one another or really one integrated offering, has been a preoccupation for companies and their counsel. The SEC's interpretative guidance, which has been referred to as the "five factor" test, was highly dependent on the specific facts and circumstances and there was never any clarity or consensus relating to which of the factors should be ascribed the greatest weight. Over time, the SEC provided additional integration guidance in a proposing release in 2007, as well as in Staff guidance, and the SEC adopted a number of integration safe harbors. In the various adopting releases relating to offering exemptions that followed the JOBS Act (for example, in the adopting releases relating to Regulation A, Regulation Crowdfunding, and Rule 147 and 147A), the SEC provided additional integration guidance and these rules included their own integration safe harbors.
The Amendments include a new, simpler approach to integration consisting of four non-exclusive safe harbors guided by several overriding principles.
This simpler approach is set forth in a new Rule 152, which replaces current Rule 152 and Rule 155. The provisions of Rule 152 will not have the effect of avoiding integration for any transaction or series of transactions that are part of a scheme to evade the Securities Act registration requirements. Instead of embedded integration provisions, Regulation D, Regulation A, Regulation Crowdfunding, and Rules 147 and 147A now contain references to new Rule 152.
Guiding Principles for Integration Analysis
Rule 152(a) sets out the general principle, which provides that for all offerings not covered by one of the safe harbors contained in Rule 152(b), offers and sales will not be integrated if, based on the particular facts and circumstances, the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or an exemption from registration that is available for the particular offering.
Rule 152(a)(1) codifies the SEC guidance from 2007 and the Staff interpretations and relates to exempt offerings as to which general solicitation is not permitted. In this case, the issuer must have 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 (1) did not solicit such purchaser through the use of general solicitation; or (2) established a substantive relationship with such purchaser prior to the commencement of the exempt offering prohibiting general solicitation.
Rule 152(a)(2) addresses two or more concurrent exempt offerings permitting general solicitation. In this case, the issuer's general solicitation offering materials for one offering that includes information about the material terms of a concurrent offering under another exemption may constitute an "offer" of the securities in such other offering. Therefore, in addition to satisfying the conditions of the particular exemption, the offer must comply with all the requirements for, and restrictions on, offers under the exemption being relied on for such other offering, including any necessary legends or communications restrictions.
To view the full article, please click here.
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe - Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2020. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
