On November 2, 2020, the U.S. Securities and Exchange Commission (SEC) voted to amend its rules to harmonize, simplify, and improve the exempt offering framework.1 The SEC believes that these amendments will promote capital formation and expand investment opportunities, while preserving or improving investor protections. These amendments follow the SEC's June 2019 concept release and March 2020 proposing release seeking to harmonize securities offering exemptions.
Under U.S. Federal securities laws, every offer and sale of a security must be registered with the SEC under Section 5 of the Securities Act of 1933 (Securities Act), unless an exemption from registration is available. Several exemptions from registration exist in the Securities Act and the rules and regulations adopted pursuant to the Securities Act. The Jumpstart Our Business Startups Act of 2012 (JOBS Act) increased the number of exemptions available to issuers, and the SEC was concerned that the framework for conducting exempt securities offerings needs to be harmonized, simplified and improved. The SEC undertook an effort to review all of the exemptions and safe harbors, and to address gaps and complexities existing within the framework.
On June 19, 2019, the SEC published a concept release soliciting comment on several exemptions from registration under the Securities Act that facilitate capital raising.2 In the concept release, the SEC noted that over the years -- and particularly since the JOBS Act -- several exemptions from registration have been introduced, expanded, or otherwise revised, and, as a result, the overall framework for exempt offerings has changed. The concept release indicated that the SEC believes that the capital markets would benefit from a comprehensive review of the design and scope of the SEC's framework for offerings that are exempt from registration. In this regard, the SEC noted that issuers and investors could benefit from a framework that is more consistent and addresses gaps and complexities. The concept release sought comment on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities, while maintaining appropriate investor protections.
On March 4, 2020, the SEC proposed amendments to its rules for exempt offerings under the Securities Act.3 The proposals addressed the ability of issuers to move from one exemption to another exempt or registered offering, increases to certain offering and investment limits in the exemptions, standards for offering communications, and harmonization of disclosure and bad actor disqualification provisions across exemptions. The proposed amendments were subject to a 60-day comment period. The SEC received numerous comment letters on the proposing release that expressed a wide range of views, and the SEC also received comments and recommendations on the proposing release from the SEC Small Business Capital Formation Advisory Committee and the 2020 Small Business Forum. The SEC also obtained feedback through direct outreach to, and engagement with, investors and issuers.
The final amendments were adopted by the SEC by a 3 to 2 vote. Commissioner Caroline Crenshaw and Commissioner Allison Herren Lee dissented, noting in their public statements that, among other things, the final rules expand access to private markets without considering appropriate investor protections.
The amendments adopted by the SEC generally:
- Establish, in one broadly applicable rule, an integration framework which addresses the ability of issuers to move from one exemption to another;
- Establish clear and consistent rules governing certain offering communications, including permitting certain "test-the-waters" and "demo day" activities;
- Increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits; and
- Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions.
The integration doctrine is a longstanding concept that seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings so that Securities Act exemptions would apply to the multiple offerings that would not be available for the combined offering. Over the years, the framework for analyzing integration in the context of registered and exempt offerings has developed through a combination of rules, SEC guidance and SEC staff interpretations.
New Rule 152 replaces current Rules 152 and 155 and provides a general framework and four specific safe harbors that replace the various safe harbors currently set forth in the various exemptions. The final rule was adopted substantially as proposed. The final rule replaces the traditional five-factor test and other applicable SEC guidance with the SEC's more recent approach to integration adopted in rulemakings involving Regulation A, Regulation Crowdfunding, and Rules 147 and 147A.
The General Principle
Introductory language in new Rule 152 states that, because of the objectives of rule and the policies underlying the Securities Act, the provisions of the rule will not have the effect of avoiding integration for any transaction or series of transactions that, although in technical compliance with the rule, is part of a plan or scheme to evade the registration requirements of the Securities Act.
Rule 152(a) specifies the general principle that, if the safe harbors in Rule 152(b) do not apply, in determining whether two or more offerings are to be treated as one for the purpose of registration or qualifying for an exemption from registration under the Securities Act, 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 that an exemption from registration is available for the particular offering.
Application of the General Principle to an Exempt Offering Prohibiting General Solicitation
New Rule 152(a)(1) relates to the application of this general principle to an exempt offering prohibiting general solicitation, and states that 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:
- 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.
New Rule 152(a)(1) codifies and expands on guidance the Commission first issued in 2007, and updated through 2016, which sets forth a framework for analyzing how an issuer can conduct simultaneous registered and private offerings.4 Under the new integration principle in Rule 152(a), issuers may conduct concurrent Rule 506(c) and Rule 506(b) offerings, or any other combination of concurrent offerings, involving an offering prohibiting general solicitation and another offering permitting general solicitation, without integration concerns, so long as the provisions of Rule 152(a)(1) and all other conditions of the applicable exemptions are satisfied.
The SEC notes that new Rule 152(a)(1)(ii) "codifies and expands the SEC's 2007 guidance that the existence of a pre-existing substantive relationship between the issuer, or its agent, and a prospective investor may be one means by which an investor may become interested in, or become aware of, a private placement conducted while a registration statement for a public offering is on file with the Commission that may be consistent with Section 4(a)(2)." The SEC confirms in the adopting release that "the existence of such a relationship prior to the commencement of an offering is one means, but not the exclusive means, of demonstrating the absence of a general solicitation in a Regulation D offering." Accordingly, an offer of the issuer's securities to a person with whom the issuer, or a person acting on its behalf, has a pre-existing substantive relationship would not constitute a general solicitation, so long as the relationship was established prior to the commencement of the offering. Investors with whom the issuer has a pre-existing substantive relationship may include the issuer's existing or prior investors, investors in prior deals of the issuer's management, friends or family of the issuer's control persons, or customers of a registered broker-dealer or investment adviser with whom the broker-dealer or investment adviser established a substantive relationship prior to the participation in the exempt offering by the broker-dealer or investment adviser.
The SEC reiterates in the adopting release the guidance that was originally provided in the proposing release indicating that the SEC generally views a "pre-existing" relationship as one that the issuer has formed with an offeree prior to the commencement of the offering or, alternatively, that was established through another person (for example, a registered broker-dealer or investment adviser) prior to that person's participation in the offering, while a "substantive" relationship is one in which the issuer (or a person acting on its behalf, such as a registered broker-dealer or investment adviser) has sufficient information to evaluate, and does, in fact, evaluate, an offeree's financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor. The SEC notes in the adopting release that it does "not believe that self-certification alone (by checking a box) without any other knowledge of a person's financial circumstances or sophistication would be sufficient to form a 'substantive' relationship for these purposes."
The SEC also notes in the adopting release that "[p]ersons other than registered broker-dealers and investment advisers may form a pre-existing, substantive relationship with an offeree as a means of establishing that a general solicitation is not involved in a Regulation D offering." In this regard, the SEC notes that whether a "pre-existing, substantive relationship" exists generally turns on procedures established by broker-dealers in connection with their customers, because traditional broker-dealer relationships require that a broker-dealer deal fairly with, and make suitable recommendations to, customers, and, thus, implies that a substantive relationship exists between the broker-dealer and its customers. The SEC reiterates its long-standing position that "the presence or absence of a general solicitation is always dependent on the facts and circumstances of each particular case." As a result, there may be facts and circumstances in which a third party, other than a registered broker-dealer, could establish a "pre-existing, substantive relationship" sufficient to avoid a "general solicitation."5 The SEC also notes in the adopting release that there may be particular instances where issuers may develop pre-existing, substantive relationships with offerees; however, "in the absence of a prior business relationship or a recognized legal duty to offerees, it is likely more difficult for an issuer to establish a pre-existing, substantive relationship, especially when contemplating or engaged in an offering over the internet." The SEC further notes that issuers "would have to consider not only whether they have sufficient information about particular offerees, but also whether they in fact use that information appropriately to evaluate the financial circumstances and sophistication of the offerees prior to commencing the offering."
Application of the General Principle to Concurrent Exempt Offerings that Each Allow General Solicitation
New Rule 152(a)(2) relates to the application of the general principle to concurrent exempt offerings that each allow general solicitation, and states that, in addition to satisfying the requirements of the particular exemption relied on, general solicitation offering materials for one offering that include information about the material terms of a concurrent offering under another exemption may constitute an offer of the securities in such other offering, and therefore the offer must comply with all of the requirements for, and restrictions on, offers under the exemption being relied on for such other offering, including any legend requirements and communications restrictions. The SEC notes in the adopting release that new Rule 152(a)(2) builds on the SEC's guidance in its 2015 Regulation A and Regulation Crowdfunding rulemakings, as well as the 2016 Rule 147 and Rule 147A rulemaking, "to provide issuers with greater flexibility and the ability to rely on existing Securities Act exemptions more effectively without compromising the investor protections of each exemption."
The SEC notes that, under new Rule 152(a)(2), an issuer may undertake an offering in reliance on Rule 506(c), so long as the issuer meets all of the conditions of that exemption, including taking reasonable steps to verify that all purchasers in the Rule 506(c) offering are accredited investors, while conducting a concurrent offering in reliance on Regulation A, so long as the concurrent offering complies with all of the requirements of Regulation A. If the issuer were to discuss, in any general solicitation materials used for the Rule 506(c) offering, the material terms of the Regulation A offering, new Rule 152(a)(2) would require the Rule 506(c) general solicitation to comply with all the requirements for offers under Regulation A, including all necessary legends and comply with any restrictions on the use of general solicitation imposed on issuers making offers under Regulation A. Similarly, an issuer undertaking a Rule 506(c) offering concurrently with a Regulation Crowdfunding offering would need to ensure sure that any general solicitation materials used in connection with the Rule 506(c) offering that mention the material terms of the Regulation Crowdfunding offering comply with the off-portal offering limitations in Rule 204 of Regulation Crowdfunding.
The Integration Safe Harbors
New Rule 152(b) provides four non-exclusive safe harbors from integration providing that:
- 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, 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, 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 (New Rule 152(b)(1));
- 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 (New Rule 152(b)(2));
- 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 not permitted (New Rule 152(b)(3)(i)),
- a terminated or completed offering for which general solicitation is permitted that was made only to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) (New Rule 152(b)(3)(ii)), or
- 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 (New Rule 152(b)(3)(iii)); and
- 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 (New Rule 152(b)(4)).
Considerations with the 30-day Safe Harbor
The SEC adopted an amendment to Rule 506(b) to limit the number of non-accredited investors purchasing in Rule 506(b) offerings to no more than 35 within a 90 calendar day period, noting that shift to a 30-day integration safe harbor could potentially allow issuers to undertake serial Rule 506(b) exempt offerings each month to up to 35 non-accredited investors in reliance on the 30-day safe harbor, resulting in unregistered sales to a significant number of non-accredited investors in a 12-month period.
The SEC notes in the adopting release that the 30-day safe harbor may not be used as a means to circumvent the prohibition on general solicitation in an exempt offering to which such prohibition applies. The SEC indicates that "regardless of whether an issuer meets the requirements of the 30-day safe harbor from integration, an issuer conducting an offering of securities under an exemption prohibiting general solicitation, such as Rule 506(b), must still ensure that it has not engaged in a general solicitation, and meets the other terms and conditions of the relevant offering exemption."
The SEC also notes in the adopting release that "if an issuer waits less than 30 days after terminating or completing an offering before commencing a subsequent offering, and therefore cannot rely on the safe harbor in Rule 152(b)(1), it may still avoid integration if it meets the terms and conditions of the general principle of integration in Rule 152(a)."
Considerations with the Rule 701/Regulation S Safe Harbor
The SEC did not adopt a proposed amendment to the definition of "directed selling efforts" in Rule 902 of Regulation S, and related proposed Rule 906, which would have applied to issuers relying on the amended definition. This amendment was proposed to address "certain perceived concerns about the ability of an issuer to conduct concurrent Regulation S and Rule 506(c) offerings, particularly when the offerings are conducted using the internet." The SEC was persuaded by commenters who argued that the existing regulatory framework appropriately addresses concerns relating to the risk of flowback of Regulation S securities to the U.S. or the use of general solicitation in an exempt offering to condition the market in the U.S. for the Regulation S securities. The SEC clarifies in the adopting release that it does not believe that general solicitation activity for exempt domestic offerings would preclude reliance on Regulation S for concurrent offshore offerings, and the SEC reaffirms its existing guidance with respect to concurrent Regulation S and domestic offerings.6 The SEC notes that compliance with the terms of both Regulation S and another applicable exemption, such as Rule 506(c), will depend on the facts and circumstances of a particular situation. For example, the SEC indicates that "the use of the same website to solicit U.S. investors under Rule 506(c) and offshore investors under Regulation S could raise concerns about the issuer's compliance with the prohibition on directed selling efforts in Regulation S because the offering material on the website could be deemed to have the effect of conditioning the market in the United States." In such situations, the SEC believes that an issuer can take certain steps to distinguish the Regulation S and domestic offering materials, in accordance with existing SEC guidance.
Considerations with the Subsequent Registered Offerings Safe Harbor
New Rule 152(b)(3)(i) builds on the SEC's prior integration guidance relating to offerings for which general solicitation is not permitted. The SEC notes that "[o]ffers and sales preceding registered offerings that do not involve general solicitation are generally not the type of offerings that, when taken together, appear to be susceptible to concerns relating to the prior offers and sales conditioning the market for the registered offering."
New Rule 152(b)(3)(ii) builds on current Rule 255(e) of Regulation A, and current Rules 147(h) and 147A(h), which provide that offerings limited to QIBs and IAIs are not integrated with a subsequently filed registered offering. Similarly, where an issuer has solicited interest in a contemplated, but subsequently abandoned, Regulation A offering only to QIBs or IAIs, the abandoned Regulation A offering would not be subject to integration with a subsequently filed registered offering.
The SEC notes in the adopting release that new Rule 152(b)(3)(iii) does not impose an additional requirement beyond that set forth in the 30-day safe harbor of new Rule 152(b)(1), but rather is meant to clarify the application of that provision to subsequent registered offerings. The SEC notes in the adopting release that "if an issuer files a registration statement under the Securities Act less than 30 calendar days after a terminated or completed offering for which general solicitation is permitted, although new Rule 152(b)(3)(iii) would not be available, integration would depend on the availability of the general principle of integration in Rule 152(a)." The SEC believes that a 30-day time frame "is sufficient to mitigate concerns that an exempt offering may condition the market for a subsequent registered offering."
Considerations with the Offers or Sales Preceding Exempt Offerings Permitting General Solicitation Safe Harbor
New Rule 152(b)(4) provides a non-exclusive safe harbor for all offers and sales made in reliance on an exemption for which general solicitation is permitted that follow any other terminated or completed offering. The safe harbor expands on the current integration safe harbors in Regulation A and Rules 147 and 147A to include offerings relying on:
- Regulation Crowdfunding;
- Rules 504(b)(1)(i), (ii), or (iii) that, depending on state registration requirements, permit general solicitation; and
- Rule 506(c).
The SEC notes in the adopting release that "exempt offerings that permit general solicitation and follow other offers and sales are generally not the type of offerings that appear to be susceptible to concerns about the prior offers and sales conditioning the market for the subsequent exempt offering."
The SEC provides guidance in the adopting release about an issuer's ability to rely on Rule 152(b)(4) with respect to an offering that was commenced in reliance on an exemption that does not permit general solicitation, but that the issuer wishes to continue in reliance on an exemption that does permit general solicitation. The SEC expresses the view that an issuer may rely on the safe harbor in new Rule 152(b)(4) if, for example, the issuer commences an offering under Rule 506(b) and thereafter engages in general solicitation in reliance on Rule 506(c), so long as once the issuer engages in general solicitation, it relies on Rule 506(c) for all subsequent sales, thereby effectively terminating the Rule 506(b) offering, including by selling exclusively to accredited investors and taking reasonable steps to verify the accredited investor status of each purchaser. The SEC notes that the use of general solicitation in reliance on Rule 506(c) will not affect the exempt status of prior offers and sales of securities made in reliance on Rule 506(b), and that it is also not necessary for an issuer to use different offering materials for offerings that rely on different exemptions, so long as the issuer satisfies the disclosure and other requirements of each applicable exemption.
Commencement and Termination of an Offering
New Rule 152(c) provides a non-exclusive list of factors to consider in determining when an offering will be deemed to be commenced for purposes of both the general principle of integration in Rule 152(a) and the safe harbors in Rule 152(b). The list of factors covers registered and exempt offerings, noting that an issuer or its agents may commence an offering in reliance on:
- Rule 241, on the date the issuer first made a generic offer soliciting interest in a contemplated securities offering for which the issuer has not yet determined the exemption under the Securities Act under which the offering of securities would be conducted;
- Section 4(a)(2), Regulation D, or Rule 147 or 147A, on the date the issuer first made an offer of its securities in reliance on these exemptions;
- Regulation A, on the earlier of the date the issuer first made an offer soliciting interest in a contemplated securities offering in reliance on Rule 255, or the public filing of a Form 1-A offering statement;
- Regulation Crowdfunding, on the earlier of the date the issuer first made an offer soliciting interest in a contemplated securities offering in reliance on new Rule 206 (discussed below), or the public filing of a Form C offering statement; and
- A registration statement filed under
the Securities Act for:
- a continuous offering that will commence promptly on the date of initial effectiveness, on the date the issuer first filed its registration statement for the offering with the Commission, or
- a delayed offering, on the earliest date on which the issuer or its agents commenced public efforts to offer and sell the securities, which could be evidenced by the earlier of the first filing of a prospectus supplement with the SEC describing the delayed offering, or the issuance of a widely disseminated public disclosure, such as a press release, confirming the commencement of the delayed offering.
The SEC notes in the adopting release that communications between an issuer, or its agents and underwriters, and QIBs and IAIs, including those that would qualify for the safe harbor in Rule 163B, will not be considered as the commencement of a registered public offering for purposes of new Rule 152, while "the commencement of private communications between an issuer, or its agents, including private placement agents, and prospective investors in an exempt offering in which general solicitation is prohibited, such as under Rule 506(b) or Section 4(a)(2), may be considered as the commencement of the nonpublic exempt offering for purposes of new Rule 152, if such private communication involves an offer of securities."
New Rule 152(d) provides a non-exclusive list of factors to consider in determining when an offering is deemed to be "terminated or completed." Regardless of the type of offering, Rule 152(d) states that termination or completion of an offering is likely to occur when the issuer and its agents cease efforts to make further offers to sell the issuer's securities under such offering. The non-exclusive list of factors are as follows:
- Section 4(a)(2), Regulation D, or Rule 147 or 147A, on the later of the date: (i) the issuer entered into a binding commitment to sell all securities to be sold under the offering (subject only to conditions outside of the investor's control); or (ii) the issuer and its agents ceased efforts to make further offers to sell the issuer's securities under such offering;
- Regulation A, on: (i) the withdrawal of an offering statement under Rule 259(a); (ii) the filing of a Form 1-Z with respect to a Tier I offering under Rule 257(a); (iii) the declaration by the SEC that the offering statement has been abandoned under Rule 259(b); or (iv) the date, after the third anniversary of the date the offering statement was initially qualified, on which Rule 251(d)(3)(i)(F) prohibits the issuer from continuing to sell securities using the offering statement, or any earlier date on which the offering terminates by its terms;
- Regulation Crowdfunding, on the deadline of the offering identified in the offering materials pursuant to Rule 201(g), or indicated by the Regulation Crowdfunding intermediary in any notice to investors delivered under Rule 304(b); or
- A registration statement filed under the Securities Act, on: (i) the withdrawal of the registration statement after an application is granted or deemed granted under Rule 477; (ii) the filing of a prospectus supplement or amendment to the registration statement indicating that the offering, or particular delayed offering in the case of a shelf registration statement, has been terminated or completed; (iii) the entry of an order of the SEC declaring that the registration statement has been abandoned under Rule 479; (iv) the date, after the third anniversary of the initial effective date of the registration statement, on which Rule 415(a)(5) prohibits the issuer from continuing to sell securities using the registration statement, or any earlier date on which the offering terminates by its terms; or (v) any other factors that indicate that the issuer has abandoned or ceased its public selling efforts in furtherance of the offering, or particular delayed offering in the case of a shelf registration statement, which could be evidenced by: (A) the filing of a Current Report on Form 8-K; or (B) the issuance of a widely disseminated public disclosure by the issuer, or its agents, informing the market that the offering, or particular delayed offering, in the case of a shelf registration statement, has been terminated or completed.
The SEC amended Rule 502(a), Rule 251(c), Rule 147(g), and Rule 147A(g) to provide cross-references to the new general principle of integration and safe harbors for integration in Rule 152. Similarly, the SEC amended current Rule 500(g) to include a cross-reference to the safe harbor for offers and sales made in compliance with Regulation S in new Rule 152(b)(2). The SEC eliminated Rule 255(e), Rule 147(h), and Rule 147A(h), given that the relief provided by these rules is provided by new Rule 152(b)(3). The SEC added a cross-reference to new Rule 152 in a new provision in Rule 100 of Regulation Crowdfunding,
General Solicitation and Offering Communications
In the adopting release, the SEC notes that the Securities Act defines the term offer broadly, and the SEC has historically interpreted that term broadly to include a variety of activities. The SEC has explained that "the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer."7 While the terms "general solicitation" and "general advertising" are not defined in Regulation D, the rules do provide examples of general solicitation and general advertising, including advertisements published in newspapers and magazines, communications broadcast over television and radio, and seminars where attendees have been invited by general solicitation or general advertising. The SEC's final rules address the use of test-the-waters materials under certain circumstances and provide an exemption for "demo day" communications.
Exemption from General Solicitation for "Demo Days" and Similar Events
In the adopting release, the SEC notes that "demo days" and similar events "are generally organized by a group or entity (such as a university, angel investors, an accelerator, or an incubator) that invites issuers to present their businesses to potential investors, with the aim of securing investment." The SEC acknowledges that "if the issuer's presentation at a 'demo day' or similar event constitutes an offer of securities, the issuer would not be deemed to have engaged in general solicitation if the organizer of the event has limited participation in the event to individuals or groups of individuals with whom the issuer or the organizer has a pre-existing substantive relationship or that have been contacted through an informal, personal network of experienced, financially sophisticated individuals, such as angel investors."
The SEC adopted new Rule 148 substantially as proposed. As adopted, an issuer will not be deemed to have engaged in general solicitation if the communications are made in connection with a seminar or meeting sponsored by a college, university, or other institution of higher education, a State or local government or instrumentality of a State or local government, a nonprofit organization, or an angel investor group, incubator, or accelerator. The rule includes a requirement that more than one issuer participate in the seminar or meeting.
Under the final rule, the sponsor will not be permitted to:
- Make investment recommendations or provide investment advice to attendees of the event;
- Engage in any investment negotiations between the issuer and investors attending the event;
- Charge attendees of the event any fees, other than reasonable administrative fees
- Receive any compensation for making introductions between event attendees and issuers, or for investment negotiations between the parties; or
- Receive any compensation with respect to the event that would require it to register as a broker or dealer under the Securities Exchange Act of 1934 (Exchange Act), or as an investment adviser under the Investment Advisers Act of 1940.
In addition, as proposed, the advertising for the event may not reference any specific offering of securities by the issuer.
Under Rule 148, online participation in the event must be limited to:
- Individuals who are members of, or otherwise associated with the sponsor organization (e.g., members of an angel investor group or students, faculty, or alumni of a college or university);
- Individuals that the sponsor reasonably believes are accredited investors; or
- Individuals who have been invited to the event by the sponsor based on industry or investment-related experience reasonably selected by the sponsor in good faith and disclosed in the public communications about the event.
The SEC also adopted limitations on the information conveyed at the event regarding the offering of securities by or on behalf of the issuer. As adopted, Rule 148 specifies that the issuer is allowed to convey only:
- Notification that the issuer is in the process of offering or planning to offer securities;
- The type and amount of securities being offered;
- The intended use of the proceeds of the offering; and
- The unsubscribed amount in an offering.
Solicitations of Interest
Securities Act Rule 163B permits issuers and those authorized to act on their behalf to gauge market interest in a registered securities offering through discussions with QIBs and IAIs prior to, or following, the filing of a registration statement. Regulation A also permits issuers to test the waters with, or solicit interest in a potential offering from, the general public either before or after filing an offering statement. These solicitations of interest are deemed to be offers of a security for sale for purposes of the antifraud provisions of the Federal securities laws.
Generic Solicitation of Interest Exemption
The SEC used its exemptive authority under Section 28 of the Securities Act to create new Rule 241, which exempts the class of persons who are issuers and use generic solicitation of interest materials pursuant to the conditions of the rule from the prohibitions on offers prior to filing a registration statement in Section 5(c) of the Securities Act. This new rule permits 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.
Under Rule 241, an issuer or any person authorized to act on behalf of an issuer may communicate orally or in writing to determine whether there is any interest in a contemplated offering of securities exempt from registration under the Securities Act. Rule 241 provides an exemption from registration only with respect to the generic solicitation of interest and the solicitation will be deemed to be an offer of a security for sale for purposes of the antifraud provisions of the Federal securities laws. In addition, no solicitation or acceptance of money or other consideration, nor of any commitment, binding or otherwise, from any person is permitted until the issuer makes a determination as to the exemption on which it will rely and commences the offering in compliance with the exemption. If the issuer moves forward with an exempt offering following the generic solicitation of interest, it will be required to comply with an applicable exemption for the subsequent offering, and investors will have the benefit of the investor protections included in such exemption.
The SEC notes in the adopting release "if the generic solicitation is done in a manner that would constitute general solicitation, and the issuer ultimately decides to conduct an unregistered offering under an exemption that does not permit general solicitation, the issuer will need to analyze whether that solicitation and the subsequent private offering will be integrated, thereby making unavailable an exemption that does not permit general solicitation." The SEC indicates that, under the new integration rules discussed above, an issuer will not be able to follow a generic solicitation of interest that constituted a general solicitation with an offering pursuant to an exemption that does not permit general solicitation (e.g., Rule 506(b)), unless 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.
Rule 241 requires the generic testing-the-waters materials to provide specified disclosures notifying potential investors about the limitations of the generic solicitation. The issuer's communications must state that:
- The issuer is considering an offering of securities exempt from registration under the Securities Act, but has not determined a specific exemption from registration the issuer intends to rely on for the subsequent offer and sale of the securities;
- No money or other consideration is being solicited, and if sent in response, will not be accepted
- No offer to buy the securities can be accepted and no part of the purchase price can be received until the issuer determines the exemption under which the offering is intended to be conducted and, where applicable, the filing, disclosure, or qualification requirements of such exemption are met; and
- A person's indication of interest involves no obligation or commitment of any kind.
Rule 241 also provides that the communication may include a means for a person to indicate interest in a potential offering and an issuer may require such indication to include the person's name, address, telephone number, and/or email address.
The SEC also adopted amendments to Regulation A and Regulation Crowdfunding to require that the Rule 241 generic solicitation materials be made publicly available as an exhibit to the offering materials filed with the Commission if the Regulation A or Regulation Crowdfunding offering is commenced within 30 days of the generic solicitation. The SEC adopted, as proposed, a requirement that an issuer provide purchasers with any written generic solicitation of interest materials used under new Rule 241 if the issuer sells securities under Rule 506(b) within 30 days of the generic solicitation of interest to any purchaser that is not an accredited investor.
Regulation Crowdfunding Communications
In contrast to Rule 255 of Regulation A, an issuer conducting an offering pursuant to Regulation Crowdfunding currently may not solicit interest or make offers or sales under Regulation Crowdfunding prior to filing a Form C with the Commission. The SEC adopted new Rule 206 to permit Regulation Crowdfunding issuers to test the waters orally or in writing prior to filing a Form C with the SEC. Rule 206 of Regulation Crowdfunding is based on Rule 255 of Regulation A.
As adopted, new Rule 206 of Regulation Crowdfunding permits issuers to test the waters with all potential investors. As with Rule 255 of Regulation A, Rule 206 requires issuers to include the following legends in the testing-the-waters materials:
- No money or other consideration is being solicited, and if sent, will not be accepted;
- No offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed and only through an intermediary's platform; and
- A prospective purchaser's indication of interest is non-binding.
Testing-the-waters materials under Rule 206 would be considered offers that are subject to the antifraud provisions of the Federal securities laws. The SEC also amended Rule 201(z) to require issuers to include any Rule 206 solicitation materials with the Form C that is filed with the Commission.
Unlike Rule 255 of Regulation A, which permits issuers to use testing-the-waters materials both before and after the filing of an offering statement, Rule 206 only permits issuers to use testing-the-waters materials before the Form C is filed. After the Form C is filed, any offering communications are required to comply with the terms of Regulation Crowdfunding, including the Rule 204 advertising restrictions. Testing-the-waters communications are not required to be conducted through intermediary platforms.
The SEC also amended Rule 204 of Regulation Crowdfunding to permit oral communications with prospective investors once a Form C is filed, as long as the communications comply with the requirements of Rule 204. The SEC expanded the information that an issuer may provide in accordance with Rule 204 to include:
- A brief description of the planned use of proceeds of the offering; and
- Information on the issuer's progress toward meeting its funding goals.
The SEC adopted amendments to Rule 204 to specify that an issuer may provide information about the terms of an offering under Regulation Crowdfunding in the offering materials for a concurrent offering, such as in an offering statement on Form 1-A for a concurrent Regulation A offering or a Securities Act registration statement filed with the SEC, without violating Rule 204. The information provided about the Regulation Crowdfunding offering must be in compliance with Rule 204, including the requirement to include a link directing the potential investor to the intermediary's platform as required by Rule 204(b)(1); however, such link may not be a live hyperlink.
Some commenters requested clarification on whether funding portals can host concurrent offerings, and the SEC noted in the adopting release that a funding portal is exempt from the broker registration requirements of Section 15(a) of the Exchange Act only in connection with its activities as an intermediary in a transaction involving the offer or sale of securities for the account of others, pursuant to Section 4(a)(6) of the Securities Act. As a result, if a funding portal seeks to host a concurrent offering pursuant to another offering exemption, it would need to consider whether these additional activities could cause it to lose the exemption provided by Rule 401, or otherwise become subject to broker registration requirements.
Rule 506(c) Verification Requirements
Rule 506(c) permits issuers to generally solicit and advertise an offering, provided that:
- all purchasers in the offering are accredited investors;
- the issuer takes reasonable steps to verify that purchasers are accredited investors; and
- certain other conditions in Regulation D are satisfied.
Rule 506(c) provides a principles-based method for verification of accredited investor status, as well as a non-exclusive list of verification methods. The principles-based method of verification requires an objective determination by the issuer, or those acting on the issuer's behalf, as to whether the steps taken are "reasonable" in the context of the particular facts and circumstances of each purchaser and transaction. Rule 506(c) includes a non-exclusive list of verification methods that issuers may use, but are not required to use, when seeking to satisfy the verification requirement with respect to natural person purchasers.
The SEC adopted amendments to Rule 506(c) to permit an issuer to establish that an investor that the issuer previously took reasonable steps to verify as an accredited investor in accordance with Rule 506(c)(2)(ii) remains an accredited investor as of the time of a subsequent sale, if the investor provides a written representation that the investor continues to qualify as an accredited investor and the issuer is not aware of information to the contrary, subject to a five-year time limit on the ability of issuers to rely on a prior verification.
In lieu of adopting specific rule changes to the verification requirement, the SEC reaffirmed and updated the SEC's prior guidance with respect to the principles-based method for verification, and what may be considered "reasonable steps" to verify an investor's accredited investor status. The SEC notes that the principles-based method was intended to "provide issuers with significant flexibility in deciding the steps needed to verify a person's accredited investor status and to avoid requiring them to follow uniform verification methods that may be ill-suited or unnecessary to a particular offering or purchaser in light of the facts and circumstances." The SEC indicates that it continues to believe that the following factors are among those an issuer should consider when using this principles-based method of verification:
- The nature of the purchaser and the type of accredited investor that the purchaser claims to be;
- The amount and type of information that the issuer has about the purchaser; and
- The nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
The SEC notes that, in some circumstances, the reasonable steps determination "may not be substantially different from an issuer's development of a 'reasonable belief' for Rule 506(b) purposes." In this regard, the SEC notes that an issuer's receipt of a representation from an investor as to his or her accredited status could meet the "reasonable steps" requirement if the issuer "reasonably takes into consideration a prior substantive relationship with the investor or other facts that make apparent the accredited status of the investor." That same representation from an investor may not meet the "reasonable steps" requirement if "the issuer has no other information about the investor or has information that does not support the view that the investor was an accredited investor." The SEC also reminds issuers that they are not required to use any of the methods set forth in the non-exclusive list and can apply the reasonableness standard directly to the specific facts and circumstances presented by the offering and the investors.
Harmonization of Disclosure Requirements
The SEC adopted amendments to address differing financial statement information requirements for Regulation A and Regulation D, while addressing particular areas of compliance with Regulation A that are more complex or difficult than for registered offerings. The SEC also amended confidential treatment standards for certain exhibits.
Rule 502(b) of Regulation D
When non-accredited investors are participating in an offering under Rule 506(b), the issuer conducting the offering must furnish the information required by Rule 502(b), including specified financial statement and non-financial information, to such non-accredited investors a reasonable time prior to the sale of the securities and must provide these investors with the opportunity to ask questions and receive answers about the offering.
The SEC amended Rule 502(b) to align the financial information that non-reporting issuers must provide to non-accredited investors participating in Regulation D offerings with the financial information that issuers must provide investors in Regulation A offerings, as follows:
- For Regulation D offerings of $20 million or less, Rule 502(b) as amended refers issuers to paragraph (b) of part F/S of Form 1-A, which applies to Tier 1 Regulation A offerings; and
- For offerings of greater than $20 million, Rule 502(b) refers issuers to paragraph (c) of part F/S of Form 1-A, which applies to Tier 2 Regulation A offerings.
The amendments eliminate the current Rule 502(b) provisions that permit an issuer, other than a limited partnership, that cannot obtain audited financial statements without unreasonable effort or expense, to provide only the issuer's audited balance sheet. Further, a foreign private issuer that is not an Exchange Act reporting company would be required to provide financial statement disclosure consistent with the Regulation A requirements. In this regard, the foreign private issuer would be permitted to provide financial statements prepared in accordance with either U.S. GAAP or International Financial Reporting Standards as issued by the International Accounting Standards Board. For business combinations and exchange offers, an issuer that is not an Exchange Act reporting company would provide financial statements consistent with the Regulation A requirements.
Amendments to Simplify Compliance with Regulation A
The SEC adopted the following amendments to simplify compliance with Regulation A:
- A new instruction to Item 17 of Form 1-A that applies to paragraphs 6 and 7 of that item and includes procedures similar to Items 601(b)(2) and (b)(10) of Regulation S-K for filing redacted material contracts or plans of acquisition, reorganization, arrangement, liquidation, or succession;
- Amendments to Form 1-A eliminating the requirement that issuers file the non-public offering statements and related amendments and correspondence as exhibits, and instead Regulation A issuers will be able to make previously non-public documents available to the public on EDGAR using the same process as issuers conducting a registered offering;
- Rule changes that permit issuers to incorporate previously filed financial statements by reference into a Regulation A offering circular; and
- Amendments to the abandonment provisions of Rule 259(b) to permit the SEC to declare a post-qualification amendment to an offering statement abandoned, consistent with Rule 479 of Regulation C, which applies to registered offerings.
Confidential Information Standard
The SEC adopted amendments to adjust the SEC's exhibit filing requirements by removing a
"competitive harm" requirement, and replacing it with a standard that permits information to be redacted from material contracts if it is the type of information that the issuer both customarily and actually treats as private and confidential, and which is also not material. The change is necessitated by the U.S. Supreme Court's decision in Food Marketing Institute v. Argus Leader Media, 139 S. Ct. 2536 (2019), in which the Supreme Court rejected the longstanding test for determining what information is confidential under Exemption 4 of the Freedom of Information Act and adopted a new definition of "confidential" that does not include a competitive harm requirement.
Offering and Investment Limits
The SEC amended the offering and investment limits for certain exemptions. For Regulation A, the amendments:
- Raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
- Raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.
For Regulation Crowdfunding, the amendments:
- Raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
- Amend the investment limits for investors in Regulation Crowdfunding offerings by: (i) removing investment limits for accredited investors; and (ii) using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors; and
- 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.
For Rule 504 of Regulation D, the amendments raise the maximum offering amount from $5 million to $10 million.
Regulation Crowdfunding and Regulation A Eligibility
The SEC adopted amendments that establish rules to permit the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers. The amendments also impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations.
Regulation Crowdfunding Eligible Issuers
Section 4A(f)(3) of the Securities Act prohibits investment companies, as defined in the Investment Company Act of 1940 (Investment Company Act) (or companies that are excluded from the definition of an investment company under section 3(b) or 3(c) of the Investment Company Act), from using the Regulation Crowdfunding exemption. When the SEC adopted Regulation Crowdfunding, it did not adopt an exception to this statutory prohibition that would have allowed a single purpose fund organized to invest in, or lend money to, a single company, to use Regulation Crowdfunding. As a result, issuers may not use special purpose vehicles that invest in a single company that are investment companies (or companies that are excluded from the definition) to conduct Regulation Crowdfunding offerings.
As a result of this statutory provision, investors purchasing securities in an offering that is exempt from registration pursuant to Regulation Crowdfunding must hold the securities in their own name. Over time, market participants identified a number of practical issues with this situation that potentially limited the utility of relying on Regulation Crowdfunding, such as unwieldy capitalization tables, administrative complexities and issues with obtaining future financing.
In response to these concerns, the SEC adopted Rule 3a-9 under the Investment Company Act to exclude from the definition of "investment company" a crowdfunding vehicle that meets specific conditions designed to require that it function as "a conduit for investors to invest in a business that seeks to raise capital through a crowdfunding vehicle." The conditions require the crowdfunding vehicle to act solely as a conduit for directly acquiring, holding, and disposing of securities issued by a single crowdfunding issuer, by limiting the scope of the activities in which the crowdfunding vehicle can engage, while also restricting the compensation that the crowdfunding vehicle can receive. The SEC notes in the adopting release that the conditions in Rule 3a-9 are designed "to limit the crowdfunding vehicle's activities to that of acting solely as a conduit to directly hold the securities of the crowdfunding issuer without the ability for independent investment decisions to be made on behalf of the crowdfunding vehicle."
Under Rule 3a-9, the crowdfunding vehicle would be a co-issuer formed by or on behalf of the underlying crowdfunding issuer to serve as a conduit for investors to invest in the crowdfunding issuer and will not have a separate business purpose. The SEC notes in the adopting release that issuers generally are not considered to be "brokers" within the meaning of Section 3(a)(4) of the Exchange Act because they sell securities for their own accounts and not for the accounts of others; nor are issuers generally considered to be "dealers" within the meaning of Section 3(a)(5) of the Exchange Act because they do not buy and sell their securities for their own accounts as part of a regular business. Moreover, the SEC notes that person operating the crowdfunding vehicle in accordance with Rule 3a-9 would not be in the business of effecting securities transactions for the account of others, or in the business of buying and selling securities for the account of the crowdfunding vehicle, given the limitations imposed by the rule.
The SEC determined that a crowdfunding vehicle should constitute a single record holder in the crowdfunding issuer for purposes of Section 12(g) of the Exchange Act, but only to the extent that all investors in the crowdfunding vehicle are natural persons. As a result, the SEC adopted new paragraph (a)(9) of Rule 12g5-1. Under Rule 12g5-1(a)(9), when determining whether a crowdfunding issuer is required to register a class of equity securities with the SEC pursuant to Section 12(g)(1) of the Exchange Act, securities issued by a crowdfunding vehicle in accordance with Rule 3a-9 may be excluded only if they are held by natural persons. This provision also applies to a crowdfunding vehicle, which is a separate legal entity from the crowdfunding issuer and itself is subject to Section 12(g). The SEC also amended Rule 12g5-1(a)(2) to clarify that a crowdfunding issuer utilizing new Rule 3a-9 should look to new Rule 12g5-1(a)(9), even though the crowdfunding vehicle may otherwise have been considered a corporation, partnership, trust or other organization for purposes of Rule 12g5-1(a)(2).
Regulation Crowdfunding Eligible Securities
The SEC did not adopt proposed amendments to harmonize the securities eligible under Regulation Crowdfunding with the securities eligible under Regulation A, based on concerns that doing so would limit the utility of Regulation Crowdfunding.
Regulation A Eligibility Restrictions for Delinquent Exchange Act Filers
Regulation A includes an eligibility requirement that an issuer conducting a Regulation A offering must have filed with the Commission all reports required to be filed, if any, pursuant to Rule 257 during the two years before the filing of the offering statement (or for such shorter period that the issuer was required to file such reports). The SEC adopted amendments to address delinquent filings by Exchange Act registrants that are not required to file reports pursuant to Rule 257. The SEC adopted amendments to Regulation A which provide that issuers that do not file all the reports required to have been filed by Sections 13 or 15(d) of the Exchange Act in the two-year period preceding the filing of an offering statement would be ineligible to conduct a Regulation A offering.
Bad Actor Disqualification Provisions
The SEC adopted amendments to Regulation D, Regulation A, and Regulation Crowdfunding to harmonize the bad actor disqualification provisions. The amendments adjust the lookback requirements in Regulation A and Regulation Crowdfunding to include the time of sale in addition to the time of filing.
The amendments will be effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register.
1. Release No. 33-10844, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets (Nov. 2, 2020), available at: https://www.sec.gov/rules/final/2020/33-10844.pdf.
2. Release No. 33-10649, Concept Release on Harmonization of Securities Offering Exemption (Jun. 8, 2019), available at: https://www.sec.gov/rules/concept/2019/33-10649.pdf.
3. Release No. 33-10763, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets (Mar. 4, 2020), available at: https://www.sec.gov/rules/proposed/2020/33-10763.pdf.
4. See, e.g., Release No. 33-8828, Revisions of Limited Offering Exemptions in Regulation D (Aug. 3, 2007), at Section II.C.1., available at: https://www.sec.gov/rules/proposed/2007/33-8828.pdf.
6. Release No. 33-6863, Offshore Offers and Sales, (Apr. 24, 1990).
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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