SEC Proposes Rule Changes to Improve Capital Raising
By Brian Blum, Manager, Assurance Services
On March 4, 2020, the Securities & Exchange Commission (“SEC”) announced proposed amendments to harmonize, simplify and improve the current exempt offering framework. The SEC’s goal is to provide a more rational framework to eliminate complexity and improve access to capital for exempt offerings. While creating these efficiencies, the SEC still seeks to enhance important investor protections.1
Currently, securities offering exemptions are determined by a patchwork of 10 incongruent requirements. The goal is to allow companies to access capital while protecting unsophisticated investors.
The most common bases for filing a public offering with the SEC include the following rules and regulations2:
- Section 4(a)(2) of the Securities Act
- Rule 506 of Regulation D
- Rule 504 of Regulation D
- Regulation Crowdfunding
- Regulation A
- Section 3(a) (11) of the Securities Act
- Rule 147
- Rule 147A
The proposed amendment will streamline the implementation of these rules through changes to offering amounts, an updated integration framework with four non-exclusive safe harbor exemptions, and other proposals described further below.
Updated Offering Amounts
The amendments update the offering limits through changes to Regulation Crowdfunding, Regulation A (Tier 2), and Rule 504 of Regulation D.
- Regulation Crowdfunding – (i) raises the offering limit from $1.07 million to $5 million, and (ii) modifies the investment limit (a) to accredited investors by not applying investment limits, and (b) to non-accredited investors by revising the calculation for investment limits allowing them to rely on the greater of their annual income or net worth.
- Regulation A (Tier 2) – (i) raise the maximum offering amount from $50 million to $75 million, and (ii) raise the maximum offering amount for secondary sales from $15 million to $22.5 million.
- Rule 504 of Regulation D: raise the maximum offering amount from $5 million to $10 million.
Overall, the three changes herein allow for more investment and access to capital by raising offering limits. Additionally, they still retain protections for non-accredited investors and simplify the calculation to streamline the process. Lastly, they meet the goals of the proposal by eliminating the limit for accredited investors.
The second updates are to establish an integration framework and to implement four non-exclusive safe harbors from integration.
The integration framework changes the integration guidance of separate offerings by looking to the particular facts and circumstances of the offerings, and focusing the analysis on whether 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 offering3.
Additionally, the following four non-exclusive safe harbors from integration are proposed:
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.
The new framework together with the new Safe Harbor provisions effectively streamline the process for issuers to allow for multiple offerings with clear determinations on whether to integrate multiple offerings together when qualifying for exemptions.
In addition to the integration and offering limit changes above, there are other new proposals that relate to general solicitation and advertising of offerings. Additionally, there are changes to Regulation A and Regulation Crowdfunding eligibility. The proposal includes amendments to the eligibility restrictions in Regulation Crowdfunding and Regulation A. Lastly, there are changes to 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. Also, there are changes to add a new item to the non-exclusive list of verification methods in Rule 506(c). There are changes to 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.
Taken together, these rule updates seek to streamline the exemption process for offerings, while retaining protection for investors. As the comment period for the proposal remained open for 60 days following publication in the Federal Register and ended May 5, 2020, we will provide updates to the resolution of these comments and any changes to the proposals in future issues of SEC Insights.