On March 15, 2021, several previously-announced amendments to the Securities and Exchange Commission’s exempt offering rules took effect. The rule changes, which were first announced in November 2020, are designed, in the SEC’s words, to “harmonize, simplify, and improve the multilayer and overly complex exempt offering framework,” and to “promote capital formation and expand investment opportunities while preserving or improving important investor protections.” The SEC press release announcing the amendments is available here, and the final rule is available here.

Amendment Highlights

The changes should allow private companies to raise capital with fewer restrictions by, among other things:

• Increasing the annual cap on crowdfunding limits to $5 million, and eliminating the personal investment limits on accredited investors contributing to crowdfunded offerings;
• Raising limits on so-called “Reg A+” offerings from $50 million to $75 million, and on offerings under Rule 504 of Regulation D from $5 million to $10 million;
• Easing restrictions on communications during private offerings by permitting issuers to “test the waters” prior to selecting an exemption for their offering, and facilitating participation in “demo days” under certain circumstances; and
• Updating the rules that determine when the SEC will deem separate offerings to be “integrated” for purposes of testing compliance with applicable exemptions from registration.

Updated Integration Rules

Of particular note for clients and friends is new Rule 152 under the Securities Act of 1933 (the Securities Act). New Rule 152 replaces old Rule 152 and Rule 155, and harmonizes the patchwork of prior individual integration safe harbors, including the six-month integration safe harbor under Rule 502(a) of Regulation D, to better streamline the rules governing “integration” of separate securities offerings.

The SEC uses the integration doctrine to determine whether two or more purportedly discrete securities offerings should be “integrated,” or considered part of a single offering, when assessing whether the offerings comply with applicable exemptions from registration under the Securities Act. The various private offering exemptions have different conditions and limitations, and if offerings intended to qualify under separate exemptions are instead “integrated” and analyzed as one offering, that integrated offering may fail to meet the applicable conditions and limitations for exemption.

Before these recent amendments, the SEC’s integration rules were complex, and lacked certainty, leaving many issuers unsure of how to structure multiple offerings to qualify under available exemptions from registration. New Rule 152 simplifies that framework by establishing a new set of general integration principles in Rule 152(a), supplemented by four new non-exclusive safe harbors in Rule 152(b). Where a safe harbor applies to a set of offerings, the offerings will not be integrated. Where a safe harbor does not clearly apply to a set of offerings, the offerings are analyzed under the general integration principles to assess whether they should be integrated.

Four Non-Exclusive Safe Harbors

Rule 152(b) establishes four safe harbors from integration, which are summarized below. If a safe harbor applies, the applicable offerings will not be integrated.

1. Any offering made more than 30 calendar days before the commencement or after the termination or completion of any other offering would not be integrated with such other offering; provided that, in the case where an exempt offering that prohibits general solicitation (such as a Rule 506(b) offering) follows by 30 or more calendar days an offering that allows general solicitation (such as a Rule 506(c) offering), the issuer has a reasonable belief that, for each purchaser in the exempt offering prohibiting general solicitation, the issuer either:
   • did not solicit such purchaser through a general solicitation, or
   • had previously established a substantive relationship with such purchaser prior to the exempt offering prohibiting general solicitation.
2. Offers and sales made in compliance with Rule 701 under the Securities Act (i.e., pursuant to an employee benefit plan) or in compliance with Regulation S under the Securities Act (i.e., for offshore offerings) would not be integrated with other offerings.
3. An offering for which a registration statement has been filed would not be integrated if it is made subsequent to:
   • an offering for which general solicitation is not permitted;
   • an offering for which general solicitation is permitted that was made only to “qualified institutional buyers” and “institutional accredited investors”; or
   • an offering for which general solicitation is permitted that was terminated or completed more than 30 calendar days prior to the commencement of the registered offering.
4. Offers and sales made in reliance on an exemption for which general solicitation is permitted would not be integrated if made after any terminated or completed offering.

General Principles of Integration

If none of the four safe harbors apply to a set of offerings, then integration is analyzed under the new general principles in Rule 152(a). The general principles provide that two or more offerings will not be integrated if the issuer can determine, based on the particular facts and circumstances surrounding the offerings, that each offering either complies with the registration requirements of the Securities Act, or qualifies for an available exemption from registration. The rule also establishes guidelines for making this determination:

• In analyzing whether to integrate an exempt offering for which general solicitation is prohibited with either an exempt offering that permits general solicitation or with a registered public offering, the issuer must reasonably believe that for each purchaser in the exempt offering for which general solicitation is prohibited, the issuer either: (i) did not solicit such purchaser through a general solicitation (i.e., through the exempt offering that permits general solicitation or through the registered public offering), or (ii) had a substantive relationship with such purchaser prior to the commencement of the exempt offering that prohibits general solicitation.
• If an issuer is conducting two or more exempt offerings for which general solicitation is permitted, and the general solicitation materials for the offerings make reference to the other offerings, then each exempt offering must comply not only with its particular exemption requirements, but also with the applicable exemption requirements for each other offering.

Of course neither the safe harbor provisions nor the general principles will prevent the SEC from integrating multiple offerings that are structured as part of a plan or scheme to evade the registration requirements of the Securities Act. 

Commencement, Termination and Completion of Offerings

The new integration rules make frequent reference to the “commencement” and to the “termination or completion” of multiple offerings, and Rules 152(c) and (d) include a list of factors for issuers to consider when determining if an offering has commenced, or if an offering has terminated or been completed. Generally, the first offer of securities by the issuer or its agents will commence an offering, and when an issuer and its agents cease efforts to make further offers to sell the issuer’s securities in an offering then that offering will be deemed terminated or completed.

Conclusion

While the integration framework has been significantly simplified by these amendments, the integration rules are still highly technical in nature, and an integration analysis is highly fact-specific. We invite you to contact us directly if you have any questions regarding new integration rules under the Securities Act.