Blog: SEC posts concept release on harmonization of private securities offering exemptions

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The SEC posted its new, much anticipated concept release seeking public comment on ways to harmonize and streamline the patchwork universe of private placement exemptions and “to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation.” The comment period will be open for 90 days from publication in the Federal Register.

According to the press release, the concept release seeks input on whether:

  • “The limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection or pose an undue obstacle to capital formation or investor access to investment opportunities
  • The Commission should take steps to facilitate a company’s ability to transition from one offering to another or to a registered offering
  • The Commission should expand companies’ ability to raise capital through pooled investment funds
  • Retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds such as interval funds and other closed-end funds
  • The Commission should revise its exemptions governing the secondary trading of securities initially issued in exempt offerings.”

SideBar

SEC officials have recently been laying the groundwork for the new concept release. For example, at the May Small Business Capital Formation Advisory Committee, Corp Fin Director Bill Hinman described the objective of the concept release as developing a system that is better suited to the business life cycle of companies. As part of that review, he said, the staff was looking at whether it still made sense to retain the accredited investor definition as it currently stands—as a binary test, in which, if you do not exceed the threshold, you cannot participate at all, but if you do exceed the threshold, you can participate to any extent in the transaction. Alternatively, it might be more appropriate to scale the level of investment permitted relative to the wealth of individual. Hinman noted that the concept release would fold in prior recommendations from the Committee’s predecessors. (See this PubCo post.)

Those prior recommendations may include the advice from the SEC Committee on Small and Emerging Companies (which then morphed into the Small Business Capital Formation Advisory Committee) in 2015 and 2016, which urged the SEC to “do no harm” with regard to the accredited investor definition. And, in the committee’s final meeting in 2017, the members advised against raising the individual income and net worth thresholds, which “would considerably decrease the number of households that qualify as accredited investors,” and have a disparate impact on areas with a lower cost of living (and, typically, lower venture capital activity), as well as on women and minority entrepreneurs. The committee expressed its support for “expanding the definition to take into account measures of sophistication, regardless of income or net worth, thereby expanding rather than contracting the pool of accredited investors. That said, simplicity and certainty are vital to the utility of any expanded definition of accredited investor, so any non-numerical criteria should generally be ascertainable with certainty.” (See this PubCo post.)

In a speech in August 2018, SEC Chair Jay Clayton discussed private capital-raising efforts, acknowledging that the current exemptive framework needed a comprehensive review “to ensure that the system, as a whole, is rational, accessible, and effective,” and indicated that the staff was working on a concept release that would attempt to harmonize the various exemptions. In that regard, he characterized the current framework as “an elaborate patchwork” that would not likely exist as it is if the SEC were starting with blank slate. In particular, he noted:

  • “We should evaluate the level of complexity of our current exemptive framework for issuers and investors alike, and consider whether changes should be made to rationalize and streamline the framework.
  • For example, do we have overlapping exemptions that create confusion for companies trying to navigate the most efficient path to raise capital?
  • Are there gaps in our framework that impact the ability of small businesses to raise capital at key stages of their business cycle?
  • “We also should consider whether current rules that limit who can invest in certain offerings should be expanded to focus on the sophistication of the investor, the amount of the investment, or other criteria rather than just the wealth of the investor.
  • “And we should take a look at whether more can be done to allow issuers to transition from one exemption to another and, ultimately, to a registered IPO, without undue friction.” (See this PubCo post.)

In a subsequent speech, Clayton noted that among the priority items on the 2019 agenda, Corp Fin was looking at harmonizing and streamlining the “patchwork” private offering system, including whether the accredited investor definition was still appropriate. (See this PubCo post.)

The press release identifies the following as highlights of the Concept Release:

“The Exempt Offering Framework Whether the Commission’s exempt offering framework, as a whole, is consistent, accessible, and effective for both companies and investors or whether the Commission should consider changes to simplify, improve, or harmonize the exempt offering framework.
“The Capital Raising Exemptions within the Framework Whether there should be any changes to improve, harmonize, or streamline any of the capital raising exemptions, specifically: the private placement exemption and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, the intrastate offering exemptions, and Regulation Crowdfunding.
“Potential Gaps in the Framework Whether there may be gaps in the Commission’s framework that may make it difficult, especially for smaller companies, to rely on an exemption from registration to raise capital at key stages of their business cycle.
“Investor Limitations Whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (i.e., whether the current levels of investor protection are insufficient, appropriate, or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities, including a discussion of the persons and companies that fall within the ‘accredited investor’ definition.
“Integration Whether the Commission can and should do more to allow companies to transition from one exempt offering to another and, ultimately, to a registered public offering, if desired, without undue friction or delay.
“Pooled Investment Funds Whether the Commission should take steps to facilitate capital formation in exempt offerings through pooled investment funds, including interval funds and other closed-end funds, and whether retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds in light of the potential advantages and risks of investing through such funds.
“Secondary Trading Whether the Commission should revise its rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity.”

[View source.]

DISCLAIMER: 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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