On March 4, the Securities and Exchange Commission (the Commission) proposed a set of amendments to the rules and regulations under the Securities Act of 1933, as amended (the Securities Act), to simplify, harmonize and improve the regulation of private placements. In June 2019, the Commission issued a concept release that solicited public comments relating thereto. Informed by the comments received, as well as other feedback, the Commission’s proposed amendments are intended to reduce potential friction points to make the capital-raising process more effective and efficient to meet evolving market needs. The full text of the proposed amendments may be found here.
The proposed amendments would do the following:
- Address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital.
- Increase the offering limits for Regulation A, Regulation Crowdfunding and Rule 504 offerings, and revise certain individual investment limits based on the Commission’s experience with the rules, marketplace practices, capital-raising trends and comments received.
- Provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation.
- Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections.
The proposed amendments are summarized below:
Offering and Investment Limits. The Commission is proposing revisions to the current offering and investment limits for certain exemptions.
For Regulation A:
- Raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million.
- Raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.
For Regulation Crowdfunding:
- 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:
- not applying any investment limits to accredited investors
- revising the calculation method for investment limits for nonaccredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest
For Rule 504 of Regulation D:
- Raise the maximum offering amount from $5 million to $10 million.
“Test-the-Waters” and “Demo Day” Communications. The Commission is proposing several amendments relating to offering communications, including:
- A proposed new rule that would permit 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
- A proposed rule amendment that would permit Regulation Crowdfunding issuers to test the waters prior to filing an offering document with the Commission in a manner similar to current Regulation A
- A proposed new rule that would provide that certain “demo day” communications would not be deemed general solicitation or general advertising
Regulation A and Regulation Crowdfunding Eligibility. The proposal includes amendments to the eligibility restrictions in Regulation Crowdfunding and Regulation A. These proposed rules would permit the use of certain special-purpose vehicles to facilitate investing in Regulation Crowdfunding issuers, and would limit the types of securities that may be offered and sold in reliance on Regulation Crowdfunding.
Integration Framework. The current Securities Act integration framework for registered and exempt offerings consists of a mixture of rules and Commission guidance for determining whether multiple securities transactions should be considered part of the same offering.
The Commission is proposing changes to the framework to better facilitate this determination by providing a general principle of integration that looks to the particular facts and circumstances of the offering, and focuses the analysis on whether the issuer can establish either that each offering complies with the registration requirements of the Securities Act or that an exemption from registration is available for the particular offering.
The Commission also proposing four nonexclusive safe harbors from integration:
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.
Other Improvements to Specific Exemptions
The amendments also would do the following:
- Change the financial information that must be provided to nonaccredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings.
- Add a new item to the nonexclusive list of verification methods in Rule 506(c).
- Simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings.
- Harmonize the bad actor disqualification provisions in Regulation D, Regulation A and Regulation Crowdfunding.
The comment period for the proposal will remain open for 60 days following publication in the Federal Register.