On November 2, 2020, the Securities and Exchange Commission voted to harmonize, simplify, and improve the current tangled framework for exempt securities offerings, a move intended to promote capital formation and expand investment opportunities while preserving or improving important investor protections.
Under SEC requirements, all securities offerings must be either registered with the SEC or qualify for an exemption from registration. The registration process generally is designed for larger companies with substantial resources. As a result, most entrepreneurs and emerging businesses raise capital by selling securities in reliance on an offering exemption, such as Regulation D, Regulation A, or Regulation CF (Crowdfunding). This important capital formation activity ranges from raising seed capital for new businesses to growth capital for companies of all sizes. The SEC has estimated that approximately $2.7 trillion of new capital was raised through exempt offering channels in 2019, of which approximately $1.3 billion (0.05 percent) was raised under Regulation A, Regulation Crowdfunding, and Rule 504 combined.
In many cases, businesses, particularly smaller businesses, have found the framework for exempt offerings confusing and difficult to navigate. Each exemption has its own specific requirements to be met, which can be inconsistent among offering exemptions available. In some cases, choosing to pursue one exemption path makes it more difficult to switch to other options.
When issuers use various private offering exemptions in parallel or in close time proximity, questions can arise as to the need to view the offerings as “integrated” for purposes of analyzing compliance. Integration means multiple offerings will be treated together as one offering for purposes of securities regulation. The integration doctrine seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that Securities Act exemptions would apply to the multiple offerings that would not be available for the combined offering. Issues can arise from the fact that many exemptions have differing limitations and conditions on their use, including whether the general solicitation (public advertising) for investors is permitted. For example, if an issuer starts by conducting an offering that is designed to meet the requirements for a specific exemption, but shortly after decides to change the offering to meet the requirements for a different specific exemption, and the requirements for the two exemptions are incompatible (for example, allowing for public advertising or not), the offerings when considered on a combined basis may be in violation of securities law.
The amendments provide four non-exclusive safe harbors from integration providing that:
Increased Maximum Offering Amounts
Many offering exemptions are characterized by a maximum offering limit. The new amendments increase many of these limits:
Rule 504 of Regulation D:
The SEC is amending offering communications rules, by:
The amendments also:
The Amendments will be effective 60 days after publication in the Federal Register.
Up to 35 sophisticated but non-accredited investors in a 90 day period
Aligned disclosure requirements for non-accredited investors with Regulation A offerings
Issuer must take reasonable steps to verify that all purchasers are accredited investors
Excludes blank check companies,* registered investment companies, business development companies, issuers of certain securities, certain issuers subject to a Section 12(j) order, and Regulation A and reporting issuers that have not filed certain required reports
“Bad actor” disqualifications apply
No asset-backed securities
Form 1‑A, including two years of audited financial statements
Annual, semi-annual, current, and exit reports
Permitted with limits on advertising after Form C is filed
Offering must be conducted on an internet platform through a registered intermediary
Non-accredited investors are subject to investment limits based on the greater of annual income and net worth
Progress and annual reports