On November 2, the SEC adopted amendments designed to harmonize and simplify the existing, complicated framework of private offering exemptions—the primary method by which private companies raise capital. The amendments incorporate feedback received by the SEC following its June 2019 concept release and March 2020 proposing release on the topic, as well as other feedback, including recommendations of the Commission’s advisory committees and the SEC’s Government-Business Forum on Small Business Capital Formation. SEC Chairman Jay Clayton stated that the amendments address “inefficiencies in the context of a more rational framework that will facilitate capital formation for small and medium-sized businesses and benefit investors for years to come.”
Emerging companies often use the exempt offering framework under the Securities Act to raise capital for a new business or to fund their businesses’ growth. These exempt offerings are often a critical step in the company’s growth, and since the framework of exemptions has evolved piecemeal over multiple legislative and regulatory amendments, navigating the complex exempt offering framework has been challenging for private companies.
In general, the amendments:
Concerns about integration of private offerings arise when a company is using more than one private offering exemption in parallel (or in close time proximity). Because different exemptions have different compliance requirements, if the two offerings were to be “integrated,” they could fail to satisfy all the requirements for the exemption and compromise the company’s exemption from the registration requirements of the Securities Act.
The amendments establish a new integration framework that provides a general principle-based approach that looks to the particular facts and circumstances of two or more offerings, replacing a traditional five-factor test first articulated by the SEC in 1962. The offerings would not be integrated based on the analysis of whether the company 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 offering. In addition to the principle-based approach, the amendments also provide four non-exclusive safe harbors from integration.
The SEC is amending the current offering and investment limits for certain exemptions.
The amendments address some long-standing issues presented with the meaning of “general solicitation” and its application to certain events, including “testing-the-waters” activities and “demo days” by:
The amendments establish rules permitting the use of certain special purpose vehicles functioning as a channel for investors to facilitate investing in Regulation Crowdfunding companies. The amendments also impose eligibility restrictions on the use of Regulation A by companies that are delinquent in their Exchange Act reporting obligations.
The amendments also harmonize certain provisions between exemptions by:
The final amendments will become effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register.