On Nov. 2, 2020, the Securities and Exchange Commission (“SEC”) approved rule amendments “to harmonize, simplify, and improve the multilayer and overly complex exempt offering framework.” The SEC believes the amendments will make it easier for companies to raise capital and will expand available investment opportunities for investors. The amendments impact securities offering under Regulation A, Regulation Crowdfunding and Regulation D, among others exemptions, and would be of interest to those engaged in exempt securities offerings. The amendments will become effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions described below, which will be effective upon publication in the Federal Register.
We have summarized below the most important aspects of the amendments. For further information, please refer to our comprehensive summary of the amendments available here, and the final rule available here.
Amendments to Regulation A
- Increased the maximum offering amount from $50 million to $75 million for primary offerings and from $15 million to $22.5 million for resale offering.
- Added a requirement that issuers subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934 must have filed all required Exchange Act reports for the past two years to be eligible to conduct a Regulation A offering.
- Simplified certain requirements of Regulation A and established greater consistency between Regulation A and registered offering related to redaction of confidential information in exhibits, public release of prior non-public materials, incorporation by reference of previously filed financial statements, and declaration of abandonment of post-qualification offering statement amendments.
- Changed the bad actor lookback period (other than for beneficial owners) by starting it from the time of sale, as opposed to the time of filing of the applicable offering statements.
Amendments to Regulation Crowdfunding
- Increased the maximum offering amount from $1.07 million to $5 million.
- Removed investment limits for accredited investors.
- Changed the calculation of the investment limit for non-accredited investors by allowing use of the greater of their annual income or net worth.
- Created new Rule 3a-9 under the Investment Company Act of 1940 permitting issuers in Regulation Crowdfunding offerings to form “crowdfunding vehicles” meeting certain requirements to serve as conduits for investments in the offering.
- Added a provision permitting oral or written test-the-waters communications before filing a Form C with the SEC in a manner similar to current rules applicable to Regulation A offerings.
- Added a provision permitting oral communication with prospective investors after filing of Form C so long as the communications comply with Regulation Crowdfunding Rule 204.
- Extended for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period. The temporary relief applies to offerings conducted between May 4, 2020, and August 28, 2022, and expires on March 1, 2023.
- Changed the bad actor lookback period (other than for beneficial owners) by starting it from the time of sale, as opposed to the time of filing of the applicable offering statements.
Amendments to Regulation D
- Raised the maximum offering amount under Rule 504 from $5 million to $10 million.
- Changed the financial information that must be provided to non-accredited investors under Rule 506(b) to be identical to that required in a Regulation A offering.
- Amended Rule 506(b)(2)(i) to provide that an issuer may include no more than 35 non-accredited investors in offerings under Rule 506(b) in any 90-calendar day period.
- Added a new non-exclusive verification method under Rule 506(c) permitting an issuer to establish that an investor the issuer previously took reasonable steps to verify as an accredited investor remains an accredited investor at the time of a subsequent sale if the issuer receives a written representation from the investor to that effect and the issuer is not aware of any information to the contrary.
Amendments to Securities Act Integration Framework
- Replaced the existing patchwork of integration rules and guidance with new Rule 152 composed of a general principle of integration and four safe harbors applicable to all Securities Act securities offerings.
- The general principle provides that, if none of the safe harbors applies, offers and sales in two or more offerings will not be integrated if, based on the particular facts and circumstances, the issuer 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.
- With respect to exempt offerings prohibiting general solicitation and each purchaser therein, the issuer must have a reasonable belief that the issuer (i) did not solicit such purchaser through the use of general solicitation; or (ii) established a substantive relationship with such purchaser before the offering commenced (the “Non-General Solicitation Test”).
- With respect to concurrent exempt offerings that each allow general solicitation, offering materials for one offering that include information about the material terms of a concurrent offering under another exemption may constitute an offer of the securities in such other offering, and therefore the offering materials must comply with all the requirements for, and restrictions on, offers under the exemption being relied on for such other offering.
- Safe harbor 1 provides that offerings separated by more than 30 days are not integrated but that an exempt offering that does not permit general solicitation that follows more than 30 days after an offering that permits general solicitation will be analyzed under the Non-General Solicitation Test.
- Safe harbor 2 provides that offers in compliance with Rule 701 or Regulation S will not be integrated with other offerings.
- Safe harbor 3 provides that a registered offering will not be integrated with (i) terminated or completed offerings that did not permit general solicitation, (ii) terminated or completed offerings that permitted general solicitation made only to qualified institutional buyers and institutional accredited investors, and (iii) an offering that permitted general solicitation that terminated or was completed more than 30 calendar days before the commencement of the registered offering.
- Safe harbor 4 provides that offerings permitting general solicitation will not be integrated if made after any terminated or completed offering.
Amendments to Offering Communication Rules
- Created new Rule 148 providing that certain “demo day” communications will not be deemed general solicitation or general advertising.
- Created new Rule 241 permitting an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offering before determining which exemption it will use for the sale of the securities.
- See description of amendments regarding the use of “test-the-waters” communications and oral communications with prospective investors in Regulation Crowdfunding offerings described above.
Several of the amendments should have a practical positive impact on capital formation efforts. The increased offering limits under Rule 504 and Regulation Crowdfunding, and the other amendments to Regulation Crowdfunding, should make both offering types more attractive to issuers. Further, the new offering communication rules will allow issuers greater flexibility to gauge interest in a planned securities offering and seek feedback on terms, structure and related matters before launch, which should save both time and money for issuers. Lastly, the new integration framework is a welcome harmonization and update of the current complex patchwork of rules and guidance to reflect current market realities. The integration safe harbors will create certainty for issuers generally, and the reduction of the current six-month integration period under Regulation D to 30 days will create greater flexibility for issuers.