On Tuesday, June 18, 2019, the SEC issued a Concept Release seeking comments on how to rationalize and simplify the framework governing exempt offerings in order to expand the opportunities for making investments while preserving appropriate investor protections.
The Concept Release describes the current framework for exempt securities offerings and examines several exemptions related to the facilitation of capital raising under the Securities Act of 1933. Many of the exemptions have been created piecemeal within the last ten years, particularly after the 2012 JOBS Act, and as a consequence, the resulting regulatory framework is often difficult to navigate even with the guidance of counsel.
Specifically, the SEC is seeking input on how to improve the effectiveness of the exemptions for both companies and investors alike, including identifying overlap or gaps in the regulations. Among the items on which the SEC is seeking comments are:
- The current exempt offering framework’s effectiveness with respect to both companies and investors, and whether the SEC needs to consider changes to streamline, improve and harmonize the rules and regulations.
- Potential changes to improve any of the capital raising exemptions, specifically, the private placement exemption, Rule 506, Regulation A, Rule 504, the intrastate offering exemptions, and Regulation Crowdfunding.
- Gaps in the SEC’s framework that cause challenges for smaller companies attempting to rely on exemptions to raise capital during key phases of their business cycle.
- Whether regulations intended to protect investors by limiting who can invest in certain exempt offerings provide the appropriate level of protection or cause unintentional obstacles by imposing undue burdens on attempts at capital formation and investor access to investment opportunities. This includes problems with the “accredited investor” definition with respect to the persons and companies that ultimately qualify, and whether the definition should consider how sophisticated the investor is rather than having merely a wealth related focus.
- Actions to allow for frictionless transitions for companies moving from one exempt offering to another, or to a registered public offering.
- Whether steps should be taken to facilitate capital formation in exempt offerings through pooled investment funds (including interval and other closed-end funds), and whether retail investors should be granted greater exposure to growth-stage companies considering the potential advantages and risks of such funds.
- Revisions to the rules governing exemptions for resales of securities in order to facilitate capital formation and promote investor protection by improving secondary market liquidity.
Potential changes to the current scheme of regulating exemptions come at a pivotal time because the market for private offerings continues to grow. SEC data shows that exempt offerings raised $2.9 trillion in 2018, compared to $1.4 trillion for registered offerings in the same time frame. As a result, non-accredited individuals are left with fewer investment opportunities, and with the current regulatory scheme, opportunities relating to capital formation remain unnecessarily strained.
The comment period will remain open for 90 days following publication of the Concept Release in the Federal Register.
 Link to the Concept Release can be found here: https://www.sec.gov/rules/concept/2019/33-10649.pdf