The Securities and Exchange Commission on March 5, 2020 proposed sweeping changes to the rules governing capital raising through private offerings and other offerings exempt from registration under the Securities Act. If adopted, these amendments, along with the previously proposed expanded definition of “accredited investor,” will be the most significant changes in the regulation of exempt offerings in many years, expanding opportunities for capital raising without registration. The SEC stated that the objective of the proposed rules is “to harmonize, simplify, and improve the exempt offering framework to promote capital formation and expand investment opportunities while preserving and enhancing important investor protections.” The proposal was approved by a 3 to 1 vote of the Commission, with the dissenting Commissioner believing that the changes would further erode the distinction between public and private markets and weaken investor protections. A Commissioner who voted for the proposal believed that it did not go far enough and suggested the possibility of deregulating “offers” entirely and streamlining the number of exemptions. The proposed rules will have a 60-day comment period following publication in the Federal Register.
Summary of the Changes
The following are some of the key changes being proposed:
- Offering limits. Increase the amount that may be offered under the three exemptions that currently are capped: (i) Regulation A Tier 2 primary offerings from $50 million to $75 million and secondary sales from $15 million to $22.5 million; (ii) Regulation Crowdfunding from $1.07 million to $5 million; and (iii) Regulation D Rule 504 from $5 million to $10 million.
- Investor limits. Loosen the investment limits for investors in Regulation Crowdfunding offerings by eliminating them for accredited investors and allowing non-accredited investors to rely on the greater of their annual income or net worth in calculating the limit.
- Offering communications. Ease the restrictions on offering communications resulting from the ban on “general solicitation” by permitting limited “test-the-waters” activity with any potential investors before deciding which exemption to use for sales, and also exempt “demo day” communications from being a general solicitation.
- Integration of offerings. Reduce the uncertainty and legal risk associated with the integration of otherwise separate offerings by establishing a general principle that no integration is required if each offering, based on its particular facts and circumstances, meets the requirements for an exemption or complies with the registration requirements, and provide several generally-applicable safe harbors: (1) offerings separated by 30 days (reduced from six months) that satisfy general solicitation limitations; (2) a Rule 701 and Regulation S firewall; (3) registered offerings made pursuant to a registration statement filed after termination or completion of certain other offerings, including one terminated or completed more than 30 days before; and (4) exempt offerings using permitted general solicitation made after other terminated or completed offerings.
- Other specific changes. Expand eligibility to use Regulation A and Regulation Crowdfunding; reduce the information requirements for non-accredited investors permitted in Rule 506(b) private offerings by aligning them with those for Regulation A offerings; add to the Rule 506(c) accredited investor verification safe harbor the ability to rely on self-certification by any previously verified accredited investor; and make more consistent across exemptions some common provisions, including bad actor disqualification.
Exempt Offering Alternatives Chart
For many years, we have co-authored a widely-used Alternatives to Registration Chart outlining the requirements for various exempt and other offerings not requiring full registration. The most recent version with the current requirements can be found at this link, with printing instructions at this link.
We have prepared a supplemental chart (available at this link) to show the proposed changes to the requirements for exempt offerings. Although we expect the SEC to move expeditiously to adopt amendments along the lines of the changes proposed, it remains to be seen what the final form of the changes, as well as those changing the definition of “accredited investor,” will be.