Earlier this month, the Securities and Exchange Commission amended certain rules related to the exempt offering framework in an effort to help small and medium-sized businesses facilitate capital raising. The amendments (adopted in substantially the form proposed in March) will harmonize, simplify, and improve what is actually the result of decades of layered-on rules and regulations. We believe this represents a workmanlike effort to simplify and make capital raising for smaller companies easier and more accessible.
- increasing offering limits for Regulation D, Regulation Crowdfunding and Regulation A;
- establishing a clearer integration framework allowing issuers to move between exemptions;
- clarifying rules on communications with investors; and
- relaxing eligibility requirements for investors.
These amendments, together with recent changes made by the SEC to expand the accredited investor definition (see the CFMB Client Alert dated September 1, 2020) and allow unregistered business brokers to assist issuers in raising funds from accredited investors are several steps taken the SEC to allow private companies, and often growing companies, more access to needed capital.
Increased Offering Limits
- Rule 504 – the twelve-month offering limit has been increased from $5 million to $10 million. This is a significant change, as Rule 504 may be used with accredited or non-accredited investors and has some strategic advantages over Rule 506 when it comes to an offering to non-accredited investors.
- Regulation Crowdfunding – the twelve-month offering limit has been increased from $1.07 million to $5 million; and the amendments also:
- removed individual investor limits for accredited investors in Regulation Crowdfunding offerings and allow non-accredited investors to use the greater of their annual income or net worth when calculating investment limits; and
- extended for 18 months the temporary relief from certain financial statement review requirements for offerings of $250,000 or less.
- Tier 2 of Regulation A – the twelve-month offering limit has been increased from $50 million to $75 million; additionally, the twelve-month offering limit for sales by existing affiliate security holders has been increased from $15 million to $22.5 million.
Offering Integration Safe Harbors
New Rule 152(a) establishes a new integration framework which provides a general principle that looks to the particular facts and circumstances of two or more offerings, and focuses the analysis on whether an issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration was available for each particular offering. New Rule 152(b) further establishes four non-exclusive safe harbors from integration, and provides that:
- most offerings commenced or concluded more than 30 calendar days apart from one another will not be integrated;
- Rule 701, employee benefit plan offerings or Regulation S compliant offerings will not be integrated with other offerings;
- certain offerings for which a Securities Act registration statement has been filed will not be integrated; and
- offerings for which general solicitation is permitted that occur subsequent to a completed or terminated offering will not be integrated.
“Test-the-Waters” and “Demo Day” Communications
Issuers in exempt offerings are subject to regulatory restrictions on communications to potential investors that can be expensive to comply with and which limit an issuer’s ability to reach investors. To address these issues, the SEC amended the rules to:
- permit an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offering of securities prior to determining which exemption it will use for the sale of the securities;
- permit Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the SEC in a manner similar to current Regulation A; and
- provide that certain “demo day” communications will not be deemed general solicitation or general advertising (see new Rule 148 for specifics on limitations with respect to such permissible communications).
Disclosure Eligibility Requirements and Bad Actor Disqualification Provisions
The final rule also amended certain items in Rule 506 of Regulation D. The amendments:
- change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings;
- clarify that an investor with respect to which an issuer previously took reasonable steps to verify as an accredited investor remains an accredited investor as of the time of a subsequent sale, so long as the investor provides a written representation that the investor continues to qualify as an accredited investor and the issuer is not aware of information to the contrary; and
- harmonize the “bad actor” disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding by using the same disqualification lookback period.
The amendments go into effect 60 days after publication in the Federal Register. The SEC press release may be accessed here. The final rule may be accessed here.
If you have any questions, please contact your CFMB lawyer or:
About Croke Fairchild Morgan & Beres
Croke Fairchild Morgan & Beres is a corporate law firm providing services to businesses, private equity and venture firms and their portfolio companies, public companies, founders and family offices. Formed by partners who worked at preeminent international law firms, the firm boasts a deep bench of sophisticated and experienced corporate lawyers. With offices in Chicago, Lake Forest, and Milwaukee, our team provides exceptional legal service while affording our clients the benefits of working with a small, agile, and driven law firm. For more information, please visit us online at crokefairchild.com.