SEC Amends Regulation A, Crowdfunding and Rule 504 Securities Exemptions
On November 2, 2020, the Securities and Exchange Commission (the “SEC”) adopted amendments to the rules for exempt offerings under the Securities Act of 1933, as amended (Securities Act). Among other changes, the amendments (collectively the “Amendments”): (1) establish a new integration framework for issuers to move from one securities offering exemption to another; (2) increase the current offering and investment limits for Regulation A Offerings, Regulation Crowdfunding – Regulation CF and Rule 504 offerings; and (3) amend “Test-the-Waters” and “Demo Day” offering communications rules. The Regulation A and Rule 504 Amendments will become effective 60 days after publication in the Federal Register, and the Regulation Crowdfunding amendments will be effective upon publication in the Federal Register.
Every offer and sale of securities must either be registered with the SEC or be exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The rules for SEC Registration and exempt offerings including private placements have evolved over the years through both SEC rulemaking and the action by Congress creating a complex and patchwork set of exemptions from SEC registration requirements. This has made compliance difficult for issuers seeking to raise capital particularly those quoted by the OTC Markets.
Regulation A, Regulation Crowdfunding and Rule 504 Offerings
The Amendments increase the offering and investment limits for Regulation A, Regulation CF and Rule 504 Offerings as follows:
- For Regulation A Offerings:
- raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million, and
- raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million
- Regulation CF Offerings:
- raise the offering limit from $1.07 million to $5 million;
- revise the investment limits for investors in such offerings by removing investment limits for accredited investors, and revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the investment limits; and
- extend the existing temporary relief for 18 months 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.
- Rule 504 of Regulation D:
- raise the maximum offering amount from $5 million to $10 million
“Test-the-Waters” and “Demo Day” Communications
The SEC Amendments make several changes relating to offering communications, including:
- permitting an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offering of securities before determining which exemption it will use for the sale of the securities;
- permitting Regulation Crowdfunding issuers to “test-the-waters” before filing an offering document with the SEC in a manner similar to existing Regulation A; and
- providing that certain “demo day” communications are not general solicitation or general advertising.
Regulation A and Crowdfunding Eligibility
The SEC Amendments permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers while limiting the types of securities a company may offer and sell in reliance on Regulation Crowdfunding. Additionally, the Amendments impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their reporting obligations under the Securities and Exchange Act of 1934.
The SEC’s Amended Integration Rules
Under the SEC’s integration rules, different offerings conducted in close proximity to one another may, based on the facts and circumstances, be considered a single offering for purposes of qualifying an exemption from registration under the Securities Act. These integration rules created significant challenges for issuers as new exemptions were created. The SEC’s Amendments to Regulation, Rule 501 and Crowdfunding establish a new integration framework for issuers conducting multiple securities offerings and analyzes whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act or that an exemption from SEC registration is available for the issuer’s offering.
The SEC Amendments provide four non-exclusive safe harbors from integration:
- A securities offering made more than 30 calendar days before the commencement of any other offering, or more than 30 calendar days after the termination or completion of any other offering, will not be integrated with another offering; provided that in the case where an exempt offering for which general solicitation is prohibited follows by 30 calendar days or more an offering that allows general solicitation, the issuer has a reasonable belief, based on the facts and circumstances, with respect to each purchaser in the exempt offering prohibiting general solicitation, that the issuer (or any person acting on the issuer’s behalf) either did not solicit such purchaser through the use of general solicitation or established a substantive relationship with such purchaser prior to the commencement of the exempt offering prohibiting general solicitation.
- Offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S will not be integrated with other offerings.
- Offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated with another offering if made after any prior terminated or completed offering.
- An offering for which a Securities Act registration statement has been filed will not be integrated with another offering if the offering is made after:
- a terminated or completed offering for which general solicitation is prohibited;
- a terminated or completed offering for which general solicitation is permitted that was made only to qualified institutional buyers and institutional accredited investors; or
- an offering for which general solicitation is permitted that was terminated or completed more than 30 calendar days prior to the commencement of the registered offering.
The Amendments also:
- change the financial information issuers must provide 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;
- add a new item to the non-exclusive list of verification methods in Rule 506(c);
- simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings; and
- harmonize the bad actor disqualification provisions in Regulation D, Regulation A and Regulation Crowdfunding.
By simplifying and clarifying the exempt offering process, the Amendments will reduce the time and compliance costs of Regulation A, Regulation Crowdfunding and Rule 504, making it easier for issuers to raise capital using these exemptions. However, companies should note that the final rule is within the lookback period of the Congressional Review Act. Consequentially, the outcome of the national election of November 3, 2020, could affect the final rule’s permanency.
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