In an effort to facilitate capital formation and increase opportunities for investors by expanding access to capital for small and medium-sized businesses, on November 2, 2020, the SEC announced that it had approved amendments to certain of its rules relating to exempt offerings. The amendments follow the SEC's June 2019 concept release and the SEC's March 2020 proposing release on the harmonization of offering exemptions and reflect the SEC's ongoing effort to harmonize, simplify and improve its offering framework. As discussed in our prior Monitor post (available here), the SEC has been working to untangle the current regulatory regime in order to ensure that capital-raising is rational, accessible and effective.
With minor exceptions, the final rules (available here) will be effective 60 days after publication in the Federal Register (i.e., likely February or March 2021).
Summary:
The amendments alter the existing regulatory landscape in the following ways, among others:
- establish a new framework for analyzing the integration of multiple offerings, and allow a registrant to avoid integration if it fits within one of five new safe harbors or, if the issuer can establish, based on the particular facts and circumstances of that offering, each offering either complies with the registration requirements of the Securities Act or is exempt from registration;
- raise the maximum offering amount for offerings under Tier 2 of Regulation A, Regulation Crowdfunding and Rule 504 of Regulation D;
- ease the restrictions on private offering communications rules; and
- adjust investor eligibility requirements under Regulation Crowdfunding and Regulation A by:
- permitting the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers; and
- imposing restrictions on eligibility under Regulation A for issuers that are delinquent in their reporting obligations under the Securities Exchange Act of 1934.
Changes to Integration Framwork:
The change to the framework for integrating multiple offerings is likely to be the most significant change enacted by the amendments. The new framework simplifies the SEC's integration doctrine by specifying a “facts and circumstances" method for evaluating the connection between multiple offerings. The amendments also provide four non-exclusive safe harbors from integration, which protect:
- offerings made more than 30 calendar days before the commencement of another separate offering or more than 30 days after the completion of the separate offering;
- offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S;
- offerings for which a Securities Act registration statement has been filed, if such offer is made after:
- a terminated or completed offering for which general solicitation is not permitted;
- 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 terminated or was completed more than 30 calendar days prior to the commencement of the registered offering; and
- offers and sales made in reliance on an exemption for which general solicitation is permitted if made subsequent to any terminated or completed offering.
Commissioner Hester M. Peirce, in her statement regarding the amendments (available here), praised the revised integration framework for streamlining the integration doctrine, thereby reducing uncertainty from the offering process. We note that it is unclear how the SEC will apply its “fact and circumstances" framework for offerings outside of the safe harbors. We encourage issuers to continue to monitor the SEC's actions and contact Gibson Dunn's Capital Markets and Securities Regulation and Corporate Governance teams to discuss specific questions as they arise.
Changes to Offering and Investment Limits:
The amendments also increase the offering and investment limits for offerings under Regulation A, Regulation Crowdfunding and Rule 504 of Regulation D, including, in particular, the following changes:
- Regulation A – the following maximum offering amounts were increased:
- Tier 2 offerings: from $50 million to $75 million; and
- Tier 2 secondary sales: from $15 million to $22.5 million.
- Regulation Crowdfunding – the following changes were implemented:
- offering limit raised from $1.07 million to $5 million;
- investment limit for accredited investors was removed; and
- investment limit for non-accredited investor is now calculated using the greater of annual income or net worth.
- Rule 504 of Regulation D:
- maximum offering amount raised from $5 million to $10 million.
Changes to Communication Rules:
Chairman Jay Clayton, in his statement at the open meeting (available
here), emphasized that the SEC is focused on modernizing its communication rules, stating that the rules should reflect the more efficient methods of communications that have been adopted by the markets. The amendments broaden communications rules in exempt offerings by:
- permitting an issuer to use general solicitation to “test-the-waters" for exempt offerings;
- permitting Regulation Crowdfunding issuers to “test-the-waters" prior to filing an offering document with the SEC; and
- providing that certain “demo day" communications will not be deemed general solicitation or general advertising.
The Dissent:
In yet another split 3-2 vote, Commissioners Caroline A. Crenshaw and Allison Herren Lee dissented. Commissioner Crenshaw, in her dissenting statement (available here), noted that, by making private markets more accessible, the SEC has inadvertently put retail investors and smaller businesses at greater risk. She expressed concern about retail investors' lack of power in private markets, as a result of which such investors may be unable to negotiate for access to information that larger investors can access, while also not having the capital to bear the losses that come with speculative investments.
Commissioner Lee, in her dissenting statement (available here), criticized the revised integration framework because it “effectively rendered the [integration] doctrine hollow but for a requirement to wait 30 days between offerings." Commissioner Lee also questioned the benefits of the new communications rules, claiming that the permissiveness of those rules, when coupled with the changes to the integration framework, effectively blur the line between public and private markets, making it harder for regulators to police private offerings.
We would like to thank Rodrigo Surcan in our New York office and William Bald in our Houston office for their work on this article.