Private Offering Exemptions Expanded to Facilitate Capital Formation

03 November 2020 Publication
Authors: Peter D. Fetzer Stuart E. Fross Stephen M. Meli Margaret G. Nelson Thomas J. Krysa

On November 2, 2020, the Securities and Exchange Commission (SEC) voted to amend its rules in order to harmonize, simplify, and improve the multilayered and overly complex exempt offering framework.  The SEC believes the amendments will promote capital formation and expand investment opportunities while preserving or improving important investor protections.

The following are the highlights of the amendments as provided by the SEC, and here is the link to the SEC’s release.  The amendments will be effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register (the amendments have not yet been published in the Federal Register).

If you have questions, or want more detail regarding specific amendments, please talk to your trusted counselor at Foley & Lardner LLP.

Highlights

Integration Framework.  When issuers use various private offering exemptions in parallel or in close time proximity, questions can arise as to the need to view the offerings as “integrated” for purposes of analyzing compliance.  This need results from the fact that many exemptions have differing limitations and conditions on their use, including whether the general solicitation of investors is permitted. If exempt offerings with different requirements are structured separately but analyzed as one “integrated” offering, it is possible that the integrated offering will fail to meet all the applicable conditions and limitations. 

The amendments establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering.

The amendments additionally provide four nonexclusive safe harbors from integration providing that:

  • Any 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 such other offering(s); 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;
  • An offering for which a Securities Act registration statement has been filed will not be integrated if it is made subsequent to:
    • 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 will not be integrated if made subsequent to any terminated or completed offering.

Offering and Investment Limits.  The Commission is amending the current offering and investment limits for certain exemptions.

For Regulation A, the amendments: 

  • 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.

For Regulation Crowdfunding, the amendments: 

  • Raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
  • Amend the investment limits for investors in Regulation Crowdfunding offerings by:
    • Removing investment limits for accredited investors; and
    • Using the greater of their annual income or net worth when calculating the investment limits for nonaccredited investors; and
  • Extend for 18 months the existing temporary relief 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.

For Rule 504 of Regulation D, the amendments: 

  • Raise the maximum offering amount from $5 million to $10 million.

“Test-the-Waters” and “Demo Day” Communications.  The Commission is amending offering communications rules by:

  • Permitting an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities;
  • Permitting Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A; and
  • Providing that certain “demo day” communications will not be deemed general solicitation or general advertising.

Regulation Crowdfunding and Regulation A Eligibility.  The amendments establish rules that permit the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers.  The amendments additionally impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations.

Other Improvements to Specific Exemptions.  The amendments also:

  • Change the financial information that must be provided to nonaccredited 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 nonexclusive 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.

Overview of Amended Capital-Raising Exemptions


Type of Offering Offering Limit within 12-month Period General Solicitation   Issuer Requirements Investor Requirements SEC Filing or Disclosure Requirements  Restrictions on Resale  Preemption of State Registration and Qualification
Section 4(a)(2)  None  No None  Transactions by an issuer not involving any public offering.  See SEC v. Ralston Purina Co.  None Yes. Restricted securities  No 
Rule 506 (b) of
Regulation D
 None No  “Bad actor” disqualifications apply Unlimited accredited investors

Up to 35 sophisticated but nonaccredited investors in a 90 day period
 
Form D

Aligned disclosure requirements for nonaccredited investors with Regulation A offerings
 
Yes. Restricted securities  Yes
Rule 506(c) of
Regulation D
 None Yes  “Bad actor” disqualifications apply Unlimited accredited investors

Issuer must take reasonable steps To verify that all purchasers are accredited investors
 Form D Yes. Restricted securities  Yes
Regulation A: Tier 1  $20 million Permitted; before qualification, testing-the-waters permitted before and after the offering statement is filed U.S. or Canadian issuers

Excludes blank check companies,* registered investment companies, business development companies, issuers of certain securities, certain issuers subject to a Section 12(j) order, and Regulation A and reporting issuers that have not filed certain required reports

“Bad actor” disqualifications apply

No asset-backed securities
 
 None Form 1 A, including two years of financial statements

Exit report
 
 No No 
Regulation A: Tier 2 $75 million  As above  As above Nonaccredited investors are subject to investment limits based on the greater of annual income and net worth, unless securities will be listed on a national securities exchange

Form 1 A, including two years of audited financial statements

Annual, semi-annual, current, and exit reports

 No Yes 
Rule 504 of
Regulation D
 
 $10 million Permitted in limited circumstances Excludes blank check companies, Exchange Act reporting companies, and investment companies

“Bad actor” disqualifications apply
 
 None Form D  Yes.  Restricted securities except in limited circumstances  No
Regulation 
Crowdfunding; Section 4(a)(6)
 
 $5 million

Testing the waters permitted before Form C is filed

Permitted with limits on advertising after Form C is filed

Offering must be conducted on an internet platform through a registered intermediary

 

Excludes non-U.S. issuers, blank check companies, Exchange Act reporting companies, and investment companies

“Bad actor” disqualifications apply

 

No investment limits for accredited investors

Non-accredited investors are subject to investment limits based on the greater of annual income and net worth

 

Form C, including two years of financial statements that are certified, reviewed or audited, as required

Progress and annual reports

 
12-month resale limitations  Yes
Intrastate: Section 3(a)(11) No federal limit (generally, individual state limits between $1 and $5 million) Offerees must be in-state residents. In-state residents “doing business” and incorporated in-state; excludes registered investment companies Offerees and purchasers must be in-state residents  None Securities must come to rest with in-state residents  No
 Intrastate:   Rule 147 No federal limit (generally, individual state limits between $1 and $5 million) Offerees must be in-state residents. In-state residents “doing business” and incorporated in-state; excludes registered investment companies Offerees and purchasers must be in-state residents  None Yes.  Resales must be within state for six months  No
 Intrastate:       Rule 147A No federal limit (generally, individual state limits between $1 and $5 million)  Yes In-state residents and “doing business” in-state; excludes registered investment companies Purchasers must be in-state residents  None Yes. Resales must be within state for six months  No