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.
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:
Offering and Investment Limits. The Commission is amending the current offering and investment limits for certain exemptions.
“Test-the-Waters” and “Demo Day” Communications. The Commission is amending offering communications rules by:
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:
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 |