Lost in much of the COVID-19 news over the last two months has been proposed changes by the U.S. Securities and Exchange Commission ("SEC") to simplify and harmonize exempt offerings. On March 4, 2020, the SEC issued a press release detailing the proposed changes. Proponents of equity crowdfunding platforms see these changes as necessary to bring Reg CF to a broader market of individuals and help companies and projects find capital they need. Meanwhile many of the changes to other exempt offerings would bring welcome consistency among exemptions. Given the current economic uncertainty, these types of changes may be needed more than ever to increase available capital to companies.
The proposal would primarily:
1. Raise the offering limits for three different exempt offerings;
2. Remove statutorily imposed investment limitations for certain investors;
3. Shorten the integration safe harbor period from six months to 30 days, thus effectively collapsing different exemptions to the lowest common denominator for investor protection;
4. Reduce the disclosures required for non-accredited investors under Reg D;
5. Expand the use of test-the-waters communications across all exempt offerings and for all types of investors;
6. Expand the use of general solicitation overall; and
7. Weaken requirements for establishing whether an investor is accredited to little more than self-certification.
A detailed summary of the proposed changes are as follows:
Proposed amendments relating to current offerings and investment limits for certain exemptions:
For Regulation A ("Reg A"):
- Raise the maximum offering amount under Tier 2 of Reg A from $50 million to $75 million; and
- Raise the maximum offering amount for secondary sales under Tier 2 of Reg A from $15 million to $22.5 million.
For Regulation Crowdfunding ("Reg CF")
- Raise the offering limit in Reg CF from $1.07 million to $5 million;
- Amend the investment limits for investors in Reg CF offerings by:
- Not applying any investment limits to 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 limit on how much they can invest.
For Rule 504 of Regulation D (Reg D):
- Raise the maximum offering amount from $5 million to $10 million.
The Commission proposed several amendments relating to offering communications, including:
- A proposed new rule that would permit 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;
- A proposed rule amendment that would permit Reg CF issuers to “test-the-waters” prior to filing an offering document with the SEC in a manner similar to current Reg A; and
- A proposed new rule that would provide that certain “demo day” communications would not be deemed general solicitation or general advertising.
The Commission also proposed four non-exclusive safe harbors from integration
The first Safeharbor is for any offering made more than 30 days before the commencement of any other offering, or more than 30 days after the termination or completion of any other offering.
The second Safeharbor pertains to offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S.
The third Safeharbor pertains to an offering for which a Securities Act registration statement has been filed if made subsequent to:
(i) A terminated or completed offering for which general solicitation is not permitted;
(ii) A terminated or completed offering for which general solicitation is permitted and made only to qualified institutional buyers and institutional accredited investors; or
(iii) An offering that terminated or completed more than 30 calendar days prior to the commencement of the registered offering.
The final Safeharbor would apply to offers and sales made in reliance on an exemption for which general solicitation is permitted if made subsequent to any prior terminated or completed offering.
Other Improvements to Specific Exemptions
- Modify financial statement disclosures that must be provided to non-accredited investors in Rule 506(b) offerings to align with the financial information that issuers must provide to investors in Reg A offerings;
- Possible new verification method(s) under Rule 506(c). Currently Rule 506(c) permits general solicitation, but only if the issuer takes reasonable steps to verify that all those who invest are accredited. The proposal contains new guidance on verification under Rule 506(c), including the statement that “in some circumstances, the reasonable steps determination may not be substantially different from an issuer’s development of a ‘reasonable belief’ for Rule 506(b) purposes.” Interestingly the proposal retains a single footnote stating that it would not be enough to require an investor to check a box or sign a form to satisfy the verification requirement but the language in the text suggests that little more may be required.
- Simplify certain requirements for Reg A offerings and establish greater consistency between Reg A and registered offerings; and
- Harmonize the bad actor disqualification provisions in Reg D, Reg A, and Reg CF.
The public comment period for the proposed rule amendments were open for 60 days following publication of the release in the Federal Register.
SEC Proposes Rule Changes to Harmonize, Simplify and Improve the Exempt Offering Framework