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On November 2, 2020, the Securities and Exchange Commission (SEC) adopted amendments to its “patchwork” exempt offering framework in order to harmonize registration exemptions, eliminate complexities, and facilitate private-capital raising transactions. These amendments are part of the SEC’s ongoing efforts to simplify the exempt offering landscape while maintaining important investor protections. The SEC recently issued a final rule that broadened the definition of “accredited investor” to allow certain individuals and businesses greater access to the private capital markets. That change will become effective on December 8, 2020.

The evolution of the SEC’s exempt offering framework, which has developed piecemeal over the past 50 years, has resulted in greater access to private capital, but has become increasingly complex and unwieldy for issuers and investors alike. There are currently at least 10 different exemptions from registration. When viewed in isolation, each exemption is manageable, but when the entire exempt-offering is viewed as a whole, there are inefficiencies and uncertainties that make this landscape difficult to navigate. This is especially true for smaller issuers and retail investors, many of whom lack the resources to devote time and money to understanding this complex regulatory space, thereby limiting their access to private capital.

The amendments accomplish the following:

  • Establish a new integration framework that allows issuers to move from one exemption to another.
  • Increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investor limits.
  • Set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities.
  • Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions.

Integration Framework

The integration doctrine was developed to prevent issuers from avoiding registration by artificially dividing a single offering into multiple offerings that, when issued separately, qualify for an exemption from registration. To counter this attempt to avoid registration in simultaneous issuances, or issuances otherwise in close time proximity, the SEC developed an “integration framework” that consists of a mixture of rules and guidance for determining whether multiple securities transactions should be considered part of the same integrated offering. This framework has grown more complex over time as new exemptions have become available.  

New Rule 152 establishes a new integration framework that considers the facts and circumstances surrounding each offering. It requires an issuer to establish that each offering either complies with the registration requirements of the Securities Act of 1933 (Securities Act) or that an exemption is available for each offering. This new facts-and-circumstances analysis replaces the five-factor test that the SEC has used since 1962.

In making this determination for an exempt offering prohibiting general solicitation, an issuer must have a reasonable belief with respect to each purchaser that the issuer did not solicit the purchaser by general solicitation or that the issuer had a substantive relationship with the purchaser prior to the commencement of the offering.

In the case of two or more concurrent exempt offerings permitting general solicitation, in addition to satisfying the requirements of the exemption, if the general solicitation materials for one offering includes information about the material terms of another offering, that offering must comply with the requirements for the exemption being used by that other offering.

New Rule 152 also provides the following four non-exclusive safe harbors from integration:

  • 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), except in the case of an exempt offering for which general solicitation is prohibited following an offering that allows for general solicitation. In that case, the issuer must have 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 one of the following:
    • 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.
    • 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.
  • 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.

New Rule 152 also lists factors to consider in determining when an offering has commenced and when it has terminated.

Increased Offering and Investment Limits

Regulation A

The maximum offering amount under Tier 2 of Regulation A is increased from $50 million to $75 million in a 12-month period, and the maximum offering amount for secondary sales under Tier 2 is increased from $15 million to $22.5 million.

Regulation Crowdfunding                                                                                        

The amendments increase the offering limit in Regulation Crowdfunding from $1.07 million to $5 million, remove investment limits for accredited investors, and allow non-accredited investors to use the greater of their annual income or net worth when calculating investment limits. In addition, the amendments extend for an additional 18 months the temporary relief from certain financial statement review requirements for eligible issuers offering up to $250,000 of securities in reliance on Regulation Crowdfunding in a 12-month period. The temporary relief will now apply to offerings initiated under Regulation Crowdfunding between May 4, 2020 and August 28, 2022.

Rule 504 of Regulation D

The maximum offering amount under Rule 504 of Regulation D is increased from $5 million to $10 million.

Additional Permitted Communications

Demo Day Communication

New Rule 148 provides that certain communications at demo days will not constitute general solicitation or advertising. To obtain the benefit of the new rule, the communication must be made in connection with a seminar or meeting in which more than one issuer participates and the seminar or meeting must be sponsored by a college, university, or other institution of higher education, State or local government or instrumentality thereof, nonprofit organization, or angel investor group, incubator, or accelerator.

In addition, no advertisement for the event can reference a specific offering of securities by the issuer and the sponsor of the event cannot provide investment recommendations or advice to the attendees, engage in investment negotiations, charge fees other than a reasonable administrative fee, receive compensation for making introductions, or receive compensation that would require the sponsor to register as a broker-dealer under the Securities Exchange Act of 1934 or as an investment adviser under the Investment Advisers Act of 1940.

The communications that an issuer can make in reliance on the rule are limited to statements that the issuer is in the process of offering or planning to offer securities, the type and amount of securities being offered, the intended use of proceeds of the offering, and the unsubscribed amount in an offering.

Any attendee that participates in the event virtually must be a member or associated with the sponsor, an accredited investor, or an individual who has been invited to the event by the sponsor based on industry or investment-related experience reasonably selected by the sponsor in good faith and disclosed in the public communications about the event.

The adopting release for new Rule 148 emphasized that for demo days not satisfying the requirements of Rule 148, issuers can rely on the SEC’s prior guidance – an issuer will not be deemed to have engaged in general solicitation by participating in a demo day if the organizer of the event has limited participation in the event to individuals or groups of individuals with whom the issuer or the organizer has a pre-existing substantive relationship or that have been contacted through an informal, personal network of experienced, financially sophisticated individuals, such as angel investors.

“Test-the-Waters” Communications

New Rule 241 permits certain written and oral test-the-waters communications for exempt offerings if made prior to the time an issuer determines which registration exemption it will use for the offering. 

Any written communication under this new rule may include a means by which a person may indicate that such person is interested in a potential offering. However, no solicitation or acceptance of money or other consideration, nor of any commitment, binding or otherwise, from any person is permitted until the issuer makes a determination as to the exemption to be relied on and the offering, meeting the requirements of the exemption, is commenced.

Any communication under Rule 241 must state that:

  • The issuer is considering an offering of securities exempt from registration under the Securities Act, but has not determined a specific exemption from registration the issuer intends to rely on for the subsequent offer and sale of the securities.
  • No money or other consideration is being solicited, and if sent in response, will not be accepted.
  • No offer to buy the securities can be accepted and no part of the purchase price can be received until the issuer determines the exemption under which the offering is intended to be conducted and, where applicable, the filing, disclosure, or qualification requirements of such exemption are met.
  • A person’s indication of interest involves no obligation or commitment of any kind.

If an issuer commences a Regulation A or Regulation Crowdfunding offering within 30 days after making a test-the-waters communication under Rule 241, it must file the communication as an exhibit to the offering materials filed with the SEC. In addition, if an issuer sells securities to a purchaser who is a non-accredited investor under Rule 506(b) of Regulation D within 30 days of making a test-the-waters communication, that communication must be provided to that purchaser.

Regulation Crowdfunding Offering Communications

New Rule 206 of Regulation Crowdfunding permits test-the-waters communications before filing a Form C with the SEC in connection with a Regulation Crowdfunding offering. Any written communication under this rule may include a means by which a person may indicate to the issuer that such person is interested in a potential offering.

Any communications using Rule 206 must contain the following statements:

  • No money or other consideration is being solicited, and if sent in response, will not be accepted.
  • No offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed and only through an intermediary’s platform.
  • A person’s indication of interest involves no obligation or commitment of any kind.

In addition, existing Rule 204 of Regulation Crowdfunding has been amended to permit certain oral communications complying with the requirements of that Rule in an offering under Regulation Crowdfunding once a Form C is filed. Prior to the amendment, an issuer could only communicate with investors and potential investors about the terms of the offering through communication channels provided on the intermediary’s platform.

Other Improvements to Specific Exemptions

The amendments also:

  • Change the financial information that must be provided 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 accredited investor verification methods in Rule 506(c), permitting an issuer to rely on a purchaser’s self-certification if the issuer has previously verified the purchaser‘s accredited investor status within the prior five years and the issuer is not aware of information to the contrary.
  • Simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings.
  • Harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding.

The amendments will become effective 60 days after publication in the Federal Register, except for the extension of temporary relief under Regulation Crowdfunding, which will be effective upon publication in the Federal Register.