The SEC proposed amendments to the Securities Act exemptive framework that would expand their availability and make it easier to raise money under those exemptions. The SEC would:
- raise permitted offering size thresholds for certain Regulation A offerings and for crowdfunding transactions;
- better codify and impose greater limits on the situations in which the SEC would "integrate" offerings, making it easier to effect a private placement without concern that the private placement would be deemed improper by virtue of the SEC deeming it to be part of another offering by the same issuer;
- permit the "testing of the waters" in connection with certain exempt offerings; and
- provide for an additional method of verifying a potential purchaser's status as an accredited investor under Rule 506(c) under the Securities Act.
As previously covered, the SEC issued a concept release after several exemptions from registration had been introduced, expanded or otherwise revised, and stated that U.S. capital markets would benefit from a comprehensive review of the design and scope of the framework. The SEC intended, through revisions to the exempt offering framework, to expand investment opportunities and promote capital formation while maintaining appropriate investor protections.
Regulation A and Regulation Crowdfunding Eligibility
According to the SEC, the proposed amendments would raise Tier 2 maximum offerings under Regulation A from $50 million to $75 million and, for secondary sales, from $15 million to $22.5 million. As to Regulation Crowdfunding, the offering limit would be raised from $1.07 million to $5 million. The SEC said the proposal would revise the regulations' eligibility restrictions by (i) allowing certain special purpose vehicles to be used when investing in Regulation Crowdfunding issuers and (ii) restricting the types of securities that can be offered under Regulation Crowdfunding.
The SEC proposed four non-exclusive safe harbors from a potential integration of securities offerings.
Rule 504 of Regulation D
The SEC highlighted several clarifications the proposal would make to rules regulating offering communications between issuers and investors, such as:
- allowing issuers to use the generic solicitation of interest material to "test the waters" for an exempt securities offering before they decide on an exemption to use for the sale of the securities;
- permitting Regulation Crowdfunding issuers to "test the waters" before submitting offering documents to the SEC consistent with Regulation A requirements; and
- excluding certain "demo day" communications from general solicitation or general advertising.
SEC Commissioner Allison Herren Lee criticized the proposal for (i) undercutting the prohibition against general solicitation, (ii) weakening the verification requirement under Rule 506(c) for issuers and (iii) proposing amendments that will impact the private market without adequate data.
SEC Commissioner Hester M. Peirce supported the proposal, stating that it removes "unnecessary friction" from the capital-raising process by harmonizing the exemptive offering framework.
SEC Chair Jay Clayton supported the proposal for taking steps to address an "overly complex, patchwork regulatory framework" and, in particular, facilitating greater access to capital for smaller issuers who are more likely to use exemptions to raise capital.
Commissioner Elad L. Roisman commended the proposal for (i) helping to facilitate private companies' transition to public companies and (ii) enabling issuers to raise money in the public markets at an earlier stage of growth."
Comments on the proposal must be submitted within 60 days of its publication in the Federal Register.
Commentary Steven Lofchie
Commissioner Lee's dissent to the proposal reflects the differing political philosophies of the Commissioners. Commissioner Lee appears more inclined to protect investors, and seems willing to make it more difficult for them to invest in private placements and for small issuers to raise money in private placements. Conversely, Chair Clayton and Commissioner Peirce seem more inclined to allow accredited investors to take the risks inherent in investing in smaller issues sold in private placements, and are more inclined to prioritize providing a means for small businesses to raise money by conducting a private offering. (Chair Clayton also points to the practical reality that most small companies will never be large enough to justify the costs of registering a securities offering with the SEC and becoming a registered issuer; i.e., raising money in private placements is their only path to the capital markets.)
Differences in the regulatory philosophy of the various commissioners have surfaced over a number of different issues, including additional disclosure as to environmental, social and governance (or "ESG") matters and the adoption of Regulation Best Interest. See, e.g., SEC Commissioners Issue Divergent Opinions on Proposed Changes to Issuer Disclosure Requirements and SEC Adopts "Retail Best Interest" Rulemaking Package.
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