On November 2, 2020, the Securities and Exchange Commission (SEC) adopted amendments to the current offering and investment limits for certain exemptions from the registration requirements of the Securities Act of 1933. Most notably, these amendments increase the offering limits for Regulation A, Regulation Crowdfunding and Rule 504 offerings. They also revise certain individual investment limits. Amendments were also made to modernize the doctrine of integration, “test-the-waters” communication rules and Regulation A eligibility requirements, among other changes that we described below.
Following the expansion of the definition of accredited investor this past August, these amendments are the latest in a series of measures by the SEC aimed at expanding and strengthening the private markets. For example, the maximum offering amount under Tier 2 of Regulation A will increase from $50 million to $75 million and the maximum offering amount for secondary sales under Tier 2 of Regulation A will increase from $15 million to $22.5 million. The $20 million maximum offering amount for Tier 1 offerings under Regulation A remains unchanged. The SEC also raised the maximum offering amount from $5 million to $10 million for intrastate private securities offerings, also known as Rule 504 offerings, under the Regulation D exemption for private securities offerings. Regulation Crowdfunding allows certain eligible companies to offer and sell securities through “crowdfunding”, which is a method of raising money via the Internet that is often used by startups and emerging businesses. The maximum amount of funds that a company may raise through Regulation Crowdfunding was increased to $5 million from $1.07 million prior to these amendments. These amendments also extend for 18 months the existing temporary relief that provides an exemption from review of financial statements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period.
Additionally, these amendments revise the doctrine of integration under which issuers may not improperly avoid registration under the Securities Act by dividing a single offering into multiple offerings, so that the multiple offerings could each benefit from registration exemptions that would not otherwise be available for the single offering. Under revised Rule 152, the integration assessment would shift from a traditional five-factor test to a principles based analysis that looks to the particular facts and circumstances of each offering to determine if the offers and sales should be integrated. This revised rule 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 SEC’s amendments to the doctrine of integration also provide four new safe harbors that issuers can rely upon to avoid registration. Pursuant to these new safe harbor provisions, (i) companies will be allowed to conduct exempt offerings within as little as 30 days of one another instead of the previous requirement of waiting at least six months; (ii) certain offers and sales made pursuant to an employee benefit plan or in compliance with Regulation S will not be integrated with other offerings; (iii) an offering for which a Securities Act registration statement has been filed will not be integrated if it is made subsequent to certain terminated or completed offerings; and (iv) 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.
The amendments also establish the following changes:
- Offering communication rules will now permit an issuer to use generic solicitation of interest materials to “test-the-waters” for exempt offerings prior to determining which exemption applies to the sale of securities.
- Issuers using Regulation Crowdfunding to raise capital will now also be allowed to “test-the-waters” prior to filing an offering document.
- Certain communications at “demo days”, which are events generally organized by a group or entity that invites issuers to present their businesses to potential investors with the aim of securing investments, will not be deemed general solicitation or advertising.
- The use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers will now be permitted.
- New eligibility restrictions will now be imposed on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations.
Except for the extension of the temporary Regulation Crowdfunding provisions, which will become effective upon publication in the Federal Register, the SEC amendments approved on November 2, 2020, will become effective 60 days after publication in the Federal Register.
For a copy of the SEC press release pertaining to these rule amendments, please see: https://www.sec.gov/news/press-release/2020-273
If you have any questions about the foregoing or any other capital markets related issues, please contact your primary relationship attorney at Seward & Kissel LLP.