SEC Proposes Changes to the Exempt Offering Framework

May 2020

On March 4th, the SEC issued a proposal to improve the exempt offering framework (framework) used by entities to raise capital. Because so many entities raise capital through the framework under the Securities Act, the proposed changes are meant to simplify and improve pieces of the framework while still protecting the investing public.
 
Comments on the proposal are due 60 days after the publication of the proposals in the Federal Register.
 
Proposed changes

All offers and sales of securities in the U.S. are required to be registered with the SEC unless one of several exemptions applies. Many of the exemptions are based on the characteristics of the securities being offered. Some of the more common type of exemptions are offerings under Regulation A and D and Crowdfunding under the Securities Act. The current exempt framework is considered complex and difficult to understand and apply by many companies. In June 2019, the SEC issued a concept release that solicited public comment on possible ways to simplify, harmonize, and improve the exempt offering framework under the Securities Act. The proposed changes are expected to:
  • Bring together the rules that allow issuers to move from one exemption to another, and ultimately to a registered offering
  • Increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits
  • Set clear and consistent rules on offering communications between investors and issuers, including permitting certain “demo day” activity that comply with the requirements on general solicitation; and
  • Synchronize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions
In addition, the integration framework for registered and exempt offerings includes both rules and SEC guidance for determining whether multiple securities transactions should be considered part of the same offering. The proposed changes to the framework would provide general principles of integration that for all offerings not covered by a safe harbor, offers and sales would not be integrated if based on the particular facts and circumstances of the offering the issuer can establish that each offering complies with the registration requirements of the Securities Act or that an exemption applies. Certain safe harbors from integration are also proposed.
 
A summary of the proposals follows:
Proposals Regulation A Regulation D1 Regulation Crowdfunding
Offering and
Investment
 Limits
Raise maximum offering amount Tier 2 from $50 million to $75 million and from $15 million to $22.5 million on secondary sales under Tier 2
 
Raise maximum offering amount from $5 million to $10 million
 
  • Raise offering limit from $1.07 million to $5 million
  • Investment limits will not apply to accredited investors and changes calculation for non-accredited investors
“Test-the-Waters”
and “Demo Day” Communications
Permit issuer to use generic solicitation of interest materials to determine which exemption to apply
and
Change to demo day communications
Demo day communications would not be considered general solicitation or advertising
 
Allow issuers to test the water, similar to Regulation A
and
Change to demo day communications
Eligibility
Restrictions
Exchange Act registrants that are delinquent in their reporting obligations are not eligible N/A – No changes proposed
 
Permit the use of certain special purpose vehicles to facilitate investing and limit type of securities offered and sold2


 









 

 

Contacts

 
Tim Kviz
National Assurance Managing Partner
Paula Hamric
National Assurance Partner 
   
Sheri Fabian
National Assurance Partner
 

 
1 Rule 504 of Regulation D of the Securities Act
2 Proposals for securities to be offered to be similar to those eligible to be offered under Regulation A such as equity or debt securities, securities convertible or exchangeable for equity interests or guarantees of and of those types of securities