November 5, 2020
On November 2, 2020, the Securities and Exchange Commission (SEC) voted to adopt broad revisions to the private placement regime under the Securities Act of 1933, as amended (Securities Act). Among other changes, the amendments (1) establish a new integration framework for issuers to move from one exemption to another; (2) increase the current offering and investment limits for Regulation A, Regulation Crowdfunding and Rule 504 offerings; and (3) amend “Test-the-Waters” and “Demo Day” offering communications rules (collectively, the Amendments). The Amendments will become effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register.
Overview
It is axiomatic that every offering of securities must either be registered with the SEC or be exempt from such registration. To keep pace with long-term developments in the capital markets, the rules for conducting private placements have evolved organically over many decades via SEC rulemaking and through direct action by Congress. Over time, this regulatory regime has evolved into a complex, multi-level, “patchwork” system of exemptions. As a result, the current exempt offering framework is often difficult for issuers of securities (particularly smaller enterprises) to understand and navigate. The Amendments will reduce the expense and complexity associated with private placements, making it easier for issuers to access capital through a private offering.
Integration Framework
Under the SEC’s integration doctrine, two offerings conducted in close proximity to one another may, based on the facts and circumstances, be collapsed into a single offering for purposes of assessing whether a private placement exemption is available. The current integration framework for determining whether multiple securities transactions made within a short period of time should be considered part of the same offering (i.e., “integrated”) for compliance purposes, derives from a series of SEC rules, formal and informal SEC guidance issued over many years, and certain market practices that have developed over time. Notwithstanding the large body of available guidance, many grey areas remain, and even seasoned securities practitioners sometimes encounter challenges in interpreting the SEC’s pronouncements on the subject. The Amendments establish a new integration framework that more clearly looks to the facts and circumstances of multiple offerings and analyzes 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.
Additionally, the Amendments provide four non-exclusive safe harbors from integration:
Safe Harbor 1 |
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 another offering; provided that in the case where an exempt offering for which general solicitation is prohibited follows by 30 calendar days or more an offering that allows general solicitation, the issuer has 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. |
Safe Harbor 2 |
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. |
Safe Harbor 3 |
An offering for which a Securities Act registration statement has been filed will not be integrated with another offering if the offering is made after:
|
Safe Harbor 4 |
Offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated with another offering if made after any prior terminated or completed offering. |
Offering and Investment Limits
The Amendments increase the offering and investment limits for certain exempt offerings.
“Test-the-Waters” and “Demo Day” Communications
The Amendments make several changes relating to offering communications, including:
Regulation A and Crowdfunding Eligibility
The Amendments permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers while limiting the types of securities a company may offer and sell in reliance on Regulation Crowdfunding. Additionally, the Amendments impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their reporting obligations under the Securities and Exchange Act of 1934.
Other Improvements to the Exempt Offering Framework
The Amendments also:
Final Thoughts
By simplifying the exempt offering framework, the Amendments will reduce the time and cost associated with private placements, making it easier for entrepreneurs and smaller enterprises to complete a private offering and raise capital in the United States. However, companies should note that the final rule is within the lookback period of the Congressional Review Act. Consequentially, the outcome of the national election of November 3, 2020, could affect the final rule’s permanency.