The US Security Exchange Commission (SEC) has finally reached a decision to implement proposed amendments to the exempt offerings framework. These changes have been advocated by numerous groups over the last few years to increase activity and interest in these progressive regulations, particularly by larger and more established investment dealers.
As stated by the Commision Chairman, Jay Clayton, these amendments will “harmonize, simplify and improve various structural and procedural aspects of our exempt offering framework.The new framework will do away with the existing, needlessly complicated patchwork of regulations, improving access to capital and opening new opportunities to investors”.
The more notable rule changes are the cap increases to Reg CF (from $1.07 million to $5 million),Tier II of Reg A+ (from $50 million to $75 million), and Rule 504 of Reg D (from $5 million to $10 million). The change to Reg CF is particularly significant as the attractive solicitation possibilities of Reg CF has been hindered by the low threshold of $1 million raises.
Apart from cap increases, the Commission also adopted “testing the waters” activities that will now allow generic solicitation of interest for an exempt offer of securities before it has been decided which exemption will be used for the sale. This is a powerful capability to establish investment interest and investor allocation levels before committing to the legal process of creating a subscription document.
The SEC has been clear that it has tried to balance the ease of capital formation while preserving or enhancing important investor protections.
Highlights from the SEC Fact Sheet:
The amendments generally:
- Establish more clearly, in one broadly applicable rule, the ability of issuers to move from one exemption to another;
Katipult Note: This provides firms the ability to assess and select the most appropriate framework to complete a financing. It removes the friction that previously existed to change frameworks.
- Increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits;
Katipult Note: The increase in capital raise limits allows more money to be raised than previously which drives down the costs of the administration but also opens the frameworks to a larger pool of issuers.
- Set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities; and
Katipult Note: Relaxing the solicitation rules allows for easier and better marketing to find appropriate investors for deals, while providing greater access to capital.
- Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions.
Katipult Note: Better standardization to adhere to compliance provides firms the ability to create internal workflows and processes to be more nimble and flexible between capital raises.
The following descriptions are excerpts from the SEC Fact Sheet from Nov 2, 2020
When issuers use various private offering exemptions in parallel or in close time proximity, questions can arise as to the need to view the offerings as “integrated” for purposes of analyzing compliance. This need results from the fact that many exemptions have differing limitations and conditions on their use, including whether the general solicitation of investors is permitted. If exempt offerings with different requirements are structured separately but analyzed as one “integrated” offering, it is possible that the integrated offering will fail to meet all the applicable conditions and limitations.
The amendments establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings, and 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 amendments additionally provide four non-exclusive safe harbors from integration providing that:
- 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); 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;
- 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 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, or
- 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; and
- 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.
Offering and Investment Limits
The Commission is amending the current offering and investment limits for certain exemptions.
For Regulation A, the amendments:
- Raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
- Raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.
For Regulation Crowdfunding, the amendments:
- Raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
- Amend the investment limits for investors in Regulation Crowdfunding offerings by:
- Removing investment limits for accredited investors; and
- Using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors; and
- Extend for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period.
For Rule 504 of Regulation D, the amendments:
- Raise the maximum offering amount from $5 million to $10 million.
“Test-the-Waters” and “Demo Day” Communications. The Commission is amending offering communications rules, by:
- Permitting an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities;
- Permitting Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A; and
- Providing that certain “demo day” communications will not be deemed general solicitation or general advertising.
Regulation Crowdfunding and Regulation A Eligibility
The amendments establish rules that permit the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers. The amendments additionally impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations.
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 verification methods in Rule 506(c);
- Simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings; and
- Harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding.
How Katipult Can Help You Leverage the Proposed SEC Changes
If your firm is looking at digital transformation to streamline deal flow and provide a modern investor experience, Katipult can work as your technology partner to provide a white-labeled platform configured with all of the following US exemptions. Our cloud-based solution provides the necessary investment workflows to eliminate transaction redundancy, strengthen compliance, delight investors, and accelerate deal flow.
We have worked with clients for 506(b), 506(c), Regulation A+, Regulation CF, and Rule 504 financings.