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.
The amendments generally:
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.
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.
Katipult Note: Relaxing the solicitation rules allows for easier and better marketing to find appropriate investors for deals, while providing greater access to capital.
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:
The Commission is amending the current offering and investment limits for certain exemptions.
“Test-the-Waters” and “Demo Day” Communications. The Commission is amending offering communications rules, by:
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:
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 customers for 506(b), 506(c), Regulation A+, Regulation CF, and Rule 504 financings.