On June 18, 2019, the SEC published a concept release requesting comments on ways to improve its private placement rules in an effort to “expand investment opportunities while maintaining appropriate investor protections and promote capital formation.” Recognizing the importance of private placements, with approximately $2.9T raised in the private markets in 2018, compared to $1.5T on public exchanges, the SEC appears ready to ease certain restrictions on private placements, even though they are often riskier investments.
For private placements to be conducted lawfully in the United States, the offer and sale of securities must either be registered with the SEC or qualify for an exemption from registration. The exemptions, which have evolved over time, can be complex to patch together and are often available to only a limited number of issuers and sophisticated investors. As a result, the SEC raises 138 questions in its concept release about the exempt offering framework, inviting discussion on the following general areas:
- Whether the exempt offering framework for private placements is consistent, accessible, and effective for both issuers and investors;
- Possible changes to improve, harmonize, and streamline offering exemptions, including Section 4(a)(2) of the Securities Act of 1933, Rules 504 and 506 of Regulation D, Regulation A, intrastate offering exemptions, and Regulation Crowdfunding;
- Potential gaps that make it harder for smaller companies to raise capital through the current exempt offering rules;
- Whether current investor limitations and disclosure requirements in exempt offerings are appropriate to protect investors or excessive, including a discussion of who is an “accredited investor”;
- Whether to implement a single integration doctrine for all exempt offerings to make it easier for issuers to transition from one exempt offering to another and, ultimately, to a registered offering;
- How to facilitate capital formation in exempt offerings through pooled investment vehicles and whether retail investors should be allowed greater exposure to growth stage companies through pooled investment funds; and
- How to revise exemptions or resales of securities to improve secondary market liquidity.
Market participants now have an important opportunity to voice how the SEC can open access to the private markets. We expect numerous comments on the concept release to be submitted. Perhaps most significant among them will be on whether to broaden the definition of “accredited investor” such that exempt offerings are accessible to a broader group of retail investors, and also on how to simplify transitions between offering exemptions so issuers can more easily raise capital at different stages of their business cycle. Those interested should submit comments on the concept release within 90 days after it is published in the Federal Register. Our firm is considering submitting a comment letter and would be glad to discuss these matters with you.
Concept release: https://www.sec.gov/rules/concept/2019/33-10649.pdf
Donald R. Reynolds and S. Halle Vakani are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.